<PAGE>
Page 1 of 23
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, 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 3,018,608
-------------------------- ------------------------------
Class Outstanding on August 3, 1999
<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............................ 20
Item 4. Submission of Matters to a Vote of
Security Holders............................. 21
Item 6. Exhibits and Reports on Form 8-K............. 22
Signatures.................................................. 23
</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,
1999 1998
-------- ------------
<S> <C> <C>
ASSETS
------
Cash and due from banks $ 15,448 $ 9,277
Federal funds sold 23,420 31,900
-------- --------
Cash and cash equivalents $ 38,868 $ 41,177
Investment securities 84,457 47,860
Interest-bearing deposits in financial
institutions 5,091 10,143
Government guaranteed loans 357 521
Loans, net of allowance for losses of
$2,326,000 in 1999 and $2,500,000 in 1998 100,170 91,180
Premises and equipment, net of accumulated
depreciation 959 790
Accrued interest receivable and other assets 3,088 2,213
-------- --------
Total Assets $232,990 $193,884
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Deposits:
Noninterest bearing $ 68,013 $ 61,964
Interest Bearing:
Savings deposits 10,449 7,314
Money market deposits 82,053 49,991
Time deposits 47,676 51,154
-------- --------
Total deposits 208,191 170,423
Securities sold under agreement to repurchase 190 0
Note payable 1,387 1,463
Accrued interest payable and other liabilities 2,124 1,528
-------- --------
Total Liabilities 211,892 173,414
</TABLE>
<PAGE>
4
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Shareholders' Equity:
Common Stock, no par value, 50,000,000 shares
authorized; 3,004,000 and 2,983,000 shares
outstanding in 1999 and 1998, respectively 16,224 16,034
Less: Unearned ESOP shares; 139,000 and 146,000
outstanding in 1999 and 1998, respectively (1,315) (1,386)
Total common stock, no par value; -------- --------
Outstanding 2,865,000 (1999) and
2,837,000 (1998) shares 14,909 14,648
Retained earnings 6,201 5,821
Accumulated other comprehensive income (12) 1
-------- --------
Total Shareholders' Equity 21,098 20,470
-------- --------
Total Liabilities and Shareholders' Equity $232,990 $193,884
======== ========
</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,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE FROM EARNING ASSETS:
Interest on loans $2,395 $1,930 $4,707 $3,605
Interest on deposits in financial
Institutions 110 137 264 238
Interest on investment securities 889 407 1,576 988
Interest on federal funds sold 275 661 685 1,142
------ ------ ------ ------
Total interest income 3,669 3,135 7,232 5,973
COST OF FUNDS:
Interest on deposits 1,075 874 2,201 1,691
Interest on other borrowings 7 (1) 8 2
------ ------ ------ -------
Total interest expense 1,082 873 2,209 1,693
------ ------ ------ -------
Net interest income 2,587 2,262 5,023 4,280
PROVISION FOR LOAN LOSSES 25 12 (195) 24
------ ------ ------ -------
Net interest income after
provision for loan losses 2,562 2,250 5,218 4,256
OTHER OPERATING INCOME 427 217 793 387
------ ------ ------ ------
OPERATING EXPENSES:
Salaries and related benefits 1,290 861 2,495 1,655
Occupancy expense 170 130 326 245
Equipment expense 88 59 173 115
Promotion expense 68 45 95 80
Professional service expense 236 174 531 335
Customer service expense 182 233 391 495
Supply/communication expense 112 70 201 115
Other expenses 273 162 539 256
------ ------ ------ -------
Total operating expenses 2,419 1,734 4,751 3,296
------ ------ ------ ------
Income before provision
for income taxes 570 733 1,260 1,347
PROVISION FOR INCOME TAXES 237 311 518 565
------ ------ ------ -------
</TABLE>
<PAGE>
6
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME $ 333 $ 422 $ 742 $ 782
====== ====== ====== ======
EARNINGS PER SHARE (Note 2)
Basic $ 0.11 $ 0.17 $ 0.26 $ 0.32
Diluted $ 0.11 $ 0.16 $ 0.25 $ 0.30
</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,
----------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 742 $ 782
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses (195) 24
Provision for depreciation and
amortization 82 63
Amortization of investment security
and guaranteed loan premiums 39 0
Accretion of investment security
discounts (93) (25)
Increase in interest receivable (232) (3)
Increase in interest payable 33 27
Increase (decrease) in taxes payable 60 (13)
Net increase in other liabilities 503 138
-------- -------
Net cash provided by
operating activities $ 939 $ 993
INVESTING ACTIVITIES
Decrease (increase) in investments in time
deposits with other financial institutions $ 5,052 $(3,409)
Increase in investment securities (36,556) (8,008)
Decrease in guaranteed loans 164 448
Net decrease (increase) in other loans (8,795) 11,747
Increase in premises and equipment (251) (120)
Net increase in other assets (643) (22)
-------- -------
Net cash (used in) provided by
investing activities $(41,029) $ 636
</TABLE>
<PAGE>
8
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------
1999 1998
---- ----
<S> <C> <C>
FINANCING ACTIVITIES
Net increase in noninterest bearing deposits
money market deposits, and other deposits $41,246 $10,030
Net increase (decrease) in time deposits (3,478) 5,113
Decrease in note payable (76) 0
Increase in securities sold under
agreement to repurchase 190 0
Decrease in shareholders' equity (101) (36)
------- -------
Net cash provided by financing activities $37,781 $15,107
Increase (decrease) in cash and cash
equivalents $(2,309) $16,736
Cash and cash equivalents, beginning of
period 41,177 48,237
------- -------
Cash and cash equivalents, end of period $38,868 $64,973
======= =======
</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, 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 June 30, 1999 and December 31, 1998 and the results of
operations for the three and six month periods ended June 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 June 30, 1999
---------------------------------------------------
Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS
---------
Income available to
common shareholders $333,000 2,899,837 $ 0.11
Effect of Dilutive
Securities
----------
Incremental shares from
assumed exercise of
outstanding options 99,376 (0.00)
-------- --------- ------
</TABLE>
<PAGE>
10
<TABLE>
<S> <C> <C> <C>
Diluted EPS
-----------
Income available to
common shareholders $333,000 2,999,213 $ 0.11
======== ========= ======
</TABLE>
<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)
-------- --------- ------
Diluted EPS
-----------
Income available to
common shareholders $422,000 2,630,401 $ 0.16
======== ========= ======
<CAPTION>
Six Months Ended June 30, 1999
----------------------------------------------------
Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS
---------
Income available to
common shareholders $742,000 2,877,784 $ 0.26
Effect of Dilutive
Securities
----------
Incremental shares from
assumed exercise of
outstanding options 115,422 (0.01)
-------- --------- ------
Diluted EPS
-----------
Income available to
common shareholders $742,000 2,993,206 $ 0.25
======== ========= ======
</TABLE>
<PAGE>
11
<TABLE>
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>
NOTE 3 - As of June 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 six month periods ended June 30, 1999 and 1998, the
Company's comprehensive income was as follows:
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
June 30, 1999 June 30, 1998
------------- -------------
(in thousands)
<S> <C> <C>
Net Income $333 $422
Other comprehensive income (10) 0
---- ----
Total comprehensive income $323 $422
<CAPTION>
Six Months Ended
---------------------------------
June 30, 1999 June 30, 1998
------------- -------------
(in thousands)
<S> <C> <C>
Net Income $742 $782
Other comprehensive income (12) (8)
---- ----
Total comprehensive income $729 $774
</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, 1999 total assets were $232,990,000 compared to $193,884,000
at December 31, 1998, an increase of $39,106,000 or 20%. Moreover, the June 30,
1999 asset level represents a $54,512,000 (30%) increase over the $178,478,000
which existed on the same date in 1998. The 1999 asset growth reflects a
corresponding increase in total deposits of $37,768,000 or 22%, from
$170,423,000 at the end of 1998 to $208,191,000 at June 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 six months of 1999. The Bank's core loan portfolio increased
by $8,826,000 during the six month period bringing the Bank's total loans to
$100,527,000 at June 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 $36.6 million while
interest-bearing deposits in financial institutions fell by $5.1 million.
Federal funds sold fell by $8.5 million in order to accommodate the changes that
took place in the rest of the balance sheet.
The Company earned a profit of $333,000 in the three months ended June 30,
1999, compared to earnings of $422,000 in the second quarter of 1998 an decrease
of 21%. The results for the six months ended June 30, 1999 were profits of
$742,000 compared to a profit of $782,000 for the corresponding period of 1998.
NET INTEREST INCOME
- -------------------
Total interest income increased by $534,000 (17%) for the second quarter of
1999 compared to the same period in 1998, and increased by $1,259,000 (21%) for
the six month period ended June 30, 1999 compared to the prior year as total
earning assets were significantly higher (29%) in 1999 than in 1998. For the
three months ended June 30, 1999 interest expense increased by $209,000 (24%) to
$1,082,000 from the 1998 level of $873,000 as total deposits were significantly
higher than in the same period in 1998. For the six months ended June 30, 1999
interest expense increased by $516,000 (30%) to $2,209,000 from the 1998 level
of $1,693,000 as total deposits were over 30% higher than in the same period in
1998. The net result was an increase in net interest income of $325,000 (14%),
from
<PAGE>
13
$2,262,000 in the second quarter of 1998 to $2,587,000 for the second quarter of
1999 and increase in net interest income of $743,000 (17%), from $4,280,000 for
the six months ended June 30, 1998 to $5,023,000 for the first six months of
1999.
OPERATING INCOME
- ----------------
Other operating income increased to $427,000 in the second quarter of 1999
from $217,000 in the three months ended June 30, 1998. For the first half of
1999 other operating income also increased significantly from $387,000 for the
six months ended June 30, 1998 to $793,000 for the first six 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 $169,000 for the second quarter of
1999 and $267,000 for the six months ended June 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 $116,000
for the second quarter of 1999 and $221,000 for the six months ended June 30,
1999 in contrast with $82,000 for the second quarter of 1998 and $134,000 for
the six months ended June 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
$42,000 in 1998's first half to $100,000 in the first half 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 half of 1998 to $0 in the same
period of 1999. No gains or losses on securities sales were realized in the
first half of 1999 or 1998.
LOAN PORTFOLIO AND PROVISION FOR LOAN LOSSES
- --------------------------------------------
The loan portfolio consisted of the following at June 30, 1999 and December
31, 1998:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
(Dollars in Thousands)
<S> <C> <C>
Commercial loans........................... $ 30,543 $24,811
Real estate construction loans............. 12,159 15,702
Real estate loans.......................... 49,915 46,251
Bankers acceptances........................ 9,936 6,681
Other loans................................ 495 797
-------- -------
Total loans........................... $103,048 $94,242
Less - Allowances for loan losses.......... 2,326 2,500
- Deferred loan fees.................. 552 562
-------- -------
Net loans............................. $100,170 $91,180
======== =======
Government guaranteed loans held for sale.. $ 357 $ 521
======== =======
</TABLE>
<PAGE>
14
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 $2,326,000 and $2,500,000 (or 2.26%
and 2.65% of gross outstanding loans) at June 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 $25,000 and
$(195,000) for the three and six month period ended June 30, 1999, compared to
$12,000 and $24,000 for the same periods of 1998. For the three and six months
ended June 30, 1999, the Company generated net loan recoveries of $10,000 and
21,000; by comparison, in the first half of 1998 the Company experienced net
loan recoveries of $22,000.
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 June 30, 1999 the Company had identified loans having an aggregate average
balance of $360,000 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, 1999 totaled $178,000 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, 1999.
<PAGE>
15
OTHER OPERATING EXPENSES
- ------------------------
Other operating expenses increased in the first six 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 $2,419,000 for the second quarter of 1999 from $1,734,000 for the
three months ended June 30, 1998. For the six months ended June 30, 1999 other
operating expenses totaled $4,751,000, an increase from $3,296,000 for the
corresponding period in 1998.
Salary and related benefits increased by $429,000, rising from a total of
$861,000 for the second quarter of 1998 to $1,290,000 for the same period in
1999, and also rose for the six months ended June 30, to $2,495,000 from
$1,655,000 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 $170,000
for the three months ended June 30, 1999 from $130,000 in the second 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 six months of 1998 there were no corresponding expense
items. Total other operating expenses rose in 1999 compared to the prior year,
increasing from $743,000 for the second quarter of 1998 to $959,000 for the
second quarter of 1999 and a corresponding increase from $1,396,000 for the
first six months of 1998 to $1,930,000 for the same period of 1999. Other
professional services expense increased in 1999 primarily in the area of legal
expenses which increased by 55,000 from the six month period in 1998.
The combined effects of the above-described factors resulted in income
before taxes of $570,000 for the three months ended June 30, 1999 compared to
$733,000 for the second quarter of 1998. For the six months ended June 30, 1999
income before taxes is $1,260,000 compared to $1,347,000 for the first six
months of the prior year. In the second quarter, the Company's provision for
taxes decreased from $311,000 in 1998 to $237,000 in 1999. For the six months
ended June 30, 1999 the provisions were $518,000 compared to $565,000 in 1998.
This brought Net Income for the second quarter of 1999 to $333,000 compared to
$422,000 for the same period in 1998. For the six months ended June 30, net
income in 1999 was $742,000, while 1998 net income through June 30 was $782,000.
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 61.7%
of total deposits at June 30, 1999. This level represents an increase from the
58.2% liquidity level which existed on December 31, 1998. In addition, at June
30, 1999 some $10.2 million of the Bank's total loans consisted of bankers
acceptances or government guaranteed loans, both of which represent a
significant source of liquidity due to the active secondary markets which exist
for these assets. The ratio of net loans (including bankers acceptances and
government guaranteed
<PAGE>
16
loans) to deposits was 48.3% and 53.8% as of June 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 June 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 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
======== ======== ========= ============= ============= ============= ========== ============ =====
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fed funds sold 23,420 0 0 0 0 0 0 23,420
Time deposits with
other banks 0 2,872 2,219 0 0 0 0 5,091
Investment securities 0 10,975 73,482 0 0 0 0 84,457
------- ------- ------ ------ ------ ------ ------- -------
Subtotal 23,420 13,847 75,701 0 0 0 0 112,968
Loans 89,559 169 10,701 58 40 0 0 100,527
------- ------- ------ ------ ------ ------ ------- -------
Total earning assets 112,979 14,016 86,402 58 40 0 0 213,495
Cash and due from banks 0 0 0 0 0 0 15,448 15,448
Premises and equipment 0 0 0 0 0 0 959 959
Other real estate owned 0 0 0 0 0 0 0 0
Other assets 0 0 0 0 0 0 3,088 3,088
------- ------- ------ ------ ------ ------ ------- -------
Total non-earning
assets 0 0 0 0 0 0 19,495 19,495
------- ------- ------ ------ ------ ------ ------- -------
Total assets 112,979 14,016 86,402 58 40 0 19,495 232,990
Funds purchased 190 0 0 0 0 0 0 190
Repurchase agreements 0 0 0 0 0 0 0 0
------- ------- ------ ------ ------ ------ ------- -------
Subtotal 190 0 0 0 0 0 0 190
Savings deposits 10,449 0 0 0 0 0 0 10,449
Money market deposits 82,053 0 0 0 0 0 0 82,053
Time deposits 0 26,184 20,181 1,054 257 0 0 47,676
------- ------- ------ ------ ------ ------ ------- -------
Total bearing
liabilities 92,692 26,184 20,181 1,054 257 0 0 140,368
Demand deposits 0 0 0 0 0 0 68,013 68,013
Other liabilities 0 0 0 0 0 0 3,511 3,511
Equity capital 0 0 0 0 0 0 21,098 21,098
------- ------- ------ ------ ------ ------ ------- -------
Total non-bearing
liabilities 0 0 0 0 0 0 92,622 92,622
------- ------- ------ ------ ------ ------ ------- -------
Total liabilities 92,692 26,184 20,181 1,054 257 0 92,622 232,990
GAP 20,287 (12,168) 66,221 (996) (217) 0 (73,127) 0
</TABLE>
<PAGE>
17
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cumulative GAP 20,287 8,119 74,340 73,344 73,127 73,127 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 3%
and 13% of the Bank's total deposits as of June 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 half of 1999. As of June 30, 1999 the Company's investment
portfolio contained gross unrealized losses of $18,000 and no unrealized gains.
By comparison, at June 30, 1998 the Company's investment portfolio contained
gross unrealized gains of $2,000 and no unrealized losses. The Company adopted
SFAS No. 115 in 1994, with the result that the unrealized net loss (adjusted for
taxes) of $12,000 at June 30, 1999 gave rise to a $12,000 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
$21,098,000 and $20,470,000 as of June 30, 1999 and December 31, 1998,
respectively. The Company's capital ratios for those dates in comparison with
regulatory capital requirements were as follows:
<TABLE>
<CAPTION>
6-30-99 12-31-98
------- --------
<S> <C> <C>
Leverage Ratio (Tier I Capital
to Assets):
Regulatory requirement 4.00% 4.00%
First Regional Bancorp 9.44% 11.17%
</TABLE>
<PAGE>
18
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>
6-30-99 12-31-98
-------- --------
<S> <C> <C>
Tier I Capital to Assets:
Regulatory requirement 4.00% 4.00%
First Regional Bancorp 12.36% 14.35%
<CAPTION>
6-30-99 12-31-98
-------- --------
<S> <C> <C>
Tier I + Tier II Capital to Assets:
Regulatory requirement 8.00% 8.00%
First Regional Bancorp 13.61% 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 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.
<PAGE>
19
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>
20
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.
<PAGE>
21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The company held its annual meeting of shareholders on May 20, 1999. The
management slate consisted of five nominees listed below:
H. Anthony Gartshore
Gary Horgan
Thomas E. McCullough
Lawrence J. Sherman
Jack A. Sweeney
Mark Rubin nominated an alternate slate consisting of Frank Moothart, Sidney
Morse and Mark Rubin. Management, using its proxies, elected four members to the
Board of Directors:
H. Anthony Gartshore
Gary Horgan
Lawrence J. Sherman
Jack A. Sweeney
Mr. Rubin using the proxies he solicited, elected one director:
Mark Rubin
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>
22
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 1999.
<PAGE>
23
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 3, 1999 /s/ Jack A. Sweeney
------------------------------------------
Jack A. Sweeney, Chairman of the Board
and Chief Executive Officer
Date: August 3, 1999 /s/ Thomas McCullough
------------------------------------------
Thomas McCullough, Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 15,448,000
<INT-BEARING-DEPOSITS> 5,091,000
<FED-FUNDS-SOLD> 23,420,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 84,457,000
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 102,853,000
<ALLOWANCE> 2,326,000
<TOTAL-ASSETS> 232,990,000
<DEPOSITS> 208,191,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,124,000
<LONG-TERM> 1,387,000
0
0
<COMMON> 14,909,000
<OTHER-SE> 6,189,000
<TOTAL-LIABILITIES-AND-EQUITY> 232,990,000
<INTEREST-LOAN> 4,707,000
<INTEREST-INVEST> 1,840,000
<INTEREST-OTHER> 685,000
<INTEREST-TOTAL> 7,232,000
<INTEREST-DEPOSIT> 2,201,000
<INTEREST-EXPENSE> 2,209,000
<INTEREST-INCOME-NET> 5,023,000
<LOAN-LOSSES> (195,000)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,751,000
<INCOME-PRETAX> 1,260,000
<INCOME-PRE-EXTRAORDINARY> 742,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 742,000
<EPS-BASIC> 0.26
<EPS-DILUTED> 0.25
<YIELD-ACTUAL> .046
<LOANS-NON> 348,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,500,000
<CHARGE-OFFS> 0
<RECOVERIES> 21,000
<ALLOWANCE-CLOSE> 2,326,000
<ALLOWANCE-DOMESTIC> 2,326,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
