10-Q

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, 2005

Commission File Number  0-10232

FIRST REGIONAL BANCORP

(Exact name of registrant as specified in its charter)

California	95-3582843
State or other jurisdiction of incorporation or organization	IRS Employer Identification Number
1801 Century Park East, Los Angeles, California	90067
Address of principal executive offices	Zip Code
(310) 552-1776
Registrant’s telephone number, including area code
Not applicable
Former name, former address, and former fiscal year, if changed since last report

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.

Common Stock, No Par Value	4,078,609
Class	Outstanding on August 10, 2005

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
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 Share Data)

(Unaudited)

	June 30,			December 31,
	2005			2004
ASSETS
Cash and due from banks	$	63,006		$	51,480
Federal funds sold	0			68,025
Cash and cash equivalents	63,006			119,505
Investment securities, available for sale, at fair value (with amortized cost of $15,183 in 2005 and $3,434 in 2004)	15,196			3,434
Interest-bearing deposits in financial institutions	3,364			3,236
Loans, net of allowance for losses of $14,817 in 2005 and $11,825 in 2004	1,332,586			1,144,229
Premises and equipment, net of accumulated depreciation	3,674			3,091
Accrued interest receivable and other assets	34,228			32,623
Total Assets	$	1,452,054		$	1,306,118
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest bearing	$	420,282		$	361,873
Interest bearing:
Savings deposits	38,817			38,914
Money market deposits	581,584			437,761
Time deposits	170,129			161,504
Total deposits	1,210,812			1,000,052
Federal Home Loan Bank advances	100,000			176,687
Note payable	487			562
Accrued interest payable and other liabilities	9,774			10,133
Subordinated debentures	41,238			41,238
Total Liabilities	1,362,311			1,228,672
Commitments and contingencies
Shareholders’ Equity:
Common Stock, no par value, 50,000,000 shares authorized; 4,071,000 and 4,051,000 outstanding in 2005 and 2004, respectively	48,570			47,970
Less: Unearned ESOP shares; 51,000 and 59,000 outstanding in 2005 and 2004, respectively	(462		)	(533		)
Total common stock, no par value; outstanding 4,020,000 in 2005 and 3,992,000 in 2004	48,108			47,437
Retained earnings	41,626			30,009
Net unrealized gains on available-for-sale securities	9			0
Total Shareholders’ Equity	89,743			77,446
Total Liabilities and Shareholders’ Equity	$	1,452,054		$	1,306,118

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 Share Data)

(Unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
INTEREST INCOME:
Interest and fees on loans	$	24,130	$	12,025	$	44,584	$	22,688
Interest on investment securities	99		5		120		13
Interest on deposits in financial institutions	15		8		31		16
Interest on federal funds sold	27		30		129		63
Total interest income	24,271		12,068		44,864		22,780
INTEREST EXPENSE:
Interest on deposits	2,927		1,172		5,158		2,164
Interest on subordinated debentures	595		454		1,120		829
Interest on FHLB advances	1,022		110		1,716		255
Interest on other borrowings	1		1		1		2
Total interest expense	4,545		1,737		7,995		3,250
Net interest income	19,726		10,331		36,869		19,530
PROVISION FOR LOAN LOSSES	1,500		915		2,700		1,802
Net interest income after provision for loan losses	18,226		9,416		34,169		17,728
OTHER OPERATING INCOME:
Customer service fees	1,320		1,037		2,686		2,199
Other, net	255		196		370		353
Total other operating income	1,575		1,233		3,056		2,552
OPERATING EXPENSES:
Salaries and related benefits	5,573		4,707		10,890		9,241
Occupancy expense	598		428		1,394		853
Equipment expense	264		190		480		383
Promotion expense	125		84		234		161
Professional service expense	626		598		1,204		1,035
Customer service expense	381		202		688		426
Supply/communication expense	274		204		537		436
Other expenses	872		882		1,608		1,601
Total operating expenses	8,713		7,295		17,035		14,136
Income before provision for income taxes	11,088		3,354		20,190		6,144
PROVISION FOR INCOME TAXES	4,713		1,415		8,573		2,543
NET INCOME	$	6,375	$	1,939	$	11,617	$	3,601
EARNINGS PER SHARE: (Note 2)
Basic	$	1.59	$	0.57	$	2.90	$	1.13
Diluted	$	1.49	$	0.48	$	2.72	$	0.95

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,
	2005			2004
OPERATING ACTIVITIES
Net Income	$	11,617		$	3,601
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	2,700			1,802
Depreciation and amortization	397			218
Accretion of investment security discounts	(120		)	(14		)
Net gain on sale/disposal of premises and equipment	(8		)	0
Increase in accrued interest receivable	(1,043		)	(445		)
Increase in accrued interest payable	113			124
Increase (decrease) in taxes payable	2,746			(407		)
Net (decrease) increase in other liabilities	(3,218		)	3,236
Net increase in other assets	(562		)	(1,877		)
Net cash provided by operating activities	12,622			6,238
INVESTING ACTIVITIES
Increase in investments in interest bearing deposits with other financial institutions	(128		)	(380		)
Purchases of investment securities	(15,083		)	(2,838		)
Proceeds from maturities of investment securities	3,450			4,450
Decrease in guaranteed loans	1,350			1,834
Net increase in other loans	(192,407		)	(194,671		)
Proceeds from sale of premises and equipment	20			0
Purchases of premises and equipment	(992		)	(647		)
Net cash used in investing activities	(203,790		)	(192,252		)
FINANCING ACTIVITIES
Net increase in noninterest bearing deposits, money market deposits, and other deposits	202,135			158,137
Net increase in time deposits	8,625			18,205
Decrease in note payable	(75		)	(74		)
Decrease in Federal Home Loan Bank advances	(76,687		)	(2,000		)
Issuance of subordinated debentures	0			7,732
Proceeds for issuance of common stock, net	0			16,395
Other changes in shareholders’ equity	671			(23		)
Net cash provided by financing activities	134,669			198,372
(Decrease) increase in cash and cash equivalents	(56,499		)	12,358
Cash and cash equivalents, beginning of period	119,505			43,006
Cash and cash equivalents, end of period	$	63,006		$	55,364
Supplemental Disclosures of Cash Flow Information:
Interest paid	$	7,882		$	3,125
Income taxes paid	$	10,042		$	2,950

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, 2005

(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.

Certain amounts in the 2004 financial statements have been reclassified to be comparable with the classifications used in the 2005 financial statements.

In the opinion of the Company, the interim condensed consolidated financial statements contain all adjustments (which consist 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 2004 Annual Report on Form 10-K.

Stock Compensation Plans

At June 30, 2005, the Company had two stock-based employee incentive plans, which are described more fully in Note 11 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004. 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 May 2005, the Company granted options to buy up to 56,500 shares of the Company’s common stock to certain officers of the Company and its subsidiaries.  The exercise price of the options is $61.50 and all options vest over seven years and expire in 2015.  No other stock options were granted during the first six months of 2005 or 2004.  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.

	Three Months Ended
	June 30,		June 30,
	2005		2004
Net income to common shareholders:
As Reported	$	6,375,000	$	1,939,000
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects	62,000		63,000
Pro forma net income	$	6,313,000	$	1,876,000
Basic earnings per share:
As reported	$	1.59	$	0.57
Pro forma	$	1.57	$	0.55
Diluted earnings per share:
As reported	$	1.49	$	0.48
Pro forma	$	1.47	$	0.46

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	Six Months Ended
	June 30,		June 30,
	2005		2004
Net income to common shareholders:
As Reported	$	11,617,000	$	3,601,000
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects	135,000		126,000
Pro forma net income	$	11,482,000	$	3,475,000
Basic earnings per share:
As reported	$	2.90	$	1.13
Pro forma	$	2.86	$	1.09
Diluted earnings per share:
As reported	$	2.72	$	0.95
Pro forma	$	2.68	$	0.92

The estimated fair value of options granted during May 2005 was $36.74 using the Black-Scholes option-pricing model with the following weighted-average assumptions used: no dividend yield, expected volatility of 42 percent, risk-free interest rate of 4.3 percent and expected lives of 10 years. There were no other options granted during 2005 or 2004.

Recent Accounting Pronouncements

Statement of Financial Accounting Standards No. 154 – In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards 154, Accounting Changes and Error Corrections (SFAS No. 154), that addresses accounting for changes in accounting principle, changes in accounting estimates, changes required by an accounting pronouncement in the instance that the pronouncement does not include specific transition provisions and error correction.  SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle and error correction unless impracticable to do so.  SFAS No. 154 states an exception to retrospective application when a change in accounting principle, or the method of applying it, may be inseparable from the effect of a change in accounting estimate.  When a change in principle is inseparable from a change in estimate, such as depreciation, amortization or depletion, the change to the financial statements is to be presented in a prospective manner.  SFAS No. 154 and the required disclosures are effective for accounting changes and error corrections in fiscal years beginning after December 15, 2005.

Statement of Financial Accounting Standards No. 123R - In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS No. 123R). This Statement supersedes APB Opinion No. 25, and its related implementation guidance, is a revision of SFAS No. 123, and amends SFAS No. 95, Statement of Cash Flows. This revision of SFAS No. 123 eliminates the ability for public companies to measure share-based compensation transactions at the intrinsic value allowed by APB Opinion No. 25, and requires that such transactions be accounted for based on the grant date fair value of the award. This Statement also amends SFAS No. 95, to require that

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excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. Under the intrinsic value method allowed under APB Opinion No. 25, the difference between the quoted market price as of the date of the grant and the contractual purchase price of the share is charged to operations over the vesting period, and no compensation expense is recognized for fixed stock options with exercise prices equal to the market price of the stock on the dates of grant. Under the fair value based method as prescribed by SFAS No. 123R, the Company is required to charge the value of all newly granted stock-based compensation to expense over the vesting period based on the computed fair value of the award on the grant date. The Statement does not specify a valuation technique to be used to estimate the fair value but states that the use of option-pricing models such as a lattice model (e.g. a binomial model) or a closed-end model (e.g. the Black-Scholes model) would be acceptable. The revised accounting for stock-based compensation requirements must be adopted no later than the beginning of the first fiscal year beginning after June 15, 2005.

The Company will adopt this Standard effective January 1, 2006, using the modified prospective method, recording compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Currently, the Company does not recognize compensation expense for stock-based compensation. Management does not anticipate that this will have a material effect on the Company’s results of operations, financial position or cash flows. Had the Company adopted SFAS No. 123R in prior periods, the impact on net income and earnings per share would have been similar to the pro forma net income and earnings per share in accordance with SFAS No. 123 as previously disclosed.

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, 2005
			Weighted
			Average	Per
	Income		Shares	Share
	(Numerator)		(Denominator)	Amount
Basic EPS
Income available to common shareholders	$	6,375,000	4,015,855	$	1.59
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options			269,532	(0.10		)
Diluted EPS
Income available to common shareholders	$	6,375,000	4,285,387	$	1.49

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	Three Months Ended June 30, 2004
			Weighted
			Average	Per
	Income		Shares	Share
	(Numerator)		(Denominator)	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

	Six Months Ended June 30, 2005
			Weighted
			Average	Per
	Income		Shares	Share
	(Numerator)		(Denominator)	Amount
Basic EPS
Income available to common shareholders	$	11,617,000	4,008,446	$	2.90
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options			268,590	(0.18		)
Diluted EPS
Income available to common shareholders	$	11,617,000	4,277,036	$	2.72

	Six Months Ended June 30, 2004
			Weighted
			Average	Per
	Income		Shares	Share
	(Numerator)		(Denominator)	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

NOTE 3 -As of June 30, 2005 the Bank had a total of $4,868,000 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 six month periods ended June 30, 2005 and 2004, the Company’s comprehensive income was as follows:

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	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2005		2004		2005		2004
	(Dollars in Thousands)
Net Income	$	6,375	$	1,939	11,617		$	3,601
Other comprehensive income	11		0		9		0
Total comprehensive income	$	6,386	$	1,939	$	11,626	$	3,601

NOTE 5 -  Management has evaluated the Company’s overall operation and determined that its business consists of certain reportable business segments as of June 30, 2005 and 2004: 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.  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 June 30, 2005 and December 31, 2004 were $895,000 and $651,000, respectively and total assets of Trust Services at June 30, 2005 and December 31, 2004 were $47,000 and $55,000, 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 (in thousands) for the core banking operations, administrative services, and trust services for the three and six month periods ended June 30, 2005 and 2004.

	Three Month Period Ended June 30, 2005
	Core Banking		Administrative		Trust		Combined
	Operations		Services		Services		Operations
Net interest income	$	19,726					$	19,726
Provision for loan losses	1,500						1,500
Other operating income	745		$	533	$	297	1,575
Operating expenses	8,297		201		215		8,713
Provision for income taxes	4,543		136		34		4,713
Net income	$	6,131	$	196	$	48	$	6,375

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	Three Month Period Ended June 30, 2004
	Core Banking		Administrative		Trust		Combined
	Operations		Services		Services		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

	Six Month Period Ended June 30, 2005
	Core Banking		Administrative		Trust		Combined
	Operations		Services		Services		Operations
Net interest income	$	36,869					$	36,869
Provision for loan losses	2,700						2,700
Other operating income	1,312		$	1,134	$	610	3,056
Operating expenses	16,240		378		417		17,035
Provision for income taxes	8,184		310		79		8,573
Net income	$	11,057	$	446	$	114	$	11,617

	Six Month Period Ended June 30, 2004
	Core Banking		Administrative		Trust		Combined
	Operations		Services		Services		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

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, 2004.  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, 2004.

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, 2005 total assets were $1,452,054,000 compared to $1,306,118,000 at December 31, 2004, an increase of $145,936,000 or 11.2% and the June 30, 2005 asset level represents a $471,826,000 (48.1%) increase over the $980,228,000 that existed on the same date in 2004.  The 2005 asset increase reflects a corresponding increase in total deposits of $210,760,000 or 21.1%, from $1,000,052,000 at the end of 2004 to $1,210,812,000 at June 30, 2005.  While overall deposits increased, the deposit growth was centered primarily in money market deposits, and noninterest bearing deposits, while time deposits also experienced an increase. Savings deposits experienced a slight decrease.  There were several changes in the composition of the Bank’s assets during the first six months of 2005.  The Bank’s core loan portfolio grew significantly by $188,357,000 during the six month period, bringing the Bank’s total loans to $1,332,586,000 at June 30, 2005 from the December 31, 2004 total of $1,144,229,000.  The combined effect of the substantial increase in loans and the growth in deposits was a decrease in the level of total liquid assets (cash and due from banks, Federal funds sold and investment securities).  Cash and cash equivalents (cash and due from banks and Federal funds sold), decreased by $56.5 million in order to accommodate the changes that took place in the rest of the balance sheet.

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The Company earned net income of $6,375,000 in the three months ended June 30, 2005, compared to earnings of $1,939,000 in the second quarter of 2004. The results for the six months ended June 30, 2005 was earnings of $11,617,000 compared to net income of $3,601,000 for the corresponding period of 2004, an increase of 223%.

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 2004, in the first six months of 2005 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 2005.  The 2005 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 2004 and 2005.

Total interest income increased by $12,203,000 (101%) for the second quarter of 2005 compared to the same period in 2004, and increased by $22,084,000 (97%) for the six month period ended June 30, 2005 compared to the prior year as total earning assets were substantially higher (45%) in 2005 than in 2004.  The majority of the increase in interest income arises from a substantial increase of $12,105,000 (101%) in interest on loans from $12,025,000 for the three months ended June 30, 2004 compared to $24,130,000 for the same period in 2005.  Although interest income increased reflecting an increase in the loan portfolio of $436,225,000 (49%) from June 30, 2004 to June 30, 2005, interest income was also affected by the Federal Reserve’s series of interest rate increases.  For the three months ended June 30, 2005 interest expense on deposits increased by $1,755,000 (150%) to $2,927,000 from the 2004 level of $1,172,000 and for the six months ended June 30, 2005 interest expense on deposits increased by $2,994,000 (138%) to $5,158,000 from the 2004 level of $2,164,000 due to an increase in total deposits of $370,524,000 (44%) from June 30, 2004 to June 30, 2005. 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, 2005 interest expense on subordinated debentures increased by $141,000 (31%), to $595,000 from the 2004 level of $454,000 due to an increase of $5,619,000 in subordinated debentures at June 30, 2005 compared to June 30, 2004 and also due to an increase in interest rates during the period. For the six months ended June 30, 2005 interest expense on subordinated debentures increased by $291,000 (35%), to $1,120,000 from the 2004 level of $829,000 due to the increase in subordinated debentures compared to the prior year and also due to an increase in interest rates during the period. For the three months ended June 30, 2005 interest expense on FHLB advances increased by $912,000 (829%), to $1,022,000 from the 2004 level of $110,000 due to an increase of $60,000,000 in FHLB advances at June 30, 2005 compared to June 30, 2004 and also due to an increase in interest rates during the period. For the six months ended June 30, 2005 interest expense on FHLB advances increased by $1,461,000 (573%), to $1,716,000 from the 2004 level of $255,000 due to the increase in FHLB advances compared to the prior year and also due to an increase in interest rates during the period. The net result was an increase in net interest income of $9,395,000 (91%), from $10,331,000 in the second quarter of 2004 to $19,726,000 for the second quarter of 2005 and an increase in net interest income of $17,339,000 (89%), from $19,530,000 for the six months ended June 30, 2004 to $36,869,000 for the first six months of 2005.

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 June 30,
	2005						2004
					Average						Average
	Average		Interest		Yield/		Average		Interest		Yield/
	Balance		Income(2)		Rate %		Balance		Income (2)		Rate %
	(Dollars in Thousands)
Interest Earning Assets:
Loans(1)	$	1,297,410	$	24,130	7.4	%	$	842,530	$	12,025	5.7	%
Interest-bearing deposits in financial institutions	3,269		15		1.8	%	3,108		8		1.0	%
Investment securities	15,121		99		2.6	%	2,175		5		0.9	%
Federal funds sold	3,561		27		3.0	%	11,065		30		1.1	%
Total Interest Earning Assets	$	1,319,361	$	24,271	7.4	%	$	858,878	$	12,068	5.6	%

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	For Three Month Period Ended June 30,
	2005						2004
					Average						Average
	Average		Interest		Yield/		Average		Interest		Yield/
	Balance		Expense		Rate %		Balance		Expense		Rate %
	(Dollars in Thousands)
Interest Bearing Liabilities:
Savings deposits	$	43,324	$	46	0.4	%	$	35,254	$	29	0.3	%
Money market accounts	488,536		1,815		1.5	%	318,045		663		0.8	%
Time deposits	168,987		1,066		2.5	%	142,139		480		1.4	%
Subordinated debentures	41,238		595		5.8	%	35,619		454		5.1	%
FHLB advances	135,275		1,022		3.0	%	43,242		110		1.0	%
Other borrowings	272		1		1.5	%	830		1		0.5	%
Total Interest Bearing Liabilities	$	877,632	$	4,545	2.1	%	$	575,129	$	1,737	1.2	%

(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 $14,151,000 in 2005 and $8,723,000 in 2004 and is not net of deferred loan fees, which had an average balance in the second quarter of $6,801,000 in 2005 and $4,833,000 in 2004.

(2)Includes loan fees in the second quarter of $2,044,000 in 2005 and $1,270,000 in 2004.

	For Six Month Period Ended June 30,
	2005							2004
						Average								Average
	Average		Interest			Yield/		Average			Interest			Yield/
	Balance		Income(2)			Rate %		Balance			Income (2)			Rate %
	(Dollars in Thousands)
Interest Earning Assets:
Loans(1)	$	1,243,090	$		44,584	7.2	%	$	796,626		$	22,688		5.7	%
Interest-bearing deposits in financial institutions	3,255		31			1.9	%	3,063			16			1.0	%
Investment securities	9,805		120			2.4	%	2,868			13			0.9	%
Federal funds sold	10,528		129			2.5	%	12,481			63			1.0	%
Total Interest Earning Assets	$	1,266,678	$	44,864		7.1	%	$		815,038	$		22,780	5.6	%

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	For Six Month Period Ended June 30,
	2004						2005
					Average							Average
	Average		Interest		Yield/		Average		Interest			Yield/
	Balance		Expense		Rate %		Balance		Expense			Rate %
	(Dollars in Thousands)
Interest Bearing Liabilities:
Savings deposits	$	39,832	$	80	0.4	%	$	33,707	$		58	0.3	%
Money market accounts	468,539		3,152		1.3	%	292,464		1,164			0.8	%
Time deposits	166,219		1,926		2.3	%	140,619		942			1.3	%
Subordinated debentures	41,238		1,120		5.4	%	32,305		829			5.1	%
Other borrowings	182		1		1.1	%	614		2			0.7	%
FHLB advances	123,612		1,716		2.8	%	48,365		255			1.1	%
Total Interest Bearing Liabilities	$	839,622	$	7,995	1.9	%	$	548,074	$	3,250		1.2	%

(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 $13,453,000 in 2005 and $8,426,000 in 2004 and is not net of the deferred loan fees, which had an average balance in the first six months of $6,830,000 in 2005 and $4,554,000 in 2004.

(2)Includes loan fees in the first six months of $3,686,000 in 2005 and $2,237,000 in 2004.

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

	For the Three Month						For the Six Month
	Period Ended June 30,						Period Ended June 30,
	2005			2004			2005			2004
	(Dollars in Thousands)
Total interest income (1)	$	24,271		$	12,068		$	44,864		$	22,780
Total interest expense	4,545			1,737			7,995			3,250
Net interest earnings	$	19,726		$	10,331		$	36,869		$	19,530
Average interest earning assets	$	1,319,361		$	858,878		$	1,266,678		$	815,038
Average interest bearing liabilities	877,632			$	575,129		$	839,622		$	548,074
Net yield on average interest earning assets	6.0		%	4.8		%	5.8		%	4.8		%

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(1)Includes loan fees in the second quarter of $2,044,000 in 2005 and $1,270,000 in 2004 and first six months of $3,686,000 in 2005 and $2,237,000 in 2004.

The following table sets forth changes in interest income and interest expense.  The net change as shown in the column “Net Increase (Decrease)” is segmented into the change attributable to variations in volume and the change attributable to variations in interest rates.  Non-performing loans are included in average loans.

	Increase (Decrease)								Increase (Decrease)
	For the Three Month Periods								For the Six Month Periods
	Ended June 30,								Ended June 30,
	2005 over 2004								2005 over 2004
	Volume		Rate			Net			Volume			Rate		Net
	(Dollars in Thousands)
Interest Income(1)
Loans (2)	$	7,753	$	4,352		$	12,105		$	14,970		$	6,926	$	21,896
Interest-bearing deposits in financial institutions	0		7			7			1			14		15
Federal Funds sold	2		(5		)	(3		)	(8		)	74		66
Investment securities	72		22			94			63			44		107
Total Interest Earning Assets	$	7,827	$	4,376		$	12,203		$	15,026		$	7,058	$	22,084
Interest Expense (1)
Savings	$	7	$	10		$	17		$	11		$	11	$	22
Money market	468		684			1,152			926			1,062		1,988
Subordinated debentures	77		64			141			240			51		291
Time	105		481			586			196			788		984
FHLB advances	474		438			912			713			748		1,461
Other borrowings	0		0			0			(42		)	41		(1		)
Total Interest Bearing Liabilities	$	1,131	$	1,677		$	2,808		$	2,044		$	2,701	$	4,745

(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.

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(2)Includes loan fees in the second quarter of $2,044,000 in 2005 and $1,270,000 in 2004 and first six months of $3,686,000 in 2005 and $2,237,000 in 2004.

OTHER OPERATING INCOME

Other operating income increased to $1,575,000 in the second quarter of 2005 from $1,233,000 in the three months ended June 30, 2004.  For the first six months of 2005 other operating income also increased to $3,056,000 from $2,552,000 for the first six months of 2004.  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 $533,000 for the second quarter of 2005 and $1,134,000 for the six months ended June 30, 2005 in contrast with $412,000 in the second quarter of 2004 and $793,000 in the first six months of 2004.  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 Trust Department, that provides trust services for living trusts, investment agency accounts, IRA rollovers, and all forms of court-related matters, had revenue of $618,000 in the first six months of 2005 and revenue of $438,000 during the first six months of 2004.  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 $283,000 for the second quarter of 2005 and $561,000 for the six months ended June 30, 2005 in contrast with $225,000 for the second quarter of 2004 and $545,000 for the six months ended June 30, 2004.  During the first six months of 2005 $12,000 in gains and $4,000 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 2005 or 2004.

INVESTMENT SECURITIES

The amortized cost and estimated fair values of securities available for sale were as follows:

			Gross
			Unrealized
	Amortized		Gains			Fair
	Cost		(Losses)			Value
June 30, 2005
U.S. Treasury securities	$	12,172	$	(1	)	$	12,171
U.S. government sponsored enterprise securities	986		(1		)	985
Mutual Funds	2,025		15			2,040
	$	15,183	$	13		$	15,196
December 31, 2004
U.S. Treasury securities	$	2,444,000	$	0		$	2,444,000
U.S. government sponsored enterprise securities	990,000		0			990,000
	$	3,434,000	$	0		$	3,434,000

LOAN PORTFOLIO AND PROVISION FOR LOAN LOSSES

The loan portfolio consisted of the following at June 30, 2005 and December 31, 2004:

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		June 30, 2005		December 31, 2004
		(Dollars in Thousands)
Commercial loans		$	163,906	$	153,480
Real estate construction loans		169,407		129,106
Real estate loans		1,014,661		871,567
Government guaranteed loans		4,651		6,001
Other loans		1,791		2,973
	Total loans	1,354,416		1,163,127
Less	• Allowances for loan losses	14,817		11,825
	• Deferred loan fees	7,013		7,073
	Net loans	$	1,332,586	$	1,144,229

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 not expected to be collected 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 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

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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 $14,817,000 and $11,825,000 (or 1.10% and 1.02% of gross outstanding loans) at June 30, 2005 and December 31, 2004 respectively.  Provisions for loan losses were $1,500,000 and $2,700,000 for the three and six month periods ended June 30, 2005, compared to $915,000 and $1,802,000 for the same periods of 2004. For the three and six months ended June 30, 2005, the Company experienced net loan charge-offs of $35,000 and $35,000, respectively; by comparison, in the first three and six months of 2004 the Company experienced net loan charge-offs of $515,000 and $515,000, respectively.  The Company had loan recoveries of $130,000 and $113,000 during the six months ended June 30, 2005 and 2004.

For the quarter ended June 30, 2005 the Company has identified loans having an aggregate average balance of $675,000 which it concluded were impaired under SFAS No. 114. By comparison, for the quarter ended June 30, 2004 the Company had 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, 2005 totaled $126,000 for the loans as a group.

OPERATING EXPENSES

Overall operating expenses increased in the first six months of 2005 compared to the same period of 2004.  Operating expenses rose to a total of $8,713,000 for the second quarter of 2005 from $7,295,000 for the three months ended June 30, 2004.  For the six months ended June 30, 2005 operating expenses totaled $17,035,000, an increase from $14,136,000 for the corresponding period in 2004.

Salary and related benefits increased by $866,000, rising from a total of $4,707,000 for the second quarter of 2004 to $5,573,000 for the same period in 2005, and also rose for the six months ended June 30, 2005 to $10,890,000 from $9,241,000 for the same period in 2004.  The increase principally reflects increases in staffing which took place during 2004 and 2005 in the regional and main offices and also reflects employee salary adjustments.  Occupancy expense rose to $598,000 for the three months ended June 30, 2005 from $428,000 in the second quarter of 2004, 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 2005 compared to the prior year, increasing from $4,042,000 for the first six months of 2004 to $4,751,000 for the same period of 2005.  The second quarter expenses increased from $2,160,000 in 2004 to $2,542,000 for the same period of 2005.

The combined effects of the above-described factors resulted in income before taxes of $11,088,000 for the three months ended June 30, 2005 compared to $3,354,000 for the second quarter of 2004.  For the six months ended June 30, 2005 income before taxes is $20,190,000 compared to $6,144,000 for the first six months of the prior year.  In the second quarter, the Company’s provision for taxes increased from $1,415,000 in 2004 to

19

$4,713,000 in 2005.  For the six months ended June 30, 2005 the provisions were $8,573,000 compared to $2,543,000 in 2004.  This brought net income for the second quarter of 2005 to $6,375,000 compared to $1,939,000 for the same period in 2004.  For the six months ended June 30, net income in 2005 was $11,617,000, while 2004 net income through June 30 was $3,601,000.

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 6.7% of total deposits at June 30, 2005.  This level represents a decrease from the 12.6% liquidity level which existed on December 31, 2004.  In addition, at June 30, 2005 some $4.7 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 Bank’s liquidity posture is further enhanced by the availability of substantial borrowing facilities from the Federal Home Loan Bank and correspondent banks.  The ratio of net loans (including government guaranteed loans) to deposits was 110% and 114% as of June 30, 2005 and December 31, 2004, respectively.

Total shareholders’ equity was $89,743,000 and $77,446,000 as of June 30, 2005 and December 31, 2004, respectively.  The Company’s and the Bank’s capital ratios for those dates in comparison with regulatory capital requirements were as follows:

	6-30-05		12-31-04
Leverage Ratio (Tier I Capital to Average Assets):
Regulatory requirement	4.0	%	4.0	%
Company	8.6	%	8.7	%
Bank	9.2	%	9.7	%

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 and the Bank’s risk adjusted capital ratios for the dates listed in comparison with the risk adjusted regulatory capital requirements were as follows:

	6-30-05		12-31-04
Tier I Capital to Risk-weighted Assets:
Regulatory requirement	4.0	%	4.0	%
Company	8.8	%	8.7	%
Bank	9.4	%	9.7	%

	6-30-05		12-31-04
Total Capital to Risk-weighted Assets:
Regulatory requirement	8.0	%	8.0	%
Company	10.6	%	11.0	%
Bank	10.5	%	10.7	%

At June 30, 2005, 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 they will continue to meet all applicable capital standards.

As a result of a recent examination by the Federal Deposit Insurance Corporation (FDIC) and the California Department of Financial Institutions (DFI) of the issuer’s subsidiary, First Regional Bank, the Bank has identified certain deficiencies and other concerns, principally with respect to the Bank Secrecy Act (BSA).  As a result, the Bank has taken corrective action directed toward achieving full compliance with BSA and addressing the other concerns so identified, and the Bank believes that the corrective action taken to date has addressed the majority of such concerns.  The Bank anticipates entering into an informal agreement with the FDIC and DFI with respect to such corrective

20

action.  While the Company does not expect such concerns to have a material adverse monetary or other impact on its financial condition or results of operations, no assurance can be given that the FDIC and DFI will not require further action if the Bank fails to comply with the terms of the informal agreement or otherwise fails to correct the deficiencies identified.

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, 2005.

BORROWINGS

Junior Subordinated Deferrable Debentures

During 2004, 2002 and 2001, the Company established Trust I, Trust II, Trust III and Trust IV (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 $41,238,000 at both June 30, 2005 and December 31, 2004 (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 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 balance sheet in accordance with accounting principles generally accepted in the United States of America even though they are treated as capital for regulatory purposes.  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.

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 bore interest at a rate of 6 percent per annum and were convertible at any time at the option of the holders of the securities.  The debentures were callable at par prior to 2007 only if the average closing price of the Company’s common stock equaled or exceeded $38.50 for 30 consecutive trading days, which occurred during November 2004.

During November 2004, the Company notified the holder’s of the convertible subordinated debentures of First Regional’s exercise of its right to redeem all outstanding debentures at a redemption price equal to 100% of the principal amount plus accrued interest. The debenture holders had the right to exercise their conversion option up until the redemption date at a conversion price of $27.50 per share. During December 2004, First Regional Bancorp announced that 100% of its convertible subordinated debentures due 2023 had been converted into shares of First Regional common stock. 

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Because all of the debentures were converted prior to the redemption date, no redemption or payment of any redemption price was made.  The conversion shares were issued at a conversion price of $27.50, resulting in the issuance of 545,450 new First Regional Bancorp common shares.  Cash was paid in lieu of the issuance of any fractional common shares.

The Company contributed the majority of the net proceeds of the above described capital transactions to First Regional Bank to support its continued growth.  The remaining proceeds were and will be used for general corporate purposes in the effort to continue to promote the future growth of the Company.

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, 2005, and thus the relative sensitivity of the Bank’s net interest income to changes in the overall level of interest rates.

(In Thousands)

	Floating	Less than		One month but less than		Six months but less than		One year but less than		Five years	Non- interest earning
Category	Rate	one month		six months		one year		five years		or more	or bearing		Total
Fed funds sold	0	0		0		0		0		0	0		0
Interest-bearing deposits in financial institutions	0	0		96		3,238		30		0	0		3,364
Investment securities	0	0		15,196		0		0		0	0		15,196
Subtotal	0	0		15,292		3,238		30		0	0		18,560
Loans	1,328,082	67		2,930		194		1,313		0	0		1,332,586
Total earning assets	1,328,082	67		18,222		3,432		1,343		0	0		1,351,146
Cash and due from banks	0	0		0		0		0		0	63,006		63,006
Premises and equipment	0	0		0		0		0		0	3,674		3,674
Other real estate owned	0	0		0		0		0		0	0		0
Other assets	0	0		0		0		0		0	34,228		34,228
Total non-earning assets	0	0		0		0		0		0	100,908		100,908
Total assets	1,328,082	67		18,222		3,432		1,343		0	100,908		1,452,054
Advances from FHLB	0	100,000		0		0		0		0	0		100,000
Repurchase agreements	0	0		0		0		0		0	0		0
Subtotal	0	100,000		0		0		0		0	0		100,000
Savings deposits	38,817	0		0		0		0		0	0		38,817
Money market deposits	581,584	0		0		0		0		0	0		581,584
Time deposits	0	54,464		100,038		10,848		4,779		0	0		170,129
Subordinated Debentures	0	41,238		0		0		0		0	0		41,238
Total interest bearing liabilities	620,401	195,702		100,038		10,848		4,779		0	0		931,768
Demand deposits	0	0		0		0		0		0	420,282		420,282
Other liabilities	487	0		0		0		0		0	9,774		10,261
Equity capital	0	0		0		0		0		0	89,743		89,743
Total non-interest bearing liabilities and equity capital	487	0		0		0		0		0	519,799		520,286
Total liabilities and equity capital	620,888	195,702		100,038		10,848		4,779		0	519,799		1,452,054
GAP	707,194	(195,635	)	(81,816	)	(7,416	)	(3,436	)	0	(418,891	)	0
Cumulative GAP	707,194	511,559		429,743		422,327		418,891		418,891	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 Government Sponsored Enterprises securities. As mentioned above, no gains or losses were recorded on securities sales in the first six months of 2005 or 2004.  As of June 30, 2005 the Company’s investment portfolio contained unrealized gains of $15,000 and $2,000 unrealized losses.  As of June 30, 2004 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,” and thus unrealized gains and losses have no effect on the Company’s income statement.

ITEM 4.  CONTROLS AND PROCEDURES

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange act of 1934, as amended (the “Exchange Act”)) as of June 30, 2005.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of such date.  There were no significant changes in the Company’s internal controls over financial reporting that occurred during the quarter ended June 30, 2005 that have materially affected or are 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 17, 2005. Three Class 1 Directors were elected as follows (Class 1 Directors serve until the 2007 Annual Meeting):

		votes against
Class 2	votes for	or withheld	abstentions
Gary M. Horgan	3,314,256	78,153	none
Richard E. Schreiber	3,287,009	105,400	none
Thomas E. McCullough	3,319,558	72,851	none

The term of all Class 2 Directors continues until the next annual meeting of shareholders, scheduled for May of 2006.  The Class 2 Directors are Fred M. Edwards, H. Anthony Gartshore, Lawrence J. Sherman and Jack A. Sweeney.

No other matters were submitted for shareholder vote.

ITEM 6.  EXHIBITS

(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

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

23

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, 2005	/s/ Jack A. Sweeney
	Jack A. Sweeney, Chairman of the Board
	and Chief Executive Officer
Date: August 12, 2005	/s/ Thomas E. McCullough
	Thomas E. McCullough, Corporate Secretary
Date: August 12, 2005	/s/ Elizabeth Thompson
	Elizabeth Thompson, Chief Financial Officer

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

EX-31.1

Exhibit 31.1

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-15(e) and 15d-15(e) for the registrant and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 12, 2005	/s/ Jack A. Sweeney
	Jack A. Sweeney
	Chairman of the Board
	and Chief Executive Officer

EX-31.2

Exhibit 31.2

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-15(e) and 15d-15(e) for the registrant and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 12, 2005	/s/ Thomas E. McCullough
	Thomas E. McCullough
	Corporate Secretary

EX-31.3

Exhibit 31.3

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-15(e) and 15d-15(e) for the registrant and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 12, 2005	/s/ Elizabeth Thompson
	Elizabeth Thompson
	Chief Financial Officer

EX-32

Exhibit 32

Certification Furnished

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of First Regional Bancorp (the “Company”) on Form 10-Q for the period ending June 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to our knowledge

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 12, 2005	/s/ Jack A. Sweeney
	Jack A. Sweeney
	Chairman of the Board
	and Chief Executive Officer
Date: August 12, 2005	/s/ Thomas McCullough
	Thomas McCullough
	Corporate Secretary
Date: August 12, 2005	/s/ Elizabeth Thompson
	Elizabeth Thompson
	Chief Financial Officer