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| FRGB > SEC Filings for FRGB > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
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, 2007. 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, 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, 2008 total assets were $2,417,965,000 compared to $2,174,315,000 at December 31, 2007, an increase of $243,650,000 or 11% and the September 30, 2008 asset level represents a $307,974,000 (15%) increase over the $2,109,991,000 that existed on the same date in 2007. Total deposits increased by $323,612,000 or 18.8%, from $1,721,077,000 at the end of 2007 to $2,044,689,000 at September 30, 2008. While overall deposits increased, the deposit growth was centered in time deposits, a $622,983,000 (212%) increase and other deposits, a $601,000 (1%) increase, while non-interest bearing deposits and money market deposits experienced a decrease. There were several changes in the composition of the Bank's assets during the first nine months of 2008. The Bank's loan portfolio grew significantly by $227,717,000 during the nine-month period, bringing the Bank's total loans, net of allowance for losses and deferred loan fees, to $2,247,934,000 at September 30, 2008 from the December 31, 2007 total of $2,020,217,000. 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 and interest-bearing deposits in financial institutions decreased by $5,821,000, while cash and cash equivalents (cash and due from banks and Federal funds sold), decreased by $12,975,000 in order to accommodate the changes that took place in the rest of the balance sheet.
The Company had net income of $1,182,000 in the three months ended September 30, 2008, compared to earnings of $8,073,000 in the third quarter of 2007. The results for the nine months ended September 30, 2008 was a net loss of $12,596,000 compared to net income of $25,708,000 for the corresponding period of 2007, a decrease of 149%.
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 2007, in the first nine months of 2008 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 2008.
Total interest income decreased by $6,653,000 (15%) for the third quarter of 2008 compared to the same period in 2007, and decreased by $13,118,000 (10%) for the nine month period ended September 30, 2008 compared to the same period in 2007 although total average earning assets were higher (15%) in 2008 than in 2007. The majority of the decrease in interest income arises from a substantial decrease of $6,542,000 (15%) in interest on loans from $43,678,000 for the three months ended September 30, 2007 compared to $37,136,000 for the same period in 2008. Although interest income decreased primarily due to the Federal Reserve's series of interest rate decreases, it was mitigated by an increase in the loan portfolio of $297,234,000 (15%) from September 30, 2007 to September 30, 2008. For the three months ended September 30, 2008 interest expense on deposits decreased by $1,144,000 (9%) to $11,884,000 from the 2007 level of $13,028,000 and for the nine months ended September 30, 2008 interest expense on deposits decreased by $4,518,000 (12%) to $32,388,000 from the 2007 level of $36,906,000 primarily due to the Federal Reserve's series of interest rate decreases but partially offset by an increase in total deposits of $372,900,000 (22%) from September 30, 2007 to September 30, 2008. The increases in deposits were primarily in time deposits, while other deposits also showed increases and non-interest bearing demand deposit and money market accounts decreased. For the three months ended September 30, 2008 interest expense on subordinated debentures decreased by $517,000 (30%), to $1,210,000 from the 2007 level of $1,727,000 due to a decrease in interest rates during the period. For the nine months ended September 30, 2008 interest expense on subordinated debentures decreased by $1,076,000 (21%), to $4,050,000 from the 2007 level of $5,126,000 due to the increase of $7,732,000 in subordinated debentures on September 25, 2007, and also due to a decrease in interest rates during the period. For the three months ended September 30, 2008 interest expense on FHLB advances decreased by $927,000 (55%), to $750,000 from the 2007 level of $1,677,000 due to a combination of an decrease of $60,000,000 in FHLB advances at September 30, 2008 compared to September 30, 2007 and a decrease in interest rates during the period. For the nine months ended September 30, 2008 interest expense on FHLB advances decreased by $785,000 (16%), to $4,086,000 from the 2007 level of $4,871,000 due to both the decrease in FHLB advances compared to the prior year and due to a decrease in interest rates during the period. The net result was a decrease in net interest income of $4,064,000 (15%), from $27,802,000 in the third quarter of 2007 to $23,738,000 for the third quarter of 2008 and a decrease in net interest income of $6,761,000 (8%), from $81,012,000 for the nine months ended September 30, 2007 to $74,251,000 for the nine months of 2008.
Interest Rates and Interest Differential
The following table sets forth the average daily balances outstanding for major categories of interest earning assets and interest bearing liabilities and the average interest rates earned and paid thereon:
For the Three Month Period Ended September 30,
2008 2007
Interest Average Interest Average
Average Income Yield/ Average Income Yield/
Balance (2) Rate % Balance (2) Rate %
(Dollars in Thousands)
Interest Earning
Assets:
Loans (1) $ 2,328,298 $ 37,136 6.3 % $ 1,935,108 $ 43,678 9.0 %
Interest bearing
deposits in financial
institutions 2,002 13 2.6 % 7,025 85 4.8 %
Investment securities 24,583 329 5.3 % 25,047 353 5.6 %
Federal funds sold 21,434 105 1.9 % 9,282 120 5.1 %
Total Interest
Earning Assets $ 2,376,317 $ 37,583 6.3 % $ 1,976,462 $ 44,236 8.9 %
For the Three Month Period Ended September 30,
2008 2007
Average Average
Average Interest Yield/ Average Interest Yield/
Balance Expense Rate % Balance Expense Rate %
(Dollars in Thousands)
Interest Bearing
Liabilities:
Other deposits $ 70,087 $ 278 1.6 % $ 57,132 $ 350 2.4 %
Money market accounts 779,079 4,150 2.1 % 970,374 9,841 4.0 %
Time Deposits 798,427 7,456 3.7 % 221,867 2,837 5.1 %
Subordinated
debentures 100,517 1,210 4.8 % 93,205 1,727 7.4 %
FHLB advances 130,380 750 2.3 % 128,967 1,677 5.2 %
Other borrowings 230 1 1.7 % 485 2 1.6 %
Total Interest
Bearing Liabilities $ 1,878,720 $ 13,845 2.9 % $ 1,472,030 $ 16,434 4.4 %
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(2) Includes loan fees in the third quarter of $1,994,000 in 2008 and $2,932,000 in 2007.
For the Nine Month Period Ended September 30,
2008 2007
Interest Average Interest Average
Average Income Yield/ Average Income Yield/
Balance (2) Rate % Balance (2) Rate %
(Dollars in Thousands)
Interest Earning
Assets:
Loans (1) $ 2,249,687 $ 113,389 6.7 % $ 1,878,584 $ 126,430 9.0 %
Interest bearing
deposits in financial
institutions 4,737 136 3.8 % 5,928 213 4.8 %
Investment securities 24,698 1,005 5.4 % 24,598 951 5.2 %
Federal funds sold 17,182 278 2.2 % 7,714 332 5.8 %
Total Interest
Earning Assets $ 2,296,304 $ 114,808 6.7 % $ 1,916,824 $ 127,926 8.9 %
For the Nine Month Period Ended September 30,
2008 2007
Average Average
Average Interest Yield/ Average Interest Yield/
Balance Expense Rate % Balance Expense Rate %
(Dollars in Thousands)
Interest Bearing
Liabilities:
Other deposits $ 67,834 $ 831 1.6 % $ 56,563 $ 990 2.3 %
Money market accounts 876,026 16,117 2.5 % 924,666 27,366 4.0 %
Time Deposits 524,208 15,440 3.9 % 226,237 8,550 5.1 %
Subordinated
debentures 100,517 4,050 5.4 % 92,927 5,126 7.4 %
FHLB advances 213,544 4,086 2.6 % 123,078 4,871 5.3 %
Other borrowings 1,489 33 3.0 % 261 11 5.6 %
Total Interest
Bearing Liabilities $ 1,783,618 $ 40,557 3.0 % $ 1,423,732 $ 46,914 4.4 %
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(2) Includes loan fees in the nine months of $6,512,000 in 2008 and $8,225,000 in 2007.
The following table shows the net interest earnings and the net yield on average interest earning assets:
For the Three Month For the Nine Month
Period Ended Period Ended
September 30, September 30,
2008 2007 2008 2007
(Dollars in Thousands)
Total interest income (l) $ 37,583 $ 44,236 $ 114,808 $ 127,926
Total interest expense 13,845 16,434 40,557 46,914
Net interest earnings $ 23,738 $ 27,802 $ 74,251 $ 81,012
Average interest earnings
assets $ 2,376,317 $ 1,976,462 $ 2,296,304 $ 1,916,824
Average interest bearing
liabilities $ 1,878,720 $ 1,472,030 $ 1,783,618 $ 1,423,732
Net yield on average
interest earning assets 4.0 % 5.6 % 4.3 % 5.7 %
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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) Net Increase (Decrease)
For the Three Month For the Nine Month
Periods Ended September 30, Periods Ended September 30,
2008 over 2007 2008 over 2007
Volume Rate Net Volume Rate Net
Interest income
(1)
Loans (2) $ 15,065 $ (21,607 ) $ (6,542 ) $ 47,500 $ (60,541 ) $ (13,041 )
Interest bearing
deposits in
financial
institutions (32 ) (40 ) (72 ) (38 ) (39 ) (77 )
Federal funds sold (28 ) 13 (15 ) (110 ) 56 (54 )
Investment
securities (7 ) (17 ) (24 ) 4 50 54
Total interest
earning assets $ 14,998 $ (21,651 ) $ (6,653 ) $ 47,356 $ (60,474 ) $ (13,118 )
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Net Increase (Decrease) Net Increase (Decrease)
For the Three Month For the Nine Month
Periods Ended September 30, Periods Ended September 30,
2008 over 2007 2008 over 2007
Volume Rate Net Volume Rate Net
Interest Expense
(1)
Other deposits $ 132 $ (204 ) $ (72 ) $ 312 $ (471 ) $ (159 )
Money Market (1,673 ) (4,018 ) (5,691 ) (1,371 ) (9,878 ) (11,249 )
Subordinated
Debentures 150 (667 ) (517 ) 466 (1,542 ) (1,076 )
Time Deposits 5,149 (530 ) 4,619 8,282 (1,392 ) 6,890
FHLB Advances 19 (946 ) (927 ) (2,646 ) 1,861 (785 )
Other Borrowings (1 ) 0 (1 ) 24 (2 ) 22
Total interest
bearing
liabilities $ 3,776 $ (6,365 ) $ (2,589 ) $ 5,067 $ (11,424 ) $ (6,357 )
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(2) Includes loan fees in the third quarter of $1,994,000 in 2008 and $2,932,000 in 2007 and nine months of $6,512,000 in 2008 and $8,225,000 in 2007.
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 at the time of reporting. 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 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 and concerns with the economic climate and its potential impact, the allowance for losses was $54,674,000 and $22,771,000 (or 2.37% and 1.11% of gross outstanding loans) at September 30, 2008 and December 31, 2007, respectively. There was a $10,418,000 total provision for loan losses including $9,015,000 related to impaired loans, during the three month period ended September 30, 2008, compared to $900,000 for the same period of 2007. There was a $65,951,000 total provision for loan losses including $61,518,000 related to impaired loans, during the nine month period ended September 30, 2008, compared to $1,200,000 for the same period of 2007. For the three and nine months ended September 30, 2008, the Company generated net loan charge-offs of $0 and $34,244,000, respectively. For the three and nine months ended September 30, 2007, the Company generated net loan charge-offs of $0 and $50,000. The Company had loan recoveries of $18,000 and $94,000 during the nine months ended September 30, 2008 and 2007, respectively.
Loans are determined to be impaired when it is determined probable that the bank will be unable to collect all the contractual interest and principal payments as scheduled in the loan agreement. Impaired loans include both non-performing and performing assets.
Per banking industry convention, non-performing assets consist of loans past due 90 or more days and still accruing interest, loans on non-accrual status, and other real estate owned ("OREO"). As of September 30, 2008 the Company had no loans past due 90 or more days which were still accruing interest, and $4,605,000 in other real estate owned. The Company's non-performing assets as of September 30, 2008, which consist of loans on non-accrual status and other real estate owned, were as follows:
Asset Type Number of Loans Amount Loans on nonaccrual status: Land loans 4 $ 24,394,000 Construction loan 4 34,141,000 Unsecured loan 1 2,000,000 Gross non-performing loans 60,535,000 Less charge-offs 32,038,000 Total non-performing loans $ 28,497,000 Other real estate owned, net: Land loan 1 1,015,000 Apartment loan 1 3,590,000 Total other real estate owned, net 4,605,000 Total nonperforming assets $ 33,102,000 |
Performing assets that are considered impaired due to concerns with the economic climate consist of the following:
Asset Type Number of Loans Amount Apartment Loans First Trust Deed 1 $ 16,450,000 Second Trust Deeds 6 10,368,000 Land Development 1 7,500,000 Unsecured 3 27,832,000 Construction 2 39,631,000 Total Performing Assets $ 101,781,000 |
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