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 June 30, 2004

 

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes   o   No   ý 

 

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
	Condensed Consolidated Statements of Financial Condition (unaudited)
	Condensed Consolidated Statements of Earnings (unaudited)
	Condensed Consolidated Statements of Cash Flows (unaudited)
	Notes to Condensed 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
Signatures

 

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PART I - FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

FIRST REGIONAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In Thousands except per share amounts)

(unaudited)

 

		June 30, 2004			December 31, 2003
ASSETS
Cash and due from banks		$	25,704		$	43,006
Federal funds sold		29,660			0
Cash and cash equivalents		55,364			43,006
Investment securities, available for sale, at fair value		2,842			4,440
Interest-bearing deposits in financial institutions		3,396			3,016
Loans, net of allowance for losses of $9,035 in 2004 and $7,660 in 2003		896,361			705,326
Premises and equipment, net of accumulated depreciation		2,295			1,866
Accrued interest receivable and other assets		19,970			17,648
Total Assets		$	980,228		$	775,302
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest bearing		$	309,229		$	251,976
Interest Bearing:
Savings deposits		33,565			33,072
Money market deposits		351,771			251,380
Time deposits		145,723			127,518
Total deposits		840,288			663,946
Federal Home Loan Bank advances		40,000			42,000
Note payable		638			712
Accrued interest payable and other liabilities		8,678			5,725
Subordinated debentures		35,619			27,887
Total Liabilities		925,223			740,270
Commitments and contingencies
Shareholders’ Equity:
Common Stock, no par value, 50,000,000 shares authorized; 3,501,000 and 2,927,000 outstanding in 2004 and 2003, respectively		33,064			16,552
Less: Unearned ESOP shares; 67,000 and 75,000 outstanding in 2004 and 2003, respectively		(604		)	(675		)
Total common stock, no par value; outstanding 3,434,000 in 2004 and 2,852,000 in 2003 shares		32,460			15,877
Retained earnings		22,545			19,155
Total Shareholders’ Equity		55,005			35,032
Total Liabilities and Shareholders’ Equity		$	980,228		$	775,302

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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FIRST REGIONAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In Thousands Except Per Share Amounts)

(Unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2004			2003			2004			2003
INTEREST INCOME:
Interest and fees on loans		$	12,025		$	7,406		$	22,688		$	13,948
Interest on investment securities		13			20			29			34
Interest on federal funds sold		30			61			63			122
Total interest income		12,068			7,487			22,780			14,104
INTEREST EXPENSE:
Interest on deposits		1,172			648			2,164			1,162
Interest on subordinated debentures		454			156			829			308
Interest on FHLB advances		110			37			255			37
Interest on other borrowings		1			3			2			5
Total interest expense		1,737			844			3,250			1,512
Net interest income		10,331			6,643			19,530			12,592
PROVISION FOR LOAN LOSSES		915			450			1,802			750
Net interest income after provision for loan losses		9,416			6,193			17,728			11,842
OTHER OPERATING INCOME:
Customer service fees		1,037			944			2,199			1,821
Other, net		196			182			353			313
Total other operating income		1,233			1,126			2,552			2,134
OPERATING EXPENSES:
Salaries and related benefits		4,707			3,343			9,241			6,666
Occupancy expense		428			345			853			690
Equipment expense		190			174			383			352
Promotion expense		84			82			161			148
Professional service expense		598			383			1,035			720
Customer service expense		202			132			426			269
Supply/communication expense		204			198			436			386
Other expenses		882			867			1,601			1,401
Total operating expenses		7,295			5,524			14,136			10,632
Income before provision for income taxes		3,354			1,795			6,144			3,344
PROVISION FOR INCOME TAXES		1,415			745			2,543			1,381
NET INCOME		$	1,939		$	1,050		$	3,601		$	1,963
EARNINGS PER SHARE (Note 2)
Basic		$	0.57		$	0.37		$	1.13		$	0.72
Diluted		$	0.48		$	0.36		$	0.95		$	0.69

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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FIRST REGIONAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

		Six Months Ended June 30,
		2004			2003
OPERATING ACTIVITIES
Net Income		$	3,601		$	1,963
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,802			750
Depreciation and amortization		218			563
Accretion of investment security discounts		(14		)	(33		)
Increase in interest receivable		(445		)	(161		)
Increase in interest payable		124			33
(Decrease) increase in taxes payable		(407		)	359
Net increase in other liabilities		3,236			1,984
Net increase in other assets		(1,877		)	(1,774		)
Net cash provided by operating activities		6,238			3,684
INVESTING ACTIVITIES
Increase in investments in time deposits, with other financial institutions		$	(380	)	$	(3,000	)
Purchases of investment securities		(2,838		)	(7,417		)
Proceeds from maturities of investment securities		4,450			4,350
Decrease in guaranteed loans		1,834			3,412
Net increase in other loans		(194,671		)	(115,121		)
Increase in premises and equipment		(647		)	(242		)
Net cash used in investing activities		(192,252		)	(118,018		)
FINANCING ACTIVITIES
Net increase in noninterest bearing deposits, money market deposits, and other deposits		158,137			55,326
Net increase in time deposits		18,205			47,704
Decrease in note payable		(74		)	(74		)
Decrease in Federal Home Loan Bank advances		(2,000		)	0
Issuance of subordinated debentures		7,732			0
Proceeds for issuance of common stock, net		16,395			2,831
Other changes in shareholders’ equity		(23		)	(429		)
Net cash provided by financing activities		198,372			105,358
Increase (decrease) in cash and cash equivalents		12,358			(8,976		)
Cash and cash equivalents, beginning of period		43,006			49,974
Cash and cash equivalents, end of period		$	55,364		$	40,998
Supplemental Disclosures of Cash Flow Information:
Interest paid		$	3,125		$	1,479
Income taxes paid		$	2,950		$	1,650

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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FIRST REGIONAL BANCORP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2004

(Unaudited)

 

NOTE 1 -                First Regional Bancorp, a bank holding company (the “Company”), and one of its wholly-owned subsidiaries, First Regional Bank, a California state-chartered bank (the “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 three other subsidiaries, First Regional Statutory Trust I, First Regional Statutory Trust II and First Regional Statutory Trust III, that exist for the sole purpose of issuing trust securities and investing the proceeds thereof in junior subordinated deferrable debentures issued by the Company and engaging in certain other limited activities.  These Trusts were previously reported on a consolidated basis, with the capital securities issued by the Trusts shown on the statement of financial condition consistent with accounting principles generally accepted in the United States of America. As of December 31, 2003, in accordance with Financial Accounting Standards Board (“FASB”) Interpretation 46 (“FIN 46”) (revised December 2003), the Trusts are no longer reported on a consolidated basis.  Therefore, the Trust Preferred Securities no longer appear on the statement of financial condition. Instead, the subordinated debentures payable by the Company to the Trusts and the investment in the Trusts’ common stock are separately reported.  This change primarily impacted the statement of financial condition and had no effect on net income.

 

Certain amounts in the 2003 financial statements have been reclassified to be comparable with the classifications used in the 2004 financial statements.

 

In the opinion of the Company, the interim condensed consolidated financial statements contain all adjustments (which consists only of normal recurring adjustments) necessary to present fairly the financial position and the results of operations for the interim periods.  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 2003 annual report on Form 10-K.

 

Stock Compensation Plans

 

At June 30, 2004, the company had two stock-based employee incentive plans, which are described more fully in Note 10 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003. 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. No stock options were granted during the first six months of 2004 or 2003.  The following table illustrates the pro forma net income 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.

 

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		Three Months Ended
		June 30, 2004			June 30, 2003
Net income to common shareholders:
As Reported		$	1,939,000		$	1,050,000
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		63,000			35,000
Pro forma net income		$	1,876,000		$	1,015,000
Basic earnings per share:
As reported		$	0.57		$	0.37
Pro forma		$	0.55		$	0.36
Diluted earnings per share:
As reported		$	0.48		$	0.36
Pro forma		$	0.46		$	0.35

 

 

		Six Months Ended
		June 30, 2004			June 30, 2003
Net income to common shareholders:
As Reported		$	3,601,000		$	1,963,000
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		126,000			71,000
Pro forma net income		$	3,475,000		$	1,892,000
Basic earnings per share:
As reported		$	1.13		$	0.72
Pro forma		$	1.09		$	0.69
Diluted earnings per share:
As reported		$	0.95		$	0.69
Pro forma		$	0.92		$	0.67

 

Recent Accounting Pronouncements

 

FIN No. 46- Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51. FIN No. 46 (revised December 2003) requires that variable interest entities be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. FIN No. 46 also requires disclosures about variable interest entities that companies are not required to consolidate but in which a company has a significant variable interest. The consolidation requirements of FIN No. 46 applied immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to entities established prior to January 31, 2003 in the first fiscal year or interim period beginning after December 15, 2003. The Company adopted this interpretation effective for the year ended December 31, 2003 and it did not have a material impact on its

 

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results of operations, financial position or cash flows.  However, as previously mentioned, adoption of FIN No. 46 did result in the deconsolidation of statutory trusts previously consolidated by the Company.

 

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 June 30, 2004
		Income (Numerator)			Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders		$	1,939,000		3,431,537		$	0.57
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options					346,983		(0.06		)
Incremental shares from assumed Conversion of convertible subordinated debentures		132,750			545,455		(0.03		)
Diluted EPS
Income available to common shareholders		$	2,071,750		4,323,975		$	0.48

 

		Three Months Ended June 30, 2003
		Income (Numerator)			Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders		$	1,050,000		2,840,842		$	0.37
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options					96,207		(0.01		)
Diluted EPS
Income available to common shareholders		$	1,050,000		2,937,049		$	0.36

 

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		Six Months Ended June 30, 2004
		Income (Numerator)			Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders		$	3,601,000		3,180,831		$	1.13
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options					346,245		(0.11		)
Incremental shares from conversion of convertible subordinated debentures		265,500			545,455		(0.07		)
Diluted EPS
Income available to common shareholders		$	3,866,500		4,072,531		$	0.95

 

		Six Months Ended June 30, 2003
		Income (Numerator)			Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders		$	1,963,000		2,742,588		$	0.72
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options					90,326		(0.03		)
Diluted EPS
Income available to common shareholders		$	1,963,000		2,832,914		$	0.69

 

NOTE 3 -                As of June 30, 2004 the Bank had a total of $6,349,000 in standby letters of credit outstanding.  No losses are anticipated as a result of these transactions.

 

NOTE 4 -                Management has evaluated the Company’s overall operation and determined that its business consists of three reportable business segments as of June 30, 2004 and 2003: core banking operations, the administrative services in relation to TASC (as defined below), 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 personnel, interest paid on deposits, and other general and administrative expenses.  Our core banking services also include the Bank’s merchant services operations, which provides credit card deposits and clearing services to retailers and other credit card accepting businesses and which generates fee income.

 

Administrative Services - The principal business activity of the Bank’s subsidiary, Trust Administration Services Corporation (referred to herein as “Administrative Services” or “TASC”) is providing administrative services for self-directed retirement plans.  The primary source of revenue for this

 

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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 service expenses, and other general and administrative expenses.

 

Total assets of TASC at June 30, 2004 and December 31, 2003 were $656,000 and $506,000, respectively and total assets of Trust Services at June 30, 2004 and December 31, 2003 were $56,000 and $63,000, respectively.  The remaining assets reflected on the statements of financial condition 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 administrative, and the trust services for the three and six month periods ended June 30, 2004 and 2003.

 

		Three Month Period Ended June 30, 2004
		Core Banking Operations			Administrative Services			Trust Services			Combined Operations
Net interest income		$	10,331								$	10,331
Provision for Loan Losses		915									915
Other operating income		596			$	412		$	225		1,233
Operating expenses		6,962			132			201			7,295
Provision for income taxes		1,290			115			10			1,415
Net income		$	1,760		$	165		$	14		$	1,939

 

		Three Month Period Ended June 30, 2003
		Core Banking Operations			Administrative Services			Trust Services			Combined Operations
Net interest income		$	6,643								$	6,643
Provision for Loan Losses		450									450
Other operating income		669			$	301		$	156		1,126
Operating expenses		4,809			519			196			5,524
Provision for income taxes		783			(38		)				745
Net income (loss)		$	1,270		$	(180	)	$	(40	)	$	1,050

 

		Six Month Period Ended June 30, 2004
		Core Banking Operations			Administrative Services			Trust Services			Combined Operations
Net interest income		$	19,530								$	19,530
Provision for Loan Losses		1,802									1,802
Other operating income		1,325			$	793		$	434		2,552
Operating expenses		13,422			322			392			14,136
Provision for income taxes		2,333			193			17			2,543
Net income		$	3,298		$	278		$	25		$	3,601

 

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		Six Month Period Ended June 30, 2003
		Core Banking Operations			Administrative Services			Trust Services			Combined Operations
Net interest income		$	12,592								$	12,592
Provision for Loan Losses		750									750
Other operating income		1,208			$	619		$	307		2,134
Operating expenses		9,488			744			400			10,632
Provision for income taxes		1,381									1,381
Net income (loss)		$	2,181		$	(125	)	$	(93	)	$	1,963

 

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 and the Bank’s subsidiary, TASC.  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 Annual Report on Form 10-K for the year ended December 31, 2003.  Certain statements in this report on Form 10-Q constitute “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  All statements, other than statements of historical fact, included herein may constitute forward-looking statements.  Although First Regional believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct.  Important factors that could cause actual results to differ materially from First Regional’s expectations include fluctuations in interest rates, inflation, government regulations, and economic conditions and competition in the geographic and business areas in which First Regional conducts its operations.  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, 2003.

 

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.

 

As of June 30, 2004 total assets were $980,228,000 compared to $775,302,000 at December 31, 2003, an increase of $204,926,000 or 26.4% and the June 30, 2004 asset level represents an $402,890,000 (69.8%) increase over the $577,338,000 that existed on the same date in 2003.  The 2004 asset increase reflects a corresponding increase in total deposits of $176,342,000 or 26.6%, from $663,946,000 at the end of 2003 to $840,288,000 at June 30, 2004.  While overall deposits increased, the deposit growth was centered primarily in money market deposits, and noninterest bearing deposits, while time deposits and savings deposits also experienced an increase. There were several changes in the composition of the Bank’s assets during the first six months of 2004.  The Bank’s core loan portfolio grew significantly by $191,035,000 during the six month period, bringing the Bank’s total loans to $896,361,000 at June 30, 2004 from the December 31, 2003 total of $705,326,000.  The combined effect of the substantial increase in loans and the growth in deposits was an increase in the level of total liquid assets (cash and due from banks, Federal funds sold and investment securities).  Investment securities decreased by $1.6 million, while cash and cash equivalents (cash and due from banks and Federal funds sold), increased by $12.4

 

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million in order to accommodate the changes that took place in the rest of the balance sheet.

 

The Company earned net income of $1,939,000 in the three months ended June 30, 2004, compared to earnings of $1,050,000 in the second quarter of 2003. The results for the six months ended June 30, 2004 was earnings of $3,601,000 compared to net income of $1,963,000 for the corresponding period of 2003, an increase of 83.4%.

 

NET INTEREST INCOME

 

Net interest income is the excess of interest income earned on interest-earning assets over interest expense incurred on interest-bearing liabilities.  Interest income or expense are determined by the average volume of interest-bearing assets or liabilities, and the average rate of interest earned or paid on those assets or liabilities.  As was the case during 2003, the first six months of 2004 the Company’s continued growth efforts resulted in an increase in interest earning assets, including loans.  The Bank’s core loan portfolio increased significantly during the first six months of 2004.  The 2004 asset growth reflects a corresponding increase in total deposits resulting in an increase in full service bank branches during 2003 and an increase in personnel in 2003 and 2004.

 

Total interest income increased by $4,581,000 (61%) for the second quarter of 2004 compared to the same period in 2003, and increased by $8,676,000 (62%) for the six month period ended June 30, 2004 compared to the prior year as total earning assets were substantially higher (76%) in 2004 than in 2003.  The majority of the increase in interest income arises from a substantial increase of $4,619,000 (62%) in interest on loans from $7,406,000 for the three months ended June 30, 2003 compared to $12,025,000 for the same period in 2004.  Although there was an increase in the loan portfolio of $385,549,000 (75%) from June 30, 2003 to June 30, 2004, the interest income increase was tempered by the Federal Reserve’s series of interest rate reductions.  For the three months ended June 30, 2004 interest expense on deposits increased by $524,000 (81%) to $1,172,000 from the 2003 level of $648,000 and for the six months ended June 30, 2004 interest expense on deposits increased by $1,002,000 (86%) to $2,164,000 from the 2003 level of $1,162,000 due to an increase in total deposits of $112,961,000 (58%) from June 30, 2003 to June 30, 2004. The increases in deposits were primarily in noninterest bearing demand deposit accounts, money market deposits and time deposits, while savings deposits increased slightly.  For the three months ended June 30, 2004 interest expense on subordinated debentures increased by $298,000 (191%), to $454,000 from the 2003 level of $156,000 due to an increase of $22,732,000 in subordinated debentures at June 30, 2004 compared the end of June 30, 2003. For the six months ended June 30, 2004 interest expense on subordinated debentures increased by $521,000 (169%), to $829,000 from the 2003 level of $308,000 due to the increase in subordinated debentures compared to the prior year. The net result was an increase in net interest income of $3,688,000 (56%), from $6,643,000 in the second quarter of 2003 to $10,331,000 for the second quarter of 2004 and an increase in net interest income of $6,938,000 (55%), from $12,592,000 for the six months ended June 30, 2003 to $19,530,000 for the first six months of 2004.

 

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:

 

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		For Three Month Period Ended June 30,
		2004								2003
		Average Balance			Interest Income(2)			Average Yield/ Rate%		Average Balance			Interest Income (2)			Average Yield/ Rate%
		(Dollars in Thousands)
Interest Earning Assets:
Loans(1)		$	837,698		$	12,025		5.7	%	$	480,881		$	7,406		6.2	%
Interest-bearing deposits in financial institutions		3,108			8			1.0	%	0			0			0.0	%
Investment Securities		2,175			5			0.9	%	6,514			20			1.2	%
Federal Funds Sold		11,065			30			1.1	%	20,724			61			1.2	%
Total Interest Earning Assets		$	854,046		$	12,068		5.7	%	$	508,119		$	7,487		5.9	%

 

		For Three Month Period Ended June 30,
		2004								2003
		Average Balance			Interest Expense			Average Yield/ Rate%		Average Balance			Interest Expense			Average Yield/ Rate%
		(Dollars in Thousands)
Interest Bearing Liabilities:
Savings deposits		$	35,254		$	29		0.3	%	$	27,838		$	25		0.4	%
Money market accounts		318,045			663			0.8	%	203,934			359			0.7	%
Time deposits		142,139			480			1.4	%	71,569			264			1.5	%
Subordinated debentures		35,619			454			5.1	%	12,887			156			4.8	%
Other Borrowings		44,072			111			1.0	%	13,185			40			1.2	%
Total Interest Bearing Liabilities		$	575,129		$	1,737		1.2	%	$	329,413		$	844		1.0	%

 

 

(1)                                  This figure reflects total loans, including non-accrual loans, and is not net of the allowance for losses, which had an average balance in the second quarter of $8,724,000 in 2004 and $5,957,000 in 2003.

 

(2)                                  Includes loan fees in the second quarter of $1,270,000 in 2004 and $676,000 in 2003.

 

		For Six Month Period Ended June 30,
		2004								2003
		Average Balance			Interest Income(2)			Average Yield/ Rate%		Average Balance			Interest Income (2)			Average Yield/ Rate%
		(Dollars in Thousands)
Interest Earning Assets:
Loans(1)		$	792,072		$	22,688		5.7	%	$	455,385		$	13,948		6.1	%
Interest-bearing deposits in financial institutions		3,063			16			1.0	%	0			0			0.0	%
Investment Securities		2,868			13			0.9	%	5,404			34			1.3	%
Federal Funds Sold		12,481			63			1.0	%	20,927			122			1.2	%
Total Interest Earning Assets		$	810,484		$	22,780		5.6	%	$	481,716		$	14,104		5.9	%

 

14

 

		For Six Month Period Ended June 30,
		2004								2003
		Average Balance			Interest Expense			Average Yield/ Rate%		Average Balance			Interest Expense			Average Yield/ Rate%
		(Dollars in Thousands)
Interest Bearing Liabilities:
Savings deposits		$	33,707		$	58		0.3	%	$	26,453		$	48		0.4	%
Money market accounts		292,464			1,164			0.8	%	200,330			691			0.7	%
Time deposits		140,619			942			1.3	%	59,707			423			1.4	%
Subordinated debentures		32,305			829			5.1	%	12,887			308			4.8	%
Other Borrowings		48,979			257			1.0	%	6,751			42			1.2	%
Total Interest Bearing Liabilities		$	548,074		$	3,250		1.2	%	$	306,128		$	1,512		1.0	%

 

(1)                                  This figure reflects total loans, including non-accrual loans, and is not net of the allowance for losses, which had an average balance in the first six months of $8,426,000 in 2004 and $5,781,000 in 2003.

 

(2)                                  Includes loan fees in the first six months of $2,237,000 in 2004 and $1,238,000 in 2003.

 

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

 

		For the Three Month Period Ended June 30,						For the Six Month Period Ended June 30,
		2004			2003			2004			2003
		(Dollars in Thousands)
Total interest income (1)		$	12,068		$	7,487		$	22,780		$	14,104
Total interest expense		1,737			844			3,250			1,512
Net interest earnings		$	10,331		$	6,643		$	19,530		$	12,592
Average interest earning assets		$	854,046		$	508,119		$	810,484		$	481,716
Average interest bearing liabilities		575,129			$	329,413		$	548,074		$	306,128
Net yield on average interest earning assets		4.8		%	5.2		%	4.8		%	5.2		%

 

15

 

(1)                                  Includes loan fees in the second quarter of $1,270,000 in 2004 and $676,000 in 2003 and first six months of $2,237,000 in 2004 and $1,238,000 in 2003.

 

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) For the Three Month Periods Ended June 30, 2004 over 2003									Increase (Decrease) For the Six Month Periods Ended June 30, 2004 over 2003
		Volume			Rate			Net			Volume			Rate			Net
		(Dollars in Thousands)
Interest Income(1)
Loans (2)		$	5,084		$	(465	)	4,619			$	9,580		$	(840	)	$	8,740
Interest-bearing deposits in financial institutions		8			0			8			16			0			16
Federal Funds sold		(27		)	(4		)	(31		)	(44		)	(15		)	(59		)
Investment securities		(11		)	(4		)	(15		)	(13		)	(8		)	(21		)
Total Interest Earning Assets		$	5,054		$	(473	)	$	4,581		$	9,539		$	(863	)	$	8,676
Interest Expense (1)
Savings		$	6		$	(2	)	$	4		$	12		$	(2	)	$	10
Money market		229			75			304			354			119			473
Subordinated debentures		289			9			298			497			24			521
Time		236			(20		)	216			541			(22		)	519
Other Borrowings		77			(6		)	71			221			(6		)	215
Total interest bearing liabilities		$	837		$	56		$	893		$	1,625		$	113		$	1,738

 

(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 second quarter of $1,270,000 in 2004 and $676,000 in 2003 and first six months of $2,237,000 in 2004 and $1,238,000 in 2003.

 

OTHER OPERATING INCOME

 

Other operating income increased to $1,233,000 in the second quarter of 2004 from $1,126,000 in the three months ended June 30, 2003.  For the first six months of 2004

 

16

 

other operating income also increased to $2,552,000 from $2,134,000 for the first six months of 2003.  The Bank’s Trust Administration Services Corp., a wholly owned subsidiary that provides administrative and custodial services to self-directed retirement plans, had revenue which increased to $412,000 for the second quarter of 2004 and $793,000 for the six months ended June 30, 2004 in contrast with $301,000 in the second quarter of 2003 and $619,000 in the first six months of 2003.  The increase in TASC revenue relates to both an increase in the structure of fees charged to customers and an increase in the number of customer accounts as a result of an aggressive marketing program.  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 $225,000 for the second quarter of 2004 and $545,000 for the six months ended June 30, 2004 in contrast with $235,000 for the second quarter of 2003 and $457,000 for the six months ended June 30, 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 $438,000 in the first six months of 2004 and revenue of $312,000 during the first six months of 2003.  During the first six months of 2003 $4,000 in gains and $8,000 in losses on sales of premises and equipment were realized.  No gains or losses were realized on sales of premises and equipment in the first six months of 2004.  No gains or losses on securities sales were realized in the first six months of 2004 or 2003.

 

LOAN PORTFOLIO AND PROVISION FOR LOAN LOSSES

 

The loan portfolio consisted of the following at June 30, 2004 and December 31, 2003:

 

			June 30, 2004			December 31, 2003
			(Dollars in Thousands)
Commercial loans			$	125,593		$	113,563
Real estate construction loans			82,188			90,596
Real estate loans			693,087			501,317
Government guaranteed loans			7,564			9,398
Other loans			2,395			2,232
	Total loans		910,827			717,106
Less	•  Allowances for loan losses		9,035			7,660
	•  Deferred loan fees		5,431			4,120
	Net loans		$	896,361		$	705,326

 

The allowance for 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.

 

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

 

17

 

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 ensure 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.

 

Reflecting the Company’s ongoing analysis of the risks presented by its loan portfolio, the allowance for losses was $9,035,000 and $7,660,000 (or 1.00% and 1.07% of gross outstanding loans) at June 30, 2004 and December 31, 2003 respectively.  Provisions for loan losses were $915,000 and $1,802,000 for the three and six month period ended June 30, 2004, compared to $450,000 and $750,000 for the same periods of 2003. For the three and six months ended June 30, 2004, the Company experienced net loan charge-offs of $515,000 and $515,000, respectively; by comparison, in the first six months of 2003 the Company generated no net loan charge-offs.  The Company had loan recoveries of $113,000 and $0 during the six months ended June 30, 2004 and 2003.

 

For the quarter ended June 30, 2004 the Company has identified loans having an aggregate average balance of $938,000 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 loan loss reserve for each of the impaired loans which at June 30, 2004 totaled $23,000 for the loans as a group.

 

18

 

OPERATING EXPENSES

 

Overall operating expenses increased in the first six months of 2004 compared to the same period of 2003.  Operating expenses rose to a total of $7,295,000 for the second quarter of 2004 from $5,524,000 for the three months ended June 30, 2003.  For the six months ended June 30, 2004 operating expenses totaled $14,136,000, an increase from $10,632,000 for the corresponding period in 2003.

 

Salary and related benefits increased by $1,364,000, rising from a total of $3,343,000 for the second quarter of 2003 to $4,707,000 for the same period in 2004, and also rose for the six months ended June 30, 2004 to $9,241,000 from $6,666,000 for the same period in 2003.  The increase principally reflects increases in staffing which took place during 2003 and 2004 in the regional offices and also reflects employee salary adjustments.  Occupancy expense rose to $428,000 for the three months ended June 30, 2004 from $345,000 in the second quarter of 2003, the increase reflects the rent paid on the various facilities which house the Bank’s regional offices and additional space at the Bank’s headquarters.  Total other operating expenses rose in 2004 compared to the prior year, increasing from $3,276,000 for the first six months of 2003 to $4,042,000 for the same period of 2004.  The second quarter expenses increased from $1,836,000 in 2003 to $2,160,000 for the same period of 2004.

 

The combined effects of the above-described factors resulted in income before taxes of $3,354,000 for the three months ended June 30, 2004 compared to $1,795,000 for the second quarter of 2003.  For the six months ended June 30, 2004 income before taxes is $6,144,000 compared to $3,344,000 for the first six months of the prior year.  In the second quarter, the Company’s provision for taxes increased from $745,000 in 2003 to $1,415,000 in 2004.  For the six months ended June 30, 2004 the provisions were $2,543,000 compared to $1,381,000 in 2003.  This brought net income for the second quarter of 2004 to $1,939,000 compared to $1,050,000 for the same period in 2003.  For the six months ended June 30, net income in 2004 was $3,601,000, while 2003 net income through June 30 was $1,963,000.

 

LIQUIDITY, SOURCES OF FUNDS, AND CAPITAL RESOURCES

 

The Company’s financial position remains liquid.  Total liquid assets (cash and due from banks, investment securities, federal funds sold and interest bearing deposits in financial institutions) stood at 7.3% of total deposits at June 30, 2004.  This level represents a slight decrease from the 7.6% liquidity level which existed on December 31, 2003.  In addition, at June 30, 2004 some $7.5 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 106.7% and 106.2% as of June 30, 2004 and December 31, 2003, respectively.

 

Total shareholders’ equity was $55,005,000 and $35,032,000 as of June 30, 2004 and December 31, 2003, respectively.  The Company completed a private placement during the first quarter of 2004 and issued 583,645 shares of common stock and increased equity by net proceeds of $16,395,000.  The Company’s and the Bank’s capital ratios for those dates in comparison with regulatory capital requirements were as follows:

 

		6-30-04		12-31-03
Leverage Ratio (Tier I Capital to Average Assets):
Regulatory requirement		4.00	%	4.00	%
Company		8.01	%	6.60	%
Bank		9.65	%	8.80	%

 

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

 

19

 

on common equity.  The Company’s and the Bank’s risk adjusted capital ratios for the dates listed in comparison with the risk adjusted regulatory capital requirements were as follows:

 

		6-30-04		12-31-03
Tier I Capital to Risk-weighted Assets:
Regulatory requirement		4.00	%	4.00	%
Company		8.25	%	6.80	%
Bank		9.94	%	9.10	%

 

		6-30-04		12-31-03
Tier I + Tier II Capital to Risk-weighted Assets:
Regulatory requirement		8.00	%	8.00	%
Company		11.16	%	10.30	%
Bank		10.98	%	10.20	%

 

At June 30, 2004, the Company and the Bank exceeded the minimum risk-based capital ratios and leverage ratio required to be “well capitalized”.  The Company and the Bank believe 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.

 

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

 

There were no material changes outside of the ordinary course of our business in our contractual obligations during the quarter ended June 30, 2004.

 

BORROWINGS

 

Convertible Subordinated Debentures

 

On October 30, 2003, the Company sold $15 million aggregate principal amount of convertible subordinated debentures due 2023 in a private placement. The debentures bear interest at a rate of 6 percent per annum and are convertible into the Company’s common stock at a conversion price of $27.50 per share. The debentures are senior to the Company’s trust securities but are subordinate to the Company’s other existing and future senior indebtedness.

 

Junior Subordinated Deferrable Debentures

 

During 2004, 2002 and 2001, the Company established Trust I, Trust II and Trust III (the “Trusts”), statutory business trusts and wholly owned subsidiaries of the Company. The 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.

 

The Trusts issued Cumulative Preferred Capital Securities (the ”Trust Securities”) in private placement transactions, which represent undivided preferred beneficial interests in the assets of the Trusts. Simultaneously, the Trusts purchased Junior Subordinated Deferrable Debentures totaling $20,619,000 at June 30, 2004 and $12,887,000 at December 31, 2003 (the “Debentures”) from the Company. The Company then invested the net proceeds of the sale of the Debentures in the 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 1 capital for regulatory reporting purposes while permitting the Company

 

20

 

to deduct the payment of future cash distributions for tax purposes. The debentures, must be redeemed within 30 years and are recorded in the liability section of the consolidated statement of financial condition in accordance with accounting principles generally accepted in the United States of America even though they are treated as capital for regulatory purposes.  Holders of the debentures are entitled to receive cumulative cash distributions, payable quarterly in arrears, equal to three-month LIBOR plus an interest factor, not to exceed 11.90% during the first five 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 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 June 30, 2004, and thus the relative sensitivity of the Bank’s net interest income to changes in the overall level of interest rates.

 

(In Thousands)

 

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		29,660		0		0		0		0		0		0		29,660
Time deposits with other banks		0		95		3,081		190		30		0		0		3,396
Investment securities		0		600		2,242		0		0		0		0		2,842
Subtotal		29,660		695		5,323		190		30		0		0		35,898
Loans		892,550		0		3,621		57		133		0		0		896,361
Total earning assets		922,210		695		8,944		247		163		0		0		932,259
Cash and due from banks		0		0		0		0		0		0		25,704		25,704
Premises and equipment		0		0		0		0		0		0		2,295		2,295
Other real estate owned		0		0		0		0		0		0		0		0
Other assets		0		0		0		0		0		0		19,970		19,970
Total non-earning assets		0		0		0		0		0		0		47,969		47,969
Total assets		922,210		695		8,944		247		163		0		47,969		980,228
Funds purchased		0		0		0		0		0		0		0		0
Advances from FHLB		0		40,000		0		0		0		0		0		40,000
Repurchase agreements		0		0		0		0		0		0		0		0
Subtotal		0		40,000		0		0		0		0		0		40,000
Savings deposits		33,565		0		0		0		0		0		0		33,565
Money market deposits		351,771		0		0		0		0		0		0		351,771
Time deposits		0		47,597		86,382		5,849		5,895		0		0		145,723
Subordinated Debentures		0		0		20,619		0		0		15,000		0		35,619
Total interest bearing liabilities		385,336		87,597		107,001		5,849		5,895		15,000		0		606,678
Demand deposits		0		0		0		0		0		0		309,229		309,229
Other liabilities		638		0		0		0		0		0		8,678		9,316
Equity capital		0		0		0		0		0		0		55,005		55,005
Total non-interest bearing liabilities and equity capital		638		0		0		0		0		0		372,912		373,550
Total liabilities and equity capital		385,974		87,597		107,001		5,849		5,895		15,000		372,912		980,228
GAP		536,236		(86,902	)	(98,057	)	(5,602	)	(5,732	)	(15,000	)	(324,943	)	0
Cumulative GAP		536,236		449,334		351,277		345,675		339,943		324,943		0		0

 

21

 

 

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 six months of 2004 or 2003.  As of June 30, 2004 the Company’s investment portfolio contained no unrealized gains or losses.  As of June 30, 2003 the Company’s investment portfolio contained unrealized gains of $1,000 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-15(e).  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.

 

As of the end of the period covered by this report, the Company’s Senior Management carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer.  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 as of the end of the period covered by this report.

 

During management’s evaluation of the effectiveness of the Company’s disclosure controls and procedures, as described above, management did not identify any change in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

22

 

PART II - OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

Litigation

 

In the ordinary course of business, the Company and the Bank are involved in litigation.  Management does not expect the ultimate outcome of any pending legal proceedings 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

 

The Company held its Annual Meeting of Shareholders on May 18, 2004. Four Class 2 Directors were elected as follows (Class 2 Directors serve until 2006):

 

Class 2

Fred M. Edwards

H. Anthony Gartshore

Lawrence J. Sherman

Jack A. Sweeney

 

At the meeting, there were 2,537,574 votes cast for, 20,000 votes cast against or withheld, and 5,700 abstentions with respect to each of the Class 2 Directors.

 

The term of all Class 1 Directors continues until the next annual meeting of shareholders, scheduled for May of 2005.  The Class 1 Directors are Gary Horgan, Richard Schreiber and Thomas McCullough.

 

No other matters were submitted for shareholder vote.

 

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

 

(a) Exhibits

 

Exhibit No.		Description
31.1		Certification of the Chief Executive Officer furnished pursuant to Section 302 of the Sarbanes-Oxley Act
31.2		Certification of the Corporate Secretary furnished pursuant to Section 302 of the Sarbanes-Oxley Act
31.3		Certification of the Chief Financial Officer furnished pursuant to Section 302 of the Sarbanes-Oxley Act
32		Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act

 

(b) Reports on Form 8-K

 

On April 1, 2004, the Company furnished certain Regulation FD disclosure pursuant to Item 9 of Form 8-K, and also furnished certain exhibits pursuant to Item 7 of Form 8-K, including a press release announcing that the Company had raised approximately $25 million of capital through the private placement of 583,465 shares of common stock and trust-preferred securities.

 

On April 15, 2004, the Company furnished a press release pursuant to Items 7 and 12 of Form 8-K, announcing financial results for the three months ended March 31, 2004.

 

Items 2, 3 and 5 of Part II of Form 10-Q are not applicable and have been omitted.

 

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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.

 

	FIRST REGIONAL BANCORP
Date: August 12, 2004	/s/ Jack A. Sweeney
	Jack A. Sweeney, Chairman of the Board
	and Chief Executive Officer
Date: August 12, 2004	/s/ Thomas E. McCullough
	Thomas E. McCullough, Corporate Secretary
Date: August 12, 2004	/s/ Elizabeth Thompson
	Elizabeth Thompson, Chief Financial Officer

 

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Exhibit Index

 

Exhibit No.		Description
31.1		Certification of the Chief Executive Officer furnished pursuant to Section 302 of the Sarbanes-Oxley Act
31.2		Certification of the Corporate Secretary furnished pursuant to Section 302 of the Sarbanes-Oxley Act
31.3		Certification of the Chief Financial Officer furnished pursuant to Section 302 of the Sarbanes-Oxley Act
32		Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act

 

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