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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| [X] | QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Quarter Ended September 30, 2000
0-10232
(Commission File Number)
FIRST REGIONAL BANCORP
(Exact name of registrant as specified in its charter)
| California (State or other jurisdiction of incorporation or organization) |
95-3582843 (IRS Employer Identification Number) |
| 1801 Century Park East Los Angeles, California (Address of principal executive offices) |
90067 (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.
Class: Common Stock, No Par Value. Outstanding on October 19, 2000: 2,814,720.
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 | 8 | |
| PART II | OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 13 | |
| Item 4. | Submission of Matters to a Vote of Security Holders | 13 | |
| Item 6. | Exhibits and Reports on Form 8-K | 13 |
| SIGNATURES | 14 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands)
(Unaudited)
| September 30, 2000 | December 31, 1999 | ||||||
| ASSETS | |||||||
| Cash and due from banks | $ | 15,201 | $ | 10,074 | |||
| Federal funds sold | 9,335 | 37,090 | |||||
| Cash and cash equivalents | 24,536 | 47,164 | |||||
| Investment securities | 4,941 | 52,789 | |||||
| Interest-bearing deposits in financial institutions | 2,772 | 6,923 | |||||
| Government guaranteed loans | 27,457 | 5,084 | |||||
| Loans, net of allowance for losses of $3,819,000 in 2000
and $2,300,000 in 1999 |
186,534 | 116,732 | |||||
| Premises and equipment, net of accumulated depreciation | 1,403 | 1,172 | |||||
| Accrued interest receivable and other assets | 10,397 | 3,169 | |||||
| Total Assets | $ | 258,040 | $ | 233,033 | |||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
| Liabilities: | |||||||
| Deposits: | |||||||
| Noninterest bearing | $ | 78,689 | $ | 65,405 | |||
| Interest bearing: | |||||||
| Savings deposits | 10,401 | 8,605 | |||||
| Money market deposits | 94,248 | 87,670 | |||||
| Time deposits | 48,319 | 44,052 | |||||
| Total deposits | 231,657 | 205,732 | |||||
| Note payable | 1,200 | 1,313 | |||||
| Accrued interest payable and other liabilities | 3,017 | 5,285 | |||||
| Total Liabilities | 235,874 | 212,330 | |||||
| Shareholders’ Equity: | |||||||
| Common Stock, no par value, 50,000,000 shares authorized;
2,815,000 and 2,809,000 shares outstanding in 2000 and 1999, respectively |
14,254 | 14,410 | |||||
| Less: Unearned ESOP shares; 125,000 and 132,000 outstanding
in 2000 and 1999, respectively |
(1,137 | ) | (1,244 | ) | |||
| Total common stock, no par value; Outstanding 2,689,000 (2000)
and 2,677,000 (1999) shares |
13,117 | 13,166 | |||||
| Retained earnings | 9,049 | 7,538 | |||||
| Accumulated other comprehensive loss | (1 | ) | |||||
| Total Shareholders’ Equity | 22,166 | 20,703 | |||||
| Total Liabilities and Shareholders’ Equity | $ | 258,040 | $ | 233,033 | |||
The accompanying notes are an integral part of these statements.
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Amounts)
(Unaudited)
| Three Months Ended September 30, |
Nine Months Ended September 30, | |||||||||||||
| 2000 | 1999 | 2000 | 1999 | |||||||||||
| Revenue From Earning Assets: | ||||||||||||||
| Interest on loans | $ | 5,445 | $ | 2,581 | $ | 13,279 | $ | 7,288 | ||||||
| Interest on deposits in financial institutions | 52 | 44 | 202 | 308 | ||||||||||
| Interest on investment securities | 145 | 976 | 1,297 | 2,552 | ||||||||||
| Interest on federal funds sold | 305 | 297 | 1,106 | 982 | ||||||||||
| Total interest income | 5,947 | 3,898 | 15,884 | 11,130 | ||||||||||
| Cost of Funds: | ||||||||||||||
| Interest on deposits | 1,305 | 1,114 | 3,410 | 3,315 | ||||||||||
| Interest on other borrowings | 3 | 5 | 11 | 13 | ||||||||||
| Total interest expense | 1,308 | 1,119 | 3,421 | 3,328 | ||||||||||
| Net interest income | 4,639 | 2,779 | 12,463 | 7,802 | ||||||||||
| Provision (credit)for loan losses | 710 | 0 | 1,424 | (195 | ) | |||||||||
| Net interest income after provision for loan losses | 3,929 | 2,779 | 11,039 | 7,997 | ||||||||||
| Other operating income | 479 | 451 | 1,223 | 1,244 | ||||||||||
| Operating Expenses: | ||||||||||||||
| Salaries and related benefits | 2,073 | 1,381 | 5,520 | 3,876 | ||||||||||
| Occupancy expense | 237 | 186 | 652 | 512 | ||||||||||
| Equipment expense | 130 | 95 | 365 | 268 | ||||||||||
| Promotion expense | 65 | 47 | 196 | 142 | ||||||||||
| Professional services expense | 244 | 282 | 822 | 813 | ||||||||||
| Customer service expense | 133 | 141 | 415 | 532 | ||||||||||
| Supply/communication expense | 137 | 138 | 384 | 339 | ||||||||||
| Other expenses | 353 | 286 | 1,060 | 825 | ||||||||||
| Total operating expenses | 3,372 | 2,556 | 9,414 | 7,307 | ||||||||||
| Income before provision for income taxes | 1,036 | 674 | 2,848 | 1,934 | ||||||||||
| Provision for income taxes | 425 | 278 | 1,174 | 796 | ||||||||||
| Net income | $ | 611 | $ | 396 | $ | 1,674 | $ | 1,138 | ||||||
| Earnings per share (Note 2): | ||||||||||||||
| Basic | $ | 0.23 | $ | 0.14 | $ | 0.62 | $ | 0.38 | ||||||
| Diluted | $ | 0.23 | $ | 0.13 | $ | 0.62 | $ | 0.36 | ||||||
The accompanying notes are an integral part of these statements.
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2000 | 1999 | |||||||
| Operating Activities: | ||||||||
| Net Income | $ | 1,674 | $ | 1,138 | ||||
| Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
| Provision (credit) for loan losses | 1,424 | (195 | ) | |||||
| Provision for depreciation and amortization | 176 | 130 | ||||||
| Amortization of investment security and guaranteed loan premiums | 406 | 61 | ||||||
| Accretion of investment security discounts | (98 | ) | (132 | ) | ||||
| Increase in interest receivable | (894 | ) | (336 | ) | ||||
| Increase in interest payable | 85 | 4 | ||||||
| (Decrease) increase in taxes payable | (511 | ) | 264 | |||||
| Net (decrease) increase in other liabilities | (1,842 | ) | 636 | |||||
| Net cash provided by operating activities | 420 | 1,570 | ||||||
| Investing Activities: | ||||||||
| Decrease in investments in time deposits with other financial institutions | 4,151 | 6,330 | ||||||
| Decrease (increase) in investment securities | 47,936 | (19,084 | ) | |||||
| Increase in guaranteed loans | (22,768 | ) | (215 | ) | ||||
| Net increase in other loans | (71,226 | ) | (10,032 | ) | ||||
| Increase in premises and equipment | (407 | ) | (424 | ) | ||||
| Net increase in other assets | (6,334 | ) | (737 | ) | ||||
| Net cash used in investing activities | (48,648 | ) | (24,162 | ) | ||||
| Financing Activities: | ||||||||
| Net increase in noninterest bearing deposits money market deposits,
and other deposits |
21,658 | 36,515 | ||||||
| Net increase (decrease) in time deposits | 4,267 | (6,361 | ) | |||||
| Decrease in note payable | (113 | ) | (113 | ) | ||||
| Increase in securities sold under agreement to repurchase | 467 | |||||||
| (Decrease) in shareholders’ equity | (212 | ) | (126 | ) | ||||
| Net cash provided by financing activities | 25,600 | 30,382 | ||||||
| (Decrease) increase in cash and cash equivalents | (22,628 | ) | 7,790 | |||||
| Cash and cash equivalents, beginning of period | 47,164 | 41,177 | ||||||
| Cash and cash equivalents, end of period | $ | 24,536 | $ | 48,967 | ||||
The accompanying notes are an integral part of these statements.
FIRST REGIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(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 1999 financial statements have been reclassified to be comparable with the classifications used in the 2000 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, 2000 and December 31, 1999 and the results of operations for the three and nine month periods ended September 30, 2000 and 1999.
In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS No. 133 requires the Company to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on the Company’s rights or obligations under the applicable derivative contract. In June 1999, the FASB issued SFAS No. 137, which deferred the effective date of adoption of SFAS No. 133 for one year. The Company will adopt SFAS No. 133 no later than the first quarter of fiscal year 2001. The Company is currently in the process of assessing the impact of the adoption of SFAS 133. Because the Company does not currently invest in derivative financial i nstruments covered by SFAS No. 133 or conduct hedging activities, adoption of the new method of accounting for derivatives and hedging activities is not expected to have a material impact on the Company’s consolidated statements of income and financial condition. Should the Company’s investment activities in this area change in the future, the Company will be required to record derivatives that were previously not given accounting recognition as assets and record the changes in the fair value of those derivatives in earnings.
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 1999 annual report. Certain statements in this Report on Form 10-Q constitute “forward looking statements” under the Private Securities Litigation Reform Act of 1995 which involve risks and uncertainties. The Company’s actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, economic conditions, competition in the geographic and business areas in which the Company conducts operations, fluctuations in interest rates, credit quality and government regulations.
Note 2.
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. A reconciliation of the numerator and the denominator used in the computation of basic and diluted earnings per share is:
| Three Months Ended September 30, 2000 | ||||||||||
| Income (Numerator) | Weighted Average Shares (Denominator) | Per Share Amount | ||||||||
| Basic EPS | ||||||||||
| Income available to common shareholders | $ | 611,000 | 2,686,919 | $ | 0.23 | |||||
| Effect of dilutive securities | ||||||||||
| Incremental shares from assumed exercise of
outstanding options |
15,176 | (0.00 | ) | |||||||
| Diluted EPS | ||||||||||
| Income available to common shareholders | $ | 611,000 | 2,702,095 | $ | 0.23 | |||||
| Three Months Ended September 30, 1999 | ||||||||||
| Income (Numerator) | Weighted Average Shares (Denominator) | PerShare Amount | ||||||||
| 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 | |||||
| Nine Months Ended September30, 2000 | ||||||||||
| Income (Numerator) | Weighted Average Shares (Denominator) | Per Share Amount | ||||||||
| Basic EPS | ||||||||||
| Income available to common shareholders | $ | 1,674,000 | 2,696,154 | $ | 0.62 | |||||
| Effect of Dilutive Securities | ||||||||||
| Incremental shares from assumed exercise of outstanding options |
15,426 | (0.00 | ) | |||||||
| Diluted EPS | ||||||||||
| Income available to common shareholders | $ | 1,674,000 | 2,711,580 | $ | 0.62 | |||||
| Nine Months Ended September30, 1999 | ||||||||||
| Income (Numerator) | Shares (Denominator) | Weighted Average Per Share Amount | ||||||||
| 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 | |||||
Note 3.
As of September 30, 2000 the Bank had a total of $1,161,000 in standby letters of credit outstanding. No losses are anticipated as a result of these transactions.
Note 4.
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, 2000 and 1999, the Company’s comprehensive income (loss) was as follows:
| Three Months Ended September 30, | |||||||
| 2000 | 1999 | ||||||
| (in thousands) | |||||||
| Net Income | $ | 611 | $ | 396 | |||
| Other comprehensive income | 0 | 7 | |||||
| Total comprehensive income | $ | 611 | $ | 403 | |||
| Nine Months Ended September30, | |||||||
| 2000 | 1999 | ||||||
| (in thousands) | |||||||
| Net Income | $ | 1,674 | $ | 1,138 | |||
| Other comprehensive loss | 0 | (5 | ) | ||||
| Total comprehensive income | $ | 1,674 | $ | 1,133 | |||
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, 2000 total assets were $258,040,000 compared to $233,033,000 at December 31, 1999, an increase of $25,007,000 or 11%. Moreover, the September 30, 2000 asset level represents a $31,738,000 (14%) increase over the $226,302,000 which existed on the same date in 1999. The 2000 asset growth reflects a corresponding increase in total deposits of $25,925,000 or 13%, from $205,732,000 at the end of 1999 to $231,657,000 at September 30, 2000. While the deposit growth was centered in money market and noninterest bearing deposits, there was also growth in savings deposits and time deposits. There were several changes in the composition of the Bank’s assets during the first nine months of 2000. The Bank’s core loan portfolio increased by $92,175,000 during the nine month period bringing the Bank’s total loans to $213,991,000 at September 30, 2000 from the December ;31, 1999 total of $121,816,000. The combined effect of the substantial increase in loans and the growth in deposits was a decrease in the level of total liquid assets. Of particular note, investment securities available for sale decreased by approximately $47.8 million and time deposits in financial institutions fell by $4.1 million. Federal funds sold fell by $27.7 million in order to accommodate the changes that took place in the rest of the balance sheet.
The Company earned a profit of $611,000 in the three months ended September 30, 2000, compared to earnings of $396,000 in the third quarter of 1999 an increase of 54%. The results for the nine months ended September 30, 2000 were profits of $1,674,000 compared to a profit of $1,138,000 for the corresponding period of 1999.
Net Interest Income
Total interest income increased by $2,049,000 (52%) for the third quarter of 2000 compared to the same period in 1999, and increased by $4,754,000 (43%) for the nine month period ended September 30, 2000 compared to the prior year as total earning assets were significantly higher (10%) in 2000 than in 1999. The majority of the increase in interest income arises from a substantial increase of $5,991,000 (82%) in interest on loans from $7,288,000 for the nine months ended September 30, 1999 compared to $13,279,000 for the same period in 2000.
This increase in interest income on loans corresponds to a substantial increase in core loan portfolio of $111,848,000 (109%) from September 30, 1999 to September 30, 2000 and generally higher interest rates which have existed this year compared to 1999. For the three months ended September 30, 2000 interest expense increased by $189,000 (17%) to $1,308,000 from the 1999 level of $1,119,000 and for the nine months ended September 30, 2000 interest expense increased slightly by $93,000 (2.8%) to $3,421,000 from the 1999 level of $3,328,000. Interest expenses increased in these periods as interest bearing deposits were $17,854,000 (13%) higher at September 30, 2000 than at September 30, 1999. The net result was an increase in net interest income of $1,860,000 (67%), from $2,779,000 in the third quarter of 1999 to $4,639,000 for the third quarter of 2000 and increase in net interest income of $4,661,000 (60%), from $7,802,000 for the nine months ended September ;30, 1999 to $12,463,000 for the first nine months of 2000.
Operating Income
Other operating income increased to $479,000 in the third quarter of 2000 from $451,000 in the three months ended September 30, 1999. For the first nine months of 2000 other operating income decreased slightly from $1,244,000 for the nine months ended September 30, 1999 to $1,223,000 for the first nine months of 2000. The Bank’s merchant services operation, which provides credit card deposit and clearing services to retailers and other credit card accepting businesses, had revenue that totaled $188,000 for the third quarter of 2000 and $531,000 for the nine months ended September 30, 2000 in contrast with $138,000 for the third quarter of 1999 and $359,000 for the nine months ended September 30, 1999. Offsetting this income increase in part was the Bank’s Trust Administration Services Corp. (TASC), a wholly owned subsidiary that provides administrative and custodial services to self-dir ected retirement plans. TASC had revenue that decreased to $291,000 for the nine months ended September 30, 2000 in contrast with $420,000 for the nine months ended September 30, 1999. Also offsetting this income increase was the decrease in gains realized on the sale of land, which decreased from $132,000 in 1999’s first nine months to $68,000 in the same period of 2000. Losses on securities sales totaled $0 for the third quarter of 2000 and $24,000 for the first nine months of 2000 while no gains or losses on securities sales were realized in the first nine months of 1999.
Loan Portfolio and Provision for Loan Losses
The loan portfolio consisted of the following at September 30, 2000 and December 31, 1999:
| September30, 2000 | December31, 1999 | ||||||
| (dollars in thousands) | |||||||
| Commercial loans | $ | 60,130 | $ | 42,789 | |||
| Real estate construction loans | 42,313 | 19,267 | |||||
| Real estate loans | 87,792 | 56,741 | |||||
| Other loans | 1,205 | 961 | |||||
| Total loans | 191,440 | 119,758 | |||||
| Less—Allowances for loan losses | 3,819 | 2,300 | |||||
| —Deferred loan fees | 1,087 | 726 | |||||
| Net loans | $ | 186,534 | $ | 116,732 | |||
| Government guaranteed loans | $ | 27,457 | $ | 5,084 | |||
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. 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 $3,819,000 and $2,300,000 (or 1.75% and 1.85% of gross outstanding loans) at September 30, 2000 and December 31, 1999 respectively. Reflecting the Company’s ongoing analysis of the risks presented by its loan portfolio, provisions for possible loan losses were $710,000 and $1,424,000 for the three and nine month periods ended September 30, 2000, compared to $0 and $(195,000) for the same periods of 1999. For the three and nine months ended September 30, 2000, the Company generated net loan recoveries of $0 and 95,000; by comparison, in the first nine months of 1999 the Company experienced net loan recoveries of $31,000.
For the quarter ended September 30, 2000 the Company had identified loans having an aggregate average balance of $54,000 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 loss reserve for each of the loans which, at September 30, 2000, totaled $25,000.
Other Operating Expenses
Other operating expenses increased in the first nine months of 2000 compared to the same period of 1999, although some categories of expense actually decreased from the levels of previous periods. Other operating expenses rose to a total of $3,372,000 for the third quarter of 2000 from $2,556,000 for the three months ended September 30, 1999. For the nine months ended September 30, 2000 other operating expenses totaled $9,414,000, an increase from $7,307,000 for the corresponding period in 1999.
Salary and related benefits increased by $692,000, rising from a total of $1,381,000 for the third quarter of 1999 to $2,073,000 for the same period in 2000, and also rose for the nine months ended September 30, to $5,520,000 from $3,876,000 in 1999. The increase principally reflects increases in staffing which took place due to the new regional offices. The increase also reflects employee salary adjustments. Occupancy expense rose to $237,000 for the three months ended September 30, 2000 from $186,000 in the third quarter of 1999, the increase reflects the rent paid on the various facilities which house the Bank’s new regional offices and the TASC operation. Total other operating expenses rose in 2000 compared to the prior year, increasing from $989,000 for the third quarter of 1999 to $1,062,000 for the third quarter of 2000 and a corresponding increase from $2,919,000 for the first nine months of 1 999 to $3,242,000 for the same period of 2000.
The combined effects of the above-described factors resulted in income before taxes of $1,036,000 for the three months ended September 30, 2000 compared to $674,000 for the third quarter of 1999. For the nine months ended September 30, 2000 income before taxes is $2,848,000 compared to $1,934,000 for the first nine months of the prior year. In the third quarter, the Company’s provision for taxes increased from $278,000 in 1999 to $425,000 in 2000. For the nine months ended September 30, 2000 the provisions were $1,174,000 compared to $796,000 in 1999. This brought net income for the third quarter of 2000 to $611,000 compared to $396,000 for the same period in 1999. For the nine months ended September 30, net income in 2000 was $1,674,000, while 1999 net income through September 30 was $1,138,000.
Liquidity, Sources of Funds, and Capital Resources
The Company’s financial position remains 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 13.9% of total deposits at September 30, 2000. This level represents a decrease from the 51.95% liquidity level which existed on December 31, 1999. In addition, at September 30, 2000, some $27.5 million of the Bank’s total loans consisted of government guaranteed loans which represent a significant source of liquidity due to the active secondary markets which exist for these assets. The ratio of net loans (including government guaranteed loans) to deposits was 92% and 59.2% as of September 30, 2000 and December 31, 1999, 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, 2000, 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 intere st rate movement would result in an inverse change in net interest income.
| Category | Floating Rate | Less Than One Month | One Month But Less Than Six Months | Six Months But Less Than One Year | One Year But Less Than Five Years | Five Years or More | Non-Interest Earning or Bearing | Total | |||||||||||||||||
| Fed funds sold | 9,335 | 0 | 0 | 0 | 0 | 0 | 0 | 9,335 | |||||||||||||||||
| Time deposits with other banks | 0 | 1,089 | 1,683 | 0 | 0 | 0 | 0 | 2,772 | |||||||||||||||||
| Investment securities | 0 | 1,000 | 3,941 | 0 | 0 | 0 | 0 | 4,941 | |||||||||||||||||
| Subtotal | 9,335 | 2,089 | 5,624 | 0 | 0 | 0 | 0 | 17,048 | |||||||||||||||||
| Loans | 211,948 | 205 | 905 | 226 | 707 | 0 | 0 | 213,991 | |||||||||||||||||
| Total earning assets | 221,283 | 2,294 | 6,529 | 226 | 707 | 0 | 0 | 231,039 | |||||||||||||||||
| Cash and due from banks | 0 | 0 | 0 | 0 | 0 | 0 | 15,201 | 15,201 | |||||||||||||||||
| Premises and equipment | 0 | 0 | 0 | 0 | 0 | 0 | 1,403 | 1,403 | |||||||||||||||||
| Other real estate owned | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||
| Other assets | 0 | 0 | 0 | 0 | 0 | 0 | 10,397 | 10,397 | |||||||||||||||||
| Total non-earning assets | 0 | 0 | 0 | 0 | 0 | 0 | 27,001 | 27,001 | |||||||||||||||||
| Total assets | 221,283 | 2,294 | 6,529 | 226 | 707 | 0 | 27,001 | 258,040 | |||||||||||||||||
| Funds purchased | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||
| Repurchase agreements | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||
| Subtotal | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||
| Savings deposits | 10,401 | 0 | 0 | 0 | 0 | 0 | 0 | 10,401 | |||||||||||||||||
| Money market deposits | 94,248 | 0 | 0 | 0 | 0 | 0 | 0 | 94,248 | |||||||||||||||||
| Time deposits | 0 | 21,603 | 22,148 | 4,442 | 126 | 0 | 0 | 48,319 | |||||||||||||||||
| Total bearing liabilities | 104,649 | 21,603 | 22,148 | 4,442 | 126 | 0 | 0 | 152,968 | |||||||||||||||||
| Demand deposits | 0 | 0 | 0 | 0 | 0 | 0 | 78,689 | 78,689 | |||||||||||||||||
| Other liabilities | 0 | 0 | 0 | 0 | 0 | 0 | 4,217 | 4,217 | |||||||||||||||||
| Equity capital | 0 | 0 | 0 | 0 | 0 | 0 | 22,166 | 22,166 | |||||||||||||||||
| Total non-bearing liabilities | 0 | 0 | 0 | 0 | 0 | 0 | 105,072 | 105,072 | |||||||||||||||||
| Total liabilities | 104,649 | 21,603 | 22,148 | 4,442 | 126 | 0 | 105,072 | 258,040 | |||||||||||||||||
| GAP | 116,634 | (19,309 | ) | (15,619 | ) | (4,216 | ) | 581 | 0 | (78,071 | ) | 0 | |||||||||||||
| Cumulative GAP | 116,634 | 97,325 | 81,706 | 77,490 | 78,071 | 78,071 | 0 | 0 | |||||||||||||||||
As the table indicates, the vast majority of the Company’s assets are either floating rate or, if fixed rate, have 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.
The Bank’s investment portfolio continues to be composed of high quality, low risk securities, primarily U.S. Treasury or Agency. As mentioned above, $24,000 in losses were recorded on securities sales in the first nine months of 2000. As of September 30, 2000 the Company’s investment portfolio contained no gross unrealized gains or unrealized losses. By comparison, at September 30, 1999 the Company’s investment portfolio contained no gross unrealized gains and unrealized losses of $8,000. 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 $22,166,000 and $20,703,000 as of September 30, 2000 and December 31, 1999, respectively. The Company’s capital ratios for those dates in comparison with regulatory capital requirements were as follows:
| September 30, 2000 | December 31, 1999 | ||||||
| Leverage Ratio (Tier I Capital to Assets): | |||||||
| Regulatory requirement | 4.00 | % | 4.00 | % | |||
| First Regional Bancorp | 8.62 | % | 8.90 | % | |||
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:
| September 30, 2000 | December 31, 1999 | ||||||
| Tier I Capital to Assets: | |||||||
| Regulatory requirement | 4.00 | % | 4.00 | % | |||
| First Regional Bancorp | 10.14 | % | 10.50 | % | |||
| September 30, 2000 | December 31, 1999 | ||||||
| Tier I + Tier II Capital to Assets: | |||||||
| Regulatory requirement | 8.00 | % | 8.00 | % | |||
| First Regional Bancorp | 11.40 | % | 11.70 | % | |||
The Company believes that it will continue to meet all applicable capital standards.
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.
PART II. OTHER INFORMATION
Item 1. Legal proceedings
Litigation
The Company is a party as plaintiff to a number of lawsuits that have arisen in connection with the normal conduct of its banking business. It is management’s opinion, based upon advice of legal counsel, that none of the pending litigation will have a materially adverse effect on the Company or the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the third quarter of 2000.
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 2000.
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 9, 2000 | /s/ Jack A. Sweeney | ||
| Jack A. Sweeney, Chairman of the Board and Chief Executive Officer |
| Date: November 9, 2000 | /s/ Thomas McCullough | ||
| Thomas McCullough, Chief Financial Officer |
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