10-Q 1 a06-15404_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

 

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, 2006

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

 

IRS Employer Identification Number

incorporation or organization

 

 

 

 

 

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 x

No o

 

Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large Accelerated filer  o      Accelerated filer  x     Non-accelerated filer  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o

No x

 

 

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

 

12,281,103*

Class

 

Outstanding on August 9, 2006

 

 

*(Reflects additional shares issuable to holders of

 

 

record as of July 31, 2006 pursuant to 3-for-1 stock split)

 

 



FIRST REGIONAL BANCORP
INDEX

 

Page

 

Part I - Financial Information

 

 

 

Item 1.  Financial Statements

 

 

 

Condensed Consolidated Statements of Financial Condition (unaudited)

 

3

 

Condensed Consolidated Statements of Earnings (unaudited)

 

4

 

Condensed Consolidated Statements of Cash Flows (unaudited)

 

5

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

6

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

14

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

24

 

Item 4.  Controls and Procedures

 

25

 

Part II - Other Information

 

 

 

Item 1.  Legal Proceedings

 

26

 

Item 1A.  Risk Factors

 

26

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

26

 

Item 6.  Exhibits

 

26

 

Signatures

 

28

 

 

2



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,

 

 

 

2006

 

2005

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

167,224

 

$

67,964

 

Federal funds sold

 

0

 

0

 

Cash and cash equivalents

 

167,224

 

67,964

 

 

 

 

 

 

 

Investment securities, available for sale, at fair value  (with amortized cost of $9,561 in 2006 and $4,200 in 2005)

 

9,360

 

4,154

 

Interest-bearing deposits in financial institutions

 

8,286

 

3,353

 

Federal Home Loan Bank stock — at cost

 

12,581

 

9,870

 

Loans, net of allowance for losses of $20,313 in 2006  and $17,577 in 2005

 

1,760,931

 

1,688,357

 

Premises and equipment, net of accumulated depreciation

 

3,821

 

3,581

 

Accrued interest receivable and other assets

 

37,741

 

34,436

 

Total Assets

 

$

1,999,944

 

$

1,811,715

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest bearing

 

$

482,458

 

$

446,098

 

Interest bearing:

 

 

 

 

 

Money market deposits

 

816,585

 

735,237

 

Time deposits

 

188,170

 

183,492

 

Other deposits

 

50,160

 

55,394

 

Total deposits

 

1,537,373

 

1,420,221

 

 

 

 

 

 

 

Federal Home Loan Bank advances

 

230,000

 

210,000

 

Note payable

 

338

 

412

 

Accrued interest payable and other liabilities

 

13,979

 

13,191

 

Subordinated debentures

 

92,785

 

61,857

 

Total Liabilities

 

1,874,475

 

1,705,681

 

 

 

 

 

 

 

Commitments and contingencies (Note 4)

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

Common Stock-no par value, authorized 50,000,000 shares;  outstanding 4,091,000 (2006) and 4,080,000 (2005)

 

51,294

 

49,918

 

Unearned ESOP shares; 36,000 (2006) and 43,000 (2005)

 

(320

)

(391

)

Total common stock-no par value; outstanding 4,055,000 (2006) and 4,037,000 (2005)

 

50,974

 

49,527

 

Retained earnings

 

74,611

 

56,534

 

Accumulated other comprehensive loss, net of tax

 

(116

)

(27

)

Total Shareholders’ Equity

 

125,469

 

106,034

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

1,999,944

 

$

1,811,715

 

 

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

3



FIRST REGIONAL BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands Except Share Data)
(Unaudited)

 

 

Three Months Ended 
June 30,

 

Six Months Ended
June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

Interest on loans

 

$

39,669

 

$

24,130

 

$

76,176

 

$

44,584

 

Interest on investment securities

 

72

 

99

 

114

 

120

 

Interest on deposits in financial institutions

 

57

 

15

 

83

 

31

 

Interest on federal funds sold

 

43

 

27

 

75

 

129

 

Total interest income

 

39,841

 

24,271

 

76,448

 

44,864

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

Interest on deposits

 

8,839

 

2,927

 

16,212

 

5,158

 

Interest on subordinated debentures

 

1,641

 

595

 

2,684

 

1,120

 

Interest on FHLB advances

 

2,459

 

1,022

 

4,895

 

1,716

 

Interest on other borrowings

 

1

 

1

 

4

 

1

 

Total interest expense

 

12,940

 

4,545

 

23,795

 

7,995

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

26,901

 

19,726

 

52,653

 

36,869

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

1,500

 

1,500

 

3,891

 

2,700

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

25,401

 

18,226

 

48,762

 

34,169

 

 

 

 

 

 

 

 

 

 

 

OTHER OPERATING INCOME:

 

 

 

 

 

 

 

 

 

Customer service fees

 

2,134

 

1,320

 

3,870

 

2,686

 

Other-net

 

364

 

255

 

580

 

370

 

Total other operating income

 

2,498

 

1,575

 

4,450

 

3,056

 

 

 

 

 

 

 

 

 

 

 

OTHER OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

Salaries and related benefits

 

6,983

 

5,573

 

13,779

 

10,890

 

Occupancy expense

 

682

 

598

 

1,304

 

1,394

 

Equipment expense

 

323

 

264

 

628

 

480

 

Promotion expense

 

210

 

125

 

365

 

234

 

Professional service expense

 

849

 

626

 

1,601

 

1,204

 

Customer service expense

 

369

 

381

 

729

 

688

 

Supply/communication expense

 

344

 

274

 

723

 

537

 

Other expenses

 

1,294

 

872

 

2,326

 

1,608

 

Total other operating expenses

 

11,054

 

8,713

 

21,455

 

17,035

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

16,845

 

11,088

 

31,757

 

20,190

 

PROVISION FOR INCOME TAXES

 

7,252

 

4,713

 

13,680

 

8,573

 

NET INCOME

 

$

9,593

 

$

6,375

 

$

18,077

 

$

11,617

 

EARNINGS PER SHARE: (Note 3)

 

 

 

 

 

 

 

 

 

Basic

 

$

2.37

 

$

1.59

 

$

4.47

 

$

2.90

 

Diluted

 

$

2.22

 

$

1.49

 

$

4.18

 

$

2.72

 

 

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

4



FIRST REGIONAL BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)

 

 

Six Months Ended June 30,

 

 

 

2006

 

2005

 

OPERATING ACTIVITIES

 

 

 

 

 

Net Income

 

$

18,077

 

$

11,617

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

3,891

 

2,700

 

Depreciation and amortization

 

424

 

397

 

Amortization of investment securities premiums and discounts-net

 

(27

)

(120

)

Stock compensation costs

 

288

 

0

 

Tax benefit from stock options exercised

 

(304

)

0

 

Federal Home Loan Bank stock dividends

 

(248

)

(144

)

Net gain on sale/disposal of premises and equipment

 

0

 

(8

)

Increase in accrued interest receivable and other assets

 

(3,240

)

(892

)

Decrease in accrued interest payable and other liabilities

 

(2,270

)

(3,105

)

Increase in taxes payable

 

3,362

 

2,746

 

Net cash provided by operating activities

 

19,953

 

13,191

 

INVESTING ACTIVITIES

 

 

 

 

 

Net increase in interest bearing deposits in financial Institutions

 

(4,933

)

(128

)

Purchases of investment securities

 

(6,620

)

(15,083

)

Proceeds from maturities of investment securities

 

1,287

 

3,450

 

Purchase of Federal Home Loan Bank stock

 

(2,463

)

(569

)

Net increase in loans

 

(76,465

)

(191,057

)

Proceeds from sale of premises and equipment

 

0

 

20

 

Purchases of premises and equipment

 

(664

)

(992

)

Net cash used in investing activities

 

(89,858

)

(204,359

)

FINANCING ACTIVITIES

 

 

 

 

 

Net increase in non-interest bearing deposits, and other interest bearing deposits

 

112,474

 

202,135

 

Net increase in time deposits

 

4,678

 

8,625

 

Decrease in note payable

 

(74

)

(75

)

Increase (decrease) in Federal Home Loan Bank advances

 

20,000

 

(76,687

)

Issuance of subordinated debentures

 

30,928

 

0

 

Stock options exercised

 

177

 

172

 

Tax benefit from stock options exercised

 

304

 

0

 

Other changes in shareholders’ equity

 

678

 

499

 

Net cash provided by financing activities

 

169,165

 

134,669

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

99,260

 

(56,499

)

Cash and cash equivalents, beginning of period

 

67,964

 

119,505

 

Cash and cash equivalents, end of period

 

$

167,224

 

$

63,006

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

Interest paid

 

$

23,701

 

$

7,882

 

Income taxes paid

 

$

13,025

 

$

10,042

 

 

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

5



FIRST REGIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)

NOTE 1: Basis of Presentation

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 2005 financial statements have been reclassified to be comparable with the classifications used in the 2006 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 2005 annual report on Form 10-K.

NOTE 2: 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 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

6



lattice model (e.g. a binomial model) or a closed-end model (e.g. the Black-Scholes model) would be acceptable.

The Company adopted 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. 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 disclosed in Note 3.

FSP Nos. 115-1 and 124-1 - In November 2005, the FASB issued Staff Position (“FSP”) Nos. FAS 115-1 and 124-1 to address the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP nullified certain requirements of Emerging Issues Task Force 03-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1), and references existing other than temporary impairment guidance. Furthermore, this FSP creates a three-step process in determining when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The FSP is effective for reporting periods beginning after December 15, 2005. The adoption has not had a material impact on our financial condition or results of operations.

SOP No. 94-6-1 - In December 2005, the FASB issued FSP Statement of Position (“SOP”) 94-6-1, Terms of Loan Products That May Give Rise to a Concentration of Credit Risk, which addresses the circumstances under which the terms of loan products give rise to such risk and the disclosures or other accounting considerations that apply for entities that originate, hold, guarantee, service, or invest in loan products with terms that may give rise to a concentration of credit risk. The guidance under this FSP is effective for interim and annual periods ending after December 19, 2005 and for loan products that are determined to represent a concentration of credit risk, disclosure requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments, should be provided for all periods presented. The adoption has not had a material impact on our financial condition or results of operations.

FIN 48 - In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) which supplements SFAS No. 109, Accounting for Income Taxes, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements.  The Interpretation requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to economic benefits of a tax position.  If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are to be recognized.  Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit.  At adoption, companies must adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date.  Any necessary adjustment would be recorded directly to retained earnings in the period of adoption and reported as a change in accounting principle. FIN 48 is effective for fiscal years beginning after December 15, 2006. It is not anticipated that adoption will have a material impact on the Company’s financial condition, results of operations, or cash flows.

NOTE 3: Earnings per Share and Stock Based Compensation

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:

7



 

 

 

Three Months Ended June 30, 2006

 

 

 

 

 

Weighted

 

 

 

 

 

Net

 

Average

 

Per

 

 

 

Income

 

Shares

 

Share

 

 

 

(Numerator)

 

(Denominator)

 

Amount

 

Basic EPS

 

 

 

 

 

 

 

Income available to common shareholders

 

$

9,593,000

 

4,052,311

 

$

2.37

 

Effect of Dilutive Securities

 

 

 

 

 

 

 

Incremental shares from assumed exercise  of outstanding options

 

 

 

278,783

 

(0.15

)

Diluted EPS

 

 

 

 

 

 

 

Income available to common shareholders

 

$

9,593,000

 

4,331,094

 

$

2.22

 

 

 

 

Three Months Ended June 30, 2005

 

 

 

 

 

Weighted

 

 

 

 

 

Net

 

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

 

 

 

 

Six Months Ended June 30, 2006

 

 

 

 

 

Weighted

 

 

 

 

 

Net

 

Average

 

Per

 

 

 

Income

 

Shares

 

Share

 

 

 

(Numerator)

 

(Denominator)

 

Amount

 

Basic EPS

 

 

 

 

 

 

 

Income available to common shareholders

 

$

18,077,000

 

4,047,018

 

$

4.47

 

Effect of Dilutive Securities

 

 

 

 

 

 

 

Incremental shares from assumed exercise of outstanding options

 

 

 

275,610

 

(0.29

)

Diluted EPS

 

 

 

 

 

 

 

Income available to common shareholders

 

$

18,077,000

 

4,322,628

 

$

4.18

 

 

 

 

Six Months Ended June 30, 2005

 

 

 

 

 

Weighted

 

 

 

 

 

Net

 

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

 

 

8



Stock-Based Compensation

On January 1, 2006, the Company adopted SFAS No. 123R, using a modified prospective application.  Accordingly, prior period amounts have not been restated. Commencing with the first quarter of 2006, compensation costs includes all share based options granted prior to, but not yet vested as of January 1, 2006, based upon the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and compensation for all share based payments granted subsequent to January 1, 2006, based upon the grant date fair value estimated in accordance with the provisions of SFAS No. 123R.

In the second quarter and the first six months of 2006, the adoption of SFAS No. 123R resulted in incremental stock-based compensation expense of $144,000 and $288,000, respectively.  For the three months and six months ended June 30, 2006, the incremental stock-based compensation expense caused income before taxes to decrease by $144,000 and $288,000, net income to decrease by $84,000 and $167,000 and basic and diluted earnings per share to each decrease by $0.02 and $0.04 per share.

Prior to the adoption of SFAS No. 123R, the Company applied APB 25 to account for its stock-based awards.  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 SFAS No. 123 to stock-based employee compensation.

 

 

Three
Months Ended

 

Six
Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2005

 

2005

 

Net income to common shareholders:

 

 

 

 

 

As Reported

 

$

6,375,000

 

$

11,617,000

 

Deduct: Total stock-based compensation  expense, determined under fair value based method, net of related tax effects

 

62,000

 

135,000

 

Pro forma net income

 

$

6,313,000

 

$

11,482,000

 

Basic earnings per share:

 

 

 

 

 

As reported

 

$

1.59

 

$

2.90

 

Pro forma

 

$

1.57

 

$

2.86

 

Diluted earnings per share:

 

 

 

 

 

As reported

 

$

1.49

 

$

2.72

 

Pro forma

 

$

1.47

 

$

2.68

 

 

Stock Compensation Plans

In May 2005, the Company’s Board of Directors adopted a nonqualified employee stock option plan that expires in 2015 and authorizes the issuance of up to 200,000 shares of its common stock upon the exercise of options granted.  The plan is intended to allow the Company the ability to grant stock options to persons who had not previously been awarded option grants commensurate with their positions, primarily persons hired since the exhaustion of options available for grant under the Company’s previous stock option plans.  The Company’s Board of Directors believes that the plan will assist the Company in attracting and retaining high quality officers and staff, and will provide grantees under the plan with added incentive to achieve high levels of performance and to assist in the effort to increase the Company’s earnings.  To date, none of the grants have been made to directors or

9



executive officers of the Company or to directors of the Bank.  During May and July 2005, the Company granted options to buy up to 59,000 shares of the Company’s common stock to certain officers of the Company and its subsidiaries.  All such granted options will vest over seven years and expire in 2015.  The exercise prices of the options granted in 2005 range from $61.50 to $75.00.

In 1999, the Company adopted a nonqualified employee stock option plan that authorizes the issuance of up to 600,000 shares of its common stock and expires in 2009.

Under both plans, options may be granted at a price not less than the fair market value of the stock at the date of the grant.  The grant date fair value is calculated using the Black-Scholes option valuation model.

No stock options were granted during the first six months of 2006.

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 the first six months of 2005.

A summary of the award activity under the stock option plans as of June 30, 2006 and changes during the 6-month period is presented below:

 

 

 

 

Weighted-

 

 

 

Number

 

Average

 

 

 

of

 

Exercise

 

 

 

Shares

 

Price

 

Outstanding at January 1, 2006

 

626,000

 

$

17.78

 

Granted

 

 

 

0.00

 

Exercised

 

(11,000

)

16.55

 

Cancelled

 

 

 

0.00

 

Outstanding at June 30, 2006

 

615,000

 

17.80

 

 

 

 

 

 

 

Options exercisable at end of period

 

347,000

 

12.90

 

 

Information pertaining to options outstanding at June 30, 2006, is as follows:

 

 

Options Outstanding

 

Vested Options

 

 

 

 

 

Weighted-

 

Weighted-

 

 

 

Weighted-

 

 

 

 

 

Average

 

Average

 

 

 

Average

 

Range of

 

Number

 

Remaining

 

Exercise

 

Number

 

Exercise

 

Exercise Prices

 

Outstanding

 

Life

 

Price

 

Exercisable

 

Price

 

$

7.25

 

 

34,000

 

4.59

 

$

7.25

 

16,000

 

$

7.25

 

8.00—8.75

 

51,000

 

4.44

 

8.54

 

23,000

 

8.39

 

11.50

 

329,000

 

6.34

 

11.50

 

262,000

 

11.50

 

20.79

 

148,000

 

7.18

 

20.79

 

41,000

 

20.79

 

61.50—75.00

 

53,000

 

8.87

 

64.02

 

5,000

 

61.50

 

 

 

615,000

 

 

 

 

 

347,000

 

 

 

 

The total intrinsic value of options exercised during the three and six month periods ended June 30, 2006 was $176,000 and $725,000, respectively. The total intrinsic value of options exercised during the three and six month periods ended

10



June 30, 2005 was $429,000 and $1,067,000, respectively. The total fair value of shares vested during the three and six month periods ended June 30, 2006 was $230,000 and $279,000, respectively. The total fair value of shares vested during the six month periods ended June 30, 2005 was $0 and $49,000, respectively.

As of June 30, 2006, there was $2,328,000 of total unrecognized compensation cost related to nonvested share-based compensation awards granted under the stock option plans.  That cost is expected to be recognized over a weighted-average period of 3.15 years.  We received $177,000 and $172,000 cash from the exercise of stock options during the six month periods ended June 30, 2006 and 2005, respectively.

NOTE 4: Commitments and Contingencies

As of June 30, 2006 the Bank had a total of $9,103,000 standby letters of credit outstanding.  No losses are anticipated as a result of these transactions.

NOTE 5: Comprehensive Income

The Company’s comprehensive income includes all items which comprise net income plus the unrealized holding losses and gains on available-for-sale securities.  For the three and six month periods ended June 30, 2006 and 2005, the Company’s comprehensive income was as follows:

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

 

2006

 

2005

 

2006

 

2005

 

 

(Dollars in Thousands)

Net income

 

$9,593

 

$6,375

 

$18,077

 

$11,617

Other comprehensive (loss) income

 

(49)

 

11

 

(89)

 

9

Total comprehensive income

 

$

9,544

 

$

6,386

 

$

17,988

 

$

11,626

 

NOTE 6: Operating Segment Reports

Management has evaluated the Company’s overall operation and determined that its business consists of certain reportable business segments as of June 30, 2006 and 2005:  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 interest paid on deposits, personnel, 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 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.

11



 

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, 2006 and December 31, 2005 were $1,046,000 and $920,000, respectively and total assets of Trust Services at June 30, 2006 and December 31, 2005 were $45,000 and $41,000, respectively.  The remaining assets reflected on the balance sheets of the Company are associated with the core banking operations.

The following table shows the operating results (in thousands) for the core banking operations, administrative services, and trust services for the three and six month periods ended June 30, 2006 and 2005.

 

 

Three Month Period Ended June 30, 2006

 

 

 

Core Banking

 

Administrative

 

Trust

 

Combined

 

 

 

Operations

 

Services

 

Services

 

Operations

 

Net interest income

 

$

26,901

 

 

 

 

 

$

26,901

 

Provision for loan losses

 

1,500

 

 

 

 

 

1,500

 

Other operating income

 

1,475

 

$

615

 

$

408

 

2,498

 

Other operating expenses

 

10,490

 

297

 

267

 

11,054

 

Provision for income taxes

 

7,059

 

134

 

59

 

7,252

 

Net income

 

$

9,327

 

$

184

 

$

82

 

$

9,593

 

 

 

 

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

 

Other 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

 

 

 

 

Six Month Period Ended June 30, 2006

 

 

 

Core Banking

 

Administrative

 

Trust

 

Combined

 

 

 

Operations

 

Services

 

Services

 

Operations

 

Net interest income

 

$

52,653

 

 

 

 

 

$

52,653

 

Provision for loan losses

 

3,891

 

 

 

 

 

3,891

 

Other operating income

 

2,325

 

$

1,297

 

$

828

 

4,450

 

Other operating expenses

 

20,380

 

562

 

513

 

21,455

 

Provision for income taxes

 

13,239

 

309

 

132

 

13,680

 

Net income

 

$

17,468

 

$

426

 

$

183

 

$

18,077

 

 

12



 

 

 

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

 

Other 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

 

 

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

NOTE 7: Subsequent Events

On July 20, 2006, the Company announced that it had declared a 3-for-1 stock split.  As a result of the stock split, shareholders of the Company will receive two additional shares for every share held at the close of business on the record date of July 31, 2006.  The additional shares will be mailed or delivered on or about August 21, 2006 by the Company’s transfer agent.  In connection with the stock split, the authorized number of shares was likewise increased from 50 million to 150 million shares, effective July 31, 2006.

The accompanying condensed consolidated financial statements are presented on a pre-stock split basis.  The pro forma earnings per share of First Regional Bancorp common stock, giving retroactive effect to the stock split, are as follows:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

EARNINGS PER SHARE:

 

 

 

 

 

 

 

 

 

Basic — as reported

 

$

2.37

 

$

1.59

 

$

4.47

 

$

2.90

 

Basic — after stock split

 

$

0.79

 

$

0.53

 

$

1.49

 

$

0.97

 

Diluted — as reported

 

$

2.22

 

$

1.49

 

$

4.18

 

$

2.72

 

Diluted — after stock split

 

$

0.74

 

$

0.50

 

$

1.39

 

$

0.91

 

 

13



 

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, 2005.  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 1A. Risk Factors” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, as supplemented by “Item 1A. Risk Factors” contained in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.

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, 2006 total assets were $1,999,944,000 compared to $1,811,715,000 at December 31, 2005, an increase of $188,229,000 or 10.4% and the June 30, 2006 asset level represents a $547,890,000 (37.7%) increase over the $1,452,054,000 that existed on the same date in 2005.  The 2006 asset increase reflects a corresponding increase in total deposits of $117,152,000 or 8.2%, from $1,420,221,000 at the end of 2005 to $1,537,373,000 at June 30, 2006.  While overall deposits increased, the deposit growth was centered primarily in money market deposits, and noninterest bearing deposits, while time deposits and other deposits also experienced an increase.  There were several changes in the composition of the Bank’s assets during the first six months of 2006.  The Bank’s core loan portfolio grew significantly by $72,574,000 during the six month period, bringing the Bank’s total loans to $1,760,931,000 at June 30, 2006 from the December 31, 2005 total of $1,688,357,000.  The combined effect of the substantial increase in loans and the growth in deposits was an increase in the level of total liquid assets (cash and due from banks, Federal funds sold and investment securities).  Investment securities increased by $5.2 million, while cash and cash equivalents (cash and due from banks and Federal funds sold),

14



increased by $99.3 million in order to accommodate the changes that took place in the rest of the balance sheet.

The Company earned net income of $9,593,000 in the three months ended June 30, 2006, compared to earnings of $6,375,000 in the second quarter of 2005. The results for the six months ended June 30, 2006 was earnings of $18,077,000 compared to net income of $11,617,000 for the corresponding period of 2005, an increase of 56%.

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 2005, in the first six months of 2006 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 2006.  The Company’s 2006 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 2005 and 2006.

Total interest income increased by $15,570,000 (64%) for the second quarter of 2006 compared to the same period in 2005, and increased by $31,584,000 (70%) for the six month period ended June 30, 2006 compared to the prior year as total earning assets were substantially higher (32%) in 2006 than in 2005.  The majority of the increase in interest income arises from a substantial increase of $15,539,000 (64%) in interest on loans from $24,130,000 for the three months ended June 30, 2005 compared to $39,669,000 for the same period in 2006.  Although interest income increased reflecting an increase in the loan portfolio of $428,345,000 (32%) from June 30, 2005 to June 30, 2006, interest income was also affected by the Federal Reserve’s series of interest rate increases.  For the three months ended June 30, 2006 interest expense on deposits increased by $5,912,000 (202%) to $8,839,000 from the 2005 level of $2,927,000 and for the six months ended June 30, 2006 interest expense on deposits increased by $11,054,000 (214%) to $16,212,000 from the 2005 level of $5,158,000 due to an increase in total deposits of $326,561,000 (27%) from June 30, 2005 to June 30, 2006. The increases in deposits were primarily in money market deposits, while non-interest bearing demand deposit accounts, time deposits and other deposits also showed increases.  For the three months ended June 30, 2006 interest expense on subordinated debentures increased by $1,046,000 (176%), to $1,641,000 from the 2005 level of $595,000 due to an increase of $51,547,000 in subordinated debentures at June 30, 2006 compared to June 30, 2005 and also due to an increase in interest rates during the period. For the six months ended June 30, 2006 interest expense on subordinated debentures increased by $1,564,000 (140%), to $2,684,000 from the 2005 level of $1,120,000 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, 2006 interest expense on FHLB advances increased by $1,437,000 (141%), to $2,459,000 from the 2005 level of $1,022,000 due to an increase of $130,000,000 in FHLB advances at June 30, 2006 compared to June 30, 2005 and also due to an increase in interest rates during the period. For the six months ended June 30, 2006 interest expense on FHLB advances increased by $3,179,000 (185%), to $4,895,000 from the 2005 level of $1,716,000 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 $7,175,000 (36%), from $19,726,000 in the second quarter of 2005 to $26,901,000 for the second quarter of 2006 and an increase in net interest income of $15,784,000 (43%), from $36,869,000 for the six months ended June 30, 2005 to $52,653,000 for the first six months of 2006.

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:

15



 

 

 

For Three Month Period Ended June 30,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Average

 

 

 

 

 

Average

 

 

 

Average

 

Interest

 

 Yield/

 

Average

 

Interest

 

Yield/

 

 

 

Balance

 

Income(2)

 

Rate %

 

Balance

 

Income (2)

 

Rate %

 

 

 

(Dollars in Thousands)

 

Interest Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans(1)

 

$

1,806,214

 

$

39,669

 

8.8

%

$

1,297,410

 

$

24,130

 

7.5

%

Interest-bearing
deposits in financial
institutions

 

6,282

 

57

 

3.6

%

3,269

 

15

 

1.8

%

Investment securities

 

7,480

 

72

 

3.9

%

15,121

 

99

 

2.6

%

Federal funds sold

 

3,620

 

43

 

4.8

%

3,561

 

27

 

3.0

%

Total Interest

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning Assets

 

$

1,823,596

 

$

39,841

 

8.8

%

$

1,319,361

 

$

24,271

 

7.4

%

 

 

For Three Month Period Ended June 30,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Average

 

 

 

 

 

Average

 

 

 

Average

 

Interest

 

Yield/

 

Average

 

Interest

 

Yield/

 

 

 

Balance

 

Expense

 

Rate %

 

Balance

 

Expense

 

Rate %

 

 

 

(Dollars in Thousands)

 

Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings deposits

 

$

49,535

 

$

204

 

1.7

%

$

43,324

 

$

46

 

0.4

%

Money market accounts

 

786,368

 

6,723

 

3.4

%

488,536

 

1,815

 

1.5

%

Time deposits

 

180,556

 

1,912

 

4.2

%

168,987

 

1,066

 

2.5

%

Subordinated debentures

 

92,785

 

1,641

 

7.1

%

41,238

 

595

 

5.8

%

FHLB advances

 

197,341

 

2,459

 

5.0

%

135,275

 

1,022

 

3.0

%

Other borrowings

 

99

 

1

 

4.1

%

272

 

1

 

1.5

%

Total Interest

 

 

 

 

 

 

 

 

 

 

 

 

 

Bearing Liabilities

 

$

1,306,684

 

$

12,940

 

4.0

%

$

877,632

 

$

4,545

 

2.1

%

(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 $20,333,000 in 2006 and $14,151,000 in 2005 and is not net of deferred loan fees, which had an average balance in the second quarter of $8,068,000 in 2006 and $6,801,000 in 2005.

(2)             Includes loan fees in the second quarter of $2,582,000 in 2006 and $2,044,000 in 2005.

16



 

 

 

For Six Month Period Ended June 30,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Average

 

 

 

 

 

Average

 

 

 

Average

 

Interest

 

Yield/

 

Average

 

Interest

 

Yield/

 

 

 

Balance

 

Income (2)

 

Rate %

 

Balance

 

Income (2)

 

Rate %

 

 

 

(Dollars in Thousands)

 

Interest Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (1)

 

$

1,780,873

 

$

76,176

 

8.6%

 

$

1,243,090

 

$

44,584

 

7.2%

 

Interest-bearing
deposits in financial
institutions

 

4,830

 

83

 

3.5%

 

3,255

 

31

 

1.9%

 

Investment securities

 

6,537

 

114

 

3.5%

 

9,805

 

120

 

2.5%

 

Federal funds sold

 

3,483

 

75

 

4.3%

 

10,528

 

129

 

2.5%

 

Total Interest

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning Assets

 

$

1,795,723

 

$

76,448

 

8.6%

 

$

1,266,678

 

$

44,864

 

7.1%

 

 

 

 

For Six Month Period Ended June 30,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Average

 

 

 

 

 

Average

 

 

 

Average

 

Interest

 

Yield/

 

Average

 

Interest

 

Yield/

 

 

 

Balance

 

Expense

 

Rate %

 

Balance

 

Expense

 

Rate %

 

 

 

(Dollars in Thousands)

 

Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings deposits

 

$

49,540

 

$

313

 

1.3%

 

$

39,832

 

$

80

 

0.4%

 

Money market accounts

 

765,291

 

12,238

 

3.2%

 

468,539

 

3,152

 

1.4%

 

Time deposits

 

182,407

 

3,661

 

4.0%

 

166,219

 

1,926

 

2.3%

 

Subordinated debentures

 

77,577

 

2,684

 

7.0%

 

41,238

 

1,120

 

5.5%

 

FHLB advances

 

207,746

 

4,895

 

4.8%

 

123,612

 

1,716

 

2.8%

 

Other borrowings

 

90

 

4

 

9.0%

 

182

 

1

 

1.1%

 

Total Interest
Bearing Liabilities

 

$

1,282,651

 

$

23,795

 

3.7%

 

$

839,622

 

$

7,995

 

1.9%

 

(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 $19,526,000 in 2006 and $13,453,000 in 2005 and is not net of the deferred loan fees, which had an average balance in the first six months of $8,022,000 in 2006 and $6,830,000 in 2005.

(2)             Includes loan fees in the first six months of $4,783,000 in 2006 and $3,686,000 in 2005.

17



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,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(Dollars in Thousands)

 

Total interest income (1)

 

$

39,841

 

$

24,271

 

$

76,448

 

$

44,864

 

Total interest expense

 

12,940

 

4,545

 

23,795

 

7,995

 

Net interest earnings

 

$

26,901

 

$

19,726

 

$

52,653

 

$

36,869

 

Average interest earning assets

 

$

1,823,596

 

$

1,319,361

 

$

1,795,723

 

$

1,266,678

 

Average interest bearing liabilities

 

$

1,306,684

 

$

877,632

 

$

1,282,651

 

$

839,622

 

Net yield on average interest earning assets

 

5.9

%

6.0

%

5.9

%

5.9

%

(1)             Includes loan fees in the second quarter of $2,582,000 in 2006 and $2,044,000 in 2005 and first six months of $4,783,000 in 2006 and $3,686,000 in 2005.

The following table sets forth changes in interest income and interest expense.  The net change as shown in the column “Net” 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.

 

 

Net Increase (Decrease)

 

Net Increase (Decrease)

 

 

 

For the Three Month Periods

 

For the Six Month Periods

 

 

 

Ended June 30,

 

Ended June 30,

 

 

 

2006 over 2005

 

2006 over 2005

 

 

 

Volume

 

Rate

 

Net

 

Volume

 

Rate

 

Net

 

 

 

(Dollars in Thousands)

 

Interest Income (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (2)

 

$

10,634

 

$

4,905

 

$

15,539

 

$

21,859

 

$

9,733

 

$

31,592

 

Interest-bearing deposits in financial institutions

 

8

 

34

 

42

 

20

 

32

 

52

 

Federal funds sold

 

0

 

16

 

16

 

410

 

(464

)

(54

)

Investment securities

 

(388

)

361

 

(27

)

22

 

(28

)

(6

)

Total interest earning assets

 

$

10,254

 

$

5,316

 

$

15,570

 

$

22,311

 

$

9,273

 

$

31,584

 

Interest Expense (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other deposits

 

$

7

 

$

151

 

$

158

 

$

24

 

$

209

 

$

233

 

Money market

 

1,566

 

3,342

 

4,908

 

2,862

 

6,224

 

9,086

 

Subordinated debentures

 

886

 

160

 

1,046

 

1,193

 

371

 

1,564

 

Time

 

78

 

768

 

846

 

204

 

1,531

 

1,735

 

FHLB advances

 

595

 

842

 

1,437

 

1,570

 

1,609

 

3,179

 

Other borrowings

 

0

 

0

 

0

 

0

 

3

 

3

 

Total interest bearing liabilities

 

$

3,132

 

$

5,263

 

$

8,395

 

$

5,853

 

$

9,947

 

$

15,800

 

(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.

18



(2)             Includes loan fees in the second quarter of $2,582,000 in 2006 and $2,044,000 in 2005 and first six months of $4,783,000 in 2006 and $3,686,000 in 2005.

OTHER OPERATING INCOME

Other operating income rose to $2,498,000 in the second quarter of 2006 from $1,575,000 in the three months ended June 30, 2005.  For the first six months of 2006 other operating income also increased to $4,450,000 from $3,056,000 for the first six months of 2005.  Trust Administration Services Corp., a wholly owned subsidiary of the Bank that provides administrative services to self-directed retirement plans, had revenue which increased to $615,000 for the second quarter of 2006 and $1,297,000 for the six months ended June 30, 2006 in contrast with $533,000 in the second quarter of 2005 and $1,134,000 in the first six months of 2005.  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 $828,000 in the first six months of 2006 and revenue of $610,000 during the first six months of 2005.  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 $351,000 for the second quarter of 2006 and $755,000 for the six months ended June 30, 2006 in contrast with $283,000 for the second quarter of 2005 and $561,000 for the six months ended June 30, 2005.  No gains or losses were realized on sales of premises and equipment in the first six months of 2006.  In contrast, 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 on securities sales were realized in the first six months of 2006 or 2005.

The Company’s earnings during the second quarter of 2006 included two non-recurring gains totaling $443,000. This amount included a gain of $268,000 resulting from the redemption by MasterCard Worldwide of a portion of its Class B common stock.  The Company had earlier acquired the stock pursuant to MasterCard Worldwide’s reorganization of its membership interests into classes of common stock.  The amount also included a $175,000 gain recognized by the Bank’s Merchant Services division in connection with the sale of a small portfolio of credit card merchant accounts.

OTHER OPERATING EXPENSES

Overall operating expenses increased in the first six months of 2006 compared to the same period of 2005.  Operating expenses rose to a total of $11,054,000 for the second quarter of 2006 from $8,713,000 for the three months ended June 30, 2005.  For the six months ended June 30, 2006 operating expenses totaled $21,455,000, an increase from $17,035,000 for the corresponding period in 2005.  While the total expense figures increased primarily due to the increases in overall bank growth, most components continue to be moderated by the effects of an ongoing program of expense control.

Salary and related benefits increased by $1,410,000, rising from a total of $5,573,000 for the second quarter of 2005 to $6,983,000 for the same period in 2006, and also rose for the six months ended June 30, 2006 to $13,779,000 from $10,890,000 for the same period in 2005.  The increase in this expense category principally reflects increases in staffing in the main and regional offices as part of the Company’s growth initiative and also reflects employee salary adjustments.  Occupancy expense rose to $682,000 for the three months ended June 30, 2006 from $598,000 in the second quarter of 2005, 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.  The total of all other operating expenses rose in 2006 compared to the prior year, increasing from $4,751,000 for the first six months of 2005 to $6,372,000 for the same period of 2006.  The second quarter expenses increased from $2,542,000 in 2005 to $3,389,000 for the same period of 2006.

The combined effects of the above-described factors resulted in income before taxes of $16,845,000 for the three months ended June 30, 2006 compared to $11,088,000 for the second quarter of 2005.  For the six months ended June 30, 2006 income before taxes is $31,757,000 compared to $20,190,000 for the first six months of the prior year.  In the

19



second quarter, the Company’s provision for taxes increased from $4,713,000 in 2005 to $7,252,000 in 2006.  For the six months ended June 30, 2006 the provisions were $13,680,000 compared to $8,573,000 in 2005.  The effective tax rate for the periods ended June 30, 2006 and 2005 are 43.0% and 42.5%, respectively.  This brought net income for the second quarter of 2006 to $9,593,000 compared to $6,375,000 for the same period in 2005.  For the six months ended June 30, net income in 2006 was $18,077,000, while 2005 net income through June 30 was $11,617,000.

INVESTMENT SECURITIES

  The amortized cost and estimated fair values of securities available for sale as of June 30, 2006 and December 31, 2005 were as follows:

 

 

 

 

Gross

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

Amortized

 

Gains

 

Fair

 

 

 

Cost

 

(Losses)

 

Value

 

June 30, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

248,000

 

$

0

 

$

248,000

 

U.S. government sponsored enterprise debt securities

 

7,198,000

 

(102,000

)

7,096,000

 

Mutual funds

 

2,115,000

 

(99,000

)

2,016,000

 

 

 

 

 

 

 

 

 

 

 

$

9,561,000

 

$(201,000

)

$

9,360,000

 

 

 

 

 

 

 

 

 

December 31, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

249,000

 

$

0

 

$

249,000

 

U.S. government sponsored enterprise debt securities

 

1,880,000

 

(11,000

)

1,869,000

 

Mutual funds

 

2,071,000

 

(35,000

)

2,036,000

 

 

 

 

 

 

 

 

 

 

 

$

4,200,000

 

$(46,000

)

$

4,154,000

 

 

 

 

 

 

 

 

 

 

LOAN PORTFOLIO AND PROVISION FOR LOAN LOSSES

The loan portfolio consisted of the following at June 30, 2006 and December 31, 2005:

 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

 

 

(Dollars in Thousands)

 

Commercial loans

 

$

177,459

 

$

165,224

 

Real estate construction loans

 

300,545

 

222,439

 

Real estate loans

 

1,303,361

 

1,312,944

 

Government guaranteed loans

 

6,174

 

7,369

 

Other loans

 

1,895

 

5,881

 

Total loans

 

1,789,434

 

1,713,857

 

Less – Allowances for loan losses

 

20,313

 

17,577

 

        – Deferred loan fees

 

8,190

 

7,923

 

Net loans

 

$

1,760,931

 

$

1,688,357

 

 

Government guaranteed loans represent loans for which the repayment of principal and interest is guaranteed by the U.S. government. The loans bear contractual interest at various rates tied to national prime lending rates

20



 

The Bank’s lending is concentrated in real estate and businesses in Southern California. From time to time, this area has experienced adverse economic conditions. Future declines in the local economy or in real estate values may result in increased losses that cannot reasonably be predicted at this date. No industry constitutes a concentration in the Bank’s portfolio, except the real estate construction industry, and loans secured by multi-family residential properties.

The Bank offers a full range of lending services including commer­cial, real estate, and real estate construction loans. The Bank has developed a substantial portfolio of short- and medium-term “mini-perm” first trust deed loans for income properties as well as specializing in construction lending for moderate-size commercial and residential projects. The Bank also offers commercial loans for commercial and industrial borrowers, which includes equipment financing as well as short-term loans. Typically the Bank’s loans are floating rate and have no prepayment penalties.

Interest-only loans allow interest-only payments for a fixed period of time. The loans generally mature at the end of the interest-only period and require a balloon payment. At June 30, 2006 and December 31, 2005, the Company had $1,108,079,000 and $1,081,523,000 of short- and medium-term “mini-perm” first trust deed loans for income properties with interest only payments that have a balloon payment at loan maturity. The Bank does not offer residential mortgage products, negative amortization loans, “option-ARMs”, or sub-prime loan products.

Provision for Loan Losses

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 insure an appropriate level of allowance is present or established.

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

Based on the risk rating system specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that

21



 

management believes indicates the probability that a loss has been incurred. Management performs a detailed analysis of these loans, including, but not limited to, cash flows, appraisals of the collateral, conditions of the marketplace for liquidating the collateral and assessment of the guarantors. Management then determines the inherent loss potential and allocates a portion of the allowance for losses as a specific allowance for each of these credits.

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

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

Reflecting the Company’s ongoing analysis of the risks presented by its loan portfolio, the allowance for losses was $20,313,000 and $17,577,000 (or 1.14% and 1.03% of gross outstanding loans) at June 30, 2006 and December 31, 2005 respectively.  Provisions for loan losses were $1,500,000 and $3,891,000 for the three and six month periods ended June 30, 2006, compared to $1,500,000 and $2,700,000 for the same periods of 2005. For the three and six months ended June 30, 2006, the Company experienced net loan charge-offs of $0 and $941,000, respectively; by comparison, in the first three and six months of 2005 the Company experienced net loan charge-offs of $35,000 and $35,000, respectively.  The Company had loan recoveries of $0 and $130,000 during the six months ended June 30, 2006 and 2005.

For the quarter ended June 30, 2006, the Company has identified loans having an aggregate average balance of $64,000 which it concluded were impaired under SFAS No. 114. By comparison, for the quarter ended June 30, 2005 the Company had identified loans having an aggregate average balance of $675,000 which it concluded were impaired under SFAS No. 114. Total impaired loans at June 30, 2006 was $62,000.  The Company’s policy is generally to discontinue the accrual of interest income on impaired loans, and to recognize income on such loans only after the loan principal has been repaid in full and to establish a loss reserve for each of the loans which at June 30, 2006 totaled $15,000 for the loans as a group.

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 12.0% of total deposits at June 30, 2006.  This level represents a increase from the 5.3% liquidity level which existed on December 31, 2005.  In addition, at June 30, 2006 some $6.2 million of the Bank’s total loans consisted of government guaranteed loans, which represent a significant source of liquidity due to the active secondary markets which exist for these assets. The ratio of net loans (including government guaranteed loans) to deposits was 115% and 119% as of June 30, 2006 and December 31, 2005, respectively.

The Bank is a member of the Federal Home Loan Bank of San Francisco (FHLB), which provides an additional source for short and long-term funding.  Borrowings from the FHLB were $230,000,000 at June 30, 2006 and were secured by loans available as collateral at the FHLB.  As of June 30, 2006, the Bank has additional borrowing capacity at the Federal Home Loan Bank of $570,549,000.

22



 

Total shareholders’ equity was $125,469,000 and $106,034,000 as of June 30, 2006 and December 31, 2005, respectively.  The Company’s and the Bank’s capital ratios for those dates in comparison with regulatory capital requirements were as follows:

 

6-30-06

 

12-31-05

 

Leverage Ratio (Tier I Capital to Average Assets):

 

 

 

 

 

Regulatory requirement

 

4.0

%

4.0

%

Company

 

8.7

%

8.4

%

Bank

 

10.9

%

9.6

%

 

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:

 

6-30-06

 

12-31-05

 

Tier I Capital to Risk-weighted Assets:

 

 

 

 

 

Regulatory requirement

 

4.0

%

4.0

%

Company

 

8.5

%

7.8

%

Bank

 

10.6

%

8.8

%

 

 

6-30-06

 

12-31-05

 

Total Capital to Risk-weighted Assets:

 

 

 

 

 

Regulatory requirement

 

8.0

%

8.0

%

Company

 

11.9

%

10.1

%

Bank

 

11.6

%

9.8

%

 

At June 30, 2006, the Company and the Bank exceeded the minimum risk-based capital ratio 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 examinations in 2005 and 2006 by the Federal Deposit Insurance Corporation (“FDIC”) and the California Department of Financial Institutions (“DFI”) of the 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 all such concerns.  Subsequently the Bank entered into an informal agreement with the FDIC and DFI with respect to such corrective 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.

23



 

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

There were no material changes outside of the ordinary course of business pertaining to contractual obligations during the quarter ended June 30, 2006.

BORROWINGS

Junior Subordinated Deferrable Debentures

During 2006, 2005, 2004, 2002 and 2001, the Company established First Regional Statutory Trusts I through VI (collectively, 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.

During 2006, 2005, 2004, 2002 and 2001, 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. Concurrent with the issuance of the Trust Securities, the Trusts purchased Junior Subordinated Deferrable Debentures (the “Debentures”) from the Company, which aggregated $92,785,000 at June 30, 2006 and $61,857,000 at December 31, 2005. After each applicable issuance and purchase, the Company invested a substantial majority of the net proceeds from the applicable sale of 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.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Since customer deposits are the Company’s principal funding source outside of its capital, management has attempted to match rates 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 manage the Company’s interest rate sensitivity and limit the fluctuations of net interest income resulting from interest rate changes.  The table which follows indicates the repricing or maturity characteristics of the major categories of the Bank’s assets and liabilities as of June 30, 2006, and thus the relative sensitivity of the Bank’s net interest income to changes in the overall level of interest rates.

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Category

 

Floating
Rate

 

Less than
one
month

 

One
month
but less 
than
six
months

 

Six
months
but less
than
one year

 

One year
but less
than
five years

 

Five
years
or more

 

Non-
interest
earning
or bearing

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fed funds sold

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

Interest-bearing deposits in financial institutions

 

0

 

96

 

8,190

 

0

 

0

 

0

 

0

 

8,286

 

Investment securities

 

0

 

2,016

 

1,226

 

0

 

0

 

6,118

 

0

 

9,360

 

Subtotal

 

0

 

2,112

 

9,416

 

0

 

0

 

6,118

 

0

 

17,646

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, net of allowance for losses

 

1,752,355

 

1,610

 

2,948

 

785

 

3,233

 

0

 

0

 

1,760,931

 

Total earning assets

 

1,752,355

 

3,722

 

12,364

 

785

 

3,233

 

6,118

 

0

 

1,778,577

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

0

 

0

 

0

 

0

 

0

 

0

 

167,224

 

167,224

 

Premises and equipment

 

0

 

0

 

0

 

0

 

0

 

0

 

3,821

 

3,821

 

Other real estate owned

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

Other assets

 

12,581

 

0

 

0

 

0

 

0

 

0

 

37,741

 

50,322

 

Total non-earning assets

 

12,581

 

0

 

0

 

0

 

0

 

0

 

208,786

 

221,367

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

1,764,936

 

3,722

 

12,364

 

785

 

3,233

 

6,118

 

208,786

 

1,999,944

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24



 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Category

 

Floating
Rate

 

Less than
one
month

 

One
month
but less 
than
six
months

 

Six
months
but less
than
one year

 

One year
but less
than
five years

 

Five
years
or more

 

Non-
interest
earning
or bearing

 

Total

 

Federal Home Loan Bank advances

 

0

 

230,000

 

0

 

0

 

0

 

0

 

0

 

230,000

 

Repurchase agreements

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

Subtotal

 

0

 

230,000

 

0

 

0

 

0

 

0

 

0

 

230,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other deposits

 

50,160

 

0

 

0

 

0

 

0

 

0

 

0

 

50,160

 

Money market deposits

 

816,585

 

0

 

0

 

0

 

0

 

0

 

0

 

816,585

 

Time deposits

 

0

 

55,060

 

103,912

 

23,692

 

5,506

 

0

 

0

 

188,170

 

Subordinated Debentures

 

0

 

0

 

92,785

 

0

 

0

 

0

 

0

 

92,785

 

Total interest bearing liabilities

 

866,745

 

285,060

 

196,697

 

23,692

 

5,506

 

0

 

0

 

1,377,700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

0

 

0

 

0

 

0

 

0

 

0

 

482,458

 

482,458

 

Other liabilities

 

338

 

0

 

0

 

0

 

0

 

0

 

13,979

 

14,317

 

Shareholders’ equity

 

0

 

0

 

0

 

0

 

0

 

0

 

125,469

 

125,469

 

Total non-interest bearing liabilities and shareholders’ equity

 

338

 

0

 

0

 

0

 

0

 

0

 

621,906

 

622,244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

867,083

 

285,060

 

196,697

 

23,692

 

5,506

 

0

 

621,906

 

1,999,944

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GAP

 

897,853

 

(281,338

)

(184,333

)

(22,907

)

(2,273

)

6,118

 

(413,120

)

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative GAP

 

897,853

 

616,515

 

432,182

 

409,275

 

407,002

 

413,120

 

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, including U.S. Treasury or Government Sponsored Enterprises debt securities. The balance of the Bank’s investment portofolio contains investments that qualify for CRA investment status.  No gains or losses were recorded on securities sales in the first six months of 2006 or 2005.  As of June 30, 2006 the Bank’s investment portfolio contained no gross unrealized gains and gross unrealized losses of $201,000, for unrealized losses net of tax benefit of $116,000. By comparison, at December 31, 2005 the Company’s investment portfolio contained no gross unrealized gains and $46,000 gross unrealized losses, for unrealized losses net of tax benefit of $27,000. 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, 2006.  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, 2006 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

25



 

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 1A.  RISK FACTORS

Risk factors associated with the Company’s business activities, including risks associated with the Company’s financial and operating results and with an investment in the Company’s common stock, have not changed materially from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2005, as supplemented in the Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.

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

The Company held its Annual Meeting of Shareholders on May 16, 2006.

Election of Directors

Four Class 2 Directors were elected as follows (Class 2 Directors serve until the 2008 Annual Meeting):

Class 2

 

Votes for

 

Votes against
or withheld

 

Abstentions

Fred M. Edwards

 

2,628,811

 

140,695

 

none

H. Anthony Gartshore

 

2,234,449

 

535,057

 

none

Lawrence J. Sherman

 

2,501,075

 

268,431

 

none

Jack A. Sweeney

 

2,235,711

 

533,795

 

none

 

The term of office of all Class 1 Directors continues until the next annual meeting of shareholders, scheduled for May of 2007.  The Class 1 Directors are Gary M. Horgan, Thomas E. McCullough and Richard E. Schreiber.

Stock Option Plan

The Company’s 2005 Stock Option Plan covering 200,000 shares of the Company’s Common Stock was approved and ratified.

Votes for

 

Votes against
or withheld

 

Abstentions

2,060,479

 

707,917

 

1,110

 

No other matters were submitted for shareholder vote.

ITEM 6.  EXHIBITS
(a) Exhibits

 

Exhibit
No.

 

Description

3.1

 

Certificate of Amendment of Articles of Incorporation, dated July 31, 2006, of First Regional Bancorp

 

 

 

3.2

 

Certificate of Amendment of Articles of Incorporation, dated November 24, 1987, of First Regional Bancorp

 

26



 

 

Exhibit
No.

 

Description

 

 

 

3.3

 

Certificate of Amendment of Articles of Incorporation, dated September 21, 1981, of First Regional Bancorp (formerly known as Great American Bancorp)

 

 

 

3.4

 

Articles of Incorporation, dated February 18, 1981, of First Regional Bancorp (formerly known as Great American Bancorp)

 

 

 

3.5

 

Amended and Restated Bylaws, dated July 18, 2006, of First Regional Bancorp

 

 

 

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.

27



 

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 9, 2006

 

/s/ Jack A. Sweeney

 

 

 

Jack A. Sweeney, Chairman of the Board

 

 

and Chief Executive Officer

 

 

 

Date: August 9, 2006

 

/s/ Thomas E. McCullough

 

 

 

Thomas E. McCullough, Corporate Secretary

 

 

 

Date: August 9, 2006

 

/s/ Elizabeth Thompson

 

 

 

Elizabeth Thompson, Chief Financial Officer

28



 

Exhibit Index

Exhibit
No.

 

Description

3.1

 

Certificate of Amendment of Articles of Incorporation, dated July 31, 2006, of First Regional Bancorp

 

 

 

3.2

 

Certificate of Amendment of Articles of Incorporation, dated November 24, 1987, of First Regional Bancorp

 

 

 

3.3

 

Certificate of Amendment of Articles of Incorporation, dated September 21, 1981, of First Regional Bancorp (formerly known as Great American Bancorp)

 

 

 

3.4

 

Articles of Incorporation, dated February 18, 1981, of First Regional Bancorp (formerly known as Great American Bancorp)

 

 

 

3.5

 

Amended and Restated Bylaws, dated July 18, 2006, of First Regional Bancorp

 

 

 

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

 

29