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   March 31, 2003

 

Commission File Number   0-10232

 

 

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

 

			Page
Part I - Financial Information
	Item 1.	Financial Statements
		Consolidated Statements of Financial Condition (unaudited)	3
		Consolidated Statements of Income (unaudited)	4
		Consolidated Statements of Cash Flows (unaudited)	5
		Notes to Consolidated Financial Statements (unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
	Item 4.	Controls and Procedures	20
Part II - Other Information
	Item 1.	Legal Proceedings	21
	Item 4.	Submission of Matters to a Vote of Security Holders	21
	Item 6.	Exhibits and Reports on Form 8-K	21
Certification and Signatures			22

 

2

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

FIRST REGIONAL BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In Thousands)

(unaudited)

 

		March 31, 2003			December 31, 2002
ASSETS
Cash and due from banks		$	29,803		$	28,014
Federal Funds Sold		4,765			21,960
Cash and cash equivalents		34,568			49,974
Investment securities, available for sale, at fair value		6,825			2,739
Loans, net of allowance for losses of $5,800 in 2003 and $5,500 in 2002		441,631			399,853
Premises and equipment, net of accumulated depreciation		1,628			1,558
Accrued interest receivable and other assets		13,789			13,130
Total Assets		$	498,441		$	467,254
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest bearing		$	174,807		$	173,192
Interest bearing:
Savings deposits		26,371			24,207
Money market deposits		197,101			178,563
Time deposits		48,291			46,168
Total deposits		446,570			422,130
Note payable		825			862
Accrued interest payable and other liabilities		7,469			3,932
Trust Securities		12,500			12,500
Total Liabilities		467,364			439,424
Shareholders’ Equity:
Common Stock, no par value, 50,000,000 shares authorized; 2,926,000 and 2,725,000 shares outstanding in 2003 and 2002, respectively		16,408			13,725
Less: Unearned ESOP shares; 87,000 and 91,000 outstanding in 2003 and 2002, respectively		(782		)	(817		)
Total common stock, no par value; outstanding 2,839,000 (2003) and 2,634,000 (2002) shares		15,626			12,908
Retained earnings		15,450			14,921
Accumulated other comprehensive income, Net of tax		1			1
Total Shareholders’ Equity		31,077			27,830
Total Liabilities and Shareholders’ Equity		$	498,441		$	467,254

 

The accompanying notes are an integral part of these statements.

 

3

 

FIRST REGIONAL BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands Except Per Share Amounts)

(Unaudited)

 

		Three Months Ended March 31,
		2003			2002
INTEREST INCOME:
Interest and fees on loans		$	6,542		4,746
Interest on investment securities		14			18
Interest on federal funds sold		61			93
Total interest income		6,617			4,857
INTEREST EXPENSE:
Interest on deposits		514			591
Interest on trust securities		152			70
Interest on other borrowings		0			2
Total interest expense		666			663
Net interest income		5,951			4,194
PROVISION FOR LOAN LOSSES		300			50
Net interest income after provision for loan losses		5,651			4,144
OTHER OPERATING INCOME:
Customer service fees		877			717
Other, net		131			126
Total other operating income		1,008			843
OPERATING EXPENSES:
Salaries and related benefits		3,323			2,428
Occupancy expense		345			330
Equipment expense		178			140
Promotion expense		66			47
Professional service expense		337			351
Customer service expense		137			89
Supply/communication expense		188			141
Other expenses		536			510
Total operating expenses		5,110			4,036
Income before provision for income taxes		1,549			951
PROVISION FOR INCOME TAXES		636			392
NET INCOME		$	913		$	559
EARNINGS PER SHARE (Note 2)
Basic		$	0.34		$	0.21
Diluted		$	0.33		$	0.21

 

The accompanying notes are an integral part of these statements.

 

4

 

FIRST REGIONAL BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

		Three Months Ended March 31,
		2003			2002
OPERATING ACTIVITIES
Net Income		$	913		$	559
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		300			50
Depreciation and amortization		87			79
Accretion of investment security discounts		(14		)	(5		)
Increase in interest receivable		(52		)	(45		)
Decrease in interest payable		(14		)	(30		)
Increase in taxes payable		871			702
Net increase in other assets		(607		)	(906		)
Net increase in other liabilities		2,680			331
Net cash provided by operating activities		$	4,164		$	735
INVESTING ACTIVITIES
(Increase) decrease in investment securities		$	(4,072	)	$	22
Decrease in guaranteed loans		1,783			2,588
Net increase in other loans		(43,861		)	(26,859		)
Increase in premises and equipment		(157		)	(92		)
Net cash used in investing activities		$	(46,307	)	$	(24,341	)
FINANCING ACTIVITIES
Net increase in noninterest bearing deposits, money market deposits, and other deposits		$	22,317		$	6,719
Net increase in time deposits		2,123			7,891
Decrease in note payable		(37		)	(38		)
Decrease in securities sold under agreement to repurchase		(0		)	(265		)
Increase (decrease) in shareholders’ equity		2,334			(206		)
Net cash provided by financing activities		$	26,737		$	14,101
Decrease in cash and cash equivalents		$	(15,406	)	$	(9,505	)
Cash and cash equivalents, beginning of period		49,974			51,615
Cash and cash equivalents, end of period		$	34,568		$	42,110
Supplemental Disclosures of Cash Flow Information:
Interest paid		$	681		$	694
Income taxes paid		$	175		$	146

 

The accompanying notes are an integral part of these statements.

 

5

 

FIRST REGIONAL BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2003

(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 2002 financial statements have been reclassified to be comparable with the classifications used in the 2003 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 March 31, 2003 and December 31, 2002 and the results of operations for the three month periods ended March 31, 2003 and 2002.  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 2002 annual report on Form 10K.

 

Recent Accounting Pronouncements

 

SFAS No. 148–Accounting for Stock-Based Compensation–Transition and Disclosure–an Amendment of FASB Statement No. 123, amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  The provisions of SFAS No. 148 are effective for annual financial statements for fiscal years ending after December 15, 2002 and for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002.

 

6

 

 

FIN No. 45–Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others, an interpretation of SFAS Nos. 5, 57 and 107, and rescission of FIN No. 34, Disclosure of Indirect Guarantees of Indebtedness of Others, in November 2002.  FIN No. 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued.  It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.  The initial recognition and measurement provisions of the interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, while the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002.  The adoption of such interpretation did not have a material impact on its results of operations, financial position or cash flows.

 

NOTE 2 -                  Basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during each period.  The computation of diluted earnings per share also considers the number of shares issuable upon the assumed exercise of outstanding common stock options.  A reconciliation of the numerator and the denominator used in the computation of basic and diluted earnings per share is:

 

		Three Months Ended March 31, 2003
		Income (Numerator)			Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders		$	913,000		2,668,402		$	0.34
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options					86,422		(0.01		)
Diluted EPS
Income available to common shareholders		$	913,000		2,754,824		$	0.33

 

7

 

		Three Months Ended March 31, 2002
		Income (Numerator)			Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders		$	559,000		2,630,145		$	0.21
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options					42,727		(0.00		)
Diluted EPS
Income available to common shareholders		$	559,000		2,672,872		$	0.21

 

NOTE 3 -                  As of March 31, 2003 the Bank had a total of $2,580,000 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 month periods ended March 31, 2003 and 2002, the Company’s comprehensive income was as follows:

 

 

NOTE 5 -                  Management has evaluated the Company’s overall operation and determined that its business consists of three reportable business segments as of March 31, 2003 and 2002: 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

 

8

 

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 March 31, 2003 and December 31, 2002 were $747,000 and $804,000, respectively, and total assets of Trust Services at March 31, 2003 and December 31, 2002 were $74,000 and $78,000, 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 three month periods ended March 31, 2003 and 2002.

 

		Core Banking Operations			Administrative Services			Trust Services			Three Month Period Ended March 31, 2003
Net interest income		$	5,951								$	5,951
Provision for Loan Losses		300									300
Other operating income		539			$	318		$	151		1,008
Other operating expenses		4,681			225			204			5,110
Provision for income taxes		636									636
Net income		$	873		$	93		$	(53	)	$	913

 

		Core Banking Operations			Administrative Services			Trust Services			Three Month Period Ended March 31, 2002
Net interest income		$	4,194								$	4,194
Provision for Loan Losses		50									50
Other operating income		554			$	188		$	101		843
Other operating expenses		3,582			290			164			4,036
Provision for income taxes		392									392
Net income		$	724		$	(102	)	$	(63	)	$	559

 

9

 

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

 

NOTE 6.                      STOCK COMPENSATION PLANS

 

At March 31, 2003, the company  had two stock-based employee incentive plans, which are described more fully in Note 10 in the 2002 Annual Report on Form 10K. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations.  No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the grant.  The Company did not grant any stock options in the first quarter of 2003 or 2002.  The following table illustrates the pro forma net income (loss) and pro forma earnings per share as if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

 

		Three Months Ended
		March 31, 2003			March 31, 2002
Net income to common shareholders:
As Reported		$	913,000		$	559,000
Pro forma		$	878,000		$	550,000
Basic earnings per share:
As reported		$	0.34		$	0.21
Pro forma		$	0.33		$	0.21

 

10

 

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 2002 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” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

 

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 increases 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.

 

11

 

As of March 31, 2003 total assets were $498,441,000 compared to $467,254,000 at December 31, 2002, an increase of $31,187,000 or 6.7% and the March 31, 2003 asset level represents an improvement over the $362,720,000 that existed on the same date in 2002. The 2003 asset increase reflects a corresponding increase in total deposits of $24,440,000 or 5.8%, from $422,130,000 at the end of 2002 to $446,570,000 at March 31, 2003.  While overall deposits increased, the deposit growth was centered in money market deposits, savings deposits and time deposits, while noninterest bearing deposits remained relatively constant.  There were several changes in the composition of the Bank’s assets during the first quarter. The Bank’s core loan portfolio grew significantly by $41,778,000 during the three month period, bringing the Bank’s total loans to $441,631,000 at March 31, 2003 from the December 31, 2002 total of $399,853,000.  The combined effect of the substantial increase in loans and the growth in deposits was a decrease in the level of total liquid assets. Investment securities increased by $4 million, while cash and cash equivalents (cash and due from banks and Federal funds sold) fell by $15.4 million in order to accommodate the changes that took place in the rest of the balance sheet.

 

The Company earned a profit of $913,000 in the first quarter of 2003, compared to earnings of $559,000 in the three months ended March 31, 2002.

 

NET INTEREST INCOME

 

Total interest income increased by $1,760,000 (36%) for the three months ended March 31, 2003 compared to the same period in 2002 as total earning assets were substantially higher (40%) in 2003 than in 2002. The majority of the increase in interest income arises from a substantial increase of $1,796,000 (38%) in interest on loans from $4,746,000 for the three months ended March 31, 2002 compared to $6,542,000 for the same period in 2003. Although there was an increase in the loan portfolio of $137,027,000 (45%) from March 31, 2002 to March 31, 2003, the interest income increase was tempered by the Federal Reserve’s unprecented series of interest rate reductions throughout 2001.  For the three months ended March 31, 2003 interest expense on deposits decreased by $77,000 (13%), to $514,000 from the 2002 level of $591,000 due to a series of interest rate reductions although total deposits increased $119,380,000 (36%) from March 31, 2002 to March 31, 2003.  The increases were primarily in noninterest bearing demand deposit accounts and money market deposits.  For the three months ended March 31, 2003 interest expense on trust securities increased by $82,000 (117%), to $152,000 from the 2002 level of $70,000 due to an increase of $7,500,000 in trust securities at March 31, 2003 compared to March 31, 2002.  The net result was an increase in net interest income of $1,757,000 (42%), from $4,194,000 in the first quarter of 2002 to $5,951,000 for the first three months of 2003.

 

12

 

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 March 31,
		2003								2002
		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)		$	429,605		$	6,542		6.1	%	$	296,775		$	4,746		6.4	%
Investment Securities		4,284			14			1.3	%	2,771			18			2.6	%
Funds Sold		21,132			61			1.2	%	22,394			93			1.7	%
Total Interest Earning Assets		$	455,021		$	6,617		5.8	%	$	321,940		$	4,857		6.0	%

 

		For Period Ended March 31,
		2003								2002
		Average Balance			Income(2)/ Expense			Yield/ Rate %		Average Balance			Income(2)/ Expense			Yield/ Rate %
		(Dollars in Thousands)
Interest Bearing Liabilities:
Savings deposits		$	4,346		$	8		0.7	%	$	4,399		$	10		0.9	%
Money Market Accounts		217,392			347			0.6	%	151,390			335			0.9	%
Time		47,713			159			1.3	%	52,846			246			1.9	%
Trust securities		12,500			152			4.9	%	5,000			70			5.6	%
Securities sold under Agreements to repurchase		$	66		$	0		0.0	%	$	421		$	2		1.9	%
Total interest Bearing liabilities		$	282,017		$	666		0.9	%	$	214,056		$	663		1.2	%

 

(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 quarter of $5,603,000 in 2003 and $5,002,000 in 2002.

 

(2)                                  Includes loan fees in the first quarter of $562,000 in 2003 and $393,000 in 2002.

 

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

 

13

 

		For Period Ended March 31,
		2003			2002
		(Dollars in Thousands)
Total interest income (1)		$	6,617		$	4,857
Total interest expense		666			663
Net interest earnings		$	5,951		$	4,194
Average interest earning assets		$	455,021		$	321,940
Average interest bearing liabilities		$	282,017		$	214,056
Net yield on average interest earning assets		5.2		%	5.2		%

 

(1)                                  Includes loan fees in the first quarter of $562,000 in 2003 and $393,000 in 2002.

 

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) March 31, 2003 over 2002
		Volume			Rate			Net
		(Dollars in Thousands)
Interest Income(1)
Loans (2)		$	2,011		$	(215	)	$	1,796
Investment securities		(44		)	40			(4		)
Funds sold		(5		)	(27		)	(32		)
Total Interest Earning Assets		$	1,962		$	(202	)	$	1,760
Interest Expense (1)
Savings		$	(0	)	$	(2	)	$	(2	)
Money market		33			(21		)	12
Time		(22		)	(65		)	(87		)
Trust Preferred		90			(8		)	82
Securities sold under agreements to repurchase		(1		)	(1		)	(2		)
Total interest bearing liabilities		$	100		$	(97	)	$	3

 

(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 quarter of $562,000 in 2003 and $393,000 in 2002.

 

14

 

OTHER OPERATING INCOME

 

Other operating income rose to $1,008,000 in the first quarter of 2003 from $843,000 in the three months ended March 31, 2002.  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 $222,000 for the three months ended March 31, 2003 in contrast with $272,000 in the corresponding period of 2002.  The Bank’s Trust Administration Services Corp. (TASC), a wholly owned subsidiary that provides administrative and custodial services to self-directed retirement plans, that had revenue which increased from $188,000 in first quarter of 2002 to $318,000 in the first quarter of 2003. 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 $154,000 in first quarter of 2003 and $104,000 in first quarter of 2002.  No gains or losses on securities sales or sales of land were realized in the first quarter of 2003 or 2002.

 

LOAN PORTFOLIO AND PROVISION FOR LOAN LOSSES

 

The loan portfolio consisted of the following at March 31, 2003 and December 31, 2002:

 

				March 31, 2003			December 31, 2002
				(Dollars in Thousands)
Commercial loans				$	79,231		$	80,510
Real estate construction loans				74,419			72,088
Real estate loans				279,131			237,477
Government guaranteed loans				14,477			16,260
Other loans				2,744			1,299
Total loans				$	450,002		$	407,634
Less	-	Allowances for loan losses		5,800			5,500
	-	Deferred loan fees		2,571			2,281
Net loans				$	441,631		$	399,853

 

15

 

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

 

The Bank has historically evaluated the adequacy of its allowance for possible loan losses on an overall basis rather than by specific categories of loans.  In determining the adequacy of the allowance for possible loan losses, management considers such factors as historical loan loss experience, known problem loans, evaluations made by bank regulatory authorities, assessment of economic conditions and other appropriate data to identify the risks in the loan portfolio.

 

The 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 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

 

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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.

 

Reflecting the Company’s ongoing analysis of the risks presented by its loan portfolio, the allowance for losses was $5,800,000 and $5,500,000 (or 1.30% and 1.36% of gross outstanding loans) at March 31, 2003 and December 31, 2002 respectively.  Provisions for loan losses were $300,000 for the three month period ended March 31, 2003, compared to $50,000 for the same period of 2002. For the three months ended March 31, 2003 and 2002, the Company generated no net loan charge-offs.

 

For the quarter ended March 31, 2003, the Company identified loans having an aggregate average balance of $2,021,000 which it concluded were

 

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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 March 31, 2003 totaled $568,000 for the loans as a group.

 

OTHER OPERATING EXPENSES

 

Overall operating expenses increased in the first quarter of 2003 compared to the same period of 2002, although some categories of expense actually decreased from the levels of previous periods.  Operating expenses rose to a total of $5,110,000 for the first quarter of 2003 from $4,036,000 for the three months ended March 31, 2002.

 

Salary and related benefits increased by $895,000, rising from a total of $2,428,000 for the first quarter of 2002 to $3,323,000 for the same period in 2003.  The increase principally reflects increases in staffing which took place during 2002 in the regional offices and also reflects employee salary adjustments.  Occupancy expense rose to $345,000 for the three months ended March 31, 2003 from $330,000 in the first quarter of 2002, the increase reflects the rent paid on the various facilities which house the Bank’s regional offices.  Total other operating expenses rose in 2003 compared to the prior year, increasing from $1,278,000 for the first quarter of 2002 to $1,442,000 for the first three months of 2003.

 

The combined effects of the above-described factors resulted in income before taxes of $1,549,000 for the three months ended March 31, 2003 compared to $951,000 for the first quarter of 2002.  In the first quarter, the Company’s provision for taxes increased from $392,000 in 2002 to $636,000 in 2003.  This brought Net Income for the first quarter of 2003 to $913,000 compared to $559,000 for the same period in 2002.

 

LIQUIDITY, SOURCES OF FUNDS, AND CAPITAL RESOURCES

 

The Company’s financial position remains liquid.  Total liquid assets (cash and due from banks, investment securities, and federal funds sold) stood at 9.3% of total deposits at March 31, 2003.  This level represents a decrease from the 12.5% liquidity level which existed on December 31, 2002. In addition, at March 31, 2003 some $14.4 million of the Bank’s total loans consisted of government guaranteed loans, which represent a significant sources 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 98.9% and 94.7% as of March 31, 2003 and December 31, 2002, respectively.

 

Total shareholders equity was $31,077,000 and $27,830,000 as of March 31, 2003 and December 31, 2002, respectively.  The Company completed a private placement during the current period and issued 236,510 shares of common stock and increased equity by $2,830,000.  The Company’s capital ratios for those dates in comparison with regulatory capital requirements were as follows:

 

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		3-31-03		12-31-02
Leverage Ratio (Tier I Capital to Assets):
Regulatory requirement		4.00	%	4.00	%
First Regional Bancorp		8.67	%	8.60	%

 

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

 

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

 

		3-31-03		12-31-02
Tier I Capital to Assets:
Regulatory requirement		4.00	%	4.00	%
First Regional Bancorp		10.01	%	9.80	%

 

		3-31-03		12-31-02
Tier I + Tier II Capital to Assets:
Regulatory requirement		8.00	%	8.00	%
First Regional Bancorp		11.26	%	11.00	%

 

At March 31, 2003, the Company exceeded the minimum risk-based capital ratio and leverage ratio required to be considered “well capitalized”.  The Company believes that it will continue to meet all applicable capital standards.

 

INFLATION

 

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

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Because customer deposits are the Company’s principal funding source outside of its capital, management has attempted to match rates and maturities of its deposits with its investment and loan portfolios as part

 

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of its liquidity and asset and liability management policies.  The objective of these policies is to manage the Company’s interest rate sensitivity and 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 March 31, 2003, 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		4,765		0		0		0		0		0		0		4,765
Investment securities		0		0		0		6,825		0		0		0		6,825
Subtotal		4,765		0		0		6,825		0		0		0		11,590
Loans		436,598		58		486		2,832		1,657		0		0		441,631
Total earning assets		441,363		58		486		9,657		1,657		0		0		453,221
Cash and due from banks		0		0		0		0		0		0		29,803		29,803
Premises and equipment		0		0		0		0		0		0		1,628		1,628
Other real estate owned		0		0		0		0		0		0		0		0
Other assets		0		0		0		0		0		0		13,789		13,789
Total non-earning assets		0		0		0		0		0		0		45,220		45,220
Total assets		441,363		58		486		9,657		1,657		0		45,220		498,441
Funds purchased		0		0		0		0		0		0		0		0
Repurchase agreements		0		0		0		0		0		0		0		0
Subtotal		0		0		0		0		0		0		0		0
Savings deposits		26,371		0		0		0		0		0		0		26,371
Money market deposits		197,101		0		0		0		0		0		0		197,101
Time deposits		0		19,932		25,753		2,506		100		0		0		48,291
Trust Preferred		0		0		12,500		0		0		0		0		12,500
Total bearing liabilities		223,472		19,932		38,253		2,506		100		0		0		284,263
Demand deposits		0		0		0		0		0		0		174,807		174,807
Other liabilities		825		0		0		0		0		0		7,469		8,294
Equity capital		0		0		0		0		0		0		31,077		31,077
Total non-bearing liabilities		825		0		0		0		0		0		213,353		214,178
Total liabilities		224,297		19,932		38,253		2,506		100		0		213,353		498,441
GAP		217,066		(19,874	)	(37,767	)	7,151		1,557		0		(168,133	)	0
Cumulative GAP		217,066		197,192		159,425		166,576		168,133		168,133		0		0

 

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

 

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 quarter of 2003.  As of March 31, 2003 the Company’s investment portfolio contained unrealized gains $1,000 and no unrealized losses.  By comparison, at March 31, 2002 the Company’s investment portfolio contained no unrealized gains or 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.

 

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.

 

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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 items were submitted to a vote of the Company’s shareholders during the first quarter of 2003.

 

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 first quarter of 2003.

 

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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 March 31, 2003 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:	May 13, 2003	/s/  Jack A. Sweeney
			Jack A. Sweeney, Chairman of the Board
			and Chief Executive Officer
Date:	May 13, 2003	/s/  Thomas McCullough
		Thomas McCullough, Chief Operating Officer
Date:	May 13, 2003	/s/  Elizabeth Thompson
		Elizabeth Thompson, 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: May 13, 2003		/s/ Thomas McCullough
		Thomas McCullough, Chief Operating Officer

 

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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: May 13, 2003		/s/ Jack A. Sweeney
		Jack A. Sweeney, Chairman of the Board
		and Chief Executive Officer

 

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Certification

 

I, Elizabeth Thompson, 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: May 13, 2003		/s/ Elizabeth Thompson
		Elizabeth Thompson, Chief Financial Officer

 

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