<PAGE>
Page 1 of 19
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Quarter Ended March 31, 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 3,051,587
-------------------------- ------------------------------
Class Outstanding on May 10, 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................................ 11
Part II - Other Information
Item 1. Legal Proceedings............................ 18
Item 4. Submission of Matters to a Vote of
Security Holders............................. 18
Item 6. Exhibits and Reports on Form 8-K............. 18
Signatures.................................................. 19
</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>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
- ------
Cash and due from banks $ 12,046 $ 9,277
Federal Funds Sold 36,320 31,900
-------- --------
Cash and Cash equivalents 48,366 41,177
Investment securities 63,564 47,860
Interest-bearing deposits in financial
institutions 11,918 10,143
Government guaranteed loans 517 521
Loans, net of allowance for losses of
$2,291,000 in 1999 and $2,500,000 in 1998 99,264 91,180
Premises and equipment, net of accumulated
depreciation 971 790
Other real estate owned 84 0
Accrued interest receivable and other assets 3,052 2,213
-------- --------
Total Assets $227,736 $193,884
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Deposits:
Noninterest bearing $ 74,539 $ 61,964
Interest bearing:
Savings deposits 7,950 7,314
Money market deposits 72,907 49,991
Time deposits 47,026 51,154
-------- --------
Total deposits 202,422 170,423
Securities sold under agreement to repurchase 450 0
Note payable 1,425 1,463
Accrued interest payable and other liabilities 2,200 1,528
-------- --------
Total Liabilities 206,497 173,414
</TABLE>
<PAGE>
4
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Shareholders' Equity:
Common Stock, no par value, 50,000,000 shares
authorized; 3,052,000 and 2,983,000 shares
outstanding in 1999 and 1998, respectively 16,361 16,034
Less: Unearned ESOP shares; 143,000 and 146,000
outstanding in 1999 and 1998, respectively (1,350) (1,386)
----------- -----------
Total common stock, no par value;
outstanding 2,909,000 (1999) and
2,837,000 (1998) shares 15,011 14,648
Retained earnings 6,230 5,821
Accumulated other comprehensive income (2) 1
----------- -----------
Total Shareholders' Equity 21,239 20,470
----------- -----------
Total Liabilities and Shareholders' Equity $227,736 $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
March 31,
----------------------
1999 1998
-------- -------
<S> <C> <C>
REVENUE FROM EARNING ASSETS:
Interest on loans $2,312 $1,675
Interest on deposits in financial institutions 154 101
Interest on investment securities 687 581
Interest on federal funds sold 410 481
------ ------
Total interest income 3,563 2,838
COST OF FUNDS:
Interest on deposits 1,126 817
Interest on other borrowings 1 3
------ ------
Total interest expense 1,127 820
------ ------
Net interest income 2,436 2,018
PROVISION FOR LOAN LOSSES (220) 12
------ ------
Net interest income after provision
for loan losses 2,656 2,006
OTHER OPERATING INCOME 366 170
------ ------
OPERATING EXPENSES:
Salaries and related benefits 1,205 794
Occupancy expense 156 115
Equipment expense 85 56
Promotion expense 27 35
Professional service expense 295 161
Customer service expense 209 262
Supply/communication expense 89 45
Other expenses 266 94
------ ------
Total operating expenses 2,332 1,562
------ ------
Income before provision for income taxes 690 614
PROVISION FOR INCOME TAXES 281 254
------ ------
</TABLE>
<PAGE>
6
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
------- -------
<S> <C> <C>
NET INCOME $ 409 $ 360
======= =======
EARNINGS PER SHARE (Note 2)
Basic $ 0.14 $ 0.15
Diluted $ 0.14 $ 0.14
</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>
Three Months Ended
March 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 409 $ 360
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses (220) 12
Provision for depreciation and
amortization 97 31
Amortization of investment security
and guaranteed loan premiums 0 16
Accretion of investment security
discounts (136) (79)
Decrease (increase) in interest
receivable (20) 58
Increase in interest payable 27 28
Increase in taxes payable 83 229
Net increase (decrease) in other
liabilities 562 (257)
-------- --------
Net cash provided by
operating activities $ 802 $ 398
INVESTING ACTIVITIES
Increase in investments in time deposits
with other financial institutions $ (1,775) $ (2,270)
Decrease (increase) in investment securities (15,571) 11,173
Decrease in guaranteed loans 4 442
Net decrease (increase) in other loans (7,864) 6,595
Increase in premises and equipment (278) (26)
Increase in other real estate owned (84) 0
Net increase in other assets (819) (47)
--------- ---------
Net cash (used in) provided by
investing activities $(26,387) $ 15,867
</TABLE>
<PAGE>
8
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
---- ----
<S> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in noninterest bearing
deposits, money market deposits, and
other deposits $ 36,127 $ (4,632)
Net increase (decrease) in time deposits (4,128) 9,656
Decrease in note payable (38) 0
Increase in securities sold under agreement
to repurchase 450 0
Increase (decrease) in shareholders' equity 363 (72)
-------- ---------
Net cash provided by
financing activities $ 32,774 $ 4,952
Increase in cash and cash equivalents $ 7,189 $ 21,217
Cash and cash equivalents, beginning of
period 41,177 48,237
-------- --------
Cash and cash equivalents, end of period $ 48,366 $ 69,454
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
9
FIRST REGIONAL BANCORP AND SUBSIDIARY
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
March 31, 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 March 31, 1999 and December 31,
1998 and the results of operations for the three month periods ended
March 31, 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 March 31, 1999
-----------------------------------------
Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS
---------
Income available to
common shareholders $ 409,000 2,863,558 $0.14
Effect of Dilutive
Securities
----------
Incremental shares from
assumed exercise of
outstanding options 131,467 (0.00)
----------- ------------- ---------
</TABLE>
<PAGE>
10
<TABLE>
<S> <C> <C> <C>
Diluted EPS
-----------
Income available to
common shareholders $ 409,000 2,995,025 $0.14
========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
--------------------------------------------
Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS
---------
Income available to
common shareholders $ 360,000 2,440,131 $0.15
Effect of Dilutive
Securities
----------
Incremental shares from
assumed exercise of
outstanding options 188,364 (0.01)
----------- ------------ ---------
Diluted EPS
-----------
Income available to
common shareholders $ 360,000 2,628,495 $0.14
=========== ============ =========
</TABLE>
NOTE 3 - As of March 31, 1999 the Bank had a total of $1,621,000 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 month
periods ended March 31, 1999 and 1998, the Company's comprehensive
income was as follows:
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
March 31, March 31,
1999 1998
----------------------------------
(in thousands)
<S> <C> <C>
Net Income $ 409 $ 360
Other comprehensive income (2) 1
------- ------
Total comprehensive income $ 407 $ 361
======= ======
</TABLE>
<PAGE>
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
SUMMARY
- -------
First Regional Bancorp did not conduct any significant business activities
independent of First Regional Bank. The following discussion and analysis
relates primarily to the Bank.
As of March 31, 1999 total assets were $227,736,000 compared to
$193,884,000 at December 31, 1998, an increase of $33,852,000 or 17.5%. Since a
modest decline in asset levels is customary in the first quarter of each year,
the growth achieved in the first three months of 1999 is a positive event.
Moreover, the March 31, 1999 asset level represents a considerable improvement
over the $167,749,000 that existed on the same date in 1998. The 1999 asset
growth reflects a corresponding increase in total deposits of $31,999,000 or
18.8%, from $170,423,000 at the end of 1998 to $202,422,000 at March 31, 1999.
While the deposit growth was centered in money market deposits, there was also
significant growth in noninterest bearing deposits, while savings deposits
increased slightly and time deposits experienced some decline. The increase in
money market accounts was due to the deposits of Trust Administration Services
Corp. (TASC), a new wholly owned subsidiary that provides administrative and
custodial services to self-directed retirement plans. There were several changes
in the composition of the Bank's assets during the first quarter. The Bank's
core loan portfolio actually grew by $8,080,000 during the three month period
bringing the Bank's total loans to $99,781,000 at March 31, 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 grew by approximately $15.7
million and time deposits with other financial institutions rose by $1.7
million. Funds sold rose slightly by $4.4 million in order to accommodate the
changes that took place in the rest of the balance sheet.
The Company earned a profit of $409,000 in the first quarter of 1999,
compared to earnings of $360,000 in the three months ended March 31, 1998.
NET INTEREST INCOME
- -------------------
Total interest income rose by $725,000 (25.5%) for the three months ended
March 31, 1999 compared to the same period in 1998 as total earning assets were
significantly higher (37%) in 1999 than in 1998. For the three months ended
March 31, 1999 interest expense increased by $307,000 (37%), to $1,127,000 from
the 1998 level of $820,000 as total deposits were over 35% higher than in the
same period in 1998. The net result was an increase in net interest income of
$418,000 (21%), from $2,018,000 in the first quarter of 1998 to $2,436,000 for
the first three months of 1999.
OPERATING INCOME
- ----------------
Other operating income rose to $366,000 in the first quarter of 1999 from
$170,000 in the three months ended March 31, 1998. The Bank's new
<PAGE>
12
merchant services operation, which provides credit card deposit and clearing
services to retailers and other credit card accepting businesses, had revenue
that totaled $105,000 for the three months ended March 31, 1999 in contrast with
$52,000 in the corresponding period of 1998. The increase in this category of
income was also in part due to increase in gains on sales of land, which
increased from $12,000 in 1998's first quarter to $60,000 in the first quarter
of 1999. Offsetting these income increases in part was the decrease in gains
realized on the sale of loans, which fell from $9,000 in the first quarter of
1998 to $0 in the same period of 1999. No gains or losses on securities sales
were realized in the first quarter of 1999 or 1998.
LOAN PORTFOLIO AND PROVISION FOR LOAN LOSSES
- --------------------------------------------
The loan portfolio consisted of the following at March 31, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------------------
(Dollars in Thousands)
<S> <C> <C>
Commercial loans................................................... $ 27,385 $ 24,811
Real estate construction loans..................................... 13,786 15,702
Real estate loans.................................................. 49,060 46,251
Bankers acceptances................................................ 11,147 6,681
Other loans........................................................ 674 797
-------- --------
Total loans................................................... $102,052 $ 94,242
Less - Allowances for loan losses................................. 2,291 2,500
- Deferred loan fees......................................... 497 562
--------- --------
Net loans..................................................... $ 99,264 $ 91,180
======== ========
Government guaranteed loans held for sale $ 517 $ 521
======== ========
</TABLE>
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
<PAGE>
13
authorities, assessment of economic conditions and other appropriate data to
identify the risks in the loan portfolio.
The allowance for possible losses was $2,291,000 and $2,500,000 (or
2.24% and 2.65% of gross outstanding loans) at March 31, 1999 and December 31,
1998 respectively. Reflecting the Company's ongoing analysis of the risks
presented by its loan portfolio, provisions for possible losses were $(220,000)
for the three month period ended March 31, 1999, compared to $12,000 in the
first quarter of 1998. For the three months ended March 31, and 1998, the
Company generated net loan recoveries of $11,000 and $12,000.
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 March 31, 1999, the Company identified loans having an aggregate average
balance of $276,000 which it concluded were impaired under SFAS No. 114. The
Company's policy is to discontinue the accrual of interest income on impaired
loans, and to recognize income on such loans only after the loan principal has
been repaid in full. Pursuant to this policy, the Company had already ceased to
accrue interest on the impaired loans, and had established a general loss
reserve for each of the loans which at March 31, 1999 totaled $101,000 for the
loans as a group. As the loss reserves established by the Company were greater
than those called for under SFAS No. 114, the adoption of SFAS No. 114 had no
effect on the Company's financial statements as of March 31, 1999.
OTHER OPERATING EXPENSES
- ------------------------
Overall operating expenses increased in the first quarter of 1999
compared to the same period of 1998, although some categories of expense
actually decreased from the levels of previous periods. Operating expenses rose
to a total of $2,332,000 for the first quarter of 1999 from $1,562,000 for the
three months ended March 31, 1998.
Salary and related benefits increased by $411,000, rising from a total
of $794,000 for the first quarter of 1998 to $1,205,000 for the same period in
1999. 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 $156,000 for the three
months ended March 31, 1999 from $115,000 in the first quarter of 1998, the
increase reflects the rent paid on the various facilities which house the Bank's
new regional offices and the TASC operation; since these operations did not
exist in the first quarter of 1998 there were no corresponding expense items.
Total other operating expenses rose in 1999 compared to the prior year,
increasing from $653,000 for the first quarter of 1998 to $971,000 for the first
three months of
<PAGE>
14
1999. Other professional services expense increased in 1999 primarily in the
area of legal expenses which increased by $83,000 from the first quarter of
1998.
The combined effects of the above-described factors resulted in income
before taxes of $690,000 for the three months ended March 31, 1999 compared to
$614,000 for the first quarter of 1998. In the first quarter, the Company's
provision for taxes rose from $254,000 in 1998 to $281,000 in 1999. This brought
Net Income for the first quarter of 1999 to $409,000 compared to $360,000 for
the same period in 1998.
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, and federal funds sold) stood at 61.2% of
total deposits at March 31, 1999. This level represents an increase from the
58.2% liquidity level which existed on December 31, 1998. In addition, at March
31, 1999 some $11.7 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 50.4% and 55.3% as of March 31,
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 March 31, 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 36,320 0 0 0 0 0 0 36,320
Time deposits with other
banks 0 2,180 9,738 0 0 0 0 11,918
Investment securities 0 19,983 43,581 0 0 0 0 63,564
-------- --------- ------------- ------------- ------------- ---------- ----------- -------
Subtotal 36,320 22,163 53,319 0 0 0 0 111,802
Loans 87,597 566 11,182 383 53 0 0 99,781
--------- -------- ------------- ------------- ------------- ---------- ----------- -------
Total earning assets 123,917 22,729 64,501 383 53 0 0 211,583
Cash and due from banks 0 0 0 0 0 0 12,046 12,046
Premises and equipment 0 0 0 0 0 0 971 971
Other real estate owned 0 0 0 0 0 0 84 84
</TABLE>
<PAGE>
15
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other assets 0 0 0 0 0 0 3,052 3,052
------- ------ ------ ------ ------ ------ ------- -------
Total non-earning assets 0 0 0 0 0 0 16,153 16,153
------- ------ ------ ------ ------ ------ ------- -------
Total assets 123,917 22,729 64,501 383 53 0 16,153 227,736
Funds purchased 450 0 0 0 0 0 0 450
Repurchase agreements 0 0 0 0 0 0 0 0
------- ------ ------ ------ ------ ------ ------- -------
Subtotal 450 0 0 0 0 0 0 450
Savings deposits 7,950 0 0 0 0 0 0 7,950
Money market deposits 72,907 0 0 0 0 0 0 72,907
Time deposits 0 22,823 22,735 1,212 256 0 0 47,026
------- ------ ------ ------ ------ ------ ------- -------
Total bearing
liabilities 81,307 22,823 22,735 1,212 256 0 0 128,333
Demand deposits 0 0 0 0 0 0 74,539 74,539
Other liabilities 0 0 0 0 0 0 3,625 3,625
Equity capital 0 0 0 0 0 0 21,239 21,239
------- ------ ------ ------ ------ ------ ------- -------
Total non-bearing
liabilities 0 0 0 0 0 0 99,403 99,403
------- ------ ------ ------ ------ ------ ------- -------
Total liabilities 81,307 22,823 22,735 1,212 256 0 99,403 227,736
GAP 42,610 (94) 41,766 (829) (203) 0 (83,250) 0
Cumulative GAP 42,610 42,516 84,282 83,453 83,250 83,250 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 7%
and 13% of the Bank's total deposits as of March 31, 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. Agency securities and
<PAGE>
16
commercial papers. As mentioned above, no gains or losses were recorded on
securities sales in the first quarter of 1999. As of March 31, 1999 the
Company's investment portfolio contained gross unrealized losses of $3,000 and
no unrealized gains. By comparison, at March 31, 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 $2,000 at March 31, 1999 gave rise to a $2,000
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 $21,239,000 and $20,470,000 as of March 31, 1999 and December 31, 1998,
respectively. The Company's capital ratios for those dates in comparison with
regulatory capital requirements were as follows:
3-31-99 12-31-98
------- --------
Leverage Ratio (Tier I Capital
to Assets):
Regulatory requirement 4.00% 4.00%
First Regional Bancorp 9.71% 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:
3-31-99 12-31-98
------- --------
Tier I Capital to Assets:
Regulatory requirement 4.00% 4.00%
First Regional Bancorp 12.97% 14.35%
3-31-99 12-31-98
------- --------
Tier I + Tier II Capital to Assets:
Regulatory requirement 8.00% 8.00%
First Regional Bancorp 14.22% 15.60%
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
<PAGE>
17
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 deposit balances. The Bank is in the process
of performing an assessment of the year 2000 readiness with both borrowers (as
part of the loan granting or renewal process) and depositors. At this time, it
is impossible to determine what impact, if any, the year 2000 will have on
either the loan payment performance of the Bank's borrowers or the balances of
key depositors. Thus far, however, none of the Bank's borrowers or depositors
have reported the expectation of material adverse impacts as a result of the
year 2000.
INFLATION
- ---------
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>
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
Litigation
- ----------
In the normal course of business, the Company and the Bank are involved
in litigation. Management does not expect the ultimate outcome of any pending
litigation to have a material effect on the Company's financial position or
results of operations.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No items were submitted to a vote of the Company's shareholders during the first
quarter of 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 first quarter of 1999.
<PAGE>
19
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: May 10, 1999 /s/ Jack A. Sweeney
------------------------------------------
Jack A. Sweeney, Chairman of the Board
and Chief Executive Officer
Date: May 10, 1999 /s/ Thomas McCullough
------------------------------------------
Thomas McCullough, Chief Financial Officer
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