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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 September 30, 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 2,972,381
-------------------------- -------------------------------
Class Outstanding on October 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)
September 30, December 31,
1998 1997
------------- ------------
ASSETS
------
Cash and due from banks $ 12,143 $ 9,847
Federal funds sold 31,530 38,390
-------- --------
Cash and cash equivalents $ 43,673 $ 48,237
Interest-bearing deposits in financial
institutions 9,341 6,626
Investment securities available for sale 51,314 26,431
Government guaranteed loans 494 942
Loans, net of allowance for losses of
$2,431,000 in 1998 and $2,400,000 in 1997 82,473 77,778
Premises and equipment, net of accumulated
depreciation 729 698
Accrued interest receivable and other assets 1,867 1,733
-------- --------
Total Assets $189,891 $162,445
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Noninterest bearing deposits $ 66,757 $ 35,820
Time deposits 39,657 30,206
Money market deposits 54,251 72,959
Other deposits 6,059 6,111
-------- --------
Total deposits 166,724 145,096
Accrued interest payable and other liabilities 3,383 1,926
-------- --------
Total Liabilities 170,107 147,022
4
September 30, December 31,
1998 1997
------------- ------------
Shareholders' Equity:
Common Stock, no par value, 50,000,000 shares
authorized; 2,972,381 and 2,416,631 shares
outstanding in 1998 and 1997, respectively 15,824 11,286
Less: Unearned ESOP shares; 150,000 and 0
outstanding in 1998 and 1997, respectively (1,421) 0
Retained earnings 5,371 4,128
Accumulated comprehensive income 10 9
-------- --------
Total Shareholders' Equity 19,784 15,423
-------- --------
Total Liabilities and Shareholders' Equity $189,891 $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 Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
----- ------ ------ ------
REVENUE FROM EARNING ASSETS:
Interest on loans $2,151 $1,959 $5,756 $6,057
Interest on federal funds sold 295 480 1,437 975
Interest on investment securities 814 583 2,040 1,888
------ ------ ------ ------
Total interest income 3,260 3,022 9,233 8,920
COST OF FUNDS:
Interest on deposits 834 808 2,525 2,451
Interest on other borrowings 1 0 3 (1)
------ ------ ------ ------
Total interest expense 835 808 2,528 2,450
------ ------ ------ ------
Net interest income 2,425 2,214 6,705 6,470
PROVISION FOR LOAN LOSSES (10) 106 14 519
------ ------ ------ ------
Net interest income after
provision for loan losses 2,435 2,108 6,691 5,951
Other operating income 229 159 616 528
------ ------ ------ ------
OTHER OPERATING EXPENSES:
Salaries and related benefits 905 740 2,560 2,153
Occupancy expense 135 103 380 292
Equipment expense 68 55 183 145
Promotion expense 30 32 110 107
Professional service expense 192 325 527 707
Customer service expense 217 293 712 897
Supply/communication expense 54 43 170 110
Other expenses 298 135 553 387
------ ------ ------ ------
Total operating expenses 1,899 1,726 5,195 4,798
------ ------ ------ ------
Income before provision
for income taxes 765 541 2,112 1,681
PROVISION FOR INCOME TAXES 303 223 868 703
------ ------ ------ ------
6
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
----- ------ ------ ------
NET INCOME $ 462 $ 318 $1,244 $ 978
====== ====== ====== =====
EARNINGS PER SHARE (Note 2)
Basic $ 0.17 $ 0.13 $ 0.49 $0.40
Diluted $ 0.16 $ 0.12 $ 0.46 $0.37
The accompanying notes are an integral part of these statements.
7
FIRST REGIONAL BANCORP AND SUBSIDIARY
-------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In Thousands)
(Unaudited)
Nine Months Ended
September 30,
-------------------------
1998 1997
-------- -------
OPERATING ACTIVITIES
Net Income $ 1,244 $ 978
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 14 519
Provision for depreciation and
amortization 97 85
Amortization of investment security
and guaranteed loan premiums 0 (197)
Accretion of investment security
discounts (136) 0
Decrease (increase) in interest
receivable (97) 706
Increase (decrease) in interest payable 60 (23)
Increase (decrease) in taxes payable (118) (41)
Net increase in other liabilities 1,515 326
-------- -------
Net cash provided by
operating activities $ 2,579 $ 2,353
INVESTING ACTIVITIES
Decrease (increase) in investments in time
deposits with other financial institutions $ (2,715) $ 497
Decrease (increase) in investment securities (24,746) (4,662)
Decrease (increase) in guaranteed loans 448 6,267
Net decrease (increase) in other loans (4,709) 15,518
Decrease (increase) in premises and equipment (128) (219)
Decrease (increase) in other real estate owned 0 (1,836)
Net decrease (increase) in other assets (37) 441
-------- -------
Net cash provided by (used in)
investing activities $(31,887) $16,006
8
Nine Months Ended
September 30,
---------------------
1998 1997
-------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in noninterest bearing
deposits, money market deposits, and other
deposits $12,177 $16,198
Net increase (decrease) in time deposits 9,451 (8,163)
Increase (decrease) in securities sold
under agreement to repurchase 0 4
Increase (decrease) in shareholders' equity 3,116 (186)
------- -------
Net cash provided by
financing activities $24,744 $ 7,853
Increase (decrease) in cash and cash
equivalents $(4,564) $26,212
Cash and cash equivalents, beginning of
period 48,237 29,279
------- -------
Cash and cash equivalents, end of period $43,673 $55,491
======= =======
The accompanying notes are an integral part of these statements.
9
FIRST REGIONAL BANCORP AND SUBSIDIARY
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
September 30, 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 September 30, 1998 and December 31, 1997 and the
results of operations for the three and nine month periods ended
September 30, 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 September 30, 1998
------------------------------------------
Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- ------
Basic EPS
- ---------
Income available to
common shareholders $462,000 2,644,069 $ 0.17
Effect of Dilutive
Securities
- ----------
Incremental shares from
assumed exercise of
outstanding options 163,951 (0.01)
-------- ---------- -------
10
Diluted EPS
- -----------
Income available to
common shareholders $ 462,000 2,808,020 $ 0.16
=========== ========= ======
Three Months Ended September 30, 1997
-------------------------------------------
Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- ------
Basic EPS
- ---------
Income available to
common shareholders $ 318,000 2,431,381 $ 0.13
Effect of Dilutive
Securities
- ----------
Incremental shares from
assumed exercise of
outstanding options 193,989 (0.01)
--------- --------- ------
Diluted EPS
- -----------
Income available to
common shareholders $ 318,000 2,625,370 $ 0.12
=========== ========= ======
Nine Months Ended September 30, 1998
-------------------------------------------
Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- ------
Basic EPS
- ---------
Income available to
common shareholders $1,244,000 2,540,506 $ 0.49
Effect of Dilutive
Securities
- ----------
Incremental shares from
assumed exercise of
outstanding options 174,278 (0.03)
---------- --------- ------
Diluted EPS
- -----------
Income available to
common shareholders $1,244,000 2,714,784 $ 0.46
========== ========= ======
11
Nine Months Ended September 30, 1997
-------------------------------------------
Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- ------
Basic EPS
---------
Income available to
common shareholders $ 978,000 2,432,149 $ 0.40
Effect of Dilutive
Securities
----------
Incremental shares from
assumed exercise of
outstanding options 189,070 (0.03)
---------- --------- ------
Diluted EPS
-----------
Income available to
common shareholders $ 978,000 2,621,219 $ 0.37
========== ========= ======
NOTE 3 - As of September 30, 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. 130, Reporting Comprehensive Income, effective January 1, 1998.
The standard requires that comprehensive income and its components be
disclosed in the financial statements. The Company's comprehensive
income includes all items which comprise net income plus the
unrealized holding gains on available-for-sale securities. For the
three and nine month periods ended September 30, 1998 and 1997, the
Company's comprehensive income was as follows:
Three Months Ended
---------------------------------
September 30, September 30,
1998 1997
------------- -------------
(in thousands)
Net Income $ 462 $ 318
Other comprehensive income 9 (15)
------ -----
Total comprehensive income $ 471 $ 303
====== =====
Nine Months Ended
---------------------------------
September 30, September 30,
1998 1997
------------- -------------
(in thousands)
Net Income $1,244 $ 978
Other comprehensive income 10 0
------ -----
Total comprehensive income $1,254 $ 978
====== =====
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 September 30, 1998 total assets were $189,891,000 compared to $162,445,000
at December 31, 1997, an increase of $27,446,000 or 17%. Moreover, the September
30, 1998 asset level represents an increase over the $161,516,000 which existed
on the same date in 1997. The 1998 asset growth reflects a corresponding
increase in total deposits of $21,628,000 or 15%, from $145,096,000 at the end
of 1997 to $166,724,000 at September 30, 1998. While the deposit growth was
centered in noninterest bearing deposits and time deposits, there was also
significant growth in other deposits, while money market deposits experienced
some decline. Most of the reduction in money market deposits 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 nine months of 1998. The Bank's core loan
portfolio actually grew by $4,695,000 during the nine month period. Government
guaranteed loans fell by $448,000 due to continued sales of loans during the
year under the loan sale program begun in the fourth quarter of 1996. These
changes brought the Bank's total loans to $82,967,000 at September 30, 1998 from
the December 31, 1997 total of $78,720,000. The combined effect of the increase
in loans and the growth in deposits was an increase in the level of total liquid
assets. Of particular note, investment securities available for sale rose by
approximately $34 million due to maturing instruments and the absence of
attractive replacements, while interest-bearing deposits in financial
institutions rose by $2.7 million. Federal funds sold decreased by $6.9 million
in order to accommodate the changes which took place in the rest of the balance
sheet.
The Company earned a profit of $462,000 in the three months ended September 30,
1998, compared to earnings of $318,000 in the third quarter of 1997 an increase
of 45%. The results for the nine months ended September 30, 1998 were profits of
$1,244,000 compared to a profit of $978,000 for the corresponding period of
1997.
NET INTEREST INCOME
- -------------------
Total interest income increased by $238,000 (8%) for the third quarter of 1998
compared to the same period in 1997, and increased by $313,000 for the nine
month period ended September 30, 1998 compared to the prior year as total
earning assets were significantly higher in 1998 than in 1997. Interest expense
increased slightly (3%) for both the three month period and the nine month
period. For the three months ended September 30, 1998 interest rose by $27,000,
to $835,000 from the 1997 level of $808,000 and for the first nine months of
1998 interest expense rose by $78,000 to
13
$2,528,000 from the 1997 nine month total of $2,450,000 because the mix of the
Bank's deposits shifted away from high-cost deposit sources such as money market
deposits in favor of lower-cost categories such as noninterest bearing deposits.
Overall, net interest income increased by $211,000 (10%), from $2,214,000 in the
third quarter of 1997 to $2,425,000 for the third quarter of 1998.
OPERATING INCOME
- ----------------
Other operating income increased to $229,000 in the third quarter of 1998 from
$159,000 in the three months ended September 30, 1997. For the first nine
months of 1998 other operating income also increased 17% from $528,000 in 1997
to $616,000. The Bank's new merchant services operation, which provides credit
card deposit and clearing services to retailers and other credit card accepting
businesses, had revenue that totaled $108,000 for the third quarter of 1998 and
$242,000 for the nine months ended September 30, 1998; there was no such revenue
in the corresponding periods of 1997. Offsetting these income increases in part
was reductions in gains realized on the sale of loans, which fell from $136,000
in the first nine months of 1997 to $13,000 in the same period of 1998, and
lower gains on sales of land, which declined from $170,000 in 1997's first nine
months to $64,000 in the same period of 1998. No gains or losses on securities
sales were realized in the first nine months of 1998 or 1997.
PROVISION FOR LOAN LOSSES
- -------------------------
The allowance for loan losses is intended to reflect known and inherent risks in
a portfolio. The allowance for loan losses is increased by provisions for loan
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 loan losses is
adequate to provide for losses that might be reasonably anticipated.
The allowance for loan losses was $2,431,000 and $2,400,000 (or 2.84% and 2.96%
of gross outstanding loans) at September 30, 1998 and December 31, 1997
respectively. Reflecting the Company's ongoing analysis of the risks presented
by its loan portfolio, provisions for loan losses were $106,000 and $519,000 for
the three and nine month periods ended September 30, 1997, compared to $(10,000)
and $14,000 for the same periods of 1998. For the three and nine months ended
September 30,1997, the Company generated net loan chargeoffs of $11,000 and
1,027,000; by comparison, in the first nine months of 1998 the Company
experienced net loan recoveries of $17,000.
In addition, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," effective
January 1, 1995. This Statement defines an impaired loan as one for which it is
likely that an institution will be unable to collect all amounts due (that is,
all principal and interest) according to the contractual terms of the loan. The
Statement generally requires impaired loans to be measured at the present value
of expected future cash flows discounted at the effective interest rate of the
loan, or, as an expedient, at the loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent. For the quarter
ended September 30,
14
1998 the Company had identified loans having an aggregate average balance of
$440,000 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 September 30, 1998 totaled $144,000 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 September 30, 1998.
OTHER OPERATING EXPENSES
- ------------------------
Other operating expenses increased in the first nine months of 1998 compared to
the same period of 1997, although some categories of expense actually decreased
from the levels of previous periods. Other operating expenses rose to a total
of $1,899,000 for the third quarter of 1998 from $1,722,000 for the three months
ended September 30, 1997. For the nine months ended September 30, 1998 other
operating expenses totaled $5,195,000, an increase from $4,794,000 for the
corresponding period in 1997.
Salary and related benefits increased by $165,000, rising from a total of
$740,000 for the third quarter of 1997 to $905,000 for the same period in 1998,
and also rose for the nine months ended September 30, to $2,560,000 from
$2,153,000 in 1997. 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 $135,000 for the three months ended September 30, 1998 from
$103,000 in the third 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 third quarter of 1997 there were no corresponding expense items.
Other operating expenses fell in 1998 compared to the prior year, falling from
$883,000 for the third quarter of 1997 to $859,000 for the third quarter 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 $765,000 for the three months ended September 30, 1998 compared to
$541,000 for the third quarter of 1997. For the nine months ended September 30,
1998 income before taxes is $2,112,000 compared to $1,681,000 for the first nine
months of the prior year. In the third quarter, the Company's provision for
taxes rose from $223,000 in 1997 to $303,000 in 1998. For the nine months ended
September 30, 1998 the provisions were $868,000 compared to $703,000 in 1997.
This brought Net Income for the third quarter of 1998 to $462,000 compared to
$318,000 for the same period in 1997. For the nine months ended September 30,
net
15
income in 1998 was $1,244,000, while 1997 net income through September 30 was
$978,000.
LIQUIDITY, SOURCES OF FUNDS, AND CAPITAL RESOURCES
- --------------------------------------------------
The Company's financial position remains highly liquid. Total liquid assets
(cash and due from banks, interest bearing deposits in financial institutions,
investment securities available for sale, and federal funds sold) stood at 62.6%
of total deposits at September 30, 1998. This level represents an increase from
the 56.0% liquidity level which existed on December 31, 1997. The ratio of net
loans (including government guaranteed loans) to deposits was 49.8% and 54.3% as
of September 30, 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 September 30, 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 ONE YEAR NON-INTEREST
FLOATING LESS THAN BUT LESS THAN BUT LESS THAN BUT LESS THAN FIVE YEARS EARNING
CATEGORY RATE ONE MONTH SIX MONTHS ONE YEAR FIVE YEARS OR MORE OR BEARING TOTAL
========================== ==== ========= ========== ======== ========== ======= ========== =====
FED FUNDS SOLD 31,530 0 0 0 0 0 0 31,530
TIME DEPOSITS WITH OTHER
BANKS 0 2,666 6,427 248 0 0 0 9,341
INVESTMENT SECURITIES 0 8,981 42,333 0 0 0 0 51,314
------- ------ ------ ------ ------ ------ ------- -------
SUBTOTAL 31,530 11,647 48,760 248 0 0 0 92,185
LOANS 82,360 147 278 160 22 0 0 82,967
------- ------ ------ ------ ------ ------ ------- -------
TOTAL EARNING ASSETS 113,890 11,794 49,038 408 22 0 0 175,152
CASH AND DUE FROM BANKS 0 0 0 0 0 0 12,143 12,143
PREMISES AND EQUIPMENT 0 0 0 0 0 0 729 729
OTHER REAL ESTATE OWNED 0 0 0 0 0 0 0 0
OTHER ASSETS 0 0 0 0 0 0 1,867 1,867
------- ------ ------ ------ ------ ------ ------- -------
TOTAL NON-EARNING ASSETS 0 0 0 0 0 0 14,739 14,739
------- ------ ------ ------ ------ ------ ------- -------
TOTAL ASSETS 113,890 11,794 49,038 408 22 0 14,739 189,891
FUNDS PURCHASED 0 0 0 0 0 0 0 0
REPURCHASE AGREEMENTS 0 0 0 0 0 0 0 0
------- ------ ------ ------ ------ ------ ------- -------
SUBTOTAL 0 0 0 0 0 0 0 0
SAVINGS DEPOSITS 6,059 0 0 0 0 0 0 6,059
16
MONEY MARKET DEPOSITS 54,251 0 0 0 0 0 0 54,251
TIME DEPOSITS 0 14,397 22,960 1,752 464 84 0 39,657
------- ------ ------ ------ ------ ------ ------- -------
TOTAL BEARING LIABILITIES 60,310 14,397 22,960 1,752 464 84 0 99,967
DEMAND DEPOSITS 0 0 0 0 0 0 66,757 66,757
OTHER LIABILITIES 0 0 0 0 0 0 3,383 3,383
EQUITY CAPITAL 0 0 0 0 0 0 19,784 19,784
------- ------ ------ ------ ------ ------ ------- -------
TOTAL NON-BEARING
LIABILITIES 0 0 0 0 0 0 89,924 89,924
------- ------ ------ ------ ------ ------ ------- -------
TOTAL LIABILITIES 60,310 14,397 22,960 1,752 464 84 89,924 189,891
GAP 53,580 (2,603) 26,078 (1,344) (442) (84) (75,185) 0
CUMULATIVE GAP 53,580 50,977 77,055 75,711 75,269 75,185 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
17% and 39% of the Bank's total deposits as of September 30, 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 nine
months of 1998. As of September 30, 1998 the Company's investment portfolio
contained gross unrealized gains of $15,000 and no unrealized losses. By
comparison, at September 30, 1997 the Company's investment portfolio contained
gross unrealized gains of $3,000 and gross unrealized losses of $3,000. 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 $10,000 at
September 30, 1998 gave rise to a $10,000 increase in the Company's
shareholders' equity as of that date. Because the Company's holdings of
securities are intended to serve as
17
source of liquidity should conditions warrant, the securities have been
classified by the Company as "available for sale."
The Company continues to enjoy a strong capital position. Total capital was
$19,774,000 and $15,423,000 as of September 30, 1998 and December 31, 1997,
respectively. The Company's capital ratios for those dates in comparison with
regulatory capital requirements were as follows:
9-30-98 12-31-97
------- --------
Leverage Ratio (Tier I Capital
to Assets):
Regulatory requirement 4.00% 4.00%
First Regional Bancorp 11.13% 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:
9-30-98 12-31-97
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Tier I Capital to Assets:
Regulatory requirement 4.00% 4.00%
First Regional Bancorp 15.53% 16.70%
9-30-98 12-31-97
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Tier I + Tier II Capital to Assets:
Regulatory requirement 8.00% 8.00%
First Regional Bancorp 16.79% 18.00%
The Company believes that it will continue to meet all applicable capital
standards.
During the third quarter of 1998, First Regional's capital was substantially
increased through a private placement offering of common shares at a price of
$9.00 per share. This transaction strengthens the Company's already solid
financial foundation, and thus provides the basis for additional future growth.
During the quarter the company also established an Employee Stock Ownership Plan
consisting of 150,000 shares of First Regional common stock acquired in market
transactions or directly from First Regional Bancorp at an average price of
$9.48 per share. This new Plan will build the capital base of First Regional
Bank and provide its employees with a powerful incentive to achieve further
improvements in First Regional's operating performance.
18
YEAR 2000 ISSUES
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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 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 financial institution, the Bank is also exposed to potential risk if
borrowers and depositors suffer year 2000-related difficulties and are unable to
repay their loans or maintain their deposit balances. The Bank is in the
process of performing an assessment of the year 2000 readiness with both
borrowers (as part of the loan granting or renewal process) and depositors. At
this time, it is impossible to determine what impact, if any, the year 2000 will
have on either the loan payment performance of the Bank's borrowers or the
balances of key depositors. Thus far, however, none of the Bank's borrowers or
depositors 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.
19
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 matters were submitted to a vote of security holders during the third 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
- -------------------
No reports on Form 8-K were filed during the third quarter of 1998.
20
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: October 28, 1998 /s/ Jack A. Sweeney
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Jack A. Sweeney, Chairman of the Board
and Chief Executive Officer
Date: October 28, 1998 /s/ Thomas McCullough
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Thomas McCullough, Chief Financial Officer