FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

 

Quarter Ended        September 30, 2002

 

Commission File Number    0-10232

 

FIRST REGIONAL BANCORP

(Exact name of registrant as specified in its charter)

 

 

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 ý   No   o

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding in each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

FIRST REGIONAL BANCORP

INDEX

 

Part I - Financial Information
	Item 1.	Financial Statements
		Consolidated Statements of Financial Condition (unaudited)
		Consolidated Statements of Income (unaudited)
		Consolidated Statements of Cash Flows (unaudited)
		Notes to Consolidated Financial Statements (unaudited)
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk
	Item 4.	Controls and Procedures
Part II - Other Information
	Item 1.	Legal Proceedings
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 6.	Exhibits and Reports on Form 8-K
Certification and Signatures

 

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PART I - FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

FIRST REGIONAL BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In Thousands)

(unaudited)

 

		September 30, 2002			December 31, 2001
ASSETS
Cash and due from banks		$	25,734		$	25,975
Federal funds sold		22,975			25,640
Cash and cash equivalents		48,709			51,615
Investment securities, available for sale, at fair value		2,733			2,739
Loans, net of allowance for losses of $5,350 in 2002 and $5,000 in 2001		355,681			280,383
Premises and equipment, net of accumulated depreciation		1,531			1,527
Accrued interest receivable and other assets		12,781			10,788
Total Assets		$	421,435		$	347,052
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest bearing		$	128,860		$	116,112
Interest Bearing:
Savings deposits		23,792			16,477
Money market deposits		164,562			132,096
Time deposits		59,427			47,895
Total deposits		376,641			312,580
Note payable		900			1,013
Accrued interest payable and other liabilities		4,519			3,504
Trust Securities		12,500			5,000
Total Liabilities		394,560			322,097
Shareholders’ Equity:
Common Stock, no par value, 50,000,000 shares authorized; 2,725,000 and 2,750,000 shares issued in 2002 and 2001, respectively		13,725			13,850
Less: Unearned ESOP shares; 95,000 and 107,000 outstanding in 2002 and 2001, respectively		(853		)	(958		)
Total common stock, no par value; Outstanding 2,630,000 (2002) and 2,643,000 (2001) shares		12,872			12,892
Retained earnings		14,003			12,068
Accumulated other comprehensive income, Net of tax		0			(5		)
Total Shareholders’ Equity		26,875			24,955
Total Liabilities and Shareholders’ Equity		$	421,435		$	347,052

 

The accompanying notes are an integral part of these statements.

 

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FIRST REGIONAL BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands Except Per Share Amounts)

(Unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2002			2001			2002			2001
INTEREST INCOME:
Interest and fees on loans		$	5,838		$	5,268		$	15,863		$	16,408
Interest on investment securities		13			23			45			94
Interest on federal funds sold		179			213			333			948
Total interest income		6,030			5,504			16,241			17,450
INTEREST EXPENSE:
Interest on deposits		726			1,180			1,939			4,325
Interest on trust securities		70			0			212			0
Interest on other borrowings		3			3			7			8
Total interest expense		799			1,183			2,158			4,333
Net interest income		5,231			4,321			14,083			13,117
PROVISION FOR LOAN LOSSES		150			100			350			900
Net interest income after provision for loan losses		5,081			4,221			13,733			12,217
OTHER OPERATING INCOME:
Customer service fees		731			571			2,121			1,563
Other, net		146			148			413			402
Total other operating income		877			719			2,534			1,965
OPERATING EXPENSES:
Salaries and related benefits		2,807			2,225			7,860			6,566
Occupancy expense		320			306			975			865
Equipment expense		153			136			443			413
Promotion expense		70			67			179			208
Professional service expense		308			348			983			995
Customer service expense		113			134			283			385
Supply/communication expense		195			158			522			470
Other expenses		449			502			1,422			1,229
Total operating expenses		4,415			3,876			12,667			11,131
Income before provision for income taxes		1,543			1,064			3,600			3,051
PROVISION FOR INCOME TAXES		634			441			1,483			1,261
NET INCOME		$	909		$	623		$	2,117		$	1,790
EARNINGS PER SHARE (Note 2)
Basic		$	0.35		$	0.24		$	0.81		$	0.68
Diluted		$	0.34		$	0.23		$	0.79		$	0.67

 

The accompanying notes are an integral part of these statements.

 

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FIRST REGIONAL BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2002			2001
OPERATING ACTIVITIES
Net Income		$	2,117		$	1,790
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		350			900
Depreciation and amortization		244			223
Amortization of investment security and guaranteed loan premiums		16			514
Accretion of investment security discounts		(38		)	(39		)
Decrease in accrued interest receivable		17			873
Decrease in accrued interest payable		(53		)	(173		)
Increase in taxes payable		448			174
Net increase in other liabilities		834			878
Net increase in other assets		(2,010		)	(1,922		)
Net cash provided by operating activities		1,925			3,218
INVESTING ACTIVITIES
Decrease in investments in time deposits with other financial institutions		$	0		$	99
Decrease (increase) in investment securities		45			(735		)
Decrease in guaranteed loans		6,161			7,842
Net increase in other loans		(81,821		)	(35,733		)
Increase in premises and equipment		(248		)	(353		)
Net cash used in investing activities		(75,863		)	(28,880		)
FINANCING ACTIVITIES
Net increase in noninterest bearing deposits money market deposits, and other deposits		52,529			29,215
Net increase (decrease) in time deposits		11,532			(4,126		)
Decrease in note payable		(113		)	(113		)
Decrease in securities sold under agreement to repurchase		(214		)	(1,401		)
Issuance of Trust Securities		7,500			0
Common stock repurchased and retired		(202		)	(223		)
Net cash provided by financing activities		71,032			23,352
Decrease in cash and cash equivalents		(2,906		)	(2,310		)
Cash and cash equivalents, beginning of period		51,615			59,559
Cash and cash equivalents, end of period		$	48,709		$	57,249
Supplemental Disclosures of Cash Flow Information:
Interest paid		$	2,217		$	4,506
Income taxes paid		$	1,491		$	1,494

 

The accompanying notes are an integral part of these statements.

 

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FIRST REGIONAL BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2002

(Unaudited)

 

NOTE 1  -                                            First Regional Bancorp, a bank holding company (the Company), and one of its wholly-owned subsidiaries, First Regional Bank primarily serve Southern California through their branches.  The Company’s primary source of revenue is providing loans to customers, which are predominantly small and midsize businesses. First Regional Bancorp has two other subsidiaries, First Regional Statutory Trust I and First Regional Statutory Trust II, that exist for the sole purpose of issuing the Trust Securities and investing the proceeds thereof in junior subordinated deferrable debentures issued by the Company and engaging in certain other limited activities.  Certain amounts in the 2001 financial statements have been reclassified to be comparable with the classifications used in the 2002 financial statements.

 

In the opinion of the Company, the accompanying consolidated financial statements contain all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2002 and December 31, 2001 and the results of operations for the three and nine month periods ended September 30, 2002 and 2001.  Interim results may not be indicative of annual operations.

 

While the Company believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these financial statements be read in conjunction with the financial statements and the notes included in the Company’s 2001 annual report on Form 10K.

 

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Accounting for Goodwill and Other Intangible Assets,” effective starting with fiscal years beginning after December 31, 2001.  The adoption of this statement did not have a material effect on the Company’s financial statements as the Company has no recorded goodwill and the intangible asset continues to be amortizable.  For the nine months ended September 2002, amortization expense for intangible assets is $96,000 and is estimated to be approximately $128,000 each year for the next four years.  These amortization amounts are consistent with 2001.

 

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” replaces SFAS No. 121.  SFAS No. 144 requires that long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations.  It also expands the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing

 

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operations of the entity in a disposal transaction.  SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001.  The adoption of this statement on January 1, 2002 did not have a material impact on the Corporation’s financial position, results of operations or cash flows.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which is effective for fiscal years beginning after December 31, 2002.  This standard requires costs associated with exit or disposal activities (including restructurings), to be recognized when the costs are incurred, rather than at a date of commitment to an exit or disposal plan. SFAS No. 146 nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. Under SFAS No. 146, a liability related to an exit or disposal activity is not recognized until such liability has actually been incurred whereas under EITF Issue No. 94-3 a liability was recognized at the time of a commitment to an exit or disposal plan. Management believes that the adoption of this statement will not have a material impact on the results of operations, the financial position or cash flows of the Company.

 

In October 2002, the FASB issued SFAS No. 147, “Acquisitions of Certain Financial Institutions,” which addresses the application of the purchase method of accounting applied to all acquisitions of financial institutions, except transactions between two or more mutual enterprises. This statement removes acquisitions of financial institutions from the scope of both SFAS No. 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions”, and FASB Interpretation 9, “Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method,” and requires that those transactions be accounted for in accordance with SFAS No. 141 and No. 142. In addition, this Statement amends FASB Statement No. 144 to include in its scope long-term customer-relationship intangible assets of financial institutions. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that Statement 144 requires for other long-lived assets that are held and used. The Company has adopted the provisions of SFAS No. 147 for acquisitions of financial institutions that are initiated after October 1, 2002. Management believes that the adoption of this statement will not have a material impact on the results of operations, the financial position or cash flows of the Company.

 

NOTE 2  - -                                            Basic earnings per share are computed by dividing income available to common shareholders by the weighted average number

 

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of common shares outstanding during each period.  The computation of diluted earnings per share also considers the number of shares issuable upon the assumed exercise of outstanding common stock options.  A reconciliation of the numerator and the denominator used in the computation of basic and diluted earnings per share is:

 

		Three Months Ended September 30, 2002
		Income (Numerator)			Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders		$	909,000		2,629,310		$	0.35
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options					47,649		(0.01		)
Diluted EPS
Income available to common shareholders		$	909,000		2,676,959		$	0.34

 

		Three Months Ended September 30, 2001
		Income (Numerator)			Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders		$	623,000		2,642,230		$	0.24
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options					36,165		(0.01		)
Diluted EPS
Income available to common shareholders		$	623,000		2,678,395		$	0.23

 

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		Nine Months Ended September 30, 2002
		Income (Numerator)			Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders		$	2,117,000		2,629,602		$	0.81
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options					45,375		(0.02		)
Diluted EPS
Income available to common shareholders		$	2,117,000		2,674,977		$	0.79

 

		Nine Months Ended September 30, 2001
		Income (Numerator)			Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders		$	1,790,000		2,644,242		$	0.68
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options					25,504		(0.01		)
Diluted EPS
Income available to common shareholders		$	1,790,000		2,669,746		$	0.67

 

NOTE 3  -                                            As of September 30, 2002 the Bank had a total of $2,130,000 in standby letters of credit outstanding.  No losses are anticipated as a result of these transactions.

 

NOTE 4  -                                            The Company’s comprehensive income includes all items which comprise net income plus the unrealized holding gains on available-for-sale securities.  For the three and nine month periods ended September 30, 2002 and 2001, the Company’s comprehensive income was as follows:

 

 

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NOTE 5  -                                            In 2002 the Company established First Regional Statutory Trust II (the “Trust”), a statutory business trust and wholly owned subsidiary of the Company.  In 2001 the Company established First Regional Statutory Trust I (the “Trust”), a statutory business trust and wholly owned subsidiary of the Company.  These Trusts were formed for the sole purpose of issuing securities and investing the proceeds thereof in obligations of the Company and engaging in certain other limited activities.

 

On September 26, 2002, the Trust issued $7,500,000 of Cumulative Preferred Capital Securities (the “Trust Securities”) in a private placement transaction, which represent undivided preferred beneficial interests in the assets of the Trust.  Simultaneously, the Trust purchased $7,500,000 of Junior Subordinated Deferrable Debentures (the “Debentures”) from the Company.  The Company then invested the majority of the net proceeds of the sale of the Debentures in First Regional Bank as additional paid-in capital to support the Bank’s future growth.

 

On December 18, 2001, the Trust issued $5,000,000 of Cumulative Preferred Capital Securities (the “Trust Securities”) in a private placement transaction, which represent undivided preferred beneficial interests in the assets of the Trust.  Simultaneously, the Trust purchased $5,000,000 of Junior Subordinated Deferrable Debentures (the “Debentures”) from the Company.  The Company then invested the net proceeds of the sale of the Debentures in First Regional Bank as additional paid-in capital to support the Bank’s future growth.

 

The structure of these transactions enabled the Company to obtain additional Tier I capital for regulatory reporting purposes while permitting the Company to deduct the payment of future interest distributions for tax purposes.  The Trust Securities, which are not registered with the Securities Exchange Commission, must be redeemed in 30 years.  Because of this required redemption, the Trust Securities are recorded in the liability section of the consolidated balance sheet in accordance with accounting principles generally accepted in the United States of America even though they are treated as capital for regulatory purposes.

 

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NOTE 6  -                                        Management has evaluated the Company’s overall operation and determined that its business consists of three reportable business segments as of September 30, 2002 and 2001:  core banking operations, the administrative services in relation to TASC, and Trust Services.  The following describes these three business segments:

 

Core Bank Operations - The principal business activities of this segment are attracting funds from the general public and originating commercial and real estate loans for small and midsize businesses in Southern California.  This segment’s primary sources of revenue are interest income from loans and investment securities and fees earned in connection with loans and deposits.  This segment’s principal expenses consist of interest paid on deposits, personnel, and other general and administrative expenses.

 

Administrative Services - The principal business activity of this segment is providing administrative services for self-directed retirement plans.  The primary source of revenue for this segment is fee income from self-directed accounts.  The segment’s principal expenses consist of personnel, rent, data processing, and other general and administrative expenses.

 

Trust Services - The principal business activity of this segment is providing trust services for living trusts, investment agency accounts, IRA rollovers, and all forms of court-related matters. The primary source of revenue for this segment is fee income.  The segment’s principal expenses consist of personnel, data processing, professional fees, and other general and administrative expenses.

 

Total assets of TASC at September 30, 2002 and December 31, 2001 were $805,000 and $864,000, respectively, and total assets of Trust Services at September 30, 2002 and December 31, 2001 were $82,000 and $92,000, respectively.  The remaining assets reflected on the balance sheets of the Company are associated with the core banking operations.

 

The following table shows the net income (loss) (in thousands) for the core banking operations, the administration and custodial services, and the trust services for the nine month periods ended September 30, 2002 and 2001.

 

		Core Banking Operations			Administrative Services			Trust Services			Nine Month Period Ended September 30, 2002
Net interest income		$	14,083								$	14,083
Provision for Loan Losses		350									350
Other operating income		1,607			$	596		$	331		2,534
Other operating expenses		11,347			799			521			12,667
Provision for income taxes		1,483									1,483
Net income		$	2,510		$	(203	)	$	(190	)	$	2,117

 

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		Core Banking Operations			Administrative Services			Trust Services			Nine Month Period Ended September 30, 2001
Net interest income		$	13,117								$	13,117
Provision for Loan Losses		900									900
Other operating income		1,514			$	434		$	17		1,965
Other operating expenses		10,054			763			314			11,131
Provision for income taxes		1,261									1,261
Net income		$	2,416		$	(329	)	$	(297	)	$	1,790

 

The operations of the administrative services positively affect the results of core banking operations by providing a low-cost source of deposits.

 

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ITEM 2.                                  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

SUMMARY

 

First Regional Bancorp did not conduct any significant business activities independent of First Regional Bank.  The following discussion and analysis relates primarily to the Bank.

 

For a more complete understanding of the Company and its operations reference should be made to the financial statements included in this report and in the Company’s 2001 Annual Report on Form 10-K.  Certain statements in this report on Form 10-Q constitute “forward looking statements” under the Private Securities Litigation Reform Act of 1995 which involve risks and uncertainties.  The Company’s actual results may differ significantly from the results discussed in such forward-looking statements.  Factors that might cause such a difference include, but are not limited to, economic conditions, competition in the geographic and business areas in which the Company conducts operations, fluctuations in interest rates, credit quality, and government regulations.  For additional information concerning these factors, see “Item 1. Business – Factors That May Affect Results” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

 

The Company has established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of the Company's financial statements.  Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the carrying value of assets and liabilities; management considers such accounting policies to be critical accounting policies.  The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances.  Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.  The Company believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of its condensed consolidated financial statements.  In estimating the allowance for loan losses, management utilizes historical experience as well as other factors including the effect of changes in the local real estate market on collateral values, the effect on the loan portfolio of current economic indicators and their probable impact on borrowers and increase or decreases in nonperforming and impaired loans.  Changes in these factors may cause management's estimate of the allowance to increase or decrease and result in adjustments to the Company's provision for loan losses.

 

As of September 30, 2002 total assets were $421,435,000 compared to $347,052,000 at December 31, 2001, an increase of $74,383,000 or 21.4%. Moreover, the September 30, 2002 asset level represents an $89,331,000 (26.9%) increase over the $332,104,000 that existed on the same date in 2001.  The 2002 asset growth reflects a corresponding increase in total deposits of $64,061,000 or 20.5%, from $312,580,000 at the end of 2001 to $376,641,000 at September 30, 2002.  While overall deposits increased, the deposit growth was centered primarily in money market deposits, noninterest bearing deposits, and time deposits while savings deposits also experienced an increase. There were several changes in the composition of the Bank’s assets during the first nine months of 2002.  The Bank’s core loan portfolio grew significantly by $75,298,000 during the nine month period, bringing the Bank’s total loans to $355,681,000 at September 30, 2002 from the December 31, 2001 total of $280,383,000.  The combined effect of the increase in loans and the growth in deposits was an increase in the level of total liquid assets.  Investment securities remained relatively constant, cash and cash equivalents, including cash and due from banks and federal funds sold, decreased by $2.9 million in order to accommodate the changes that took place in the rest of the balance sheet.

 

The Company earned a profit of $909,000 in the three months ended September 30, 2002, compared to earnings of $623,000 in the third quarter of 2001. The results for the nine months ended September 30, 2002 were profits of $2,117,000 compared to a profit of $1,790,000 for the corresponding period of 2001, an increase of 18.3%.

 

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NET INTEREST INCOME

 

Total interest income increased by $526,000 (10%) for the third quarter of 2002 compared to the same period in 2001, and decreased by $1,209,000 (7%) for the nine month period ended September 30, 2002 compared to the prior year although total earning assets were substantially higher (31.3%) in 2002 than in 2001.  The majority of the decrease in interest income arises from a substantial decrease of $615,000 (65%) in interest on federal funds sold from $948,000 for the nine months ended September 30, 2001 compared to $333,000 for the same period in 2002.  There was a decrease in the average federal funds sold of $3,523,000 (12%) from September 30, 2001 to September 30, 2002, but this decrease in interest income on federal funds sold relates also to the Federal Reserve’s unprecedented series of interest rate reductions throughout 2001.  Another portion of the decrease in interest income arises from a substantial decrease of $545,000 (3%) in interest on loans from $16,408,000 for the nine months ended September 30, 2001 compared to $15,863,000 for the same period in 2002.  Although there was an increase in the loan portfolio of $97,634,000 (38%) from September 30, 2001 to September 30, 2002, this decrease in interest income on loans relates to the Federal Reserve’s unprecedented series of interest rate reductions throughout 2001. For the three months ended September 30, 2002 interest expense decreased by $384,000 (32%) to $799,000 from the 2001 level of $1,183,000 and for the nine months ended September 30, 2002 interest expense decreased by $2,175,000 (50%) to $2,158,000 from the 2001 level of $4,333,000 due to a series of interest rate reductions although total deposits increased $73,489,000 (24%) from September 30, 2001 to September 30, 2002. The increases were primarily in noninterest bearing demand deposit accounts, savings and money market deposits.  The net result was an increase in net interest income of $910,000 (21%), from $4,321,000 in the third quarter of 2001 to $5,231,000 for the third quarter of 2002 and an increase in net interest income of $966,000 (7%), from $13,117,000 for the nine months ended September 30, 2001 to $14,083,000 for the first nine months of 2002.

 

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 the Nine Month Period Ended September 30,
		2002								2001
		Average Balance			Interest Income(2)/ Expense			Average Yield/ Rate%		Average Balance			Interest Income(2)/ Expense			Average Yield/ Rate%
		(Dollars in Thousands)
Interest Earning Assets:
Loans(1)		$	325,400		$	15,863		6.5	%	$	249,296		$	16,408		8.8	%
Investment Securities		2,748			45			2.2	%	2,383			92			5.1	%
Federal Funds Sold		25,847			333			1.7	%	29,370			948			4.3	%
Time Deposits With Other Financial Institutions		0			0			0.0	%	29			2			9.2	%
Total Interest Earning Assets		$	353,995		$	16,241		6.1	%	$	281,078		$	17,450		8.3	%

 

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		For the Nine Month Period Ended September 30,
		2002								2001
		Average Balance			Income(2)/ Expense			Yield/ Rate%		Average Balance			Income(2)/ Expense			Yield/ Rate%
		(Dollars in Thousands)
Interest Bearing Liabilities:
Savings deposits		$	5,937		$	47		1.1	%	$	2,098		$	38		2.4	%
Money Market Accounts		163,195			1,088			0.9	%	117,518			2,144			2.4	%
Time deposits		58,106			804			1.8	%	61,393			2,143			4.6	%
Trust Securities		5,000			212			5.7	%	0			0			0.0	%
Securities sold under agreements to repurchase		$	597		$	7		1.6	%	$	434		$	8		2.5	%
Total interest bearing liabilities		$	232,835		$	2,158		1.2	%	$	181,443		$	4,333		3.2	%

 

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(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 in the first nine months of $5,120,000 in 2002 and $4,835,000 in 2001.

 

(2)                                  Includes loan fees in the first nine months of $1,511,000 in 2002 and $1,099,000 in 2001.

 

The following table shows the net interest earnings and the net yield on average interest earning assets:

 

		For the Nine Month Period Ended September 30,
		2002			2001
		(Dollars in Thousands)
Total interest income (1)		$	16,241		$	17,450
Total interest expense		2,158			4,333
Net interest earnings		$	14,083		$	13,117
Average interest earning assets		$	353,995		$	281,078
Average interest bearing liabilities		$	232,835		$	181,443
Net yield on average interest earning assets		5.3		%	6.2		%

 

(1)           Includes loan fees in the first nine months of $1,511,000 in 2002 and $1,099,000 in 2001.

 

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.

 

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		Increase (Decrease) For the Nine Month Periods September 30, 2002 over 2001
		Volume			Rate			Net
		(Dollars in Thousands)
Interest Income(1)
Loans (2)		$	(3,480	)	$	2,935		$	(545	)
Funds sold		(102		)	(513		)	(615		)
Investment securities		17			(64		)	(47		)
Total Interest Earning Assets		$	(3,565	)	$	2,358		$	(1,207)
Interest Expense (1)
Savings		$	13		$	(4	)	$	9
Money market		1,675			(2,731		)	(1,056		)
Trust Securities		212			0			212
Time deposits		(109		)	(1,230		)	(1,339		)
Securities sold under agreements to repurchase		(28		)	27			(1		)
Total interest bearing liabilities		$	1,763		$	(3,938	)	$	(2,175	)

 

(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 to the relationship of the absolute dollar amounts of the change in each.

 

(2)          Includes loan fees in the first nine months of $1,511,000 in 2002 and $1,099,000 in 2001.

 

OTHER OPERATING INCOME

 

Other operating income increased to $877,000 in the third quarter of 2002 from $719,000 in the three months ended September 30, 2001.  For the first nine months of 2002 other operating income also increased to $2,534,000 for the nine months ended September 30, 2002 from $1,965,000 for the first nine months of 2001.  The Bank’s merchant services operation, which provides credit card deposit and clearing services to retailers and other credit card accepting businesses, had revenue that totaled $209,000 for the third quarter of 2002 and $696,000 for the nine months ended September 30, 2002 in contrast with $292,000 for the third quarter of 2001 and $726,000 for the nine months ended September 30, 2001.  The Bank’s Trust Administration Services Corp. (TASC), a wholly owned subsidiary that provides administrative and custodial services to self-directed retirement plans, had an increase in revenue to $595,000 for the nine months ended September 30, 2002 in contrast with $434,000 in the first nine months of 2001.  The Bank’s Trust Department that provides trust services for living trusts, investment agency accounts, IRA rollovers, and all forms of court-related matters had revenue of $339,000 in the first nine months of 2002 and revenue of $19,000 during the first nine months of 2001.  No gains or losses on securities sales or sales of premises and equipment were realized in the first nine months of 2002 or 2001.

 

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LOAN PORTFOLIO AND PROVISION FOR LOAN LOSSES

 

The loan portfolio consisted of the following at September 30, 2002 and December 31, 2001:

 

		September 30, 2002			December 31, 2001
		(Dollars in Thousands)
Commercial loans		$	77,102		$	72,173
Real estate construction loans		62,110			46,748
Real estate loans		205,993			143,762
Government guaranteed loans		16,826			22,999
Other loans		1,042			1,125
Total loans		363,073			286,807
Less - Allowances for loan losses		5,350			5,000
- Deferred loan fees		2,042			1,424
Net loans		$	355,681		$	280,383

 

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 loan losses is continually evaluated in light of many factors, including loan loss experience and current economic conditions. The allowance for loan losses is increased by provisions for loan losses, and is decreased by net charge-offs.  Management believes the allowance for loan losses is adequate in relation to both existing and potential risks in the loan portfolio.

 

The Bank has historically evaluated the adequacy of its allowance for loan losses on an overall basis rather than by specific categories of loans.  In determining the adequacy of the allowance for 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 first major element includes a detailed analysis of the loan portfolio in two phases. The first phase is conducted in accordance with SFAS No. 114, “Accounting by Creditors for the Impairment of a Loan.”, as amended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan – Income Recognition and Disclosures.” Individual loans are reviewed to identify loans for impairment. A loan is impaired when principal and interest are deemed uncollectable in accordance with the original contractual terms of the loan. Impairment is measured as either the expected future cash flows discounted at each loan’s effective interest rate, the fair value of the loan’s collateral if the loan is collateral dependent, or an observable market price of the loan (if one exists). Upon

 

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measuring the impairment, the Bank will insure an appropriate level of allowance is present or established.

 

Central to the first phase and the Bank’s credit risk management is its loan risk rating system. The originating credit officer assigns borrowers an initial risk rating, which is based primarily on a thorough analysis of each borrower’s financial capacity in conjunction with industry and economic trends. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit administration personnel. Credits are monitored by line and credit administration personnel for deterioration in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract.  Risk ratings are adjusted as necessary.

 

Based on the risk rating system specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates the probability that a loss has been incurred. Management performs a detailed analysis of these loans, including, but not limited to, cash flows, appraisals of the collateral, conditions of the marketplace for liquidating the collateral and assessment of the guarantors. Management then determines the inherent loss potential and allocates a portion of the allowance for losses as a specific allowance for each of these credits.

 

The second phase is conducted by evaluating or segmenting the remainder of the loan portfolio into groups or pools of loans with similar characteristics in accordance with SFAS No. 5, “Accounting for Contingencies”. In this second phase, groups or pools of homogeneous loans are reviewed to determine a portfolio allowance. Additionally groups of non-homogeneous loans, such as construction loans are also reviewed to determine a portfolio allowance.  The risk assessment process in this case emphasizes trends in the different portfolios for delinquency, loss, and other-behavioral characteristics of the subject portfolios.

 

The second major element in the Bank’s methodology for assessing the appropriateness of the allowance consists of management’s considerations of all known relevant internal and external factors that may affect a loan’s collectibility. This includes management’s estimates of the amounts necessary for concentrations, economic uncertainties, the volatility of the market value of collateral, and other relevant factors. The relationship of the two major elements of the allowance to the total allowance may fluctuate from period to period.

 

When considered necessary by management, the Bank also establishes special reserves to reflect unusual conditions that could impact the repayment performance of the Bank’s borrowers.  In 2001, for example, the bank established special reserves relating to California’s energy crisis and the economic recession.  In 2002, Management concluded that these factors would no longer influence borrower performance, and the associated reserves were discontinued.

 

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Reflecting the Company’s ongoing analysis of the risks presented by its loan portfolio, the allowance for losses was $5,350,000 and $5,000,000 (or 1.48% and 1.75% of gross outstanding loans) at September 30, 2002 and December 31, 2001 respectively.  Provisions for loan losses were $150,000 and $350,000 for the three and nine month period ended September 30, 2002, compared to $100,000 and $900,000 for the same periods of 2001. For the three and nine months ended September 30, 2002, the Company generated no net loan charge-offs; by comparison, in the first nine months of 2001 the Company experienced net loan chargeoffs of $0 and $559,000.

 

For the quarter ended September 30, 2002 the Company identified loans having an aggregate average balance of $239,000 which it concluded were impaired under SFAS No. 114.  The Company’s policy is generally 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 and to establish a loss reserve for each of the loans which at September 30, 2002 totaled $50,000 for the loans as a group.

 

OTHER OPERATING EXPENSES

 

Other operating expenses increased in the first nine months of 2002 compared to the same period of 2001, although some categories of expense actually decreased from the levels of previous periods.  Other operating expenses rose to a total of $4,415,000 for the third quarter of 2002 from $3,876,000 for the three months ended September 30, 2001.  For the nine months ended September 30, 2002 other operating expenses totaled $12,667,000, an increase from $11,131,000 for the corresponding period in 2001.

 

Salary and related benefits increased by $582,000, rising from a total of $2,225,000 for the third quarter of 2001 to $2,807,000 for the same period in 2002, and also rose for the nine months ended September 30, to $7,860,000 from $6,566,000 in 2001.  The increase principally reflects increases in staffing which took place during 2001 due to staffing in the new trust department and also reflects employee salary adjustments.  Occupancy expense rose to $320,000 for the three months ended September 30, 2002 from $306,000 in the third quarter of 2001, the increase reflects the rent paid on the various facilities which house the Bank’s regional offices.  Total other operating expenses rose in 2002 compared to the prior year, increasing from $3,700,000 for the first nine months of 2001 to $3,832,000 for the same period of 2002, although the expenses for the nine months increased, the third quarter expenses decreased from $1,345,000 in 2001 to $1,288,000 for the same period of 2002.

 

The combined effects of the above-described factors resulted in income before taxes of $1,543,000 for the three months ended September 30, 2002 compared to $1,064,000 for the third quarter of 2001.  For the nine months ended September 30, 2002 income before taxes is $3,600,000 compared to $3,051,000 for the first nine months of the prior year.  In the third quarter, the Company’s provision for taxes increased from $441,000 in 2001 to $634,000 in 2002.  For the nine months ended September 30, 2002 the provisions were $1,483,000 compared to $1,261,000 in 2001.  This brought net income for the third quarter of 2002 to $909,000 compared to $623,000

 

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for the same period in 2001.  For the nine months ended September 30, net income in 2002 was $2,117,000, while 2001 net income through September 30 was $1,790,000.

 

LIQUIDITY, SOURCES OF FUNDS, AND CAPITAL RESOURCES

 

The Company’s financial position remains liquid.  Total liquid assets (cash and due from banks, investment securities available for sale, and federal funds sold) stood at 13.7% of total deposits at September 30, 2002.  This level represents a decrease from the 17.4% liquidity level which existed on December 31, 2001.  In addition, at September 30, 2002 some $16.8 million of the Bank’s total loans consisted of government guaranteed loans, which represent a significant source of liquidity due to the active secondary markets which exist for these assets. The ratio of net loans (including government guaranteed loans) to deposits was 94.4% and 89.7% as of September 30, 2002 and December 31, 2001, respectively.

 

Total shareholders equity was $26,875,000 and $24,955,000 as of September 30, 2002 and December 31, 2001, respectively.  The Bank’s capital ratios for those dates in comparison with regulatory capital requirements were as follows (the Company’s ratios are substantially the same):

 

		9-30-02		12-31-01
Leverage Ratio (Tier I Capital to Assets):
Regulatory requirement		4.00	%	4.00	%
First Regional Bank		8.86	%	8.90	%

 

The “regulatory requirement” listed represents the level of capital required for Adequately Capitalized status.

 

In addition, bank regulators have issued risk-adjusted capital guidelines which assign risk weighting to assets and off-balance sheet items and place increased emphasis on common equity.  The Bank’s risk adjusted capital ratios for the dates listed in comparison with the risk adjusted regulatory capital requirements were as follows (the Company’s ratios are substantially the same):

 

		9-30-02		12-31-01
Tier I Capital to Assets:
Regulatory requirement		4.00	%	4.00	%
First Regional Bank		10.53	%	10.00	%
Tier I + Tier II Capital to Assets:
Regulatory requirement		8.00	%	8.00	%
First Regional Bank		11.78	%	11.30	%

 

At September 30, 2002, the Company exceeded the minimum risk-based capital ratio and leverage ratio required to be considered “well capitalized”.  The

 

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Company believes that it will continue to meet all applicable capital standards.

 

INFLATION

 

The impact of inflation on the Company differs significantly from other industries, since virtually all of its assets and liabilities are monetary. During periods of rising inflation, companies with net monetary assets will always experience a reduction in purchasing power.  Inflation continues to have an impact on salary, supply, and rent expenses, but the rate of inflation in general and its impact on these expenses in particular has remained moderate in recent years.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Because custome deposits are the Company’s principal funding source outside of its capital, management has attempted to match rates and maturities of its deposits with its investment and loan portfolios as part of its liquidity and asset and liability management policies.  The objective of these policies is to limit the fluctuations of net interest income resulting from interest rate changes.  The table which follows indicates the repricing or maturity characteristics of the major categories of the Bank’s assets and liabilities as of September 30, 2002, and thus the relative sensitivity of the Bank’s net interest income to changes in the overall level of interest rates.

 

Category		Floating Rate		Less than one month		One month but less than six months		Six months but less than one year		One year but less than five years		Five years or more		Non-interest earning or bearing		Total
Fed funds sold		22,975		0		0		0		0		0		0		22,975
Time deposits with other banks		0		0		0		0		0		0		0		0
Investment securities		0		0		2,733		0		0		0		0		2,733
Subtotal		22,975		0		2,733		0		0		0		0		25,708
Loans		351,963		151		2,600		818		149		0		0		355,681
Total earning assets		374,938		151		5,333		818		149		0		0		381,389
Cash and due from banks		0		0		0		0		0		0		25,734		25,734
Premises and equipment		0		0		0		0		0		0		1,531		1,531
Other real estate owned		0		0		0		0		0		0		0		0
Other assets		0		0		0		0		0		0		12,781		12,781
Total non-earning assets		0		0		0		0		0		0		40,046		40,046
Total assets		374,938		151		5,333		818		149		0		40,046		421,435
Funds purchased		423		0		0		0		0		0		0		423
Repurchase agreements		0		0		0		0		0		0		0		0
Subtotal		423		0		0		0		0		0		0		423
Savings deposits		23,792		0		0		0		0		0		0		23,792
Trust Securities		0		12,500		0		0		0		0		0		12,500
Money market deposits		164,562		0		0		0		0		0		0		164,562
Time deposits		0		29,288		27,914		2,114		111		0		0		59,427
Total bearing liabilities		188,777		41,788		27,914		2,114		111		0		0		260,704
Demand deposits		0		0		0		0		0		0		128,860		128,860
Other liabilities		900		0		0		0		0		0		4,096		4,996
Equity capital		0		0		0		0		0		0		26,875		26,875
Total non-bearing liabilities		900		0		0		0		0		0		159,831		160,731
Total liabilities		189,677		41,788		27,914		2,114		111		0		159,831		421,435
GAP		185,261		(41,637	)	(22,581	)	(1,296	)	38		0		(119,785	)	0
Cumulative GAP		185,261		143,624		121,043		119,747		119,785		119,785		0		0

 

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As the table indicates, the vast majority of the Company’s assets are either floating rate or, if fixed rate, have short maturities.  Since the yields on these assets quickly adjust to reflect changes in the overall level of interest rates, there are no significant unrealized gains or losses with respect to the Company’s assets, nor is there much likelihood of large realized or unrealized gains or losses developing in the future.

 

The Bank’s investment portfolio continues to be composed of high quality, low risk securities, primarily U.S. Treasury or Agency securities. As mentioned above, no gains or losses were recorded on securities sales in the first nine months of 2002.  As of September 30, 2002 the Company’s investment portfolio contained no gross unrealized gains or losses.  By comparison, at September 30, 2001 the Company’s investment portfolio contained gross unrealized gains of $5,000 and no unrealized losses.  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.”

 

ITEM 4.  CONTROLS AND PROCEDURES

 

The Company maintains controls and procedures designed to ensure that information is recorded and reported in all filings of financial reports.  Such information is reported to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer to allow timely and accurate disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-14(c).  In designing these controls and procedures, management recognizes that they can only provide reasonable assurance of achieving the desired control objectives.  Management also evaluated the cost-benefit relationship of possible controls and procedures.

 

Within 90 days prior to the date of this report, the Company carried out an evaluation of the effectiveness of the Company’s controls and disclosure procedures under the supervision and with the participation of the Chief Executive Officer, the Chief Financial Officer and other senior management of the Company.  Based on the foregoing, the Company’s Chief Executive Officer and the Chief Financial Officer conclude that the Company’s disclosure controls and procedures were effective.

 

23

 

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation.

 

24

 

PART II - OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

Litigation

 

In the normal course of business, the Company and the Bank are involved in litigation.  Management does not expect the ultimate outcome of any pending litigation to have a material effect on the Company’s financial position or results of operations.

 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matters were submitted for shareholder vote during the third quarter of 2002.

 

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

 

Exhibits

 

There are no exhibits to this report.

 

Reports on Form 8-K

 

No reports on Form 8-K were filed during the third quarter of 2002.

 

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CERTIFICATION AND SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Each of the undersigned hereby certifies in his capacity as an officer of First Regional Bancorp (the “Company”) that the Quarterly Report of the Company on Form 10Q for the period ended September 30, 2002 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such periods and the results of operations of the Company for such periods.

 

		FIRST REGIONAL BANCORP
Date: November 12, 2002		/s/ Jack A. Sweeney
		Jack A. Sweeney, Chairman of the Board and Chief Executive Officer
Date: November 12, 2002		/s/ Thomas McCullough
		Thomas McCullough, Chief Financial Officer

 

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Certification

 

I, Thomas McCullough, certify that:

 

1.  I have reviewed this quarterly report on Form 10-Q of First Regional Bancorp;

 

2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.  The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.  The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.  The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: November 12, 2002		/s/ Thomas McCullough
			Thomas McCullough, Chief Financial Officer

 

27

 

Certification

 

I, Jack A. Sweeney, certify that:

 

1.  I have reviewed this quarterly report on Form 10-Q of First Regional Bancorp;

 

2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.  The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.  The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.  The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: November 12, 2002		/s/ Jack A. Sweeney
			Jack A. Sweeney, Chairman of the Board and Chief Executive Officer

 

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