Small Cap Watch List (Track at Marketocracy) member First Regional Bancorp (FRGB) today reported strong net income for the second quarter ended June 30, 2007. Total assets, deposits and net loans all posted increases over the prior year, although net income for the first six months of 2007 was approximately 2.4% below last year’s record first half. Net income for the second quarter of 2007 was $8.6 million, equal to 66 cents per diluted share, compared with $9.6 million or 74 cents per diluted share in the corresponding quarter of 2006 and consensus estimates of $0.67.

Part of the shortfall in earnings was likely due to the company’s decision to take a higher loan loss reserve:

To keep pace with loan growth, First Regional added $300,000 to its loan loss reserve in the second quarter of 2007. This brought the balance of the reserve to $21.1 million at June 30, 2007, compared with nonperforming assets of just $13,000 as of the same date.

It may seem like a $21.1 million reserve against just $13,000 in nonperforming assets is overly conservative. But last year the company added $1.5 million to the reserve. If the company had simply taken the same amount as a reserve this year, net income would have been about 10% lower than reported. In terms of the total loan balance of $1.9 billion, the reserves are slightly more than 1%. We have seen from the Bear Stearns example how quickly loans can become worthless.

This is the second time I’ve noted that additions to the loan loss reserve were below the prior year levels.  It could be as simple an issue as higher actual losses last year and improved credit performance this year. However, given the overall lending environment I would expect the opposite. It is something I will continue to keep an eye on.

With the end of the first quarter approaching, it is time to adjust the names in my Watch Lists. I will price all the new lists as of the close on Friday, June 29.

Today I present my planned updates to the Small Cap Watch List. There was a fairly high level of turnover to the list. 12 of the 24 names from the previous run made it to the current list, which was also 24 names. Performance-wise, the list created in March has returned an unweighted average return of 2.6% through June 28, with 80% of the stocks in positive territory. All of the money-losers from the previous list fell out of consideration.
So without further ado, the names on the chopping block from the previous list are: PW Eagle (PWEI), Insteel Industries (IIIN), Allied Defense (ADG - Annual Report), Hartmarx (HMX), Parlux (PARL), Hansen Natural (HANS), FirstFed Financial (FED), Young Innovations (YDNT), ITT Educational (ESI), Rent-a-Center (RCII), Valassis (VCI), and Travelzoo (TZOO). The castaways include four of the five money losers from the previous portfolio (HMX, PARL, YDNT and TZOO) as well as the biggest gainer (ESI).
The new list is:

I will continue to track both lists on StockPickr.

I am proud to host this edition of the Festival of Stocks. Since you are here for some stock picks, let’s get to them!

Rock Your Stock rang in first with Callaway (ELY) is Hot. He says the stock is on a tear and has the fundamentals to back it up.

Rick Casterline at Once More Unto the Breach figures he can sleep when he dies. No way is he going to do it during day 3 of the Berkshire Hathaway Annual Meeting.

Average Joe at Investment Jungle weighs in with a review of Small Cap Watch List (Track at Marketocracy) member First Regional Bancorp (FRGB). Joe and I have frequently been on the same investment page.

Project Stocks submitted Beat the Market With Only 15 Minutes of Work Each Year. The idea is to buy each year’s top performing fund and hold it for a year. Seems simplistic, but it actually has some support from recent academic research.

Neural Market Trends wonders about the effect of financial asteroids on market trends.

Fiscal Times tells us the stocks Business Week ranks as most innovative tend to perform better.

Big Cajun Man has found a real lu-lu.

TJP at Investor Trip explains what he missed when he first got Sirius (SIRI).

Trader’s Narrative is calling a bubble… in China.

Self Investors outlines a successful day trade in Force Protection (FRPT).

Silicon Valley Blogger offers 5 tips for evaluating your portfolio.

George at Fat Pitch Financials presents his five favorite ways to hack into the web’s resources for investors. I downloaded the Excel add-in and am looking forward to trying it out.

Sox First outlines what went wrong with the planned private equity takeover of Qantas.

And what the heck? I’ll toot my own horn by presenting my take on United Industrial Corp. (UIC).

Our Watch Lists continue to fare well, although a certain regional bank weighed heavily on the Small Cap Watch List (Track at Marketocracy) this week. As a result, that watch list lost 38 basis points while the Russell 2000 and S&P Small Cap averaged 1.23% gains. Still, the Small Cap Watch List (Track at Marketocracy) maintains its overall lead since inception on January 31.

The Mid Cap Watch List (Track at Marketocracy) gained 2.78%, compared with 1.39% for the S&P Midcap.

The Large Cap Watch List (Track at Marketocracy), at 2.11%, was just a hair behind the S&P 500’s performance for the week.

Finally, our legacy watch list (unchanged other than corporate actions) from June 2006 gained 1.67% and our heavily hedged personal portfolio eked out a 33 basis point gain.

Overall, quite satisfying.

Small Cap Watch List (Track at Marketocracy) member First Regional Bank reported earnings, saying:

First Regional Bancorp today reported record first quarter financial results for the three months ended March 31, 2007. Continuing to generate positive results, the company posted increases in net income, as well as total assets, total deposits, net loans and total capital.Net income for the first three months of 2007 was $8,991,000, equal to 69 cents per diluted share, an increase of 6% from $8,484,000, or 65 cents per diluted share in the corresponding quarter of 2006. Results have been adjusted to reflect the 3-for-1 stock split effected in August, 2006.

The lone analyst estimate called for $0.72 in earnings per share, but the stock actually regained some its losses for the day in after-hours trading.  Concerns over bad debt appeared to have been alleviated, as the company said:

Reflecting the quality of the loan portfolio, no increases in reserves for loan losses were required during the quarter. The reserve for loan losses totaled $20.7 million at March 31, 2007, and nonperforming loans amounted to just $63,000 on that date.

The lack of a loan loss provision is a mixed bag, however. On the one hand it indicates lower earnings quality since last year’s earnings were impacted by a $2.3 million reserve. In fact, earnings were down on a cash basis compared to the same quarter last year. On the other hand, though, the existing provision was higher as a percentage of gross loans and was many multiples of the current underperforming loan portfolio. These measures suggest that it was at least somewhat appropriate to maintain the reserve as is rather than adding to it.

Investors should continue to monitor the reserves as well as the actual bad debt expenses to be certain which side of the story will ultimately prevail.

We asked, but no one answered. So we are taking our own counsel and breaking our Watch List into three portfolios: Small Cap, Mid Cap and Large Cap. Each will be tracked against the relevant S&P index going forward from their collective inception date of January 31 (priced at the close of market trading that day.)

For your viewing pleasure, the Small Cap Watch List (Track at Marketocracy) (to be measured against the S&P 600) follows.

In addition, we will provide a “quick and dirty” analysis of each name, with a goal of one such analysis per day. As the name implies, the quick and dirty analysis will be incomplete. We are hoping you will join in the debate and fill the gaps in our analysis.

Summary:

The spread between corporate and treasury bonds has been holding steady near its long term (since 1962) average but toward the low end of the more recent history. The low spreads should be positive for the stock market and capital spending, as it reduces the cost companies pay for capital. We’d hate to see what the market and capital spending would look like if the spread widened.

Watch List news:

Summary: Inflation continues to be a worry, with the PPI data fairly strong and seemingly on the rise. That means lenders are getting paid back with cheaper currency. Earnings are coming in strong, however - particularly for the brokers and asset managers.

Watch List news:
Bancolombia SA (CIB) agreed to sell its majority stake in Almacenar S.A. for 29 billion pesos. Translating to approximately $11 million, the transaction is fairly small for a company with $4.14 billion in market capitalization.

SEI Investments Co. (SIEC - Annual Report), which provides investment services to financial institutions, said second-quarter profit rose 31 percent on higher revenue, a lower tax rate, and lower expenses to account for the value of employee stock options. The company posted net income for the second quarter ended June 30 of $57.9 million, or 57 cents per share, versus profit of $44.2 million, or 43 cents per share, in the year-ago quarter. Revenue rose 50 percent to $285 million from $190.1 million. Analysts polled by Thomson Financial forecast earnings of 55 cents per share on $284.1 million revenue.

First Regional sets 3-for-1 stock split

Other news:
Merrill Lynch (MER) said second-quarter earnings were $1.6 billion, or $1.63 a share, compared with $1.14 billion, or $1.14 a share, in the same quarter last year. Analysts polled by Reuters Estimates on average expected earnings of $1.53 before exceptional items.

Citigroup (C - Annual Report) earned $5.27 billion, or $1.05 a share, compared to $5.07 billion, or 97 cents a share, a year ago. Analysts had expected the company to earn $1.06. “Lower bankruptcy filings and a continued favorable credit environment led to a $193 million decline in net credit losses and a $160 million pre-tax loan loss reserve release,” the bank said. Comment: Releasing reserves is sometimes considered aggressive accounting. Regardless of how it is considered, approximately $0.01 of the current quarter EPS was the result of this accounting adjustment.

Wells Fargo profit up 9 percent - which was below expectations.

MGIC Investment Corp. reported that second-quarter net income fell 14% as the mortgage-insurance specialist’s net premiums declined in the face of a real estate slowdown.

AmSouth Bancorp said second-quarter net income rose slightly from the year-ago period and indicated it is making “good progress” in closing its merger with Regions Financial Corp. in the fourth quarter.

State Street said its net earnings rose 3% in the second quarter, topping analysts estimates, and said it expects full-year earnings to come in at the high-end of forecasts.

Discount stockbroker Charles Schwab Corp. said quarterly earnings rose 35 percent as net new assets nearly doubled from a year earlier.

Online brokerage TD Ameritrade said its third-quarter profit soared 67 percent on higher fee-based revenue and its acquisition of TD Waterhouse.

National City Corp., a large Midwest U.S. bank, said second-quarter profit fell 24 percent because of hedging losses from mortgages. Still, this was better than expectations.

KeyCorp, a large U.S. Midwest bank, said second-quarter profit rose 6 percent, topping analyst forecasts, helped by growth in fee income and commercial lending.