<PAGE>
Page 1 of 21
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 June 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 2,469,631
-------------------------- ------------------------------
Class Outstanding on August 7, 1998
<PAGE>
2
FIRST REGIONAL BANCORP
----------------------
INDEX
-----
<TABLE>
<CAPTION>
Page
----
<S> <C>
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............. 20
Signatures.................................................. 21
</TABLE>
<PAGE>
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
FIRST REGIONAL BANCORP AND SUBSIDIARY
-------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
(In Thousands)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
ASSETS
- ------
Cash and due from banks $ 10,663 $ 9,847
Federal funds sold 54,310 38,390
-------- --------
Cash and cash equivalents $ 64,973 $ 48,237
Interest-bearing deposits in financial
institutions 10,035 6,626
Investment securities available for sale 34,456 26,431
Government guaranteed loans 494 942
Loans, net of allowance for losses of
$2,446,000 in 1998 and $2,400,000 in 1997 66,007 77,778
Premises and equipment, net of accumulated
depreciation 755 698
Accrued interest receivable and other assets 1,758 1,733
-------- --------
Total Assets $178,478 $162,445
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Noninterest bearing deposits $ 53,384 $ 35,820
Time deposits 35,319 30,206
Money market deposits 62,041 72,959
Other deposits 9,495 6,111
-------- --------
Total deposits 160,239 145,096
Accrued interest payable and other liabilities 2,078 1,926
-------- --------
Total Liabilities 162,317 147,022
Shareholders' Equity:
Common Stock, no par value, 50,000,000 shares
authorized; 2,469,631 and 2,416,631 shares
outstanding in 1998 and 1997, respectively 11,251 11,286
Retained earnings 4,909 4,128
</TABLE>
<PAGE>
4
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
Accumulated comprehensive income 1 9
-------- --------
Total Shareholders' Equity 16,161 15,423
-------- --------
Total Liabilities and Shareholders' Equity $178,478 $162,445
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
5
FIRST REGIONAL BANCORP AND SUBSIDIARY
-------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(In Thousands Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ---------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
REVENUE FROM EARNING ASSETS:
Interest on loans $1,930 $2,091 $3,605 $4,098
Interest on federal funds 661 240 1142 495
Interest on investment securities 544 634 1,226 1,305
------ ------ ------ ------
Total interest income 3,135 2,965 5,973 5,898
COST OF FUNDS:
Interest on deposits 874 797 1,691 1,643
Interest on other borrowings (1) 0 2 (1)
------ ------ ------ ------
Total interest expense 873 797 1,693 1,642
------ ------ ------ ------
Net interest income 2,262 2,168 4,280 4,256
PROVISION FOR LOAN LOSSES 12 257 24 413
------ ------ ------ ------
Net interest income after
provision for loan losses 2,250 1,911 4,256 3,843
Other operating income 217 186 387 369
------ ------ ------ ------
OTHER OPERATING EXPENSES:
Salaries and related benefits 861 722 1,655 1,413
Occupancy expense 130 97 245 189
Equipment expense 59 44 115 90
Promotion expense 45 38 80 75
Professional service expense 174 217 335 382
Customer service expense 233 306 495 604
Supply/communication expense 70 36 115 67
Other expenses 162 115 256 252
------ ------ ------ -----
Total operating expenses 1,734 1,575 3,296 3,072
------ ------ ------ ------
Income before provision
for income taxes 733 522 1,347 1,140
PROVISION FOR INCOME TAXES 311 224 565 480
------ ------ ------ ------
</TABLE>
<PAGE>
6
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
NET INCOME $ 422 $ 298 $ 782 $ 660
===== ===== ===== =====
EARNINGS PER SHARE (Note 2)
Basic $0.17 $0.12 $0.32 $0.27
Diluted $0.16 $0.11 $0.30 $0.25
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
7
FIRST REGIONAL BANCORP AND SUBSIDIARY
-------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 782 $ 660
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 24 413
Provision for depreciation and
amortization 63 52
Amortization of investment security
and guaranteed loan premiums 0 (116)
Accretion of investment security
discounts (25) 0
Decrease (increase) in interest
receivable (3) 574
Increase (decrease) in interest payable 27 (27)
Increase (decrease) in taxes payable (13) 79
Net increase in other liabilities 138 143
------- ------
Net cash provided by
operating activities $ 993 $1,778
INVESTING ACTIVITIES
Decrease (increase) in investments in time
deposits with other financial institutions $(3,409) $1,486
Decrease (increase) in investment securities (8,008) 1,662
Decrease (increase) in guaranteed loans 448 4,446
Net decrease (increase) in other loans 11,747 2,271
Decrease (increase) in premises and equipment (120) (138)
Decrease (increase) in other real estate owned 0 0
Net decrease (increase) in other assets (22) 10
------- ------
Net cash provided by
investing activities $ 636 $9,737
</TABLE>
<PAGE>
8
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------
1998 1997
------- -------
<S> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in noninterest bearing
deposits, money market deposits, and other
deposits $10,030 $ 4,990
Net increase (decrease) in time deposits 5,113 (8,423)
Increase (decrease) in securities sold
under agreement to repurchase 0 52
Increase (decrease) in shareholders' equity (36) 0
------- -------
Net cash (used) provided by
financing activities $15,107 $(3,381)
Increase (decrease) in cash and cash
equivalents $16,736 $ 8,134
Cash and cash equivalents, beginning of
period 48,237 29,279
------- -------
Cash and cash equivalents, end of period $64,973 $37,413
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
9
FIRST REGIONAL BANCORP AND SUBSIDIARY
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
June 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 June 30, 1998 and December 31, 1997 and the results of
operations for the three and six month periods ended June 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:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998
----------------------------------------
Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
<S> <C> <C> <C>
Basic EPS
---------
Income available to
common shareholders $422,000 2,459,881 $ 0.17
Effect of Dilutive
Securities
----------
Incremental shares from
assumed exercise of
outstanding options 170,520 (0.01)
-------- --------- ------
</TABLE>
<PAGE>
10
<TABLE>
<S> <C> <C> <C>
Diluted EPS
- -----------
Income available to
common shareholders $422,000 2,630,401 $ 0.16
======== ========= ======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1997
-------------------------------------------
Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------- ---------
<S> <C> <C> <C>
Basic EPS
- ---------
Income available to
common shareholders $ 298,000 2,446,131 $ 0.12
Effect of Dilutive
Securities
- ----------
Incremental shares from
assumed exercise of
outstanding options 176,162 (0.01)
--------- ------- ------
Diluted EPS
- -----------
Income available to
common shareholders $ 298,000 2,622,293 $ 0.11
========= ========= ======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998
------------------------------------------
Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS
- ---------
Income available to
common shareholders $ 782,000 2,449,774 $ 0.32
Effect of Dilutive
Securities
- ----------
Incremental shares from
assumed exercise of
outstanding options 179,442 (0.02)
--------- --------- ------
Diluted EPS
- -----------
Income available to
common shareholders $ 782,000 2,629,216 $ 0.30
========= ========= ======
</TABLE>
<PAGE>
11
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997
---------------------------------------
Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
<S> <C> <C> <C>
Basic EPS
- ---------
Income available to
common shareholders $660,000 2,434,586 $ 0.27
Effect of Dilutive
Securities
- ----------
Incremental shares from
assumed exercise of
outstanding options 186,610 (0.02)
------- ------
Diluted EPS
- -----------
Income available to
common shareholders $660,000 2,621,196 $ 0.25
======== ========= ======
</TABLE>
NOTE 3 - As of June 30, 1998 the Bank had a total of $1,643,000 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 six month periods ended June 30, 1998 and 1997, the
Company's comprehensive income was as follows:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
June 30, 1998 June 30, 1997
-------------- --------------
(in thousands)
<S> <C> <C>
Net Income $422 $298
Other comprehensive income 11
---- ----
Total comprehensive income $422 $309
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------
June 30, 1998 June 30, 1997
------------- -------------
(in thousands)
<S> <C> <C>
Net Income $782 $660
Other comprehensive income (8) (11)
---- ----
Total comprehensive income $414 $649
</TABLE>
<PAGE>
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 June 30 total assets were $178,478,000 compared to $162,445,000 at
December 31, 1997, an increase of $16,033,000 or 10%. Moreover, the June 30,
1998 asset level represents a considerable increase over the $149,910,000 which
existed on the same date in 1997. The 1998 asset growth reflects a corresponding
increase in total deposits of $15,143,000 or 10%, from $145,096,000 at the end
of 1997 to $160,239,000 at June 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 six months of 1998. Loans (net) fell by $11,771,000 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 six month period, but that growth was
overshadowed by the maturities of the bankers acceptances. 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 $66,501,000 at June 30, 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 available for sale rose by approximately
$8 million due to maturing instruments and the absence of attractive
replacements, while interest-bearing deposits in financial institutions rose by
$3.4 million. Federal funds sold rose by $15.9 million in order to accommodate
the changes which took place in the rest of the balance sheet.
The Company earned a profit of $422,000 in the three months ended June 30, 1998,
compared to earnings of $298,000 in the second quarter of 1997 an increase of
42%. The results for the six months ended June 30, 1998 were profits of $782,000
compared to a profit of $660,000 for the corresponding period of 1997.
NET INTEREST INCOME
- -------------------
Total interest income increased by $170,000 (6%) for the second quarter of 1998
compared to the same period in 1997, and increased slightly for the six month
period ended June 30, 1998 compared to the prior year. Although total earning
assets were significantly higher in 1998 than in 1997, the 1998 assets were
composed of relatively lower levels of high-yielding
<PAGE>
13
assets (such as loans) and relatively greater levels of lower-yielding assets
(such as funds sold) than prevailed in 1997 causing the revenue increase for the
six month period to be slight. A similar situation occurred in the area of
interest expense, in which interest expense increased slightly despite higher
deposit volumes, 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. Because the drop in yields on
earning assets was less pronounced than the reduction in the cost of funds, the
net result was an increase in net interest income, from $1,911,000 in the second
quarter of 1997 to $2,250,000 for the second quarter of 1998.
OPERATING INCOME
- ----------------
Other operating income increased to $217,000 in the second quarter of 1998 from
$186,000 in the three months ended June 30, 1997. For the first half of 1998
other operating income also increased slightly. 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 totalled $82,000
for the second quarter of 1998 and $134,000 for the six months ended June 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 $86,000 in the first half of 1997 to $13,000
in the same period of 1998, and lower gains on sales of land, which declined
from $138,000 in 1997's first half to $42,000 in the first half of 1998. No
gains or losses on securities sales were realized in the first half 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 $2,446,000 and $2,400,000 (or 3.55% and 2.96%
of gross outstanding loans) at June 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 $257,000 and $413,000 for the three
and six month period ended June 30, 1997, compared to $12,000 and $24,000 for
the same periods of 1998. For the three and six months ended June 30, 1997, the
Company generated net loan chargeoffs of $475,000 and 1,016,000; by comparison,
in the first half of 1998 the Company experienced net loan recoveries of
$22,000.
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
<PAGE>
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 June 30, 1998 the Company
had identified loans having an aggregate average balance of $260,000 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 June 30, 1998 totalled $147,000 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 June 30, 1998.
OTHER OPERATING EXPENSES
- ------------------------
Other operating expenses increased in the first six 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 $1,734,000 for the second quarter of 1998 from $1,575,000 for the three
months ended June 30, 1997. For the six months ended June 30, 1998 other
operating expenses totaled $3,296,000, an increase from $3,072,000 for the
corresponding period in 1997.
Salary and related benefits increased by $139,000, rising from a total of
$722,000 for the second quarter of 1997 to $861,000 for the same period in 1998,
and also rose for the six months ended June 30, to $1,655,000 from $1,413,000 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 $130,000 for
the three months ended June 30, 1998 from $97,000 in the second 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 $756,000 for the second quarter of
1997 to $743,000 for the second 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 $733,000 for the three months ended June 30, 1998 compared to $522,000
for the second quarter of 1997. For the six months ended June 30, 1998 income
before taxes is $1,347,000 compared to $1,140,000 for the first 6 months of the
prior year. In the second quarter, the Company's provision for taxes rose from
$224,000 in 1997 to $311,000 in 1998. For the six months ended June 30, 1998
the provisions were $565,000 compared to $480,000 in 1997. This brought Net
Income for the second quarter of 1998
<PAGE>
15
to $422,000 compared to $298,000 for the same period in 1997. For the six
months ended June 30, net income in 1998 was $782,000, while 1997 net income
through June 30 was $660,000.
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 68.3%
of total deposits at June 30, 1998. This level represents an increase from the
56.0% liquidity level which existed on December 31, 1997. In addition, at June
30, 1998 some $1.5 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 41.5% and 54.3% as of June 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 June 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.
<TABLE>
<CAPTION>
One month Six months
Floating Less than but less than but less than
Category Rate one month six months one year
======== ======== ========= ============= =============
<S> <C> <C> <C> <C>
Federal funds sold 54,310 0 0 0
Time deposits with other banks 0 297 9,688 50
Investment securities 0 1,992 31,466 998
------- ----- ------ -----
Subtotal 54,310 2,289 41,154 1,048
Loans 65,763 103 316 255
------- ----- ------ -----
Total earning assets 120,073 2,392 41,470 1,303
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 120,073 2,392 41,470 1,303
</TABLE>
<TABLE>
<CAPTION>
One year Non-interest
but less than Five years earning
Category five years or more or bearing Total
======== ============= ========== ============ =======
<S> <C> <C> <C> <C>
Federal funds sold 0 0 0 54,310
Time deposits with other banks 0 0 0 10,035
Investment securities 0 0 0 34,456
-- - ------ -------
Subtotal 0 0 0 98,801
Loans 64 0 0 66,501
-- - ------ -------
Total earning assets 64 0 0 165,302
Cash and due from banks 0 0 10,663 10,663
Premises and equipment 0 0 755 755
Other real estate owned 0 0 0 0
Other assets 0 0 1,758 1,758
-- - ------ -------
Total non-earning assets 0 0 13,176 13,176
-- - ------ -------
Total assets 64 0 13,176 178,478
</TABLE>
<PAGE>
16
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 9,495 0 0 0 0 0 0 9,495
Money market deposits 62,041 0 0 0 0 0 0 62,041
Time deposits 0 16,065 17,194 1,891 85 84 0 35,319
------ ------- ------ ------ ------ ------ ------- -------
Total bearing liabilities 71,536 16,065 17,194 1,891 85 84 0 106,855
Demand deposits 0 0 0 0 0 0 53,384 53,384
Other liabilities 0 0 0 0 0 0 2,078 2,078
Equity capital 0 0 0 0 0 0 16,161 16,161
------ ------- ------ ------ ------ ------ ------- -------
Total non-bearing liabilities 0 0 0 0 0 0 71,623 71,623
------ ------- ------ ------ ------ ------ ------- -------
Total liabilities 71,536 16,065 17,194 1,891 85 84 71,623 178,478
GAP 48,537 (13,673) 24,276 (588) (21) (84) (58,447) 0
Cumulative GAP 48,537 34,864 59,140 58,552 58,531 58,447 0 0
</TABLE>
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
23% and 39% of the Bank's total deposits as of June 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 half of
1998. As of June 30, 1998 the Company's investment portfolio contained gross
unrealized gains of $2,000 and no unrealized losses. By comparison, at June 30,
1997 the Company's investment portfolio contained gross unrealized gains of
$70,000 and gross unrealized losses of $47,000. As discussed more fully in Note
5, the Company adopted SFAS No.
<PAGE>
17
115 in 1994, with the result that the unrealized net gain (adjusted for taxes)
of $1,000 at June 30, 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."
The Company continues to enjoy a strong capital position. Total capital was
$16,161,000 and $15,423,000 as of June 30, 1998 and December 31, 1997,
respectively. The Company's capital ratios for those dates in comparison with
regulatory capital requirements were as follows:
<TABLE>
<CAPTION>
6-30-98 12-31-97
------- --------
<S> <C> <C>
Leverage Ratio (Tier I Capital
to Assets):
Regulatory requirement 4.00% 4.00%
First Regional Bancorp 9.03% 9.50%
</TABLE>
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:
<TABLE>
<CAPTION>
6-30-98 12-31-97
------- --------
<S> <C> <C>
Tier I Capital to Assets:
Regulatory requirement 4.00% 4.00%
First Regional Bancorp 13.75% 16.70%
6-30-98 12-31-97
------- --------
Tier I + Tier II Capital to Assets:
Regulatory requirement 8.00% 8.00%
First Regional Bancorp 15.01% 18.00%
</TABLE>
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.
<PAGE>
18
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 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
- ---------
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.
<PAGE>
19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
Litigation
- ----------
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
- ------------------------------------------------------------
The company held its annual meeting of shareholders on May 21, 1998. The
management slate consisted of nine nominees listed below:
H. Anthony Gartshore
Gary Horgan
Alexander S. Lowy
Thomas E. McCullough
Frank R. Moothart
Carolyn Zarro Nicholson
Mark Rubin
Lawrence J. Sherman
Jack A. Sweeney
Mark Rubin nominated an alternate slate consisting of Jeffrey Cove, Sheldon
Kadish, Don Levin, Alan Levy, Frank Moothart and Mark Rubin. Both sides
solicited shareholder proxies. Management, using its proxies, elected five
members to the Board of Directors:
H. Anthony Gartshore
Gary Horgan
Thomas E. McCullough
Lawrence J. Sherman
Jack A. Sweeney
Mr. Rubin using the proxies he solicited, elected four directors:
Frank R. Moothart
Mark Rubin
Don S. Levin
Jeffrey Cove
The election was conducted under the rules of cumulative voting which were
invoked by both Mr. Rubin and the management proxy holders. No other matters
were submitted for shareholder vote.
<PAGE>
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
Exhibits
- --------
There are no exhibits to this report.
Reports on Form 8-K
- -------------------
No reports on Form 8-K were filed during the second quarter of 1998.
<PAGE>
21
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: August 7, 1998 /s/ Jack A. Sweeney
-------------------------------------------
Jack A. Sweeney, Chairman of the Board
and Chief Executive Officer
Date: August 7, 1998 /s/ Thomas McCullough
-------------------------------------------
Thomas McCullough, Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 10,663,000
<INT-BEARING-DEPOSITS> 10,035,000
<FED-FUNDS-SOLD> 54,310,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,456,000
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 68,947,000
<ALLOWANCE> 2,446,000
<TOTAL-ASSETS> 178,478,000
<DEPOSITS> 160,239,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,078,000
<LONG-TERM> 0
0
0
<COMMON> 11,251,000
<OTHER-SE> 4,910,000
<TOTAL-LIABILITIES-AND-EQUITY> 178,478,000
<INTEREST-LOAN> 3,605,000
<INTEREST-INVEST> 1,226,000
<INTEREST-OTHER> 1,142,000
<INTEREST-TOTAL> 5,973,000
<INTEREST-DEPOSIT> 1,691,000
<INTEREST-EXPENSE> 1,693,000
<INTEREST-INCOME-NET> 4,280,000
<LOAN-LOSSES> 24,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,296,000
<INCOME-PRETAX> 1,347,000
<INCOME-PRE-EXTRAORDINARY> 782,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 782,000
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.30
<YIELD-ACTUAL> 0.049
<LOANS-NON> 244,000
<LOANS-PAST> 1,703,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,400,000
<CHARGE-OFFS> 0
<RECOVERIES> 22,000
<ALLOWANCE-CLOSE> 2,446,000
<ALLOWANCE-DOMESTIC> 2,446,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
