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| FRGB > SEC Filings for FRGB > Form 10-Q on 15-May-2009 | All Recent SEC Filings |
15-May-2009
Quarterly Report
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, 2008. 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, 2008.
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. Other accounting policies that require significant judgments and assumptions by management include the provision for income taxes, evaluation of investments for other than temporary impairment and stock-based compensation.
As of March 31, 2009 total assets were $2,481,345,000 compared to $2,465,141,000 at December 31, 2008, an increase of $16,204,000 or 0.7% and the March 31, 2009 asset level represents an increase compared to the $2,321,101,000 that existed on the same date in 2008. Total deposits increased by $77,231,000 or 3.6% from $2,129,972,000 at the end of 2008 to $2,207,203,000 at March 31, 2009. Overall deposits increased with deposit growth in time, non-interest bearing demand and other deposits and deposit reductions in money market deposits. There were several changes in the composition of the Bank's assets during the first quarter of 2009. The Bank's core loan portfolio decreased by $22,635,000 during the three-month period, bringing the Bank's total loans, net of allowance for losses, to $2,234,844,000 at March 31, 2009 from the December 31, 2008 total of $2,257,479,000. The combined effect of the decrease in loans and the increase in deposits was an increase in the level of total liquid assets (cash and due from banks, Federal funds sold and investment securities). Investment securities increased by $2,439,000, while cash and cash equivalents (cash and due from banks and Federal funds sold) increased by $30,564,000.
The Company had a net loss of $3,237,000 in the first quarter of 2009, compared to net earnings of $4,735,000 in the three months ended March 31, 2008.
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 2008, in the first three months of 2009 there was an increase in interest earning assets, including loans. The Bank's core loan portfolio decreased during the first three months of 2009.
Total interest income decreased by $12,582,000 (30.8%) for the three months ended March 31, 2009 compared to the same period in 2008 although total average earning assets were higher (11.8%) in 2009 than in 2008. The majority of the decrease in interest income arises from a substantial decrease of $12,449,000 (30.9%) in interest on loans from $40,296,000 for the three months ended March 31, 2008 compared to $27,847,000 for the same period in 2009. Although interest income decreased, it was mitigated by an increase in the loan portfolio of $68,691,000 (3.2%) from March 31, 2008 to March 31, 2009. Interest income was primarily affected by the Federal Reserve's series of interest rate decreases. For the three months ended March 31, 2009, interest expense on deposits decreased by $208,000 (1.9%) to $11,275,000 from the 2008 level of $11,067,000 due to an increase in total deposits of $511,295,000 (30.2%) from March 31, 2008 to March 31, 2009. The increases in deposits were primarily in time deposits and non-interest bearing demand deposit accounts, while other deposits and money market deposit accounts decreased. For the three months ended March 31, 2009, interest expense on subordinated debentures decreased by $652,000 (40.4%) to $964,000 from the 2008 level of $1,616,000 due to a decrease in interest rates during the period. For the three months ended March 31, 2009 interest expense on FHLB advances decreased by $1,686,000 (98.7%) to $22,000 from the 2008 level of $1,708,000 due to a combination of a decrease of $326,000,000 in FHLB advances at March 31, 2009 compared to March 31, 2008 and a decrease in interest rates during the period. The net result was a decrease in net interest income of $10,444,000 (39.6%), from $26,396,000 in the first quarter of 2008 to $15,952,000 for the first three months of 2009.
Interest Rates and Interest Differential
The following table sets forth the daily average 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 March 31
2009 2008
Interest Average Interest Average
Average Income Yield/ Average Income Yield/
Balance (2) Rate % Balance (2) Rate %
(Dollars in Thousands)
Interest Earning
Assets:
Loans (1) $ 2,327,465 $ 27,847 4.85 % $ 2,129,698 $ 40,296 7.61 %
Investment
securities 24,604 311 5.13 % 24,814 359 5.82 %
Interest bearing
deposits in
financial
institutions 2,003 12 2.43 % 7,036 72 4.12 %
Federal funds sold 71,962 43 0.24 % 8,827 68 3.10 %
Total Interest
Earning Assets $ 2,426,034 $ 28,213 4.72 % $ 2,170,375 $ 40,795 7.56 %
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For the Three Month Period Ended March 31
2009 2008
Average Interest Yield/ Average Interest Yield/
Balance Expense Rate % Balance Expense Rate %
(Dollars in Thousands)
Interest Bearing
Liabilities:
Other deposits $ 51,591 $ 72 0.57 % $ 60,522 $ 266 1.77 %
Money market
accounts 573,812 1,799 1.27 % 961,673 7,283 3.05 %
Time deposits 1,190,297 9,404 3.20 % 302,063 3,518 4.68 %
Subordinated
debentures 100,517 964 3.89 % 100,517 1,616 6.47 %
FHLB advances 24,206 22 0.37 % 221,780 1,708 3.10 %
Other borrowings 37 0 0.00 % 734 8 4.38 %
Total Interest
Bearing Liabilities $ 1,940,460 $ 12,261 2.56 % $ 1,647,289 $ 14,399 3.52 %
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(2) Includes loan fees in the first quarter of $1,284,000 in 2009 and $2,273,000 in 2008.
The following table shows the net interest earnings and the net yield on average interest earning assets:
For the Three Month
Period Ended March 31,
2009 2008
(Dollars in Thousands)
Total interest income (1) $ 28,213 $ 40,795
Total interest expense 12,261 14,399
Net interest earnings $ 15,952 $ 26,396
Average interest earning assets $ 2,426,034 $ 2,173,793
Average interest bearing liabilities $ 1,940,460 $ 1,647,289
Net yield on average interest earning assets 2.67 % 4.88 %
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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 March 31, 2009 over 2008
Volume Rate Net
(Dollars in Thousands)
Interest Income (1)
Loans (2) $ 21,421 $ (33,870 ) $ (12,449 )
Interest bearing deposits in
financial institutions (26 ) (34 ) (60 )
Investment securities (3 ) (45 ) (48 )
Federal funds sold (29 ) 4 (25 )
Total interest earning assets $ 21,363 $ (33,945 ) $ (12,582 )
Interest Expense (1)
Other deposits $ (35 ) $ (159 ) $ (194 )
Money market (2,243 ) (3,241 ) (5,484 )
Time 6,595 (709 ) 5,886
Subordinated debentures 0 (652 ) (652 )
FHLB advances (848 ) (838 ) (1,686 )
Other borrowings (4 ) (4 ) (8 )
Total interest bearing liabilities $ 3,465 $ (5,603 ) $ (2,138 )
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(2) Includes loan fees in the first quarter of $1,284,000 in 2009 and $2,273,000 in 2008.
PROVISION FOR LOAN LOSSES
The allowance for loan losses is intended to reflect the known and unknown risks, which are inherent in a loan portfolio. The adequacy of the allowance for loan losses is continually evaluated in light of many factors, including loan loss experience and current economic conditions. The allowance for loan losses is increased by provisions for loan losses, and is decreased by net charge-offs. Management believes the allowance for loan losses is adequate in relation to both existing and potential risks in the loan portfolio.
In determining the adequacy of the allowance for loan losses, management considers such factors as historical loan loss experience, known problem loans, evaluations made by bank regulatory authorities, assessment of economic conditions and other appropriate data to identify the risks in the loan portfolio.
The first major element includes a detailed analysis of the loan portfolio in two phases. The first phase is conducted in accordance with SFAS No. 114, "Accounting by Creditors for the Impairment of a Loan." as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." Individual loans are reviewed to identify loans for impairment. A loan is impaired when principal and interest are not expected to be collected in accordance with the original contractual terms of the loan. Impairment is measured as either the expected future cash flows discounted at each loan's effective interest rate, the fair value of the loan's collateral
if the loan is collateral dependent, or an observable market price of the loan (if one exists). Upon measuring the impairment, the Bank will insure an appropriate level of allowance is present or established.
Central to the first phase and the Bank's credit risk management is its loan risk rating system. The originating credit officer assigns borrowers an initial risk rating, which is based primarily on a thorough analysis of each borrower's financial capacity in conjunction with industry and economic trends. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit administration personnel. Credits are monitored by line and credit administration personnel for deterioration in a borrower's financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary.
Based on the risk rating system, specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate 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 $68,264,000 and $61,336,000 (or 2.96% and 2.65% of gross outstanding loans) at March 31, 2009 and December 31, 2008, respectively. There was a $7,500,000 total provision for loan losses, primarily related to impaired loans, during the three-month period ended March 31, 2009, compared to a $10,790,000 total provision for loan losses, including $9,035,000 related to impaired loans for the same period of 2008. For the three months ended March 31, 2009 and 2008, the Company generated net loan charge-offs of $672,000 and $0. The Company had loan recoveries of $4,000 and $0 during the three months ended March 31, 2009 and 2008, 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 loans. 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 March 31, 2009, the Company had $18,145,000 in loans past due 90 or more days which were still accruing interest and $12,652,000 in other real estate owned. The Company's non-performing assets as of March 31, 2009, which consist of loans on non-accrual status, loans past due 90 days or more and still accruing interest, and other real estate owned, were as follows:
March 31, 2009 December 31, 2008
Number Number
of of
Asset Type Loans Amount Loans Amount
Loans On Non-Accrual Status:
Land Loans 19 $ 72,844,000 4 $ 22,506,000
Construction Loans 9 74,672,000 5 39,297,000
Commercial real estate loans 9 19,864,000 8 16,357,000
Apartment loans 4 10,844,000 - -
Residential loan - - 1 7,096,000
Unsecured Loans 6 31,817,000 5 7,261,000
Net Non-Accrual Loans 210,041,000 92,517,000
Other Real Estate Owned, Net:
Land 3 2,908,000 3 2,908,000
Apartment 1 3,444,000 1 3,444,000
Condominium conversion 1 6,300,000 1 3,259,000
Total Other Real Estate Owned, Net 12,652,000 9,611,000
90 or More Days Past Due:
Land loans - - 3 14,200,000
Apartment loan - - 1 4,340,000
Construction loans 2 17,945,000 - -
Unsecured loan 1 200,000 - -
Total Loans Past Due 90 days or more 18,145,000 18,540,000
Total Non-Performing Assets $ 240,838,000 $ 120,668,000
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Performing assets that are considered impaired due to concerns with the economic climate consist of the following:
March 31, 2009 December 31, 2008
Number Number
of of
Asset Type Loans Amount Loans Amount
Apartment loans 4 $ 18,118,000 10 $ 60,883,000
Land loan - - 1 4,831,000
Unsecured - - 1 24,221,000
Construction - - 1 14,198,000
Total Performing Assets
Considered Impaired $ 18,118,000 $ 104,133,000
Total Performing and
Non-Performing Loans Considered
Impaired $ 246,304,000 $ 215,190,000
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Thus, at March 31, 2009 and December 31, 2008, the Company has identified non-performing and performing loans totaling $246,304,000 and $215,190,000, which it concluded were impaired. These loans are principally secured by real estate or other guarantees. The Company's policy is generally to discontinue the accrual of interest income on non-performing impaired loans, and to recognize income on such loans only after the loan principal has been repaid in full. The Company has established a loss reserve for each of the performing and non-performing impaired loans, which at March 31, 2009 and December 31, 2008 totaled $43,434,000 and $32,264,000 for the loans as a group.
Other real estate owned includes properties acquired through foreclosure. During the first quarter of 2009, the Company acquired one (1) OREO property and sold one (1) OREO property, for a total of five (5) OREO properties at March 31, 2009. The Company also had five (5) OREO properties December 31, 2008.
At March 31, 2009, the Company has identified loans having an aggregate average balance of $230,747,000 which it concluded were impaired under SFAS No. 114. By comparison, at March 31, 2008, the Company had identified loans having an aggregate average balance of $16,131,000 which it concluded were impaired under SFAS No. 114.
OTHER OPERATING INCOME
Other operating income decreased to $2,101,000 in the first quarter of 2009 from $5,171,000 in the three months ended March 31, 2008. During the first quarter of 2008, the Company realized a gain of $2,758,000 on the redemption of restricted stock of Visa Inc., which results in the majority of the difference in other operating income over the first quarter of 2009. The Bank's Trust Administration Services division that provides administrative and custodial services to self-directed retirement plans, had revenue which decreased from $607,000 in first quarter of 2008 to $566,000 in the first quarter of 2009. 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 $561,000 in first quarter of 2009 and $599,000 in first quarter of 2008. 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 decreased to $373,000 for the three months ended March 31, 2009 in contrast with $397,000 in the corresponding period of 2008. During the first three months of both 2009 and 2008 no gains or losses on sales of premises and equipment were realized. No gains or losses on securities sales were realized in the first quarter of 2009. During the first quarter of 2008, the Company realized a gain of $2,758,000 on the redemption of restricted stock in VISA, Inc.
OTHER OPERATING EXPENSES
Overall, other operating expenses increased in the first quarter of 2009 compared to the same period of 2008. Other operating expenses increased to a total of $16,490,000 for the first quarter of 2009 from $12,542,000 for the three months ended March 31, 2008. Included in other operating expenses during the first quarter of 2008 is a reversal of a litigation accrual of $2,232,000 further described below.
Salary and related benefits decreased by $670,000, from a total of $9,486,000 for the first quarter of 2008 to $8,816,000 for the same period in 2009. The decrease in this expense category principally reflects employee incentive adjustments. The total of all other operating expenses increased in 2009 compared to the prior year, increasing from $3,056,000 for the first quarter of 2008 to $7,674,000 for the first three months of 2009. The FDIC assessment increased to $2,399,000 in the first quarter of 2009 compared to $485,000 in the first quarter of 2008. Included in all other operating expenses during the first quarter of 2008 is a reversal of a litigation accrual of $2,232,000 further described below.
During the fourth quarter of 2007, the Company recorded a charge of $2,232,000 for its share of contingent liabilities relating to settlement of lawsuits by Visa Inc. This charge was reversed in the first quarter of 2008 after the successful completion of the Visa Inc. IPO, where a portion of the proceeds from the IPO funded an escrow account expected to be used for litigation settlement/claims, reducing all other operating expenses.
The combined effects of the above-described factors resulted in a loss before taxes (benefit) of $5,937,000 for the three months ended March 31, 2009 compared to income before taxes of $8,235,000 for the first quarter of 2008. In the . . .
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