FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Quarterly Report Under Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

 

Quarter Ended September 30, 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 5.	Other Information
	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)

 

		September 30, 2004			December 31, 2003
ASSETS
Cash and due from banks		$	67,320		$	43,006
Federal funds sold		430			0
Cash and cash equivalents		67,750			43,006
Investment securities, available for sale, at fair value		2,744			4,440
Interest-bearing deposits in financial institutions		3,224			3,016
Loans, net of allowance for losses of $10,084 in 2004 and $7,660 in 2003		973,579			705,326
Premises and equipment, net of accumulated depreciation		2,580			1,866
Accrued interest receivable and other assets		20,630			17,648
Total Assets		$	1,070,507		$	775,302
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest bearing		358,816			251,976
Interest Bearing:
Savings deposits		35,568			33,072
Money market deposits		412,639			251,380
Time deposits		142,035			127,518
Total deposits		949,058			663,946
Federal Home Loan Bank advances		20,000			42,000
Note payable		600			712
Accrued interest payable and other liabilities		6,890			5,725
Subordinated debentures		35,559			27,887
Total Liabilities		1,012,107			740,270
Commitments and contingencies
Shareholders’ Equity:
Common Stock, no par value, 50,000,000 shares authorized; 3,506,000 and 2,927,000 outstanding in 2004 and 2003, respectively		33,231			16,552
Less: Unearned ESOP shares; 63,000 and 75,000 outstanding in 2004 and 2003, respectively		(569		)	(675		)
Total common stock, no par value; outstanding 3,443,000 in 2004 and 2,852,000 in 2003		32,662			15,877
Retained earnings		25,737			19,155
Net unrealized gain on available-for-sale securities		1			0
Total Shareholders’ Equity		58,400			35,032
Total Liabilities and Shareholders’ Equity		$	1,070,507		$	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 September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
INTEREST INCOME:
Interest and fees on loans		$	14,343		$	8,214		$	37,031		$	22,162
Interest on investment securities		13			11			26			45
Interest on deposits in financial Institutions		9			8			25			8
Interest on federal funds sold		47			69			110			191
Total interest income		14,412			8,302			37,192			22,406
INTEREST EXPENSE:
Interest on deposits		1,532			733			3,696			1,895
Interest on subordinated debentures		477			142			1,306			450
Interest on FHLB advances		109			0			364			37
Interest on other borrowings		0			1			2			6
Total interest expense		2,118			876			5,368			2,388
Net interest income		12,294			7,426			31,824			20,018
PROVISION FOR LOAN LOSSES		1,100			1,000			2,902			1,750
Net interest income after provision for loan losses		11,194			6,426			28,922			18,268
OTHER OPERATING INCOME:
Customer service fees		1,150			967			3,349			2,788
Other, net		183			162			536			475
Total other operating income		1,333			1,129			3,885			3,263
OPERATING EXPENSES:
Salaries and related benefits		4,452			3,456			13,693			10,122
Occupancy expense		427			381			1,280			1,071
Equipment expense		250			176			633			528
Promotion expense		91			52			252			200
Professional service expense		543			410			1,578			1,130
Customer service expense		246			148			672			417
Supply/communication expense		237			175			673			561
Other expenses		829			537			2,430			1,938
Total operating expenses		7,075			5,335			21,211			15,967
Income before provision for income taxes		5,452			2,220			11,596			5,564
PROVISION FOR INCOME TAXES		2,260			914			4,803			2,295
NET INCOME		$	3,192		$	1,306		$	6,793		$	3,269
EARNINGS PER SHARE (Note 2)
Basic		$	0.93		$	0.46		$	2.09		$	1.18
Diluted		$	0.79		$	0.44		$	1.80		$	1.14

 

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)

 

		Nine Months Ended September 30,
		2004			2003
OPERATING ACTIVITIES
Net Income		$	6,793		$	3,269
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,902			1,750
Depreciation and amortization		333			658
Accretion of investment security discounts		(26		)	(44		)
Increase in interest receivable		(861		)	(255		)
Increase in interest payable		168			40
Decrease in taxes payable		(423		)	(295		)
Net increase in other liabilities		1,420			3,585
Net increase in other assets		(2,121		)	(1,731		)
Net cash provided by operating activities		8,185			6,977
INVESTING ACTIVITIES
Increase in investments in time deposits, with other financial institutions		(208		)	(3,008		)
Purchases of investment securities		(8,077		)	(8,464		)
Proceeds from maturities of investment securities		9,800			9,400
Decrease in guaranteed loans		2,474			5,035
Net increase in other loans		(273,629		)	(173,673		)
Purchases of premises and equipment		(1,047		)	(485		)
Net cash used in investing activities		(270,687		)	(171,195		)
FINANCING ACTIVITIES
Net increase in noninterest bearing deposits, money market deposits, and other deposits		270,595			116,982
Net increase in time deposits		14,517			47,206
Decrease in note payable		(112		)	(112		)
Decrease in Federal Home Loan Bank advances		(22,000		)	0
Issuance of subordinated debentures		7,672			0
Proceeds for issuance of common stock, net		16,395			2,831
Other changes in shareholders’ equity		179			(352		)
Net cash provided by financing activities		287,246			166,555
Increase in cash and cash equivalents		24,744			2,337
Cash and cash equivalents, beginning of period		43,006			49,974
Cash and cash equivalents, end of period		$	67,750		$	52,311
Supplemental Disclosures of Cash Flow Information:
Interest paid		$	5,200		$	2,349
Income taxes paid		$	5,225		$	3,000

 

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

September 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 September 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.  During September 2003, the company granted options to buy up to 150,000 shares of the Company’s common stock to certain officers and directors of the Company and its subsidiaries.  The exercise price of the options is $20.79 and all options vest over seven years and expire in 2013.  No other stock options were granted during the first nine 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
		September 30, 2004			September 30, 2003
Net income to common shareholders:
As Reported		$	3,192,000		$	1,306,000
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		63,000			38,000
Pro forma net income		$	3,129,000		$	1,268,000
Basic earnings per share:
As reported		$	0.93		$	0.46
Pro forma		$	0.91		$	0.45
Diluted earnings per share:
As reported		$	0.79		$	0.44
Pro forma		$	0.78		$	0.43

 

		Nine Months Ended
		September 30, 2004			September 30, 2003
Net income to common shareholders:
As Reported		$	6,793,000		$	3,269,000
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		189,000			109,000
Pro forma net income		$	6,604,000		$	3,160,000
Basic earnings per share:
As reported		$	2.09		$	1.18
Pro forma		$	2.03		$	1.14
Diluted earnings per share:
As reported		$	1.80		$	1.14
Pro forma		$	1.75		$	1.10

 

 

Recent Accounting Pronouncements

 

FIN No. 46R - In December 2003, the FASB issued FIN No. 46R, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51. FIN No. 46R 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. 46R 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 Company adopted this interpretation effective for the year ended December 31, 2003 and it did not have a material impact on its results of operations, financial position or cash flows.  However, as previously mentioned, adoption of FIN No. 46R did result in the deconsolidation of statutory trusts previously consolidated by the Company.

 

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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 and shares issuable upon the assumed conversion of convertible subordinated debentures.  A reconciliation of the numerator and the denominator used in the computation of basic and diluted earnings per share is:

 

		Three Months Ended September 30, 2004
		Income (Numerator)			Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders		$	3,192,000		3,436,790		$	0.93
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options					205,159		(0.05		)
Incremental shares from assumed Conversion of convertible subordinated debentures		132,000			543,273		(0.09		)
Diluted EPS
Income available to common shareholders		$	3,324,000		4,185,222		$	0.79

 

		Three Months Ended September 30, 2003
		Income (Numerator)			Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders		$	1,306,000		2,844,800		$	0.46
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options					120,649		(0.02		)
Diluted EPS
Income available to common shareholders		$	1,306,000		2,965,449		$	0.44

 

		Nine Months Ended September 30, 2004
		Income (Numerator)			Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders		$	6,793,000		3,257,946		$	2.09
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options					202,739		(0.13		)
Incremental shares from conversion of convertible subordinated debentures		397,000			543,273		(0.16		)
Diluted EPS
Income available to common shareholders		$	7,190,000		4,003,958		$	1.80

 

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		Nine Months Ended September 30, 2003
		Income (Numerator)			Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders		$	3,269,000		2,773,449		$	1.18
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options					99,258		(0.04		)
Diluted EPS
Income available to common shareholders		$	3,269,000		2,872,707		$	1.14

 

NOTE 3 -                As of September 30, 2004 the Bank had a total of $7,838,000 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 September 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 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 September 30, 2004 and December 31, 2003 were $634,000 and $506,000, respectively and total assets of Trust Services at September 30, 2004 and

 

 

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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 nine month periods ended September 30, 2004 and 2003.

 

		Three Month Period Ended September 30, 2004
		Core Banking Operations			Administrative Services			Trust Services			Combined Operations
Net interest income		$	12,294								$	12,294
Provision for Loan Losses		1,100									1,100
Other operating income		658			$	418		$	257		1,333
Operating expenses		6,760			122			193			7,075
Provision for income taxes		2,113			121			26			2,260
Net income		$	2,979		$	175		$	38		$	3,192

 

		Three Month Period Ended September 30, 2003
		Core Banking Operations			Administrative Services			Trust Services			Combined Operations
Net interest income		$	7,426								$	7,426
Provision for Loan Losses		1,000									1,000
Other operating income		604			$	347		$	178		1,129
Operating expenses		5,030			137			168			5,335
Provision for income taxes		879			35						914
Net income		$	1,121		$	175		$	10		$	1,306

 

		Nine Month Period Ended September 30, 2004
		Core Banking Operations			Administrative Services			Trust Services			Combined Operations
Net interest income		$	31,824								$	31,824
Provision for Loan Losses		2,902									2,902
Other operating income		1,983			$	1,211		$	691		3,885
Operating expenses		20,182			444			585			21,211
Provision for income taxes		4,446			314			43			4,803
Net income		$	6,277		$	453		$	63		$	6,793

 

		Nine Month Period Ended September 30, 2003
		Core Banking Operations			Administrative Services			Trust Services			Combined Operations
Net interest income		$	20,018								$	20,018
Provision for Loan Losses		1,750									1,750
Other operating income		1,812			$	966		$	485		3,263
Operating expenses		14,518			881			568			15,967
Provision for income taxes		2,260			35						2,295
Net income (loss)		$	3,302		$	50		$	(83	)	$	3,269

 

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 management 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 management’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 Bancorp 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 September 30, 2004 total assets were $1,070,507,000 compared to $775,302,000 at December 31, 2003, an increase of $295,205,000 or 38.1% and the September 30, 2004 asset level represents a $429,713,000 (67.1%) increase over the $640,794,000 that existed on the same date in 2003.  The 2004 asset increase reflects a corresponding increase in total deposits of $285,112,000 or 42.9%, from $663,946,000 at the end of 2003 to $949,058,000 at September 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 nine months of 2004.  The Bank’s core loan portfolio grew significantly by $268,253,000 during the nine month period, bringing the Bank’s total loans to $973,579,000 at September 30, 2004 from the December 31, 2003 total of $705,326,000.  The Bank’s loan growth was moderated by the participation to other financial institutions of approximately $17 million in loans during the third quarter of 2004.  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 $1.7 million, while cash and cash equivalents (cash and due from banks and

 

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Federal funds sold), increased by $24.7 million in order to accommodate the changes that took place in the rest of the balance sheet.

 

The Company earned net income of $3,192,000 in the three months ended September 30, 2004, compared to earnings of $1,306,000 in the third quarter of 2003. The results for the nine months ended September 30, 2004 was earnings of $6,793,000 compared to net income of $3,269,000 for the corresponding period of 2003, an increase of 107.8%.

 

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 nine 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 nine months of 2004.  The 2004 asset growth reflects a corresponding increase in total deposits resulting from an increase in full service bank branches during 2003 and an increase in personnel in 2003 and 2004.

 

Total interest income increased by $6,110,000 (74%) for the third quarter of 2004 compared to the same period in 2003, and increased by $14,786,000 (66%) for the nine month period ended September 30, 2004 compared to the prior year as total earning assets were substantially higher (64%) in 2004 than in 2003.  The majority of the increase in interest income arises from a substantial increase of $6,129,000 (75%) in interest on loans from $8,214,000 for the three months ended September 30, 2003 compared to $14,343,000 for the same period in 2004.  Although there was an increase in the loan portfolio of $406,838,000 (72%) from September 30, 2003 to September 30, 2004, the interest income increase was also affected by the Federal Reserve’s series of interest rate increases.  For the three months ended September 30, 2004 interest expense on deposits increased by $799,000 (109%) to $1,532,000 from the 2003 level of $733,000 and for the nine months ended September 30, 2004 interest expense on deposits increased by $1,801,000 (95%) to $3,696,000 from the 2003 level of $1,895,000 due to an increase in total deposits of $362,740,000 (62%) from September 30, 2003 to September 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 September 30, 2004 interest expense on subordinated debentures increased by $335,000 (236%), to $477,000 from the 2003 level of $142,000 due to an increase of $22,672,000 in subordinated debentures at September 30, 2004 compared the end of September 30, 2003. For the nine months ended September 30, 2004 interest expense on subordinated debentures increased by $856,000 (190%), to $1,306,000 from the 2003 level of $450,000 due to the increase in subordinated debentures compared to the prior year. The net result was an increase in net interest income of $4,868,000 (66%), from $7,426,000 in the third quarter of 2003 to $12,294,000 for the third quarter of 2004 and an increase in net interest income of $11,806,000 (59%), from $20,018,000 for the nine months ended September 30, 2003 to $31,824,000 for the first nine 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:

 

		For Three Month Period Ended September 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)		$	941,460		$	14,343		6.1%		$	528,411		$	8,214		6.2%
Interest-bearing deposits in financial institutions		3,289			9			1.1%		3,002			8			1.1%
Investment Securities		3,881			13			1.3%		4,016			11			1.1%
Federal Funds Sold		13,164			47			1.4%		27,970			69			1.0%
Total Interest Earning Assets		$	961,794		$	14,412		6.0%		$	563,399		$	8,302		5.9%

 

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