Page 1 of 20
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Quarter Ended March 31, 1998
--------------
Commission File Number 0-10232
-------
FIRST REGIONAL BANCORP
----------------------
(Exact name of registrant as specified in its charter)
California 95-3582843
- ---------- ----------
State or other jurisdiction of IRS Employer
incorporation or organization Identification Number
1801 Century Park East, Los Angeles, California 90067
- ----------------------------------------------- -----
Address of principal executive offices Zip Code
(310) 552-1776
- --------------
Registrant's telephone number, including area code
Not applicable
- --------------
Former name, former address, and former fiscal year, if changed since last
report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, No Par Value 2,451,631
-------------------------- ---------
Class Outstanding on April 28, 1998
2
FIRST REGIONAL BANCORP
----------------------
INDEX
-----
Page
----
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial
Condition.................................... 3
Consolidated Statements of Income............ 5
Consolidated Statements of Cash Flows........ 7
Notes to Consolidated Financial
Statements................................... 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations................................ 12
Part II - Other Information
Item 1. Legal Proceedings............................ 19
Item 4. Submission of Matters to a Vote of
Security Holders............................. 19
Item 6. Exhibits and Reports on Form 8-K............. 19
Signatures.................................................. 20
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
FIRST REGIONAL BANCORP AND SUBSIDIARY
-------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
(In Thousands)
(unaudited)
March 31, December 31,
ASSETS 1998 1997
------ --------- ------------
Cash and due from banks $ 9,454 $ 9,847
Time deposits with other financial
institutions 8,896 6,626
Investment securities 15,313 26,431
Funds sold 60,000 38,390
Federally guaranteed loans 500 942
Other loans, net of allowance for losses of
$2,424,000 in 1998 and $2,400,000 in 1997 71,171 77,778
Premises and equipment, net of accumulated
depreciation 693 698
Other real estate owned 0 0
Accrued interest receivable and other assets 1,722 1,733
-------- --------
Total Assets $167,749 $162,445
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Demand deposits $ 38,955 $ 35,820
Savings deposits 6,001 6,111
Money market deposits 65,302 72,959
Time deposits 39,862 30,206
-------- --------
Total deposits 150,120 145,096
Securities sold under agreement to repurchase 0 0
Accrued interest payable and other liabilities 1,926 1,926
-------- --------
Total Liabilities 152,046 147,022
Shareholders' Equity:
Common Stock, no par value, 50,000,000 shares
authorized; 2,451,631 and 2,416,631 shares
outstanding in 1998 and 1997, respectively 11,215 11,286
Retained earnings 4,487 4,128
4
March 31 December 31,
1998 1997
-------- ------------
Net unrealized gain (loss) on securities
available for sale 1 9
-------- --------
Total Shareholders' Equity 15,703 15,423
-------- --------
Total Liabilities and Shareholders' Equity $167,749 $162,445
======== ========
The accompanying notes are an integral part of these statements.
5
FIRST REGIONAL BANCORP AND SUBSIDIARY
-------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(In Thousands Except Per Share Amounts)
(Unaudited)
Three Months Ended
March 31,
------------------
1998 1997
---- ----
REVENUE FROM EARNING ASSETS:
Interest and fees on loans $1,675 $2,007
Interest on time deposits with
other financial institutions 101 78
Interest on investment securities 581 593
Interest on funds sold 481 255
------ ------
Total revenue from earning assets 2,838 2,933
COST OF FUNDS:
Interest on deposits 817 846
Interest on securities sold under
agreements to repurchase 3 (1)
------ ------
Total cost of funds 820 845
Net revenue from earning assets
before provision for loan losses 2,018 2,088
PROVISION FOR LOAN LOSSES 12 156
------ ------
Net revenue from earning assets 2,006 1,932
OPERATING INCOME
Net gains (losses) on sales of
investment securities 0 0
Other revenue 170 183
------ ------
Total operating income 170 183
OPERATING EXPENSES:
Salaries and related benefits 794 691
Occupancy expense 115 92
Equipment expense 56 46
Promotion expense 35 37
Professional service expense 161 165
Customer service expense 262 298
Supply/communication expense 45 31
Other expenses 94 137
------ ------
Total operating expenses 1,562 1,497
Income before provision for income taxes 614 618
PROVISION FOR INCOME TAXES 254 256
------ ------
6
Three Months Ended
March 31,
------------------
1998 1997
---- ----
NET INCOME $ 360 $ 362
====== ======
NET INCOME PER SHARE (Note 2)
Basic $ 0.15 $ 0.15
Diluted $ 0.14 $ 0.14
Average shares outstanding 2,440,131 2,425,927
Diluted average shares 2,628,495 2,622,985
The accompanying notes are an integral part of these statements.
7
FIRST REGIONAL BANCORP AND SUBSIDIARY
-------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In Thousands)
(Unaudited)
Three Months Ended
March 31,
------------------
1998 1997
---- ----
OPERATING ACTIVITIES
Net Income $ 360 $ 362
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 12 156
Provision for depreciation and
amortization 31 19
Amortization of investment security
and guaranteed loan premiums 16 32
Accretion of investment security
discounts (79) (43)
Decrease (increase) in interest
receivable 58 357
Increase (decrease) in interest payable 28 12
Increase (decrease) in taxes payable 229 255
Net increase (decrease) in other
liabilities (257) (75)
------- --------
Net cash provided by
operating activities $ 398 $ 1,075
INVESTING ACTIVITIES
Decrease (increase) in investments in time
deposits with other financial institution $(2,270) $ (98)
Decrease (increase) in investment securities 11,173 2,988
Decrease (increase) in guaranteed loans 442 3,584
Net decrease (increase) in other loans 6,595 (10,830)
Decrease (increase) in premises and equipment (26) (29)
Decrease (increase) in other real estate owned 0 0
Net decrease (increase) in other assets (47) 18
------- --------
Net cash provided by
investing activities $15,867 $ (4,367)
8
Three Months Ended
March 31,
------------------
1998 1997
---- ----
FINANCING ACTIVITIES
Net increase (decrease) in demand
deposits, savings accounts, and
money market accounts $(4,632) $(1,029)
Net increase (decrease) in time deposits 9,656 (2,386)
Increase (decrease) in securities sold
under agreement to repurchase 0 (94)
Increase (decrease) in shareholders' equity (72) 0
------- -------
Net cash provided by
financing activities $ 4,952 $(3,509)
Increase (decrease) in cash and cash
equivalents $21,217 $(6,801)
Cash and cash equivalents, beginning of
period 48,237 29,279
------- -------
Cash and cash equivalents, end of period $69,454 $22,478
======= =======
The accompanying notes are an integral part of these statements.
9
FIRST REGIONAL BANCORP AND SUBSIDIARY
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
March 31, 1998
(Unaudited)
NOTE 1 - The consolidated financial statements include the accounts of First
Regional Bancorp (the Company), a bank holding company, and its
wholly-owned subsidiary, First Regional Bank (the Bank). Certain
amounts in the 1997 financial statements have been reclassified to be
comparable with the classifications used in the 1998 financial
statements.
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (which consist only of normal
recurring adjustments) necessary to present fairly the financial
position as of March 31, 1998 and December 31, 1997 and the results of
operations for the three month periods ended March 31, 1998 and 1997.
While the Company believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these
financial statements be read in conjunction with the financial
statements and the notes included in the Company's 1997 annual report.
NOTE 2 - Effective December 31, 1997, the Company adopted SFAS No. 128,
"Earnings per Share." Accordingly, basic earnings per share are
computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding during each
period. The computation of diluted earnings per share also considers
the number of shares issuable upon the assumed exercise of outstanding
common stock options. All earnings per common share amounts presented
have been restated in accordance with the provisions of this
statement. A reconciliation of the numerator and the denominator used
in the computation of basic and diluted earnings per share is:
Three Months Ended March 31, 1998
----------------------------------------
Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
---------
Income available to
common shareholders $360,000 2,440,131 $ 0.15
Effect of Dilutive
Securities
----------
Incremental shares from
assumed exercise of
outstanding options 188,364 (0.01)
-------- --------- ------
10
Diluted EPS
-----------
Income available to
common shareholders $360,000 2,628,495 $ 0.14
======== ========= ======
Three Months Ended March 31, 1997
----------------------------------------
Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
---------
Income available to
common shareholders $362,000 2,425,927 $ 0.15
Effect of Dilutive
Securities
----------
Incremental shares from
assumed exercise of
outstanding options 197,058 (0.01)
-------- --------- ------
Diluted EPS
-----------
Income available to
common shareholders $362,000 2,622,985 $ 0.14
======== ========= ======
NOTE 3 - As of March 31, 1998 the Bank had a total of $1,703,000 in standby
letters of credit outstanding. No losses are anticipated as a result
of these transactions.
NOTE 4 - The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 114, "Accounting by Creditors for Impairment of a Loan," effective
January 1, 1995. This Statement defines an impaired loan as one for
which it is likely that an institution will be unable to collect all
amounts due (that is, all principal and interest) according to the
contractual terms of the loan. The Statement generally requires
impaired loans to be measured at the present value of expected future
cash flows discounted at the effective interest rate of the loan, or,
as an expedient, at the loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent. For the
quarter ended March 31, 1998 the Company had identified loans having
an aggregate average balance of $317,182 which it concluded were
impaired under SFAS No. 114. The Company's policy is to discontinue
the accrual of interest income on impaired loans, and to recognize
income on such loans only after the loan principal has been repaid in
full. Pursuant to this policy, the Company had already ceased to
accrue interest on the impaired loans, and had established a general
loss reserve for each of the loans which at March 31, 1998 totalled
$128,000 for the loans as a group. As the loss reserves established
by the Company were greater than those called for under SFAS No. 114,
the adoption of SFAS No. 114 had no effect on the Company's financial
statements as of March 31, 1998.
11
NOTE 5 - The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 115, "Accounting for Investments in Certain Debt and Equity
Securities," effective January 1, 1994. This Statement supersedes
SFAS No. 12, and significantly amends SFAS No. 65 and SFAS No. 60, the
standards previously used by the Company. The effect of adopting SFAS
No. 115 on the Company's financial statements was to increase
shareholders' equity at March 31, 1998 by $1,000 from the level which
would have existed had SFAS No. 115 not been adopted. Because the
applicable investment securities are classified by the Company as
"available for sale," there was no effect on the Company's income
statement.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
SUMMARY
- -------
First Regional Bancorp did not conduct any significant business activities
independent of First Regional Bank. The following discussion and analysis
relates primarily to the Bank.
As of March 31, 1998 total assets were $167,749,000 compared to $162,445,000 at
December 31, 1997, an increase of $5,304,000 or 3%. Since a modest decline in
asset levels is customary in the first quarter of each year, the growth achieved
in the first three months of 1998 is a positive event. Moreover, the March 31,
1998 asset level represents a considerable improvement over the $149,472,000
which existed on the same date in 1997. The 1998 asset growth reflects a
corresponding increase in total deposits of $5,024,000 or 3%, from $145,096,000
at the end of 1997 to $150,120,000 at March 31, 1998. While the deposit growth
was centered in time deposits, there was also significant growth in demand
deposits, while savings deposits and money market deposits experienced some
decline. Most of the reduction in money market accounts was due to scheduled
deposit reductions in connection with the termination of the Bank's deposit and
service relationship with Transcorp Pension Services, which is described more
fully below. There were several changes in the composition of the Bank's assets
during the first quarter. Other loans (net) fell by $6,607,000 due to the
maturity of past investments in bankers acceptances and the inability to find
suitable replacement instruments providing competitive yields; the Bank's core
loan portfolio actually grew during the quarter, but that growth was
overshadowed by the maturities of the bankers acceptances. Federally guaranteed
loans fell by $442,000 due to continued sales of loans during the quarter under
the loan sale program begun in the fourth quarter of 1996. These changes
brought the Bank's total loans to $71,671,000 at March 31, 1998 from the
December 31, 1997 total of $78,720,000. The combined effect of the shrinkage in
loans and the growth in deposits was an increase in the level of total liquid
assets. Of particular note, investment securities fell by approximately $11
million due to maturing instruments and the absence of attractive replacements,
while time deposits with other financial institutions rose by $2.2 million.
Funds sold rose by a whopping $21.6 million in order to accommodate the changes
which took place in the rest of the balance sheet.
The Company earned a profit of $360,000 in the first quarter of 1998, compared
to earnings of $362,000 in the three months ended March 31, 1997. The consistent
results between the 1998 and 1997 periods are a reflection of generally stable
net interest revenue resulting from the growth in the level of earning assets
over the prior year, combined with somewhat higher non-interest expenses.
NET INTEREST INCOME
- -------------------
Total revenue from earning assets fell by $95,000 (3%) for the three months
ended March 31, 1998 compared to the same period in 1997. This revenue decrease
was due to the fact that, while total earning assets were higher
13
in 1998 than in 1997, the 1998 assets were composed of relatively lower levels
of high-yielding assets (such as loans) and relatively greater levels of lower-
yielding assets (such as funds sold) than prevailed in 1997. A similar
situation occurred in the area of interest expense, in which interest expense
fell slightly despite higher deposit volumes, because the mix of the Bank's
deposits shifted away from high-cost deposit sources such as money market
accounts in favor of lower-cost categories such as demand deposits. Because the
drop in yields on earning assets was more pronounced than the reduction in the
cost of funds, the net result was a slight decrease in net revenue from earning
assets, from $2,088,000 in the first quarter of 1997 to $2,018,000 for the first
three months of 1998.
OPERATING INCOME
- ----------------
Other revenue fell to $170,000 in the first quarter of 1998 from $183,000 in the
three months ended March 31, 1997. The decrease in this category of income was
in part due to reductions in gains realized on the sale of loans, which fell
from $79,000 in the first quarter of 1997 to $9,000 in the same period of 1998,
and lower gains on sales of land, which declined from $70,000 in 1997's first
quarter to $12,000 in the first quarter of 1998. Offsetting these income
declines was income generated by the Bank's new merchant services operation,
which provides credit card deposit and clearing services to retailers and other
credit card accepting businesses. Merchant services revenue totalled $52,000 for
the three months ended March 31, 1998; there was no such revenue in the
corresponding period of 1997. No gains or losses on securities sales were
realized in the first quarter of 1998 or 1997.
PROVISION FOR POSSIBLE LOSSES
- -----------------------------
The allowance for possible losses is intended to reflect known and inherent
risks in a portfolio. The allowance for possible losses is increased by
provisions for possible losses, and is decreased by net chargeoffs. Management
continues to evaluate the portfolio in light of many factors, including loss
experience and current economic conditions. Management believes the allowance
for possible losses is adequate to provide for losses that might be reasonably
anticipated.
The allowance for possible losses was $2,424,000 and $2,400,000 (or 3.27% and
2.96% of gross outstanding loans) at March 31, 1998 and December 31, 1997
respectively. Reflecting the Company's ongoing analysis of the risks presented
by its loan portfolio, provisions for possible losses were $156,000 for the
three month period ended March 31, 1997, compared to $12,000 in the first
quarter of 1998. For the three months ended March 31, 1997, the Company
generated net loan chargeoffs of $541,000; by comparison, in the first quarter
of 1998 the Company experienced net loan recoveries of $12,000.
In addition, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," effective
January 1, 1995. This Statement defines an impaired loan as one for which it is
likely that an institution will be unable to collect all amounts due (that is,
all principal and interest) according to the contractual terms of the loan. The
Statement generally requires impaired
14
loans to be measured at the present value of expected future cash flows
discounted at the effective interest rate of the loan, or, as an expedient, at
the loan's observable market price, or the fair value of the collateral if the
loan is collateral dependent. For the quarter ended March 31, 1998 the Company
had identified loans having an aggregate average balance of $317,000 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 which at March 31, 1998 totalled $128,000 for the loans as a group. As
the loss reserves established by the Company were greater than those called for
under SFAS No. 114, the adoption of SFAS No. 114 had no effect on the Company's
financial statements as of March 31, 1998.
OPERATING EXPENSES
- ------------------
Overall operating expenses increased in the first quarter of 1998 compared to
the same period of 1997, although some categories of expense actually decreased
from the levels of previous periods. Operating expenses rose to a total of
$1,562,000 for the first quarter of 1998 from $1,497,000 for the three months
ended March 31, 1997.
Salary and related benefits increased by $103,000, rising from a total of
$691,000 for the first quarter of 1997 to $794,000 for the same period in 1998.
The increase principally reflects employee salary adjustments, as well as
increases in staffing which took place in recent years as part of the Bank's
program to increase its level of assets. Occupancy expense rose to $115,000 for
the three months ended March 31, 1998 from $92,000 in the first quarter of 1997
due in part to the one-time adjustment in rent called for in the Bank's head
office lease. In addition, the increase reflects the rent paid on the various
facilities which house the Bank's regional offices and the merchant services
operation; since these operations did not exist in the first quarter of 1997
there were no corresponding expense items. Other operating expenses fell in
1998 compared to the prior year, falling from $714,000 for the first quarter of
1997 to $653,000 for the first three months of 1998. In addition to the
benefits of the Bank's ongoing program of expense control, the expense reduction
from prior years reflects reduced expenses for customer services as a result of
the termination of the Bank's deposit and service relationship with Transcorp
Pension Services.
The combined effects of the above-described factors resulted in income before
taxes of $614,000 for the three months ended March 31, 1998 compared to $618,000
for the first quarter of 1997. In the first quarter, the Company's provision
for taxes fell from $256,000 in 1997 to $254,000 in 1998. This brought Net
Income for the first quarter of 1998 to $360,000 compared to $362,000 for the
same period in 1997.
LIQUIDITY, SOURCES OF FUNDS, AND CAPITAL RESOURCES
- --------------------------------------------------
The Company's financial position remains highly liquid. Total liquid assets
(cash and due from banks, time deposits with other financial
15
institutions, investment securities, and funds sold) stood at 62.4% of total
deposits at March 31, 1998. This level represents a slight increase from the
56.0% liquidity level which existed on December 31, 1997. In addition, at March
31, 1998 some $8.5 million of the Bank's total loans consisted of bankers
acceptances or government guaranteed loans, both of which represent a
significant sources of liquidity due to the active secondary markets which exist
for these assets. The ratio of net loans (including bankers acceptances and
government guaranteed loans) to deposits was 47.7% and 54.3% as of March 31,
1998 and December 31, 1997, respectively.
Because customer deposits are the Company's principal funding source outside of
its capital, management has attempted to match rates and maturities of its
deposits with its investment and loan portfolios as part of its liquidity and
asset and liability management policies. The objective of these policies is to
limit the fluctuations of net interest income resulting from interest rate
changes. The table which follows indicates the repricing or maturity
characteristics of the major categories of the Bank's assets and liabilities as
of March 31, 1998, and thus the relative sensitivity of the Bank's net interest
income to changes in the overall level of interest rates. A positive "gap" for
a period indicates that an upward or downward movement in the level of interest
rates would cause a corresponding change in net interest income, while a
negative "gap" implies that an interest rate movement would result in an inverse
change in net interest income.
One month Six months
Floating Less than but less than but less than
Category Rate one month six months one year
- -------- ---- --------- ---------- --------
Fed funds sold 60,000 0 0 0
Time deposits with other banks 0 1,288 7,608 0
Investment securities 0 3,989 11,299 25
------- ------ ------ ---
Subtotal 60,000 5,277 18,907 25
Loans 63,066 1,042 7,248 276
------- ------ ------ ---
Total earning assets 123,066 6,319 26,155 301
Cash and due from banks 0 0 0 0
Premises and equipment 0 0 0 0
Other real estate owned 0 0 0 0
Other assets 0 0 0 0
------- ------ ------ ---
Total non-earning assets 0 0 0 0
------- ------ ------ ---
Total assets 123,066 6,319 26,155 301
Funds purchased 0 0 0 0
Repurchase agreements 0 0 0 0
------- ------ ------ ---
Subtotal 0 0 0 0
Savings deposits 6,001 0 0 0
Money market deposits 65,302 0 0 0
Time deposits 0 19,934 18,766 993
------- ------ ------ ---
Total bearing liabilities 71,303 19,934 18,766 993
Demand deposits 0 0 0 0
One year Non-interest
but less than Five years earning
Category five years or more or bearing Total
- -------- ---------- ------- ---------- -----
Fed funds sold 0 0 0 60,000
Time deposits with other banks 0 0 0 8,896
Investment securities 0 0 0 15,313
--- - ------ -------
Subtotal 0 0 0 84,209
Loans 39 0 0 71,671
--- - ------ -------
Total earning assets 39 0 0 155,880
Cash and due from banks 0 0 9,454 9,454
Premises and equipment 0 0 693 693
Other real estate owned 0 0 0 0
Other assets 0 0 1,722 1,722
--- - ------ -------
Total non-earning assets 0 0 11,869 11,869
--- - ------ -------
Total assets 39 0 11,869 167,749
Funds purchased 0 0 0 0
Repurchase agreements 0 0 0 0
--- - ------ -------
Subtotal 0 0 0 0
Savings deposits 0 0 0 6,001
Money market deposits 0 0 0 65,302
Time deposits 169 0 0 39,862
--- - ------ -------
Total bearing liabilities 169 0 0 111,165
Demand deposits 0 0 38,955 38,955
16
One month Six months
Floating Less than but less than but less than
Category Rate one month six months one year
- -------- ---- --------- ---------- --------
Other liabilities 0 0 0 0
Equity capital 0 0 0 0
------ ------- ------ ------
Total non-bearing liabilities 0 0 0 0
------ ------- ------ ------
Total liabilities 71,303 19,934 18,766 993
GAP 51,763 (13,615) 7,389 (692)
Cumulative GAP 51,763 38,148 45,537 44,845
One year Non-interest
but less than Five years earning
Category five years or more or bearing Total
- -------- ---------- ------- ---------- -----
Other liabilities 0 0 1,926 1,926
Equity capital 0 0 15,703 15,703
------ ------ ------- -------
Total non-bearing liabilities 0 0 56,584 56,584
------ ------ ------- -------
Total liabilities 169 0 56,584 167,749
GAP (130) 0 (44,715) 0
Cumulative GAP 44,715 44,715 0 0
As the table indicates, the vast majority of the Company's assets are either
floating rate or, if fixed rate, have extremely short maturities. Since the
yields on these assets quickly adjust to reflect changes in the overall level of
interest rates, there are no significant unrealized gains or losses with respect
to the Company's assets, nor is there much likelihood of large realized or
unrealized gains or losses developing in the future. For this reason, realized
or unrealized gains or losses are not expected to have any significant impact on
the Company's future operating results or liquidity.
Deposits of custodial clients of retirement plans administered by Transcorp
Pension Services, a corporate customer of the Bank, represented approximately
29% and 39% of the Bank's total deposits as of March 31, 1998 and December 31,
1997, respectively; in recognition of this the Bank has maintained a large
portion of its assets in liquid form since the inception of the Transcorp
relationship. In 1997 Transcorp merged with an affiliated company which already
possessed custodial powers, and for this reason Transcorp sought to terminate
its deposit relationship with the Bank. The Bank and Transcorp ultimately
agreed to terminate the relationship under a settlement agreement which, among
other things, provided for the transfer of the remaining deposits over an 18-
month period beginning in March, 1998 and continuing through September, 1999.
Because the Bank has invested the Transcorp deposits in highly liquid assets, it
anticipates no difficulty in accommodating the deposit withdrawals over the 18-
month transfer period.
The Bank's investment portfolio continues to be composed of high quality, low
risk securities, primarily U.S. Treasury or Agency obligations. As mentioned
above, no gains or losses were recorded on securities sales in the first quarter
of 1998. As of March 31, 1998 the Company's investment portfolio contained
gross unrealized gains of $2,000 and no unrealized losses. By comparison, at
March 31, 1997 the Company's investment portfolio contained gross unrealized
gains of $63,000 and gross unrealized losses of $57,000. As discussed more
fully in Note 5, the Company adopted SFAS No. 115 in 1994, with the result that
the unrealized net gain (adjusted for taxes) of $1,000 at March 31, 1998 gave
rise to a $1,000 increase in the Company's shareholders' equity as of that date.
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."
17
The Company continues to enjoy a strong capital position. Total capital was
$15,703,000 and $15,423,000 as of March 31, 1998 and December 31, 1997,
respectively. The Company's capital ratios for those dates in comparison with
regulatory capital requirements were as follows:
3-31-98 12-31-97
------- --------
Leverage Ratio (Tier I Capital
to Assets):
Regulatory requirement 4.00% 4.00%
First Regional Bancorp 9.34% 9.50%
The "regulatory requirement" listed represents the level of capital required for
Adequately Capitalized status.
In addition, bank regulators have issued risk-adjusted capital guidelines which
assign risk weighting to assets and off-balance sheet items and place increased
emphasis on common equity. The Company's risk adjusted capital ratios for the
dates listed in comparison with the risk adjusted regulatory capital
requirements were as follows:
3-31-98 12-31-97
------- --------
Tier I Capital to Assets:
Regulatory requirement 4.00% 4.00%
First Regional Bancorp 15.82% 16.70%
3-31-98 12-31-97
------- --------
Tier I + Tier II Capital to Assets:
Regulatory requirement 8.00% 8.00%
First Regional Bancorp 17.08% 18.00%
The Company believes that it will continue to meet all applicable capital
standards.
YEAR 2000 ISSUES
- ----------------
The approach of the year 2000 presents potential problems to businesses, such as
the Company, which utilize computers. Many computer systems in use today,
particularly older computers and computer programs, may not be able to properly
interpret dates after December 31, 1999 because they use only two digits to
indicate the year in a date. For example, the year 2000 could be interpreted as
the year 1900 by such systems. As a result, the systems could produce
inaccurate data, or not function at all.
In anticipation of this potential problem, the Company has developed a
comprehensive plan to ensure that all of its systems are able to properly deal
with the year 2000. The Company is currently assessing the ability of each
system to properly perform, and is implementing corrective measures when
deficiencies are found. Thus far, relatively few required corrections have been
identified, and most of these situations would have been corrected in the normal
course of business as part of the routine ongoing maintenance and updating of
the Company's systems. At this point, the Company anticipates no
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difficulty in achieving full year 2000 capability. Further, while it is
impossible to determine the costs of achieving full year 2000 capability, at
this point those costs are not expected to be material.
As a lending institution, the Bank is also exposed to potential risk if
borrowers suffer year 2000-related difficulties and are unable to repay their
loans. The Bank is discussing the year 2000 issue with borrowers as part of the
loan granting or renewal process. At this time, it is impossible to determine
what impact, if any, the year 2000 will have on the loan payment performance of
the Bank's borrowers. Thus far, however, none of the Bank's borrowers have
reported the expectation of material adverse impacts as a result of the year
2000.
INFLATION
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The impact of inflation on the Company differs significantly from other
industries, since virtually all of its assets and liabilities are monetary.
During periods of rising inflation, companies with net monetary assets will
always experience a reduction in purchasing power. Inflation continues to have
an impact on salary, supply, and rent expenses, but the rate of inflation in
general and its impact on these expenses in particular has remained moderate in
recent years.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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Litigation
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The Company is a party as plaintiff 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
- ------------------------------------------------------------
No items were submitted to a vote of the Company's shareholders during the first
quarter of 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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Exhibits
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Exhibit 27 Financial Data Schedule
Reports on Form 8-K
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No reports on Form 8-K were filed during the first quarter of 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST REGIONAL BANCORP
Date: April 30, 1998 /s/ Jack A. Sweeney
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Jack A. Sweeney, Chairman of the Board
and Chief Executive Officer
Date: April 30, 1998 /s/ Thomas McCullough
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Thomas McCullough, Chief Financial Officer