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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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For the fiscal year ended December 31, 1998 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_____
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Aggregate market value of Common Stock held by non-affiliates as of March
19, 1999: $25,175,593
Number of shares of Common Stock outstanding at March 19, 1999:
3,051,587.
Documents incorporated by reference and parts of Form 10-K into which
incorporated:
Portions of Proxy Statement for 1999 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)
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FORM 10-K
TABLE OF CONTENTS AND
CROSS REFERENCE SHEET
Page
in Incorporation
PART I 10-K by Reference
---- ------------
Item 1. Business................................................ 4
-------
Item 2. Properties.............................................. 31
-------
Item 3. Legal Proceedings....................................... 31
-------
Item 4. Submission of Matters to a Vote of
------- Securities Holders...................................... 32
PART II
Item 5. Market for Registrant's Common Stock
------- and Related Stockholder Matters......................... 33
Item 6. Selected Financial Data................................. 35
-------
Item 7. Management's Discussion and Analysis
------- of Financial Condition and Results of
Operations.............................................. 36
Item 8. Financial Statements and Supplementary
------- Data.................................................... 45
Item 9. Disagreements on Accounting and
------- Financial Disclosure.................................... 45
PART III
Item 10. Directors and Executive Officers of 1999 Proxy
-------- the Registrant.......................................... 46 Statement
Item 11. Executive Compensation.................................. 46 1999 Proxy
-------- Statement
Item 12. Security Ownership of Certain 1999 Proxy
-------- Beneficial Owners and Management........................ 46 Statement
Item 13. Certain Relationships and Related 1999 Proxy
-------- Transactions............................................ 46 Statement
3
PART IV
Item 14. Exhibits, Financial Statement
-------- Schedules, and Reports on Form 8-K. 47
SIGNATURES........................................................ 48
INDEX TO FINANCIAL STATEMENTS..................................... 49
INDEX TO EXHIBITS................................................. 76
4
PART I
Item 1. Business
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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-looking 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
5
Regional Offices located in the California cities of Irvine, Glendale, Santa
Monica and Gardena. The Irvine office is a full branch office and the other
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, 1999 the Bank had 65 equivalent full-time employees.
Competition
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The banking business in California generally, and in the Los Angeles County
area where the Bank is located, is highly competitive with respect to both loans
and deposits and is dominated by a relatively small number of major banks which
have many offices operating over wide geographic areas. The Bank competes for
deposits and loans principally with these major banks, but also with small
independent banks located in its service areas. Among the advantages which the
major banks have over the Bank are their ability to finance extensive
advertising campaigns and to allocate their investment assets to regions of
highest yield and demand. Many of the major commercial banks operating in the
Bank's service area offer certain services (such as trust and cash management
services) which are not offered directly by the Bank and, by virtue of their
greater total capitalization, such banks have substantially higher lending
limits than the Bank.
Moreover, banks generally, and the Bank in particular, face increasing
competition for loans and deposits from non-bank financial intermediaries such
as savings and loan associations, thrift and loan associations, credit unions,
mortgage companies, insurance companies, and other lending institutions. Money
market funds offer rates competitive with banks, and an increasingly
sophisticated financial services industry continually develops new products for
consumers that compete with banks for investment dollars. In addition, other
entities (both public and private) seeking to raise capital through the issuance
and sale of debt or equity securities compete with banks in the acquisition of
deposits.
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
7
of the community. In the event that a customer's loan demands exceed the Bank's
lending limits, the Bank attempts to arrange for such loans on a participation
basis with its correspondent banks. The Bank also assists customers requiring
services not offered by the Bank to obtain these services from its correspondent
banks.
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
8
activities which the FRB has determined to be so closely related to banking or
managing or controlling banks as to be properly incident thereto. In making such
a determination, the FRB is required to consider whether the performance of such
activities can reasonably be expected to produce benefits to the public, such as
greater convenience, increased competition, or gains in efficiency, that
outweigh possible adverse effects, such as undue 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, 1998 was
15.60%. 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
9
subsidiaries are subject to examination by and may be required to file 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, 1998.
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,
11
stronger capital standards, and stronger civil and criminal enforcement
provisions. Certain of the more significant provisions contained in FIRREA are
summarized below.
FIRREA gave the FDIC the duty of insuring the deposits of savings associations
as well as banks. The insurance funds are maintained separately and have been
renamed. The Bank Insurance Fund ("BIF") insures the deposits of commercial
banks and state chartered savings banks, while the Savings Association Insurance
Fund ("SAIF") insures deposits of savings and loans and federally chartered
savings banks. The FDIC is also authorized to act as conservator or receiver
for federally insured banks, and, after a period of three years from the date of
enactment, for insured savings associations that are chartered under federal or
state law.
FIRREA expands, enhances, and clarifies the enforcement powers of the
financial institution regulatory agencies and increases the maximum amount of
civil money penalties for violation of laws and regulations, expands the grounds
for imposing them, and authorizes the various regulatory agencies to take action
to collect them. FIRREA also provides increased insurance assessments for
members of both the Bank Insurance Fund (such as the Bank) and the SAIF, and
expands the federal banking agencies' powers to appoint a conservator or
receiver, including "early intervention."
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
12
capital measure. Asset growth and branching restrictions will apply to
undercapitalized banks, which will be required to submit acceptable capital
plans guaranteed by its holding company, if any. Broad regulatory authority is
granted with respect to significantly undercapitalized banks, including forced
mergers, growth restrictions, ordering new elections for directors, forcing
divestiture by its holding company, if any, requiring management changes, and
prohibiting the payment of bonuses to senior management. Even more severe
restrictions will be applicable to critically undercapitalized banks, those with
capital at or less than 2%, including the appointment of a receiver or
conservator after 90 days.
FDICIA also grants the regulatory agencies authority to prescribe standards
relating to internal controls, credit underwriting, asset growth, and
compensation, among others, and requires the regulatory agencies to promulgate
regulations prohibiting excessive compensation or fees.
FDICIA further establishes a new truth in savings scheme, providing for clear
and uniform disclosure of terms and conditions on which interest is paid and
fees are assessed on deposits, to be effective upon adoption of implementing
regulations.
FDICIA imposes limits on the acceptance of brokered deposits by other than
well capitalized banks, including notification requirements on deposit 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
13
Real Estate Settlement Procedures Act for business, commercial and agricultural
real estate secured transactions, amendments to the national flood insurance
program, and amendments to the Truth in Lending Act to provide greater
protection for consumers by reducing discrimination against the disadvantaged.
Title I, Subtitle A of the 1994 Act, designated as the "Community Development
Banking and Financial Institutions Act of 1994," created the Fund in order to
promote economic revitalization and community development through investment in
and assistance to Community Development Financial Institutions ("CDFIs") that
provide capital and other resources to economically-depressed communities. The
primary focus of the program will be to aid the country's urban, rural and
native American communities that are facing severe economic problems due to the
lack of economic growth, poverty and the general lack of employment and other
opportunities. Financial institutions may participate in the assistance program
upon approval by the Fund.
In addition to establishing the Fund, Title I also provides funding for the
Bank Enterprise Act ("BEA") of 1991, which will now be administered by the Fund.
Under the BEA, insured financial institutions may be awarded insurance premium
assessment credits where they are involved in providing lifeline deposit
accounts, community lending and other forms of financial assistance in
distressed areas, including investing in CDFIs.
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
14
Act also amends the Bank Holding Company Act and Securities Act of 1933 to
simplify the formation of bank holding companies.
Additional titles of the 1994 Act include Title V, the "National Flood
Insurance Reform Act of 1994,", Subtitle A of Title II, the "Small Business Loan
Securitization and Secondary Market Enhancement Act of 1994," and Subtitle B of
Title II, the "Small Business Capital Enhancement Act."
The foregoing summarizes only the most significant aspects of the 1994 Act,
many of the provisions of which have not yet become effective. Therefore, it is
not possible to predict at this time the impact this legislation will have on
the Bank or the banking industry.
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
15
effect of increasing the Bank's net interest margin, while decreases in interest
rates have the opposite effect.
Product Development Research
- ----------------------------
The Company has not engaged in any material research activities relating to
the development of new services or the improvement of existing banking services
during the last three fiscal years. The officers and employees of the Bank are
continually engaged in marketing activities, however, including the evaluation
and development of new services, to enable the Bank to retain a competitive
position in the service area.
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,
1998 1997
------ ------
(Dollars in Thousands)
Assets
Cash and Due From Banks.................... $ 8,351 $ 5,952
Time Deposits with Other
Financial Institutions..................... 9,145 4,731
Investment Securities...................... 32,090 21,748
Funds Sold................................. 34,163 28,761
Net Loans.................................. 79,964 87,594
Other Assets............................... 2,528 3,365
-------- --------
Total............................... $166,241 $152,151
======== ========
Liabilities & Shareholders' Equity
Deposits:
Demand (non-interest
bearing)............................ $ 43,087 $ 25,851
Savings............................. 1,522 1,260
Money Market Accounts............... 66,056 88,044
Time................................ 35,763 20,376
-------- --------
Total Deposits.............. 146,428 135,531
Securities Sold Under
Agreements to Repurchase................... 104 (13)
Other Liabilities.......................... 2,117 1,721
-------- --------
Total Liabilities................... 148,649 137,239
-------- --------
Shareholders' Equity....................... 17,592 14,912
-------- --------
Total............................... $166,241 $152,151
======== ========
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,
1998 1997
---------------------------------- ----------------------------------
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) $ 82,387 $ 8,517 10.3% $ 89,526 $ 8,742 9.8%
Investment
Securities 32,090 1,766 5.5% 21,748 1,277 5.9%
Funds Sold 34,163 1,808 5.3% 28,761 1,569 5.5%
Time Dep-
osits With
Other Fin-
ancial In-
stitutions 9,145 521 5.7% 4,731 280 5.9%
-------- ------- -------- --------
Total
Interest
Earning
Assets $157,785 $12,612 8.0% $144,766 $11,868 8.2%
======== ======= ======== =======
Interest
Bearing
Liabilities:
Savings
deposits $ 1,522 $ 37 2.4% $ 1,260 $ 30 2.4%
Money
Market
Accounts 66,056 1,544 2.3% 88,043 2,228 2.5%
Time 35,763 1,856 5.2% 20,377 1,027 5.0%
18
1998 1997
-------------------------- --------------------------
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 $ 104 $ 3 2.9% $ (13) $ 0 0.0%
-------- ------- --------- -------
Total
interest
bearing
liabili-
ties $103,445 $ 3,440 3.3% $109,667 $ 3,285 3.0%
======== ======= ======== =======
(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
$2,423,000 in 1998 and $1,932,000 in 1997.
(2) Includes loan fees of $655,000 in 1998 and $602,000 in 1997.
19
The following table shows the net interest earnings and the net yield on average
interest earning assets:
1998 1997
---------- ---------
(Dollars in Thousands)
Total interest income (1)..................... $ 12,612 $ 11,868
Total interest expense........................ 3,440 3,285
-------- --------
Net interest earnings......................... $ 9,172 $ 8,583
======== ========
Average interest earning assets............... $157,785 $144,766
Net yield on average interest earning
assets........................................ 5.8% 5.9%
__________
(1) Includes loan fees of $655,000 in 1998 and $602,000 in 1997.
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)
1998 over 1997 1997 over 1996
-------------------------- --------------------------
Volume Rate Net Volume Rate Net
(Dollars in Thousands)
Interest Income(1)
- ------------------
Loans (2) $ (852) $ 627 $ (225) $ 250 $ (17) $ 233
Investment
securities 563 (74) 489 140 (318) (178)
Funds sold 284 (45) 239 305 45 350
Interest on time
deposits with
other financial
Finstitu-
tions 251 (10) 241 0 0 0
------- --------- ------ ------ ------- -------
Total
Interest
Earning
Assets $ 246 $ 498 $ 744 $ 695 $ (290) $ 405
======= ======== ======== ======= ======== ========
Interest Expense (1)
- --------------------
Savings $ 6 $ 1 $ 7 $ 3 $ 0 $ 3
Money market (524) (160) (684) 101 22 123
Time 798 31 829 171 18 189
Securities
sold under
agreements to
repurchase 0 3 3 (1) (3) (4)
------- --------- -------- ------- ------- --------
Total interest
bearing liab-
ilities $ 280 $ (125) $ 155 $ 274 $ 37 $ 311
======= ======== ======== ======= ====== ========
__________
(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 $655,000 in 1998 and $602,000 in 1997.
22
Investment Securities
- ---------------------
The following table shows fair value of the investment securities portfolio at
December 31, 1998 and 1997:
December 31,
1998 1997
------------- ----------
(Dollars in Thousands)
U.S. Treasury Securities................... $ 0 $ 0
Obligations of U.S. Government
Agencies and Corporations.................. 5,999 18,402
Commercial Paper........................... 41,861 8,004
Other Securities........................... 0 25
------ -------
Total.................................... $47,860 $26,431
======= =======
The maturity schedule and weighted average yields of investment securities at
December 31, 1998 is as follows:
Average
Amount Yield
------- ------
(Dollars in Thousands)
U.S. Agency Securities
- ----------------------
One year or less................... $ 5,999 5.29%
Over one year...................... 0 0.00%
-------
Category total $ 5,999 5.29%
Commercial Paper
- ----------------
One year or less................... $41,861 5.17%
Over one year...................... 0 0.00%
-------
Category total $41,861 5.17%
Total Investment Portfolio
- -----------------------------------
One year or less................... $47,860 5.19%
Over one year through five years... 0 0.00%
Over five years.................... 0 0.00%
-------
Total $47,860 5.19%
=======
23
Loan Portfolio
- --------------
The loan portfolio consisted of the following at December 31, 1998 and 1997:
1998 1997
---- ----
(Dollars in Thousands)
Commercial loans............................ $24,811 $15,365
Real estate construction loans.............. 15,702 4,982
Real estate loans........................... 46,251 38,195
Bankers acceptances......................... 6,681 21,727
Other loans................................. 797 420
------- -------
Total loans....................... $94,242 $80,689
Less - Allowances for loan losses...... 2,500 2,400
- Deferred loan fees.............. 562 511
------- -------
Net loans......................... $91,180 $77,778
======= ========
Government guaranteed loans held for sale... $ 521 $ 942
======= =======
24
Loan Maturities and Interest Rates
- ----------------------------------
The following table shows the amounts of total loans outstanding as of
December 31, 1998, 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....................... $44,694
Interest rates are fixed or
predetermined.................... 7,723
After one year but within five years:
Interest rates are floating or
adjustable....................... 33,461
Interest rates are fixed or
predetermined.................... 760
After five years but within ten years:
Interest rates are floating or
adjustable....................... 7,604
Interest rates are fixed or
predetermined.................... 0
After ten years or more:
Interest rates are floating or
adjustable....................... 521
Interest rates are fixed or
predetermined.................... 0
-------
Total...................................... $94,763
=======
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, 1998 and 1997:
December 31,
1998 1997
----- -----
(Dollars in Thousands)
Non-accrual loans
Commercial.................... $ 85 $ 100
Real estate loans............. 158 238
Government guaranteed loans... 0 0
Bankers acceptances........... 0 0
Other loans................... 0 0
----- -----
Total......................... $ 243 $ 338
===== =====
Accruing loans past due more than 90 days
Commercial.................... $ 0 $ 0
Real estate loans............. 0 0
Government guaranteed loans... 220 193
Bankers acceptances........... 0 0
Other loans................... 0 0
---- ----
Total......................... $220 $193
==== ====
Except as may have been included in the above table, at December 31, 1998,
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, 1998, 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 $32,000 in 1998 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 1998 and 1997:
1998 1997
---- ----
(Dollars in Thousands)
Amount of loans outstanding at end of
period..................................... $ 94,763 $ 81,631
======== ========
Average amount of loans outstanding
before allowance for loan losses........... $ 82,393 $ 89,526
======== ========
Balance of allowance for loan losses at
beginning of period........................... $2,400 $2,300
Loans charged off:
Commercial.............................. 19 529
Real estate............................. 0 190
Government guaranteed loans............. 0 0
Bankers acceptances..................... 0 0
Other................................... 0 0
------ ------
Total loans charged off........... 19 719
Recoveries of loans previously charged off:
Commercial.............................. 47 279
Real estate............................. 0 0
Government guaranteed loans............. 0 0
Bankers acceptances..................... 0 0
Other................................... 0 0
------ ------
Total loan recoveries............. 47 279
------ ------
Net loans (recovered) charged off............. (28) 440
------ ------
Provisions charged to operating expense....... 72 540
------ ------
Balance of allowance for possible loan
losses at end of period.................... $ 2,500 $ 2,400
======= =======
The ratio of net loans charged off to average loans outstanding was (0.03)%
and 0.5% for the two years ended December 31, 1998 and 1997, 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.
1998 1997
------ ------
Allowance Ratio of Allowance Ratio of
for loans to for loans to
possible total possible total
loan losses loans loan losses loans
------------ -------- ----------- -----------
Commercial loans........... $ 472 26% $ 408 19%
Real estate loans.......... 1,009 65% 754 54%
Gov't guaranteed........... 0 1% 0 1%
Bankers acceptances 0 7% 0 25%
Other loans................ 4 1% 5 1%
Unallocated................ 1,015 0% 1,233 0%
------ --- ------ ---
Total...................... $2,500 100% $2,400 100%
====== === ====== ===
29
Deposits
- --------
The average amounts of deposits for the periods indicated are summarized
below.
1998 1997
-------- --------
(Dollars in Thousands)
Demand Deposits........................ $ 43,087 $ 25,851
Savings deposits, money market and
time certificates of deposit of less
than $100,000.......................... 85,895 94,627
Time certificates of deposit of
$100,000 or more....................... 17,446 15,053
-------- --------
Total.......................... $146,428 $135,531
======== ========
The maturity schedule of time certificates of deposit of $100,000 or more at
December 31, 1998 is as follows:
December 31, 1998
-----------------
(Dollars in Thousands)
3 months or less.......................... $15,517
Over 3 through 6 months................... 5,752
Over 6 through 12 months.................. 977
Over 12 months............................ 0
-------
Total................................ $22,246
=======
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.
1998 1997
----- -----
Return on assets......... 1.0% 0.8%
Return on equity......... 9.7% 8.1%
Dividend payment ratio... 0.0% 0.0%
Equity to assets ratio... 10.6% 9.8%
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,
Irvine, California, and consists of approximately 1440 square feet. The
premises are provided under a lease which expires November 3, 2001 at a monthly
rental of $4,464 plus a proportionate share of the building's operating costs.
The Bank also leases an office located at 144 N. Glendale Avenue, Suite 202,
Glendale, California to house its Glendale Regional Office. The premises
consisting of approximately 570 square feet are provided under a lease which
expires July 31, 1999 at a rental of $937 per month.
Item 3. Legal Proceedings
- --------------------------
Litigation
- ----------
In the normal course of business, the Company and the Bank are involved in
litigation. Management does not expect the ultimate outcome of any pending
litigation to have a material effect on the Company's financial position or
results of operations.
However, in late 1998, Mark Rubin, a director of the Company and its former
vice chairman, filed suit against the Company, the Bank, and individual members
of the Company's executive committee. Mr. Rubin alleges that his employment
with the Company was wrongfully terminated and that the defendants also breached
fiduciary duties owed to Mr. Rubin and committed
32
acts of defamation and fraud against him. In his complaint, Mr. Rubin's suit
seeks compensatory and punitive damages of approximately $59 million.
In January 1999, Mr. Rubin submitted a statutory offer of compromise under
Section 998 of the California Code of Civil Procedure offering to settle the
lawsuit for $3 million. The Company rejected this settlement proposal.
The Company believes the claims, as alleged, are without merit and has
moved to dismiss Mr. Rubin's complaint. Mr. Rubin has informed the Company that
he intends to amend his complaint prior to the court hearing on the Company's
motion, but has not yet done so. The Company has vigorously defended against
Mr. Rubin's lawsuit and will continue to do so. Because the case is in its very
early stages, it is not currently possible to determine what impact, if any, the
resolution of this matter will have on the future financial condition and
results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
During the fourth quarter of 1998, no matters were submitted to a vote of the
Company's shareholders.
33
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.
1998 1997
------ ------
High Low High Low
----- ----- ------ -----
1st Quarter 9 3/4 8 1/4 7 1/2 5 3/4
2nd Quarter 10 7 3/4 7 6
3rd Quarter 10 1/8 8 1/2 9 3/4 5 5/8
4th Quarter 8 7/8 7 10 1/2 7 1/4
Dividends
- ---------
The Company has not paid any cash dividends and it is the Company's Board of
Directors' intention that no cash dividends be declared by the Company during
this stage of the Company's development. The Board of Directors intends to
increase the Company's capital and to pay cash dividends only when it is prudent
to do so and the Company's performance justifies such action.
The Company is a legal entity separate and distinct from its subsidiaries, and
has not engaged in any activities other than acting as a holding company.
Accordingly, the Company's principal source of funds, including funds available
for payment of cash dividends to its shareholders, have and will consist of
dividends paid and other funds advanced to the Company by its subsidiaries. As
described below, statutory and regulatory requirements impose limitations on the
amounts of dividends payable by the Bank to the Company and on extensions of
credit by the Bank to the Company.
Holders of the Company's Common Stock are entitled to receive dividends as and
when declared by the Board of Directors out of funds legally available therefor
under the laws of the State of California. Under California law, the Company
would be prohibited from paying dividends unless: (1) its retained earnings
immediately prior to the dividend payment equals or exceeds the amount of the
dividend; or (2) immediately after giving effect to the dividend (i) the sum of
the Company's assets would be at least equal to 125% of its liabilities, and
(ii) the current assets of the Company would be at least equal to its current
liabilities, or, if the average of its earnings 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.
34
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 $100,000 and $230,000 in 1998 and 1997; no
dividends were paid to the Company in 1996.
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). 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 Commissioner
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.
35
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:
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Total assets $193,884 $162,445 $152,449 $137,810 $124,287
Net loans 91,701 78,720 87,602 85,327 76,581
Investment securities 58,003 33,057 32,059 22,003 18,434
Funds sold 31,900 38,390 22,780 20,690 21,300
Total deposits 170,423 145,096 136,755 124,724 113,666
Shareholders' equity 20,470 15,423 14,316 12,259 10,222
Book value per share $ 7.22 $ 6.38 $ 5.95 $ 5.11 $ 4.26
outstanding
The Company's operating results are summarized as follows for the twelve-month
periods ending December 31 of each of the following years:
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands except for per share)
Interest income $12,612 $11,868 $11,463 $10,920 $ 9,040
Interest expense 3,440 3,285 2,974 2,764 2,432
------- ------- ------- ------- -------
Net interest income 9,172 8,583 8,489 8,156 6,608
Provision for loan losses 72 540 0 678 250
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 9,100 8,043 8,489 7,478 6,358
Other income 858 695 700 447 807
Other expense 7,052 6,645 6,320 5,644 6,162
------- ------- ------- ------- -------
36
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands except for per share)
Income (loss) before taxes and
effects of accounting change 2,906 2,093 2,869 2,281 1,003
Provision (credit) for income
taxes 1,197 885 833 254 2
------- ------- ------- ------- -------
Net income (loss) $ 1,709 $ 1,208 $ 2,036 $ 2,027 $ 1,001
Basic earnings (loss) per $ 0.66 $ 0.50 $ 0.85 $ 0.85 $ .42
common share outstanding
Cash dividends declared per
share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
The number of shares outstanding (net of unearned ESOP shares) was 2,837,0000
in 1998, 2,416,000 in 1997, 2,406,000 in 1996, and 2,398,800 for 1995, and 1994.
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 1998, with significant
increases in net income, assets, deposits and loans. 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 1996, 1997, and 1998. 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.
Average assets in 1998 were $166,241,000 compared to $152,151,000 in 1997 and
$140,162,000 in 1996. As was the case in 1997 and 1996, the Company's asset
growth in 1998 was funded by an increase in deposits, as well as by the
retention of earnings for the year. The Company generated net income of
$1,709,000 in 1998, compared to a profit of $1,208,000 in 1997 and a profit of
$2,036,000 in 1996.
37
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 1997, in 1998
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 and
investment securities. During 1998 the mix of the Bank's deposits shifted away
from high-cost deposit sources such as money market deposits in favor of lower-
cost catagories such as noninterest bearing deposits. As deposit interest rates
were essentially stable in 1998 as they were during 1997 and 1996, the higher
deposit levels led to slight increases in interest expense in all three years.
Other Operating Income
----------------------
Other operating income increased substantially in 1998 after remaining
generally stable in 1997 and 1996. Other operating income for 1998 was
$858,000, versus $695,000 in 1997 and $700,000 for the year 1996. The 1998
figure included gains on sales of land of $86,000. 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. The Bank's new merchant services operation, which provides
credit card deposit and clearing services to retailers and other credit card
accepting businesses, had revenue that totaled $350,000 in 1998 compared to
$14,000 in 1997. Customer service fees continued their decline of the past
several years.
Loan Portfolio and Provision for Loan Losses
- --------------------------------------------
The loan portfolio consisted of the following at December 31, 1998 and 1997:
1998 1997
--------- -------
(Dollars in Thousands)
Commercial loans.................................... $24,811 $15,365
Real estate construction loans...................... 15,702 4,982
Real estate loans................................... 46,251 38,195
Bankers acceptances................................. 6,681 21,727
Other loans......................................... 797 420
------- -------
Total loans............................... $94,242 $80,689
Less - Allowances for loan losses................. 2,500 2,400
- Deferred loan fees......................... 562 511
------- -------
Net loans................................. $91,180 $77,778
======= =======
Government guaranteed loans held for sale $ 521 $ 942
======= =======
38
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 has not
been a significant factor in recent years. More important, the Company's
emphasis on maintaining high asset quality continued in 1998, 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)
totaled just $243,000 at the end of 1998, down from $338,000 on December 31,
1997, and compared to $302,000 at the end of 1996. Management believes the
allowance for possible loan losses as of December 31, 1998 was adequate in
relation to both existing and potential risks in the loan portfolio.
The Bank has historically evaluated the adequacy of its allowance for possible
loan losses on an overall basis rather than by specific categories of loans. In
determining the adequacy of the allowance for possible loan losses, management
considers such factors as historical loan loss experience, known problem loans,
evaluations made by bank regulatory authorities, assessment of economic
conditions and other appropriate data to identify the risks in the loan
portfolio.
The allowance for possible 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.
1998 1997
------ ---------
Allowance Ratio of Allowance Ratio of
for loans to for loans to
possible total possible total
loan losses loans loan losses loans
----------- ------ ---------- -------
Commercial loans........... $ 472 26% $ 408 19%
Real estate loans.......... 1,009 65% 754 54%
Gov't guaranteed........... 0 1% 0 1%
Bankers acceptances 0 7% 0 25%
Other loans................ 4 1% 5 1%
Unallocated................ 1,015 0% 1,233 0%
------ --- ------ ---
Total...................... $2,500 100% $2,400 100%
====== === ====== ===
39
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 1998 provisions of $72,000 were made to the
reserve for loan losses, $19,000 in loans were charged off, and $47,000 in loans
previously charged off were recovered. By way of comparison, during 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. 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. These transactions brought the
balance of the allowance for possible loan losses at the end of 1998 to
$2,500,000 (or 2.7% of total loans), compared to $2,400,000 (or 2.9% of total
loans) at December 31, 1997, and compared to $2,300,000 (or 2.5% of total loans)
at the end of 1996.
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 1998, the
Company identified loans having an aggregate average balance of $370,000 which
it concluded were impaired under SFAS No. 114. During 1997, the Company had
identified loans having an aggregate average balance of $1,783,000 which it
concluded were impaired. In contrast, during 1996 the Company had identified
loans having an aggregate average balance of $1,252,000 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 1998, 1997, or 1996.
Operating Expenses
------------------
Total operating expenses rose in 1998, to $7,052,000 from $6,645,000 in 1997
and $6,320,000 in 1996. While the total expense figures have fluctuated over
time, most components continue to be moderated by the effects of an ongoing
program of expense control.
Salaries and related benefits expense increased again in 1998, rising to
$3,555,000 from a 1997 total of $2,915,000 and from $2,566,000 in 1996. 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 1998 in connection with the establishment of new offices and
lines of business. Occupancy expense rose slightly in 1998, to $410,000 from
$393,000 in 1997 and a 1996 total of $374,000 due to operating
40
cost pass-throughs on the premises occupied by the Company. Real estate expense
from prior years was partially reversed leaving income of $33,000 in 1998 in
contrast to real estate expense of $3,000 in 1997 after a 1996 level of
$380,000. 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 1998 as they did in both 1997 and 1996, standing at
$553,000 for the year after $987,000 for 1997 versus $1,089,000 in 1996. 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 again 1998 as they did in 1997,
reversing the pattern of modest declines which had prevailed in prior years.
Other expenses totaled $2,567,000 in 1998 compared to $2,347,000 in 1997, which
was increased from $1,911,000 in 1996. Other expenses in 1998 include
professional services of $330,000 a significant decrease from the prior year.
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
$865,000 for 1997 after amounting to $467,000 in 1996. Data processing fees rose
in 1998 to $365,000 compared to $254,000 in 1997 and $242,000 in 1996. A
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 1998
was $17,000, for 1997 was $16,000, and $2,000 in 1996. Most of the remaining
categories of other expense generally remained stable: general insurance was
$120,000 during 1998, and $108,000 for both 1997 and 1996; directors fees rose
to $72,000 in 1998 due to an increase in outside directors during 1998 from
$46,000 in 1997 and from $59,000 in 1996 due to the elimination of directors
fees for directors who are also officers of the Bank; and other expenses, which
rose to $1,409,000 in 1998 after falling to $862,000 in 1997 from $946,000 in
1996 principally due to higher costs of services provided to customers.
Taxes and Effects of Accounting Changes
---------------------------------------
The combined effects of the activity described above resulted in Income Before
Taxes of $2,906,000 in 1998, up sharply from $2,093,000 in 1997, and up from
$2,869,000 in 1996. In 1998, the Company recorded tax provisions of $1,197,000.
During 1997, the Company recorded tax provisions of $885,000. At the end of
1995, the Company had a gross deferred tax asset, representing the accumulated
effects of timing differences between the Company's accounting records and tax
returns. 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 reduced to $200,000. The remaining balance of
the reserve was eliminated in 1996, and this reserve reversal led to net tax
provisions of $833,000 in 1996. As a result, the Company generated Net Income
of $1,709,000 in 1998, compared to $1,208,000 in 1997, and versus Net Income of
$2,036,000 in 1996.
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
41
sold) totaled $99,180,000 and $81,294,000 (or 58.0% and 56.0% of total deposits)
at December 31, 1998 and 1997, respectively. The ratio of net loans to deposits
was 53.5% and 54.3% at the end of 1998 and 1997, respectively.
Deposits of custodial clients of retirement plans administered by Transcorp
Pension Services, a corporate customer of the Bank, represented approximately
13% and 39% of the Bank's total deposits as of December 31, 1998 and 1997,
respectively; in recognition of this the Bank has maintained a large portion of
its assets in liquid form since the inception of the Transcorp relationship. In
1997 Transcorp merged with an affiliated company which already possessed
custodial powers, and for this reason Transcorp sought to terminate its deposit
relationship with the Bank. The Bank and Transcorp ultimately agreed to
terminate the relationship under a settlement agreement which, among other
things, provided for the transfer of the remaining deposits over an 18-month
period beginning in March, 1998 and continuing through September, 1999. Because
the Bank has invested the Transcorp deposits in highly liquid assets, it
anticipates no difficulty in accommodating the deposit withdrawals over the 18-
month transfer period.
The Bank's investment portfolio continues to be composed of high quality, low
risk securities, principally U.S. Agency securities and commercial papers. No
gains or losses were recorded on securities sales during 1998. In 1997, the
Bank generated net gains of $23,000 on sales of securities; by way of
comparison, losses of $65,000 on sales of securities were incurred in 1996. As
of December 31, 1998 the Bank's investment portfolio contained gross unrealized
gains of $3,000 and gross unrealized losses of $2,000, for net unrealized gains
of $1,000; at 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. The Company adopted SFAS No. 115 in 1994, with the
result that the net unrealized gains and losses gave rise to a $1,000 (net of
taxes) increase in shareholders' equity as of December 31, 1998, and a $9,000
increase (net of taxes) in the Company's shareholders' equity as of December 31,
1997. 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
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.
42
One month Six months One year
Floating Less than but less than but less than but less than Five years
Category Rate one month six months one year five years or more
=============================== ======== ========= ============= ============= ============== ==========
Fed funds sold 31,900 0 0 0 0 0
Time deposits with other banks 0 297 9,004 842 0 0
Investment securities 0 16,960 30,900 0 0 0
------- ------ ------ ------ ------ ------
Subtotal 31,900 17,257 39,904 842 0 0
Loans 83,871 5,815 1,251 750 14 0
------- ------ ------ ------ ------ ------
Total earning assets 115,771 23,072 41,155 1,592 14 0
Cash and due from banks 0 0 0 0 0 0
Premises and equipment 0 0 0 0 0 0
Other real estate owned 0 0 0 0 0 0
Other assets 0 0 0 0 0 0
------- ------ ------ ------ ------ ------
Total non-earning assets 0 0 0 0 0 0
------- ------ ------ ------ ------ ------
Total assets 115,771 23,072 41,155 1,592 14 0
Funds purchased 1 0 0 0 0 0
Repurchase agreements 0 0 0 0 0 0
------- ------ ------ ------ ------ ------
Subtotal 1 0 0 0 0 0
Savings deposits 7,314 0 0 0 0 0
Money market deposits 49,991 0 0 0 0 0
Time deposits 0 18,565 30,886 1,563 140 0
------- ------ ------ ------ ------ ------
Total bearing liabilities 57,306 18,565 30,886 1,563 140 0
Demand deposits 0 0 0 0 0 0
Other liabilities 0 0 0 0 0 0
Equity capital 0 0 0 0 0 0
------- ------ ------ ------ ------ ------
Total non-bearing liabilities 0 0 0 0 0 0
------- ------ ------ ------ ------ ------
Total liabilities 57,306 18,565 30,886 1,563 140 0
GAP 58,465 4,507 10,269 29 (126) 0
Cumulative GAP 58,465 62,972 73,241 73,270 73,144 73,144
Non-interest
earning
Category or bearing Total
=============================== ============= =======
Fed funds sold 0 31,900
Time deposits with other banks 0 10,143
Investment securities 0 47,860
------- -------
Subtotal 0 89,903
Loans 0 91,701
------- -------
Total earning assets 0 181,604
Cash and due from banks 9,277 9,277
Premises and equipment 790 790
Other real estate owned 0 0
Other assets 2,213 2,213
------- -------
Total non-earning assets 12,280 12,280
------- -------
Total assets 12,280 193,884
Funds purchased 0 1
Repurchase agreements 0 0
------- -------
Subtotal 0 1
Savings deposits 0 7,314
Money market deposits 0 49,991
Time deposits 0 51,154
------- -------
Total bearing liabilities 0 108,460
Demand deposits 61,964 61,964
Other liabilities 2,990 2,990
Equity capital 20,470 20,470
------- -------
Total non-bearing liabilities 85,424 85,424
------- -------
Total liabilities 85,424 193,884
GAP (73,144) 0
Cumulative GAP 0 0
As the table indicates, the vast majority of the Company's assets are either
floating rate or, if fixed rate, have extremely short maturities. Since the
yields on these assets quickly adjust to reflect changes in the overall level of
interest rates, there are no significant unrealized gains or losses with respect
to the Company's assets, nor is there much likelihood of large realized or
unrealized gains or losses developing in the future. For this reason, realized
or unrealized gains or losses are not expected to have any significant impact on
the Company's future operating results or liquidity.
The Company continues to maintain a strong and prudent capital position. Total
shareholders' equity was $20,470,000 and $15,423,000 as of December 31, 1998 and
1997, respectively. The Company's capital ratios for those dates in comparison
with regulatory capital requirements were as follows:
43
12-31-98 12-31-97
-------- --------
Leverage Ratio (Tier I Capital
to Assets:
First Regional Bancorp 11.17% 9.50%
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:
12-31-98 12-31-97
--------- --------
Tier I Capital to Assets:
First Regional Bancorp 14.35% 16.70%
Regulatory requirement 4.00% 4.00%
Tier I + Tier II Capital to Assets:
First Regional Bancorp 15.60% 18.00%
Regulatory requirement 8.00% 8.00%
The Company believes that it will continue to meet all applicable capital
standards.
During 1998, First Regional's capital was substantially increased through a
private placement offering of common shares at a price of $9.00 per share. This
transaction strengthens the Company's already solid financial foundation, and
thus provides the basis for additional future growth.
During the year the company also established an Employee Stock Ownership Plan
consisting of 150,000 shares of First Regional common stock acquired in market
transactions or directly from First Regional Bancorp at an average price of
$9.48 per share. This new Plan will build the capital base of First Regional
Bank and provide its employees with a powerful incentive to achieve further
improvements in First Regional's operating performance.
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.
44
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 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 financial institution, the Bank is also exposed to potential risk if
borrowers and depositors suffer year 2000-related difficulties and are unable to
repay their loans or maintain their deposit balances. The Bank is in the
process of performing an assessment of the year 2000 readiness with both
borrowers (as part of the loan granting or renewal process) and depositors. At
this time, it is impossible to determine what impact, if any, the year 2000 will
have on either the loan payment performance of the Bank's borrowers or the
balances of key depositors. Thus far, however, none of the Bank's borrowers or
depositors have reported the expectation of material adverse impacts as a result
of the year 2000.
Inflation
---------
The impact of inflation on the Company differs significantly from other
industries, since virtually all of its assets and liabilities are monetary.
During periods of 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.
45
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.
46
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.
47
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
1998.
48
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 30, 1999
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 30, 1999
- ------------------------
Jack A. Sweeney of the Board and Chief
Executive Officer
/s/ Lawrence Sherman Director, Vice Chairman March 30, 1999
- ------------------------
Lawrence J. Sherman of the Board
/s/ H. Anthony Gartshore Director and President March 30, 1999
- ------------------------
H. Anthony Gartshore
/s/ Thomas McCullough Director, Chief March 30, 1999
- ------------------------
Thomas E. McCullough Financial Officer and
Chief Accounting
Officer
/s/ Gary M. Horgan Director March 30, 1999
- ------------------------
Gary M. Horgan
/s/ Jeffrey Cove Director March 30, 1999
- ----------------------
Jeffrey Cove
/s/ Don S. Levin Director March 30, 1999
- ----------------------
Don S. Levin
/s/ Frank R. Moothart Director March 30, 1999
- ------------------------
Frank R. Moothart
/s/ Mark Rubin Director March 30, 1999
- -----------------------
Mark Rubin
49
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Financial Statements Page in Form 10-K
- -------------------- -----------------
First Regional Bancorp and Subsidiary:
Report of Independent Auditors.................. 51
Consolidated Balance Sheets as of
December 31, 1998 and 1997...................... 52
Consolidated Statements of Earnings for
the years ended December 31, 1998, 1997,
1996............................................ 53
Consolidated Statements of Shareholders'
Equity for the years ended December 31, 1998,
1997, and 1996.................................. 55
Consolidated Statements of Cash Flows for
the years ended December 31, 1998, 1997,
and 1996........................................ 56
Notes to Consolidated Financial Statements 58
First Regional Bancorp (Parent Company):
Note 16 to Consolidated Financial
Statements...................................... 75
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.
50
First Regional Bancorp and Subsidiary
Consolidated Financial Statements as of December 31, 1998
and 1997 and for Each of the Three Years in the Period
Ended December 31, 1998 and Independent Auditors' Report
51
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, 1998 and 1997, 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,
1998. 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, 1998 and 1997, and the results of their earnings
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.
Los Angeles, California
February 19, 1999
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------------------------------------------
ASSETS 1998 1997
Cash and due from banks (Note 6) $ 9,277,000 $ 9,847,000
Federal funds sold 31,900,000 38,390,000
------------ ------------
Cash and cash equivalents 41,177,000 48,237,000
Investment securities available for sale, amortized cost
$47,859,000 and $26,418,000 (Note 2) 47,860,000 26,431,000
Interest-bearing deposits in financial institutions 10,143,000 6,626,000
Loans, net (Note 3) 91,180,000 77,778,000
Government guaranteed loans, held for sale, at lower of cost
or market (Note 3) 521,000 942,000
Premises and equipment, net (Note 4) 790,000 698,000
Accrued interest receivable and other assets 1,287,000 1,106,000
Income tax assets (Note 5) 926,000 627,000
------------ ------------
TOTAL $193,884,000 $162,445,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits (Notes 12 and 14):
Noninterest bearing $ 61,964,000 $ 35,820,000
Interest bearing:
Time deposits 51,154,000 30,206,000
Money market deposits 49,991,000 72,959,000
Other 7,314,000 6,111,000
------------ ------------
Total deposits 170,423,000 145,096,000
Note payable (Note 10) 1,463,000
Accrued interest payable and other liabilities (Note 5) 1,528,000 1,926,000
------------ ------------
Total liabilities 173,414,000 147,022,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 6)
SHAREHOLDERS' EQUITY (Notes 7, 8 and 10):
Common stock, no par value; authorized, 50,000,000 shares;
outstanding, 2,983,000 (1998) and 2,416,000 (1997) shares 16,034,000 11,286,000
Less unearned ESOP shares; 146,000 in 1998 (1,386,000)
------------ ------------
Total common stock, no par value; outstanding
2,837,000 (1998) and 2,416,000 (1997) shares 14,648,000 11,286,000
Retained earnings 5,821,000 4,128,000
Accumulated other comprehensive income 1,000 9,000
------------ ------------
Total shareholders' equity 20,470,000 15,423,000
------------ ------------
TOTAL $193,884,000 $162,445,000
============ ============
See notes to consolidated financial statements.
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
INTEREST INCOME:
Interest on loans $ 8,517,000 $ 8,742,000 $ 8,509,000
Interest on deposits in financial institutions 521,000 280,000 280,000
Interest on federal funds sold 1,808,000 1,569,000 1,219,000
Interest on investment securities 1,766,000 1,277,000 1,455,000
----------- ----------- -----------
Total interest income 12,612,000 11,868,000 11,463,000
----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits (Notes 12 and 14) 3,437,000 3,285,000 2,970,000
Interest on other borrowings 3,000 4,000
----------- ----------- -----------
Total interest expense 3,440,000 3,285,000 2,974,000
----------- ----------- -----------
NET INTEREST INCOME 9,172,000 8,583,000 8,489,000
PROVISION FOR LOAN LOSSES (Note 3) 72,000 540,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 9,100,000 8,043,000 8,489,000
----------- ----------- -----------
OTHER OPERATING INCOME:
Customer service fees 680,000 291,000 361,000
Other 178,000 404,000 339,000
----------- ----------- -----------
Total operating income 858,000 695,000 700,000
----------- ----------- -----------
OTHER OPERATING EXPENSES:
Salaries and related benefits (Note 6) 3,555,000 2,915,000 2,566,000
Occupancy expenses (Note 4) 410,000 393,000 374,000
Custodial and other service (Note 14) 553,000 987,000 1,089,000
Real estate (income) expense, net (33,000) 3,000 380,000
Other expenses (Note 13) 2,567,000 2,347,000 1,911,000
----------- ----------- -----------
Total operating expenses 7,052,000 6,645,000 6,320,000
----------- ----------- -----------
See notes to consolidated financial statements.
(Continued)
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ---------------------------------------------------------------------------------------------------------------------
1998 1997 1996
INCOME BEFORE PROVISION FOR INCOME
TAXES $2,906,000 $2,093,000 $2,869,000
PROVISION FOR INCOME TAXES (Note 5) 1,197,000 885,000 833,000
---------- ---------- ----------
NET INCOME $1,709,000 $1,208,000 $2,036,000
========== ========== ==========
BASIC EARNINGS PER COMMON SHARE
(Note 8) $ 0.66 $ 0.50 $ 0.85
========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE
(Note 8) $ 0.62 $ 0.46 $ 0.78
========== ========== ==========
See notes to consolidated financial statements.
(Concluded)
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Accumulated
------------------------------- Other
Shares Retained Comprehensive Comprehensive
Outstanding Amount Earnings Income Income
BALANCE, JANUARY 1, 1996 2,399,000 $11,332,000 $ 922,000 $ 5,000
Options exercised 7,000
Comprehensive income -
Net income 2,036,000 $2,036,000
Other comprehensive income -
Net change in unrealized gain (loss)
on securities available for sale,
net of tax 21,000 21,000
-------------
Comprehensive income $2,057,000
--------- ----------- ------------ ------------- =============
BALANCE, DECEMBER 31, 1996 2,406,000 11,332,000 2,958,000 26,000
Options exercised including tax benefit 40,000 102,000
Common stock repurchased and
retired (30,000) (148,000) (38,000)
Comprehensive income -
Net income 1,208,000 $1,208,000
Other comprehensive income -
Net change in unrealized gain (loss)
on securities available for sale,
net of tax (17,000) (17,000)
-------------
Comprehensive income $1,191,000
--------- ----------- ------------ ------------- =============
BALANCE, DECEMBER 31, 1997 2,416,000 11,286,000 4,128,000 9,000
Common stock repurchased and retired (4,000) (20,000) (16,000)
Common stock issued in private
placement and for ESOP 503,000 4,574,000
Unearned ESOP shares (146,000) (1,386,000)
Options exercised including tax benefit 68,000 194,000
Comprehensive income -
Net income 1,709,000 $1,709,000
Other comprehensive income -
Net change in unrealized gain (loss)
on securities available for sale,
net of tax (8,000) (8,000)
-------------
Comprehensive income $1,701,000
--------- ----------- ------------ ------------- =============
BALANCE, DECEMBER 31, 1998 2,837,000 $14,648,000 $ 5,821,000 $ 1,000
========= =========== ============ =============
See notes to consolidated financial statements.
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
OPERATING ACTIVITIES:
Net income $ 1,709,000 $ 1,208,000 $ 2,036,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on loans 72,000 540,000
Provision for losses on real estate 80,000
Contribution of real estate 320,000
Provision for depreciation 136,000 88,000 51,000
Gain on sale of investment securities, net (23,000) (32,000)
Gain on sale of real estate (86,000) (179,000)
Amortization of investment securities premiums
and discounts, net (287,000) (261,000) (154,000)
Gain on sale of loans (9,000) (103,000) (295,000)
Loss (gain) on sale of fixed assets 4,000 (15,000)
Amortization of loan premiums and discounts, net (464,000) (977,000) 610,000
(Increase) decrease in interest receivable
and other assets (181,000) 1,418,000 (473,000)
(Decrease) increase in interest payable
and other liabilities (398,000) 659,000 551,000
Deferred income tax benefit (212,000) (4,000) (273,000)
------------ ------------ ------------
Net cash provided by operating activities 284,000 2,351,000 2,421,000
------------ ------------ ------------
INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits
in financial institutions (3,517,000) (1,384,000) 2,879,000
Net increase in loans (13,017,000) (263,000) (19,189,000)
Proceeds from sale of loans 452,000 7,275,000 16,620,000
Purchases of investment securities (88,500,000) (39,158,000) (24,452,000)
Proceeds from maturities of investment securities 67,346,000 22,474,000 7,567,000
Proceeds from sales of investment securities 17,328,000 4,135,000
Purchases of premises and equipment (352,000) (425,000) (212,000)
Proceeds from sale of premises and equipment 120,000 16,000
Net decrease in investment in real estate 12,000
Proceeds from sale of real estate 86,000 2,589,000
------------ ------------ ------------
Net cash (used in) provided by investing
activities (37,382,000) 8,452,000 (12,640,000)
------------ ------------ ------------
See notes to consolidated financial statements.
(Continued)
FIRST REGIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
FINANCING ACTIVITIES:
Net increase in time deposits $19,785,000 $ 5,367,000 $11,824,000
Net increase in noninterest-bearing
deposits and other interest-bearing deposits 5,542,000 2,974,000 207,000
Decrease in note payable (37,000)
Sales of common stock 4,688,000
Stock options exercised 96,000
Common stock repurchased and retired (36,000) (186,000)
----------- ----------- -----------
Net cash provided by financing activities 30,038,000 8,155,000 12,031,000
----------- ----------- -----------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (7,060,000) 18,958,000 1,812,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 48,237,000 29,279,000 27,467,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $41,177,000 $48,237,000 $29,279,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
NONCASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of debt for ESOP shares $ 1,500,000
Acquisition of other real estate owned through
foreclosure $ 2,410,000
Net transfer of loans to loans held for sale $20,480,000
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest paid $ 3,354,000 $ 3,272,000 $ 2,721,000
Income taxes paid $ 1,397,000 $ 625,000 $ 1,285,000
See notes to consolidated financial statements.
58
FIRST REGIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
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"), primarily serve Southern California through its branch and loan
production offices. 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. 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.
Government guaranteed loans are generally classified as held for sale. 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.
59
The allowance for loan losses is maintained at a level considered adequate by
management to provide for losses that might be reasonably anticipated. The
allowance is increased by provisions charged to earnings and reduced by
charge-offs, net of recoveries. Management's periodic estimates of the
allowance for loan losses are inherently uncertain and depend on the outcome
of future events. Such estimates are based on previous loan loss experience;
current economic conditions; volume, growth, and composition of the loan
portfolio; the value of collateral; and other relevant factors.
Loans are considered to be impaired when it is not probable that they will be
collected in accordance with their original terms. Impaired loans are
carried at the lower of their contractual balances or estimated fair values.
Specific reserves necessary to reduce their carrying amounts to fair value
are included in the allowance for 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 supports 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 is recognized 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.
60
Earnings per Common Share - 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.
Employee Stock Ownership Plan and Trust - The Company accounts for its ESOP
in accordance with Statement of Position 93-6. Accordingly, the debt of the
ESOP is recorded as debt of the Company and the shares pledged as collateral
are reported as unearned ESOP shares in the balance sheet. As shares are
released from collateral, the Company reports compensation expense equal to
the current market price of the shares, and the shares become outstanding for
earnings-per-share ("EPS") computations.
Current Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," effective for the fiscal
years beginning after December 15, 1997. This statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements.
Reclassification of financial statements for earlier periods, provided for
comparative purposes, is required. This statement was adopted for the year
ended December 31, 1998, and is reflected in the Company's consolidated
financial statements.
In September 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," effective for financial statements
for periods beginning after December 15, 1997. This statement established
standards for reporting information about operating segments in annual and
interim financial statements. Because the Company has no other operating
segments outside of the banking operation that meet the threshold
requirements under this statement, no segment disclosures are provided.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for financial statements for
periods beginning after June 15, 1999. This statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to
as derivatives), and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Adoption of
this statement is not expected to have a material impact on the Company's
consolidated financial statements.
Reclassifications - Certain amounts in the 1997 and 1996 financial statements
have been reclassified to be comparable to the classification used in the
1998 financial statements.
2. INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available for sale
as of December 31, 1998 and 1997 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
1998 Cost Gains Losses Value
U.S. agency securities $ 5,998,000 $ 1,000 $ - $ 5,999,000
Commercial paper 41,861,000 41,861,000
----------- ------- ------- -----------
$47,859,000 $ 1,000 $ - $47,860,000
=========== ======= ======= ===========
1997
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
=========== ======= ======= ===========
All securities held at December 31, 1998 are scheduled to mature in 1999.
The Banks investments in commercial paper are subject to credit risk. The
Bank's policy is to purchase commercial paper rated "A1" by Moody's or "P1"
by Standard and Poors. All purchases are reviewed and approved by the
Investment Committee.
Securities carried at $6,000,000 and $4,000,000 were pledged as of December
31, 1998 and 1997, respectively, to secure current or future public deposits
and for other purposes required or permitted by law.
3. LOANS
The loan portfolio consisted of the following at December 31, 1998 and 1997:
1998 1997
Real estate loans $46,251,000 $38,195,000
Commercial loans 24,811,000 15,365,000
Real estate construction loans 15,702,000 4,982,000
Bankers' acceptances 6,681,000 21,727,000
Other loans 797,000 420,000
----------- -----------
94,242,000 80,689,000
Allowance for loan losses (2,500,000) (2,400,000)
Deferred loan fees, net (562,000) (511,000)
----------- -----------
Loans, net $91,180,000 $77,778,000
=========== ===========
Government guaranteed loans held for sale $ 521,000 $ 942,000
=========== ===========
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, 1998, 1997 and 1996 is as follows:
1998 1997 1996
Balance, beginning of year $2,400,000 $2,300,000 $2,000,000
Provision for loan losses 72,000 540,000
Loans charged off (19,000) (719,000) (230,000)
Recoveries on loans previously charged off 47,000 279,000 530,000
---------- ---------- ----------
Balance, end of year $2,500,000 $2,400,000 $2,300,000
========== ========== ==========
Management believes the allowance for loan losses as of December 31, 1998 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, 1998 and 1997, the recorded investment in loans for which
impairment had been recognized was $463,000 and $496,000, with specific
reserves of $121,000 and $252,000 respectively. The average recorded
investment in impaired loans during 1998 and 1997 was $370,000 and
$1,783,000, respectively. Interest income on impaired loans of $43,000,
$45,000, and $190,764 was recognized for cash payments received in 1998, 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, 1998 and 1997:
1998 1997
Balance, beginning of year $ 64,000 $ 78,000
Loans granted or renewed 64,000
Repayments (64,000) (78,000)
-------- --------
Balance, end of year $ - $ 64,000
======== ========
4. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following as of December 31, 1998 and
1997:
1998 1997
Furniture, fixtures and equipment $ 2,020,000 $ 1,988,000
Leasehold improvements 555,000 538,000
----------- -----------
2,575,000 2,526,000
Accumulated depreciation and amortization (1,785,000) (1,828,000)
----------- -----------
Premises and equipment, net $ 790,000 $ 698,000
=========== ===========
Rental expense for premises included in occupancy expenses for 1998, 1997 and
1996 was approximately $385,000, $366,000 and $356,000, respectively.
The future minimum rental commitments, primarily representing noncancelable
operating leases for premises, were as follows at December 31, 1998,
excluding the effect of future cost-of-living increases provided for in the
leases, and net of sublease income:
Minimum Rental
Commitments
1999 $ 498,000
2000 486,000
2001 469,000
2002 423,000
2003 61,000
Thereafter ----------
Total $1,937,000
==========
At the end of 1994, the Company elected to apply the unused tenant
improvement allowance of $224,000 against its future lease payments for the
Century City Office. 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.
5. INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1998, 1997 and
1996, net of valuation adjustments, consists of the following:
1998 1997 1996
Current provision:
Federal $1,068,000 $652,000 $ 997,000
State 341,000 237,000 109,000
---------- -------- ----------
1,409,000 889,000 1,106,000
---------- -------- ----------
Deferred provision (benefit):
Federal (190,000) (3,000) (389,000)
State (22,000) (1,000) 116,000
---------- -------- ----------
(212,000) (4,000) (273,000)
---------- -------- ----------
Total $1,197,000 $885,000 $ 833,000
========== ======== ==========
Income tax assets (liabilities) consisted of the following at December 31,
1998 and 1997:
1998 1997
Income taxes currently receivaable:
Federal $ 34,000 $ 5,000
State 57,000 (5,000)
-------- --------
91,000
-------- --------
Deferred income tax asset:
Federal 614,000 428,000
State 221,000 199,000
-------- --------
835,000 627,000
-------- --------
Total $926,000 $627,000
======== ========
The components of the net deferred income tax asset at December 31 are
summarized as follows:
Federal 1998 1997
Deferred tax liabilities:
Prepaid expenses $ (37,000) $ (53,000)
State taxes (75,000) (67,000)
Depreciation (119,000) (78,000)
Other (194,000)
--------- ---------
Gross liabilities (231,000) (392,000)
--------- ---------
Deferred tax assets:
Loan and real estate loss allowances 311,000 291,000
Deferred compensation 328,000 270,000
State franchise tax 97,000 64,000
Contribution charge-off 77,000 173,000
Other 32,000 22,000
--------- ---------
Gross assets 845,000 820,000
--------- ---------
Net deferred tax asset - federal 614,000 428,000
--------- ---------
State
Deferred tax liabilities:
Prepaid expenses (12,000) (17,000)
Depreciation (35,000) (22,000)
Other (62,000)
-------- ---------
Gross liabilities (47,000) (101,000)
-------- ---------
Deferred tax assets:
Loan and real estate loss allowances 153,000 155,000
Deferred compensation 105,000 86,000
Real estate contribution 52,000
Other 10,000 7,000
-------- ---------
Gross assets 268,000 300,000
-------- ---------
Net deferred tax asset - state 221,000 199,000
-------- ---------
Net deferred tax asset $835,000 $ 627,000
======== =========
The provision for income taxes (benefit) for the years ended December 31,
1998, 1997 and 1996 varied from the federal statutory tax rate for the
following reasons:
1998 1997 1996
---------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
Tax expense (benefit)
at statutory rate $1,017,000 35.0 % $733,000 35.0 % $1,014,000 35.0 %
State franchise taxes,
net of federal income
tax benefit 211,000 7.3 156,000 7.4 146,000 5.1
Valuation allowance (200,000) (6.9)
Other, net (31,000) (1.1) (4,000) (0.1) (127,000) (4.4)
---------- ----- -------- ----- ---------- -----
Total $1,197,000 41.2 % $885,000 42.3 % $ 833,000 28.8 %
========== ===== ======== ===== ========== =====
6. COMMITMENTS AND CONTINGENCIES
As of December 31, 1998, the Company had the following commitments and
contingent liabilities:
Undisbursed loans $27,914,000
Stand-by letters of credit $ 1,621,000
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 $47,000, $42,000 and $28,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
As of December 31, 1998, 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.
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
$2,202,000 and $830,000 at December 31, 1998 and 1997, respectively.
67
In the normal course of business, the Company and the Bank are involved in
litigation. Management does not expect the ultimate outcome of any pending
litigation to have a material effect on the Company's financial position or
results of operations.
However, in late 1998, Mark Rubin, a director of the Company and its former
vice chairman, filed suit against the Company, the Bank, and individual
members of the Company's executive committee. Mr. Rubin alleges that his
employment with the Company was wrongfully terminated and that the defendants
also breached fiduciary duties owed to Mr. Rubin and committed acts of
defamation and fraud against him. In his complaint, Mr. Rubin's suit seeks
compensatory and punitive damages of approximately $59 million. In January
1999, Mr. Rubin submitted a statutory offer of compromise under Section 998
of the California Code of Civil Procedure offering to settle the lawsuit for
$3 million. The Company rejected this settlement proposal.
The Company believes the claims, as alleged, are without merit and has moved
to dismiss Mr. Rubin's complaint. Mr. Rubin has informed the Company that he
intends to amend his complaint prior to the court hearing on the Company's
motion, but has not yet done so. The Company has vigorously defended against
Mr. Rubin's lawsuit and will continue to do so. Because the case is in its
very early stages, it is not currently possible to determine what impact, if
any, the resolution of this matter will have on the future financial
condition and results of operations of the Company.
7. REGULATORY CAPITAL
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, 1998
and 1997, that the Bank meets all capital adequacy requirements to which it
is subject.
As of December 31, 1998 and 1997, the most recent notifications 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
the most recent notification that management believes have changed the Bank's
category.
Following is a table showing the minimum capital ratios required for the Bank
and the Bank's actual capital ratios and actual capital amounts at December
31, 1998 and 1997 (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, 1998:
Total capital
(to risk-weighted
assets) $23,546,000 15.6 % $12,075,000 > 8.0 % $15,093,000 > 10.0 %
Tier I capital
(to risk-weighted
assets) $21,651,000 14.4 % $ 6,035,000 > 4.0 % $ 9,053,000 > 6.0 %
Tier I capital
(to average assets) $21,651,000 11.2 % $ 7,753,000 > 4.0 % $ 9,692,000 > 5.0 %
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 %
8. EARNINGS PER SHARE RECONCILIATION
December 31, 1998
----------------------------------------------------------------------
Weighted-
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS
Income available to common shareholders $1,709,000 2,595,000 $ 0.66
Effect of Dilutive Securities
Incremental shares from assumed exercise
of outstanding options 169,000 (0.04)
---------- ---------- ------
Diluted EPS
Income available to common shareholders $1,709,000 2,764,000 $ 0.62
---------- ---------- ------
December 31, 1997
----------------------------------------------------------------------
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
---------- ---------- ------
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
---------- ---------- ------
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 1998 or 1997.
In 1998, under the terms of the Plan, 74,000 stock options were exchanged for
68,000 shares of stock. In 1997, under the terms of the Plan, 60,000 stock
options were exchanged for 40,408 shares of stock.
At December 31, 1998, 1997 and 1996, the Company had options outstanding
granted under the plan as follows:
1998 1997 1996
--------------------------------- --------------------------------- ---------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 280,000 $2.29 340,000 $2.24 345,000 $2.09
Granted 20,000 4.63
Exercised (74,000) 2.10 (60,000) 2.00 (10,000) 2.00
Terminated (15,000) 2.00
------- ------- -------
Outstanding at
end of year 206,000 2.36 280,000 2.29 340,000 2.24
======= ======= =======
Options exercis-
able at year end 64,000 2.38 70,000 2.21 64,000 2.09
======= ======= =======
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, 1998 and 1997 would have been
reduced to the pro forma amounts indicated below:
1998 1997 1996
Net income to common shareholders:
As reported $1,709,000 $1,208,000 $2,036,000
Pro forma $1,672,000 $1,171,000 $1,999,000
Basic earnings per share:
As reported $ 0.66 $ 0.50 $ 0.85
Pro forma $ 0.64 $ 0.49 $ 0.83
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.
71
10. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
During 1998, the company established for eligible employees an Employee
Stock Ownership Plan and Trust ("ESOP"). Eligible full-time and part-time
employees employed with the Bank who have been credited with at least 1,000
hours during a 12-month period and who have attained age 21 are eligible to
participate.
On September 30, 1998, the ESOP borrowed $1,500,000 from an unrelated bank
in order to fund the purchase of 150,000 shares of the Company's common
stock. This loan is scheduled to be repaid monthly on a straight-line basis
over five years, with the funds for repayment from the Company's
contributions to the ESOP. The ESOP shares were pledged as collateral for
its debt. The interest rate on this loan is variable, prime plus .5%, with
interest of 8.25% at December 31, 1998. The outstanding principal balance
of the ESOP loan at December 31, 1998 was $1,463,000.
Shares purchased by the ESOP are held in a trust account for allocation
among participants as the loan is repaid. The number of shares allocated
each plan year is dependent upon the ratio of that year's total loan
payment to the aggregate payments scheduled to occur throughout the term of
the loan. The annual allocation of shares is apportioned among participants
on the basis of compensation in the year of allocation. ESOP benefits
generally become 100% vested after an employee completes seven years of
credited service. Benefits are payable upon death, retirement, or
disability. The number of shares of common stock allocated to employee
accounts was 3,750 shares at December 31, 1998.
Periodic operating expense associated with the ESOP is recognized based
upon both the number of shares pro-rata allocated and the periodic fair
market value of the common stock. The expense related to the ESOP for the
year ended December 31, 1998 was $68,000. At December 31, 1998, unearned
compensation related to the ESOP approximated $1,386,000 and is shown as a
reduction of shareholders' equity in the accompanying balance sheet. Based
upon the market price of the Company's stock at December 31, 1998, the
unearned shares of the ESOP have a cumulative fair value of $1,097,000.
11. 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, December 31,
1998 1997
--------------------------------- ---------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In thousands) (In thousands)
Assets:
Cash and due from banks $ 9,277 $ 9,277 $ 9,847 $ 9,847
Federal funds sold 31,900 31,900 38,390 38,390
Interest-bearing deposits in
financial institutions 10,143 10,143 6,626 6,626
Investment securities available for sale 47,860 47,860 26,431 26,431
Loans 91,180 96,364 77,778 79,597
Government guaranteed loans 521 521 942 970
Accrued interest receivable 660 660 787 787
Liabilities:
Deposits:
Noninterest-bearing 61,964 61,964 35,820 35,820
Interest-bearing:
Time deposits 49,991 50,114 30,206 30,217
Money market and other deposits 58,468 58,468 79,070 79,070
Accrued interest payable 220 220 131 131
Fair market values of commitments to extend credit and standby letters of
credit are immaterial as of December 31, 1998 and 1997.
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 $463,000 in 1998 and $496,000 in 1997 were not
estimated because it is not practicable to reasonably assess the credit
adjustment that would be applied in the marketplace for such loans.
73
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1998 and 1997. 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.
12. INTEREST EXPENSE
A summary of interest expense on deposits for the years ended December 31,
1998, 1997 and 1996 is as follows:
1998 1997 1996
Money market savings/NOW account deposits $1,544,000 $2,228,000 $2,105,000
Time deposits under $100,000 1,026,000 322,000 222,000
Time deposits of $100,000 or more 830,000 705,000 616,000
Savings deposits 37,000 30,000 27,000
---------- ---------- ----------
$3,437,000 $3,285,000 $2,970,000
========== ========== ==========
The aggregate amount of time deposits in denominations of $100,000 or more
outstanding as of December 31, 1998 and 1997 was approximately $22,246,000
and $16,672,000, respectively. The aggregate amount of deposits from escrow
related accounts was approximately $30,294,000 and $14,522,000 as of December
31, 1998 and 1997.
13. OTHER OPERATING EXPENSES
Included in other operating expenses for the years ended December 31, 1998,
1997 and 1996 are the following items:
1998 1997 1996
Professional services $ 330,000 $ 865,000 $ 467,000
Data processing fees 365,000 254,000 242,000
Equipment expense 254,000 196,000 87,000
General insurance 120,000 108,000 108,000
Directors' fees 72,000 46,000 59,000
FDIC assessment 17,000 16,000 2,000
Other 1,409,000 862,000 946,000
---------- ---------- ----------
Total $2,567,000 $2,347,000 $1,911,000
========== ========== ==========
74
14. TRANSCORP RELATIONSHIP
The Bank 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 were governed by an agreement that required,
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
nonmonetary, 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 13% and 39% of the Bank's total deposits as of December 31,
1998 and 1997, respectively. For the years ended December 31, 1998, 1997 and
1996, the Bank paid interest of $782,000, $1,780,000 and $1,746,000,
respectively, on deposits of Transcorp custodial clients, and paid $553,000,
$987,000 and $1,089,000, 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 remaining transfer period called for in the settlement.
Over time, the Bank intends to replace the Transcorp-related deposits with
deposits obtained from other sources.
15. RELATED-PARTY TRANSACTIONS
The Bank has an agreement with a director whereby the Bank receives
management and consulting services for properties. Total payments in 1998,
1997, and 1996 to the director under the agreement were $0, $4,000, and
$6,000, 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, 1998 and 1997, deposits from directors, officers and their
affiliates amounted to $318,000 and $4,654,000, respectively.
75
16. FINANCIAL INFORMATION REGARDING FIRST REGIONAL BANCORP
As of December 31, 1998 and 1997, the Company's investment in the Bank was
recorded on the equity method at $21,619,000 and $15,312,000, respectively.
The Company's cash balance held in the Bank was $36,000 and $1,000 as of
December 31, 1998 and 1997, respectively. The only other significant asset
or liability recorded on the Company's balance sheet in 1998 is a tax benefit
of $199,000 pertaining to the exercise of stock options. There was no
significant asset or liability in 1997 and 1996. The Company's significant
operations consist solely of the recognition of its equity in the income or
loss of the Bank. The Bank paid dividends of $100,000 to the Company in 1998
and $230,000 in 1997. No dividends were paid by the Bank to the Company in
1996.
Federal law restricts the Bank from extending credit to the Company; any such
extensions of credit are subject to strict collateral requirements.
17. SUBSEQUENT EVENT - TRUST ADMINISTRATION SERVICES CORP. ACQUISITION
In January 1999, First Regional Bank established Trust Administration
Services Corp. ("TASC"), a new, wholly owned subsidiary that provides
administrative and custodial services to self-directed retirement plans. In
conjunction with the formation of TASC, the Bank acquired the retirement plan
division of another institution at a cost of approximately $900,000. As a
result of this acquisition, TASC became the administrator for approximately
$250 million in retirement assets, including approximately $25 million in
cash deposits that were transferred to First Regional Bank in 1999.
Management believes that TASC will become a significant source of deposits
and fee income in the future, but at this point it is impossible to determine
what impact, if any, the formation of TASC will have on the Bank's future
results.
* * * * * *
76
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 58 of this report on Form 10-
K)
21 Subsidiary of Registrant
27 Financial Data Schedule