| FIRST REGIONAL BANCORP Item 1A Risk Factors Our financial and operating results, and an investment in First Regional Bancorp common stock, are subject to a number of factors, many of which are not within the Company’s control |
| These factors include the following: We are highly dependent on real estate and events that negatively impact the real estate market could hurt our business |
| A significant portion of our loan portfolio is dependent on real estate |
| At December 31, 2005, real estate served as the principal source of collateral with respect to approximately 90prca of our loan portfolio |
| Our financial condition may be adversely affected by a decline in the value of the real estate securing our loans and, while we presently own no real estate, a decline in the value of real estate that may be owned by us in the future could adversely impact our financial condition |
| In addition, acts of nature, including earthquakes, fires, landslides and floods, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact our financial condition |
| This is particularly significant in light of the fact that most of the real estate that makes up the collateral of our real estate secured loans is located in Southern California, where the risk of such acts of nature is high |
| Economic conditions in the Southern California area could adversely affect our operations |
| Our banking operations are concentrated primarily in Los Angeles, Orange and Ventura Counties |
| As a result of this geographic concentration, our results of operations depend largely upon economic conditions in these areas |
| Deterioration in economic conditions in our market area could have a material adverse impact on the quality of our loan portfolio and the demand for our commercial banking products and services, which in turn may have a material adverse effect on our results of operations |
| We are dependent on the continued services of key members of management |
| The Company’s continued success depends on the retention, recruitment and continued contributions of key members of management |
| Key member’s of the Company’s and the Bank’s management include Jack A Sweeney, our Chairman and Chief Executive Officer, H Anthony Gartshore, our President, Thomas E McCullough, our Corporate Secretary and Executive Vice President and Chief Operating Officer of the Bank, and other officers with key positions and/or who have relationships with customers of the Bank |
| The loss of such key personnel could have an adverse affect on the Company’s growth and profitability, and many of these persons would be difficult or impossible to replace |
| The competition for qualified personnel is intense |
| The loss of services of members of the Company’s key personnel could have a material adverse effect on the Company’s business, financial condition and results of operations |
| We face strong competition from financial service companies and other companies that offer banking services that could hurt our business |
| The banking business in California, generally, and in the Los Angeles, Orange and Ventura County areas where the Bank’s operations are centered, specifically, is highly competitive with respect to both loans and deposits and is dominated by major banks, both domestic and foreign, which have many offices operating over wide geographic areas |
| The Bank competes for deposits and loans principally with these major banks, but also with small independent banks located in its service areas |
| Among the advantages 22 ______________________________________________________________________ which the major banks have over the Bank are their ability to finance extensive advertising campaigns and to allocate their investment assets to regions of highest yield and demand |
| Many of the major commercial banks operating in the Bank’s service area offer certain services that are not offered directly by the Bank and, by virtue of their greater total capitalization, such banks have substantially higher lending limits than the Bank |
| In addition, the Bank faces direct competition from newly chartered banks which are formed from time to time in the Bank’s service area |
| Moreover, banks generally, and the Bank in particular, face increasing competition for loans and deposits from non-bank financial intermediaries such as savings and loan associations, thrift and loan associations, credit unions, mortgage companies, insurance companies, and other lending institutions |
| Money market funds offer rates competitive with, or higher than those of, banks, and an increasingly sophisticated financial services industry continually develops new products for businesses and consumers that compete with banks for investment dollars |
| In addition, other entities (both public and private) seeking to raise capital through the issuance and sale of debt or equity securities compete with banks in the acquisition of deposits |
| Increasing levels of competition in the banking and financial services businesses may reduce our market share or cause the prices we charge for our services to fall |
| Our results may differ in future periods depending upon the nature or level of competition |
| We may not or will not sustain recent performance or growth trends |
| The Company has grown substantially in recent years, including with respect to net income, assets, net loans, deposits and other benchmarks |
| For example, the Company’s net income for the year ended December 31, 2005, rose by 139prca from the year before |
| In addition, the Company’s assets, net loans and deposits as of December 31, 2005 rose by 39prca, 48prca and 42prca, respectively, from the prior year |
| It is unlikely that the Company will maintain such growth patterns |
| In particular, management believes that the Company will not sustain such growth on a percentage basis over the next several years |
| Changes in the rate of growth of these and other benchmarks could result in corresponding changes in the rate of growth of earnings per share |
| In addition, a substantial portion of our loan portfolio is paid off each year, in part because our loans are short to medium term loans which do not contain any prepayment penalties or other barriers to early payoff |
| Should the Bank be unable to originate and fund additional loans to replace loans which are paid off, the size of the Bank’s loan portfolio could decline over time |
| Also, whereas the Bank has enjoyed robust net interest margins, as competition for loans and deposits has increased and continues to increase, such competition may result in future compression of the Bank’s net interest margin |
| Each of these factors could adversely affect the Bank’s financial and operating results in the future |
| Our substantial growth presents certain risks, including a decline in credit quality or capital adequacy |
| The Company’s substantial asset growth of recent years may continue, even if not at the same percentage rate we have experienced in recent years |
| Such growth presents certain risks |
| While management believes that the Company has maintained good credit quality relative to its peers notwithstanding such growth, substantial growth has often been associated with a decline in credit quality at some institutions |
| Accordingly, continued substantial asset growth could lead to a decline in our credit quality in the future |
| In addition, continued substantial asset growth could cause a decline in the Company’s or the Bank’s capital adequacy for regulatory purposes, which, in turn, could require the Company to raise additional capital or take other measures in the future to regain “well capitalized” status |
| 23 ______________________________________________________________________ Failure to successfully execute our strategy could adversely affect our performance |
| Our financial performance and profitability depends on our ability to execute our corporate growth strategy |
| Continued growth may present operating and other problems that could adversely affect our business, financial condition and results of operations |
| Accordingly, there can be no assurance that we will be able to execute our growth strategy or maintain the level of profitability that we have recently experienced |
| In addition, while we have no formal acquisition plans, we remain open to such possibilities should competitive circumstances make them advisable or should significant opportunities present themselves |
| Even if we identify an acquisition candidate, there can be no assurance that we will be able to effect an acquisition at a reasonable price or upon favorable terms |
| Moreover, if we effect an acquisition, there can be no assurance that we will be able to successfully integrate the acquired company with our own, or that the acquisition will be otherwise successful or profitable |
| Our performance and growth are dependent on our maintaining a high quality of service for our customers, and will be impaired by a decline in our quality of service |
| Our continued performance and growth is dependent on our maintaining a high quality of service for our customers |
| As we continue to grow, it may become increasingly difficult to maintain high service quality for our customers |
| This could cause a decline in our performance and growth with respect to net income, deposits, assets and other benchmarks |
| Our size subjects us to lower lending limits than many of our competitors are subject to |
| The Bank is subject to lending limits, calculated as a function of the Bank’s capital |
| Because of the Bank’s size, the Bank is limited in the size of loans it is able to make, singly or in the aggregate, to existing or potential customers |
| As of December 31, 2005, our lending limit for secured loans was approximately dlra45 million and our lending limit for unsecured loans was approximately dlra27 million |
| In the event that a customer’s loan demands exceed the Bank’s lending limits, the Bank may attempt to arrange for such loans on a participation basis with its correspondent banks |
| Where this is not feasible, the Bank may be unable to make the loan |
| We are subject to other government regulation that could limit or restrict our activities, which in turn could adversely impact our operations |
| The financial services industry is regulated extensively |
| Federal and state regulation is designed primarily to protect consumers and the deposit insurance funds, rather than our shareholders |
| These regulations can sometimes impose significant limitations on our operations |
| In addition, these regulations are constantly evolving and may change significantly over time |
| New laws and regulations or changes in existing laws and regulations or repeal of existing laws and regulations may adversely impact our business |
| We have incurred substantial cost to interpret and ensure compliance with applicable laws and regulations, including the Sarbanes-Oxley Act of 2002 and its implementing regulations |
| The Company cannot be certain of the effect, if any, of the foregoing legislation on the business of the Company |
| Future changes in the laws, regulation, or policies that impact the Company cannot necessarily be predicted and may have a material effect on the business and earnings of the Company |
| Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects economic conditions for us |
| If a significant number of borrowers, guarantors and related parties fail to perform as required by the terms of their loans, we will sustain losses |
| A significant source of risk for us arises from the possibility that losses will be sustained if a significant number of our borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans and guaranties |
| This risk increases when the economy is weak |
| We have adopted underwriting 24 ______________________________________________________________________ and credit monitoring procedures and credit policies, including the establishment and review of the loan loss reserve, that management believes are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying our credit portfolio |
| These policies and procedures, however, may not prevent unexpected losses that could materially adversely affect our results of operations |
| Our business is subject to interest rate risk and changes in interest rates may adversely affect our performance and financial condition |
| Our earnings are impacted by changing interest rates, which are unpredictable and beyond our control |
| Changes in interest rates impact the demand for new loans, the credit profile of our borrowers, the rates received on loans and securities and rates paid on deposits and borrowings |
| The difference between the rates received on loans and securities and the rates paid on deposits and borrowings is known as interest rate spread |
| Given our current volume and mix of interest-bearing liabilities and interest-earning assets, we would expect our interest rate spread to increase if interest rates rise and, conversely, to decline if interest rates fall |
| Recent growth trends in interest rates may not continue |
| Also, competitive pressures on both the pricing of loans and on the cost of deposits can have the effect of compressing our net interest margin, making it difficult for us to sustain or enhance our net income in the future |
| Although we believe our current level of interest rate sensitivity is reasonable, significant fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations |
| We are exposed to risk of environmental and other liabilities with respect to properties to which we take title |
| In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental or other liabilities with respect to these properties |
| We may be held liable to a governmental entity or to third persons for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property |
| The costs associated with investigation or remediation activities could be substantial |
| In addition, in the event we become the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property |
| If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected |
| Our internal operations are subject to a number of risks |
| We are subject to certain operations risks, including, but not limited to, data processing system failures and errors, customer or employee fraud and catastrophic failures resulting from terrorist acts or natural disasters |
| We maintain a system of internal controls to mitigate against such occurrences and maintain insurance coverage for such risks that are insurable, but should such an event occur that is not prevented or detected by our internal controls and uninsured or in excess of applicable insurance limits, it could have a significant adverse impact on our business, financial condition or results of operations |
| There is a limited trading market for the Company common stock |
| The Company’s common stock is traded on the Nasdaq National Market under the symbol “FRGB” However, there is a limited trading market for the Company’s common stock, with an average trading volume of approximately 7cmam000 shares per trading day |
| There can be no assurance that a holder of the Company’s common stock will have the ability to dispose of shares of the Company’s common stock in a liquid market or that a more active trading market for the Company’s common stock will develop or will be sustained |
| 25 ______________________________________________________________________ The interests of our controlling shareholders may differ from yours |
| The Company’s directors, executive officers and their related interests have voting control or beneficial ownership of approximately 40prca of its outstanding shares (including shares issuable to them upon exercise of vested stock options) |
| In particular, Jack A Sweeney, the Company’s Chairman and Chief Executive Officer, has voting control or beneficial ownership of approximately 31prca of the Company’s outstanding common stock (including shares issuable to him upon exercise of vested stock options) |
| The interests of these controlling shareholders may differ from yours |
| Because of this beneficial ownership and voting power, our controlling shareholders may have the power to substantially control any matter presented to shareholders for a vote, including with respect to the election of directors or other material transactions, such as a future issuance of securities, a potential acquisition of, or take-over proposal made by, another company |
| As a result, these controlling shareholders may cause the defeat of a proposal you support, or cause the approval of a proposal you oppose |
| Provisions in the Company’s bylaws may delay or prevent an acquisition of the Company, which could decrease the value of its common stock, and therefore, the Shares |
| The Company has in place various types of protections which would make it difficult for a company or investor to buy the Company without the approval of the Company’s board of directors |
| These provisions include the elimination of cumulative voting and the classification of the Board of Directors into two or three classes, depending on the number of directors |