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| FRGB > SEC Filings for FRGB > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
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, 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 judgment and assumptions by management include the provision for income taxes, evaluation of investments for other than temporary impairment and stock-based compensation.
As of June 30, 2009 total assets were $2,379,993,000 compared to $2,465,141,000 at December 31, 2008, a decrease of $85,148,000 or 3.5% and the June 30, 2009 asset level represents a $92,395,000 (3.7%) decrease over the $2,472,388,000 that existed on the same date in 2008. The Company has made a deliberate effort to reduce total assets and net loans in concert with our ongoing program of shrinking the asset base, thereby further strengthening our capital position. Total deposits decreased by $119,373,000 or 5.6%, from $2,129,972,000 at the end of 2008 to $2,010,599,000 at June 30, 2009. While overall deposits decreased, the deposit decline was centered in time deposits, a $57,141,000 (5.2%) decrease and money market deposits, a $96,097,000 (15.8%) decrease, while non-interest bearing deposits and other deposits experienced an increase. There were several changes in the composition of the Bank's assets during the first six months of 2009. The Bank's loan portfolio decreased significantly by $100,904,000 during the six-month period, bringing the Bank's total loans, net of allowance for losses and deferred loan fees, to $2,156,575,000 at June 30, 2009 from the December 31, 2008 total of $2,257,479,000. The combined effect of the decrease in loans and the decrease in deposits was a slight 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 increased by $14,273,000, while cash and cash equivalents (cash and due from banks and Federal funds sold), decreased by $18,757,000 in order to accommodate the changes that took place in the rest of the balance sheet.
The Company had a net loss of $17,783,000 in the three months ended June 30, 2009, compared to a net loss of $18,513,000 in the second quarter of 2008. The results for the six months ended June 30, 2009 was a net loss of $21,020,000 compared to a net loss of $13,778,000 for the corresponding period of 2008, a decrease of 53%.
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. In contrast to the first six months of 2008, in the first six months of 2009 there was a decrease in interest earning assets, including loans. The Bank's core loan portfolio decreased during the first six months of 2009.
Total interest income decreased by $10,341,000 (28%) for the second quarter of 2009 compared to the same period in 2008, and decreased by $22,923,000 (30%) for the six-month
period ended June 30, 2009 compared to the same period in 2008 although total average earning assets were higher (6%) in 2009 than in 2008. The majority of the decrease in interest income arises from a substantial decrease of $10,229,000 (28%) in interest on loans from $25,728,000 for the three months ended June 30, 2009 compared to $35,957,000 for the same period in 2008. Although interest income decreased primarily due to the Federal Reserve's series of interest rate decreases, it also decreased due to a decrease in the loan portfolio of $125,029,000 (5%) and the increase in non-performing assets from $32,861,000 to $283,430,000 from June 30, 2008 to June 30, 2009. For the three months ended June 30, 2009 interest expense on deposits increased by $101,000 (1%) to $9,538,000 from the 2008 level of $9,437,000 and for the six months ended June 30, 2009 interest expense on deposits increased by $309,000 (2%) to $20,813,000 from the 2008 level of $20,504,000 primarily due an increase in total deposits of $28,847,000 (1%) from June 30, 2008 to June 30, 2009, but partially offset by the Federal Reserve's series of interest rate decreases. The increases in deposits were primarily in time deposits, while demand deposits also showed increases and other deposits and money market accounts decreased. For the three months ended June 30, 2009 interest expense on subordinated debentures decreased by $411,000 (34%), to $813,000 from the 2008 level of $1,224,000 due to a decrease in interest rates during the period. For the six months ended June 30, 2009 interest expense on subordinated debentures decreased by $1,063,000 (37%), to $1,777,000 from the 2008 level of $2,840,000 due to a decrease in interest rates during the period. For the three months ended June 30, 2009 interest expense on FHLB advances decreased by $1,568,000 (96%), to $60,000 from the 2008 level of $1,628,000 due to a combination of a decrease of $100,000,000 in FHLB advances at June 30, 2009 compared to June 30, 2008 and a decrease in interest rates during the period. For the six months ended June 30, 2009 interest expense on FHLB advances decreased by $3,254,000 (98%), to $82,000 from the 2008 level of $3,336,000 due to 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 $8,439,000 (35%), from $24,117,000 in the second quarter of 2008 to $15,678,000 for the second quarter of 2009 and a decrease in net interest income of $18,883,000 (37%), from $50,513,000 for the six months ended June 30, 2008 to $31,630,000 for the first six months of 2009.
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 June 30,
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) $ 2,277,383 $ 25,728 4.5 % $ 2,293,118 $ 35,957 6.3 %
Interest bearing deposits
in financial institutions 10,312 14 0.5 % 5,203 51 3.9 %
Investment securities 26,036 330 5.1 % 24,699 317 5.2 %
Federal funds sold 34,413 17 0.2 % 21,240 105 2.0 %
Total Interest Earning
Assets $ 2,348,144 $ 26,089 4.5 % $ 2,344,260 $ 36,430 6.3 %
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For the Three Month Period Ended June 30,
2009 2008
Average Average
Average Interest Yield/ Average Interest Yield/
Balance Expense Rate % Balance Expense Rate %
(Dollars in Thousands)
Interest Bearing
Liabilities:
Other deposits $ 50,483 $ 55 0.4 % $ 72,865 $ 287 1.6 %
Money market accounts 517,453 1,449 1.1 % 888,391 4,684 2.1 %
Time Deposits 1,091,262 8,034 3.0 % 469,121 4,466 3.8 %
Subordinated
debentures 100,517 813 3.2 % 100,517 1,224 4.9 %
FHLB advances 71,420 60 0.3 % 289,385 1,628 2.3 %
Other borrowings - - 0.0 % 3,520 24 2.7 %
Total Interest
Bearing Liabilities $ 1,831,135 $ 10,411 2.3 % $ 1,823,799 $ 12,313 2.7 %
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(2) Includes loan fees in the second quarter of $1,044,000 in 2009 and $2,245,000 in 2008.
For the Six Month Period Ended June 30,
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) $ 2,302,286 $ 53,575 4.7 % $ 2,211,408 $ 76,253 6.9 %
Interest bearing
deposits in financial
institutions 6,180 26 0.9 % 6,120 123 4.0 %
Investment securities 25,324 641 5.1 % 24,756 676 5.5 %
Federal funds sold 53,084 60 0.2 % 15,033 173 2.3 %
Total Interest
Earning Assets $ 2,386,874 $ 54,302 4.6 % $ 2,257,317 $ 77,225 6.9 %
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For the Six Month Period Ended June 30,
2009 2008
Average Average
Average Interest Yield/ Average Interest Yield/
Balance Expense Rate % Balance Expense Rate %
(Dollars in Thousands)
Interest Bearing
Liabilities:
Other deposits $ 51,034 $ 127 0.5 % $ 66,694 $ 553 1.7 %
Money market accounts 545,476 3,248 1.2 % 925,032 11,967 2.6 %
Time Deposits 1,140,506 17,438 3.1 % 385,592 7,984 4.2 %
Subordinated
debentures 100,517 1,777 3.6 % 100,517 2,840 5.7 %
FHLB advances 47,943 82 0.3 % 255,582 3,336 2.6 %
Other borrowings - - 0.0 % 2,126 32 3.0 %
Total Interest
Bearing Liabilities $ 1,885,476 $ 22,672 2.4 % $ 1,735,543 $ 26,712 3.1 %
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(2) Includes loan fees in the first six months of $2,328,000 in 2009 and $4,518,000 in 2008. The following table shows the net interest earnings and the net yield on average interest earning assets:
For the Three Month For the Six Month
Period Ended Period Ended
June 30, June 30,
2009 2008 2009 2008
(Dollars in Thousands)
Total interest income (l) $ 26,089 $ 36,430 $ 54,302 $ 77,225
Total interest expense 10,411 12,313 22,672 26,712
Net interest earnings $ 15,678 $ 24,117 $ 31,630 $ 50,513
Average interest earnings assets $ 2,348,144 $ 2,344,260 $ 2,386,874 $ 2,257,317
Average interest bearing
liabilities $ 1,831,135 $ 1,823,799 $ 1,885,476 $ 1,735,543
Net yield on average interest
earning assets 2.7 % 4.1 % 2.7 % 4.5 %
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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 Six Month
Period Ended June 30, Period Ended June 30,
2009 over 2008 2009 over 2008
Volume Rate Net Volume Rate Net
(Dollars in Thousands)
Interest income (1)
Loans (2) $ (243 ) $ (9,986 ) $ (10,229 ) $ 3,303 $ (25,981 ) $ (22,678 )
Interest bearing
deposits in financial
institutions 31 (68 ) (37 ) 1 (98 ) (97 )
Federal funds sold 195 (283 ) (88 ) (176 ) 63 (113 )
Investment securities 18 (5 ) 13 17 (52 ) (35 )
Total interest
earning assets $ 1 $ (10,342 ) $ (10,341 ) $ 3,145 $ (26,068 ) $ (22,923 )
Net Increase (Decrease) Net Increase (Decrease)
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
2009 over 2008 2009 over 2008
Volume Rate Net Volume Rate Net
(Dollars in Thousands)
Interest Expense (1)
Other deposits $ (69 ) $ (163 ) $ (232 ) $ (107 ) $ (319 ) $ (426 )
Money Market (1,521 ) (1,714 ) (3,235 ) (3,771 ) (4,948 ) (8,719 )
Subordinated
Debentures - (411 ) (411 ) - (1,063 ) (1,063 )
Time Deposits 4,312 (744 ) 3,568 10,899 (1,445 ) 9,454
FHLB Advances (736 ) (832 ) (1,568 ) (1,573 ) (1,681 ) (3,254 )
Other Borrowings (12 ) (12 ) (24 ) (16 ) (16 ) (32 )
Total interest
bearing liabilities $ 1,974 $ (3,876 ) $ (1,902 ) $ 5,432 $ (9,472 ) $ (4,040 )
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(2) Includes loan fees in the second quarter of $1,044,000 in 2009 and $2,245,000 in 2008 and first six months of $2,328,000 in 2009 and $4,518,000 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 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 $42,101,000 and $61,336,000 (or 1.91% and 2.64% of gross outstanding loans) at June 30, 2009 and December 31, 2008, respectively. There was a $31,116,000 total provision for loan losses primarily related to impaired loans, during the three month period ended June 30, 2009, compared to $44,743,000 including $43,468,000 related to impaired loans for the same period of 2008. There was a $38,616,000 total provision for loan losses primarily related to impaired loans, during the six-month period ended June 30, 2009, compared to $55,533,000 including $52,503,000 related to impaired loans for the same period of 2008. For the three and six months ended June 30, 2009, the Company generated net loan charge-offs of $57,480,000 and $58,152,000, respectively, compared to net loan charge-offs of $34,244,000 for both the three and six months ended June 30, 2008. The Company had loan recoveries of $80,000 and $18,000 during the six months ended June 30, 2009 and 2008, respectively.
The allowance for loan losses has been allocated to the major categories of loans as set forth in the following table. The allocations are estimates based upon historical loss
experience and management judgment. The allowance for loan losses should not be interpreted as an indication that charge-offs will occur in these amounts or proportions, or that the allocation indicates future charge-off trends. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories, since even in this allocation is an unallocated portion, and, as previously stated, the total allowance is applicable to the entire portfolio (dollar amounts in the following table are in thousands).
June 30, 2009 December 31, 2008
Allowance Ratio of Allowance Ratio of
for Loan Loans to for Loan Loans to
Losses Total Loans Losses Total Loans
Commercial $ 3,253 11 % $ 15,121 12 %
Real Estate 21,505 65 % 22,737 62 %
Real Estate Construction 17,343 24 % 23,478 26 %
Government Guaranteed - - - -
Other - - - -
Unallocated - - - -
Total $ 42,101 100 % $ 61,336 100 %
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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 . . .
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