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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
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, 1997 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
--------------------------
(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
----- -----
Aggregate market value of Common Stock held by non-affiliates as of March
20, 1998: $12,570,714
Number of shares of Common Stock outstanding at March 20, 1998: 2,451,631.
Documents incorporated by reference and parts of Form 10-K into which
incorporated:
Portions of Proxy Statement for 1998 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)
2
FORM 10-K
TABLE OF CONTENTS AND
CROSS REFERENCE SHEET
Page
in Incorporation
10-K by Reference
---- ------------
PART I
Item 1. Business............................... 4
Item 2. Properties............................. 31
Item 3. Legal Proceedings...................... 31
Item 4. Submission of Matters to a Vote of
Securities Holders..................... 31
PART II
Item 5. Market for Registrant's Common Stock
and Related Stockholder Matters........ 32
Item 6. Selected Financial Data................ 34
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations............................. 35
Item 8. Financial Statements and Supplement-
ary Data............................... 43
Item 9. Disagreements on Accounting and
Financial Disclosure................... 43
PART III
Item 10. Directors and Executive Officers of.... 1998 Proxy
the Registrant......................... 44 Statement
Item 11. Executive Compensation................. 44 1998 Proxy
Statement
Item 12. Security Ownership of Certain.......... 1998 Proxy
Beneficial Owners and Management....... 44 Statement
Item 13. Certain Relationships and Related...... 1998 Proxy
Transactions........................... 44 Statement
3
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K.... 45
SIGNATURES.......................................... 46
INDEX TO FINANCIAL STATEMENTS....................... 47
INDEX TO EXHIBITS................................... 72
4
PART I
Item 1. Business
- -----------------
Business of First Regional Bancorp
- ----------------------------------
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.
Certain matters discussed in this Annual Report on Form 10-K may constitute
forward-looking statements within the meaning of the Private Securities Reform
Act of 1995 (the "Reform Act") and as such may involve risks and uncertainties.
These forward-loking statements relate to, among other things, expectations of
the business environment in which the Company and the Bank operate, projections
of future performance, perceived opportunities in the market, and statements
regarding the Company's and/or the Bank's mission and vision. The Company's
and/or the Bank's actual results, performance, or achievements may differ
significantly from the results, performance, or achievements expressed or
implied in such forward-looking statements. The following discusses certain
factors which may affect the Company's and/or the Bank's financial results and
operations and should be considered in evaluating the Company and/or the Bank.
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 also has
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Regional Offices located in the California cities of Irvine and Glendale. These
offices are presently established as loan production offices, but it is the
intent of the Bank to convert these facilities to full branch offices as soon as
sufficient business has been obtained to make this conversion advisable. The
Bank also has a Merchant Services division located in Agoura Hills, California.
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 specializing in construction lending for
moderate-size commercial and residential projects. The Bank also offers
commercial loans for commercial and industrial borrowers, which includes
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's Merchant Services division offers
credit card deposit and clearing services for retailers and other businesses
that accept credit cards. The Bank does not currently offer trust services, but
it does make trust services available to its customers through a correspondent
bank. At March 20, 1998 the Bank had 39 equivalent full-time employees.
Competition
- -----------
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.
6
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, 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.
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
7
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.
Supervision and Regulation
- --------------------------
The Company
-----------
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
8
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 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, 1997 was
18.00%. The acceptable capital ratio is 8 percent.
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
9
reports with the California Commissioner of Financial Institutions (the
"Commissioner"). Regulations have not yet been proposed or adopted or steps
otherwise taken to implement the Commissioner's powers under this statute.
The Financial Accounting Standards Board ("FASB") has 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' 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.
On January 1, 1996 the Company adopted SFAS 121, "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of." This
statement requires that long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used, or disposed of, be
reviewed for impairment based on the fair value of the asset. Furthermore, this
statement requires that certain long-lived assets and identifiable intangibles
to be disposed of be reported at the lower of carrying amount or fair value less
cost to sell. The Company has determined that the impact of SFAS 121 on its
operations and financial position is not material for the year ended December
31, 1996.
10
In June, 1996 the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities, and is applied
prospectively to financial statements for fiscal years beginning after December
31, 1996. In 1996, the FASB also issued SFAS 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125," which defers for one year
the effective date of certain provisions within SFAS 125. The Company does not
believe the impact on its operations and financial position will be material
upon adoption of SFAS 125 or SFAS 127.
SFAS 123, "Accounting for Stock-Based Compensation," encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans based on the estimated fair value of the stock options or
other awards granted. The Company has chosen to continue to account for stock-
based compensation using the intrinsic value method. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of grant over the amount an employee
must pay to acquire the stock.
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings
per Share." Accordingly, basic earnings per share are computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding during each year. The computation of diluted earnings per
share also considers the number of shares issuable upon the assumed exercise of
outstanding common stock options.
The Bank
--------
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 Department of
Financial Institutions 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
11
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."
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
12
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 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
13
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.
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.
14
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.
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.
15
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.
16
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,
1997 1996
---- ----
(Dollars in Thousands)
Assets
Cash and Due From Banks....... $ 5,952 $ 3,910
Time Deposits with Other
Financial Institutions........ 4,731 4,727
Investment Securities......... 21,748 20,071
Funds Sold.................... 28,761 23,143
Net Loans..................... 87,594 84,692
Other Assets.................. 3,365 3,619
--------- ---------
Total....................... $ 152,151 $ 140,162
========= =========
Liabilities & Shareholders' Equity
Deposits:
Demand (non-interest
bearing).................... $ 25,851 $ 23,210
Savings..................... 1,260 1,145
Money Market Accounts....... 88,043 84,044
Time........................ 20,377 16,978
--------- ---------
Total Deposits......... $ 135,531 $ 125,377
Securities Sold Under
Agreements to Repurchase........... (13) (27)
Other Liabilities.................. 1,721 1,670
--------- --------
Total Liabilities........... 137,239 127,020
--------- --------
Shareholders' Equity............... 14,912 13,142
--------- --------
Total....................... $ 152,151 $ 140,162
========= ========
17
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,
1997 1996
--------------------------- ----------------------------
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) $ 89,526 $ 8,742 9.8% $ 86,961 $ 8,509 9.8%
Investment
Securities 21,748 1,277 5.9% 20,071 1,455 7.2%
Funds Sold 28,761 1,569 5.5% 23,143 1,219 5.3%
Time Dep-
osits With
Other Fin-
ancial In-
stitutions 4,731 280 5.9% 4,727 280 5.9%
-------- ------- -------- -------
Total
Interest
Earning
Assets $144,766 $11,868 8.2% $134,902 $11,463 8.5%
======== ======= ======== =======
Interest
Bearing
Liabilities:
Savings
deposits $ 1,260 $ 30 2.4% $ 1,145 $ 27 2.4%
Money
Market
Accounts 88,043 2,228 2.5% 84,044 2,105 2.5%
Time 20,377 1,027 5.0% 16,978 838 4.9%
18
1997 1996
--------------------------- ----------------------------
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 $ (13) $ 0 0.0% $ (27) $ 4 5.5%
--------- ------- --------- -------
Total
interest
bearing
liabili-
ties $109,667 $ 3,285 3.0% $102,140 $ 2,974 2.9%
======== ======= ======== =======
__________
(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
$1,932,000 in 1997 and $2,269,000 in 1996.
(2) Includes loan fees of $602,000 in 1997 and $505,000 in 1996.
19
The following table shows the net interest earnings and the net yield on
average interest earning assets:
1997 1996
---- ----
(Dollars in Thousands)
Total interest income (1).................. $ 11,868 $ 11,463
Total interest expense..................... 3,285 2,974
------- -------
Net interest earnings...................... $ 8,583 $ 8,489
======= =======
Average interest earning assets............ $ 144,766 $ 134,902
Net yield on average interest earning
assets..................................... 5.9% 6.3%
__________
(1) Includes loan fees of $602,000 in 1997 and $505,000 in 1996.
20
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)
1997 over 1996 1996 over 1995
----------------------------- ----------------------------
Volume Rate Net Volume Rate Net
(Dollars in Thousands)
Interest Income(1)
- ------------------
Loans (2) $ 250 $ (17) $ 233 $ 442 $ (360) $ 82
Investment
securities 140 (318) (178) 694 170 864
Funds sold 305 45 350 (137) (113) (250)
Interest on time
deposits with
other financial
institutions 0 0 0 (137) (16) (153)
------- -------- ------- ------- -------- -------
Total
Interest
Earning
Assets $ 695 $ (290) $ 405 $ 862 $ (319) $ 543
======= ========= ======== ======= ======== =======
Interest Expense (1)
- --------------------
Savings $ 3 $ 0 $ 3 $ 0 $ 0 $ 0
Money market 101 22 123 14 22 36
Time 171 18 189 179 23 202
Securities
sold under
agreements to
repurchase (1) (3) (4) (6) (22) (28)
-------- -------- -------- ------- -------- -------
Total interest
bearing liab-
ilities $ 274 $ 37 $ 311 $ 187 $ 23 $ 210
======= ======= ======= ====== ======= =======
__________
(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
21
to the relationship of the absolute dollar amounts of the change in each.
(2) Includes loan fees of $602,000 in 1997 and $505,000 in 1996.
22
Investment Securities
- ---------------------
The following table shows the fair value of the investment securities
portfolio at December 31, 1997 and 1996:
December 31,
1997 1996
------ -------
(Dollars in Thousands)
U.S. Treasury Securities................... $ 0 $ 0
Obligations of U.S. Government
Agencies and Corporations.................. 18,402 26,792
Commercial Paper........................... 8,004 0
Other Securities........................... 25 25
------- -------
Total................................. $26,431 $26,817
======= =======
The maturity schedule and weighted average yields of investment securities at
December 31, 1997 is as follows:
Average
Amount Yield
------ -------
(Dollars in Thousands)
U.S. Agency Securities
- ----------------------
One year or less................... $18,402 5.65%
Over one year...................... 0 0.00%
-------
Category total $18,402 5.65%
Commercial Paper
- ----------------
One year or less................... $ 8,004 5.71%
Over one year...................... 0 0.00%
-------
Category total $ 8,004 5.71%
Other Securities
- ----------------
Over one year through five years... 25 7.50%
-------
Category total $ 25 7.50%
Total Investment Portfolio
- --------------------------
One year or less................... $26,406 5.67%
23
Average
Amount Yield
------ -------
(Dollars in Thousands)
Over one year through five years..... 25 7.50%
Over five years...................... 0 0.00%
-------
Total $26,431 5.67%
=======
Loan Portfolio
- --------------
The loan portfolio consisted of the following at December 31, 1997 and 1996:
1997 1996
---- ----
(Dollars in Thousands)
Commercial loans........................... $15,365 $10,564
Real estate construction loans............. 4,982 11,010
Real estate loans.......................... 38,195 44,250
Bankers acceptances........................ 21,727 16,733
Other loans................................ 420 398
------- --------
Total loans..................... $80,689 $82,955
Less - Allowances for loan losses.......... 2,400 2,300
- Deferred loan fees.................. 511 551
------- --------
Net loans............................. $77,778 $80,104
======= ========
Government guaranteed loans................ $ 0 $ 2,665
======= ========
Government guaranteed loans held for sale.. $ 942 $ 4,833
======= ========
24
Loan Maturities and Interest Rates
- ----------------------------------
The following table shows the amounts of total loans outstanding as of
December 31, 1997, 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............................ $28,719
Interest rates are fixed or
predetermined......................... 23,110
After one year but within five years:
Interest rates are floating or
adjustable............................ 16,501
Interest rates are fixed or
predetermined......................... 0
After five years but within ten years:
Interest rates are floating or
adjustable............................ 9,374
Interest rates are fixed or
predetermined......................... 0
After ten years or more:
Interest rates are floating or
adjustable............................ 3,927
Interest rates are fixed or
predetermined......................... 0
--------
Total................................... $ 81,631
========
25
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, 1997 and 1996:
December 31,
1997 1996
---- ----
(Dollars in Thousands)
Non-accrual loans
Commercial.................... $100 $ 242
Real estate loans............. 238 0
Government guaranteed loans... 0 0
Bankers acceptances........... 0 0
Other loans................... 0 0
---- -----
Total......................... $338 $ 242
==== =====
Accruing loans past due more than 90 days
Commercial.................... $ 0 $ 110
Real estate loans............. 0 0
Government guaranteed loans... 193 2,145
Bankers acceptances........... 0 0
Other loans................... 0 0
---- ------
Total......................... $193 $2,255
==== ======
Except as may have been included in the above table, at December 31, 1997,
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, 1997, 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
26
of $86,000 in 1997 had the loans been current in accordance with their original
terms.
27
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 1997 and 1996:
1997 1996
---- ----
(Dollars in Thousands)
Amount of loans outstanding at end of
period..................................... $ 81,631 $ 90,453
======== ========
Average amount of loans outstanding
before allowance for loan losses........... $ 89,526 $ 86,961
======== ========
Balance of allowance for loan losses at
beginning of period........................ $2,300 $2,000
Loans charged off:
Commercial............................ 529 0
Real estate........................... 190 223
Government guaranteed loans........... 0 0
Bankers acceptances................... 0 0
Other................................. 0 7
------- -------
Total loans charged off.......... 719 230
Recoveries of loans previously charged off:
Commercial............................ 279 116
Real estate........................... 0 414
Government guaranteed loans........... 0 0
Bankers acceptances................... 0 0
Other................................. 0 0
------- -------
Total loan recoveries............ 279 530
------- -------
Net loans charged off...................... 440 (300)
------- -------
Provisions charged to operating expense.... 540 0
------- -------
Balance of allowance for possible loan
losses at end of period.................... $ 2,400 $ 2,300
======= =======
The ratio of net loans charged off to average loans outstanding was 0.5% and
(0.3%) for the two years ended December 31, 1997 and 1996, 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
28
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.
1997 1996
-------- ---------
Allowance Ratio of Allowance Ratio of
for loans to for loans to
possible total possible total
loan losses loans loan losses loans
----------- -------- ----------- --------
Commercial loans...... $ 408 19% $ 336 12%
Real estate loans..... 754 54% 1,473 61%
Gov't guaranteed...... 0 1% 0 8%
Bankers acceptances 0 25% 0 18%
Other loans........... 5 1% 5 1%
Unallocated........... 1,233 0% 486 0%
------ ---- ------ ----
Total............. $2,400 100% $2,300 100%
====== ==== ====== ====
29
Deposits
- --------
The average amounts of deposits for the periods indicated are summarized
below.
1997 1996
---------- ---------
(Dollars in Thousands)
Demand Deposits........................ $ 25,851 $ 23,210
Savings deposits, money market and
time certificates of deposit of less
than $100,000.......................... 94,627 89,626
Time certificates of deposit of
$100,000 or more....................... 15,053 12,542
-------- --------
Total.......................... $135,531 $125,378
======== ========
The maturity schedule of time certificates of deposit of $100,000 or more at
December 31, 1997 is as follows:
December 31, 1997
-----------------
(Dollars in Thousands)
3 months or less.......................... $10,741
Over 3 through 6 months................... 5,324
Over 6 through 12 months.................. 492
Over 12 months............................ 115
-------
Total................................ $16,672
=======
30
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.
1997 1996
----- -----
Return on assets......... 0.8% 1.5%
Return on equity......... 8.1% 15.5%
Dividend payment ratio... 0.0% 0.0%
Equity to assets ratio... 9.8% 9.4%
31
Item 2. Properties
- -------------------
The Bank's head office is 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 was 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.
The Bank's Merchant Services division is located at 28310 Roadside Drive,
Suite 152, Agoura Hills, California. The premises consist of approximately
1,040 square feet which are provided under a lease which expires on July 14,
2000, and the Bank has the option to extend the lease for an additional two year
period. The total monthly rental is $1,196, subject to annual adjustments for
increases in the consumer price index and various operating costs. Should the
Bank elect to exercise its option to extend the lease, the monthly rental will
be set at the then-prevailing rate for comparable buildings in the Agoura Hills
area.
The Bank also subleases an office in an executive suite facility to house
its Orange County Regional Office. The office is located at 2030 Main Street,
Suite 1300, Irvine, California, and consists of approximately 185 square feet.
The premises are subleased on a month-to-month basis at a monthly rental of $925
plus a proportionate share of the building's operating costs.
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 1997, no matters were submitted to a vote of
the Company's shareholders.
32
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 Nasdaq Stock Market
under the trading symbol FRGB. Quotations are carried either daily or weekly by
newspapers throughout the nation including The Wall Street Journal and the Los
Angeles Times. The following table summarizes the quotations reported by Nasdaq
of First Regional Bancorp's common stock.
1997 1998
---- ----
High Low High Low
------ ----- ----- -----
1st Quarter 7 1/2 5 3/4 6 4
2nd Quarter 7 6 6 4 1/2
3rd Quarter 9 3/4 5 5/8 6 1/4 4 3/4
4th Quarter 10 1/2 7 1/4 6 5/8 5 5/8
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 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.
33
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
paid dividends to the Company of $230,000 in 1997; no dividends were paid to the
Company in 1996 or 1995.
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, 1996 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 California Commissioner of Financial Institutions, without regard to
retained earnings or net income for its last three fiscal years. If the
Commissioner of Financial Institutions 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 circumstances
be such an unsafe or unsound practice.
34
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:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Total assets $162,445 $152,449 $137,810 $124,287 $130,412
Net loans 78,720 87,602 85,327 76,581 83,119
Investment securities 33,057 32,059 22,003 18,434 7,529
Funds sold 38,390 22,780 20,690 21,300 19,470
Total deposits 145,096 136,755 124,724 113,666 120,664
Shareholders' equity 15,423 14,316 12,259 10,222 9,226
Book value per share
outstanding $ 6.38 $ 5.95 $ 5.11 $ 4.26 $ 3.85
The Company's operating results are summarized as follows for the twelve-
month periods ending December 31 of each of the following years:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands except for per share)
Interest income $11,868 $11,463 $10,920 $ 9,040 $ 9,872
Interest expense 3,285 2,974 2,764 2,432 3,176
------- ------- ------- ------- -------
Net interest income 8,583 8,489 8,156 6,608 6,696
Provision for loan losses 540 0 678 250 3,925
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 8,043 8,489 7,478 6,358 2,771
Other income 695 700 447 807 417
Other expense 6,645 6,320 5,644 6,162 7,862
------- ------- ------- ------- -------
35
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands except for per share)
Income (loss) before taxes and
effects of accounting change 2,093 2,869 2,281 1,003 (4,674)
Provision (credit) for income
taxes 885 833 254 2 (417)
------- ------- ------- ------- --------
Income (loss) before effects of
accounting change 1,208 2,036 2,027 1,001 (4,257)
Effects of accounting change 0 0 0 0 98
------- ------- ------- ------- -------
Net income (loss) $ 1,208 $ 2,036 $ 2,027 $ 1,001 $(4,159)
Basic earnings (loss) per $ 0.50 $ 0.85 $ 0.85 $ 0.42 $ (1.73)
common share outstanding
Cash dividends declared per
share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
The number of shares outstanding was 2,416,000 in 1997, 2,406,000 in 1996,
and 2,398,800 for 1995, 1994, and 1993.
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 achieved continued profitability in 1997, although the level of
net income was below the results of recent years. Results for 1997 were
adversely impacted by the absence of tax benefits and gains on assets sales
which positively affected net income in 1996. The 1997 results also reflect
essentially flat revenues despite higher levels of earning assets as a result of
changes in asset composition and competitive pressures during the year. The
Company continues to benefit from strategic decisions made in 1995, when the
Company initiated a program of prudent, managed growth; this program resulted in
higher levels of earning assets and interest revenue in 1995, 1996, and 1997.
The Company's profitability was also in part a reflection of the continued low
levels of nonperforming loans, other real estate owned, and other nonearning
assets. The low levels of problem assets continue to result in higher revenues
due to additional funds being available for investment, and also eliminated the
need for large loan loss provisions or real estate writedowns.
36
Average assets in 1997 were $152,151,000, compared to $140,162,000 in 1996
and $127,691,000 in 1995. As was the case in 1996 and 1995, the Company's asset
growth in 1997 was funded by an increase in deposits, as well as by the
retention of earnings for the year. The Company generated net income of
$1,208,000 in 1997, compared to a profit of $2,036,000 in 1996 and a profit of
$2,027,000 in 1995.
Net Revenue From Earning Assets
-------------------------------
Net revenue from earning assets is the excess of interest income earned on
interest-earning assets over 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. As was the case during 1996, in 1997
the Company's continued growth efforts resulted in an increase in interest
earning assets, including loans. In both years, however, the growth in loans
was less than the growth in deposits, so much of the increase in funds flowed
into the lower-yielding categories of liquid assets, principally funds sold. In
1995, due to the sluggish economy in the Company's Southern California market
area, 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 once again the Company's
earning asset growth was concentrated in lower-yielding asset categories. In
contrast to 1996, when the growth in deposits was concentrated in time deposits,
in 1997 all categories of deposits experienced growth. As deposit interest
rates were essentially stable in 1997 as they were during 1996, the higher
deposit levels led to slight increases in interest expense in both 1997 and 1996
compared to the prior 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 basically
stable during this year as well, the result was only a slight increase in
interest expense for 1995.
Other Operating Income
----------------------
Other operating income remained generally stable in 1997 compared to the
prior year after rising substantially in 1996. Other operating income for 1997
was $695,000, versus $700,000 in 1996, up from $447,000 for the year 1995. The
1997 figure included gains on sales of land of $179,000 and gains on sales of
loans of $136,000. By contrast, the increase in 1996 was the result of the
receipt of profits of $303,000 from the sale of a large portion of a portfolio
of government guaranteed loans. There were no sales of loans, and thus no gains
on sales, in 1995. Customer service fees continued their decline of the past
several years.
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 appears to be giving way to full
recovery, its impact on the payment performance of the Bank's borrowers
37
has not been a significant factor in recent years. More important, the Company's
emphasis on maintaining high asset quality continued in 1997, 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 $338,000 at the end of 1997, up slightly from $302,000 on December
31, 1996, and compared to $1,195,000 at the end of 1995. Management believes the
allowance for possible loan losses as of December 31, 1997 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, in 1997 provisions of $540,000 were made to
the reserve for loan losses, $719,000 in loans were charged off, and $279,000 in
loans previously charged off were recovered. By way of comparison, during 1996
no provisions were made to the allowance for loan losses, a total of $230,000 in
loans were charged off, and $530,000 in previously charged off loans were
recovered. In 1995, provisions of $678,000 were made to the allowance for loan
losses, a total of $219,000 in loans were charged off, and $151,000 in
previously charged off loans were recovered. These transactions brought the
balance of the allowance for possible loan losses at the end of 1997 to
$2,400,000 (or 2.9% of total loans), compared to $2,300,000 (or 2.5% of total
loans) at December 31, 1996, and compared to $2,000,000 (or 2.3% of total loans)
at the end of 1995.
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. In 1997, the
Company identified loans having an aggregate average balance of $1,783,000 which
it concluded were impaired under SFAS No. 114. During 1996, the Company had
identified loans having an aggregate average balance of $1,252,000 which it
concluded were impaired. In contrast, 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 1997, 1996, or 1995.
Operating Expenses
------------------
Total operating expenses rose in 1997, to $6,645,000 from $6,320,000 in
1996 and $5,644,000 in 1995. While the total expense figures have fluctuated
38
over time, most components continue to be moderated by the effects of an ongoing
program of expense control.
Salaries and related benefits expense increased again in 1997, rising to
$2,915,000 from a 1996 total of $2,566,000 and from $2,195,000 in 1995. The
increase in this expense category principally reflects the increases in staffing
which began in 1995 as part of the Company's growth initiative and which have
continued through 1997 in connection with the establishment of new offices and
lines of business. Occupancy expense rose slightly in 1997, to $393,000 from
$374,000 in 1996 and a 1995 total of $348,000 due to operating cost pass-
throughs on the premises occupied by the Company. Real estate expense fell to
just $3,000 in 1997 from $380,000 in 1996 after a 1995 level of $59,000. The
1996 total reflects a charitable donation by the Bank of its only parcel of
other real estate owned; this expense was essentially offset by the tax benefits
resulting from the donation. Custodial and other services to customers declined
again in 1997 as they did in both 1996 and 1995, standing at $987,000 for the
year after $1,089,000 for 1996 versus $1,093,000 in 1995. 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 rose in 1997, reversing the pattern of modest
declines which had prevailed in prior years. Other expenses totalled $2,347,000
in 1997 compared to $1,911,000 in 1996, which was down from $1,949,000 in 1995.
Other expenses in 1997 include an increase in legal fees relating to collection
of non-performing loans and the termination of the Company's deposit
relationship with Transcorp Pension Services; professional services jumped to
$1,119,000 for 1997 after amounting to $467,000 in 1996 and compared to $424,000
in 1995. A more positive factor was the continued low level of premiums for
FDIC insurance, reflecting the banking industry's achievement of full
capitalization of the Bank Insurance Fund as defined by applicable statute.
FDIC premium expense for 1997 was $16,000, after falling to just $2,000 in 1996
from $161,000 in 1995. Most of the remaining categories of other expense
generally remained stable: data processing fees rose slightly in 1997 to
$254,000 compared to $242,000 in 1996, after falling to $225,000 in 1995;
general insurance was unchanged in 1997, at $108,000 for both 1997 and 1996
after rising to $134,000 in 1995; directors fees fell again, to just $46,000 in
1997 from $59,000 in 1996 from $105,000 in 1995 due to the elimination of
directors fees for directors who are also officers of the Bank; and other
expenses, which fell to $608,000 in 1997 after rising to $946,000 in 1996 from
$764,000 in 1995 principally due to higher costs of services provided to
customers and losses of $65,000 incurred on sales of investment securities.
Taxes and Effects of Accounting Changes
---------------------------------------
The combined effects of the activity described above resulted in Income
Before Taxes of $2,093,000, down sharply from $2,869,000 in 1996, and somewhat
lower than the $2,281,000 for 1995. In 1997, the Company recorded tax provisions
of $885,000. 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
39
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. The remaining balance of the reserve was
eliminated in 1996, and this much lower level of reserve reversals led to net
tax provisions of $833,000 in 1996. As a result, the Company generated Net
Income of $1,208,000 in 1997, compared to $2,036,000 in 1996, and versus Net
Income of $2,027,000 in 1995.
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 $81,294,000 and $61,338,000 (or 56.0% and 44.9% of total deposits) at
December 31, 1997 and 1996, respectively. The ratio of net loans to deposits was
54.3% and 64.1% at the end of 1997 and 1996, respectively.
Deposits of custodial clients of retirement plans administered by Transcorp
Pension Services, a corporate customer of the Bank, represented approximately
39% and 54% of the Bank's total deposits as of December 31, 1997 and 1996,
respectively; in recognition of this the Bank has maintained a large portion of
its assets in liquid form since the inception of the Transcorp relationship. In
1997 Transcorp merged with an affiliated company which already possessed
custodial powers, and for this reason Transcorp sought to terminate its deposit
relationship with the Bank. The Bank and Transcorp ultimately agreed to
terminate the relationship under a settlement agreement which, among other
things, provided for the transfer of the remaining deposits over an 18-month
period beginning in March, 1998 and continuing through September, 1999. Because
the Bank has invested the Transcorp deposit in highly liquid assets, it
anticipates no difficulty in accommodating the deposit withdrawals over the 18-
month transfer period.
The Bank's investment portfolio continues to be composed of high quality,
low risk securities, principally U.S. Agency securities. In 1997, the Bank
generated net gains of $23,000 on sales of securities; losses on sales of
securities of $65,000 were incurred in 1996. By way of comparison, gains of
$11,000 on sales of securities were realized in 1995. As of December 31, 1997
the Bank's investment portfolio contained gross unrealized gains of $20,000 and
gross unrealized losses of $7,000, for net unrealized gains of $13,000; at
December 31, 1996 the Bank's investment portfolio contained gross unrealized
gains of $82,000 and gross unrealized losses of $43,000, for net unrealized
gains of $39,000. The Company adopted SFAS No. 115 in 1994, with the result that
the net unrealized gains and losses gave rise to a $9,000 (net of taxes)
increase in shareholders' equity as of December 31, 1997, and a $26,000 increase
(net of taxes) in the Company's shareholders' equity as of December 31, 1996.
Because the Company's holdings of securities are intended to serve as a source
of liquidity should conditions warrant, the securities have been classified by
the Company as "available for sale," and thus the unrealized gains and losses
had no effect on the Company's income statement.
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
40
asset/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
but less but less but less Non-interest
Floating Less than than than than Five years earning
Category Rate one month six months one year five years or more or bearing Total
======================= ======== ========== ========== =========== =========== ========== ============= =======
Fed funds sold 38,390 0 0 0 0 0 0 38,390
Time deposits with
other banks 0 396 6,133 0 97 0 0 6,626
Investment securities 0 1,949 24,457 0 25 0 0 26,431
------ ------ ------ ------ ------ ------ ------- -------
Subtotal 38,390 2,345 30,590 0 122 0 0 71,447
Loans 55,610 999 21,297 814 0 0 0 78,720
------ ------ ------ ------ ------ ------ ------- -------
Total earning assets 94,000 3,344 51,887 814 122 0 0 150,167
Cash and due from banks 0 0 0 0 0 0 9,847 9,847
Premises and equipment 0 0 0 0 0 0 698 698
Other real estate owned 0 0 0 0 0 0 0 0
Other assets 0 0 0 0 0 0 1,733 1,733
------ ------ ------ ------ ------ ------ ------- -------
Total non-earning
assets 0 0 0 0 0 0 12,278 12,278
------ ------ ------ ------ ------ ------ ------- -------
Total assets 94,000 3,344 51,887 814 122 0 12,278 162,445
Funds purchased 6 0 0 0 0 0 0 6
Repurchase agreements 0 0 0 0 0 0 0 0
------ ------ ------ ------ ------ ------ ------- -------
Subtotal 6 0 0 0 0 0 0 6
Savings deposits 6,111 0 0 0 0 0 0 6,111
Money market deposits 72,959 0 0 0 0 0 0 72,959
Time deposits 0 13,029 16,076 892 209 0 0 30,206
------ ------ ------ ------ ------ ------ ------- -------
Total bearing
liabilities 79,076 13,029 16,076 892 209 0 0 109,282
Demand deposits 0 0 0 0 0 0 35,820 35,820
Other liabilities 0 0 0 0 0 0 1,920 1,920
Equity capital 0 0 0 0 0 0 15,423 15,423
------ ------ ------ ------ ------ ------ ------- -------
Total non-bearing
liabilities 0 0 0 0 0 0 53,163 53,163
------ ------ ------ ------ ------ ------ ------- -------
Total liabilities 79,076 13,029 16,076 892 209 0 53,163 162,445
GAP 14,924 (9,685) 35,811 (78) (87) 0 (40,885) 0
Cumulative GAP 14,924 5,239 41,050 40,972 40,885 40,885 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
41
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 $15,423,000 and $14,316,000 as of December 31,
1997 and 1996, respectively. The Company's capital ratios for those dates in
comparison with regulatory capital requirements were as follows:
12-31-97 12-31-96
-------- --------
Leverage Ratio (Tier I Capital
to Assets:
First Regional Bancorp 9.50% 9.71%
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:
12-31-97 12-31-96
-------- --------
Tier I Capital to Assets:
First Regional Bancorp 16.70% 16.40%
Regulatory requirement 4.00% 4.00%
Tier I + Tier II Capital to Assets:
First Regional Bancorp 18.00% 17.70%
Regulatory requirement 8.00% 8.00%
The Company believes that it will continue to meet all applicable capital
standards.
Year 2000 Issues
----------------
The approach of the year 2000 presents potential problems to businesses,
such as the Company, which utilize computers. Many computer systems in use
today, particularly older computers and computer programs, may not be able to
properly interpret dates after December 31, 1999 because they use only two
digits to indicate the year in a date. For example, the year 2000 could be
interpreted as the year 1900 by such systems. As a result, the systems could
produce inaccurate data, or not function at all.
In anticipation of this potential problem, the Company has developed a
comprehensive plan to ensure that all of its systems are able to properly deal
with the year 2000. The Company is currently assessing the ability of each
system to properly perform, and is implementing corrective measures when
deficiencies are found. Thus far, relatively few required corrections have
42
been identified, and most of these situations would have been corrected in the
normal course of business as part of the routine ongoing maintenance and
updating of the Company's systems. At this point, the Company anticipates no
difficulty in achieving full year 2000 capability. Further, while it is
impossible to determine the costs of achieving full year 2000 capability, at
this point those costs are not expected to be material.
As a lending institution, the Bank is also exposed to potential risk if
borrowers suffer year 2000-related difficulties and are unable to repay their
loans. The Bank is discussing the year 2000 issue with borrowers as part of the
loan granting or renewal process. At this time, it is impossible to determine
what impact, if any, the year 2000 will have on the loan payment performance of
the Bank's borrowers. Thus far, however, none of the Bank's borrowers have
reported the expectation of material adverse impacts as a result of the year
2000.
Inflation
---------
The impact of inflation on the Company differs significantly from other
industries, since virtually all of its assets and liabilities are monetary.
During periods of 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.
43
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.
44
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.
45
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
1997.
46
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
Chief Executive Officer
Date: March 27, 1998
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 27, 1998
- --------------------------- of the Board and Chief
Jack A. Sweeney Executive Officer
/s/ Mark Rubin Director, Vice Chairman March 27, 1998
- --------------------------- of the Board, and
Mark Rubin President
/s/ H. Anthony Gartshore Director March 27, 1998
- ---------------------------
H. Anthony Gartshore
/s/ Gary M. Horgan Director March 27, 1998
- ------------------------
Gary M. Horgan
/s/ Alexander S. Lowy Director March 27, 1998
- ------------------------
Alexander S. Lowy
/s/ Frank R. Moothart Director March 27, 1998
- ------------------------
Frank R. Moothart
/s/ Lawrence Sherman Director March 27, 1998
- ------------------------
Lawrence J. Sherman
/s/ Carolyn Z. Nicholson Director March 27, 1998
- ------------------------
Carolyn Zarro Nicholson
/s/ Thomas McCullough Director, Chief March 27, 1998
- ------------------------ Financial Officer and
Thomas E. McCullough Chief Accounting
Officer
47
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Financial Statements Page in Form 10-K
- -------------------- -----------------
First Regional Bancorp and Subsidiary:
Report of Independent Auditors.................. 49
Consolidated Balance Sheets as of
December 31, 1997 and 1996...................... 50
Consolidated Statements of Income for
the years ended December 31, 1997, 1996,
1995............................................ 51
Consolidated Statements of Shareholders'
Equity for the years ended December 31, 1997,
1996, and 1995.................................. 53
Consolidated Statements of Cash Flows for
the years ended December 31, 1997, 1996,
and 1995........................................ 54
Notes to Consolidated Financial Statements...... 56
First Regional Bancorp (Parent Company):
Note 15 to Consolidated Financial
Statements...................................... 71
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.
FIRST REGIONAL BANCORP
AND SUBSIDIARY
Consolidated Financial Statements as of December 31, 1997 and 1996 and for Each
of the Three Years in the Period Ended December 31, 1997 and Independent
Auditors' Report.
49
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, 1997 and 1996, and the
related consolidated statements of earnings, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. 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 audits 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, 1997 and 1996, and the results of their earnings
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 18, 1998
50
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- -----------------------------------------------------------------------------------------------------
ASSETS 1997 1996
Cash and due from banks (Note 6) $ 9,847,000 $ 6,499,000
Federal funds sold 38,390,000 22,780,000
------------ ------------
Cash and cash equivalents 48,237,000 29,279,000
Investment securities available for sale, amortized cost
$26,418,000 and $26,778,000 (Note 2) 26,431,000 26,817,000
Interest-bearing deposits in financial institutions 6,626,000 5,242,000
Loans, net (Note 3) 77,778,000 80,104,000
Government guaranteed loans (Note 3) 2,665,000
Government guaranteed loans, held for sale, at lower of cost
or market (Note 3) 942,000 4,833,000
Premises and equipment, net (Note 4) 698,000 362,000
Accrued interest receivable and other assets (Note 5) 1,106,000 2,524,000
Deferred income tax asset, net (Note 5) 627,000 623,000
------------ ------------
TOTAL $162,445,000 $152,449,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits (Notes 11 and 13):
Noninterest bearing $ 35,820,000 $ 22,516,000
Interest bearing:
Time deposits 30,206,000 24,839,000
Money market deposits 72,959,000 83,956,000
Other 6,111,000 5,444,000
------------ ------------
Total deposits 145,096,000 136,755,000
Accrued interest payable and other liabilities (Note 5) 1,926,000 1,378,000
------------ ------------
Total liabilities 147,022,000 138,133,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 6)
SHAREHOLDERS' EQUITY (Notes 7, 8 and 9):
Common stock, no par value; authorized, 50,000,000 shares;
outstanding, 2,416,000 (1997) and 2,406,000 (1996) shares 11,286,000 11,332,000
Retained earnings 4,128,000 2,958,000
Unrealized gain on securities available for sale, net of tax 9,000 26,000
------------ ------------
Total shareholders' equity 15,423,000 14,316,000
------------ ------------
TOTAL $162,445,000 $152,449,000
============ ============
See notes to consolidated financial statements.
51
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -----------------------------------------------------------------------------------------------
1997 1996 1995
INTEREST INCOME:
Interest on loans $ 8,742,000 $ 8,509,000 $ 8,427,000
Interest on deposits in financial institutions 280,000 280,000 433,000
Interest on federal funds sold 1,569,000 1,219,000 1,469,000
Interest on investment securities 1,277,000 1,455,000 591,000
----------- ----------- -----------
Total interest income 11,868,000 11,463,000 10,920,000
----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits (Notes 11 and 13) 3,285,000 2,970,000 2,732,000
Interest on other borrowings 4,000 32,000
----------- ----------- -----------
Total interest expense 3,285,000 2,974,000 2,764,000
----------- ----------- -----------
NET INTEREST INCOME 8,583,000 8,489,000 8,156,000
PROVISION FOR LOAN LOSSES (Note 3) 540,000 678,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 8,043,000 8,489,000 7,478,000
----------- ----------- -----------
OTHER OPERATING INCOME:
Customer service fees 291,000 361,000 404,000
Other 404,000 339,000 43,000
----------- ----------- -----------
Total operating income 695,000 700,000 447,000
----------- ----------- -----------
OTHER OPERATING EXPENSES:
Salaries and related benefits (Note 6) 2,915,000 2,566,000 2,195,000
Occupancy expenses (Note 4) 393,000 374,000 348,000
Real estate expense, net 3,000 380,000 59,000
Custodial and other service (Note 13) 987,000 1,089,000 1,093,000
Other expenses (Note 12) 2,347,000 1,911,000 1,949,000
----------- ----------- -----------
Total operating expenses 6,645,000 6,320,000 5,644,000
----------- ----------- -----------
See notes to consolidated financial statements.
(Continued)
52
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1996 AND
- --------------------------------------------------------------------------------------------------
1997 1996 1995
INCOME BEFORE PROVISION FOR INCOME
TAXES $2,093,000 $2,869,000 $2,281,000
PROVISION FOR INCOME TAXES (Note 5) 885,000 833,000 254,000
---------- ---------- ----------
NET INCOME $1,208,000 $2,036,000 $2,027,000
========== ========== ==========
BASIC EARNINGS PER COMMON SHARE $ 0.50 $ 0.85 $ 0.85
========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE $ 0.46 $ 0.78 $ 0.80
========== ========== ==========
See notes to consolidated financial statements.
(Concluded)
53
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------
UNREALIZED
GAIN
(LOSS) ON
COMMON STOCK SECURITIES
--------------------------- RETAINED AVAILABLE
SHARES EARNINGS FOR SALE,
OUTSTANDING AMOUNT (DEFICIT) NET OF TAX TOTAL
BALANCE,
JANUARY 1, 1995 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 2,027,000 2,027,000
----------- ------------ ------------ ---------- -----------
BALANCE,
DECEMBER 31, 1995 2,399,000 11,332,000 922,000 5,000 12,259,000
Net change in unrealized gain (loss)
on securities available for sale,
net of tax 21,000 21,000
Net income 2,036,000 2,036,000
Options exercised 7,000
----------- ------------ ------------ ---------- -----------
BALANCE,
DECEMBER 31, 1996 2,406,000 11,332,000 2,958,000 26,000 14,316,000
Net change in unrealized gain (loss)
on securities available for sale,
net of tax (17,000) (17,000)
Common stock
repurchased and retired (30,000) (148,000) (38,000) (186,000)
Net income 1,208,000 1,208,000
Options exercised
including tax benefit 40,000 102,000 102,000
----------- ------------ ------------ ---------- -----------
BALANCE,
DECEMBER 31, 1997 2,416,000 $11,286,000 $ 4,128,000 $ 9,000 $15,423,000
=========== ============ ============ ========== ===========
See notes to consolidated financial statements.
54
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1997 1996 1995
OPERATING ACTIVITIES:
Net income $ 1,208,000 $ 2,036,000 $ 2,027,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on loans 540,000 678,000
Provision for losses on real estate 80,000 50,000
Contribution of real estate 320,000
Provision for depreciation 88,000 51,000 53,000
Gain on sale of investment securities, net (23,000) (32,000) (5,000)
Gain on sale of real estate (179,000) (14,000)
Accretion of investment securities
premiums and discounts, net (261,000) (154,000) (366,000)
Gain on sale of loans (103,000) (295,000) (6,000)
Gain on sale of fixed assets (15,000)
Amortization of loan premiums and discounts, net (977,000) 610,000 649,000
Decrease (increase) in interest receivable
and other assets 1,418,000 (473,000) (431,000)
Increase in interest payable
and other liabilities 659,000 551,000 433,000
Deferred income tax benefit (4,000) (273,000) (29,000)
------------ ------------ ------------
Net cash provided by operating activities 2,351,000 2,421,000 3,039,000
------------ ------------ ------------
INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing
deposits
in financial institutions (1,384,000) 2,879,000 (1,494,000)
Net increase in loans (263,000) (19,189,000) (11,902,000)
Proceeds from sale of loans 7,275,000 16,620,000 1,975,000
Purchases of investment securities (39,158,000) (24,452,000) (20,393,000)
Proceeds from maturities of investment securities 22,474,000 7,567,000 17,000,000
Proceeds from sales of investment securities 17,328,000 4,135,000 1,699,000
Purchases of premises and equipment (425,000) (212,000) (87,000)
Proceeds from sale of premises and equipment 16,000
Net decrease in investment in real estate 12,000 385,000
Proceeds from sale of real estate 2,589,000 210,000
------------ ------------ ------------
Net cash provided by (used in) investing
activities 8,452,000 (12,640,000) (12,607,000)
------------ ------------ ------------
See notes to consolidated financial statements.
(Continued)
55
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
FINANCING ACTIVITIES:
Net increase in time deposits $ 5,367,000 $11,824,000 $ 1,568,000
Net increase in noninterest-bearing
deposits and other interest-bearing deposits 2,974,000 207,000 9,490,000
Common stock repurchased and retired (186,000)
----------- ----------- -----------
Net cash provided by financing activities 8,155,000 12,031,000 11,058,000
----------- ----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 18,958,000 1,812,000 1,490,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 29,279,000 27,467,000 25,977,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $48,237,000 $29,279,000 $27,467,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES:
Acquisition of other real estate owned through foreclosure $ 2,410,000 $ 140,000
Net transfer of loans to loans held for sale $20,480,000 $ 1,969,000
Loans to facilitate sale of other real estate owned $ 280,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 3,272,000 $ 2,721,000 $ 2,687,000
Income taxes paid $ 625,000 $ 1,285,000 $ 166,000
See notes to consolidated financial statements.
(Concluded)
56
FIRST REGIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------
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, which 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, deferred
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
lives of the loans as a yield adjustment.
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 Bank does not originate or purchase loans with the intention of selling
them. When a decision to sell a loan is made, the loan is classified as held
for sale and carried at the lower of cost or market value. Gains or losses
on the sale of loans are determined on a specific identification basis and
reported in earnings.
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
57
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.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures - an Amendment of SFAS No. 114," effective January 1, 1995. 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. This statement generally
requires an impaired loan 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 Company
determined that the combined effect of adoption of SFAS Nos. 114 and 118 was
immaterial to the consolidated financial statements due to the Company's pre-
existing methodology for calculating its allowance for possible loan losses.
All loans on nonaccrual are considered to be impaired; however, not all
impaired loans are on nonaccrual status. Impaired loans on accrual status
must be such that the loan underwriting must support the debt service
requirements. Factors that contribute to a performing loan being classified
as impaired include: a below-market interest rate, delinquent taxes and
debts to other lenders that cannot be serviced out of existing cash flow.
Nonaccrual loans are those which are past due 90 days as to either principal
or interest, or earlier when payment in full of principal or interest is not
expected. When a loan is placed on nonaccrual status, interest accrued but
not received is reversed against interest income. Thereafter, interest
income is no longer recognized, and the full amount of all payments received,
whether principal or interest, is applied to the principal balance of the
loan. A nonaccrual loan may be restored to an accrual basis when principal
and interest payments are current, and full payment of principal and interest
is expected.
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 using
the straight-line method over the estimated useful lives of the assets, which
range from 5 to 15 years. Amortization is computed using the straight-line
method over the estimated useful lives of the leasehold improvements or the
term of the lease, whichever is shorter.
INCOME TAXES - 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.
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.
RECLASSIFICATIONS - Certain amounts in the 1996 and 1995 financial statements
have been reclassified to be comparable to the classification used in the
1997 financial statements.
58
IMPAIRMENT OF LONG-LIVED ASSETS - On January 1, 1996, the Company adopted
SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed of." This statement requires that long-lived
assets, certain identifiable intangibles, and goodwill related to those
assets to be held and used, or disposed of, be reviewed for impairment based
on the fair values of the assets. Furthermore, this statement requires that
certain long-lived assets and identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell.
Adoption of SFAS No. 121 did not have a material impact on the Company's
operations or financial position.
STOCK-BASED COMPENSATION - SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans based on the
estimated fair value of the stock options or other awards granted. The
Company has chosen to continue to account for stock-based compensation using
the intrinsic value method. Accordingly, compensation cost for stock options
is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay
to acquire the stock.
EARNINGS PER COMMON SHARE - Effective December 31, 1997, the Company adopted
SFAS No. 128, "Earnings per Share." Accordingly, basic earnings per share
are computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding during each year. The
computation of diluted earnings per share also considers the number of shares
issuable upon the assumed exercise of outstanding common stock options. All
earnings per common share amounts presented have been restated in accordance
with the provisions of this statement. A reconciliation of the numerator and
the denominator used in the computation of basic and diluted earnings per
common share is included in Note 8.
59
2. INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available for sale
as of December 31, 1997 and 1996 were as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
1997 COST GAINS LOSSES VALUE
U.S. agency securities $18,389,000 $20,000 $ (7,000) $18,402,000
Commercial paper 8,004,000 8,004,000
Other securities 25,000 25,000
----------- ------- -------- -----------
$26,418,000 $20,000 $ (7,000) $26,431,000
=========== ======= ======== ===========
1996
U.S. agency securities $26,753,000 $82,000 $(43,000) $26,792,000
Other securities 25,000 25,000
----------- ------- -------- -----------
$26,778,000 $82,000 $(43,000) $26,817,000
=========== ======= ======== ===========
Proceeds from sales of investment securities available for sale during 1997,
1996 and 1995 were $17,328,000, $4,135,000 and $1,699,000, respectively.
Realized gains and losses on sales during 1997, 1996 and 1995 were
immaterial.
All securities held at December 31, 1997 are scheduled to mature in 1998.
Securities carried at $4,000,000 were pledged as of December 31, 1997 and
1996 to secure current or future public deposits and for other purposes
required or permitted by law.
60
3. LOANS
The loan portfolio consisted of the following at December 31, 1997 and 1996:
1997 1996
Real estate loans $38,195,000 $44,250,000
Commercial loans 15,365,000 10,564,000
Real estate construction loans 4,982,000 11,010,000
Bankers' acceptances 21,727,000 16,733,000
Other loans 420,000 398,000
----------- -----------
80,689,000 82,955,000
Allowance for loan losses (2,400,000) (2,300,000)
Deferred loan fees, net (511,000) (551,000)
----------- -----------
Loans, net $77,778,000 $80,104,000
=========== ===========
Government guaranteed loans, including premiums on
loans of $22,000 at December 31, 1996 $ - $ 2,665,000
=========== ===========
Government guaranteed loans held for sale, including
premiums on loans of $36,000 and $239,000 at
December 31, 1997 and 1996, respectively $ 942,000 $ 4,833,000
=========== ===========
The Bank's lending is concentrated in real estate in Southern California. In
the recent past, this area experienced adverse economic conditions. Future
declines in the local economy or in real estate values may result in
increased losses that cannot reasonably be predicted at this date. No
industry constitutes a concentration in the Bank's portfolio except the real
estate construction industry.
An analysis of the activity in the allowance for loan losses for the years
ended December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995
Balance, beginning of year $2,300,000 $2,000,000 $1,390,000
Provision for loan losses 540,000 678,000
Loans charged off (719,000) (230,000) (219,000)
Recoveries on loans previously charged off 279,000 530,000 151,000
---------- ---------- ----------
Balance, end of year $2,400,000 $2,300,000 $2,000,000
========== ========== ==========
Management believes the allowance for loan losses as of December 31, 1997 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 Department of
Financial Institutions upon subsequent examination of the Bank by such
authorities.
At December 31, 1997 and 1996, the recorded investment in loans for which
impairment had been recognized in accordance with SFAS No. 114 as amended by
SFAS No. 118 was $496,000 and $3,100,000, respectively, with reserves of
$252,000 and $681,000, respectively. The average recorded investment in
impaired loans during 1997 and
61
1996 was $1,783,000 and $1,252,000, respectively. Interest income on impaired
loans of $45,000 and $190,764 was recognized for cash payments received in
1997 and 1996, 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, 1997 and 1996:
1997 1996
Balance, beginning of year $ 78,000 $ 79,000
Loans granted or renewed 64,000 30,000
Repayments (78,000) (31,000)
-------- --------
Balance, end of year $ 64,000 $ 78,000
======== ========
4. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following as of December 31, 1997 and
1996:
1997 1996
Furniture, fixtures and equipment $ 1,988,000 $ 1,716,000
Leasehold improvements 538,000 531,000
----------- -----------
2,526,000 2,247,000
Accumulated depreciation and amortization (1,828,000) (1,885,000)
----------- -----------
Premises and equipment, net $ 698,000 $ 362,000
=========== ===========
Rental expense for premises included in occupancy expenses for 1997, 1996 and
1995 was approximately $366,000, $356,000 and $331,000, respectively.
The future minimum rental commitments, primarily representing noncancelable
operating leases for premises, were as follows at December 31, 1997,
excluding the effect of future cost-of-living increases provided for in the
leases, and net of sublease income:
MINIMUM RENTAL
COMMITMENTS
1998 $426,000
1999 437,000
2000 431,000
2001 423,000
2002 423,000
Thereafter 61,000
----------
Total $2,201,000
==========
At the end of 1994, the Company elected to apply the unused tenant
improvement allowance of $224,000 against its future lease payments. Payment
of the allowance was made to the Company over a 15-month period beginning
February 1, 1995. The Company is deferring recognition of the amount and
amortizing it evenly over the lease term, which expires in February 2003.
62
5. INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1997, 1996 and
1995, net of valuation adjustments, consists of the following:
1997 1996 1995
Current provision (benefit):
Federal $652,000 $ 997,000 $ (85,000)
State 237,000 109,000 368,000
-------- ---------- ---------
889,000 1,106,000 283,000
-------- ---------- ---------
Deferred provision (benefit):
Federal (3,000) (389,000) 85,000
State (1,000) 116,000 (114,000)
-------- ---------- ---------
(4,000) (273,000) (29,000)
-------- ---------- ---------
Total $885,000 $ 833,000 $ 254,000
======== ========== =========
Income tax assets (liabilities) consisted of the following at December 31,
1997 and 1996:
1997 1996
Income taxes currently receivable (payable),
included in other assets/other liabilities:
Federal $ 5,000 $237,000
State (5,000) 25,000
-------- --------
262,000
-------- --------
Deferred income tax asset:
Federal 428,000 425,000
State 199,000 198,000
-------- --------
627,000 623,000
-------- --------
Total $627,000 $885,000
======== ========
63
The components of the net deferred income tax asset at December 31 are
summarized as follows:
FEDERAL 1997 1996
Deferred tax liabilities:
Prepaid expenses $ (53,000) $ (61,000)
State taxes (67,000) (68,000)
Depreciation (78,000) (62,000)
Other (194,000) (170,000)
--------- ---------
Gross liabilities (392,000) (361,000)
--------- ---------
Deferred tax assets:
Loan and real estate loss allowances 291,000 256,000
Deferred compensation 270,000 134,000
State franchise tax 64,000 88,000
Contribution charge-off 173,000 229,000
Other 22,000 79,000
--------- ---------
Gross assets 820,000 786,000
--------- ---------
Net deferred tax asset - federal 428,000 425,000
--------- ---------
STATE
Deferred tax liabilities:
Prepaid expenses (17,000) (20,000)
Depreciation (22,000) (18,000)
Other (62,000) (57,000)
--------- --------
Gross liabilities (101,000) (95,000)
--------- --------
Deferred tax assets:
Loan and real estate loss allowances 155,000 146,000
Deferred compensation 86,000 45,000
Real estate contribution 52,000 76,000
Other 7,000 26,000
--------- --------
Gross assets 300,000 293,000
--------- --------
Net deferred tax asset - state 199,000 198,000
--------- --------
Net deferred tax asset $ 627,000 $623,000
========= ========
64
The provision for income taxes (benefit) for the years ended December 31,
1997, 1996 and 1995 varied from the federal statutory tax rate for the
following reasons:
1997 1996 1995
-------------------------------------------------------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
Tax expense (benefit)
at statutory rate $733,000 35.0 % $1,014,000 35.0 % $ 798,000 35.0 %
State franchise taxes,
net of federal
income tax benefit 156,000 7.4 146,000 5.1 167,000 7.3
Valuation allowance (200,000) (6.9) (996,000) (43.7)
Tax credits resulting
from loss carryback 174,000 7.6
Other, net (4,000) (0.1) (127,000) (4.4) 111,000 4.9
-------- ----- ---------- ----- --------- -----
Total $885,000 42.3 % $ 833,000 28.8 % $ 254,000 11.1 %
======== ===== ========== ===== ========= =====
6. COMMITMENTS AND CONTINGENCIES
As of December 31, 1997, the Company had the following commitments and
contingent liabilities:
Undisbursed loans $19,844,000
Standby letters of credit 1,153,000
The Bank uses the same standards of credit underwriting in entering into
these commitments to extend credit as it does for making loans 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
50% matching up to the first 6% 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 $42,000, $28,000 and $7,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
As of December 31, 1997, the Bank had unused lines of credit with other
depository institutions of $6,500,000.
The Bank's principal regulators are the FDIC and the California Department of
Financial Institutions; 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.
65
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 are not
available for investment purposes. The average Federal Reserve balances
required to be maintained to meet these requirements were approximately
$830,000 and $611,000 at December 31, 1997 and 1996, 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.
7. 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, 1997
and 1996, that the Bank meets all capital adequacy requirements to which it
is subject.
As of December 31, 1997 and 1996, 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 which management believes have changed the Bank's category.
66
Following is a table showing the minimum capital ratios required for the Bank
and the Bank's actual capital ratios and actual capital amounts at December
31, 1997 and 1996 (the Company's ratios and amounts are substantially the
same):
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
Actual ADEQUACY PURPOSES ACTION PROVISIONS
----------------------- --------------------------------- -----------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
As of December 31, 1997:
Total capital
(to risk-weighted assets) $16,581,000 18.0 % * $7,373,000 * 8.0 % $9,216,000 * 10.0 %
Tier I capital
(to risk-weighted assets) $15,413,000 16.7 % * $3,686,000 * 4.0 % $5,530,000 * 6.0 %
Tier I capital
(to average assets) $15,413,000 9.5 % * $6,256,000 * 4.0 % $8,122,000 * 5.0 %
As of December 31, 1996:
Total capital
(to risk-weighted assets) $15,389,000 17.7 % * $6,968,000 * 8.0 % $8,710,000 * 10.0 %
Tier I capital
(to risk-weighted assets) $14,283,000 16.4 % * $3,484,000 * 4.0 % $5,226,000 * 6.0 %
Tier I capital
(to average assets) $14,283,000 9.71 % * $5,883,000 * 4.0 % $7,353,000 * 5.0 %
* Represents "greater than or equal to."
8. EARNINGS PER SHARE RECONCILIATION
December 31, 1997
----------------------------------------------------------------------
WEIGHTED
AVERAGE
Income SHARES PER SHARE
(Numerator) (DENOMINATOR) AMOUNT
BASIC EPS
Income available to common shareholders $1,208,000 2,429,000 $ 0.50
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise
of outstanding options 194,000 (0.04)
-------------------- --------- ------
DILUTED EPS
Income available to common shareholders $1,208,000 2,623,000 $ 0.46
==================== ========= ======
1,208,000 2,623,000 0
December 31, 1996
---------------------------------------------------------------------
BASIC EPS
Income available to common shareholders $2,036,000 2,401,000 $ 0.85
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise
of outstanding options 205,000 (0.07)
---------- --------- ------
DILUTED EPS
Income available to common shareholders $2,036,000 2,606,000 $ 0.78
========== ========= ======
67
December 31, 1995
-------------------------------------------------------
BASIC EPS
Income available to common shareholders $2,027,000 2,399,000 $ 0.85
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise
of outstanding options 125,000 (0.05)
---------- --------- ------
DILUTED EPS
Income available to common shareholders $2,027,000 2,524,000 $ 0.80
========== ========= ======
9. STOCK COMPENSATION PLANS
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.
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 1996 and 1995, additional options were granted to
officers for an aggregate of 20,000 and 30,000 shares, respectively, at
exercise prices ranging from $3.50 - $5.75 per share in 1996 and $2.50 -
$3.50 per share in 1995. No options were granted in 1997.
In 1997, under the terms of the Plan, 60,000 stock options were exchanged for
40,408 shares of stock.
At December 31, 1997, 1996 and 1995, the Company had options outstanding
granted under the plan as follows:
1997 1996 1995
---------------------- ---------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at
beginning of year 340,000 $2.24 345,000 $2.09 315,000 $2.00
Granted 20,000 4.63 30,000 3.00
Exercised (60,000) 2.00 (10,000) 2.00
Terminated (15,000) 2.00
------- ------- -------
Outstanding at
end of year 280,000 2.24 340,000 2.24 345,000 2.09
======= ======= =======
Options exercis-
able at year end 70,000 2.21 64,000 2.09 - -
======= ======= =======
68
The estimated fair value of options granted during 1996 was $2.45 per share.
No compensation cost has been recognized for the stock option plan. Had
compensation cost for the Company's stock option plan been determined based
on the fair value at the grant dates for awards under the plan consistent
with the method of SFAS No. 123, the Company's net income and basic earnings
per share for the year ended December 31, 1997 and 1996 would have been
reduced to the pro forma amounts indicated below:
Net income to common shareholders:
As reported $1,208,000 $2,036,000
Pro forma $1,201,000 $2,029,000
Basic earnings per share:
As reported $ 0.50 $ 0.85
Pro forma $ 0.49 $ 0.85
The fair values of options granted under the Company's stock option plan
during 1996 were estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used:
no dividend yield, expected volatility of 53%, risk free interest rate of
6.3%, and expected lives of five years.
10. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following 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, 1997 DECEMBER 31, 1998
--------------------------------- ---------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
(IN THOUSANDS) (IN THOUSANDS)
Assets:
Cash and due from banks $ 9,847 $ 9,847 $ 6,499 $ 6,499
Federal funds sold 38,390 38,390 22,780 22,780
Interest-bearing deposits in
financial institutions 6,626 6,626 5,242 5,242
Investment securities available for 26,431 26,431 26,817 26,817
sale
Loans 77,778 79,597 80,104 82,399
Government guaranteed loans 942 970 7,498 7,713
Liabilities:
Deposits:
Noninterest-bearing 35,820 35,820 22,516 22,516
Interest-bearing:
Time deposits 30,206 30,217 24,839 24,849
Money market and other deposits 79,070 79,070 89,400 89,400
Fair market values of commitments to extend credit and standby letters of
credit are immaterial as of December 31, 1997 and 1996.
69
The fair values of cash and due from banks, federal funds sold, interest-
bearing deposits in financial institutions, noninterest-bearing deposits, and
money market and other deposits approximate their carrying value.
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 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 loan portfolio
for which there are no known credit concerns, results in a fair valuation of
such loans on an entry-value basis. The fair value of nonperforming loans
with a recorded book value of $496,000 in 1997 and $681,000 in 1996 were not
estimated because it is not practicable to reasonably assess the credit
adjustment that would be applied in the marketplace for such loans.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1997 and 1996. 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.
11. INTEREST EXPENSE
A summary of interest expense on deposits for the years ended December 31,
1997, 1996 and 1995 is as follows:
1997 1996 1995
Money market savings/NOW account deposits $2,228,000 $2,105,000 $2,069,000
Time deposits under $100,000 322,000 222,000 205,000
Time deposits of $100,000 or more 705,000 616,000 431,000
Savings deposits 30,000 27,000 27,000
---------- ---------- ----------
$3,285,000 $2,970,000 $2,732,000
========== ========== ==========
The aggregate amount of time deposits in denominations of $100,000 or more
outstanding as of December 31, 1997 and 1996 was approximately $16,672,000
and $16,781,000, respectively.
70
12. OTHER OPERATING EXPENSES
Included in other operating expenses for the years ended December 31, 1997,
1996 and 1995 are the following items:
1997 1996 1995
Professional services $1,119,000 $ 467,000 $ 424,000
FDIC assessment 16,000 2,000 161,000
Data processing fees 254,000 242,000 225,000
General insurance 108,000 108,000 134,000
Directors' fees 46,000 59,000 105,000
Equipment expense 196,000 87,000 136,000
Other 608,000 946,000 764,000
---------- ---------- ----------
Total $2,347,000 $1,911,000 $1,949,000
========== ========== ==========
13. TRANSCORP RELATIONSHIP
The Bank has had a long-term relationship with Transcorp Pension Services,
Inc. ("Transcorp"), an administrator of self-directed individual retirement
accounts and simplified employee pension retirement plans pursuant to which
the Bank provided custodial and other services to IRA and pension plans for
which Transcorp served as administrator. The Bank's 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. In 1997, Transcorp merged with an affiliated company
that already possessed custodial powers, and in anticipation of that merger,
Transcorp gave notice of its intent to terminate the deposit and service
relationships with the Bank.
In order to ensure that the terms of its agreement with Transcorp were
honored, as well as to provide for a complete and orderly transfer of
custodial responsibilities to the new custodian, the Bank sought certain
assurances from Transcorp. When these were not forthcoming, the Bank filed
suit seeking judicial determination of disagreements regarding various
aspects of the Transcorp relationship and the Bank's custodial obligations.
That suit was ultimately settled in the first quarter of 1998, with the
settlement terms satisfying the Bank's requirement for the complete and
orderly transfer of custodial responsibility, and providing for the transfer
of the remaining deposits over an 18-month period beginning in March, 1998
and continuing through September, 1999. The terms of the settlement are non-
monetary, except that the Bank has agreed to pay Transcorp $50,000 upon the
successful re-registration of all custodial assets, and Transcorp has agreed
to pay the Bank $50,000 if it fails to re-register the custodial assets
within the established time frame.
Deposits of custodial clients of the plans Transcorp administers represent
approximately 39% and 54% of the Bank's total deposits as of December 31,
1997 and 1996, respectively. For the years ended December 31, 1997, 1996 and
1995, the Bank paid interest of $1,780,000, $1,746,000 and $1,717,000,
respectively, on deposits of Transcorp custodial clients, and paid $987,000,
$1,089,000 and $1,093,000, respectively, in administrative fees to Transcorp
on behalf of its custodial clients.
Because the Bank has invested the Transcorp-related deposits in highly liquid
assets, the Bank anticipates no difficulty in accommodating the deposit
withdrawals over the 18-month transfer period called for in the settlement.
Over time, the Bank intends to replace the Transcorp-related deposits with
deposits obtained from other sources. Management believes that the Transcorp
relationship has been profitable for the Bank, but it is impossible to
determine what impact, if any, the termination of the Transcorp relationships
will have on the Bank's future results.
71
14. RELATED-PARTY TRANSACTIONS
The Bank has an agreement with a director whereby the Bank receives
management and consulting services for properties. Total payments in 1997,
1996 and 1995 to the director under the agreement were $4,000, $6,000 and
$4,000, 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, 1997 and 1996, deposits from directors, officers and their
affiliates amounted to $4,654,000 and $6,346,000, respectively.
15. FINANCIAL INFORMATION REGARDING FIRST REGIONAL BANCORP
As of December 31, 1997 and 1996, the Company's investment in the Bank was
recorded on the equity method at $15,312,000 and $14,283,000, respectively.
The Company's cash balance held in the Bank was $1,000 and $6,000 as of
December 31, 1997 and 1996, 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 1997, 1996 or 1995.
Federal law restricts the Bank from extending credit to the Company, as any
such extensions of credit are subject to strict collateral requirements.
******
72
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). Lease
for office at 28310 Roadside Drive, Suite 152, Agoura Hills, California.
11 Statement regarding computation of per share earnings (see Note 1 of the
Notes to Consolidated Financial Statements at page 56 of this report on Form 10-
K)
22 Subsidiary of Registrant
27 Financial Data Schedule