Page 1 of 68
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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For the fiscal year ended December 31, 1996 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
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(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
21, 1997: $10,558,957
Number of shares of Common Stock outstanding at March 21, 1997: 2,446,131.
Documents incorporated by reference and parts of Form 10-K into which
incorporated:
Portions of Proxy Statement for 1997 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)
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FORM 10-K
TABLE OF CONTENTS AND
CROSS REFERENCE SHEET
Page
in Incorporation
PART I 10-K by Reference
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Item 1. Business........................... 4
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Item 2. Properties......................... 30
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Item 3. Legal Proceedings.................. 30
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Item 4. Submission of Matters to a Vote of
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Securities Holders................. 30
PART II
Item 5. Market for Registrant's Common Stock
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and Related Stockholder Matters.... 31
Item 6. Selected Financial Data............ 33
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Item 7. Management's Discussion and Analysis
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of Financial Condition and Results of
Operations......................... 34
Item 8. Financial Statements and Supplement-
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ary Data........................... 41
Item 9. Disagreements on Accounting and
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Financial Disclosure............... 41
PART III
Item 10. Directors and Executive Officers of 1997 Proxy
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the Registrant..................... 42 Statement
Item 11. Executive Compensation............. 42 1997 Proxy
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Statement
Item 12. Security Ownership of Certain 1997 Proxy
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Beneficial Owners and Management... 42 Statement
Item 13. Certain Relationships and Related 1997 Proxy
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Transactions....................... 42 Statement
3
PART IV
Item 14. Exhibits, Financial Statement
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Schedules, and Reports on Form 8-K. 43
SIGNATURES....................................... 44
INDEX TO FINANCIAL STATEMENTS.................... 45
INDEX TO EXHIBITS................................ 70
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PART I
Item 1. Business
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Business of First Regional Bancorp
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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.
Certain matters discussed in this Annual Report on Form 10-K may constitute
forward-looking statements within the meaning of the Private Securities Reform
Act of 1995 (the "Reform Act") and as such may involve risks and uncertainties.
These forward-loking statements relate to, among other things, expectations of
the business environment in which the Company and the Bank operate, projections
of future performance, perceived opportunities in the market, and statements
regarding the Company's and/or the Bank's mission and vision. The Company's
and/or the Bank's actual results, performance, or achievements may differ
significantly from the results, performance, or achievements expressed or
implied in such forward-looking statements. The following discusses certain
factors which may affect the Company's and/or the Bank's financial results and
operations and should be considered in evaluating the Company and/or the Bank.
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
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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
5
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 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 21, 1997 the Bank had 38 equivalent full-time
employees.
Competition
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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
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The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act"), enacted on September 29, 1994, repeals the McFadden
6
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, 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.
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
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The Company
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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, 1996 was
18.34%. The acceptable capital ratio is 8 percent.
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") has issued SFAS 114,
9
"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 contractual 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
under the original loan agreement. The impact of initially applying the
statement is reported as a part of bad debt expense. The Company adopted this
standard in 1995, but no material effect on the Company's financial position
resulted.
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,
investment securities are classified into three categories as follows:
Held to Maturity Securities. Debt securities that the Company has the
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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
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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).
The Company adopted this standard in 1994. There was no material impact on
the financial statements of the Company due to this adoption.
On January 1, 1996 the Company adopted SFAS 121, "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of." This
statement requires that long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used, or disposed of, be
reviewed for impairment based on the fair value of the asset. Furthermore, this
statement requires that certain long-lived assets and identifiable intangibles
to be disposed of be reported at the lower of carrying amount or fair value less
cost to sell. The Company has determined that the impact of SFAS 121 on its
operations and financial position is not material for the year ended December
31, 1996.
In June, 1996 the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities, and is applied prospectively
to financial statements for fiscal years beginning
10
after December 31, 1996. In 1996, the FASB also issued SFAS 127, "Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125," which
defers for one year the effective date of certain provisions within SFAS 125.
The Company does not believe the impact on its operations and financial position
will be material upon adoption of SFAS 125 or SFAS 127.
SFAS 123, "Accounting for Stock-Based Compensation," encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans based on the estimated fair value of the stock options or
other awards granted. The Company has chosen to continue to account for stock-
based compensation using the intrinsic value method. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of grant over the amount an employee
must pay to acquire the stock.
The Bank
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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.
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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
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
12
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.
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
13
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
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.
Future legislation is also likely to impact the Bank's business. Consumer
legislation has been proposed in Congress which may require banks to
14
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 a competitive
position in the service area.
15
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,
1996 1995
---- ----
(Dollars in Thousands)
Assets
Cash and Due From Banks.............. $ 3,910 $ 3,094
Time Deposits with Other
Financial Institutions............... 4,727 7,032
Investment Securities................ 20,071 10,120
Funds Sold........................... 23,143 25,655
Net Loans............................ 84,692 78,662
Other Assets......................... 3,619 3,128
-------- --------
Total............................ $140,162 $127,691
======== ========
Liabilities & Shareholders' Equity
Deposits:
Demand (non-interest
bearing)......................... $ 23,210 $ 17,359
Savings.......................... 1,145 1,167
Money Market Accounts............ 84,044 83,479
Time............................. 16,978 13,338
-------- --------
Total Deposits.............. 125,377 115,343
Securities Sold Under
Agreements to Repurchase............. (27) 584
Other Liabilities.................... 1,670 673
-------- --------
Total Liabilities................ 127,020 116,600
-------- --------
Shareholders' Equity................. 13,142 11,091
-------- --------
Total............................ $140,162 $127,691
======== ========
16
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,
1996 1995
------------------------------------ -------------------------------------
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) $ 86,961 $ 8,509 9.8% $ 80,392 $ 8,427 10.5%
Investment Securities 20,071 1,455 7.2% 10,120 591 5.8%
Funds Sold 23,143 1,219 5.3% 25,655 1,469 5.7%
Time Deposits With Other
Financial Institutions 4,727 280 5.9% 7,032 433 6.2%
-------- ------- -------- -------
Total Interest Earning Assets $134,902 $11,463 8.5% $123,199 $10,920 8.9%
======== ======= ======== =======
Interest Bearing Liabilities:
Savings deposits $ 1,145 $ 27 2.4% $ 1,167 $ 27 2.3%
Money Market Accounts 84,044 2,105 2.5% 83,479 2,069 2.5%
Time 16,978 838 4.9% 13,338 636 4.8%
17
1996 1995
------------------------------------ ------------------------------------
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 $ (27) $ 4 5.5% $ 584 $ 32 5.5%
--------- ------- -------- -------
Total interest bearing
liabilities $102,140 $ 2,974 2.9% $ 98,568 $ 2,764 2.8%
======== ======= ======== =======
- ----------
(1) This figure reflects total loans, including non-accrual loans, and is not
net of the allowance for possible losses, which had an average balance of
$2,269,000 in 1996 and $1,730,000 in 1995.
(2) Includes loan fees of $505,000 in 1996 and $363,000 in 1995.
18
The following table shows the net interest earnings and the net yield on
average interest earning assets:
1996 1995
---- ----
(Dollars in Thousands)
Total interest income (1).................. $ 11,463 $ 10,920
Total interest expense..................... 2,974 2,764
-------- --------
Net interest earnings...................... $ 8,489 $ 8,156
======== ========
Average interest earning assets............ $134,902 $123,199
Net yield on average interest earning
assets..................................... 6.3% 6.6%
- ----------
(1) Includes loan fees of $505,000 in 1996 and $363,000 in 1995.
19
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)
1996 over 1995 1995 over 1994
-------------------------- -------------------------
Volume Rate Net Volume Rate Net
(Dollars in Thousands)
Interest Income(1)
- ------------------
Loans (2) $ 442 $ (360) $ 82 $ (25) $ 790 $ 765
Investment securities 694 170 864 62 136 198
Funds sold (137) (113) (250) 444 355 799
Interest on time deposits with
other financial institutions (137) (16) (153) (7) 125 118
-------- -------- -------- -------- ------- -------
Total Interest Earning Assets $ 862 $ (319) $ 543 $ 474 $ 1,406 $ 1,880
======= ======== ======== ======== ======= =======
Interest Expense (1)
- --------------------
Savings $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Money market 14 22 36 (37) 104 67
Time 179 23 202 53 178 231
Securities sold under agreements
to repurchase (6) (22) (28) 57 (23) 34
-------- -------- -------- ------- -------- -------
Total interest bearing liabilities $ 187 $ 23 $ 210 $ 73 $ 259 $ 332
======= ======= ======= ======= ======= =======
- ----------
(1) The change in interest due to both rate and volume has been allocated to
the change due to volume and the change due to rate in proportion to the
relationship of the absolute dollar amounts of the change in each.
(2) Includes loan fees of $505,000 in 1996 and $363,000 in 1995.
20
Investment Securities
- ---------------------
The following table shows book value of the investment securities portfolio
at December 31, 1996 and 1995:
December 31,
1996 1995
---- ----
(Dollars in Thousands)
U.S. Treasury Securities................... $ 0 $ 0
Obligations of U.S. Government
Agencies and Corporations.................. 26,792 13,857
Other Securities........................... 25 25
------- -------
Total................................. $26,817 $13,882
======= =======
The maturity schedule and weighted average yields of investment securities at
December 31, 1996 is as follows:
Average
Amount Yield
------ -------
(Dollars in
Thousands)
U.S. Agency Securities
- ----------------------
One year or less ........................ $11,249 5.62%
Over one year through five years ........ 0 0.00%
Over five years through ten years ....... 3,309 5.88%
Over ten years .......................... 12,234 5.83%
------
Category total ................. $29,792 5.75%
Other Securities
- ----------------
Over one year through five years ........ 25 7.50%
------
Category total ................. $ 25 7.50%
Total Investment Portfolio
- --------------------------
One year or less ........................ $11,249 5.62%
Over one year through five years ........ 25 7.50%
Over five years through ten years ....... 3,309 5.88%
21
Average
Amount Yield
------ -------
(Dollars in
Thousands)
Over ten years ......................... 12,234 5.83%
-------
Total ......................... $26,817 5.76%
=======
Loan Portfolio
- --------------
The loan portfolio consisted of the following at December 31, 1996 and
1995:
1996 1995
---- ----
(Dollars in Thousands)
Commercial loans........................... $ 10,564 $ 9,958
Real estate construction loans............. 11,010 1,776
Real estate loans.......................... 44,250 45,968
Bankers acceptances........................ 16,733 2,000
Other loans................................ 398 408
-------- --------
Total loans........................... $ 82,955 $ 60,110
Less - Allowances for loan losses.......... 2,300 2,000
- Deferred loan fees.................. 551 443
-------- --------
Net loans............................. $ 80,104 $ 57,667
======== ========
Government guaranteed loans $ 2,665 $ 27,660
======== ========
Government guaranteed loans held for sale $ 4,833 $ 0
======== ========
22
Loan Maturities and Interest Rates
- ----------------------------------
The following table shows the amounts of total loans outstanding as of
December 31, 1996, 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....................... $22,089
Interest rates are fixed or
predetermined.................... 17,046
After one year but within five years:
Interest rates are floating or
adjustable....................... 34,404
Interest rates are fixed or
predetermined.................... 0
After five years but within ten years:
Interest rates are floating or
adjustable....................... 8,456
Interest rates are fixed or
predetermined.................... 0
After ten years or more:
Interest rates are floating or
adjustable....................... 8,458
Interest rates are fixed or
predetermined.................... 0
-------
Total...................................... $90,453
=======
23
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, 1996 and 1995:
December 31,
1996 1995
---- ----
(Dollars in Thousands)
Non-accrual loans
Commercial..................... $ 242 $ 0
Real estate loans.............. 0 530
Government guaranteed loans.... 0 0
Bankers acceptances............ 0 0
Other loans.................... 0 0
------ ------
Total..................... $ 242 $ 530
====== ======
Accruing loans past due more than 90 days
Commercial..................... $ 110 $ 273
Real estate loans.............. 0 0
Government guaranteed loans.... 2,145 2,113
Bankers acceptances............ 0 0
Other loans.................... 0 0
------ ------
Total..................... $2,255 $2,386
====== ======
Except as may have been included in the above table, at December 31, 1996,
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, 1996, 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 of $93,000 in 1996 had the loans been current in
accordance with their original terms.
24
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 1996
and 1995:
1996 1995
---- ----
(Dollars in Thousands)
Amount of loans outstanding at end of
period..................................... $ 90,453 $ 87,327
======== ========
Average amount of loans outstanding
before allowance for loan losses........... $ 86,961 $ 80,392
======== ========
Balance of allowance for loan losses at
beginning of period........................ $ 2,000 $ 1,390
Loans charged off:
Commercial............................ 0 169
Real estate........................... 223 20
Government guaranteed loans........... 0 0
Bankers acceptances................... 0 0
Other................................. 7 30
-------- --------
Total loans charged off.......... 230 219
Recoveries of loans previously charged off:
Commercial............................ 116 151
Real estate........................... 414 0
Government guaranteed loans........... 0 0
Bankers acceptances................... 0 0
Other................................. 0 0
-------- --------
Total loan recoveries............ 530 151
-------- --------
Net loans charged off...................... (300) 68
-------- --------
Provisions charged to operating expense.... 0 678
-------- --------
Balance of allowance for possible loan
losses at end of period.................... $ 2,300 $ 2,000
======== ========
The ratio of net loans charged off to average loans outstanding was (3.3%)
and 0.1% for the two years ended December 31, 1996 and 1995, 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
25
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 judgment. 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.
1996 1995
---- ----
Allowance for Allowance for
possible loan Ratio of loans possible loan Ratio of loans
losses to total loans losses to total loans
------------- -------------- ------------- --------------
Commercial loans... $ 336 12% $ 331 11%
Real estate loans.. 1,473 61% 564 54%
Gov't guaranteed... 0 8% 0 32%
Bankers acceptances 0 18% 0 0%
Other loans........ 5 1% 8 3%
Unallocated........ 486 0% 1,097 0%
------ ---- ------ ----
Total......... $2,300 100% $2,000 100%
====== ==== ====== ====
26
Deposits
- --------
The average amounts of deposits for the periods indicated are summarized
below.
1996 1995
---- ----
(Dollars in Thousands)
Demand Deposits..................... $ 23,210 $ 17,359
Savings deposits, money market and
time certificates of deposit of less
than $100,000....................... 89,626 88,744
Time certificates of deposit of
$100,000 or more.................... 12,542 9,240
-------- --------
Total.......................... $125,378 $115,343
======== ========
The maturity schedule of time certificates of deposit of $100,000 or more at
December 31, 1996 is as follows:
December 31, 1996
-----------------
(Dollars in Thousands)
3 months or less.......................... $ 9,724
Over 3 through 6 months................... 5,971
Over 6 through 12 months.................. 1,086
Over 12 months............................ 0
-------
Total................................ $16,781
=======
27
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.
1996 1995
---- ----
Return on assets...................... 1.5% 1.6%
Return on equity...................... 15.5% 18.3%
Dividend payment ratio................ 0.0% 0.0%
Equity to assets ratio................ 9.4% 8.7%
28
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. At the
end of 1994, the Bank elected to apply the unused tenant improvement allowance
of $224,000 against its future lease payments. Payment of the allowance was made
to the Bank over a 15-month period beginning February 1, 1995. The Bank is
deferring recognition of this amount and amortizing it evenly over the lease
term.
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 1996, no matters were submitted to a vote of
the Company's shareholders.
29
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 Nasdaq SmallCap
Market tier of The Nasdaq Stock Market under the trading symbol FRGB. Quotations
are carried either daily or weekly by newspapers throughout the nation including
the Wall Street Journal and Los Angeles Times. The following table summarizes
the quotations reported by Nasdaq for First Regional Bancorp's common stock.
1996 1995
---- ----
High Low High Low
---- --- ---- ---
1st Quarter 6 4 3 7/8 2
2nd Quarter 6 4 1/2 4 1/8 3
3rd Quarter 6 1/4 4 3/4 4 3 1/4
4th Quarter 6 5/8 5 5/8 5 3
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.
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% 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
30
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 1995, 1994, or 1993.
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.
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, 1996 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.
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.
31
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:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Total assets ........... $152,449 $137,810 $124,287 $130,412 $143,822
Net loans .............. 87,602 85,327 76,581 83,119 117,298
Investment securities .. 32,059 22,003 18,434 7,529 4,984
Funds sold ............. 22,780 20,690 21,300 19,470 7,000
Total deposits ......... 136,755 124,724 113,666 120,664 129,072
Shareholders' equity ... 14,316 12,259 10,222 9,226 13,385
Book value per share and $ 5.54 $ 4.90 $ 4.26 $ 3.85 $ 6.16
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:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands except for per share)
Interest income $11,463 $10,920 $ 9,040 $ 9,872 $12,064
Interest expense 2,974 2,764 2,432 3,176 4,245
------- ------- ------- ------- -------
Net interest income 8,489 8,156 6,608 6,696 7,819
Provision for loan losses 0 678 250 3,925 1,359
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 8,489 7,478 6,358 2,771 6,460
Other income 700 447 807 417 601
Other expense 6,320 5,644 6,162 7,862 5,770
------- ------- ------- ------- -------
32
1996 1995 1994 1993 1992
(Dollars in Thousands except for per share)
Income (loss) before taxes and
effects of accounting change 2,869 2,281 1,003 (4,674) 1,291
Provision (credit) for income
taxes 833 254 2 (417) 481
------- ------- ------- -------- -------
Income (loss) before effects of
accounting change 2,036 2,027 1,001 (4,257) 810
Effects of accounting change 0 0 0 98 0
------- ------- ------- ------- -------
Net income (loss) $ 2,036 $ 2,027 $ 1,001 $(4,159) $ 810
Net income (loss) per share $ 0.79 $ 0.81 $ 0.42 $ (1.73) $ 0.37
Cash dividends declared per
share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
The number of shares and share equivalents was 2,583,000 in 1996, 2,502,000
in 1995, 2,398,800 for 1994 and 1993, and 2,173,000 for 1992.
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 results in 1996 represent a continuation of the positive results
of recent years. In 1995, the Company initiated a program of prudent, managed
growth, and this program resulted in higher levels of earning assets and
interest revenue in 1995 and 1996. The Company's profitability was also in part
a reflection of the continued low levels of nonperforming loans, other real
estate owned, and other nonearning assets. In contrast with earlier periods, the
low levels of problem assets led to higher revenues due to additional funds
being available for investment, and also eliminated the need for large loan loss
provisions or real estate writedowns. In addition, in 1995 higher levels of
interest rates on assets coupled with generally stable deposit costs resulted in
further growth in net interest income. In 1994, by way of comparison,
profitability was favorably impacted by the sale or collection of nonearning
assets, but the benefits were smaller in 1994 because the process was ongoing
during the year. Unlike 1996 and 1995, in 1994 some shrinkage in overall asset
levels took place, although higher levels of interest rates on assets coupled
with stable deposit costs resulted in stable net interest income despite the
shrinkage.
Average assets for 1996 were $132,958,000, compared to $127,691,000 in 1995
33
and $123,837,000 in 1994. The Company's asset growth in 1996 was funded by an
increase in deposits, as well as the retention of earnings for the year; the
1995 growth was funded by a modest increase in deposits, as well as by the
retention of the Company's substantial earnings in that year. The lower 1994
asset levels were principally due to a reduction in time deposits from the prior
year; the lower levels of time deposits reflected the Company's decision to
deemphasize this deposit source at that time due to its relatively high cost.
The Company generated net income of $2,036,000 in 1996, compared to a profit of
$2,027,000 in 1995 and a profit of $1,001,000 in 1994.
Net Revenue From Earning Assets
-------------------------------
Net revenue from earning assets is the excess of interest income earned on
interest-earning assets over interest expense incurred on interest-bearing
liabilities. Interest income or expense are determined by the average volume of
interest-bearing assets or liabilities, and the average rate of interest earned
or paid on those assets or liabilities. During 1996, the Company's growth effort
resulted in a significant increase in interest earning assets, including loans.
The 1996 growth in loans was less than the growth in deposits, however, so much
of the increase in funds flowed into the lower-yielding categories of liquid
assets. In 1995, due to the sluggish economy in the Company's Southern
California market area, no loan growth was achieved, although the level of loans
did remain stable. Since loans are generally the highest yielding category of
earning assets, the absence of loan growth in 1995 meant that once again the
Company's earning asset growth was concentrated in lower-yielding asset
categories. In 1994, by comparison, total interest-earning assets dropped from
the levels of the prior year. Further, there was a recession-induced reduction
in loan demand and consequently in gross loans, the highest yielding category of
assets, with modest growth being limited to lower-yielding categories such as
investment securities and funds sold. The 1996 growth in deposits was
concentrated in time deposits, but all categories of interest-bearing
liabilities experienced at least modest increases. As deposit interest rates
were essentially stable during 1996, the higher deposit levels led to a slight
increase in interest expense in 1996 compared to the prior year. During 1995,
the level of interest bearing liabilities was virtually unchanged overall,
although there were modest shifts in liability composition. Because liability
interest rates were essentially stable during the year, the result was only a
slight increase in interest expense for 1995 compared to 1994. In 1994, however,
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.
Other Operating Income
----------------------
Other operating income rose substantially in 1996, to $700,000 from $447,000 for
the year 1995 and compared to $807,000 for 1994. The increase in 1996 was the
result of the receipt of profits of $303,000 from the sale of a large portion of
a portfolio of government guaranteed loans. There were no sales of loans, and
thus no gains on sales, in 1995. In 1994, by comparison, gains of approximately
$11,000 were recorded for the year, because the Company
34
opted to retain loans whenever possible in order to enhance asset yields. Other
operating income in 1995 represented a more normal level of income following a
sizable increase in 1994. The principle reason for the revenue growth in 1994
was the receipt of approximately $365,000 in rental income from a parcel of
other real estate owned which was subsequently sold in June, 1994. Higher
customer service fees were also a factor in the revenue increase, reflecting
more vigorous assessment of existing service charge schedules.
Provision for Loan 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 appears to be giving way to full
recovery, its impact on the payment performance of the Bank's borrowers has not
been a significant factor in recent years. More important, in 1994 the Bank
acted aggressively to collect or otherwise strengthen nonperforming loans, and
to liquidate other real estate owned. The emphasis on maintaining high asset
quality continued in 1995 and 1996, and as a result, non-performing assets
(loans past due ninety days or more excluding government guaranteed loans, loans
on nonaccrual status, and other real estate owned) totalled just $302,000 on
December 31, 1996, compared to $1,195,000 at the end of 1995, and $4,025,000 at
the end of 1994. Management believes the allowance for possible loan losses as
of December 31, 1996 was adequate in relation to both 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, during 1996 no provisions were made to the
allowance for loan losses, a total of $230,000 in loans were charged off, and
$530,000 in previously charged off loans were recovered. In 1995, provisions of
$678,000 were made to the allowance for loan losses, a total of $219,000 in
loans were charged off, and $151,000 in previously charged off loans were
recovered. In 1994, in contrast, and reflecting the perceived impact of the
continued California recession on the Bank's borrowers, 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. These
transactions brought the balance of the allowance for possible loan losses at
December 31, 1996 to $2,300,000 (or 2.7% of total loans), compared to $2,000,000
(or 2.3% of total loans) at the end of 1995, and $1,390,000 (or 1.8% of total
loans) at December 31, 1994.
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. During
35
1996, the Company had identified loans having an aggregate average balance of
$648,000 which it concluded were impaired under SFAS No. 114. In contrast,
during 1995 the Company had identified loans having an aggregate average balance
of $687,000 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. 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 for 1996 or 1995.
Operating Expenses
------------------
At $6,320,000, total operating expenses rose in 1996 from the levels of prior
years, after falling to $5,644,000 in 1995 from $6,162,000 in 1994. While the
total expense figures have fluctuated over time, most components continue to be
moderated by the effects of an ongoing program of expense control.
Salaries and related benefits expense rose in 1996, to $2,566,000 from
$2,195,000 in 1995 and $1,876,000 in 1994. The increase in this expense category
principally reflects the ongoing effect of increases in staffing made in 1995 as
part of the Company's growth initiative. Occupancy expense rose slightly in 1996
to $374,000 due to operating cost pass-throughs on the premises occupied by the
Company. These expenses fell in 1995 to $348,000 from $366,000 in 1994, as the
Company continues to enjoy the benefits realized from the 1993 renegotiation of
its premises lease. Real estate expense rose to $380,000 in 1996 after falling
in 1995 to $59,000 from a 1994 total of $515,000. The 1996 total reflects a
charitable donation by the Bank of its only parcel of other real estate owned;
this expense was essentially offset by the tax benefits resulting from the
donation. Custodial and other services to customers declined slightly in 1996 as
they did in 1995 compared to the prior year, amounting to $1,089,000 for the
year versus $1,093,000 in 1995 and $1,172,000 in 1994. This category typically
fluctuates in conjunction with the deposit balances maintained by customers, and
this factor accounts for the changes in this area over the past three years.
Other expenses fell in 1996 as they did in 1995, reversing the pattern of modest
growth which had prevailed in prior years. Other expenses totalled $1,911,000 in
1996, down from $1,949,000 in 1995 and a 1994 total of $2,233,000. The largest
single factor in the 1995 expense reduction was the lowering of premiums for
FDIC insurance reflecting the banking industry's achievement of full
capitalization of the Bank Insurance Fund as defined by applicable statute, and
this effect continued in 1996. FDIC premium expense fell to just $2,000 in 1996
from $161,000 in 1995, both down substantially from $339,000 in 1994. Most of
the remaining categories of other expense generally remained stable:
professional services amounted to $467,000 in 1996 compared to $424,000 in 1995
and $381,000 in 1994; data processing fees rose to $242,000 in 1996 after
falling to $225,000 in 1995 from $281,000 in 1994; general insurance, which fell
to $108,000 in 1996 after rising to $134,000 in 1995 from $126,000 in 1994 in
line with changes in market rates for coverage; directors fees fell to just
$59,000 in 1996 from $105,000 in 1995 and $87,000 in 1994 due to the elimination
of directors fees for directors who are also officers of the Bank; and other
expenses, which rose
36
to $946,000 in 1996 after falling to $764,000 in 1995 from $936,000 for 1994
principally due to higher costs of services provided to customers and losses of
$65,000 incurred on sales of investment securities.
Taxes and Effects of Accounting Changes
---------------------------------------
The combined effects of the activity described above resulted in Income Before
Taxes of $2,869,000 in 1996, a significant increase over the $2,281,000 for
1995, and a strong improvement from $1,003,000 in 1994. 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, would be utilized in the immediate future, a valuation reserve for
deferred income tax assets was established in the amount of $1,027,000. During
1995, the need for such a valuation reserve was reevaluated, and the balance of
the reserve was reduced to $200,000. The reduction in the reserve balance had
the effect of substantially offsetting the Company's federal tax provisions, and
as a result the Company recorded net tax provisions of $254,000 in 1995. The
remaining balance of the reserve was eliminated in 1996, and this much lower
level of reserve reversals led to net tax provisions of $833,000 in 1996. In
1994, by comparison, the carryforward of net operating losses incurred in prior
years required a tax provision of but $2,000 for that year. As a result, the
Company generated Net Income of $2,036,000 in 1996, versus Net Income of
$2,027,000 in 1995, and compared to Net Income of $1,001,000 in 1994.
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
$61,338,000 and $49,470,000 (or 44.9% and 39.7% of total deposits) at December
31, 1996 and 1995, respectively. In addition, at December 31, 1995 approximately
$28 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 1996
was approximately $7 million. Deposits of custodial clients of retirement plans
administered by Transcorp Pension Services, a corporate customer of the Bank,
represented approximately 64% and 57% of the Bank's total deposits as of
December 31, 1996 and 1995, respectively, and in recognition of this the Bank
has maintained a large portion of its assets in liquid form since the inception
of the Transcorp relationship. The ratio of net loans to deposits was 64.0% and
68.4% at the end of 1996 and 1995, respectively.
The Bank's investment portfolio continues to be composed of high quality, low
risk securities, including U.S. Treasury securities, U.S. Agency securities, and
pools of loans guaranteed by the U.S. Treasury. As noted earlier, losses on
sales of securities of $65,000 were incurred in 1996. By way of comparison,
gains of $11,000 on sales of securities were realized in 1995. At December 31,
1996 the Bank's investment portfolio contained gross unrealized gains of $82,000
and gross unrealized losses of $43,000, for net unrealized gains of $39,000; at
December 31, 1995 the portfolio contained gross unrealized gains of $8,000 and
no unrealized losses. The Company adopted SFAS No. 115 in 1994, with the result
that the net unrealized gains
37
and losses gave rise to a $26,000 increase (net of taxes) in the Company's
shareholders' equity as of December 31, 1996, and a $5,000 increase (net of
taxes) in shareholders' equity as of December 31, 1995. Because the Company's
holdings of securities are intended to serve as a source of liquidity should
conditions warrant, the securities have been classified by the Company as
"available for sale," and thus the unrealized gains and losses had no effect on
the Company's income statement.
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/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.
One month Six months One year
but but but Five Non-interest
Floating Less than less than less than less than years earning
Category Rate one month six months one year five years or more or bearing Total
================================================================================================================================
Fed funds sold 22,780 0 0 0 0 0 0 22,780
Time deposits with other banks 0 693 4,450 99 0 0 0 5,242
Investment securities 15,543 5,258 5,991 0 25 0 0 26,817
------ ----- ----- - -- - - ------
Subtotal 38,323 5,951 10,441 99 25 0 0 54,839
Loans 70,556 0 16,733 313 0 0 0 87,602
------ - ------ --- - - - ------
Total earning assets 108,879 5,951 27,174 412 25 0 0 142,441
Cash and due from banks 0 0 0 0 0 0 6,499 6,499
Premises and equipment 0 0 0 0 0 0 362 362
Other real estate owned 0 0 0 0 0 0 0 0
Other assets 0 0 0 0 0 0 2,547 2,547
- - - - - - ----- -----
Total non-earning assets 0 0 0 0 0 0 9,408 9,408
- - - - - - ----- -----
Total assets 108,879 5,951 27,174 412 25 0 9,408 151,849
Funds purchased 1 0 0 0 0 0 0 1
Repurchase agreements 0 0 0 0 0 0 0 0
- - - - - - - -
Subtotal 1 0 0 0 0 0 0 1
Savings deposits 5,444 0 0 0 0 0 0 5,444
Money market deposits 83,956 0 0 0 0 0 0 83,956
Time deposits 0 14,380 8,832 1,607 20 0 0 24,839
- ------ ----- ----- -- - - ------
Total bearing liabilities 89,401 14,380 8,832 1,607 20 0 0 114,240
Demand deposits 0 0 0 0 0 0 22,516 22,516
Other liabilities 0 0 0 0 0 0 777 777
Equity capital 0 0 0 0 0 0 14,316 14,316
- - - - - - ------ ------
Total non-bearing liabilities 0 0 0 0 0 0 37,609 37,609
- - - - - - ------ ------
Total liabilities 89,401 14,380 8,832 1,607 20 0 37,609 151,849
GAP 19,478 (8,429) 18,342 1,195) 5 0 (28,201) 0
Cumulative GAP 19,478 11,049 29,391 28,196 28,201 28,201 0 0
38
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 Company continues to maintain a strong and prudent capital position. Total
shareholders' equity was $14,316,000 and $12,259,000 as of December 31, 1996 and
1995, respectively. The Company's capital ratios for those dates in comparison
with regulatory capital requirements were as follows:
12-31-96 12-31-95
-------- --------
Leverage Ratio (Tier I Capital
to Assets:
First Regional Bancorp 9.38% 8.96%
Regulatory requirement 4.00% 4.00%
The "regulatory requirement" listed represents the level of capital required for
Adequately Capitalized status.
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:
12-31-96 12-31-95
-------- --------
Tier I Capital to Assets:
First Regional Bancorp 17.07% 15.91%
Regulatory requirement 4.00% 4.00%
Tier I + Tier II Capital to Assets:
First Regional Bancorp 18.34% 17.17%
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.
39
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.
40
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.
41
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
1996.
42
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 28, 1997
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 28, 1997
- ------------------------
Jack A. Sweeney of the Board and Chief
Executive Officer
/s/ Mark Rubin Director, Vice Chairman March 28, 1997
- ------------------------
Mark Rubin of the Board, and
President
/s/ H. Anthony Gartshore Director March 28, 1997
- ------------------------
H. Anthony Gartshore
/s/ Alexander S. Lowy Director March 28, 1997
- ------------------------
Alexander S. Lowy
/s/ Frank R. Moothart Director March 28, 1997
- ------------------------
Frank R. Moothart
/s/ Lawrence Sherman Director March 28, 1997
- ------------------------
Lawrence J. Sherman
/s/ Carolyn Zarro Director March 28, 1997
- ------------------------
Carolyn Zarro
/s/ Thomas McCullough Director, Chief March 28, 1997
- ------------------------
Thomas E. McCullough Financial Officer and
Chief Accounting
Officer
43
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, 1996 and 1995 .......................... 48
Consolidated Statements of Income for
the years ended December 31, 1996, 1995,
and 1994 ............................................ 49
Consolidated Statements of Shareholders'
Equity for the years ended December 31, 1996,
1995, and 1994 ...................................... 51
Consolidated Statements of Cash Flows for
the years ended December 31, 1996, 1995,
and 1994 ............................................ 52
Notes to Consolidated Financial Statements .......... 54
First Regional Bancorp (Parent Company):
Note 15 to Consolidated Financial
Statements .......................................... 69
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.
[LETTERHEAD OF DELOITTE & TOUCHE LLP]
FIRST REGIONAL BANCORP
AND SUBSIDIARY
Consolidated Financial Statements as of
December 31, 1996 and 1995 and for Each of the
Three Years in the Period Ended December 31,
1996 and Independent Auditors' Report
[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, 1996 and 1995, and the
related consolidated statements of earnings, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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, 1996 and 1995, and the results of their earnings
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
February 7, 1997
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS 1996 1995
Cash and due from banks (Note 7) $ 6,499,000 $ 6,777,000
Federal funds sold 22,780,000 20,690,000
------------ ------------
Cash and cash equivalents 29,279,000 27,467,000
Investment securities available for sale, at fair value (Note 2) 26,817,000 13,882,000
Interest-bearing deposits in financial institutions 5,242,000 8,121,000
Loans, net (Note 3) 80,104,000 57,667,000
Government guaranteed loans (Note 3) 2,665,000 27,660,000
Government guaranteed loans, held for sale (Note 3) 4,833,000
Premises and equipment, net (Note 4) 362,000 200,000
Other real estate owned, net (Note 5) 392,000
Accrued interest receivable and other assets (Note 6) 2,524,000 2,071,000
Deferred income tax asset, net (Note 6) 623,000 350,000
------------ ------------
TOTAL $152,449,000 $137,810,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits (Notes 11 and 13):
Noninterest bearing $ 22,516,000 $ 24,005,000
Interest bearing:
Time deposits 24,839,000 13,015,000
Money market deposits 83,956,000 82,998,000
Other 5,444,000 4,706,000
------------ ------------
Total deposits 136,755,000 124,724,000
Accrued interest payable and other liabilities (Note 6) 1,378,000 827,000
------------ ------------
Total liabilities 138,133,000 125,551,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 7)
SHAREHOLDERS' EQUITY (Notes 8 and 9):
Common stock, no par value; authorized, 50,000,000 shares;
outstanding, 2,406,000 (1996) and 2,399,000 (1995) shares 11,332,000 11,332,000
Retained earnings 2,958,000 922,000
Unrealized gain on securities available for sale, net of tax 26,000 5,000
------------ ------------
Total shareholders' equity 14,316,000 12,259,000
------------ ------------
TOTAL $152,449,000 $137,810,000
============ ============
See notes to consolidated financial statements.
-2-
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
INTEREST INCOME:
Interest on loans $ 8,509,000 $ 8,427,000 $ 7,662,000
Interest on deposits in financial institutions 280,000 433,000 315,000
Interest on federal funds sold 1,219,000 1,469,000 670,000
Interest on investment securities 1,455,000 591,000 393,000
----------- ----------- -----------
Total interest income 11,463,000 10,920,000 9,040,000
----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits (Notes 11 and 13) 2,970,000 2,732,000 2,432,000
Interest on other borrowings 4,000 32,000
----------- ----------- -----------
Total interest expense 2,974,000 2,764,000 2,432,000
----------- ----------- -----------
NET INTEREST INCOME 8,489,000 8,156,000 6,608,000
PROVISION FOR LOAN LOSSES (Note 3) 678,000 250,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 8,489,000 7,478,000 6,358,000
----------- ----------- -----------
OTHER OPERATING INCOME:
Customer service fees 361,000 404,000 424,000
Other 339,000 43,000 383,000
----------- ----------- -----------
Total operating income 700,000 447,000 807,000
----------- ----------- -----------
OTHER OPERATING EXPENSES:
Salaries and related benefits (Note 7) 2,566,000 2,195,000 1,876,000
Occupancy expenses (Note 4) 374,000 348,000 366,000
Real estate expense, net (Note 5) 380,000 59,000 515,000
Custodial and other service (Note 13) 1,089,000 1,093,000 1,172,000
Other expenses (Note 12) 1,911,000 1,949,000 2,233,000
----------- ----------- -----------
Total operating expenses 6,320,000 5,644,000 6,162,000
----------- ----------- -----------
(Continued)
See notes to consolidated financial statements.
-3-
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
INCOME BEFORE PROVISION FOR INCOME
TAXES $2,869,000 $2,281,000 $1,003,000
PROVISION FOR INCOME TAXES (Note 6) 833,000 254,000 2,000
---------- ---------- ----------
NET INCOME $2,036,000 $2,027,000 $1,001,000
========== ========== ==========
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE TOTAL $ 0.79 $ 0.81 $ 0.42
========== ========== ==========
(Concluded)
See notes to consolidated financial statements.
-4-
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized
Gain
(Loss) on
Common Stock Securities
--------------------------- Retained Available
Shares Earnings for Sale,
Outstanding Amount (Deficit) Net of Tax Total
BALANCE,
JANUARY 1, 1994 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 1,001,000 1,001,000
--------- ------------ ------------ ------- ------------
BALANCE,
DECEMBER 31, 1994 2,399,000 11,332,000 (1,105,000) (5,000) 10,222,000
Net change in unrealized
gain (loss) on securities
available for sale,
net of tax 10,000 10,000
Net income 2,027,000 2,027,000
--------- ------------ ------------ ------- ------------
BALANCE,
DECEMBER 31, 1995 2,399,000 11,332,000 922,000 5,000 12,259,000
Net change in unrealized
gain (loss) on securities
available for sale, net of
tax 21,000 21,000
Net income 2,036,000 2,036,000
Options exercised
7,000
--------- ------------ ------------ ------- ------------
BALANCE,
DECEMBER 31, 1996 2,406,000 $ 11,332,000 $ 2,958,000 $26,000 $ 14,316,000
========= ============ ============ ======= ============
See notes to consolidated financial statements.
-5-
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------------------------------
1996 1995 1994
OPERATING ACTIVITIES:
Net income $ 2,036,000 $ 2,027,000 $ 1,001,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on loans 678,000 250,000
Provision for losses on real estate 80,000 50,000 130,000
Contribution of real estate 320,000
Provision for depreciation 51,000 53,000 58,000
Gain on sale of investment securities, net (32,000) (5,000)
Gain on sale of real estate (14,000)
Accretion of investment securities
premiums and discounts, net (154,000) (366,000) (257,000)
Gain on sale of loans (295,000) (6,000) (11,000)
Amortization of loan premiums, net 610,000 649,000 519,000
(Increase) decrease in interest receivable
and other assets (473,000) (431,000) 61,000
Increase in interest payable
and other liabilities 551,000 433,000 1,390,000
Deferred income tax benefit (273,000) (29,000)
------------ ------------ ----------
Net cash provided by operating activities 2,421,000 3,039,000 3,141,000
------------ ------------ ----------
INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits
in financial institutions 2,879,000 (1,494,000) (119,000)
Net (increase) decrease in loans (19,189,000) (11,902,000) 11,918,000
Proceeds from sale of loans 16,620,000 1,975,000 2,897,000
Purchases of investment securities (24,452,000) (20,393,000) (23,537,000)
Proceeds from maturities of investment securities 7,567,000 17,000,000 13,000,000
Proceeds from sales of investment securities 4,135,000 1,699,000
Purchases of premises and equipment (212,000) (87,000) (91,000)
Purchase of majority interest in other real estate
owned (100,000)
Net decrease in investment in real estate 12,000 385,000 298,000
Proceeds from sale of other real estate owned 210,000 2,593,000
------------ ------------ ----------
Net cash (used in) provided by investing
activities (12,640,000) (12,607,000) 6,859,000
------------ ------------ ----------
(Continued)
See notes to consolidated financial statements.
-6-
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
FINANCING ACTIVITIES:
Net increase (decrease) in time deposits $ 11,824,000 $ 1,568,000 $ (5,237,000)
Net increase (decrease) in noninterest-bearing
deposits and other interest-bearing deposits 207,000 9,490,000 (1,761,000)
Increase in short-term borrowed funds 4,000
------------ ------------ ------------
Net cash provided by (used in) financing
activities 12,031,000 11,058,000 (6,994,000)
------------ ------------ ------------
INCREASE IN CASH AND
CASH EQUIVALENTS
1,812,000 1,490,000 3,006,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 27,467,000 25,977,000 22,971,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 29,279,000 $ 27,467,000 $ 25,977,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF
NONCASH INVESTING ACTIVITIES:
Acquisition of other real estate owned through
foreclosure $ 140,000 $ 1,289,000
Net transfer of loans to (from) loans held for sale $ 20,480,000 $ 1,969,000 $ (448,000)
Loans to facilitate sale of other real estate owned $ 280,000 $ 6,990,000
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest paid $ 2,721,000 $ 2,687,000 $ 2,431,000
Income taxes paid $ 1,285,000 $ 166,000 $ 1,600
(Concluded)
See notes to consolidated financial statements
-7-
FIRST REGIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Regional Bancorp, a bank holding company (the "Company"), and its
subsidiary, First Regional Bank, a California state-chartered bank (the
"Bank"), operate one branch in Century City, California. The Company's
primary source of revenue is providing loans to customers, which are
predominantly small and mid-sized businesses. The accounting and reporting
policies of the Company conform to 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.
Use of Estimates in the Preparation of the Financial Statements - The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Investment Securities - 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.
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 lives of the loans as a yield adjustment.
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. Premiums on purchases of government guaranteed loans are
amortized on a level-yield method over the estimated lives of the loans,
considering prepayments.
-8-
The Bank does not originate or purchase loans with the intention of
selling them. When a decision to sell a loan is made, the loan is
classified as held for sale and carried at the lower of cost or market
value. Gains or losses on the sale of loans are determined on a specific
identification basis and reported in earnings.
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 charge-offs, net of recoveries. Management's periodic 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.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures - an Amendment of SFAS No. 114," effective
January 1, 1995. SFAS No. 114 prescribes that a loan is impaired when it
is probable that the creditor will be unable to collect all contractual
principal and interest payments under the terms of the loan agreement.
This statement generally requires an impaired loan to be measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate or, as an expedient, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. The Company has determined that the combined effect of adoption
of SFAS Nos. 114 and 118 was immaterial to the consolidated financial
statements due to the Company's pre-existing methodology for calculating
its allowance for possible loan losses.
All loans on nonaccrual are considered to be impaired; however, not all
impaired loans are on nonaccrual status. Impaired loans on accrual status
must be such that the loan underwriting must support the debt service
requirements. Factors that contribute to a performing loan being
classified as impaired include: a below market interest rate, delinquent
taxes and debts to other lenders that cannot be serviced out of existing
cash flow.
Nonaccrual loans are those which are past due 90 days as to either
principal or interest, or earlier when payment in full of principal or
interest is not expected. When a loan is placed on nonaccrual status,
interest accrued but not received is reversed against interest income.
Thereafter, interest income is no longer recognized, and the full amount
of all payments received, whether principal or interest, is applied to the
principal balance of the loan. A nonaccrual loan may be restored to an
accrual basis when principal and interest payments are current, and full
payment of principal and interest is expected.
Other Real Estate Owned - Other real estate owned generally results when a
property collateralizing a loan is foreclosed upon or otherwise acquired
by the Bank in satisfaction of the loan. Upon foreclosure, other real
estate owned is recorded at estimated 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 using
the straight-line method over the estimated useful lives of the assets,
which range from 5 to 15 years. Amortization is computed using the
straight-line method over the estimated useful lives of the leasehold
improvements or the term of the lease, whichever is shorter.
-9-
Income Taxes - Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases 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 - Earnings per share have been computed on the basis of
the weighted-average number of common shares and common stock equivalents
outstanding during the year. The weighted average number of common shares
and common stock equivalents used for earnings per share was 2,583,000,
2,502,000 and 2,399,000 for 1996, 1995 and 1994, respectively.
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.
Reclassifications - Certain amounts in the 1995 and 1994 financial
statements have been reclassified to be comparable to the classification
used in the 1996 financial statements.
Impairment of Long-Lived Assets - On January 1, 1996, the Company adopted
SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of." This statement requires that
long-lived assets, certain identifiable intangibles, and goodwill related
to those assets to be held and used, or disposed of, be reviewed for
impairment based on the fair value of the asset. Furthermore, this
statement requires that certain long-lived assets and identifiable
intangibles to be disposed of be reported at the lower of carrying amount
or fair value less cost to sell.
The Company has determined that the impact of SFAS No. 121 on its
operations and financial position is not material for the year ended
December 31, 1996.
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities - In June 1996, the Financial Accounting Standards Board
("FASB") issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." This statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities, and is applied
prospectively to financial statements for fiscal years beginning after
December 31, 1996. In 1996, the FASB also issued SFAS No. 127, "Deferral
of the Effective Date of Certain Provisions of FASB Statement No. 125,"
which defers for one year the effective date of certain provisions within
SFAS No. 125. The Company does not believe the impact on its operations
and financial position will be material upon adoption of SFAS No. 125 or
No. 127.
Stock-Based Compensation - SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans based on the
estimated fair value of the stock options or other awards granted. The
Company has chosen to continue to account for stock-based compensation
using the intrinsic value method. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock. Disclosures about stock compensation
required by SFAS No. 123 are included in Note 9.
-10-
2. INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available for
sale as of December 31, 1996 and 1995 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
1996 Cost Gains Losses Value
U.S. agency securities $26,753,000 $82,000 $(43,000) $26,792,000
Other securities 25,000 25,000
----------- ------- --------- -----------
$26,778,000 $82,000 $(43,000) $26,817,000
=========== ======= ========= ===========
1995
U.S. agency securities $13,849,000 $ 8,000 $ -- $13,857,000
Other securities 25,000 25,000
----------- ------- --------- -----------
$13,874,000 $ 8,000 $ -- $13,882,000
=========== ======= ========= ===========
The scheduled maturities of securities available for sale at December 31,
1996 were as follows:
Amortized Fair
Cost Value
Due in one year or less $11,231,000 $11,249,000
Due from one to five years 25,000 25,000
Due from five to ten years 3,328,000 3,309,000
Due after ten years 12,194,000 12,234,000
----------- -----------
$26,778,000 $26,817,000
========== ===========
Securities carried at $2,000,000 were pledged as of December 31, 1996 and
1995 to secure current or future public deposits and for other purposes
required or permitted by law.
-11-
3. LOANS
The loan portfolio consisted of the following at December 31, 1996 and
1995:
1996 1995
Real estate loans $ 44,250,000 $ 45,968,000
Commercial loans 10,564,000 9,958,000
Real estate construction loans 11,010,000 1,776,000
Bankers' acceptances 16,733,000 2,000,000
Other loans 398,000 408,000
------------ ------------
82,955,000 60,110,000
Allowance for loan losses (2,300,000) (2,000,000)
Deferred loan fees, net (551,000) (443,000)
------------ ------------
Loans, net $ 80,104,000 $ 57,667,000
============ ============
Government guaranteed loans, including premiums on
loans $22,000 and $1,701,000 at December 31,
1996 and 1995, respectively $ 2,665,000 $ 27,660,000
============ ============
Government guaranteed loans held for sale, including
premiums on loans of $239,000 $ 4,833,000
============
No industry constitutes a concentration in the Bank's portfolio except the
real estate construction industry.
An analysis of the activity in the allowance for loan losses for the years
ended December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994
Balance, beginning of year $ 2,000,000 $ 1,390,000 $ 2,250,000
Provision for loan losses 678,000 250,000
Loans charged off (230,000) (219,000) (1,303,000)
Recoveries on loans previously charged off 530,000 151,000 193,000
----------- ----------- -----------
Balance, end of year $ 2,300,000 $ 2,000,000 $ 1,390,000
=========== =========== ===========
Management believes the allowance for loan losses as of December 31, 1996
is adequate to absorb losses inherent in the loan portfolio. 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. The Bank's lending is concentrated in real estate in Southern
California. In the recent past, this area experienced adverse economic
conditions. Further declines in the local economy or in real estate values
may result in increased losses that cannot reasonably be predicted at this
date.
-12-
At December 31, 1996 and 1995, the recorded investment in loans for which
impairment had been recognized in accordance with SFAS No. 114 as amended
by SFAS No. 118 was $681,000 and $530,000, respectively. No specific
allowance was established for these loans under the provisions of SFAS No.
114. Generally, this is due to identified losses on such loans having been
charged off under regulatory guidelines or because sufficient collateral
exists to provide for recovery of the recorded loan amount. The average
recorded investment in these impaired loans during 1996 and 1995 was
$648,000 and $687,000, respectively. Interest income on impaired loans of
$190,764 and $0 was recognized for cash payments received in 1996 and
1995, respectively.
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, 1996 and 1995:
1996 1995
Balance, beginning of year $ 79,000 $ 238,000
Loans granted or renewed 30,000 10,000
Repayments (31,000) (169,000)
--------- ---------
Balance, end of year $ 78,000 $ 79,000
========= =========
4. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following as of December 31, 1996
and 1995:
1996 1995
Furniture, fixtures and equipment $ 1,716,000 $ 1,505,000
Leasehold improvements 531,000 529,000
----------- -----------
2,247,000 2,034,000
Accumulated depreciation and amortization (1,885,000) (1,834,000)
----------- -----------
Premises and equipment, net $ 362,000 $ 200,000
=========== ===========
Rental expense for premises included in occupancy expenses for 1996, 1995
and 1994 was approximately $356,000, $331,000 and $348,000, respectively.
-13-
The future minimum rental commitments, primarily representing
noncancelable operating leases for premises, were as follows at December
31, 1996, excluding the effect of future cost-of-living increases provided
for in the leases, and net of sublease income:
Minimum Rental
Commitments
1997 $ 353,000
1998 412,000
1999 423,000
2000 423,000
2001 423,000
Thereafter 494,000
----------
Total $2,528,000
==========
At the end of 1994, the Bank elected to apply the unused tenant
improvement allowance of $224,000 against its future lease payments.
Payment of the allowance was made to the Bank over a 15-month period
beginning February 1, 1995. The Bank is deferring recognition of the
amount and amortizing it evenly over the lease term, which expires in
February 2003.
5. OTHER REAL ESTATE OWNED
No other real estate was owned at December 31, 1996; other real estate
owned consisted of the following at December 31, 1995:
Property acquired through foreclosure $ 400,000
Investment in real estate 12,000
---------
412,000
Allowance for real estate losses (20,000)
Other real estate owned, net $ 392,000
=========
The investment in real estate originated as an acquisition and development
loan secured by land, and the Bank had a limited partnership interest in
the real estate venture. During 1996, the Bank transferred the investment
in real estate to a newly formed subsidiary, First Regional Capital. The
investment has a zero basis at December 31, 1996 for financial statement
reporting purposes.
Real estate expenses in the consolidated statements of operations for the
years ended December 31, 1996, 1995 and 1994 consist of:
1996 1995 1994
Donation of other real estate owned $ 320,000
Direct write-downs and provisions for losses on
real estate 80,000 $ 50,000 $ 130,000
Net real estate (income) expenses (20,000) 9,000 385,000
--------- --------- ---------
Real estate expenses, net $ 380,000 $ 59,000 $ 515,000
========= ========= =========
-14-
6. INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1996, 1995
and 1994, net of valuation adjustments, consists of the following:
1996 1995 1994
Current provision (benefit):
Federal $ 997,000 $ (85,000)
State 109,000 368,000 $2,000
---------- --------- ------
1,106,000 283,000 2,000
---------- ---------
Deferred provision (benefit):
Federal (389,000) 85,000
State 116,000 (114,000)
---------- ---------
(273,000) (29,000)
---------- --------- ------
Total $ 833,000 $ 254,000 $2,000
========== ========= ======
Income tax assets (liabilities) consisted of the following at December 31,
1996 and 1995:
1996 1995
Income taxes currently receivable (payable),
included in other assets/other liabilities:
Federal $ 237,000 $ (41,000)
State 25,000 28,000
--------- ---------
262,000 (13,000)
--------- ---------
Deferred income tax asset:
Federal 425,000 235,000
State 198,000 315,000
Valuation allowance (200,000)
--------- ---------
623,000 350,000
--------- ---------
Total $ 885,000 $ 337,000
========= =========
-15-
The components of the net deferred income tax asset at December 31 are
summarized as follows:
FEDERAL 1996 1995
Deferred tax liabilities:
Prepaid expenses $ (61,000) $ (35,000)
State taxes (68,000)
Depreciation (62,000)
Other (170,000) (277,000)
--------- ---------
Gross liabilities (361,000) (312,000)
--------- ---------
Deferred tax assets:
Loan and real estate loss allowances 256,000 283,000
Deferred compensation 134,000 100,000
State franchise tax 88,000
Tax credits 102,000
Unrealized loss on securities
Contribution charge-off 229,000
Other 79,000 62,000
--------- ---------
Gross assets 786,000 547,000
--------- ---------
Net deferred tax asset - federal 425,000 235,000
--------- ---------
STATE
Deferred tax liabilities:
Prepaid expenses (20,000) (11,000)
Depreciation (18,000)
Other (57,000) (75,000)
--------- ---------
Gross liabilities (95,000) (86,000)
--------- ---------
Deferred tax assets:
Loan and real estate loss allowances 146,000 205,000
Deferred compensation 45,000 33,000
Real estate contribution 76,000
Other 26,000 163,000
--------- ---------
Gross assets 293,000 401,000
--------- ---------
Net deferred tax asset - state 198,000 315,000
--------- ---------
Net deferred tax asset before valuation allowance 623,000 550,000
Valuation allowance (200,000)
--------- ---------
Net deferred tax asset $ 623,000 $ 350,000
========= =========
-16-
The provision for income taxes (benefit) for the years ended December 31,
1996, 1995 and 1994 varied from the federal statutory tax rate for the
following reasons:
1996 1995 1994
-------------------------- --------------------------- ----------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
Tax expense (benefit)
at statutory rate $ 1,014,000 35.0 % $ 798,000 35.0 % $ 351,000 35.0 %
State franchise taxes,
net of federal
income tax benefit 146,000 5.1 167,000 7.3 1,000 0.1
Valuation allowance (200,000) (6.9) (996,000) (43.7) 169,000 17.0
Tax credits resulting
from loss carryback 174,000 7.6 (511,000) (51.5)
Other, net (127,000) (4.4) 111,000 4.9 (8,000) (0.4)
----------- ------ ----------- ------ ----------- -----
Total $ 833,000 28.8 % $ 254,000 11.1 % $ 2,000 0.2 %
=========== ====== =========== ====== =========== =====
7. COMMITMENTS AND CONTINGENCIES
As of December 31, 1996, the Company had the following commitments and
contingent liabilities:
Undisbursed loans $18,906,000
Standby letters of credit 951,000
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 Company sponsors a defined contribution 401(k) plan benefiting
substantially all employees. At the discretion of the Board of Directors,
the Company matches employee contributions. Currently, the Company
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.
Company contributions are used to buy the Company's common stock on the
open market for allocation to the employees' accounts in the plan. The
Company contributed approximately $28,000, $7,000 and $18,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
As of December 31, 1996, the Bank had unused lines of credit with other
depository institutions of $5,500,000.
The Bank's principal regulators are the FDIC and the California State
Department of Banking; 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.
-17-
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 $611,000 and $540,000 at December 31, 1996 and 1995,
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 Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by the regulators that, if undertaken,
could have a direct material effect on the Company's consolidated
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital (as defined)
to average assets (as defined). Management believes, as of December 31,
1996 and 1995, that the Bank meets all capital adequacy requirements to
which it is subject.
-18-
As of December 31, 1996 and 1995, the most recent notification from the
FDIC categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the table. There are
no conditions or events since that notification which management believes
have changed the Bank's category. Following is a table showing the minimum
capital ratios required for the Bank and the Bank's actual capital ratios
and actual capital amounts at December 31, 1996 and 1995 (the Company's
ratios and amounts are substantially the same):
To Be Well
Capitalized under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------- ---------------------------------- ---------------------------------
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1996:
Total capital
(to risk-weighted $15,388,773 17.7 % > $ 6,968,000 > 8.0 % $ 8,710,000 > 10.0 %
_ _ _
assets)
Tier I capital
(to risk-weighted $14,283,000 16.4 % > $ 3,484,000 > 4.0 % $ 5,226,000 > 6.0 %
_ _ _
assets)
Tier I capital
(to average assets) $14,283,000 9.71 % > $ 5,883,000 > 4.0 % $ 7,353,000 > 5.0 %
_ _ _
As of December 31, 1995:
Total capital
(to risk-weighted $13,199,000 17.17 % > $ 6,144,000 > 8.0 % $ 7,680,000 > 10.0 %
_ _ _
assets)
Tier I capital
(to risk-weighted $12,226,000 15.91 % > $ 3,072,000 > 4.0 % $ 4,608,000 > 6.0 %
_ _ _
assets)
Tier I capital
(to average assets) $12,226,000 8.96 % > $ 5,458,000 > 4.0 % $ 6,823,000 > 5.0 %
_ _ _
9. STOCK COMPENSATION PLANS
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. During 1996, 1995 and 1994, additional
options were granted to officers for an aggregate of 20,000, 30,000 and
40,000 shares, respectively, at exercise prices ranging from $3.50 - $5.75
per share in 1996, $2.50 - $3.50 per share in 1995 and $2.00 per share in
1994.
In 1996, under the terms of the Plan, 10,000 stock options were exchanged
for 7,000 shares of stock.
-19-
At December 31, 1996, 1995 and 1994, the Company had options outstanding
granted under the plan as follows:
1996 1995 1994
---------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
Beginning of year 345,000 $ 2.09 315,000 $ 2.00 275,000 $ 2.75
Granted 20,000 4.63 30,000 3.00 315,000 2.00
Exercised 10,000 2.00
Terminated 15,000 2.00 275,000 2.75
-------- -------- --------
Outstanding at
End of year 340,000 $ 2.24 345,000 $ 2.09 315,000 $ 2.00
======== ======== ========
Options Exercisable
at Year end 64,000 $ 2.09 - $ - - $ -
======== ======== ========
The estimated fair value of options granted during 1996 and 1995 was $2.45
and $1.60 per share, respectively. No compensation cost has been
recognized for the stock option plan. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the
grant dates for awards under the plan consistent with the method of SFAS
No. 123, the Company's net income and earnings per share for the year
ended December 31, 1996 and 1995 would have been reduced to the pro forma
amounts indicated below:
1995 1995
Net income to common shareholders:
As reported $2,036,000 $2,027,000
Pro forma $2,029,000 $2,023,000
Net income to per common and share equivalent:
As reported $ 0.79 $ 0.81
Pro forma $ 0.79 $ 0.81
The fair values of options granted under the Company's fixed stock option
plan during 1996 and 1995 were estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used: no dividend yield, expected volatility of 53%, risk free
interest rate of 6.3%, and expected lives of five years.
-20-
10. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated
fair value amounts have been determined by the Company using available
market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.
December 31, 1996 December 31, 1995
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In thousands) (In thousands)
Assets:
Cash and due from banks $ 6,499 $ 6,499 $ 6,777 $ 6,777
Federal funds sold 22,780 22,780 20,690 20,690
Interest-bearing deposits in
financial institutions 5,242 5,242 8,121 8,121
Investment securities available for sale 26,817 26,817 13,882 13,882
Loans 80,104 82,399 57,667 59,490
Government guaranteed loans 7,498 7,713 27,660 28,033
Liabilities:
Deposits:
Noninterest-bearing 22,516 22,516 24,005 24,005
Interest-bearing:
Time deposits 24,839 24,849 13,015 13,013
Money market and other deposits 89,400 89,400 87,704 87,704
Fair market values of commitments to extend credit and standby letters of
credit are immaterial as of December 31, 1996 and 1995.
The fair values of cash and due from banks, federal funds sold,
interest-bearing deposits in financial institutions, noninterest-bearing
deposits, and money market and other deposits approximate their carrying
value.
The fair value of investment securities available for sale is based on
quoted market prices, dealer quotes, and prices obtained from independent
pricing services. The fair value of loans and time deposits is estimated
based on present values using applicable risk-adjusted spreads to the U.S.
Treasury curve to approximate current entry-value interest rates
applicable to each category of such financial instruments.
-21-
No adjustment was made to the entry-value interest rates for changes in
credit of performing loans for which there are no known credit concerns.
Management segregates loans in appropriate risk categories. Management
believes that the risk factor embedded in the entry-value interest rates,
along with the general reserves applicable to the performing loan
portfolio for which there are no known credit concerns, results in a fair
valuation of such loans on an entry-value basis. The fair value of
nonperforming loans with a recorded book value of $681,000 in 1996 was not
estimated because it is not practicable to reasonably assess the credit
adjustment that would be applied in the marketplace for such loans. In
addition, the fair value of commitments is immaterial to the financial
statements as a whole.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1996. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and
therefore, current estimates of fair value may differ significantly from
the amounts presented herein.
11. INTEREST EXPENSE
A summary of interest expense on deposits for the years ended December 31,
1996, 1995 and 1994 is as follows:
1996 1995 1994
Money market savings/NOW account deposits $2,105,000 $2,069,000 $2,000,000
Time deposits under $100,000 222,000 205,000 149,000
Time deposits of $100,000 or more 616,000 431,000 256,000
Savings deposits 27,000 27,000 27,000
---------- ---------- ----------
$2,970,000 $2,732,000 $2,432,000
========== ========== ==========
The aggregate amount of time deposits in denominations of $100,000 or more
outstanding as of December 31, 1996 and 1995 was approximately $16,781,000
and $9,016,000, respectively.
12. OTHER OPERATING EXPENSES
Included in other operating expenses for the years ended December 31,
1996, 1995 and 1994 are the following items:
1996 1995 1994
Professional services $ 467,000 $ 424,000 $ 381,000
FDIC assessment 2,000 161,000 339,000
Data processing fees 242,000 225,000 281,000
General insurance 108,000 134,000 126,000
Directors' fees 59,000 105,000 87,000
Equipment expense 87,000 136,000 83,000
Other 946,000 764,000 936,000
---------- ---------- ----------
Total $1,911,000 $1,949,000 $2,233,000
========== ========== ==========
-22-
13. TRANSCORP RELATIONSHIP
Transcorp Pension Services, Inc. ("Transcorp"), a corporate customer of
the Bank, is an administrator of self-directed individual retirement
accounts 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 54% and 57% of
the Bank's total deposits as of December 31, 1996 and 1995, respectively.
The deposit and service relationships with Transcorp are governed by an
agreement that requires, among other things, not less than a 30-day prior
notice of intent by either party to terminate the relationships and
withdrawal of the deposited amount over a two-year period. For the years
ended December 31, 1996, 1995 and 1994, the Bank paid interest of
$1,746,000, $1,717,000 and $1,733,000, respectively, on deposits of
Transcorp custodial clients, and paid $1,089,000, $1,093,000 and
$1,105,000, respectively, in administrative fees to Transcorp on behalf of
its custodial clients.
In the first quarter of 1997 the Bank was informed of a proposed merger of
Transcorp with another company under which the Bank's custodial services
would no longer be required, and that for this reason Transcorp intended
to terminate the deposit and service relationships between Transcorp and
the Bank. Because the Bank has invested the Transcorp-related deposits in
highly liquid assets, the Bank anticipates no difficulty in accommodating
the deposit withdrawals over the two-year period called for in its
agreement with Transcorp. The Bank intends to replace the
Transcorp-related deposits with deposits obtained from other sources.
Management believes that the Transcorp relationship has been profitable
for the Bank, but it is impossible to determine what impact, if any, the
termination of the Transcorp relationships will have on the Bank's future
results.
14. RELATED PARTY TRANSACTIONS
In 1992 the Bank entered into an agreement with a director whereby the
Bank receives management and consulting services for properties. Total
payments in 1996, 1995 and 1994 to the director under the agreement were
$6,000, $4,000 and $71,000, 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.
As of December 31, 1996 and 1995, deposits from directors, officers and
their affiliates amounted to $6,346,000 and $6,948,000, respectively.
15. FINANCIAL INFORMATION REGARDING FIRST REGIONAL BANCORP
As of December 31, 1996 and 1995, the Company's investment in the Bank was
recorded on the equity method at $14,283,000 and $12,205,000,
respectively. The Company's cash balance held in the Bank was $6,000 and
$34,000 as of December 31, 1996 and 1995, 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 1996, 1995 or 1994.
Federal law restricts the Bank from extending credit to the Company, as
any such extensions of credit are subject to strict collateral
requirements.
******
-23-
68
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 56 of this report on Form
10-K)
22 Subsidiary of Registrant
27 Financial Data Schedule