FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Quarterly Report Under Section 13 or 15(d)

of the Securities Exchange Act of 1934

Quarter Ended September 30, 2007

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.  

Yesý               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   ý 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   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	11,954,004
Class	Outstanding on November 9, 2007

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	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23
Item 4.	Controls and Procedures	25
Part II - Other Information
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	26
Item 6.	Exhibits	26
Signatures		27

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)

	September 30,			December 31,
	2007			2006
ASSETS
Cash and due from banks	$	59,006		$	72,134
Federal funds sold		0			103,860
Cash and cash equivalents		59,006			175,994
Investment securities, available for sale, at fair value		25,041			22,465
(with amortized cost of $24,980 in 2007 and $22,509 in 2006)
Interest-bearing deposits in financial institutions		7,028			5,020
Federal Home Loan Bank stock – at cost		8,930			12,385
Loans, net of allowance for losses of $21,993 in 2007and $20,624 in 2006		1,950,700			1,805,301
Premises and equipment, net of accumulated depreciation		5,536			3,838
Accrued interest receivable and other assets		53,750			49,633
Total Assets	$	2,109,991		$	2,074,636
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest bearing	$	407,583		$	468,547
Interest bearing:
Money market deposits		985,510			865,434
Time deposits		224,994			233,335
Other deposits		53,702			60,443
Total deposits		1,671,789			1,627,759
Federal Home Loan Bank advances		150,000			190,000
Note payable		150			262
Accrued interest payable and other liabilities		19,207			16,820
Subordinated debentures		100,517			92,785
Total Liabilities		1,941,663			1,927,626
Commitments and contingencies (Note 5)
Shareholders' Equity:
Common Stock-no par value, authorized 150,000,000 shares; outstanding 12,027,000 (2007) and 12,283,000 (2006)		52,924			52,415
Unearned ESOP shares; 48,000 (2007) and 83,000 (2006)		(142	)		(249	)
Total common stock-no par value; outstanding 11,979,000 (2007) and 12,200,000 (2006)		52,782			52,166
Retained earnings		115,511			94,870
Accumulated other comprehensive income (loss), net of tax		35			(26	)
Total Shareholders' Equity		168,328			147,010
Total Liabilities and Shareholders' Equity	$	2,109,991		$	2,074,636

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				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
INTEREST INCOME:
Interest on loans	$	43,678	$	42,141	$	126,430	$	118,317
Interest on investment securities		353		170		951		328
Interest on deposits in financial institutions		85		75		213		158
Interest on federal funds sold		120		54		332		129
Total interest income		44,236		42,440		127,926		118,932
INTEREST EXPENSE:
Interest on deposits		13,028		10,756		36,906		26,968
Interest on subordinated debentures		1,727		1,825		5,126		4,509
Interest on FHLB advances		1,677		2,046		4,871		6,941
Interest on other borrowings		2		1		11		5
Total interest expense		16,434		14,628		46,914		38,423
Net interest income		27,802		27,812		81,012		80,509
PROVISION FOR LOAN LOSSES		900		0		1,200		3,891
Net interest income after provision for loan losses		26,902		27,812		79,812		76,618
OTHER OPERATING INCOME:
Customer service fees		1,873		1,581		4,977		5,451
Other-net		470		326		1,773		862
Total other operating income		2,343		1,907		6,750		6,313
OTHER OPERATING EXPENSES:
Salaries and related benefits		9,652		8,116		27,300		21,895
Occupancy expense		903		754		2,684		2,058
Equipment expense		409		369		1,217		997
Promotion expense		183		113		468		478
Professional service expense		1,352		864		3,114		2,465
Customer service expense		559		390		1,637		1,119
Supply/communication expense		402		339		1,099		1,062
Other expenses		1,715		1,155		4,394		3,481
Total other operating expenses		15,175		12,100		41,913		33,555
Income before provision for income taxes		14,070		17,619		44,649		49,376
PROVISION FOR INCOME TAXES		5,997		7,580		18,941		21,260
NET INCOME	$	8,073	$	10,039	$	25,708	$	28,116
EARNINGS PER SHARE: (Note 3)
Basic	$	0.67	$	0.82	$	2.11	$	2.31
Diluted	$	0.62	$	0.77	$	1.98	$	2.16

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)

	Nine Months Ended September 30,
	2007			2006
OPERATING ACTIVITIES
Net Income	$	25,708		$	28,116
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,200			3,891
Depreciation and amortization		817			655
Amortization of investment securities premiums and discounts-net		49			(43	)
Stock compensation costs		438			432
Tax benefit from stock options exercised		(263	)		(385	)
Federal Home Loan Bank stock dividends		(458	)		(417	)
Net gains on sale/disposal of premises and equipment		(92	)		0
Loss on sale of investment security		29			0
Increase in accrued interest receivable and other assets		(4,161	)		(4,112	)
Increase in accrued interest payable and other liabilities		2,387			188
Increase in taxes payable		263			1,800
Net cash provided by operating activities		25,917			30,125
INVESTING ACTIVITIES
Net increase in interest bearing deposits in financial institutions		(2,008	)		(1,759	)
Purchases of investment securities		(6,476	)		(10,389	)
Proceeds from maturities/sale of investment securities		3,927			1,571
Redemption (purchase) of Federal Home Loan Bank stock, net		3,913			(2,461	)
Net increase in loans		(146,599	)		(137,188	)
Proceeds from sale of premises and equipment		130			0
Purchases of premises and equipment		(2,553	)		(867	)
Net cash used in investing activities		(149,666	)		(151,093	)
FINANCING ACTIVITIES
Net increase in non-interest bearing deposits,and other interest bearing deposits		52,371			119,421
Net (decrease) increase in time deposits		(8,341	)		33,045
Decrease in note payable		(112	)		(112	)
(Decrease) increase in Federal Home Loan Bank advances		(40,000	)		10,000
Issuance of subordinated debentures		7,732			30,928
Common stock repurchased and retired		(6,301	)		0
Stock options exercised		210			233
Tax benefit from stock options exercised		263			385
Other changes in shareholders’ equity		939			1,052
Net cash provided by financing activities		6,761			194,952
(Decrease) increase in cash and cash equivalents		(116,988	)		73,984
Cash and cash equivalents, beginning of period		175,994			67,964
Cash and cash equivalents, end of period	$	59,006		$	141,948
Supplemental Disclosures of Cash Flow Information:
Interest paid	$	47,041		$	40,805
Income taxes paid	$	18,650		$	22,282

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

September 30, 2007

(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 2006 financial statements have been reclassified to be comparable with the classifications used in the 2007 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 2006 annual report on Form 10-K.

NOTE 2: Recent Accounting Pronouncements

FIN 48 - In September 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (“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. The Company adopted the provisions of FIN 48 on January 1, 2007.  At the adoption date and as of September 30, 2007, the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations were required.

SEC Staff Accounting Bulletin No. 108— In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, Quantifying Financial Misstatements, which expresses the staff’s views regarding the process of quantifying financial statement misstatements. Registrants are required to quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior-year misstatements, on the current-year financial statements. The techniques most commonly used in practice to accumulate and quantify misstatements are generally referred to as the “rollover” (current-year income statement perspective) and “iron curtain” (year-end balance perspective) approaches. The financial statements would require adjustment when either approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors. This   guidance did not have a material effect on the Company’s financial condition, results of operations, or cash flows.

6

SFAS No. 157 - In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides a definition of fair value, establishes a framework for measuring fair value and requires expanded disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. The provisions of SFAS No. 157 should be applied prospectively. Management is assessing the potential impact on the Company’s financial condition, results of operations, and cash flows.

SFAS No. 159 - In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115, which establishes presentation and disclosure requirements designed to facilitate comparisons for companies that choose different measurement attributes for similar types of assets and liabilities.  The standard requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the Company’s choice to use fair value on its earnings.  It also requires entities to display the fair value of those assets and liabilities for which the Company has chosen to use fair value on the face of the balance sheet.  This new guidance does not eliminate disclosure requirements included in other accounting standards, including fair value measurement disclosures required by SFAS No. 157 and SFAS No. 107, Disclosures about Fair Value of Financial Instruments.  SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.  Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes the choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157.  Management is assessing the potential impact on the Company’s financial condition, results of operations, and 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:

	Three Months Ended September 30, 2007
	Net Income (Numerator)		Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders	$	8,073,000		12,115,113	$	0.67
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options				836,138		(0.05	)
Diluted EPS
Income available to common shareholders	$	8,073,000		12,951,251	$	0.62

	Three Months Ended September 30, 2006
	Net Income (Numerator)		Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders	$	10,039,000		12,178,163	$	0.82
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options				847,128		(0.05	)
Diluted EPS
Income available to common shareholders	$	10,039,000		13,025,291	$	0.77

7

	Nine Months Ended September 30, 2007
	Net Income (Numerator)		Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders	$	25,708,000		12,180,854	$	2.11
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options				788,909		(0.13	)
Diluted EPS
Income available to common shareholders	$	25,708,000		12,969,763	$	1.98

	Nine Months Ended September 30, 2006
	Net Income (Numerator)		Weighted Average Shares (Denominator)		Per Share Amount
Basic EPS
Income available to common shareholders	$	28,116,000		12,153,387	$	2.31
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options				835,429		(0.15	)
Diluted EPS
Income available to common shareholders	$	28,116,000		12,988,816	$	2.16

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 600,000 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 for 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 executive officers of the Company or to directors of the Bank.  During May and July 2005, the Company granted options to buy up to 177,000 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 $20.50 to $25.00.  No stock options were granted in 2006. During August 2007, the Company granted options to buy up to 45,000 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 2017.  The exercise price of the options granted in 2007 is $23.84.

8

In 1999, the Company adopted a nonqualified employee stock option plan that authorizes the issuance of up to 1,800,000 shares of its common stock and expires in 2009.

Under all plans, options may be granted at a price not less than the fair market value of the stock at the date of the grant.

A summary of the award activity under the stock option plans as of September 30, 2007 and changes during the nine month period is presented below:

	Shares (in thousands)			Weighted Average Exercise Price		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)
Outstanding—January 1, 2007		1,836		$	5.93
Granted		45			23.84
Exercised		(27	)		7.80
Cancelled
Outstanding—September 30, 2007		1,854		$	6.34	5.13 years	$	33,733
Vested or expected to vest at September 30, 2007		1,487		$	5.86	5.05 years	$	36,482
Exercisable at September 30, 2007		1,243		$	4.63	5.09 years	$	24,752

The total intrinsic value of options exercised during the three and nine month periods ended September 30, 2007 was $0 and $627,000, respectively. The total intrinsic value of options exercised during the three and nine month periods ended September 30, 2006 was $193,000 and $918,000, respectively. The total fair value of shares vested during the three and nine month periods ended both September 30, 2007 and 2006 was $63,000 and $342,000, respectively.

As of September 30, 2007, there was $1,602,000 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 3.05 years.  The Company received $210,000 and $233,000 cash from the exercise of stock options during the nine month periods ended September 30, 2007 and 2006, respectively.

For the three and nine month periods ended September 30, 2007, stock based compensation expense reduced income before taxes by $150,000 and $438,000 and reduced net income by $87,000 and $254,000. For each of the three and nine month periods ended September 30 2006, stock based compensation expense reduced income before taxes by $144,000 and $432,000 and reduced net income by $84,000 and $251,000. This additional expense reduced both basic and diluted earnings per share by $0.01 for the three months ended September 30, 2007 and 2006, and reduced both basic and diluted earnings per share by $0.02 for the nine months ended September 30, 2007 and 2006.  Cash provided by operating activities decreased by $263,000 and $385,000 and cash provided by financing activities increased by an identical amount for the first nine months of 2007 and 2006, respectively, related to excess tax benefits from the exercise of stock options.

NOTE 4: Subordinated Debentures

During September 2007, the Company raised $15,000,000 of capital pursuant to “trust preferred” transactions involving a newly formed, wholly owned, statutory business trust, First Regional Statutory Trust VIII.  Half of this amount, or $7,500,000, represented new capital of First Regional Bancorp.  The other half was used to redeem the entire $7,500,000 outstanding amount of First Regional Statutory Trust II “trust preferred” securities.

9

Holders of the $15,000,000 of newly issued “Trust VIII” trust preferred securities will be entitled to receive cumulative cash distributions, accumulating from the original date of issuance, and payable quarterly in arrears at a floating annual interest rate starting at 8.35% and thereafter equal to three-month LIBOR plus 3.15%.  The $7,500,000 of “Trust II” trust preferred securities, redeemed on September 26, 2007, had borne interest at the rate of three-month LIBOR plus 3.40%.

NOTE 5: Commitments and Contingencies

As of September 30, 2007 the Bank had a total of $25,741,000 in standby letters of credit outstanding.  No losses are anticipated as a result of these transactions.

NOTE 6: Comprehensive Income

The Company’s comprehensive income includes all items which comprise net income plus the unrealized holding (losses) gains on available-for-sale securities.  For the three and nine month periods ended September 30, 2007 and 2006, the Company’s comprehensive income was as follows:

	Three Months Ended September 30				Nine Months Ended September 30
	2007		2006		2007		2006
	(Dollars in Thousands)
Net income	$	8,073	$	10,039	$	25,708	$	28,116
Other comprehensive income		284		121		61		32
Total comprehensive income	$	8,357	$	10,160	$	25,769	$	28,148

NOTE 7: Operating Segment Reports

Management has evaluated the Company’s overall operation and determined that its business consists of certain reportable business segments as of September 30, 2007 and 2006:  core banking operations, the administrative services in relation to TAS (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.

Trust Administrative Services - The principal business activity of the Bank’s division, Trust Administration Services (referred to as “Administrative Services” or “TAS”) 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.

10

Total assets of TAS at September 30, 2007 and December 31, 2006 were $1,132,000 and $842,000, respectively and total assets of Trust Services at September 30, 2007 and December 31, 2006 were $102,000 and $31,000, respectively.  The remaining assets reflected on the balance sheets of the Company are associated with the core banking operations.

A table showing the net income (loss) for the core banking operations, administrative services, and trust services for the three and nine month periods ended September 30, 2007 and 2006 (in thousands)is presented below:

	Three Month Period Ended September 30, 2007
	Core Banking Operations		Administrative Services			Trust Services		Combined Operations
Net interest income	$	27,802						$	27,802
Provision for loan losses		900							900
Other operating income		1,073	$	726		$	544		2,343
Other operating expenses		13,864		1,014			297		15,175
Provision (benefit) for income taxes		6,014		(121	)		104		5,997
Net income (loss)	$	8,097	$	(167	)	$	143	$	8,073

	Three Month Period Ended September 30, 2006
	Core Banking Operations		Administrative Services		Trust Services		Combined Operations
Net interest income	$	27,812					$	27,812
Provision for loan losses		0						0
Other operating income		954	$	551	$	402		1,907
Other operating expenses		11,407		426		267		12,100
Provision for income taxes		7,471		52		57		7,580
Net income	$	9,888	$	73	$	78	$	10,039

	Nine Month Period Ended September 30, 2007
	Core Banking Operations		Administrative Services			Trust Services		Combined Operations
Net interest income	$	81,012						$	81,012
Provision for loan losses		1,200							1,200
Other operating income		3,383	$	1,784		$	1,583		6,750
Other operating expenses		38,595		2,440			878		41,913
Provision (benefit) for income taxes		18,921		(276	)		296		18,941
Net income (loss)	$	25,679	$	(380	)	$	409	$	25,708

	Nine Month Period Ended September 30, 2006
	Core Banking Operations		Administrative Services		Trust Services		Combined Operations
Net interest income	$	80,509	$				80,509
Provision for loan losses		3,891					3,891
Other operating income		3,235	$	1,848	$	1,230		6,313
Other operating expenses		31,787		988		780		33,555
Provision for income taxes		20,710		361		189		21,260
Net income	$	27,356	$	499	$	261	$	28,116

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

Note 8: Subsequent Events

On October 30, 2007, the Company learned that it would record a pre-tax gain of $2,455,000 from the sale of all of its remaining restricted shares of Mastercard Worldwide Class B common stock.  The sale of the restricted Class B shares was made in connection with Mastercard Worldwide’s 2007-1 Class B Common Stock Voluntary Conversion and Sale Program.  Pursuant to such program, the Company elected to sell all of its remaining restricted Class B common shares.  Such payment will be recorded as a nonrecurring gain for the fourth quarter of 2007 and is expected to have an after-tax effect of increasing the Company’s earnings for the fourth quarter of 2007 by approximately $1.4 million.

Previously, in July 2006, the Company had reported that its earnings during the second quarter of 2006 included a gain of $268,000 resulting from the redemption by MasterCard Worldwide of a portion of its restricted Class B common stock.  First Regional had earlier acquired the restricted Mastercard Worldwide Class B shares pursuant to MasterCard Worldwide’s reorganization of its membership interests into classes of restricted common stock. 

12

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SUMMARY

First Regional Bancorp did not conduct any significant business activities independent of First Regional Bank.  The following discussion and analysis relates primarily to the Bank.

For a more complete understanding of the Company and its operations reference should be made to the financial statements included in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.  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, 2006, as supplemented by “Item 1A. Risk Factors” contained in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.

The Company has established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of the Company's financial statements. Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the carrying value of assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company. The Company believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of its condensed consolidated financial statements. In estimating the allowance for loan losses, management utilizes historical experience as well as other factors including the effect of changes in the local real estate market on collateral values, the effect on the loan portfolio of current economic indicators and their probable impact on borrowers and increases or decreases in nonperforming and impaired loans. Changes in these factors may cause management's estimate of the allowance to increase or decrease and result in adjustments to the Company's provision for loan losses.

As of September 30, 2007 total assets were $2,109,991,000 compared to $2,074,636,000 at December 31, 2006, an increase of $35,355,000 or 1.7% and the September 30, 2007 asset level represents a $73,141,000 (3.6%) increase over the $2,036,850,000 that existed on the same date in 2006.  Total deposits increased by $44,030,000 or 2.7%, from $1,627,759,000 at the end of 2006 to $1,671,789,000 at September 30, 2007.  While overall deposits increased, the deposit growth was centered in money market deposits, while time deposits, non-interest bearing deposits and other deposits experienced a decrease.  There were several changes in the composition of the Bank's assets during the first nine months of 2007.  The Bank’s core loan portfolio grew significantly by $145,399,000 during the nine month period, bringing the Bank’s total loans, net of allowance for losses and deferred loan fees, to $1,950,700,000 at September 30, 2007 from the December 31, 2006 total of $1,805,301,000.  The combined effect of the 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).  Investment securities increased by $2,576,000, while cash and cash equivalents (cash and due from banks and Federal funds sold), decreased by $116,988,000 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 $8,073,000 in the three months ended September 30, 2007, compared to earnings of $10,039,000 in the third quarter of 2006. The results for the nine months ended September 30, 2007 was earnings of $25,708,000 compared to net income of $28,116,000 for the corresponding period of 2006, a decrease of 8.6%.

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 and interest 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 2006, in the first nine months of 2007 the Company’s continued growth efforts resulted in an increase in interest earning assets, including loans.  The Bank’s core loan portfolio increased during the first nine months of 2007.

Total interest income increased by $1,796,000 (4%) for the third quarter of 2007 compared to the same period in 2006, and increased by $8,994,000 (8%) for the nine month period ended September 30, 2007 compared to the prior year as total average earning assets were higher (6%) in 2007 than in 2006.  The majority of the increase in interest income arises from an increase of $1,537,000 (4%) in interest on loans from $42,141,000 for the three months ended September 30, 2006 compared to $43,678,000 for the same period in 2007.  Although interest income increased reflecting an increase in the loan portfolio of $129,046,000 (7%) from September 30, 2006 to September 30, 2007, interest income was also affected by the Federal Reserve’s series of interest rate changes.  For the three months ended September 30, 2007 interest expense on deposits increased by $2,272,000 (21%) to $13,028,000 from the 2006 level of $10,756,000 and for the nine months ended September 30, 2007 interest expense on deposits increased by $9,938,000 (37%) to $36,906,000 from the 2006 level of $26,968,000 due to an increase in total deposits of$99,102,000 (6%) from September 30, 2006 to September 30, 2007. The increases in deposits were primarily in money market deposits, while time deposits and other deposits also showed increases and non-interest bearing demand deposit accounts decreased.  For the three months ended September 30, 2007 interest expense on subordinated debentures decreased by $98,000 (5%), to $1,727,000 from the 2006 level of $1,825,000 due to a decrease in interest rates during the period.  For the nine months ended September 30, 2007 interest expense on subordinated debentures increased by $617,000 (14%), to $5,126,000 from the 2006 level of $4,509,000 due to the increase of $30,928,000 in subordinated debentures on March 30, 2006, and also due to an increase in interest rates during the period. For the three months ended September 30, 2007 interest expense on FHLB advances decreased by $369,000 (18%), to $1,677,000 from the 2006 level of $2,046,000 and for the nine months ended September 30, 2007 interest expense on FHLB advances decreased by $2,070,000 (30%), to $4,871,000 from the 2006 level of $6,941,000.  The decrease in interest on FHLB advances is due to a decrease of $70,000,000 in FHLB advances at September 30, 2007 compared to September 30, 2006 which is partially offset due to fluctuations in interest rates during the period.  The net result was a slight decrease in net interest income of $10,000 (.04%), from $27,812,000 in the third quarter of 2006 to $27,802,000 for the third quarter of 2007 and an increase in net interest income of $503,000 (.6%), from $80,509,000 for the nine months ended September 30, 2006 to $81,012,000 for the first nine months of 2007.

Interest Rates and Interest Differential

The following table sets forth the average balances outstanding for major categories of interest earning assets and interest bearing liabili­ties and the average interest rates earned and paid thereon:

	For Three Month Period Ended September 30,
	2007							2006
	Average Balance		Interest Income(2)		Average Yield/Rate %			Average Balance		Interest Income (2)		Average Yield/ Rate %
	(Dollars in Thousands)
Interest Earning Assets:
Loans(1)	$	1,935,108	$	43,678		9.0	%	$	1,833,987	$	42,141		9.1	%
Interest-bearing deposits in financial institutions		7,025		85		4.8	%		6,886		75		4.3	%
Investment securities		25,047		353		5.6	%		12,716		170		5.3	%
Federal funds sold		9,282		120		5.1	%		4,836		54		4.4	%
Total Interest Earning Assets	$	1,976,462	$	44,236		8.9	%	$	1,858,425	$	42,440		9.1	%

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	For Three Month Period Ended September 30,
	2007							2006
	Average Balance		Interest Expense		Average Yield/ Rate %			Average Balance		Interest Expense		Average Yield/ Rate %
	(Dollars in Thousands)
Interest Bearing Liabilities:
Savings deposits	$	57,132	$	350		2.4	%	$	50,860	$	229		1.8	%
Money market deposits		970,374		9,841		4.0	%		839,873		8,052		3.8	%
Time deposits		221,867		2,837		5.1	%		204,031		2,475		4.8	%
Subordinated debentures		93,205		1,727		7.4	%		92,785		1,825		7.8	%
FHLB advances		128,967		1,677		5.2	%		151,250		2,046		5.4	%
Other borrowings		485		2		1.6	%		67		1		5.9	%
Total Interest Bearing Liabilities	$	1,472,030	$	16,434		4.4	%	$	1,338,866	$	14,628		4.3	%

__________

(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 third quarter of $21,968,000 in 2007 and $21,026,000 in 2006 and is not net of deferred loan fees, which had an average balance in the third quarter of $8,545,000 in 2007 and $8,020,000 in 2006.

(2) Includes loan fees in the third quarter of $2,932,000 in 2007 and $2,526,000 in 2006.

	For Nine Month Period Ended September 30,
	2007							2006
	Average Balance		Interest Income(2)		Average Yield/ Rate %			Average Balance		Interest Income (2)		Average Yield/ Rate %
	(Dollars in Thousands)
Interest Earning Assets:
Loans(1)	$	1,878,584	$	126,430		9.0	%	$	1,798,773	$	118,317		8.8	%
Interest-bearing deposits in financil institutions		5,928		213		4.8	%		5,523		158		3.8	%
Investment securities		24,598		951		5.2	%		8,620		328		5.1	%
Federal funds sold		7,714		332		5.8	%		3,939		129		4.4	%
Total Interest Earning Assets	$	1,916,824	$	127,926		8.9	%	$	1,816,855	$	118,932		8.8	%

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	For Nine Month Period Ended September 30,
	2007							2006
	Average Balance		Interest Expense		Average Yield/ Rate %			Average Balance		Interest Expense		Average Yield/ Rate %
	(Dollars in Thousands)
Interest Bearing Liabilities:
Savings deposits	$	56,563	$	990		2.3	%	$	49,985	$	542		1.4	%
Money market deposits		924,666		27,366		4.0	%		790,425		20,290		3.4	%
Time deposits		226,237		8,550		5.1	%		189,694		6,136		4.3	%
Subordinated debentures		92,927		5,126		7.4	%		82,816		4,509		7.3	%
FHLB advances		123,078		4,871		5.3	%		188,707		6,941		4.9	%
Other borrowings		261		11		5.6	%		45		5		14.9	%
Total Interest Bearing Liabilities	$	1,423,732	$	46,914		4.4	%	$	1,301,672	$	38,423		3.9	%

_________

(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 nine months of $21,677,000 in 2007 and $20,032,000 in 2006 and is not net of the deferred loan fees, which had an average balance in the first nine months of $7,974,000 in 2007 and $8,022,000 in 2006.

(2) Includes loan fees in the first nine months of $8,225,000 in 2007 and $7,309,000 in 2006.

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

	For the Three Month Period Ended September 30,						For the Nine Month Period Ended September 30,
	2007			2006			2007			2006
	(Dollars in Thousands)
Total interest income (1)	$	44,236		$	42,440		$	127,926		$	118,932
Total interest expense		16,434			14,628			46,914			38,423
Net interest earnings	$	27,802		$	27,812		$	81,012		$	80,509
Average interest earning assets	$	1,976,462		$	1,858,425		$	1,916,824		$	1,816,855
Average interest bearing liabilities	$	1,472,030		$	1,338,866		$	1,423,732		$	1,301,672
Net yield on average interest earning assets		5.6	%		5.9	%		5.7	%		5.9	%

__________

(1) Includes loan fees in the third quarter of $2,932,000 in 2007 and $2,526,000 in 2006 and first nine months of $8,225,000 in 2007 and $7,309,000 in 2006.

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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) For the Three Month Periods Ended September 30, 2007 over 2006									Net Increase (Decrease)For the Nine Month Periods Ended September 30, 2007 over 2006
	Volume			Rate			Net			Volume			Rate			Net
Interest Income(1)	(Dollars in Thousands)
Loans (2)	$	2,263		$	(726	)	$	1,537		$	5,330		$	2,783		$	8,113
Interest-bearing deposits in financial institutions		1			9			10			12			43			55
Federal funds sold		56			10			66			153			50			203
Investment securities		173			10			183			618			5			623
Total interest earning assets	$	2,493		$	(697	)	$	1,796		$	6,113		$	2,881		$	8,994
Interest Expense (1)
Other deposits	$	31		$	90		$	121		$	79		$	369		$	448
Money market deposits		1,304			485			1,789			3,723			3,353			7,076
Subordinated debentures		8			(106	)		(98	)		557			60			617
Time deposits		224			138			362			1,288			1,126			2,414
FHLB advances		(292	)		(77	)		(369	)		(2,649	)		579			(2,070	)
Other borrowings		1			(0	)		1			7			(1	)		6
Total interest bearing liabilities	$	1,276		$	530		$	1,806		$	3,005		$	5,486		$	8,491

_________

(1) The change in interest due to both rate and volume has been allocated to the change due to volume and the change due to rate in proportion to the relationship of the absolute dollar amounts of the change in each.

(2) Includes loan fees in the third quarter of $2,932,000 in 2007 and $2,526,000 in 2006 and in the first nine months of $8,225,000 in 2007 and $7,309,000 in 2006.

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OTHER OPERATING INCOME

Other operating income increased to $2,343,000 in the third quarter of 2007 from $1,907,000 in the three months ended September 30, 2006.  For the first nine months of 2007 other operating income also increased to $6,750,000 from $6,313,000 for the first nine months of 2006.  The Bank’s Trust Administration Services division which provides administrative and custodial services to self-directed retirement plans, had revenue which increased to $726,000 for the third quarter of 2007 and decreased to $1,784,000 for the nine months ended September 30, 2007 in contrast with $551,000 in the third quarter of 2006 and $1,848,000 in the first nine months of 2006.  The decrease in TAS revenues for the nine month period relates to a decrease in the number of customer accounts as a result of a management decision to reduce accounts that are considered high risk.  The Bank’s Trust Department, which provides trust services for living trusts, investment agency accounts, IRA rollovers, and all forms of court-related matters, had revenue of $1,583,000 in the first nine months of 2007 and revenue of $1,230,000 during the first nine months of 2006.  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 $314,000 for the third quarter of 2007 and $781,000 for the nine months ended September 30, 2007 in contrast with $356,000 for the third quarter of 2006 and $1,111,000 for the nine months ended September 30, 2006.  The decrease in revenues relates primarily to a reduction in deposit accounts relating to internet “e-wallet” accounts which have reduced activity levels due to changes in the applicable regulations.  During the first nine months of 2007 gains of $108,000 and losses of $16,000 on sales of premises and equipment were realized.  In contrast, during the first nine months of 2006 no gains or losses on sales of premises and equipment were realized.  No gains and $29,000 in losses on securities sales were realized in the first nine months of 2007.  In comparison, no gains or losses on securities sales were realized in the first nine months of 2006.

OTHER OPERATING EXPENSES

Overall operating expenses increased in the first nine months of 2007 compared to the same period of 2006.  Operating expenses rose to a total of $15,175,000 for the third quarter of 2007 from $12,100,000 for the three months ended September 30, 2006.  For the nine months ended September 30, 2007 operating expenses totaled $41,913,000, an increase from $33,555,000 for the corresponding period in 2006.  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 $1,536,000, rising from a total of $8,116,000 for the third quarter of 2006 to $9,652,000 for the same period in 2007, and also rose for the nine months ended September 30, 2006 to $27,300,000 from $21,895,000 for the same period in 2006.  The third quarter 2007 expense includes an $800,000 provision to reflect the accrued vacation time of the Company’s employees.  The item was not deemed material in the years past, but with the ongoing growth of our organization, it became appropriate to record it in the financial statements, and future changes in in accrued vacation time will be recognized on an ongoing basis.  The increase in this expense category also 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 $903,000 for the three months ended September 30, 2007 from $754,000 in the third quarter of 2006, 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 and many of the regional offices.  The total of all other operating expenses rose in 2007 compared to the prior year, increasing from $9,602,000 for the first nine months of 2006 to $11,929,000 for the same period of 2007.  The third quarter expenses increased from $3,230,000 in 2006 to $4,620,000 for the same period of 2007.  Other expense includes a $300,000 provision for the estimated costs of discontinuing our custodial services program for third-party administrators of retirement accounts, unrelated to the Company’s Trust Administrative Services division.  Changes in the industry and regulatory environment reduced the profitability of this third party administration activity for the Company, and it is not central to our business model.

The combined effects of the above-described factors resulted in income before taxes of $14,070,000 for the three months ended September 30, 2007 compared to $17,619,000 for the third quarter of 2006.  For the nine months ended September 30, 2007 income before taxes is $44,649,000 compared to $49,376,000 for the first nine months of the prior year.  In the third quarter, the Company's provision for taxes decreased from $7,580,000 in 2006 to $5,997,000 in 2007.  For the nine months ended September 30, 2007 the provision was $18,941,000 compared to $21,260,000 in 2006.  The effective tax rate for the nine month periods ended September 30, 2007 and 2006 are 42.4% and 43.1%, respectively.  This brought net income for the third quarter of 2007 to $8,073,000 compared to $10,039,000 for the same period in 2006.  For the nine months ended September 30, net income in 2007 was $25,708,000, while 2006 net income through September 30 was $28,116,000.

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INVESTMENT SECURITIES

The amortized cost and estimated fair values of securities available for sale as of September 30, 2007 and December 31, 2006 were as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
September 30, 2007
U.S. Treasury securities	$	246,000	$	0	$	0		$	246,000
U.S. government sponsored enterprise debt securities		24,734,000		149,000		(88,000	)		24,795,000
	$	24,980,000	$	149,000	$	(88,000	)	$	25,041,000
December 31, 2006
U.S. Treasury securities	$	248,000	$	0	$	0		$	248,000
U.S. government sponsored enterprise debt securities		20,100,000		114,000		(107,000	)		20,107,000
Mutual funds		2,161,000		0		(51,000	)		2,110,000
	$	22,509,000	$	114,000	$	(158,000	)	$	22,465,000

LOAN PORTFOLIO AND PROVISION FOR LOAN LOSSES

The loan portfolio consisted of the following at September 30, 2007 and December 31, 2006:

	September 30,		December 31,
	2007		2006
	(Dollars in Thousands)
Commercial loans	$	227,238	$	223,571
Real estate construction loans		558,912		375,175
Real estate loans		1,188,387		1,226,870
Government guaranteed loans		3,240		4,827
Other loans		3,318		3,096
Total loans		1,981,095		1,833,539
Less   -  Allowances for loan losses.		21,993		20,624
- Deferred loan fees		8,402		7,614
Net loans	$	1,950,700	$	1,805,301

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.

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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.

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 September 30, 2007 and December 31, 2006, the Company had $940,726,000 and $1,026,515,000 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.

Certain customers of the Bank control various separate legal entities representing, in the aggregate, significant borrowing concentration, including as much as $154,000,000 as of September 30, 2007.  While each individual loan is separately and independently underwritten, and while the majority of such loans are secured by commercial real property, these borrowing concentrations nevertheless present certain risks.

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.

20

Based on the risk rating system, specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates the probability that a loss has been incurred. Management performs a detailed analysis of these loans, including, but not limited to, cash flows, appraisals of the collateral, conditions of the marketplace for liquidating the collateral and assessment of the guarantors. Management then determines the inherent loss potential and allocates a portion of the allowance for losses as a specific allowance for each of these credits.

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

The second major element in the Company’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 $21,993,000 and $20,624,000 (or 1.11% and 1.13% of gross outstanding loans) at September 30, 2007 and December 31, 2006, respectively. Provision for loan losses were $900,000 and $1,200,000 during the three and nine month periods ended September 30, 2007, compared to $0 and $3,891,000 for the same periods of 2006. For the three and nine months ended September 30, 2007, the Company generated net loan charge-offs of $0 and $50,000 respectively; by comparison, in the first three and nine months of 2006, the Company generated net loan charge-offs of $87,000 and $1,028,000 respectively. The Company had loan recoveries of $94,000 and $0 during the nine months ended September 30, 2007 and 2006, respectively.

For the quarter ended September 30, 2007, the Company has identified loans having an aggregate average balance of $13,000 which it concluded were impaired under SFAS No. 114. By comparison, for the quarter ended September 30, 2006, the Company had identified loans having an aggregate average balance of $52,000 which it concluded were impaired under SFAS No. 114. The total of impaired loans at September 30, 2007 was $12,000.  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 September 30, 2007 totaled $3,000 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 5.4% of total deposits at September 30, 2007.  This level represents a decrease from the 12.5% liquidity level which existed on December 31, 2006.  In addition, at September 30, 2007 some $3.2 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 117% and 111% as of September 30, 2007 and December 31, 2006, 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 $150,000,000 at September 30, 2007 and were secured by loans available as collateral at the FHLB.  As of September 30, 2007, the Bank has additional borrowing capacity at the Federal Home Loan Bank of $329,177,000.

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Total shareholders’ equity was $168,328,000 and $147,010,000 as of September 30, 2007 and December 31, 2006, respectively.  The Company’s and the Bank’s capital ratios for those dates in comparison with regulatory capital requirements were as follows:

	9-30-07		12-31-06
Leverage Ratio (Tier I Capital to Average Assets):
Regulatory requirement	4.0	%	4.0	%
Company	10.8	%	9.6	%
Bank	11.6	%	11.8	%

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:

	9-30-07		12-31-06
Tier I Capital to Risk-weighted Assets:
Regulatory requirement	4.0	%	4.0	%
Company	9.8	%	9.2	%
Bank	10.5	%	11.0	%

	9-30-07		12-31-06
Total Capital to Risk-weighted Assets:
Regulatory requirement	8.0	%	8.0	%
Company	12.5	%	12.2	%
Bank	11.5	%	12.0	%

At September 30, 2007, 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.

On July 30, 2007, the Company adopted a share repurchase program authorizing the Company to repurchase in the open market up to 1,000,000 shares, or approximately 8%, of its outstanding common stock over the next twelve months.  During the third quarter of 2007, the Company repurchased approximately 283,000 shares of its outstanding common stock at a total cost of $6,301,000.

As a result of a 2005 examination of the Bank by the Federal Deposit Insurance Corporation (“FDIC”) and the California Department of Financial Institutions (“DFI”), the Bank has identified certain deficiencies and other concerns, principally with respect to the Bank Secrecy Act (“BSA”). As a result, the Bank took corrective action directed toward achieving full compliance with BSA and addressing the other concerns so identified. Subsequently, the Bank entered into an informal agreement with the FDIC and DFI with respect to such corrective action. In 2006, the FDIC and DFI conducted another examination which indicated that, while improvement had been achieved, additional corrections were still required. In response, the Bank implemented further remedial action, and believes that the corrective action taken to date has substantially addressed the regulatory concerns embodied in the informal agreement. 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 maintain full compliance with the terms of the informal agreement.

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.

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CONTRACTUAL OBLIGATIONS AND COMMITMENTS

There were no material changes outside of the ordinary course of business pertaining to contractual obligations during the quarter ended September 30, 2007.

BORROWINGS

Junior Subordinated Deferrable Debentures

During 2007, 2006, 2005, 2004, 2002 and 2001, the Company established First Regional Statutory Trusts I through VIII (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 2007, 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 $100,517,000 at September 30, 2007 and $92,785,000 at December 31, 2006. The Company invested a substantial majority of the net proceeds from the sale of Debentures in the Bank as additional paid-in capital to support the Bank’s future growth. In addition, net proceeds from the issuance of Trust VIII Trust Securities have been, and may continue to be, used to fund the repurchase of shares pursuant to the Company’s previously announced share repurchase program, or for general corporate purposes and to support the future growth of the Company. 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 September 30, 2007, and thus the relative sensitivity of the Bank's net interest income to changes in the overall level of interest rates.

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(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 funds sold	$	0	$	0		$	0		$	0		$	0	$	0	$	0		$	0
Interest-bearing deposits in financial institutions		0		0			7,028			0			0		0		0			7,028
Investment securities		0		0			1,240			0			0		23,801		0			25,041
Subtotal		0		0			8,268			0			0		23,801		0			32,069
Loans, net of allowance for losses		1,850,365		407			211			3,168			93,780		2,769		0			1,950,700
Total earning assets		1,850,365		407			8,479			3,168			93,780		26,570		0			1,982,769
Cash and due from banks		0		0			0			0			0		0		59,006			59,006
Premises and equipment		0		0			0			0			0		0		5,536			5,536
Other real estate owned		0		0			0			0			0		0		0			0
Deferred income taxes		0		0			0			0			0		0		14,429			14,429
Federal Home Loan Bank stock		8,930		0			0			0			0		0		0			8,930
Other assets		0		0			7,188			0			0		0		32,133			39,321
Total non-earning assets		8,930		0			7,188			0			0		0		111,104			127,222
Total assets	$	1,859,295	$	407		$	15,667		$	3,168		$	93,780	$	26,570	$	111,104		$	2,109,991
Federal Home Loan Bank advances	$	0	$	150,000		$	0		$	0		$	0	$	0	$	0		$	150,000
Repurchase agreements		0		0			0			0			0		0		0			0
Subtotal		0		150,000			0			0			0		0		0			150,000
Other deposits		53,702		0			0			0			0		0		0			53,702
Money market deposits		985,510		0			0			0			0		0		0			985,510
Time deposits		0		45,184			126,836			48,662			4,312		0		0			224,994
Subordinated debentures		0		0			100,517			0			0		0		0			100,517
Total interest bearing liabilities		1,039,212		195,184			227,353			48,662			4,312		0		0			1,514,723
Demand deposits		0		0			0			0			0		0		407,583			407,583
Note payable		0		150			0			0			0		0		0			150
Other liabilities		0		0			0			0			0		0		19,207			19,207
Shareholders' equity		0		0			0			0			0		0		168,328			168,328
Total non-interest bearing liabilities and shareholders'  equity		0		150			0			0			0		0		595,118			595,268
Total liabilities and shareholders'  equity	$	1,039,212	$	195,334		$	227,353		$	48,662		$	4,312	$	0	$	595,118		$	2,109,991
GAP	$	820,083	$	(194,927	)	$	(211,686	)	$	(45,494	)	$	89,468	$	26,570	$	(484,014	)	$	0
Cumulative GAP	$	820,083	$	625,156		$	413,470		$	367,976		$	457,444	$	484,014	$	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 portfolio contains investments that qualify for CRA investment status.  No gains and $29,000 in losses were recorded on securities sales in the first nine months of 2007.  In comparison, no gains or losses were recorded on securities sales in the first nine months of 2006.  As of September 30, 2007 the Bank’s investment portfolio contained  gross unrealized gains of $149,000 and gross unrealized losses of $88,000, for net unrealized gains of $35,000 net of tax. By comparison, at December 31, 2006 the Company's investment portfolio contained $114,000 in gross unrealized gains and $158,000 gross unrealized losses, a net loss of $44,000 before tax benefit. 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.

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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 September 30, 2007.  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 September 30, 2007 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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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

In addition to the other information set forth in this report, you should carefully consider the risk factors associated with the Company’s business activities, which are discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006. These include risks associated with the Company’s financial and operating results and with an investment in the Company’s common stock, and have not changed materially from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2006.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On July 30, 2007, the Company announced that its Board of Directors had approved and adopted a share repurchase program authorizing the Company to repurchase up to 1,000,000 shares, or approximately 8%, of its outstanding common stock through July 30 2008.  The repurchase program authorizes the Company to purchase shares from time to time in the open market, depending on market price and other considerations.  The timing of purchases and the prices to be paid are at the discretion of management.  All repurchased shares are expected to be retired.  The repurchase program is intended to be structured to conform with the safe harbor provisions of Securities and Exchange Commission Rule 10b-18.

Repurchases of the Company’s securities during the third quarter of 2007 are as follows:

Month Ended	Total Number of Shares Purchased	Weighted Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program
July 31, 2007	—	—		—
August 31, 2007	283,100	22.26		283,100
September 30, 2007	—	—		—
Total	283,100	$	22.26	283,100

ITEM 6.  EXHIBITS

The following is a table of exhibits to this Quarterly Report on Form 10-Q.

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 3, 4 and 5 of Part II of Form 10-Q are not applicable and have been omitted.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FIRST REGIONAL BANCORP
Date: November 9, 2007	/s/ Jack A. Sweeney
	Jack A. Sweeney, Chairman of the Board and Chief Executive Officer
Date: November 9, 2007	/s/ Thomas E. McCullough
	Thomas E. McCullough, Corporate Secretary
Date: November 9, 2007	/s/ Elizabeth Thompson
	Elizabeth Thompson, Chief Financial Officer

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Exhibit Index

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

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