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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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For the fiscal year ended December 31, 1995 Commission File No. 0-10232
FIRST REGIONAL BANCORP
(Exact name of registrant as specified in its charter)
California 95-3582843
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1801 Century Park East
Los Angeles, California 90067
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 552-1776
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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(Title of class)
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
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Aggregate market value of Common Stock held by non-affiliates as of March
22, 1996: $5,981,500
Number of shares of Common Stock outstanding at March 22, 1996:
2,398,800.
Documents incorporated by reference and parts of Form 10-K into which
incorporated:
Portions of Proxy Statement for 1996 Annual Meeting of Share- PART III
holders (to be filed within 120 days of fiscal year end)
Annual Report on Form 10-K for the Years Ended December 31, PART IV
1982, 1987, 1988, 1991, and 1993
Registration Statement on Form 10 as Filed with the Commission PART IV
in March, 1982
Registration Statement on Form S-14 Filed with the Commission PART IV
on December 2, 1981 (File Number 2-75140)
FORM 10-K
TABLE OF CONTENTS AND
CROSS REFERENCE SHEET
Page
in Incorporation
PART I 10-K by Reference
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Item 1. Business........................... 4
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Item 2. Properties......................... 30
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Item 3. Legal Proceedings.................. 30
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Item 4. Submission of Matters to a Vote of
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Securities Holders................. 30
PART II
Item 5. Market for Registrant's Common Stock
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and Related Stockholder Matters.... 31
Item 6. Selected Financial Data............ 33
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Item 7. Management's Discussion and Analysis
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of Financial Condition and Results of
Operations......................... 34
Item 8. Financial Statements and Supplement-
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ary Data........................... 41
Item 9. Disagreements on Accounting and
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Financial Disclosure............... 41
PART III
Item 10. Directors and Executive Officers of
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the Registrant..................... 42 1996 Proxy Statement
Item 11. Executive Compensation............. 42 1996 Proxy Statement
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Item 12. Security Ownership of Certain
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Beneficial Owners and Management... 42 1996 Proxy Statement
Item 13. Certain Relationships and Related
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Transactions....................... 42 1996 Proxy Statement
PART IV
Item 14. Exhibits, Financial Statement
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Schedules, and Reports on Form 8-K. 43
SIGNATURES....................................... 44
INDEX TO FINANCIAL STATEMENTS.................... 45
INDEX TO EXHIBITS................................ 68
PART I
Item 1. Business
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Business of First Regional Bancorp
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First Regional Bancorp (the Company) maintains its principal executive
offices at 1801 Century Park East, Los Angeles, California 90067. The Company
was incorporated in California as Great American Bancorp on February 18, 1981
for the purpose of becoming a bank holding company and acquiring all of the
outstanding common stock of First Regional Bank (the Bank), formerly Great
American Bank, a state-chartered bank headquartered in Los Angeles (Century
City), California. The reorganization of the Bank was accomplished on March 8,
1982, under the terms of a Plan of Reorganization and Merger Agreement dated
October 15, 1981, providing for the merger of a Company subsidiary with the
Bank, with the Bank being the surviving entity in the merger. As a result of
the Bank's reorganization, the Bank's outstanding shares were exchanged on a
one-for-one basis for shares of the Company's Common Stock, and the Company
became the sole shareholder of the Bank. Prior to acquiring the Bank, the
Company did not conduct any ongoing business activities. The Company's
principal asset is the stock of the Bank and the Company's primary function is
to coordinate the general policies and activities of the Bank, as well as to
consider from time to time, other legally available investment opportunities.
Both the Company and the Bank changed their names from Great American to First
Regional in 1987 as part of an agreement with another financial institution.
The Company does not anticipate that its operations will be materially
affected as a result of compliance with Federal, State and local environmental
laws and regulations.
Business of First Regional Bank
- -------------------------------
The Bank was incorporated under the laws of the State of California on July
10, 1979, and has authorized capital of 5,000,000 shares of no par value Common
Stock. The Bank commenced operations as a California-chartered bank on December
31, 1979. The Bank conducts a business-oriented wholesale banking operation,
with services tailored to the needs of businesses and professionals in its
service area. The Bank's main office is located in the Century City office
complex in Los Angeles, California. The Bank had branch offices in Beverly
Hills, Newport Beach, and downtown Los Angeles which were closed on September 5,
1986 and their deposits and loans consolidated into the Century City office.
The Bank's customers include professionals working in the primary service areas
as well as many business accounts located throughout Los Angeles County. In
distinction from many other independent banks in California, the Bank's deposit
business is generated by a relatively small number of accounts, although most
accounts have a very high average balance.
The Bank offers a full range of lending services including commercial, real
estate, and real estate construction loans. The Bank has developed a
substantial portfolio of short and medium-term "mini-perm" first trust deed
loans for income properties as well as a much smaller portfolio of commercial
loans. The Bank also specializes in construction lending for moderate-size
4
commercial and residential projects. For commercial and industrial borrowers,
the Bank offers equipment financing as well as short-term loans. The Bank also
offers standard banking services for its customers, including telephone
transfers, wire transfers, and travelers checks. The Bank accepts all types of
demand, savings, and time certificates of deposit. The Bank does not currently
offer trust services, but it does make trust services available to its customers
through a correspondent bank. At March 22, 1996 the Bank had 38 equivalent
full-time employees.
Competition
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The banking business in California generally, and in the Los Angeles County
area where the Bank is located, is highly competitive with respect to both loans
and deposits and is dominated by a relatively small number of major banks which
have many offices operating over wide geographic areas. The Bank competes for
deposits and loans principally with these major banks, but also with small
independent banks located in its service areas. Among the advantages which the
major banks have over the Bank are their ability to finance extensive
advertising campaigns and to allocate their investment assets to regions of
highest yield and demand. Many of the major commercial banks operating in the
Bank's service area offer certain services (such as trust and cash management
services) which are not offered directly by the Bank and, by virtue of their
greater total capitalization, such banks have substantially higher lending
limits than the Bank.
Moreover, banks generally, and the Bank in particular, face increasing
competition for loans and deposits from non-bank financial intermediaries such
as savings and loan associations, thrift and loan associations, credit unions,
mortgage companies, insurance companies, and other lending institutions. Money
market funds offer rates competitive with banks, and an increasingly
sophisticated financial services industry continually develops new products for
consumers that compete with banks for investment dollars. In addition, other
entities (both public and private) seeking to raise capital through the issuance
and sale of debt or equity securities compete with banks in the acquisition of
deposits.
Interstate Competition
- ----------------------
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act"), enacted on September 29, 1994, repeals the McFadden Act
of 1927, which required states to decide whether national or state banks could
enter their state, and allows banks to open branches across state lines
beginning on June 1, 1997. The Riegle-Neal Act also repeals the 1956 Douglas
Amendment to the Bank Holding Company Act, which placed the same requirements on
bank holding companies. The repeal of the Douglas Amendment now makes it
possible for banks to buy out-of-state banks in any state after September 29,
1995, which may then be converted into interstate branches in 1997.
The Riegle-Neal Act permits interstate banking to begin 12 months after the
enactment of the new law. The amendment of the Bank Holding Company Act permits
bank holding companies to acquire banks in other states provided that the
acquisition does not result in the bank holding company controlling more than 10
percent of the deposits of the United States, or 30 percent of the deposits in
the state in which the bank to be acquired is located. However,
5
the Riegle-Neal Act also provides that states have the authority to waive the
state concentration limit. Individual states may also require that the bank
being acquired be in existence for up to five years before an out-of-state bank
or bank holding company may acquire it.
The Riegle-Neal Act provides that interstate branching and merging of
existing banks is permitted beginning June 1, 1997, provided that the banks are
at least adequately capitalized and demonstrate good management. Interstate
mergers and branch acquisitions are permitted at an earlier time if a state
chooses to enact a law allowing such activity. The states are also authorized
to enact a law to permit interstate banks to branch de novo.
In 1986, California adopted interstate banking legislation permitting
interstate banking on a regional basis (Alaska, Arizona, Colorado, Hawaii,
Idaho, Nevada, New Mexico, Oregon, Texas, Utah, and Washington) beginning July
1, 1987 and on a national basis beginning on January 1, 1991. The California
legislation permits interstate banking only on a reciprocal basis, which
requires that the home state of the bank holding company desirous of entering
California must permit the entrance of California bank holding companies on
substantially the same terms and conditions. While it is anticipated that this
legislation may increase the demand by buyers to acquire California banks, it is
also anticipated that it will increase competitive pressures on existing
California banks, as out-of-state bank holding companies enter the California
market.
On August 9, 1989, the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") was signed into law. Among other things,
FIRREA allows the acquisition of healthy and failed savings associations by bank
holding companies, and imposes no interstate barriers on such bank holding
company acquisitions. With certain qualifications, FIRREA also allows bank
holding companies to merge acquired savings associations into their existing
commercial bank subsidiaries; however, for a period of five years from the date
of enactment, the acquired savings association must continue as a member of, and
continue to pay premiums to, the Savings Association Insurance Fund, which was
created by FIRREA to replace the Federal Savings and Loan Insurance Corporation
deposit insurance fund, which FIRREA abolished.
Recent legislation and economic developments have favored increased
competition between different types of financial institutions for both deposits
and loans, resulting in increased cost of funds to banks generally and to the
Bank in particular. In order to compete with the other financial institutions
in its service area, the Bank relies principally upon personal contacts by its
officers, directors, founders, employees and shareholders; local promotional
activity including direct mail, advertising in local newspapers and business
journals; and specialized services. The Bank's promotional activities emphasize
the advantages of dealing with a locally-owned and headquartered institution
attuned to the particular needs of the community. In the event that a
customer's loan demands exceed the Bank's lending limits, the Bank attempts to
arrange for such loans on a participation basis with its correspondent banks.
The Bank also assists customers requiring services not offered by the Bank to
obtain these services from its correspondent banks.
6
Supervision and Regulation
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The Company
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The Company is a bank holding company registered under the Act, and is
subject to supervision by the Board of Governors of the Federal Reserve System
(the "FRB"). As a bank holding company, the Company is required to file with
the FRB an annual report and such other additional information as the FRB may
require pursuant to the Act. The FRB may also make examinations of the Company
and its subsidiaries.
The Act requires prior approval of the FRB for, among other things, the
acquisition by a bank holding company of direct or indirect ownership or control
of more than 5% of the voting shares, or substantially all the assets, of any
bank or for a merger or consolidation by a bank holding company with any other
bank holding company. The Act also prohibits the acquisition by a bank holding
company or any of its subsidiaries of voting shares or substantially all the
assets of any bank located in a state other than the state in which the
operations of the bank holding company's banking subsidiaries are principally
conducted, unless the statutes of the state, in which the bank to be acquired is
located, expressly authorize such an acquisition, such as enacted by California.
The Company and the Bank are deemed to be affiliates within the meaning of
the Act. Pursuant thereto, a bank can loan or extend credit to an affiliate,
purchase or invest in the securities of an affiliate, purchase assets from an
affiliate, accept securities of an affiliate as collateral security for a loan
or extension of credit to any person or company or issue a guarantee,
acceptance, or letter of credit on behalf of an affiliate only if the aggregate
amount of the above transactions of the bank and its subsidiaries does not
exceed 10% of the capital stock and surplus of the bank on a per affiliate basis
or 20% of the capital stock and surplus of the bank on an aggregate affiliate
basis. In addition, such transactions must be on terms and conditions that are
consistent with safe and sound banking practices and in particular, a bank and
its subsidiaries generally may not purchase from an affiliate a low-quality
asset, as that term is defined in the Federal Reserve Act. Such restrictions
also prevent a bank holding company and its other affiliates from borrowing from
a banking subsidiary of the bank holding company unless the loans are secured by
marketable collateral of designated amounts.
With certain limited exceptions, a bank holding company is prohibited from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank or bank holding company and from
engaging directly or indirectly in any activity other than banking or managing
or controlling banks or furnishing services to or performing services for its
authorized subsidiaries. A bank holding company may, however, engage or acquire
an interest in a company that engages in activities which the FRB has determined
to be so closely related to banking or managing or controlling banks as to be
properly incident thereto. In making such a determination, the FRB is required
to consider whether the performance of such activities can reasonably be
expected to produce benefits to the public, such as greater convenience,
increased competition, or gains in efficiency, that outweigh possible adverse
effects, such as undue
7
concentration of resources, decreased or unfair competition, conflicts of
interest, or unsound banking practices. The FRB is also empowered to
differentiate between activities commenced de novo and activities commenced by
the acquisition, in whole or in part, of a going concern. Although the future
scope of permitted activities is uncertain and cannot be predicted, some of the
activities that the FRB has determined by regulation to be closely related to
banking are: making or servicing loans; performing certain data processing
services; acting as a fiduciary or investment advisor; leasing personal or real
property; providing limited insurance activities; acting as a commodity trading
and futures commission merchant advisor; providing securities brokerage services
solely as agent for a customer; and real estate and personal property appraisal.
Federal law prohibits a holding company and any subsidiary bank from
engaging in certain tie-in arrangements in connection with the extension of
credit. Thus, the Bank may not extend credit, lease or sell property, or
furnish any services, or fix or vary the consideration for any of the foregoing
on the condition that: (i) the customer must obtain or provide some additional
credit, property or service from or to the Bank other than a loan, discount,
deposit or trust service; or (ii) the customer must obtain or provide some
additional credit, property or service from or to the Company or any other
subsidiary of the Company; or (iii) the customer may not obtain some other
credit, property or service from competitors, except reasonable requirements to
assure soundness of credit extended.
In December, 1988, the FRB adopted risk-based capital adequacy guidelines
for bank holding companies and state member banks. The other bank regulators
have adopted similar guidelines. The FRB's guidelines assign various risk
percentages to different categories of assets, and capital is measured as a
percentage of risk assets. While in many cases total risk assets calculated in
accordance with the guidelines is less than total assets calculated absent the
rating, certain non-balance sheet assets, including loans sold with recourse,
legally binding loan commitments, and standby letters of credit, are treated as
risk assets, with the assigned rate varying with the type of asset. As a
result, it is possible that total risk assets for purposes of the guidelines
exceeds total assets under generally accepted accounting principles, thereby
reducing the capital-to-assets ratio. Under the terms of the guidelines, bank
holding companies are expected to meet capital adequacy guidelines based both on
total assets and on total risk assets. To the extent that holding companies
have favorable capital adequacy ratios based on total risk assets, such banks
are more likely to be permitted to operate at or near the minimum primary
capital to total assets ratios specified in regulatory guidelines. Under the
new guidelines, the Company's capital adequacy ratio at December 31, 1994 was
16.20%. The acceptable capital ratio is 8 percent.
In November, 1992 the Company entered into an agreement with the Federal
Reserve Bank which called for the Company to develop a plan to improve the
financial condition of the Company and its subsidiary, First Regional Bank. The
agreement also requires the Company to obtain Federal Reserve Bank approval
prior to the payment of cash dividends or the addition or replacement of any
director or executive officer of the Company. In addition, under the agreement
the Company was to provide periodic progress reports to the Federal Reserve
Bank. The Company complied fully with the
8
agreement, and the agreement was terminated by the Federal Reserve in the third
quarter of 1995.
The Company is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, the Company and its
subsidiaries are subject to examination by and may be required to file reports
with the California Superintendent of Banks (the "Superintendent"). Regulations
have not yet been proposed or adopted or steps otherwise taken to implement the
Superintendent's powers under this statute.
The Financial Accounting Standards Board ("FASB") promulgated a new
statement for income tax accounting (SFAS 109). The statement was implemented
by the Company for the year commencing January 1, 1993. The Company decided to
implement the statement by recording the adjustment for prior years in the
income statement for the year in which the statement was adopted. The
cumulative effect of the implementation of SFAS 109 resulted in an increase in
net income of $98,000. While adoption of the statement did not have a material
effect on the Company's financial position, its effect on results of operations
for subsequent years has not yet been determined.
The FASB has also issued SFAS 114, "Accounting by Creditors for Impairment
of a Loan." This statement prescribes that a loan is impaired when it is
probable that a creditor will be unable to collect all contractual principal and
interest amounts due under the terms of the loan agreement. Measurement of the
impairment can be based on the expected future cash flows from the loan
discounted at the loan's effective interest rate, or by reference to an
observable market price (if one exists), or by the fair value of the collateral
for a collateral-dependent loan. Additionally, the statement prescribes
measuring the impairment of a restructured loan by discounting the total
expected future cash flows at the effective interest rate under the original
loan agreement. The impact of initially applying the statement is reported as a
part of bad debt expense. The Company adopted this standard in 1995, but no
material effect on the Company's financial position resulted.
In addition, the FASB has issued SFAS 115, "Accounting for Investments in
Debt and Equity Securities." This statement addresses the accounting and
reporting of investments in equity securities that have readily determinable
market value, and all investments in debt securities. Under this statement,
investment securities are classified into three categories as follows:
Held to Maturity Securities. Debt securities that the Company has the
---------------------------
positive intent and ability to hold to maturity. These securities are to be
reported at amortized cost.
Trading Securities. Debt and equity securities that are bought and held
------------------
principally for the purpose of selling them in the near term. These
securities are to be reported at fair value with unrealized gains and
losses included in earnings.
Available for Sale Securities. Debt and equity securities not classified
-----------------------------
into either of the above categories. These securities are to be reported at
fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of shareholders'
9
equity (net of tax effects).
The Company adopted this standard in 1994. There was no material impact on
the financial statements of the Company due to this adoption.
The Bank
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The Bank, as a California state chartered bank whose accounts are insured
by the FDIC up to the maximum legal limits of the FDIC, is subject to
regulation, supervision, and regular examination by the California State Banking
Department and the Federal Deposit Insurance Corporation. The Bank is also
subject to certain regulations issued by the FRB. The regulations of these
various state and federal agencies govern most aspects of the Bank's business,
including reserves against deposits, interest rates payable on certain types of
deposits, loans, investments, mergers and acquisitions, borrowings, dividends
and locations of branch offices. Supervision, regulation, and examination of
the Bank by the regulatory agencies are generally intended to protect depositors
and are not intended to protect the shareholders of the Company.
From time to time, new legislation is adopted which increases the cost of
doing business, limits permissible activities, or affects the competitive
balance between banks and other financial institutions. For example, in 1980
and 1982 federal legislation resulted in major changes to interest rate
structures and permissible bank powers and changed the competitive relationships
with other financial institutions.
FIRREA has had significant impact on financial institutions. The chief
purposes of this extensive legislation are to promote a safe and stable system
of affordable housing, and to improve the supervision of savings associations.
In this effort, FIRREA contains major regulatory reforms, stronger capital
standards, and stronger civil and criminal enforcement provisions. Certain of
the more significant provisions contained in FIRREA are summarized below.
FIRREA gave the FDIC the duty of insuring the deposits of savings
associations as well as banks. The insurance funds are maintained separately
and have been renamed. The Bank Insurance Fund ("BIF") insures the deposits of
commercial banks and state chartered savings banks, while the Savings
Association Insurance Fund ("SAIF") insures deposits of savings and loans and
federally chartered savings banks. The FDIC is also authorized to act as
conservator or receiver for federally insured banks, and, after a period of
three years from the date of enactment, for insured savings associations that
are chartered under federal or state law.
FIRREA expands, enhances, and clarifies the enforcement powers of the
financial institution regulatory agencies and increases the maximum amount of
civil money penalties for violation of laws and regulations, expands the grounds
for imposing them, and authorizes the various regulatory agencies to take action
to collect them. FIRREA also provides increased insurance assessments for
members of both the Bank Insurance Fund (such as the Bank) and the SAIF, and
expands the federal banking agencies' powers to appoint a conservator or
receiver, including "early intervention."
10
Although the effects of FIRREA upon the future business, earnings and
growth of the Bank cannot be predicted, management does not believe that the
provisions of FIRREA will have a material adverse impact on the Bank.
The Omnibus Budget Reconciliation Act of 1990, designed to address the
Federal budget deficit, increased the insurance assessment rates for members of
the BIF and SAIF over that provided by FIRREA, and eliminated FIRREA's maximum
reserve ratio constraints on the BIF.
The Crime Control Act of 1990 further strengthened the authority of Federal
bank and thrift regulators to enforce capital requirements, increased civil and
criminal penalties for financial fraud, and enacted provisions allowing the FDIC
to regulate or prohibit certain forms of golden parachute benefits and
indemnification payments to officers and directors.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), was signed into law on December 19, 1991. FDICIA recapitalized the
FDIC's Bank Insurance Fund, granted broad authorization to the FDIC to increase
deposit insurance premium assessments and to borrow from other sources, and
continued the expansion of regulatory enforcement powers, along with many other
significant changes. The FDIC has already implemented a risk-based deposit
insurance premium system which effectively raised BIF premiums for most banks,
and, should the condition of the BIF so require, it is possible that premiums
could be increased again in the future.
FDICIA establishes five categories of capitalization: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. Effective December 19, 1992, banks will be
prohibited from paying dividends or management fees to controlling persons or
entities if, after making the payment, the bank would be undercapitalized, that
is, the bank fails to meet the required minimum level for any relevant capital
measure. Asset growth and branching restrictions will apply to undercapitalized
banks, which will be required to submit acceptable capital plans guaranteed by
its holding company, if any. Broad regulatory authority is granted with respect
to significantly undercapitalized banks, including forced mergers, growth
restrictions, ordering new elections for directors, forcing divestiture by its
holding company, if any, requiring management changes, and prohibiting the
payment of bonuses to senior management. Even more severe restrictions will be
applicable to critically undercapitalized banks, those with capital at or less
than 2%, including the appointment of a receiver or conservator after 90 days.
FDICIA also grants the regulatory agencies authority to prescribe standards
relating to internal controls, credit underwriting, asset growth, and
compensation, among others, and requires the regulatory agencies to promulgate
regulations prohibiting excessive compensation or fees.
FDICIA further establishes a new truth in savings scheme, providing for
clear and uniform disclosure of terms and conditions on which interest is paid
and fees are assessed on deposits, to be effective upon adoption of implementing
regulations.
FDICIA imposes limits on the acceptance of brokered deposits by other than
well capitalized banks, including notification requirements on deposit
11
brokers.
The new legislation also creates restrictions on activities authorized
under state law. FDICIA generally restricts activities through subsidiaries to
those permissible for national banks and provides for a five-year divestiture
period for impermissible investments. Insurance activities are also limited,
except to the extent permissible for national banks.
Real estate lending has been targeted for close supervision. The
regulatory authorities are required to establish uniform credit standards
relating to real estate secured loans.
The foregoing summarizes only the most significant aspects of FDICIA.
Because of the broad scope and complexity of this legislation and the fact that
all implementing regulations have not yet been adopted, it is impossible to
predict at this time the full effect FDICIA will ultimately have on the Bank or
the banking industry.
The Riegle Community Development and Regulatory Improvement Act of 1994
(the "1994 Act"), which has been viewed as the most important piece of banking
legislation since the enactment of the FDICIA, was signed into law on September
23, 1994. In addition to providing funding for the establishment of a Community
Development Financial Institutions Fund (the "Fund"), which will provide
assistance to new and existing community development lenders to help meet the
needs of low- and moderate-income communities and groups, the 1994 Act mandates
changes to a wide range of banking regulations. These changes include
modifications to the present publication requirements for Call Reports, less
frequent regulatory examination schedules for small institutions, small business
and commercial real estate loan securitization, amendments to the money
laundering and currency transactions reporting requirements of the Bank Secrecy
Act, clarification of the coverage of the Real Estate Settlement Procedures Act
for business, commercial and agricultural real estate secured transactions,
amendments to the national flood insurance program, and amendments to the Truth
in Lending Act to provide greater protection for consumers by reducing
discrimination against the disadvantaged.
Title I, Subtitle A of the 1994 Act, designated as the "Community
Development Banking and Financial Institutions Act of 1994," created the Fund in
order to promote economic revitalization and community development through
investment in and assistance to Community Development Financial Institutions
("CDFIs") that provide capital and other resources to economically-depressed
communities. The primary focus of the program will be to aid the country's
urban, rural and native American communities that are facing severe economic
problems due to the lack of economic growth, poverty and the general lack of
employment and other opportunities. Financial institutions may participate in
the assistance program upon approval by the Fund.
In addition to establishing the Fund, Title I also provides funding for the
Bank Enterprise Act ("BEA") of 1991, which will now be administered by the Fund.
Under the BEA, insured financial institutions may be awarded insurance premium
assessment credits where they are involved in providing lifeline deposit
accounts, community lending and other forms of financial assistance in
distressed areas, including investing in CDFIs.
12
Title I, Subtitle B of the 1994 Act amended the Truth in Lending Act to
expand disclosure requirements and expand protections regarding consumer lending
secured by the consumer's principal dwelling.
Title IV of the 1994 Act amended the Bank Secrecy Act by reducing the
reporting requirements imposed on financial institutions for large currency
transactions, expanding the ability of financial institutions to provide
exemptions to the reporting requirements for businesses that regularly deal in
large amounts of currency, and providing for the delegation of civil money
penalty enforcement from the Treasury Department to the individual federal
banking agencies.
The "Paperwork Reduction and Regulatory Improvement Act," Title III of the
1994 Act, requires the federal banking agencies to consider the administrative
burdens that new regulations will impose before their adoption and requires a
transition period in order to provide adequate time for compliance. This Act
also requires the federal banking agencies to work together to establish uniform
regulations and guidelines as well as to work together to eliminate duplicative
or unnecessary requests for information in connection with applications or
notices. This Act reduces the frequency of examinations for well-rated
institutions, simplifies the quarterly financial reporting ("Call Reports") and
eliminates the requirement that financial institutions publish their Call
Reports in local newspapers. This Act also establishes an internal regulatory
appeal process and independent ombudsman to provide a means for review of
material supervisory determinations.
Historically, national banks have been required to have two-thirds of their
directors residents of the state of domicile. The Paperwork Reduction and
Regulatory Improvement Act reduces this requirement to a majority. This Act
also amends the Bank Holding Company Act and Securities Act of 1933 to simplify
the formation of bank holding companies.
Additional titles of the 1994 Act include Title V, the "National Flood
Insurance Reform Act of 1994,", Subtitle A of Title II, the "Small Business Loan
Securitization and Secondary Market Enhancement Act of 1994," and Subtitle B of
Title II, the "Small Business Capital Enhancement Act."
The foregoing summarizes only the most significant aspects of the 1994 Act,
many of the provisions of which have not yet become effective. Therefore, it is
not possible to predict at this time the impact this legislation will have on
the Bank or the banking industry.
In February 1993, the Bank entered into a regulatory agreement with the
Federal Deposit Insurance Corporation (the "FDIC"). The agreement required the
Bank to reduce the level of its classified assets in accordance with an agreed-
upon schedule, to continue to maintain a strong capital position and an adequate
reserve for loan losses, to develop written policies in a number of areas, and
to furnish periodic progress reports to the FDIC. The agreement also required
the Bank to obtain FDIC approval prior to the payment of cash dividends or the
replacement of any director or executive officer of the Bank. The FDIC
concluded that the Bank had fully complied with the agreement, and the agreement
was terminated by the FDIC in the third quarter of 1995.
13
Future legislation is also likely to impact the Bank's business. Consumer
legislation has been proposed in Congress which may require banks to offer
basic, low-cost financial services to meet minimum consumer needs. Various
proposals to restructure the Federal bank regulatory agencies are currently
pending in Congress, some of which include proposals to expand the ability of
banks to engage in previously prohibited businesses. Further, the regulatory
agencies have proposed and may propose a wide range or regulatory changes,
including the calculation of capital adequacy and limiting business dealings
with affiliates. These and other legislative and regulatory changes may have
the impact of increasing the cost of business or otherwise impacting the
earnings of financial institutions. However, the degree, timing, and full
extent of these proposals cannot be predicted.
As a result of both Federal and California legislation during the 1980's,
there has been a lessening of the historical distinction between the services
offered by banks, savings and loan associations, credit unions, and other
financial institutions. Banks have experienced increased competition for
deposits which can result in increases in their cost of funds. Increased
competition for loans can reduce the yield available.
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest rates on a bank's deposits and
other interest-bearing liabilities and the interest rates on a bank's loans,
securities and other interest-earning assets comprise the major source of a
bank's earnings. These rates are highly sensitive to many factors which are
beyond the control of the Bank and, accordingly, the earnings and growth of the
Bank will be subject to the influence of economic conditions generally, both
domestic and foreign, including inflation, recession, and unemployment, and also
to the monetary and fiscal policies of the United States Government and its
agencies, particularly the FRB. The FRB implements national monetary policy,
such as seeking to curb inflation and combat recession, by its open-market
dealings in the level of reserves for financial institutions subject to reserve
requirements, by placing limitations upon savings and time deposit interest
rates, and through adjustments to the discount rate applicable to borrowings by
banks and other financial institutions from the Federal Reserve. The actions of
the FRB in these areas influence the growth of bank loans, investments, and
deposits and also affect interest rates. The nature and timing of any future
changes in such policies and their impact on the Bank cannot be predicted;
however, depending on the degree to which the Bank's maturities of interest-
earning assets exceed the maturities of interest-bearing liabilities, increases
in interest rates have the temporary effect of increasing the Bank's net
interest margin, while decreases in interest rates have the opposite effect.
Product Development Research
- ----------------------------
The Company has not engaged in any material research activities relating to
the development of new services or the improvement of existing banking services
during the last three fiscal years. The officers and employees of the Bank are
continually engaged in marketing activities, however, including the evaluation
and development of new services, to enable the Bank to retain a competitive
position in the service area.
14
Distribution of Assets, Liabilities and Shareholders' Equity
- ------------------------------------------------------------
The following table shows the average balances of the Bank's assets,
liabilities, and shareholders' equity for the past two years:
For Period Ended
December 31,
1995 1994
---------- ---------
(Dollars in Thousands)
Assets
Cash and Due From Banks.... $ 3,094 $ 2,982
Time Deposits with Other
Financial Institutions..... 7,032 7,201
Investment Securities...... 10,120 8,844
Funds Sold................. 25,655 16,709
Net Loans.................. 78,662 79,126
Other Assets............... 3,128 8,975
------- -------
Total.................. $127,691 $123,837
======== ========
Liabilities & Shareholders' Equity
Deposits:
Demand (non-interest
bearing)................ $ 17,359 $ 15,777
Savings................. 1,167 1,202
Money Market Accounts... 83,479 85,092
Time.................... 13,338 11,903
------- -------
Total Deposits..... 115,343 113,974
Securities Sold Under
Agreements to Repurchase..... 584 71
Other Liabilities............ 673 416
------- -------
Total Liabilities....... 116,600 114,461
------- -------
Shareholders' Equity......... 11,091 9,376
------- -------
Total................... $127,691 $123,837
======== ========
15
Interest Rates and Interest Differential
- ----------------------------------------
The following table sets forth the average balances outstanding for major
categories of interest earning assets and interest bearing liabilities and the
average interest rates earned and paid thereon:
For Period Ended December 31,
1995 1994
-------------------------- --------------------------
Interest Average Interest Average
Average Income(2)/ Yield/ Average Income(2)/ Yield/
Balance Expense Rate % Balance Expense Rate %
------- --------- ------ ------- --------- ------
(Dollars in Thousands)
Interest
Earning
Assets:
Loans(1) $ 80,392 $ 8,427 10.5% $ 80,661 $ 7,662 9.5%
Investment
Securities 10,120 591 5.8% 8,844 393 4.4%
Funds Sold 25,655 1,469 5.7% 16,709 670 4.0%
Time Dep-
osits With
Other Fin-
ancial In-
stitutions 7,032 433 6.2% 7,201 315 4.4%
-------- ------- -------- -------
Total
Interest
Earning
Assets $123,199 $10,920 8.9% $113,415 $ 9,040 8.0%
======== ======= ======== =======
Interest
Bearing
Liabilities:
Savings
deposits $ 1,167 $ 27 2.3% $ 1,202 $ 27 2.2%
Money
Market
Accounts 83,479 2,069 2.5% 85,092 2,002 2.4%
Time 13,338 636 4.8% 11,903 405 3.4%
16
1995 1994
-------------------------- --------------------------
Interest Average Interest Average
Average Income(2)/ Yield/ Average Income(2)/ Yield/
Balance Expense Rate % Balance Expense Rate %
------- --------- ------ ------- --------- ------
(Dollars in Thousands)
Securities
sold under
agreements
to repur-
chase $ 584 $ 32 5.5% $ 71 $ (2) 2.8%
-------- ------- -------- --------
Total
interest
bearing
liabili-
ties $ 98,568 $ 2,764 2.8% $ 98,268 $ 2,432 2.5%
======== ======= ======== =======
__________
(1) This figure reflects total loans, including non-accrual loans, and is not
net of the allowance for possible losses, which had an average balance of
$1,730,000 in 1995 and 1,535,000 in 1994.
(2) Includes loan fees of $363,000 in 1995 and $415,000 in 1994.
17
The following table shows the net interest earnings and the net yield on
average interest earning assets:
1995 1994
---------- ---------
(Dollars in Thousands)
Total interest income (1)... $10,920 $9,040
Total interest expense................... 2,764 2,432
-------- --------
Net interest earnings.................... $ 8,156 $ 6,608
======== ========
Average interest earning assets.......... $123,199 $113,415
Net yield on average interest earning
assets................................... 6.6% 5.8%
__________
(1) Includes loan fees of $363,000 in 1995 and $415,000 in 1994.
18
The following table sets forth changes in interest income and interest
expense. The net change as shown in the column "Net Increase (Decrease)" is
segmented into the change attributable to variations in volume and the change
attributable to variations in interest rates. Non-performing loans are included
in average loans.
Increase (Decrease) Increase (Decrease)
1995 over 1994 1994 over 1993
-------------------------- -------------------------
Volume Rate Net Volume Rate Net
(Dollars in Thousands)
Interest Income(1)
- ------------------
Loans (2) $ (25) $ 790 $ 765 $(3,279) $ 1,726 $(1,553)
Investment
securities 62 136 198 72 140 212
Funds sold 444 355 799 154 175 329
Interest on time
deposits with
other financial
institu-
tions (7) 125 118 161 19 180
-------- -------- ------- ------ ------- ------
Total
Interest
Earning
Assets $ 474 $ 1,406 $ 1,880 $(2,892) $ 2,060 $ (832)
======= ======== ======== ======== ======= ========
Interest Expense (1)
- --------------------
Savings $ 0 $ 0 $ 0 $ 0 $ (1) $ (1)
Money market (37) 104 67 61 (113) 61
Time 53 178 231 (632) (37) (669)
Securities
sold under
agreements to
repurchase 57 (23) 34 (20) (2) (22)
------- -------- ------- ------- -------- -------
Total interest
bearing liab-
ilities $ 73 $ 259 $ 332 $ (591) $ (153) $ (744)
======= ======= ======= ======= ======== ========
__________
(1) The change in interest due to both rate and volume has been allocated to
the change due to volume and the change due to rate in proportion
19
to the relationship of the absolute dollar amounts of the change in each.
(2) Includes loan fees of $363,000 in 1995 and $415,000 in 1994.
20
Investment Securities
- ---------------------
The following table shows book value of the investment securities portfolio
at December 31, 1995 and 1994:
December 31,
1995 1994
---- ----
(Dollars in Thousands)
U.S. Treasury Securities................... $ 0 $11,782
Obligations of U.S. Government
Agencies and Corporations.................. 13,857 0
Other Securities........................... 25 25
------- -------
Total................................. $13,882 $11,807
======= =======
The maturity schedule and weighted average yields of investment securities at
December 31, 1995 is as follows:
Average
Amount Yield
------- --------
(Dollars in Thousands)
U.S. Agency Securities
- ----------------------
One year or less.................... $ 2,950 5.41%
Over one year through five years.... 5,336 6.20%
Over five years through ten years... 0 0.00%
Over ten years...................... 5,571 6.38%
-------
Category total $13,857 5.64%
Other Securities
- ----------------
Over one year through five years.... 25 7.50%
-------
Category total $ 25 7.50%
Total Investment Portfolio
- --------------------------
One year or less.................... $ 2,950 5.41%
Over one year through five years.... 5,361 6.21%
Over five years through ten years... 0 0.00%
21
Average
Amount Yield
------- --------
(Dollars in Thousands)
Over ten years....................... 5,571 6.38%
-------
Total $13,882 5.64%
Loan Portfolio
- --------------
The loan portfolio consisted of the following at December 31, 1995 and
1994:
1995 1994
--------- --------
(Dollars in Thousands)
Commercial loans....................... $ 9,958 $ 5,797
Real estate construction loans......... 1,776 4,354
Government guaranteed loans............ 27,660 22,852
Real estate loans...................... 45,968 44,842
Bankers acceptances.................... 2,000 0
Other loans............................ 408 616
------- -------
Total loans........................... $ 87,770 $78,461
Less - Allowances for loan losses...... 2,000 1,390
- Deferred loan fees.................. 443 490
------- -------
Net loans............................. $ 85,327 $ 76,581
======== ========
22
Loan Maturities and Interest Rates
- ----------------------------------
The following table shows the amounts of total loans outstanding as of
December 31, 1995, which, based on remaining scheduled payments of principal,
are due in one year or less, more than one year but less than five years, more
than five years but less than ten years, and ten years or more. The amount due
for each interval is classified according to whether the interest rate floats in
response to changes in interest rates or is fixed.
Aggregate maturities of loan balances
which are due:
In one year or less:
Interest rates are floating or
adjustable....................... $16,133
Interest rates are fixed or
predetermined.................... 231
After one year but within five years:
Interest rates are floating or
adjustable....................... 39,333
Interest rates are fixed or
predetermined.................... 40
After five years but within ten years:
Interest rates are floating or
adjustable....................... 16,052
Interest rates are fixed or
predetermined.................... 0
After ten years or more:
Interest rates are floating or
adjustable....................... 15,981
Interest rates are fixed or
predetermined.................... 0
--------
Total...................................... $ 87,770
========
23
Non-Performing Loans
- --------------------
The current policy is to cease accruing interest on commercial, real estate
and installment loans which are past due as to principal or interest 90 days or
more, except that in certain circumstances interest accruals are continued on
loans deemed by management to be fully collectible.
The following table shows the principal amount of nonperforming loans as of
December 31, 1995 and 1994:
December 31,
1995 1994
----- ------
(Dollars in Thousands)
Non-accrual loans
Commercial.................... $ 0 $1,249
Real estate loans............. 530 140
Government guaranteed loans... 0 0
Bankers acceptances........... 0 0
Other loans................... 0 0
----- ------
Total........................ $ 530 $1,389
===== ======
Accruing loans past due more than 90 days
Commercial.................... $ 273 $ 0
Real estate loans............. 0 0
Government guaranteed loans... 2,113 1,473
Bankers acceptances........... 0 0
Other loans................... 0 0
------ ------
Total.................... $2,386 $1,473
====== ======
Except as may have been included in the above table, at December 31, 1995,
there were no loans, the terms of which had been renegotiated to provide a
reduction or deferral of interest or principal because of a deterioration of the
financial position of the borrower or which would be classified as restructured
debt in a troubled loan situation. In addition, at December 31, 1995, there
were no loans then current as to which there were serious doubts as to the
ability of the borrower to comply with the then-present loan repayment terms.
For the non-accrual loans listed in the above table, the Bank would have
realized additional gross interest income
24
of $250,000 in 1995 had the loans been current in accordance with their original
terms.
25
Summary of Loan Loss Experience
- -------------------------------
The following table provides information concerning changes in the
allowance for possible loan losses and loans charged off and recovered for 1995
and 1994:
1995 1994
---- ----
(Dollars in Thousands)
Amount of loans outstanding at end of
period..................................... $ 87,327 $ 77,971
======== ========
Average amount of loans outstanding
before allowance for loan losses........... $ 80,392 $ 80,661
======== ========
Balance of allowance for loan losses at
beginning of period........................ $1,390 $2,250
Loans charged off:
Commercial............................ 169 28
Real estate........................... 20 1,267
Government guaranteed loans........... 0 0
Bankers acceptances................... 0 0
Other................................. 30 8
------ ------
Total loans charged off.......... 219 1,303
Recoveries of loans previously charged off:
Commercial............................ 151 40
Real estate........................... 0 153
Government guaranteed loans........... 0 0
Bankers acceptances................... 0 0
Other................................. 0 0
------ ------
Total loan recoveries............ 151 193
------ ------
Net loans charged off...................... 68 1,110
------ ------
Provisions charged to operating expense.... 678 250
------ ------
Balance of allowance for possible loan
losses at end of period.................... $ 2,000 $ 1,390
======= =======
The ratio of net loans charged off to average loans outstanding was
0.1% and 1.4% for the two years ended December 31, 1995 and 1994, respectively.
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
26
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.
For the purposes of this report, the allowance for possible loan losses has
been allocated to the major categories of loans as set forth in the following
table. The allocations are estimates based upon historical loss experience and
management judgment. The allowance for possible loan losses should not be
interpreted as an indication that charge-offs will occur in these amounts or
proportions, or that the allocation indicates future charge-off trends.
Furthermore, the portion allocated to each loan category is not the total amount
available for future losses that might occur within such categories, since even
in this allocation is an unallocated portion, and, as previously stated, the
total allowance is applicable to the entire portfolio.
1995 1994
-------- ---------
Allowance Ratio of Allowance Ratio of
for loans to for loans to
possible total possible total
loan losses loans loan losses loans
----------- -------- ----------- --------
Commercial loans...... $ 331 11% $ 615 7%
Real estate loans..... 564 54% 669 63%
Gov't guaranteed...... 0 32% 0 29%
Bankers acceptances 0 0% 0 0%
Other loans........... 8 3% 8 1%
Unallocated........... 1,097 0% 98 0%
------ ---- ------ ----
Total............ $2,000 100% $1,390 100%
====== ==== ====== ====
27
Deposits
- --------
The average amounts of deposits for the periods indicated are summarized
below.
1995 1994
---------- ---------
(Dollars in Thousands)
Demand Deposits........................ $17,359 $15,777
Savings deposits, money market and
time certificates of deposit of less
than $100,000.......................... 88,744 89,251
Time certificates of deposit of
$100,000 or more....................... 9,240 8,946
------- -------
Total.......................... $115,343 $113,974
======== ========
The maturity schedule of time certificates of deposit of $100,000 or more at
December 31, 1995 is as follows:
December 31, 1995
-----------------
(Dollars in Thousands)
3 months or less.......................... $ 6,177
Over 3 through 6 months................... 1,870
Over 6 through 12 months.................. 969
Over 12 months............................ 0
-------
Total................................ $ 9,016
=======
28
Selected Financial Ratios
- -------------------------
The following table sets forth the ratios of net income to average total
assets and to average shareholders' equity, and average shareholders' equity to
average total assets.
1995 1994
----- -----
Return on assets......... 1.6% 0.8%
Return on equity......... 18.3% 10.7%
Dividend payment ratio... 0.0% 0.0%
Equity to assets ratio... 8.7% 7.6%
29
Item 2. Properties
- -------------------
The Bank's offices are located on the ground and eighth floors of an office
building located at 1801 Century Park East, Los Angeles, California. The Bank
has leased approximately 3,735 square feet of ground floor office space and
approximately 8,256 square feet of eighth floor office space under a lease which
expires on February 28, 2003. The Bank has an option to extend the term of the
lease for an additional five years. The total monthly rental for the premises
is $29,400 for the period from March, 1993 through February, 1998, and $35,280
for the period from March, 1998 through February, 2003, subject to annual
adjustments for increases in property taxes and other operating costs. At the
end of 1994, the Bank elected to apply the unused tenant improvement allowance
of $224,000 against its future lease payments. Payment of the allowance is
being made to the Bank over a 15-month period beginning February 1, 1995. The
Bank is deferring recognition of this amount and amortizing it evenly over the
lease term.
Item 3. Legal Proceedings
- --------------------------
Litigation
- ----------
The Bank is a party as plaintiff or defendant 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
- ------------------------------------------------------------
During the fourth quarter of 1995, no matters were submitted to a vote of
the Company's shareholders.
30
PART II
-------
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
- -----------------------------------------------------------------------------
Securities Activity
- -------------------
The common stock of First Regional Bancorp is traded on the over-the-
counter market through the National Association of Securities Dealers Automated
Quotation system (NASDAQ) under the trading symbol FRGB. The following table
summarizes the "bid" and "ask" quotations reported by NASDAQ of First Regional
Bancorp's common stock:
1995 1994
------------- ----
Bid Ask Bid Ask
--- --- --- ---
1st Quarter 2 - 3 1/4 2 5/8 - 3 7/8 1 - 1 3/4 1 1/2 - 2
2nd Quarter 3 - 3 1/2 3 1/2 - 4 1/8 3/4 - 1 1 1/2 - 1 3/4
3rd Quarter 3 1/4 - 3 5/8 3 1/2 - 4 3/4 - 1 1/4 1 1/2 - 1 7/8
4th Quarter 3 - 4 1/4 3 3/4 - 5 1 1/4 - 2 1/4 1 7/8 - 2 3/4
Dividends
- ---------
The Company has not paid any cash dividends and it is the Company's Board
of Directors' intention that no cash dividends be declared by the Company during
this stage of the Company's development. The Board of Directors intends to
increase the Company's capital and to pay cash dividends only when it is prudent
to do so and the Company's performance justifies such action.
The Company is a legal entity separate and distinct from its subsidiaries,
and has not engaged in any activities other than acting as a holding company.
Accordingly, the Company's principal source of funds, including funds available
for payment of cash dividends to its shareholders, have and will consist of
dividends paid and other funds advanced to the Company by its subsidiaries. As
described below, statutory and regulatory requirements impose limitations on the
amounts of dividends payable by the Bank to the Company and on extensions of
credit by the Bank to the Company.
Holders of the Company's Common Stock are entitled to receive dividends as
and when declared by the Board of Directors out of funds legally available
therefor under the laws of the State of California. Under California law, the
Company would be prohibited from paying dividends unless: (1) its retained
earnings immediately prior to the dividend payment equals or exceeds the amount
of the dividend; or (2) immediately after giving effect to the dividend (i) the
sum of the Company's assets would be at least equal to 125% of its liabilities,
and (ii) the current assets of the Company would be at least equal to its
current liabilities, or, if the average of its earnings
31
before taxes on income and before interest expense for the two preceding fiscal
years was less than the average of its interest expense for the two preceding
fiscal years, at least 125% of its current liabilities.
Prior to the consummation of the reorganization of the Bank, the Bank did
not pay any cash dividends to its shareholders. It is the Bank's Board of
Directors' current intention to retain most of the Bank's earnings to increase
its capital, although the Bank may pay cash dividends to the Company as its
current sole shareholder subject to regulation and when deemed prudent. The
Bank did not pay dividends in 1995, 1994, or 1993.
Restrictions on Transfer of Funds to the Company by the Bank
- ------------------------------------------------------------
The Company is a legal entity separate and distinct from the Bank. It is
anticipated that the Company may eventually receive sufficient income to fund
its operating expenses through the payment of management fees by its
subsidiaries. However, if the Company requires significant amounts of cash,
including funds available for the payment of dividends and extraordinary
operating expenses, such funds initially will be received as dividends paid by
the Bank. Subject to the regulatory restrictions described below, future cash
dividends by the Bank to the Company also will depend upon Management's
assessment of the Bank's future capital requirements, contractual restrictions
and other factors.
In addition, there are statutory and regulatory limitations on the amount
of dividends which may be paid to the Company by the Bank. Under California
law, funds available for cash dividend payments by a bank are restricted to the
lesser of: (i) retained earnings or (ii) the bank's net income for its last
three fiscal years (less any distributions to shareholders made during such
period). Based on the foregoing requirements, as of December 31, 1995 the Bank
is restricted from paying any dividends. Cash dividends may also be paid out of
net income for a bank's last preceding fiscal year upon the prior approval of
the Superintendent of Banks, without regard to retained earnings or net income
for its last three fiscal years. If the Superintendent of Banks finds that the
shareholders' equity of a bank is not adequate or that the payment of a dividend
would be unsafe or unsound for the bank, the Superintendent may order the bank
not to pay any dividend to its shareholders.
Moreover, in a policy statement adopted in November, 1985, the Federal
Reserve Board advised banks and bank holding companies that payment of cash
dividends in excess of current earnings from operations is inappropriate and may
be cause for supervisory action. As a result of this new policy, banks and
their holding companies may find it difficult to pay dividends out of retained
earnings from historical periods prior to the most recent fiscal year or to take
advantage of earnings generated by extraordinary items such as sales of
buildings, other large assets, or business segments in order to generate profits
to enable payment of future dividends.
Under the Financial Institutions Supervisory Act, the FDIC also has
authority to prohibit a bank from engaging in business practices which the FDIC
considers to be unsafe or unsound. It is possible, depending upon the financial
condition of the bank in question and other factors, that the FDIC could assert
that the payment of dividends or other payments might under some
32
circumstances be such an unsafe or unsound practice.
In addition, the Bank is subject to certain restrictions imposed by federal
law on any extensions of credit to the Company or other affiliates, investments
in stock or other securities thereof, and taking of such securities as
collateral for loans. Such restrictions prevent the Company and such other
affiliates from borrowing from the Bank unless the loans are secured by
marketable obligations of designated amounts.
Item 6. Selected Financial Data
- --------------------------------
The balances of selected balance sheet components as of December 31 of each
of the past five years were as follows:
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Total assets $137,810 $124,287 $130,412 $143,822 $136,858
Net loans 85,327 76,581 83,119 117,298 107,757
Investment securities 22,003 18,434 7,529 4,984 9,994
Funds sold 20,690 21,300 19,470 7,000 6,100
Total deposits 124,724 113,666 120,664 129,072 122,430
Shareholders' equity 12,259 10,222 9,226 13,385 12,033
Book value per share and $ 4.90 $ 4.26 $ 3.85 $ 6.16 $ 5.42
share equivalent
The Company's operating results are summarized as follows for the twelve-
month periods ending December 31 of each of the following years:
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in Thousands except for per share)
Interest income $10,920 $ 9,040 $ 9,872 $12,064 $12,249
Interest expense 2,764 2,432 3,176 4,245 5,611
------- ------- ------- ------- -------
Net interest income 8,156 6,608 6,696 7,819 6,638
Provision for loan losses 678 250 3,925 1,359 303
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 7,478 6,358 2,771 6,460 6,335
Other income 447 807 417 601 404
Other expense 5,644 6,162 7,862 5,770 5,701
------- ------- ------- ------- -------
33
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in Thousands except for per share)
Income (loss) before taxes and
effects of accounting change 2,281 1,003 (4,674) 1,291 1,038
Provision (credit) for income
taxes 254 2 (417) 481 330
------- ------- -------- ------- -------
Income (loss) before effects of
accounting change 2,027 1,001 (4,257) 810 708
Effects of accounting change 0 0 98 0 0
------- ------- ------- ------- -------
Net income (loss) $ 2,027 $ 1,001 $(4,159) $ 810 $ 708
Net income (loss) per share $ 0.81 $ 0.42 $ (1.73) $ 0.37 $ 0.32
Cash dividends declared per
share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
The number of shares and share equivalents was 2,502,000 in 1995, 2,398,800
for 1994 and 1993, 2,173,000 for 1992, and 2,223,000 for 1991.
The summary information presented above should be read in conjunction with
the Notes to Consolidated Financial Statements, which accompany the Company's
financial statements as described below.
Item 7. Management's Discussion and Analysis of Financial
- ----------------------------------------------------------
Condition and Results of Operations
-----------------------------------
Summary
-------
First Regional Bancorp (the Company) has not conducted any significant business
activities independent of First Regional Bank (the Bank) since the
reorganization of the Bank on March 8, 1982. Therefore, the following
discussion and analysis relates primarily to the Bank.
The Company's results in 1995 represent a continued improvement over 1994's
results and the loss incurred in 1993. During 1995, the Company initiated a
program of prudent, managed growth, which resulted in higher levels of earning
assets and interest revenue. The improved profitability was also in part a
reflection of the benefits of the successful sale or collection of nonperforming
loans, other real estate owned, and other nonearning assets in prior periods,
which gave rise to an increase in revenue due to the investment of the collected
funds for the full year, and also eliminated the need for large loan loss
provisions or real estate writedowns. In addition, higher levels of interest
rates on assets coupled with generally stable deposit costs resulted in further
growth in net interest income. In 1994, by way of comparison, profitability was
favorably impacted by the sale or collection of nonearning assets, but the
benefits were smaller in 1994 because the process was ongoing during the year.
Unlike 1995, in 1994 some shrinkage in overall asset levels took place, although
higher levels of interest rates on assets coupled with stable deposit costs
resulted in stable net interest income despite the shrinkage. By comparison,
the 1993 loss was largely the result of loan losses which gave rise to sharply
increased provisions to the reserve for loan losses, as well as large writedowns
of
34
other real estate owned and a direct investment in real estate. In addition,
shrinkage in loans and other earning assets that year combined with lower levels
of interest rates resulted in reduced net interest income.
Average assets for 1995 were $127,691,000, compared to $123,837,000 in 1994, and
$143,919,000 in 1993. The Company's asset growth in 1995 was funded by a modest
increase in deposits, as well as by the retention of the Company's substantial
1995 earnings. The lower 1994 asset levels were principally due to a reduction
in time deposits from the prior year, while the changes in the 1993 asset level
reflected a reduction total time deposits which was partially offset by growth
in money market deposits. In both 1994 and 1993, the lower levels of time
deposits were due to the Company's decision to deemphasize this deposit source
due to its relatively high cost. The Company generated net income of $2,027,000
in 1995 compared to a profit of $1,001,000 in 1994, and in contrast a net loss
of $4,159,000 in 1993.
Net Revenue From Earning Assets
-------------------------------
Net revenue from earning assets is the excess of interest income earned on
interest-earning assets over the interest expense incurred on interest-bearing
liabilities. Interest income or expense are determined by the average volume of
interest-bearing assets or liabilities, and the average rate of interest earned
or paid on those assets or liabilities. During 1995, the Company's growth
effort resulted in a significant increase in interest earning assets. Due to
the sluggish economy in the Company's Southern California market area, however,
no loan growth was achieved, although the level of loans did remain stable.
Since loans are generally the highest yielding category of earning assets, the
absence of loan growth in 1995 meant that the Company's earning asset growth was
concentrated in lower-yielding asset categories. In 1994, by comparison, total
interest-earning assets dropped from the levels of the prior year. Further,
there was a recession induced reduction in loan demand and consequently in
gross loans, the highest yielding category of assets, with modest growth being
limited to lower-yielding categories such as investment securities and funds
sold. In 1993, interest-earning assets fell from the levels of the prior year,
and in addition the composition of these assets shifted from higher yielding
categories (such as Loans) to lower yielding components (such as Funds Sold). A
partial cause of the 1993 reduction in interest-earning assets was an increase
in non-performing assets, which is described more fully under "Provision for
Loan Losses," below. The result was a lower level of interest revenue for that
year. During 1995, the level of interest bearing liabilities was virtually
unchanged overall, although there were modest shifts in liability composition.
Because liability interest rates were essentially stable during the year, the
result was only a slight increase in interest expense for 1995 compared to 1994.
In 1994, however, total interest bearing liabilities fell, as a substantial
reduction in time deposits was countered by a modest increase in money market
accounts. Because overall interest rates paid on deposits fell at the same time
that deposit levels were declining, a substantial reduction in interest expense
was experienced in 1994. Interest-bearing liabilities also fell modestly in
1993, once again with a drop in Time Deposits being partially offset by growth
in money market accounts. This liability reduction, coupled with the generally
lower interest rates which prevailed in 1993, led to a drop in interest expense
for the year.
35
Other Operating Income
----------------------
Other operating income returned to normal levels in 1995, at $447,000 for the
year compared to $807,000 for 1994 and $417,000 in 1993. The principal reason
for the revenue growth in 1994 was the receipt of approximately $365,000 in
rental income from a parcel of other real estate owned which was subsequently
sold in June, 1994. Higher customer service fees were also a factor in the
revenue increase, reflecting more vigorous assessment of existing service charge
schedules. Other operating income fell in 1993, reversing the pattern of
increasing levels of other operating income which had prevailed in recent years.
The shrinkage in income for 1993 primarily was due to lower levels of gains on
sales of loans. From time to time, the Company sold loans in the ordinary
course of business, and gains on such sales totalled $68,000 in 1993. This
source of income ceased to be significant in 1994, when gains of approximately
$11,000 were recorded for the year, because the Company opted to retain loans
whenever possible in order to enhance asset yields. There were no sales of
loans, and thus no gains on sales, in 1995.
Provision for Loan Losses
-------------------------
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. While
the recent economic recession in California, and in particular its impact on
real estate, has yet to give way to full recovery, its impact on the payment
performance of the Bank's borrowers does not appear to be a significant factor.
More important, in 1994 the Bank acted aggressively to collect or otherwise
strengthen nonperforming loans, and to liquidate other real estate owned. The
emphasis on maintaining high asset quality continued in 1995, and as a result,
non-performing assets (loans past due ninety days or more excluding government
guaranteed loans, loans on nonaccrual status, and other real estate owned)
totalled just $1,195,000 at the end of 1995, compared to $4,025,000 at December
31, 1994, and $15,113,000 the end of 1993. Management believes the allowance
for possible loan losses as of December 31, 1995 was adequate in relation to
both existing and potential risks in the loan portfolio.
The allowance for possible loan losses is increased by provisions which are
charged to operating expense and is reduced by loan chargeoffs. Any subsequent
recoveries of charged off loans are added back into the allowance. Based on its
ongoing evaluation of loan risks, during 1995 provisions of $678,000 were made
to the allowance for loans losses, a total of $219,000 in loans were charged
off, and $151,000 in previously charged off loans were recovered. In 1994, in
contrast, and reflecting the perceived impact of the continued California
recession on the Bank's borrowers, the Bank made loan loss provisions of
$250,000, charged off a total of $1,303,000 in loans, and recovered $193,000 on
loans which had been previously charged off. By comparison, the Bank made
provisions of $3,925,000 to the loan loss reserve in 1993, while charging off
loans totalling $4,153,000 and recovering $39,000 on loans previously charged
off. The large loss provisions of 1993 were made at the suggestion of banking
regulators; neither the Company nor its regulators had anticipated the rate or
degree of economic decline brought on
36
by the recession in California. These transactions brought the balance of the
allowance for possible loan losses at December 31, 1995 to $2,000,000 (or 2.3%
of total loans) compared to $1,390,000 (or 1.8% of total loans) at December 31,
1994 and $2,250,000 (or 2.6% of total loans) at December 31, 1993.
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. During 1995, the
Company had identified loans having an aggregate average balance of $687,000
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. 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 for 1995.
Operating Expenses
------------------
Total operating expenses continued to decline from the levels of prior years,
falling to $5,644,000 in 1995 from $6,162,000 in 1994 and $7,862,000 in 1993.
While the total expense figures have fluctuated over time, most components
continue to be moderated by the effects of an ongoing program of expense
control.
Salaries and related benefits expense rose in 1995, to $2,195,000 from
$1,876,000 in 1994 and $1,974,000 in 1993. The increase in this expense
category in 1995 principally reflected increases in staffing made as part of the
Company's growth initiative. Occupancy expense fell in 1995 to $348,000 from
$366,000 in 1994 and $482,000 in 1993 as continued benefits were realized from
the 1993 renegotiation of the Bank's banking premises lease. Reflecting the
lessening impact of the recession on the real estate industry and on property
values, losses on other real estate owned fell to $59,000 in 1995 from a 1994
total of $515,000. While the 1994 level was high, it was in sharp contrast to
the prior year in which real estate losses rose significantly, to $2,099,000 in
1993. The 1993 results also included $707,000 in maintenance, sales, and other
carrying costs and $275,000 in writedowns of previously capitalized interest,
but these components were not present in 1995 or 1994. Custodial and other
services to customers declined slightly in 1995 compared to the prior year,
amounting to $1,093,000 for the year versus $1,172,000 in 1994 and $1,068,000
for 1993. This category typically fluctuates in conjunction with the deposit
balances maintained by customers, and this factor accounts for the changes in
this area over the past three years. Other expenses also fell in 1995,
reversing the pattern of modest growth which prevailed in recent years. Other
expenses totalled $1,949,000 in 1995, down from a 1994 total of $2,233,000 and
$2,239,000 in
37
1993. The largest single factor in the 1995 expense reduction was the lowering
of premiums for FDIC insurance reflecting the banking industry's achievement of
full capitalization of the Bank Insurance Fund as defined in applicable statute.
FDIC premium expense fell to $161,000 in 1995 from $339,000 in 1994 and a 1993
total of $354,000. Most of the remaining categories of other expense generally
remained stable in 1995: professional services amounted to $424,000 in 1995
compared to $381,000 in 1994 and $464,000 in 1993; data processing fees fell
from $281,000 in 1994 and $248,000 in 1993 to a 1995 total of $225,000; general
insurance, which rose from a 1993 total of $104,000 to $126,000 in 1994 and
$134,000 in 1995 in line with changes in market rates for coverage; directors
fees are paid based on the attendance of directors at board and committee
meetings, and the associated expense rose to $105,000 in 1995 from $87,000 in
1994 and $103,000 in 1993 due to changes in the number of meetings held in the
respective years; and other expenses, which fell to $764,000 in 1995 after
rising to $936,000 for 1994 from a total of $714,000 in 1993.
Taxes and Effects of Accounting Changes
---------------------------------------
The combined effects of the activity described above resulted in a Income Before
Taxes and Effects of Accounting Change of $2,281,000 for 1995, a strong
improvement from $1,003,000 in 1994, and compared to a Net Loss Before Taxes and
Effects of Accounting Change of $4,674,000 in 1993. At the end of 1993, the
Company had a gross deferred tax asset, representing the accumulated effects of
timing differences between the Company's accounting records and tax returns, of
$1,360,000. Based on an analysis of the portion of this asset which, more
likely than not, would be utilized in the immediate future, a valuation reserve
for deferred income tax assets was established in the amount of $1,027,000.
During 1995, the need for such a valuation reserve was reevaluated, and the
balance of the reserve was reduced to $200,000. The reduction in the reserve
balance had the effect of substantially offsetting the Company's federal tax
provisions, and as a result the Company recorded net tax provisions of $254,000
in 1995. Due to the carryforward of net operating losses incurred in prior
years, a tax provision of but $2,000 was required in 1994. In 1993, by
comparison, the provisions required to establish the original valuation reserve
for deferred income taxes were netted against the anticipated refund of
previously paid income taxes in determining the income tax benefit of $417,000
for the year. In 1993, the Company realized a gain of $98,000 representing the
cumulative effects of a required change in accounting principle; there were no
corresponding items in 1994 or 1995. As a result, the Company generated Net
Income of $2,027,000 in 1995, versus Net Income of $1,001,000 in 1994, and
compared to a Net Loss of $4,159,000 in 1993.
Regulatory Matters
------------------
In February, 1993 the Company and the Bank each entered into agreements with
their respective Federal regulators calling for the maintenance of capital
strength, the improvement of asset quality, the development of various written
policies and procedures, and the forwarding of periodic progress reports to the
regulators. In the third quarter of 1995 the regulators each concluded that the
terms of the agreements had been fully complied with, and accordingly the
agreements were terminated by the regulators.
38
Liquidity, Sources of Funds, and Capital Resources
--------------------------------------------------
The Bank continues to enjoy a liquid financial position. Total liquid assets
(cash and due from banks, investment securities, and federal funds sold) totaled
$49,470,000 and $44,411,000 (or 39.7% and 39.1% of total deposits) at December
31, 1995 and 1994, respectively. In addition, at December 31, 1995
approximately $28 million of the Bank's total loans represented government
guaranteed loans which represent a significant source of liquidity due to the
active secondary market which exists for these assets; the comparable figure at
the end of 1994 was $23 million. Deposits of custodial clients of retirement
plans administered by Transcorp Pension Services, a corporate customer of the
Bank, represented approximately 57% and 63% of the Bank's total deposits as of
December 31, 1995 and 1994, respectively, and in recognition of this the Bank
has maintained a large portion of its assets in liquid form from the inception
of the Transcorp relationship. The ratio of net loans to deposits was 68.4% and
67.4% at the end of 1995 and 1994, respectively.
The Bank's management has attempted to match the rates and maturities of its
interest-bearing assets and liabilities as part of its liquidity and asset and
liability management policy. The objective of this policy is to moderate the
fluctuations of net interest revenue which result from changes in the level of
interest rates. The table which follows indicates the repricing or maturity
characteristics of the major categories of the Bank's assets and liabilities,
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 have 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.
One month Six months One year
Floating Less than but less than but less than but less than Five years
Category Rate one month six months one year five years or more
=============================================================================================================================
Fed funds sold 20,690 0 0 0 0 0
Time deposits with other banks 0 1,486 5,051 1,584 0 0
Investment securities 9,702 0 4,155 0 25 0
------- ----- ----- ----- -- -
Subtotal 30,392 1,486 9,206 1,584 25 0
Loans 85,056 0 0 231 40 0
------- ----- ----- ----- -- -
Total earning assets 115,448 1,486 9,206 1,815 65 0
Cash and due from banks 0 0 0 0 0 0
Premises and equipment 0 0 0 0 0 0
Other real estate owned 0 0 0 0 0 0
Other assets 0 0 0 0 0 0
------- ----- ----- ----- -- -
Total non-earning assets 0 0 0 0 0 0
------- ----- ----- ----- -- -
Total assets 115,448 1,486 9,206 1,815 65 0
Funds purchased 36 0 0 0 0 0
Repurchase agreements 0 0 0 0 0 0
------- ----- ----- ----- -- -
Subtotal 36 0 0 0 0 0
Savings deposits 4,706 0 0 0 0 0
Money market deposits 82,998 0 0 0 0 0
Time deposits 0 6,075 5,520 1,358 62 0
------- ----- ----- ----- -- -
Total bearing liabilities 87,740 6,075 5,520 1,358 62 0
Non-interest
earning
Category or bearing Total
===========================================================
Fed funds sold 0 20,690
Time deposits with other banks 0 8,121
Investment securities 0 13,882
----- -------
Subtotal 0 42,693
Loans 0 85,327
----- -------
Total earning assets 0 128,020
Cash and due from banks 6,777 6,777
Premises and equipment 200 200
Other real estate owned 392 392
Other assets 2,421 2,421
----- -------
Total non-earning assets 9,790 9,790
----- -------
Total assets 9,790 137,810
Funds purchased 0 36
Repurchase agreements 0 0
----- -------
Subtotal 0 36
Savings deposits 0 4,706
Money market deposits 0 82,998
Time deposits 0 13,015
----- -------
Total bearing liabilities 0 100,755
39
One month Six months One year
Floating Less than but less than but less than but less than Five years
Category Rate one month six months one year five years or more
=========================================================================================================================
Demand deposits 0 0 0 0 0 0
Other liabilities 0 0 0 0 0 0
Equity capital 0 0 0 0 0 0
------ ------ ------ ------ ------ ------
Total non-bearing liabilities 0 0 0 0 0 0
------ ------ ------ ------ ------ ------
Total liabilities 87,740 6,075 5,520 1,358 62 0
GAP 27,708 (4,589) 3,686 457 3 0
Cumulative GAP 27,708 23,119 26,805 27,262 27,265 27,265
Non-interest
earning
Category or bearing Total
=============================================================
Demand deposits 24,005 24,005
Other liabilities 791 791
Equity capital 12,259 12,259
------- -------
Total non-bearing liabilities 37,055 37,055
------- -------
Total liabilities 37,055 137,810
GAP (27,265) 0
Cumulative GAP 0 0
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.
The Company continues to maintain a strong and prudent capital position. Total
shareholders' equity was $12,259,000 and $10,222,000 as of December 31, 1995 and
1994, respectively. The Company's capital ratios for those dates in comparison
with regulatory capital requirements were as follows:
12-31-95 12-31-94
-------- --------
Leverage Ratio (Tier I Capital
to Assets:
First Regional Bancorp 8.96% 8.08%
Regulatory requirement 4.00% 4.00%
The "regulatory requirement" listed represents the level of capital required for
Adequately Capitalized status.
In addition, bank regulators have issued new 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 capital requirements
were as follows:
12-31-95 12-31-94
-------- --------
Tier I Capital to Assets:
First Regional Bancorp 15.91% 14.94%
Regulatory requirement 4.00% 4.00%
Tier I + Tier II Capital to Assets:
First Regional Bancorp 17.17% 16.20%
Regulatory requirement 8.00% 8.00%
40
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 inflation, companies with net monetary assets will always
experience a reduction in purchasing power. Inflation continues to have an
impact on salary, supply, and occupancy expenses, but the rate of inflation in
general and its impact on these expenses in particular has remained moderate in
recent years.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
See "Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K" below for financial statements filed as part of this report.
Item 9. Disagreements on Accounting and Financial Disclosure
- -------------------------------------------------------------
The Company has not reported a disagreement with its existing or previous
accountants on any matter of accounting principle or practice on financial
statement disclosure.
41
PART III
--------
Item 10. Directors and Executive Officers of Registrant
- --------------------------------------------------------
The information pertaining to directors which is required by this item will
be included in the definitive proxy statement to be filed by the Company within
120 days of fiscal year end pursuant to Section 14 of the Act. Such information
is hereby incorporated by reference in accordance with Rule G of the General
Instructions to the Annual Report on Form 10-K.
Item 11. Executive Compensation
- --------------------------------
The information required by this item will be included in the definitive
proxy statement to be filed by the Company within 120 days of fiscal year end
pursuant to Section 14 of the Act. Such information is hereby incorporated by
reference in accordance with Rule G of the General Instructions to the Annual
Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information required by this item will be included in the definitive
proxy statement to be filed by the Company within 120 days of fiscal year end
pursuant to Section 14 of the Act. Such information is hereby incorporated by
reference in accordance with Rule G of the General Instructions to the Annual
Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item will be included in the definitive
proxy statement to be filed by the Company within 120 days of fiscal year end
pursuant to Section 14 of the Act. Such information is hereby incorporated by
reference in accordance with Rule G of the General Instructions to the Annual
Report on Form 10-K.
42
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports
- --------------------------------------------------------------
on Form 8-K
-----------
List of Documents filed as a part of this report:
(a) Financial Statements and Financial Statement Schedules
See Index to Financial Statements which is part of this Form 10-K.
(b) Exhibits
See Index to Exhibits which is part of this Form 10-K
(Exhibits are listed by numbers corresponding to the Exhibit Table in Item 601
of Regulation S-K)
(c) Reports on Form 8-K
No Form 8-K reports were filed by the Company during the fourth quarter of 1995.
43
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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
By/s/ Jack A. Sweeney
--------------------------------------
Jack A. Sweeney, Chairman of the Board
and Chief Executive Officer
Date: March 28, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Jack A. Sweeney Director, Chairman March 28, 1996
- ------------------------
Jack A. Sweeney of the Board and Chief
Executive Officer
/s/ Mark Rubin Director, Vice Chairman March 28, 1996
- ------------------------
Mark Rubin of the Board, and
President
/s/ Alexander S. Lowy Director March 28, 1996
- ------------------------
Alexander S. Lowy
/s/ Frank R. Moothart Director March 28, 1996
- ---------------------
Frank R. Moothart
/s/ Lawrence Sherman Director March 28, 1996
- ---------------------
Lawrence J. Sherman
/s/ Steven J. Sweeney Director March 28, 1996
- ---------------------
Steven J. Sweeney
/s/ Thomas McCullough Director, Chief March 28, 1996
- ---------------------
Thomas E. McCullough Financial Officer and
Chief Accounting
Officer
44
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Financial Statements Page in Form 10-K
- -------------------- -----------------
First Regional Bancorp and Subsidiary:
Report of Independent Accountants......... 47
Consolidated Balance Sheets as of
December 31, 1995 and 1994................ 48
Consolidated Statements of Income for
the years ended December 31, 1995, 1994,
and 1993.................................. 49
Consolidated Statements of Shareholders'
Equity for the years ended December 31, 1995,
1994, and 1993............................ 51
Consolidated Statements of Cash Flows for
the years ended December 31, 1995, 1994,
and 1993.................................. 52
Notes to Consolidated Financial Statements 54
First Regional Bancorp (Parent Company):
Note 13 to Consolidated Financial
Statements................................ 67
All other financial statement schedules are omitted because they are not
applicable, not material or because the information is included in the financial
statements or the notes.
45
DELOITTE &
TOUCHE LLP
[LOGO OF DELOITTE & TOUCHE LLP APPEARS HERE]
- --------------------------------------------------------------------------------
FIRST REGIONAL BANCORP AND
SUBSIDIARY
Consolidated Financial Statements as of
December 31, 1995 and 1994 and for
Each of the Three Years in the
Period Ended December 31, 1995 and
Independent Auditors' Report
- --------------------------------------------------------------------------------
- ----------------
DELOITTE TOUCHE
TOHMATSU
INTERNATIONAL
- ----------------
[LETTERHEAD OF DELOITTE & TOUCHE LLP APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
First Regional Bancorp and Subsidiary
Century City, California:
We have audited the accompanying consolidated balance sheets of First Regional
Bancorp and subsidiary (the "Company") as of December 31, 1995 and 1994, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of First Regional Bancorp and its
subsidiary as of December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
January 30, 1996
47
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
ASSETS 1995 1994
Cash and due from banks (Note 7) $ 6,777,000 $ 4,677,000
Federal funds sold 20,690,000 21,300,000
------------ ------------
Cash and cash equivalents 27,467,000 25,977,000
Investment securities available for sale, at
fair value (Note 2) 13,882,000 11,807,000
Interest-bearing deposits in financial institutions 8,121,000 6,627,000
Loans, net (Note 3) 57,667,000 53,729,000
Government guaranteed loans (Note 3) 27,660,000 22,852,000
Premises and equipment, net (Note 4) 200,000 166,000
Other real estate owned, net (Note 5) 392,000 1,163,000
Accrued interest receivable and other assets 2,071,000 1,640,000
Deferred income tax asset, net (Note 6) 350,000 326,000
------------ ------------
TOTAL $137,810,000 $124,287,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits (Notes 10 and 12):
Noninterest bearing $ 24,005,000 $ 18,777,000
Interest bearing:
Time deposits 13,015,000 11,447,000
Money market deposits 82,998,000 78,295,000
Other 4,706,000 5,147,000
------------ ------------
Total deposits 124,724,000 113,666,000
Accrued interest payable and other
liabilities (Note 6) 827,000 399,000
------------ ------------
Total liabilities 125,551,000 114,065,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 7)
SHAREHOLDERS' EQUITY (Note 8):
Common stock, no par value; authorized, 5,000,000
shares; outstanding, 2,399,000 shares 11,332,000 11,332,000
Retained earnings (deficit) 922,000 (1,105,000)
Net unrealized gain/(loss) on securities available
for sale, net of tax 5,000 (5,000)
------------ ------------
Total shareholders' equity 12,259,000 10,222,000
------------ ------------
TOTAL $137,810,000 $124,287,000
============ ============
See notes to consolidated financial statements.
48
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
1995 1994 1993
INTEREST INCOME:
Interest on loans $ 8,427,000 $7,662,000 $ 9,215,000
Interest on deposits in financial institutions 433,000 315,000 135,000
Interest on federal funds sold 1,469,000 670,000 341,000
Interest on investment securities 591,000 393,000 181,000
----------- ---------- -----------
Total interest income 10,920,000 9,040,000 9,872,000
----------- ---------- -----------
INTEREST EXPENSE:
Interest on deposits (Notes 10 and 12) 2,732,000 2,432,000 3,156,000
Interest on other borrowings 32,000 20,000
----------- ---------- -----------
Total interest expense 2,764,000 2,432,000 3,176,000
----------- ---------- -----------
NET INTEREST INCOME 8,156,000 6,608,000 6,696,000
PROVISION FOR LOAN LOSSES (Note 3) 678,000 250,000 3,925,000
----------- ---------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,478,000 6,358,000 2,771,000
----------- ---------- -----------
OTHER OPERATING INCOME:
Customer service fees 404,000 424,000 345,000
Other 43,000 383,000 72,000
----------- ---------- -----------
Total operating income 447,000 807,000 417,000
----------- ---------- -----------
OTHER OPERATING EXPENSES:
Salaries and related benefits (Note 7) 2,195,000 1,876,000 1,974,000
Occupancy expenses (Note 4) 348,000 366,000 482,000
Real estate expense, net (Note 5) 59,000 515,000 2,099,000
Custodial and other service (Note 12) 1,093,000 1,172,000 1,068,000
Other expenses (Note 11) 1,949,000 2,233,000 2,239,000
----------- ---------- -----------
Total operating expenses 5,644,000 6,162,000 7,862,000
----------- ---------- -----------
See notes to consolidated financial statements.
(Continued)
49
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,1995, 1994 AND 1993
- --------------------------------------------------------------------------------
1995 1994 1993
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE $2,281,000 $1,003,000 $(4,674,000)
PROVISION (BENEFIT) FOR INCOME
TAXES (Note 6) 254,000 2,000 (417,000)
---------- ---------- -----------
INCOME (LOSS) AFTER INCOME TAXES
AND BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 2,027,000 1,001,000 (4,257,000)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (Notes 1 and 6) 98,000
---------- ---------- -----------
NET INCOME (LOSS) $2,027,000 $1,001,000 $(4,159,000)
========== ========== ===========
EARNINGS (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE (Note 1):
Income (loss) before cumulative effect of
change in accounting principle $ 0.81 $ 0.42 $ (1.77)
Cumulative effect of change in accounting
principle 0.04
---------- ---------- -----------
TOTAL $ 0.81 $ 0.42 $ (1.73)
========== ========== ===========
See notes to consolidated financial statements.
(Concluded)
50
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
Unrealized
Gain
(Loss) on
Common Stock Securities
-------------------------- Retained Available
Shares Earnings for Sale,
Outstanding Amount (Deficit) Net of Tax Total
BALANCE,
JANUARY 1, 1993 2,399,000 $11,332,000 $ 2,053,000 $13,385,000
Net loss for year 1993 (4,159,000) (4,159,000)
--------- ----------- ----------- -----------
BALANCE,
DECEMBER 31, 1993 2,399,000 11,332,000 (2,106,000) 9,226,000
Unrealized loss on
securities available for
sale, net of tax $(5,000) (5,000)
Net income for year 1994 1,001,000 1,001,000
--------- ----------- ----------- ------- -----------
BALANCE,
DECEMBER 31, 1994 2,399,000 11,332,000 (1,105,000) (5,000) 10,222,000
Net change in unrealized
gain (loss) on securities
available for sale,
net of tax 10,000 10,000
Net income for year 1995 2,027,000 2,027,000
--------- ----------- ----------- ------- -----------
BALANCE,
DECEMBER 31, 1995 2,399,000 $11,332,000 $ 922,000 $ 5,000 $12,259,000
========= =========== =========== ======= ===========
See notes to consolidated financial statements.
51
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
1995 1994 1993
OPERATING ACTIVITIES:
Net income (loss) $ 2,027,000 $ 1,001,000 $ (4,159,000)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for losses on loans 678,000 250,000 3,925,000
Provision for losses on real estate 50,000 130,000 1,392,000
Provision for depreciation 53,000 58,000 140,000
Gain on sale of investment securities, net (5,000)
Gain on sale of real estate (14,000) (21,000)
(Accretion) amortization of investment securities
premiums and discounts, net (366,000) (257,000) 35,000
Gain on sale of loans (6,000) (11,000) (68,000)
Amortization of loan premiums, net 649,000 519,000 346,000
Loss on disposal of fixed assets 6,000
(Decrease) increase in interest receivable
and other assets (431,000) 61,000 239,000
Increase (decrease) in interest payable
and other liabilities 389,000 (123,000) 80,000
Deferred income taxes (benefit) provision (24,000) 1,007,000
Change in current income taxes payable/receivable 39,000 1,513,000 (1,619,000)
------------ ------------ ------------
Net cash provided by operating activities 3,039,000 3,141,000 1,303,000
------------ ------------ ------------
INVESTING ACTIVITIES:
Net increase in interest-bearing deposits in
financial institutions (1,494,000) (119,000) (3,555,000)
Net (increase) decrease in loans (11,902,000) 11,918,000 5,884,000
Proceeds from sale of loans 1,975,000 2,897,000 11,359,000
Purchases of investment securities (20,393,000) (23,537,000) (44,325,000)
Proceeds from maturities of investment securities 17,000,000 13,000,000 45,300,000
Proceeds from sales of investment securities 1,699,000
Purchases of premises and equipment (87,000) (91,000) (11,000)
Purchase of majority interest on other real estate
owned (100,000)
Net decrease in investment in real estate 385,000 298,000
Proceeds from sale of other real estate owned 210,000 2,593,000 4,312,000
------------ ------------ ------------
Net cash (used in) provided by
investing activities (12,607,000) 6,859,000 18,964,000
------------ ------------ ------------
See notes to consolidated financial statements.
(Continued)
52
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- -------------------------------------------------------------------------------------------------------
1995 1994 1993
FINANCING ACTIVITIES:
Net increase (decrease) in time deposits $1,568,000 $(5,237,000) $(16,013,000)
Net increase (decrease) in noninterest-bearing
deposits and other interest-bearing deposits 9,490,000 (1,761,000) 7,605,000
Increase (decrease) in short-term borrowed funds 4,000 (923,000)
Net cash provided by (used in) financing ---------- ----------- -------------
activities 11,058,000 (6,994,000) (9,331,000)
---------- ---------- -------------
INCREASE IN CASH AND
CASH EQUIVALENTS 1,490,000 3,006,000 10,936,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 25,977,000 22,971,000 12,035,000
---------- ---------- -------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $27,467,000 $25,977,000 $22,971,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
NONCASH INVESTING ACTIVITIES:
Acquisition of other real estate owned through
foreclosure $ 140,000 $ 1,289,000 $ 11,516,000
Net transfer of loans to (from) loans held for sale $ 1,969,000 $ (448,000) $ 13,138,000
Loans to facilitate sale of other real estate owned $ 280,000 $ 6,990,000
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest paid $2,687,000 $2,431,000 $ 3,096,000
Income taxes paid $ 166,000 $ 1,600 $ 340,000
See notes to consolidated financial statements.
(Concluded)
53
FIRST REGIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- ----------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Regional Bancorp, a bank holding company (the "Company"), and its
subsidiary, First Regional Bank, a California state-chartered bank (the "Bank"),
operate one branch in Century City, California. The Company's primary source of
revenue is providing loans to customers, who are predominantly small and mid-
sized businesses. The accounting and reporting policies of the Company conform
to generally accepted accounting principles and general practices within the
banking industry. The following are descriptions of the more significant of
these policies:
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and the Bank. All significant intercompany transactions
and accounts have been eliminated.
Use of Estimates in the Preparation of the Financial Statements - The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Investment Securities - Investment securities available for sale are reported in
the accompanying consolidated balance sheets at fair value, and the net
unrealized gain or loss on such securities (unless other than temporary) is
reported as a separate component of shareholders' equity. Premiums and
discounts on debt securities are amortized or accreted as adjustments to
interest income using the level-yield method. Realized gains and losses on
sales of securities are determined on a specific identification basis and
reported in earnings.
Loans - Loans are carried at face amount less payments collected, unearned fees
and allowances for loan losses. Interest on loans is accrued monthly on a
simple interest basis. Accrual of interest is discontinued on a loan when
management believes, after considering economic and business conditions and
collection efforts, that the borrowers' financial condition is such that
collection of interest is doubtful. Loan origination fees and commitment fees,
net of related costs, are deferred and recognized over the contractual life of
the loan as a yield adjustment.
In the normal course of business, the Bank designates certain of its loans as
being held for sale. Loans held for sale are carried at the lower of aggregate
cost or market value. Adjustments to the lower of cost or market are charged to
current operations and are included in other expense in the consolidated
statements of operations. There were no loans held for sale outstanding as of
December 31, 1995 or 1994.
54
Government guaranteed loans represent loans for which the repayment of principal
and interest is guaranteed by the U.S. government. Those loans are secured by
real estate and are due in amortizing installments over periods of up to 40
years. The loans bear contractual interest at various rates above national
prime lending rates and were generally purchased at premiums. Premiums on
purchases of government guaranteed loans are amortized on a level yield method
over the estimated lives of the loans, considering prepayments.
The allowance for loan losses is maintained at a level considered adequate by
management to provide for losses that might be reasonably anticipated. The
allowance is increased by provisions charged to earnings and reduced by charge-
offs, net of recoveries. Management's periodic estimates of the allowance for
loan losses are inherently uncertain and depend on the outcome of future events.
Such estimates are based on previous loan loss experience; current economic
conditions; volume, growth, and composition of the loan portfolio; the value of
collateral; and other relevant factors.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan, "
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures." SFAS No. 114 prescribes that a loan is
impaired when it is probable that the creditor will be unable to collect all
contractual principal and interest payments under the terms of the loan
agreement. SFAS No. 114 generally requires impaired loans to be measured based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, or as an expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent.
The effect of the adoption of SFAS No. 114 was not material to the Company's
financial statements.
Other Real Estate Owned - Other real estate owned generally results when a
property collateralizing a loan is foreclosed upon or otherwise acquired by the
Bank in satisfaction of the loan. Upon foreclosure, other real estate owned is
recorded at estimated fair value. Reductions in value at the time of
foreclosure are charged against the allowance for loan losses. Allowances are
recorded to provide for estimated declines in fair value and costs to sell
subsequent to the date of acquisition.
Premises and Equipment - Premises and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets, which range
from 5 to 15 years. Amortization is computed on the straight-line method over
the estimated useful lives of the leasehold improvements or the term of the
lease, whichever is shorter.
Income Taxes - In 1993, the Company adopted SFAS No. 109, "Accounting for Income
Taxes." Under SFAS No. 109, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. A deferred tax asset is
recorded to the extent that management believes it is more likely than not to be
realized. A valuation allowance is recognized for the remaining portion of the
deferred tax asset.
Earnings per Share - Earnings per share has been computed on the basis of the
weighted-average number of common shares and common stock equivalents. The
weighted average number of shares used for earnings per share was 2,502,000,
2,399,000 and 2,399,000 for 1995, 1994 and 1993, respectively.
Cash and Cash Equivalents - Cash and cash equivalents include cash and due from
banks and federal funds sold. Generally, federal funds are sold for one-day
periods.
55
Reclassifications - Certain amounts in the prior years financial statements have
been reclassified to be comparable with the classification used in the current
year financial statements.
2. INVESTMENT SECURITIES
The amortized cost and fair values of securities available for sale as of
December 31, 1995 and 1994 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
1995
U.S. agency securities $13,849,000 $8,000 $ - $13,857,000
Other securities 25,000 25,000
----------- ------ ------ -----------
$13,874,000 $8,000 $ - $13,882,000
=========== ====== ====== ===========
1994
U.S. Treasury and
agency securities $11,790,000 $ - $8,000 $11,782,000
Other securities 25,000 25,000
----------- ------ ------ -----------
$11,815,000 $ - $8,000 $11,807,000
=========== ====== ====== ===========
The maturities of securities available for sale at December 31, 1995 are as
follows:
After One After Five
Within But Within But Within
One Year Five Years Ten Years
U.S. agency securities $2,950,000 $5,336,000 $5,571,000
Other securities 25,000
---------- ---------- ----------
$2,950,000 $5,361,000 $5,571,000
========== ========== ==========
All debt securities held as of December 31, 1994 mature within one year, except
one $25,000 security maturing in 1998.
Securities carried at $2,000,000 and $1,400,000 were pledged as of December 31,
1995 and 1994, respectively, to secure current or future public deposits and for
other purposes required or permitted by law.
56
3. LOANS
The loan portfolio consisted of the following at December 31, 1995 and 1994:
1995 1994
Real estate loans $45,968,000 $44,842,000
Commercial loans 9,958,000 5,797,000
Real estate construction loans 1,776,000 4,354,000
Bankers acceptances 2,000,000
Other loans 408,000 616,000
----------- -----------
60,110,000 55,609,000
Allowance for loan losses (2,000,000) (1,390,000)
Deferred loan fees, net (443,000) (490,000)
----------- -----------
Loans, net $57,667,000 $53,729,000
=========== ===========
Government guaranteed loans, including
premiums on loans of $1,701,000 and
$1,463,000 at December 31, 1995 and
1994, respectively $27,660,000 $22,852,000
=========== ===========
An analysis of the activity in the allowance for loan losses for the years ended
December 31, 1995, 1994 and 1993 is as follows:
1995 1994 1993
Balance, beginning of year $1,390,000 $ 2,250,000 $ 2,439,000
Provision for loan losses 678,000 250,000 3,925,000
Loans charged off (219,000) (1,303,000) (4,153,000)
Recoveries on loans previously
charged off 151,000 193,000 39,000
---------- ----------- -----------
$2,000,000 $ 1,390,000 $ 2,250,000
========== =========== ===========
Management believes the allowance for loan losses as of December 31, 1995 is
adequate to absorb losses inherent in the loan portfolio. Management's
estimates of the allowance are subject to potential adjustment by the Federal
Deposit Insurance Corporation (the "FDIC") and the California State Banking
Department upon subsequent examination of the Bank by such authorities. The
Bank's lending is concentrated in real estate in Southern California. In the
recent past, this area experienced adverse economic conditions, including
declining real estate values. Further declines in the local economy or in real
estate values may result in increased losses that cannot reasonably be predicted
at this date.
At December 31, 1995, the recorded investment in loans for which impairment had
been recognized in accordance with SFAS No. 114 was $530,000. No specific
allowance was established for these loans under the provisions of SFAS No. 114.
Generally, this is due to identified losses on such loans having been charged-
off under regulatory guidelines or because sufficient collateral exists to
provide for recovery of the recorded loan amount. The average recorded
investment and cash collected on these impaired loans during 1995 were $687,000
and $312,000, respectively. As of December 31, 1995, direct writedowns on
impaired loans charged against the allowance amounted to $242,000.
57
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. Nonaccrual loans at December 31, 1995 and
1994 amounted to $530,000 and $1,389,000, respectively. Interest income that
would have been recorded under the original terms of such loans was $250,000,
$255,000 and $209,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
In the ordinary course of business, the Bank grants loans to its directors and
executive officers. Following is a summary of such loans for the years ended
December 31, 1995 and 1994:
1995 1994
Balance, beginning of year $ 238,000 $208,000
Loans granted or renewed 10,000 70,000
Repayments (169,000) (40,000)
--------- --------
Balance, end of year $ 79,000 $238,000
========= ========
4. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following as of December 31, 1995 and
1994:
1995 1994
Furniture, fixtures and equipment $ 1,505,000 $ 1,429,000
Leasehold improvements 529,000 518,000
----------- -----------
2,034,000 1,947,000
Accumulated depreciation and amortization (1,834,000) (1,781,000)
----------- -----------
Premises and equipment, net $ 200,000 $ 166,000
=========== ===========
Rental expense for premises included in occupancy expenses for 1995, 1994 and
1993 was approximately $331,000, $348,000 and $392,000, respectively.
58
The future minimum rental commitments, primarily representing noncancelable
operating leases for premises, were as follows at December 31, 1995, excluding
the effect of future cost-of-living increases provided for in the leases,
deferred lease concessions, and net of sublease income:
Minimum Rental
Commitments
1996 $ 353,000
1997 353,000
1998 412,000
1999 423,000
2000 423,000
Thereafter 917,000
----------
Total $2,881,000
==========
At the end of 1994, the Bank had elected to apply the unused tenant improvement
allowance of $224,000 against its future lease payments. Payment of the
allowance is being made to the Bank over a 15-month period beginning February 1,
1995. The Bank is deferring recognition of the amount and amortizing it evenly
over the lease term, which expires in February 2003.
5. OTHER REAL ESTATE OWNED
Other real estate owned consists of the following at December 31, 1995 and 1994:
1995 1994
Properties acquired through foreclosure $400,000 $ 978,000
Investment in real estate 12,000 397,000
-------- ----------
412,000 1,375,000
Allowance for real estate losses (20,000) (212,000)
-------- ----------
Other real estate owned, net $392,000 $1,163,000
======== ==========
The investment in real estate was originated as an acquisition and development
loan secured by land. The Bank has a limited partnership interest in the real
estate venture.
Real estate expenses in the consolidated statements of operations for the years
ended December 31, 1995, 1994 and 1993, respectively, consist of:
1995 1994 1993
Direct write-downs and provisions
for losses on real estate $50,000 $130,000 $1,117,000
Real estate expenses, net 9,000 385,000 707,000
Charge-off of capitalized interest 275,000
------- -------- ----------
$59,000 $515,000 $2,099,000
======= ======== ==========
59
6. INCOME TAXES
In 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." The
cumulative effect of the adoption of SFAS No. 109 reduced the net loss by
$98,000 and is reported separately in the statement of operations.
Income tax expense (benefit) for the years ended December 31, 1995, 1994 and
1993, net of valuation adjustments, consists of the following:
1995 1994 1993
Current provision (benefit):
Federal $ (85,000) $(1,328,000)
State 368,000 $2,000 2,000
--------- ------ -----------
283,000 2,000 (1,326,000)
--------- ------ -----------
Deferred provision (benefit):
Federal 85,000 751,000
State (114,000) 158,000
--------- ------ ----------
(29,000) 909,000
--------- ------ ----------
Total $ 254,000 $2,000 $ (417,000)
========= ====== ==========
Income tax assets (liabilities) consisted of the following at December 31, 1995
and 1994:
1995 1994
Income taxes currently receivable
(payable), included in other
assets/other liabilities:
Federal $ (41,000) $ 40,000
State 28,000 66,000
--------- ---------
(13,000) 106,000
--------- ---------
Deferred income tax asset (liability):
Federal 235,000 783,000
State 315,000 739,000
Valuation allowance (200,000) (1,196,000)
--------- ----------
350,000 326,000
--------- ----------
Total $ 337,000 $ 432,000
========= ==========
60
The components of the net deferred income tax asset at December 31 are
summarized as follows:
1995 1994
FEDERAL
Deferred tax liabilities:
Prepaid expenses $ (35,000) $ (26,000)
Other (277,000) (646,000)
--------- -----------
Gross liabilities (312,000) (672,000)
--------- -----------
Deferred tax assets:
Loan and real estate loss allowances 283,000 328,000
Deferred compensation 100,000 71,000
Depreciation 15,000
Federal net operating loss
carryforward 490,000
State franchise tax 1,000
Tax credits 102,000 337,000
Unrealized loss on securities 3,000
Other 62,000 210,000
--------- -----------
Gross assets 547,000 1,455,000
--------- -----------
Net deferred tax asset - federal 235,000 783,000
--------- -----------
STATE
Deferred tax liabilities:
Prepaid expenses (11,000) (9,000)
Other (75,000) (3,000)
--------- -----------
Gross liabilities (86,000) (12,000)
--------- -----------
Deferred tax assets:
Loan and real estate loss allowances 205,000 595,000
Deferred compensation 33,000 24,000
State net operating loss
carryforward 61,000
Depreciation 1,000
Other 163,000 70,000
--------- -----------
Gross assets 401,000 751,000
--------- -----------
Net deferred tax asset - state 315,000 739,000
--------- -----------
Net deferred tax asset before
valuation allowance 550,000 1,522,000
Valuation allowance (200,000) (1,196,000)
Net deferred tax asset $ 350,000 $ 326,000
========= ===========
61
The provision for income taxes (benefit) for the years ended December 31, 1995,
1994 and 1993 varied from the federal statutory tax rate for the following
reasons:
1995 1994 1993
---------------- ---------------- -------------------
Amount Rate Amount Rate Amount Rate
Tax expense (benefit)
at statutory rate $ 798,000 35.0 % $ 351,000 35.0 % $(1,636,000) 35.0 %
State franchise taxes,
net of federal income
tax benefit 167,000 7.3 1,000 0.1 99,000 (2.1)
Valuation allowance (996,000) (43.7) 169,000 17.0 1,027,000 (22.0)
Tax credits resulting
from loss carryback 174,000 7.6 (511,000) (51.5)
Other, net 111,000 4.9 (8,000) (0.4) 93,000 (2.0)
--------- ----- --------- ----- ----------- -----
Total $ 254,000 11.1 % $ 2,000 0.2 % $ (417,000) 8.9 %
========= ===== ========= ===== =========== =====
7. COMMITMENTS AND CONTINGENCIES
As of December 31, 1995, the Company had the following commitments and
contingent liabilities:
Undisbursed loans $7,895,000
Standby letters of credit 360,000
The Bank uses the same standards of credit underwriting in entering into these
commitments to extend credit and, therefore, does not anticipate any losses as a
result of these transactions. Also, commitments may expire unused, and
consequently, the above amounts do not necessarily represent future cash
requirements. The majority of the commitments above carry variable interest
rates.
The Company sponsors a defined contribution 401(k) plan benefiting substantially
all employees. At the discretion of the Board of Directors, the Company matches
employee contributions. Currently, the Company provides 25% matching on the
first 3% of wages contributed by an employee, and 75% matching on the next 3% of
wages contributed by an employee. Company contributions are used to buy the
Company's common stock on the open market for allocation to the employees'
accounts in the plan. The Company contributed approximately $7,000, $18,000 and
$16,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
As of December 31, 1995, the Bank had unused lines of credit with other
depository institutions of $5,500,000.
The Bank's principal regulators are the FDIC and the California State Department
of Banking; the Company is regulated by the Federal Reserve Bank. At periodic
intervals, these agencies examine the Bank and the Company as part of their
legally prescribed oversight responsibilities.
62
Regulations of the Federal Reserve Board require depository institutions to
maintain a portion of their deposits in the form of either cash or deposits with
the Federal Reserve Bank that are noninterest bearing and which are not
available for investment purposes. The average Federal Reserve balances
required to be maintained to meet these requirements were approximately $540,000
and $153,000 at December 31, 1995 and 1994, respectively.
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.
8. SHAREHOLDERS' EQUITY
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
the regulators that, if undertaken, could have a direct material effect on the
Company's consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1995, that the
Bank meets all capital adequacy requirements to which it is subject. As of
December 31, 1995, the most recent notification from the FDIC categorized the
Bank as well-capitalized under the regulatory framework for prompt corrective
action. To be categorized as well-capitalized, the Bank must maintain minimum
total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the Bank's category. Following is a table
showing the minimum capital ratios required for the Bank and the Bank's actual
capital ratios at December 31, 1995 (the Company's ratios are substantially the
same):
Well-Capitalized
Requirements
First For Capital Under Prompt
Regional Adequacy Corrective Action
Bank Purposes Provisions
Total capital to risk-weighted assets 17.17 % 8.00 % 10.00 %
Tier 1 capital to risk-weighted assets 15.91 % 4.00 % 6.00 %
Leverage - Tier 1 capital to average
total assets 8.96 % 4.00 % 5.00 %
The Company has a nonqualified employee stock option plan that authorizes the
issuance of up to 350,000 shares of its common stock and expires in 2000.
Options may be granted at a price not less than the fair market value of the
stock at the date of grant, are exercisable and expire as determined by the
Board of Directors.
63
During 1994, the Board of Directors authorized cancellation of the outstanding
options under the plan of 275,000 shares at an exercise price of $2.75 per
share. These options were subsequently reissued at an exercise price of $2.00
per share, vesting over a five-year period and expiring on January 1, 2000.
During 1995 and 1994, additional options were granted to officers for an
aggregate of 30,000 shares and 40,000 shares, respectively, at exercise prices
ranging from $2.50 - $3.50 per share in 1995 and $2.00 per share in 1994.
At December 31, 1995, 1994 and 1993, the Company had options outstanding granted
under the plan as follows:
1995 1994 1993
Options outstanding (number of shares) 345,000 315,000 275,000
Exercise price per share $2.00-$3.50 $2.00 $2.75
In 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which encourages companies to account
for stock-based compensation awards at their fair values at the date the awards
are granted. SFAS No. 123 does not require the application of the fair value
method and allows the continuance of the current accounting method, which
requires accounting for stock-based compensation awards at their intrinsic
value, if any, as of the measurement date. The accounting and disclosure
requirements of SFAS No. 123 are effective for financial statements at various
dates beginning after December 15, 1995. The Company has elected not to adopt
the fair value accounting provisions of SFAS No. 123.
9. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments." The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is required
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
December 31, 1995
---------------------------
Carrying Estimated
Amount Fair Value
(In thousands)
Assets:
Cash and due from banks $ 6,777 $ 6,777
Federal funds sold 20,690 20,690
Interest-bearing deposits in financial institutions 8,121 8,121
Investment securities available for sale 13,882 13,882
Loans 57,667 59,490
Government guaranteed loans 27,660 28,033
64
December 31, 1995
--------------------
Carrying Estimated
Amount Fair Value
(in thousands)
Liabilities:
Deposits:
Noninterest-bearing $24,005 $24,005
Interest-bearing:
Time deposits 13,015 13,013
Money market and other deposits 87,704 87,704
The fair value of investment securities available for sale is based on quoted
market prices, dealer quotes, and prices obtained from independent pricing
services. The fair value of loans and time deposits is estimated based on
present values using applicable risk-adjusted spreads to the U.S. Treasury curve
to approximate current entry-value interest rates applicable to each category of
such financial instruments.
No adjustment was made to the entry-value interest rates for changes in credit
of performing commercial loans for which there are no known credit concerns.
Management segregates loans in appropriate risk categories. Management believes
that the risk factor embedded in the entry-value interest rates, along with the
general reserves applicable to the performing commercial loan portfolio for
which there are no known credit concerns, result in a fair valuation of such
loans on an entry-value basis. The fair value of nonperforming loans with a
recorded book value of $2,916,000 in 1995 was not estimated because it is not
practicable to reasonably assess the credit adjustment that would be applied in
the marketplace for such loans. In addition, the fair value of commitments is
immaterial to the financial statements as a whole. As required by SFAS No. 107,
demand deposits are shown at their face value.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1995. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date and, therefore, current estimates of
fair value may differ significantly from the amounts presented herein.
10. INTEREST EXPENSE
A summary of interest expense on deposits for the years ended December 31, 1995,
1994 and 1993 is as follows:
1995 1994 1993
Money market savings/NOW account deposits $2,069,000 $2,000,000 $2,054,000
Time deposits under $100,000 205,000 149,000 637,000
Time deposits of $100,000 or more 431,000 256,000 437,000
Savings deposits 27,000 27,000 28,000
---------- ---------- ----------
$2,732,000 $2,432,000 $3,156,000
========== ========== ==========
65
The aggregate amount of time deposits in denominations of $100,000 or more
outstanding as of December 31, 1995 and 1994 was approximately $9,016,000 and
$8,946,000, respectively.
11. OTHER OPERATING EXPENSES
Included in other operating expenses for the years ended December 31, 1995, 1994
and 1993 are the following items:
1995 1994 1993
Professional services $ 424,000 $ 381,000 $ 464,000
FDIC assessment 161,000 339,000 354,000
Data processing fees 225,000 281,000 248,000
Litigation 150,000
General insurance 134,000 126,000 104,000
Directors' fees 105,000 87,000 103,000
Equipment expense 136,000 83,000 102,000
Other 764,000 936,000 714,000
---------- ---------- ----------
Total $1,949,000 $2,233,000 $2,239,000
========== ========== ==========
12. TRANSCORP RELATIONSHIP AND RELATED PARTY TRANSACTIONS
Transcorp Pension Services, Inc. ("Transcorp"), a corporate customer of the
Bank, is an administrator of self-directed individual retirement account and
simplified employee pension retirement plans for which the Bank provides
custodial and other services. Deposits of custodial clients of the plans
Transcorp administers represent approximately 57% and 63% of the Bank's total
deposits as of December 31, 1995 and 1994, respectively. The deposit and
service relationships with Transcorp are governed by an agreement that requires,
among other things, not less than a 30-day prior notice of intent by either
party to terminate the relationships and withdrawal of the deposited amount over
a two-year period. For the years ended December 31, 1995, 1994 and 1993, the
Bank paid interest of $1,717,000, $1,733,000 and $1,727,000, respectively, on
deposits of Transcorp custodial clients, and paid $1,093,000, $1,105,000 and
$1,054,000, respectively, in administrative fees to Transcorp on behalf of its
custodial clients.
In 1992 the Bank entered into an agreement with a director under which the Bank
receives management and consulting services for properties. Total payments in
1995, 1994 and 1993 to the director under the agreement were $4,000, $71,000 and
$38,000, respectively. In the opinion of the Bank, the terms of the agreement
are no less favorable to the Bank than could have been obtained in a similar
transaction with a person unaffiliated with the Bank.
As of December 31, 1995 and 1994, deposits from directors, officers and their
affiliates amounted to $6,948,000 and $7,060,000, respectively.
66
13. FINANCIAL INFORMATION REGARDING FIRST REGIONAL BANCORP
As of December 31, 1995 and 1994, the Company's investment in the Bank was
recorded on the equity method at $12,205,000 and $10,034,000, respectively. The
Company's cash balance held in the Bank was $34,000 and $54,000 as of December
31, 1995 and 1994, respectively. There were no other significant assets or
liabilities recorded on the Company's balance sheets. The Company's significant
operations consist solely of the recognition of its equity in the income or loss
of the Bank. There were no dividends paid by the Bank to the Company in 1995,
1994 or 1993.
Federal law restricts the Bank from extending credit to the Company since any
such extensions of credit are subject to strict collateral requirements.
* * * * * *
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INDEX TO EXHIBITS
-----------------
Exhibit No.
- -----------
3.1 Articles of Incorporation, as amended (filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-14, File No. 2-75140 filed December
2, 1981 and incorporated herein). Certificate of Chairman and Chief Executive
Officer and Assistant Secretary evidencing amendment of Articles of
Incorporation by written consent of shareholders on November 24, 1987 and filed
with the Secretary of State of the State of California on December 7, 1987
(filed as Exhibit 3.1 to the Company's Annual Statement on Form 10-K for the
year ended December 31, 1987 and incorporated herein). Certificate of Chairman
and Chief Executive Officer and Assistant Secretary evidencing amendment of
Articles of Incorporation adopted at Annual Shareholders Meeting on May 19, 1988
and filed with the Secretary of State of the State of California (filed as
Exhibit 3.1 to the Company's Annual Statement on Form 10-K for the year ended
December 31, 1988 and incorporated herein).
3.2 Bylaws, as amended (filed as Exhibit 3(b) to the Company's
Registration Statement on Form 10, File No. 0-10232 filed in March, 1982 and
incorporated herein). Certificate of Assistant Secretary evidencing amendment
adopted at Annual Shareholders Meeting on May 16, 1985 (filed as Exhibit 3.2 to
the Company's Annual Statement on Form 10-K for the year ended December 31, 1985
and incorporated herein).
10.1 1982 Stock Option Plan and Agreement, as amended (filed as Exhibit
10.1 to Company's Annual Statement on Form 10-K for the year ended December 31,
1982 and incorporated herein).
10.2 1991 Stock Option Plan and Agreement (filed as Exhibit 10.4 to
Company's Annual Statement on Form 10-K for the year ended December 31, 1991 and
incorporated herein).
10.3 Lease for ground and eighth floor premises at 1801 Century Park East,
Los Angeles, California (filed as Exhibit 10.3 to Company's Annual Statement on
Form 10-K for the year ended December 31, 1993 and incorporated herein).
11 Statement regarding computation of per share earnings (see Note 1 of
the Notes to Consolidated Financial Statements at page 55 of this report on Form
10-K)
22 Subsidiary of Registrant
68