<PAGE>
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, 1999
----------------------------------------------------------------
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 2,811,608
-------------------------- -------------------------------
Class Outstanding on November 3, 1999
<PAGE>
FIRST REGIONAL BANCORP
----------------------
INDEX
-----
Page
----
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial
Condition.................................... 3
Consolidated Statements of Income............ 4
Consolidated Statements of Cash Flows........ 5
Notes to Consolidated Financial
Statements................................... 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations................................ 9
Part II - Other Information
Item 1. Legal Proceedings............................ 17
Item 4. Submission of Matters to a Vote of
Security Holders............................. 18
Item 6. Exhibits and Reports on Form 8-K............. 18
Signatures.................................................. 19
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
FIRST REGIONAL BANCORP AND SUBSIDIARY
-------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
(In Thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
ASSETS
------
<S> <C> <C>
Cash and due from banks $ 11,077 $ 9,277
Federal funds sold 37,890 31,900
-------- --------
Cash and cash equivalents $ 48,967 $ 41,177
Investment securities 67,009 47,860
Interest-bearing deposits in financial
institutions 3,813 10,143
Government guaranteed loans 736 521
Loans, net of allowance for losses of
$2,290,000 in 1999 and $2,500,000 in 1998 101,407 91,180
Premises and equipment, net of accumulated
depreciation 1,084 790
Accrued interest receivable and other assets 3,286 2,213
-------- --------
Total Assets $226,302 $193,884
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Deposits:
Noninterest bearing $ 65,463 $ 61,964
Interest Bearing:
Savings deposits 9,915 7,314
Money market deposits 80,406 49,991
Time deposits 44,793 51,154
-------- --------
Total deposits 200,577 170,423
Securities sold under agreement to repurchase 467 0
Note payable 1,350 1,463
Accrued interest payable and other liabilities 2,432 1,528
-------- --------
Total Liabilities 204,826 173,414
Shareholders' Equity:
Common Stock, no par value, 50,000,000 shares
authorized; 3,012,000 and 2,983,000 shares
outstanding in 1999 and 1998, respectively 16,193 16,034
Less: Unearned ESOP shares; 135,000 and 146,000
outstanding in 1999 and 1998, respectively (1,279) (1,386)
-------- --------
Total common stock, no par value;
Outstanding 2,877,000 (1999) and
2,837,000 (1998) shares 14,914 14,648
Retained earnings 6,567 5,821
Accumulated other comprehensive income (5) 1
-------- --------
Total Shareholders' Equity 21,476 20,470
-------- --------
Total Liabilities and Shareholders' Equity $226,302 $193,884
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
FIRST REGIONAL BANCORP AND SUBSIDIARY
-------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(In Thousands Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE FROM EARNING ASSETS:
Interest on loans $2,581 $2,151 $ 7,288 $5,756
Interest on deposits in
financial Institutions 44 308
Interest on investment
securities 976 814 2,552 2,040
Interest on federal funds
sold 297 295 982 1,437
------ ------ ------ ------
Total interest income 3,898 3,260 11,130 9,233
COST OF FUNDS:
Interest on deposits 1,114 834 3,315 2,525
Interest on other borrowings 5 1 13 3
------ ------ ------ ------
Total interest expense 1,119 835 3,328 2,528
------ ------ ------- ------
Net interest income 2,779 2,425 7,802 6,705
PROVISION FOR LOAN LOSSES 0 (10) (195) 14
------ ------ ------- ------
Net interest income after
provision for loan losses 2,779 2,435 7,997 6,691
OTHER OPERATING INCOME 451 229 1,244 616
------ ------ ------ ------
OPERATING EXPENSES:
Salaries and related benefits 1,381 905 3,876 2,560
Occupancy expense 186 135 512 380
Equipment expense 95 68 268 183
Promotion expense 47 30 142 110
Professional service expense 282 192 813 527
Customer service expense 141 217 532 712
Supply/communication expense 138 54 339 170
Other expenses 286 298 825 553
------ ------ ------- ------
Total operating expenses 2,556 1,899 7,307 5,195
------ ------ ------ ------
Income before provision
for income taxes 674 765 1,934 2,112
PROVISION FOR INCOME TAXES 278 303 796 868
------ ------ ------- ------
NET INCOME $ 396 $ 462 $ 1,138 $1,244
====== ====== ======= ======
EARNINGS PER SHARE (Note 2)
Basic $ 0.14 $ 0.17 $ 0.38 $ 0.49
Diluted $ 0.13 $ 0.16 $ 0.36 $ 0.46
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
FIRST REGIONAL BANCORP AND SUBSIDIARY
-------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,138 $ 1,244
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses (195) 14
Provision for depreciation and
amortization 130 97
Amortization of investment security
and guaranteed loan premiums 61 0
Accretion of investment security
discounts (132) (136)
Increase in interest receivable (336) (97)
Increase in interest payable 4 60
Increase (decrease) in taxes payable 264 (118)
Net increase in other liabilities 636 1,515
-------- --------
Net cash provided by
operating activities $ 1,570 $ 2,579
INVESTING ACTIVITIES
Decrease (increase) in investments in time
deposits with other financial institutions $ 6,330 $ (2,715)
Increase in investment securities (19,084) (24,746)
(Increase) decrease in guaranteed loans (215) 448
Net increase in other loans (10,032) (4,709)
Increase in premises and equipment (424) (128)
Net increase in other assets (737) (37)
-------- --------
Net cash (used in) provided by
investing activities $(24,162) $(31,887)
FINANCING ACTIVITIES
Net increase in noninterest bearing deposits
money market deposits, and other deposits $ 36,515 $ 12,177
Net increase (decrease) in time deposits (6,361) 9,451
Decrease in note payable (113) 0
Increase in securities sold under
agreement to repurchase 467 0
Increase (decrease) in shareholders' equity (126) 3,116
-------- --------
Net cash provided by financing activities $ 30,382 $ 24,744
Increase (decrease) in cash and cash equivalents $ 7,790 $ (4,564)
Cash and cash equivalents, beginning of
period 41,177 48,237
-------- --------
Cash and cash equivalents, end of period $ 48,967 $ 43,673
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
FIRST REGIONAL BANCORP AND SUBSIDIARY
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
September 30, 1999
(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 1998 financial statements have been reclassified to be
comparable with the classifications used in the 1999 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, 1999 and December 31, 1998 and the
results of operations for the three and nine month periods ended
September 30, 1999 and 1998.
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 1998 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 September 30, 1999
---------------------------------------------------------
Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS
---------
Income available to common shareholders $396,000 2,874,840 $ 0.14
Effect of Dilutive Securities
-----------------------------
Incremental shares from assumed exercise of
outstanding options 78,831 (0.01)
-------- --------- ------
Diluted EPS
-----------
Income available to common shareholders $396,000 2,953,671 $ 0.13
======== ========= ======
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998
---------------------------------------------------------
Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
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)
---------- --------- ------
Diluted EPS
-----------
Income available to common shareholders $ 462,000 2,808,020 $ 0.16
========== ========= ======
<CAPTION>
Nine Months Ended September 30, 1999
---------------------------------------------------------
Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS
---------
Income available to common shareholders $1,138,000 3,018,482 $ 0.38
Effect of Dilutive Securities
-----------------------------
Incremental shares from assumed exercise of
outstanding options 103,361 (0.02)
---------- --------- ------
Diluted EPS
-----------
Income available to common shareholders $1,138,000 3,121,843 $ 0.36
========== ========= ======
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
---------------------------------------------------------
Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
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
========== ========= ======
</TABLE>
NOTE 3 - As of September 30, 1999 the Bank had a total of $1,203,000 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, 1999 and 1998, the
Company's comprehensive income was as follows:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
September 30, September 30,
1999 1998
----------------------------------
(in thousands)
<S> <C> <C>
Net Income $ 396 $ 462
Other comprehensive income 7 9
------ ------
Total comprehensive income $ 401 $ 471
====== ======
<CAPTION>
Nine Months Ended
----------------------------------
September 30, September 30,
1999 1998
----------------------------------
(in thousands)
<S> <C> <C>
Net Income $1,138 $1,244
Other comprehensive income (5) 10
------ ------
Total comprehensive income $1,133 $1,254
====== ======
</TABLE>
8
<PAGE>
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, 1999 total assets were $226,302,000 compared to
$193,884,000 at December 31, 1998, an increase of $32,418,000 or 17%. Moreover,
the September 30, 1999 asset level represents a $36,411,000 (19%) increase over
the $189,891,000 which existed on the same date in 1998. The 1999 asset growth
reflects a corresponding increase in total deposits of $30,154,000 or 18%, from
$170,423,000 at the end of 1998 to $200,577,000 at September 30, 1999. While
the deposit growth was centered in money market deposits, there was also
significant growth in savings deposits and noninterest bearing deposits, while
time deposits experienced some decline. The increase in money market deposits
was due to both the deposits of Trust Administration Services Corp. (TASC), a
new wholly owned subsidiary that provides administrative and custodial services
to self-directed retirement plans and to a new program to provide deposit
services to Bankruptcy Trustees. There were several changes in the composition
of the Bank's assets during the first nine months of 1999. The Bank's core loan
portfolio increased by $10,442,000 during the nine month period bringing the
Bank's total loans to $102,143,000 at September 30, 1999 from the December 31,
1998 total of $91,701,000. 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
$19.1 million while interest-bearing deposits in financial institutions fell by
$6.3 million. Federal funds sold rose by $6.0 million in order to accommodate
the changes that took place in the rest of the balance sheet.
The Company earned a profit of $396,000 in the three months ended September
30, 1999, compared to earnings of $462,000 in the third quarter of 1998 an
decrease of 14%. The results for the nine months ended September 30, 1999 were
profits of $1,138,000 compared to a profit of $1,244,000 for the corresponding
period of 1998.
NET INTEREST INCOME
- -------------------
Total interest income increased by $638,000 (20%) for the third quarter of
1999 compared to the same period in 1998, and increased by $1,897,000 (21%) for
the nine month period ended September 30, 1999 compared to the prior year as
total earning assets were significantly higher (20%) in 1999 than in 1998. For
the three months ended September 30, 1999 interest expense increased by $284,000
(34%) to $1,119,000 from the 1998 level of $835,000 as total deposits were
significantly higher than in the same period in 1998. For the nine months ended
September 30, 1999 interest expense increased by $800,000 (32%) to $3,328,000
from the 1998 level of $2,528,000 as total deposits were over 20% higher than in
the same period in 1998. The net result was an increase in net interest income
of
9
<PAGE>
$354,000 (15%), from $2,425,000 in the third quarter of 1998 to 2,779,000 for
the third quarter of 1999 and increase in net interest income of $1,097,000
(16%), from $6,705,000 for the nine months ended September 30, 1998 to
$7,802,000 for the first nine months of 1999.
OPERATING INCOME
- ----------------
Other operating income increased to $451,000 in the third quarter of 1999
from $229,000 in the three months ended September 30, 1998. For the first nine
months of 1999 other operating income also increased significantly from $616,000
for the nine months ended September 30, 1998 to $1,244,000 for the first nine
months of 1999. The Bank's new Trust Administration Services Corp. (TASC), a
new wholly owned subsidiary that provides administrative and custodial services
to self-directed retirement plans, had revenue that totaled $179,000 for the
third quarter of 1999 and 446,000 for the nine months ended September 30, 1999;
there was no such revenue in the corresponding periods of 1998. 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 $138,000 for the third quarter of 1999 and $359,000 for the nine
months ended September 30, 1999 in contrast with $108,000 for the third quarter
of 1998 and $242,000 for the nine months ended September 30, 1998. The increase
in this category of income was also in part due to increase in gains on sales of
land, which increased from $64,000 in 1998's first nine months to $132,000 in
the same period of 1999. Offsetting these income increases in part was
reductions in gains realized on the sale of loans, which fell from $13,000 in
the first nine months of 1998 to $0 in the same period of 1999. No gains or
losses on securities sales were realized in the first nine months of 1999 or
1998.
LOAN PORTFOLIO AND PROVISION FOR LOAN LOSSES
- --------------------------------------------
The loan portfolio consisted of the following at September 30, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-----------------------------
(Dollars in Thousands)
<S> <C> <C>
Commercial loans............................ $ 33,744 $24,811
Real estate construction loans.............. 20,090 15,702
Real estate loans........................... 48,740 46,251
Bankers acceptances......................... 499 6,681
Other loans................................. 1,214 797
-------- -------
Total loans............................ $104,287 $94,242
Less - Allowances for loan losses........... 2,290 2,500
- Deferred loan fees................... 590 562
-------- -------
Net loans.............................. $101,407 $91,180
======== =======
Government guaranteed loans held for sale... $ 736 $ 521
======== =======
</TABLE>
10
<PAGE>
The allowance for possible loan losses is intended to reflect the known and
unknown risks which are inherent in a loan portfolio. The adequacy of the
allowance for possible loan losses is continually evaluated in light of many
factors, including loan loss experience and current economic conditions. The
allowance for loan losses is increased by provisions for loan losses, and is
decreased by net chargeoffs. While the recent economic recession in California
appears to be giving way to full recovery, its impact on the payment performance
of the Bank's borrowers has not been a significant factor in recent years.
Management believes the allowance for possible loan losses is adequate in
relation to both existing and potential risks in the loan portfolio.
The Bank has historically evaluated the adequacy of its allowance for
possible loan losses on an overall basis rather than by specific categories of
loans. In determining the adequacy of the allowance for possible loan losses,
management considers such factors as historical loan loss experience, known
problem loans, evaluations made by bank regulatory authorities, assessment of
economic conditions and other appropriate data to identify the risks in the loan
portfolio.
The allowance for possible losses was $2,290,000 and $2,500,000 (or 2.19%
and 2.65% of gross outstanding loans) at September 30, 1999 and December 31,
1998 respectively. Reflecting the Company's ongoing analysis of the risks
presented by its loan portfolio, provisions for possible loan losses were $0 and
$(195,000) for the three and nine month period ended September 30, 1999,
compared to $(10,000) and $14,000 for the same periods of 1998. For the three
and nine months ended September 30, 1999, the Company generated net loan
recoveries of $10,000 and 31,000; by comparison, in the first nine months of
1998 the Company experienced net loan recoveries of $17,000.
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, 1999 the Company had identified loans having an aggregate
average balance of $219,000 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, 1999 totaled
$85,000 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, 1999.
11
<PAGE>
OTHER OPERATING EXPENSES
- ------------------------
Other operating expenses increased in the first nine months of 1999
compared to the same period of 1998, although some categories of expense
actually decreased from the levels of previous periods. Other operating
expenses rose to a total of $2,556,000 for the third quarter of 1999 from
$1,899,000 for the three months ended September 30, 1998. For the nine months
ended September 30, 1999 other operating expenses totaled $7,307,000, an
increase from $5,195,000 for the corresponding period in 1998.
Salary and related benefits increased by $476,000, rising from a total of
$905,000 for the third quarter of 1998 to $1,381,000 for the same period in
1999, and also rose for the nine months ended September 30, to $3,876,000 from
$2,560,000 in 1998. The increase principally reflects increases in staffing
which took place in the first quarter of 1999 due to both the addition of the
TASC operation as well as staffing in the new regional offices. The increase
also reflects employee salary adjustments. Occupancy expense rose to $186,000
for the three months ended September 30, 1999 from $135,000 in the third quarter
of 1998, the increases reflects the rent paid on the various facilities which
house the Bank's new regional offices and the TASC operation; since the
operations did not exist in the first nine months of 1998 there were no
corresponding expense items. Total other operating expenses rose in 1999
compared to the prior year, increasing from $859,000 for the third quarter of
1998 to $989,000 for the third quarter of 1999 and a corresponding increase from
$2,255,000 for the first nine months of 1998 to $3,019,000 for the same period
of 1999. Other professional services expense increased in 1999 primarily in the
area of legal expenses which increased by 123,000 from the nine month period in
1998.
The combined effects of the above-described factors resulted in income
before taxes of $674,000 for the three months ended September 30, 1999 compared
to $765,000 for the third quarter of 1998. For the nine months ended September
30, 1999 income before taxes is $1,934,000 compared to $2,112,000 for the first
nine months of the prior year. In the third quarter, the Company's provision
for taxes decreased from $303,000 in 1998 to $278,000 in 1999. For the nine
months ended September 30, 1999 the provisions were $796,000 compared to
$868,000 in 1998. This brought Net Income for the third quarter of 1999 to
$396,000 compared to $462,000 for the same period in 1998. For the nine months
ended September 30, net income in 1999 was $1,138,000, while 1998 net income
through September 30 was $1,244,000.
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 59.7%
of total deposits at September 30, 1999. This level represents an increase from
the 58.2% liquidity level which existed on December 31, 1998. In addition, at
September 30, 1999 some $1.2 million of the Bank's total loans consisted of
bankers acceptances or government guaranteed loans, both of which represent a
significant source of liquidity
12
<PAGE>
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 50.92% and 53.8% as of September 30, 1999 and December 31, 1998,
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, 1999, 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 One year
Floating Less than but less than but less than but less than Five years
Category Rate one month six months one year five years or more
========= ======= ========== ============= ============== ============== ==========
<S> <C> <C> <C> <C> <C> <C>
Fed funds sold 37,890 0 0 0 0 0
Time deposits with other banks 0 149 3,367 297 0 0
Investment securities 0 15,940 51,069 0 0 0
------- ------ ------ ------ ------ ------
Subtotal 37,890 16,089 54,436 297 0 0
Loans 101,024 421 326 332 40 0
------- ------ ------ ------ ------ ------
Total earning assets 138,914 16,510 54,762 629 40 0
Cash and due from banks 0 0 0 0 0 0
Premises and equipment 0 0 0 0 0 0
Other real estate owned 0 0 0 0 0 0
Other assets 0 0 0 0 0 0
------- ------ ------ ------ ------ ------
Total non-earning assets 0 0 0 0 0 0
------- ------ ------ ------ ------ ------
Total assets 138,914 16,510 54,762 629 40 0
Funds purchased 467 0 0 0 0 0
Repurchase agreements 0 0 0 0 0 0
------- ------ ------ ------ ------ ------
Subtotal 467 0 0 0 0 0
Savings deposits 9,915 0 0 0 0 0
Money market deposits 80,406 0 0 0 0 0
Time deposits 0 24,274 18,396 1,523 600 0
------- ------ ------ ------ ------ ------
Total bearing liabilities 90,788 24,274 18,396 1,523 600 0
Demand deposits 0 0 0 0 0 0
Other liabilities 0 0 0 0 0 0
Equity capital 0 0 0 0 0 0
------- ------ ------ ------ ------ ------
Total non-bearing liabilities 0 0 0 0 0 0
------- ------ ------ ------ ------ ------
Total liabilities 90,788 24,274 18,396 1,523 600 0
GAP 48,126 (7,764) 36,366 (894) (560) 0
Cumulative GAP 48,126 40,362 76,728 75,834 75,274 75,274
</TABLE>
<TABLE>
<CAPTION>
Non-interest
earning
Category or bearing Total
========= ============= =======
<S> <C> <C>
Fed funds sold 0 37,890
Time deposits with other banks 0 3,813
Investment securities 0 67,009
------- -------
Subtotal 0 108,712
Loans 0 102,143
------- -------
Total earning assets 0 210,855
Cash and due from banks 11,077 11,077
Premises and equipment 1,084 1,084
Other real estate owned 0 0
Other assets 3,286 3,286
------- -------
Total non-earning assets 15,447 15,447
------- -------
Total assets 15,447 226,302
Funds purchased 0 467
Repurchase agreements 0 0
------- -------
Subtotal 0 467
Savings deposits 0 9,915
Money market deposits 0 80,406
Time deposits 0 44,793
------- -------
Total bearing liabilities 0 135,581
Demand deposits 65,463 65,463
Other liabilities 3,782 3,782
Equity capital 21,476 21,476
------- -------
Total non-bearing liabilities 90,721 90,721
------- -------
Total liabilities 90,721 226,302
GAP (75,274) 0
Cumulative GAP 0 0
</TABLE>
13
<PAGE>
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 0%
and 13% of the Bank's total deposits as of September 30, 1999 and December 31,
1998, 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 securities and commercial
papers. As mentioned above, no gains or losses were recorded on securities
sales in the first nine months of 1999. As of September 30, 1999 the Company's
investment portfolio contained gross unrealized losses of $8,000 and no
unrealized gains. By comparison, at September 30, 1998 the Company's investment
portfolio contained gross unrealized gains of $15,000 and no unrealized losses.
The Company adopted SFAS No. 115 in 1994, with the result that the unrealized
net loss (adjusted for taxes) of $8,000 at September 30, 1999 gave rise to a
$5,000 decrease 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
$21,476,000 and $20,470,000 as of September 30, 1999 and December 31, 1998,
respectively. The Company's capital ratios for those dates in comparison with
regulatory capital requirements were as follows:
14
<PAGE>
9-30-99 12-31-98
------- --------
Leverage Ratio (Tier I Capital
to Assets):
Regulatory requirement 4.00% 4.00%
First Regional Bancorp 9.91% 11.17%
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>
9-30-99 12-31-98
------- --------
<S> <C> <C>
Tier I Capital to Assets:
Regulatory requirement 4.00% 4.00%
First Regional Bancorp 13.04% 14.35%
9-30-99 12-31-98
------- --------
Tier I + Tier II Capital to Assets:
Regulatory requirement 8.00% 8.00%
First Regional Bancorp 14.29% 15.60%
</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.
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 has assessed the ability of each system to
properly perform, and implemented corrective measures when deficiencies were
found. Relatively few required corrections were 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 has achieved full year 2000 capability, and the cost was not
material.
As a lending 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 deposits. The Bank is in the process
15
<PAGE>
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
- ---------
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.
16
<PAGE>
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.
However, in late 1998, Mark Rubin, a director of the Company and its former
vice chairman, filed suit against the Company, the Bank, and individual members
of the Company's executive committee. Mr. Rubin alleges that his employment
with the Company was wrongfully terminated and that the defendants also breached
fiduciary duties owed to Mr. Rubin and committed acts of defamation and fraud
against him. In his complaint, Mr. Rubin's suit seeks compensatory and punitive
damages of approximately $59 million.
In January 1999, Mr. Rubin submitted a statutory offer of compromise under
Section 998 of the California Code of Civil Procedure offering to settle the
lawsuit for $3 million. The Company rejected this settlement proposal.
The Company believes the claims, as alleged, are without merit and has
moved to dismiss Mr. Rubin's complaint. The Company has vigorously defended
against Mr. Rubin's lawsuit and will continue to do so. Because the case is in
its very early stages, it is not currently possible to determine what impact, if
any, the resolution of this matter will have on the future financial condition
and results of operations of the Company.
17
<PAGE>
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 1999.
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 third quarter of 1999.
18
<PAGE>
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: November 3, 1999 /s/ Jack A. Sweeney
-------------------------------------------
Jack A. Sweeney, Chairman of the Board
and Chief Executive Officer
Date: November 3, 1999 /s/ Thomas McCullough
-------------------------------------------
Thomas McCullough, Chief Financial Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 11,077,000
<INT-BEARING-DEPOSITS> 3,813,000
<FED-FUNDS-SOLD> 37,890,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 67,009,000
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 104,433,000
<ALLOWANCE> 2,290,000
<TOTAL-ASSETS> 226,302,000
<DEPOSITS> 200,577,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,432,000
<LONG-TERM> 1,350,000
14,914,000
0
<COMMON> 0
<OTHER-SE> 6,562,000
<TOTAL-LIABILITIES-AND-EQUITY> 226,302,000
<INTEREST-LOAN> 7,288,000
<INTEREST-INVEST> 2,860,000
<INTEREST-OTHER> 982,000
<INTEREST-TOTAL> 11,130,000
<INTEREST-DEPOSIT> 3,315,000
<INTEREST-EXPENSE> 3,328,000
<INTEREST-INCOME-NET> 7,802,000
<LOAN-LOSSES> (195,000)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,307,000
<INCOME-PRETAX> 1,934,000
<INCOME-PRE-EXTRAORDINARY> 1,138,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,138,000
<EPS-BASIC> 0.38
<EPS-DILUTED> 0.36
<YIELD-ACTUAL> .048
<LOANS-NON> 169,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,500,000
<CHARGE-OFFS> 46,000
<RECOVERIES> 31,000
<ALLOWANCE-CLOSE> 2,290,000
<ALLOWANCE-DOMESTIC> 2,290,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
