<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997.
--------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
--------------- ------------
COMMISSION FILE NUMBER 33-82150
-----------
REGENCY BANCORP
---------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0378956
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organizations) Identification No.)
7060 N. FRESNO STREET, FRESNO, CALIFORNIA 93720
----------------------------------------- -----
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (209) 438-2600.
---------------
NONE
----
(Former name, former address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for the shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
--- ---
As of August 8, 1997, the registrant had 1,871,125 shares of Common
Stock outstanding.
The Exhibit Index is located on page 33.
This report contains a total of 34 pages of which this is page one.
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
PART I ITEM 1. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA) JUNE 30, 1997 DECEMBER 31, 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 12,070 $ 14,833
Federal funds sold 6,400 5,000
- ----------------------------------------------------------------------------------------------------
Total Cash and Equivalents 18,470 19,833
- ----------------------------------------------------------------------------------------------------
Interest bearing deposits in other banks - 98
Securities available-for-sale 37,199 33,270
- ----------------------------------------------------------------------------------------------------
Loans 112,434 102,458
Allowance for credit losses (1,891) (1,615)
Deferred loan fees & discounts (1,158) (1,073)
- ----------------------------------------------------------------------------------------------------
Net Loans 109,385 99,770
- ----------------------------------------------------------------------------------------------------
Investments in real estate 11,260 16,489
Other real estate owned 444 437
Cash surrendered value of life insurance 2,968 2,903
Premises and equipment, net 2,011 2,262
Accrued interest receivable and other assets 5,133 5,996
- ----------------------------------------------------------------------------------------------------
Total Assets $ 186,870 $ 181,058
- ----------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing transaction accounts $ 39,161 $ 36,613
Interest bearing transaction accounts 49,591 47,850
Savings accounts 35,126 25,540
Time Deposits $100,000 or over 28,584 30,766
Other time deposits 18,400 19,033
- ----------------------------------------------------------------------------------------------------
Total Deposits 170,862 159,802
Short term borrowings - -
Notes Payable 2,545 4,976
Other Liabilities 1,418 2,810
- ----------------------------------------------------------------------------------------------------
Total Liabilities 174,825 167,588
- ----------------------------------------------------------------------------------------------------
Shareholders' Equity:
Preferred stock, no par value;
1,000,000 shares authorized
no shares issued or outstanding
Common stock, no par value; 5,000,000
shares authorized, 1,871,125 and 1,818,160 shares
issued and outstanding in 1997 and 1996, respectively 9,276 8,868
Retained earnings 2,694 4,601
Net unrealized gain (loss) on available-for-sale securities,
net of taxes of $54,000 in 1997 and $1,000 in 1996 75 1
- ----------------------------------------------------------------------------------------------------
Total Shareholders' Equity 12,045 13,470
- ----------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 186,870 $ 181,058
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to consolidated financial statements
2
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
- --------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans (including fees) $2,904 $2,627 $5,704 $5,496
Investment securities:
Taxable 580 399 1,094 842
Tax exempt 34 22 54 45
- --------------------------------------------------------------------------------------------------------------
Total Investment Interest Income 614 421 1,148 887
Other 141 24 255 43
- --------------------------------------------------------------------------------------------------------------
Total Interest Income 3,659 3,072 7,107 6,426
- --------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 1,310 1,038 2,569 2,166
Other 20 62 40 100
- --------------------------------------------------------------------------------------------------------------
Total Interest Expense 1,330 1,100 2,609 2,266
- --------------------------------------------------------------------------------------------------------------
Net interest income 2,329 1,972 4,498 4,160
Provision for credit losses 835 - 835 -
- --------------------------------------------------------------------------------------------------------------
Net interest income after
provision for credit losses 1,494 1,972 3,663 4,160
- --------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Income from investments in real estate partnerships - - - -
Gain/(loss) on sale of loans 216 573 486 888
Depositor service charges 96 85 194 161
Income from investment management services 188 162 402 326
Gain/(loss) on sale of securities (36) - (34) -
Gain on sale of assets 0 4 4 9
Servicing fees on loans sold 81 81 167 139
Other 74 157 181 252
- --------------------------------------------------------------------------------------------------------------
Total Noninterest Income 619 1,062 1,400 1,775
- --------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Loss from investments in real estate partnerships 3,350 85 3,590 182
Salaries and related benefits 1,233 1,075 2,397 2,186
Occupancy 411 401 814 793
FDIC insurance and regulatory assessments 22 16 44 32
Marketing 142 121 232 211
Professional Services 157 269 278 423
Director's fees and expenses 80 92 176 168
Management fees for real estate projects 4 154 112 233
Supplies, Telephone & Postage 84 93 163 178
Other 323 317 545 559
- --------------------------------------------------------------------------------------------------------------
Total Noninterest Expense 5,806 2,623 8,351 4,965
- --------------------------------------------------------------------------------------------------------------
Income before income taxes (benefit) (3,693) 411 (3,288) 970
Provision (benefit) for income taxes (1,551) 173 (1,381) 410
- --------------------------------------------------------------------------------------------------------------
Net Income/(loss) $(2,142) $238 $(1,907) $560
- --------------------------------------------------------------------------------------------------------------
Net income/(loss) per common and common equivalent share (1.15) .13 (1.03) .30
Weighted average common shares outstanding (in thousands) 1,859 1,874 1,845 1,872
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------------------------------------
Common Common Net
Stock Stock Retained Unrealized
(In thousands) Number of Shares Amount Earnings Gain (Loss) Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,818 $ 8,868 $4,029 $45 $ 12,942
- --------------------------------------------------------------------------------------------------------------
Issuance of common stock
under stock option plan - - - - -
Cash dividends - - (218) - (218)
Net change in unrealized gain (loss) on
available-for-sale securities (net of
taxes of $183,000) - - - (253) (253)
Net Income - - 560 - 560
- --------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 1,818 $ 8,868 $4,371 $(208) $ 13,031
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Common Common Net
Stock Stock Retained Unrealized
(In thousands) Number of Shares Amount Earnings Gain (Loss) Total
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,818 $ 8,868 $ 4,601 $ 1 $ 13,470
- --------------------------------------------------------------------------------------------------------------
Issuance of common stock to employee
stock ownership plan 36 333 - - 333
Issuance of common stock under stock
option plan 17 75 - - 75
Cash dividends - - - - -
Net change in unrealized gain (loss)
on available-for-sale securities (net
of taxes of $53,000) - - - 74 74
Net Loss - - (1,907) - (1,907)
- ---------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 1,871 $9,276 $2,694 $75 $12,045
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------------------------------------------
(IN THOUSANDS) FOR THE SIX MONTHS ENDED JUNE 30, 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Increase (decrease) in cash equivalents:
Net income/(loss) $ (1,907) $ 560
Adjustments:
Provision for credit losses 835 -
Provision for losses on real estate 635 -
Provision for OREO losses 29 -
Depreciation and amortization 315 325
Deferred income taxes (286) 490
(Increase) decrease in interest receivable and other assets 1,096 (67)
Increase in surrender value of life insurance (65) (70)
Distributions of income from real estate partnerships 7 103
Equity in (income) loss of real estate partnerships 218 5
(Increase) decrease in real estate held for sale 4,169 3,987
(Gain)/loss on acquisition of partnerships - (63)
Increase (decrease) in other liabilities (1,392) (811)
Gain on sale of loans held-for-sale (227) (888)
Proceeds from sale of loans held-for-sale 5,587 8,742
Additions to loans held-for-sale (3,884) (5,901)
Loss (gain) on sale of premises and equipment and OREO (6) (1)
Loss (gain) on sale of furniture and equipment 16 -
(Gain)/loss on sale of investment securities 36 -
- --------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 5,176 6,411
- --------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of available-for-sale securities (12,820) (11,223)
Proceeds from sales of available-for-sale securities 2,102 -
Proceeds from maturities of available-for-sale securities 6,848 14,778
Loan participations purchased - -
Loan participations sold - -
Net (increase) decrease in loans (12,159) (3,079)
Net decrease (increase) in other short-term investments 98 -
Cash received through acquisition of partnerships - 441
Proceeds from sale of OREO 203 123
Capital contributions to real estate partnerships - (397)
Capital distributions from real estate partnerships 200 1,012
Purchases of premises and equipment (82) (199)
Proceeds from sale of premises and equipment 34 -
- --------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (15,576) 1,456
- --------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in time deposits accounts 13,875 6,418
Net increase (decrease) in other deposits (2,815) (9,441)
Net increase (decrease) on short term borrowings - -
Cash dividends paid - (218)
Payments for fractional shares related to
stock dividends - -
Payments on notes payable (4,610) (3,773)
Proceeds from notes payable 2,179 380
Proceeds from the issuance of common stock
under employee stock option plan 75 -
Proceeds from the issuance of common stock
to employee stock ownership plan 333 -
- --------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 9,037 (6,634)
- --------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,363) 1,233
- --------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,833 8,925
- --------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 18,470 $10,158
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Regency Bancorp and its wholly-owned subsidiaries (the "Company").
Regency Bancorp is a California corporation organized to act as the holding
company for Regency Bank (the "Bank") and Regency Investment Advisors, Inc.,
("RIA"). RIA provides investment management and consulting services. The
Bank has one wholly-owned subsidiary, Regency Service Corporation, a
California corporation ("RSC"), that engages in the business of real estate
development primarily in the Fresno/Clovis area. All significant intercompany
balances and transactions have been eliminated in consolidation.
These unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles on a basis
consistent with the accounting policies reflected in the audited consolidated
financial statements of the Company included in the Annual Report on Form
10-K for the year ended December 31, 1996. They do not, however, include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
the unaudited interim consolidated financial statements reflect all
adjustments (all of which are of a normal, recurring nature) necessary for a
fair presentation of the results for the interim periods presented.
Operating results for the interim periods presented are not necessarily
indicative of the results that may be expected for any other interim period
or for the year as a whole.
NOTE 2. - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". This Statement establishes standards for when transfers of
financial assets, including those with continuing involvement by the
transferor, should be considered a sale. SFAS No. 125 also establishes
standards for when a liability should be considered extinguished. This
statement is effective for transfers of assets and extinguishments of
liabilities after December 31, 1996, applied prospectively. In December
1996, the FASB reconsidered certain provisions of SFAS No. 125 and issued
SFAS No. 127 "Deferral of the Effective Date of Certain Provisions of SFAS
No. 125" to defer for one year the effective date of implementation for
transactions related to repurchase agreements, dollar-roll repurchase
agreements, securities lending and similar transactions. Management
determined that the effect of adoption of SFAS No. 125 on the Company's
financial statements was not material and believes that the effect of
adoption of SFAS No. 127 will also not be material.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share".
This Statement simplifies the standards for computing earnings per share
("EPS") and makes them comparable to international EPS standards. SFAS No.
128 replaces the presentation of primary EPS with a presentation of basic
EPS. In addition, all entities with complex capital structures are
6
<PAGE>
required to provide a dual disclosure of basic and diluted EPS on the face of
the income statement and a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted EPS
computation. This Statement applies to entities with publicly held common
stock or potential common stock and is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods,
and requires restatement of all prior period EPS data presented. Management
believes the adoption of this Standard will not materially affect its
earnings per share.
The following table provides pro forma disclosure of basic and diluted EPS
in accordance with SFAS No. 128:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Proforma basic EPS (1.15) .13 (1.03) .31
Proforma diluted EPS (1.12) .13 (1.00) .30
</TABLE>
In June 1997, the Financial Accounting Standards Board adopted Statements of
Financial Accounting Standards No. 130 ("Reporting of Comprehensive Income"),
which requires that an enterprise report, by major components and as a single
total, the change in its net assets during the period from nonowner sources;
and No. 131, ("Disclosures about Segments of an Enterprise and Related
Information") which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas, and major customers. Adoption of these
statements will not impact the Company's consolidated financial position,
results of operations or cash flows. Both statements are effective for
fiscal years beginning after December 15, 1997, with earlier application
permitted.
NOTE 3. - INVESTMENT SECURITIES
During the period between December 31, 1996, and June 30, 1997, the
Company recorded a net increase in the value of its available-for-sale
portfolio of $74,000 net of applicable taxes. This change is reflected as a
change in shareholders' equity in the Consolidated Statement of Shareholders'
Equity. This change in value is primarily the result of slightly lower
interest rates in the bond market at June 30, 1997 as compared to rates at
December 31, 1996 and higher yielding investments in the Company's investment
securities portfolio.
Following is a comparison of the amortized cost and approximate fair value of
securities available-for-sale:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES JUNE 30, 1997 DECEMBER 31, 1996
- -------------------------------------------------------------------------------
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasuries $ 2,013 $ 2,019 $ 2,020 $ 2,029
U.S. Government Agencies 22,456 22,456 21,408 21,384
Mortgage-backed securities 2,550 2,650 7,972 7,948
State and Political Subdivisions 9,836 9,860 1,518 1,559
Equity Securities 214 214 350 350
- -------------------------------------------------------------------------------
Total $37,069 $37,199 $33,268 $33,270
- -------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
NOTE 4. - LOANS
The following table presents a breakdown of the Company's loan portfolio in
both dollars outstanding as well as a percentage of total loans. Further
discussion of the Company's loan portfolio can be found in Item 2 -
Management's Discussion and Analysis, Balance Sheet Analysis.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) JUNE 30, 1997 DECEMBER 31, 1996
- -------------------------------------------------------------------------------
Percent of Percent of
Amount Total Loans Amount Total Loans
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 65,397 58.3% $ 56,624 55.3%
Real estate mortgage 13,917 12.3% 13,260 12.9%
Real estate construction 24,093 21.4% 23,796 23.2%
Consumer and other 9,027 8.0% 8,778 8.6%
- -------------------------------------------------------------------------------
Subtotal $112,434 100.0% $102,458 100.0%
- -------------------------------------------------------------------------------
Less:
Unearned discount 706 681
Deferred loan fees 452 392
Allowances for credit losses 1,891 1,615
- -------------------------------------------------------------------------------
Total loans, net $109,385 $99,770
- -------------------------------------------------------------------------------
</TABLE>
NOTE 5. - SUPPLEMENTAL CASH FLOW INFORMATION
Following is a summary of amounts paid for interest and taxes and of non-cash
transactions for the six months ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Cash paid during the period for:
Interest on deposits and other borrowings $1,762 $2,266
Income taxes - 316
- -------------------------------------------------------------------------------
Non cash transactions:
Transfer of loans to other real estate owned 233 162
- -------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed in this Report on Form 10-Q are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. Such
risks and uncertainties include, but are not limited to, those described in
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Therefore, the information set forth therein should be carefully
considered when evaluating the business prospects of the Company and the Bank.
FINANCIAL SUMMARY
The Company's consolidated net loss for the six months ended June 30,
1997, was $1,907,000, compared to net income of $560,000 for the period ended
June 30, 1996. The net loss for the second quarter of 1997 was $2,142,000 as
compared to income of $238,000 in the second quarter of 1996. The net loss
for the second quarter and the first six months of 1997 was the direct result
of the Company's decision to further accelerate the disposition of RSC's
real estate holdings. Based upon the Company's new direction to pursue the
bulk sale of several projects, as well as discounting other holdings to
reflect RSC's currently anticipated sales proceeds, several properties were
written down in value and additional reserves were added to allow for
potential future losses on the sale of real estate. Additionally reserves
were added to allow for potential future credit losses. Further discussion
regarding RSC and the amounts of the aforementioned writedowns and reserves
can be found on pages 16-18.
Earnings/(loss) per weighted average common share was $(1.15) in the
second quarter of 1997, and $(1.03) for the six month period ended June 30,
1997, compared to $0.13 per share in the second quarter of 1996 and $0.31 for
the six month period ended June 30, 1996. The Company paid no cash dividends
in the second quarter of 1997, while a cash dividend of $0.06 per share was
paid in the second quarter of 1996. The Company's net income, without the
loss from RSC, would have been $934,000 or $.51 per share for the six months
ended June 30, 1997.
The Company's return on average assets was (2.06)% for the first six
months of 1997 compared to 0.69% for the first six months of 1996. Return on
average common equity for the first six months of 1997 was (27.44)% compared
to 8.43% for the same period in 1996.
At June 30, 1997, the Company's total risk-based capital ratio was
9.21%, while the leverage ratio was 5.76%. Capital ratios at these levels
are considered adequate under FDICIA regulatory guidelines, discussed in
greater detail on pages 27-29. In a press release dated July 22, 1997,
the Company reported its second quarter and year to date results of
operations and indicated that during the next six months it would pursue
raising additional capital to allow for the continued growth of its banking
and investment advisory activities.
During the second quarter of 1997, RSC continued to pursue divestiture
of its remaining real estate projects through various transactions. During
the quarter, RSC sold 51 homes and lots
9
<PAGE>
and entered into escrow or sales agreements for the sale of 97 additional
homes and lots which are expected to close during the third and fourth
quarters of 1997. Based upon management's accelerated divestiture program,
as well as discounted sales prices in the Fresno/Clovis marketplace, a
writedown of $2,342,000 was made on June 30, 1997, to levels that more
accurately reflect RSC's currently anticipated sales proceeds. In addition
to the writedown, $634,000 was added to the reserve for potential future
losses, bringing the reserve balance to $1,300,000 as of June 30, 1997, and
an additional $835,000 was added to RSC's reserve for credit losses with
$600,000 in loans being charged off. The total of the aforementioned
reserves and writedowns incurred during the second quarter was $3,811,000.
During the second quarter, the Bank implemented a new Visa Debit Card
product as well as a program to obtain fee income from the usage of the
Bank's ATM's by non-Regency clients. Both of these programs have begun to
produce modest fee income and are expected to augment the Bank's non interest
income in the future.
NET INTEREST INCOME
The Company's operating results depend primarily on net interest income
(the difference between the interest earned on loans and investments less
interest expense on deposit accounts and borrowings). A primary factor
affecting the level of net interest income is the Company's interest rate
margin, the difference between the yield earned on interest earning assets
and the rate paid on interest bearing liabilities, as well as the difference
between the relative amounts of average interest earning assets and interest
bearing liabilities.
The following table presents, for the periods indicated, the Company's total
dollar amount of interest income from average interest earning assets and the
resultant yields, as well as the interest expense on average interest bearing
liabilities and the resultant cost, expressed both in dollars and rates. The
table also sets forth the net interest income and the net earning balance for
the periods indicated.
10
<PAGE>
CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND INTEREST RATES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
FOR THE THREE MONTHS ENDED JUNE 30, 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Rate Interest Balance Rate Interest
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (1) $105,732 11.02% $2,904 $98,643 10.71% $2,627
Investment securities (2) 37,381 6.59% 614 27,871 6.08% 421
Federal funds sold & other 10,274 5.50% 141 1,736 5.56% 24
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-earning assets $153,387 9.57% $3,659 $128,250 9.63% $3,072
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets:
Allowance for credit losses (1,677) (1,750)
Cash and due from banks 9,000 8,035
Real estate investments 15,862 19,143
Premises and equivalent, net 2,143 2,252
Cash surrender value of life insurance 2,949 2,812
Accrued interest receivable and other assets 4,570 4,477
- -----------------------------------------------------------------------------------------------------------------------------------
Total Average Assets $186,234 $163,219
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS'EQUITY
Interest-bearing liabilities:
Transaction accounts $48,913 2.50% $305 $44,235 2.63% $289
Savings accounts 33,552 4.04% 338 24,472 4.11% 250
Time deposits 48,590 5.51% 667 38,910 5.16% 499
Federal funds purchased, notes payable
and other 3,864 2.08% 20 10,558 2.36% 62
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing liabilities $134,919 3.95% $1,330 $118,175 3.74% $1,100
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Transaction accounts 35,042 29,551
Other liabilities 2,257 2,282
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 172,218 150,008
Shareholders' Equity:
Common stock 9,208 8,868
Retained earnings 4,922 4,393
Unrealized gain / (loss) on investment
securities (114) (50)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Shareholders Equity $14,016 $13,211
- -----------------------------------------------------------------------------------------------------------------------------------
Total average liabilities and shareholders'
equity $186,234 $163,219
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $2,329 $1,972
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income as a percentage of average
interest-earning assets 9.57% 9.63%
Interest expense as a percentage of average
interest-earning assets (3.48%) (3.45%)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Margin 6.09% 6.18%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Loan amounts include nonaccrual loans, but the related interest income has
been included only for the period prior to the loan being placed on a
nonaccrual basis. Loan interest income includes loan fees of approximately
$320,000 and $328,000 for the three months ended June 30, 1997, and 1996,
respectively.
(2) Applicable nontaxable securities yields have not been calculated on a
taxable-equivalent basis because they are not material to the Company's results
of operations.
11
<PAGE>
CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND INTEREST RATES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 1996
- -------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE RATE INTEREST BALANCE RATE INTEREST
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (1) $104,159 11.04% $5,704 $ 96,846 11.41% $5,496
Investment securities (2) 35,092 6.60% 1,148 28,945 6.16% 887
Federal funds sold & other 9,532 5.39% 255 1,650 5.24% 43
- -------------------------------------------------------------------------------------------------------------
Total Interest-earning assets $148,783 9.63% $7,107 $127,441 10.14% $6,426
- -------------------------------------------------------------------------------------------------------------
Noninterest-earning assets:
Allowance for credit losses (1,675) (1,770)
Cash and due from banks 8,834 8,114
Real estate investments 16,157 19,757
Premises and equivalent, net 2,196 2,289
Cash surrender value of life insurance 2,932 2,794
Accrued interest receivable and other assets 4,260 4,558
- -------------------------------------------------------------------------------------------------------------
Total Average Assets $181,487 $163,183
- -------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Transaction accounts $ 47,999 2.55% $ 607 $ 45,239 2.70% $ 607
Savings accounts 31,378 4.07% 634 26,094 4.16% 540
Time deposits 48,690 5.50% 1,328 38,443 5.33% 1,019
Federal funds purchased, notes payable and
other (3) 4,259 1.89% 40 8,226 2.44% 100
- -------------------------------------------------------------------------------------------------------------
Total Interest-bearing liabilities $132,326 3.98% $2,609 $118,002 3.86% $2,266
- -------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Transaction accounts 33,021 29,163
Other liabilities 2,291 2,657
- -------------------------------------------------------------------------------------------------------------
Total liabilities 167,638 149,822
Shareholders' Equity:
Common stock 9,096 8,868
Retained earnings 4,815 4,476
Unrealized gain / (loss) on investment securities (62) 17
- -------------------------------------------------------------------------------------------------------------
Total Shareholders Equity $ 13,849 $ 13,361
- -------------------------------------------------------------------------------------------------------------
Total average liabilities and shareholders' equity $181,487 $163,183
- -------------------------------------------------------------------------------------------------------------
Net Interest Income $4,498 $4,160
- -------------------------------------------------------------------------------------------------------------
Interest income as a percentage of average
interest-earning assets 9.63% 10.14%
Interest expense as a percentage of average
interest-earning assets (3.54%) (3.58%)
- -------------------------------------------------------------------------------------------------------------
Net Interest Margin 6.09% 6.56%
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Loan amounts include nonaccrual loans, but the related interest income
has been included only for the period prior to the loan being placed on a
nonaccrual basis. Loan interest income includes loan fees of approximately
$606,000 and $614,000 for the six months ended June 30, 1997, and 1996,
respectively.
(2) Applicable nontaxable securities yields have not been calculated on a
taxable-equivalent basis because they are not material to the Company's
results of operations.
12
<PAGE>
Changes in the interest margin can be attributed to changes in the yield
on interest earning assets, the rate paid on interest bearing liabilities, as
well as changes in the volume of interest earning assets and interest bearing
liabilities. The following table presents the dollar amount of certain
changes in interest income and expense for each major component of interest
earning assets and interest bearing liabilities and the difference
attributable to changes in average rates and volumes for the periods
indicated.
VOLUME/RATE ANALYSIS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO 1996 VOLUME (1) RATE (1) TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Interest Earnings Variance Analysis
Increase (decrease) in interest income:
Loans 244 33 277
Investment securities (2) 134 59 193
Federal funds sold and other 118 (1) 117
- -----------------------------------------------------------------------------------------------------
Total 496 91 587
- -----------------------------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Transaction accounts 23 (7) 16
Savings accounts 75 13 88
Time deposits 138 30 168
Federal funds purchased, notes payable and other (26) (16) (42)
- -----------------------------------------------------------------------------------------------------
Total 210 20 230
- -----------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income 286 71 357
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO 1996 VOLUME (1) RATE (1) TOTAL
- -----------------------------------------------------------------------------------------------------
Net Interest Earnings Variance Analysis
Increase (decrease) in interest income:
Loans 388 (180) 208
Investment securities (2) 198 63 261
Federal funds sold and other 211 1 212
- -----------------------------------------------------------------------------------------------------
Total 797 (116) 681
- -----------------------------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Transaction accounts - - -
Savings accounts 106 (12) 94
Time deposits 279 30 309
Federal funds purchased and other (41) (19) (60)
- -----------------------------------------------------------------------------------------------------
Total 344 (1) 343
- -----------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income 453 (115) 338
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) A change due to both volume and rate has been allocated to the change in
volume and rate in proportion to the relationship of the dollar amount of the
change in each.
(2) Changes calculated on nontaxable securities have not considered tax
equivalent effects.
Net interest income before the provision for credit losses was
$2,329,000 for the second quarter of 1997 as compared to $1,972,000 for the
comparable period of 1996, an increase of $357,000 or 18.1%. This increase
was primarily attributable to a larger earning assets base with only a
modest decrease in the overall interest margin. The Company's net interest
margin in the second quarter of 1997 (based on average interest earning
assets) was 6.09% as compared to 6.18%
13
<PAGE>
for the same period in 1996. Interest earning assets grew 19.6% between June
30, 1996 and June 30, 1997. Interest bearing liabilities grew 14.1% over
the same period. The Company's earning asset mix shifted between comparable
periods with federal funds sold increasing from 1.4% of interest earning
assets during the second quarter of 1996 to 6.7% of interest earning assets
during the second quarter of 1997. As a percentage of average assets, loans
dropped from 76.9% to 68.9% between the second quarter of 1996 and the second
quarter of 1997 respectively, while investments increased from 21.7% to 24.4%
of average earning assets. The shift of interest earning assets from higher
yielding loans to lower yielding federal funds sold and investments is one of
the components causing the decline in the net interest margin between the
quarters ending June 30, 1996 and 1997, respectively.
Net interest income before the provision for credit losses for the first
six months of 1997 was $4,498,000 as compared to $4,160,000 for the
comparable period of 1996, an increase of $338,000 or 8.1%. This increase was
primarily attributable to a larger earning asset portfolio. The Company's
net interest margin for the six month period ended June 30, 1997 (based on
average interest-earning assets) was 6.09% as compared to 6.56% for the same
period in 1996. Average interest-earning assets grew 16.7% for the six month
period ended June 30, 1997 as compared to the six month period ended June 30,
1996 while interest-bearing liabilities grew 12.1% over the comparable
periods. The Company's earning asset mix showed an increased level of Fed
Funds sold and investment securities and a lower level of loans, based on the
percentage of earning assets, between comparable periods.
INTEREST EARNING ASSET MIX
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
(In thousands, except percentages)
For the six months ended June 30, 1997 1996
- -----------------------------------------------------------------------------
Average Percent Average Percent
Balance of Total Balance of Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-Earning Asset Mix:
Loans $104,159 70.0% $ 96,846 76.0%
Investment securities 35,092 23.6% 28,945 22.7%
Federal funds sold and other 9,532 6.4% 1,650 1.3%
- -----------------------------------------------------------------------------
Total Interest-earning Assets $148,783 100.0% $127,441 100.0%
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
Average interest-earning assets for the six months ended June 30, 1997
increased to $148,783,000 from $127,441,000 for the comparable period in
1996. Average loans increased by $7,313,000 to $104,159,000 representing
70.0% of average interest-earning assets for the first six months of 1997,
compared to $96,846,000 or 76.0% for the first six months of 1996. The yield
on average loans declined to 11.04% at June 30, 1997, from 11.41% at June 30,
1996, primarily due to lower interest rates as a result of competitive
pressure from other banks.
Other interest-earning assets consist of investment securities,
overnight federal funds sold and other short term investments. These
investments are maintained to meet the liquidity requirements of the Company
as well as pledging requirements on certain deposits, and typically
14
<PAGE>
have a lower yield than loans. The yield on investments increased to 6.60%
for the six month period ended June 30, 1997, from 6.16% in the comparable
period in 1996.
Average interest-bearing liabilities for the six months ended June 30,
1997 increased to $132,326,000 from $118,002,000 for the comparable period
in 1996 an increase of $14,324,000 or 12.1%. The primary reason for the
increase was a result of exceptionally strong growth in deposits over the
past 12 months with a large portion attributable to the opening of the Bank's
Madera branch in August 1996. For the first six months ended June 30, 1997,
the average interest rate paid on interest-bearing liabilities increased to
3.98% from an average rate of 3.86% paid during the first six months of 1996.
NONINTEREST INCOME
The Company receives a significant portion of its income from
noninterest sources related both to activities conducted by the Bank (SBA
loan originations and servicing, depositor service charges), as well as from
the Company's investment advisory firm, RIA.
OTHER INCOME
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
(IN THOUSANDS) FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
- ---------------------------------------------------------------------------------------------
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Other Income:
Income from investments in real estate partnerships $ - $ - $ - $ -
Gain/(loss) on sale of loans 216 573 486 888
Depositor service charges 96 85 194 161
Income from investment management services 188 162 402 326
Gain on sale of securities (36) - (34) -
Gain on sale of assets 0 4 4 9
Servicing fees on loans sold 81 81 167 139
Other 74 157 181 252
- ---------------------------------------------------------------------------------------------
Total $619 $1,062 $1,400 $1,775
- ---------------------------------------------------------------------------------------------
(Income from RSC and RIA in these consolidated financial statements is included in noninterest
income. A further discussion of RSC and RIA is set forth below.)
</TABLE>
During the second quarter of 1997, the Company recognized noninterest
income of $619,000, compared to $1,062,000 for the same period during 1996, a
decrease of $443,000 or 41.7%. For the first six months of 1997, noninterest
income was $1,400,000, compared to $1,775,000 for the first six months of
1996, a decrease of $375,000 or 21.1%. These declines were primarily
attributable to lower gains on sale of SBA loans related to the decision to
hold a larger portfolio of these loans in the Bank's loan portfolio rather
than sell them for immediate gain.
LOAN ORIGINATION & SALES
The Bank originates various types of loans that may be sold on active
secondary markets. The majority of loans available for sale are originated
under a Small Business Administration ("SBA") program that generally provides
for SBA guarantees of 70% to 90% of each loan. The Bank then sells the
guaranteed portion of the loan in the secondary market while retaining the
15
<PAGE>
unguaranteed portion of the loan as well as the ongoing servicing. Income
from the sale of the guaranteed portion is affected by the timing and volume
of sales (when loans are funded and available for sale), as well as the
premium paid in the secondary market. The premium paid in the secondary
market is further affected by the rate and terms of the loan as well as the
yield curve.
During the quarter ended June 30, 1997, the Company had no sales of SBA
loans, choosing instead to hold a larger portfolio of the guaranteed portion
of these loans in an effort to increase interest income, however, several
loans made under another program, Business and Industry "B&I", were sold and
a gain recognized. Net income from loans sold in the second quarter of 1997
was $216,000 compared to $573,000 in the second quarter of 1996. The primary
cause of the decline in income between the second quarter of 1996 and 1997
was the decision to hold a larger portfolio of SBA guaranteed loans in the
Bank's portfolio. For the six months ended June 30, 1997, gains on the sale
of loans was $486,000 compared to $888,000 during the first six months of
1996, a decrease of $402,000.
An additional source of income related to the Bank's SBA loan
origination activities is reflected in income from the ongoing servicing of
loans sold. During the second quarter ended June 30, 1997, servicing income
totaled $81,000, which was identical to the servicing income during the
quarter ended June 30, 1996. For the six months ended June 30, 1997,
servicing income totaled $167,000, an increase of $28,000 compared to
$139,000 during the first six months of 1996. The servicing income increase
for the first six months of 1997 was the result of a larger portfolio of
loans.
REGENCY SERVICE CORPORATION (RSC)
The Bank's wholly owned subsidiary, Regency Service Corporation ("RSC"),
has engaged in real estate development activities since 1986. Such
activities, which typically involve the acquisition, development and sale of
residential real properties (but which sometimes involve the sale of
properties prior to development), historically have been structured as
limited partnerships in which RSC is the limited partner and local developers
are the general partners. Partnerships are accounted for under the equity
method.
Under FDIC regulations, banks were required to divest their real estate
development investments as quickly as prudently possible but in no event
later than December 19, 1996, and submit a plan to the FDIC regarding
divestiture of such investments. Such regulations also permitted banks to
apply for the FDIC's consent to continue, on a limited basis, certain real
estate development activities.
In 1994, the Bank and RSC submitted a divestiture plan (the "Divestiture
Plan") to the FDIC. The Divestiture Plan provided for RSC to divest itself
of all real estate development investments by year-end 1996; however, since
RSC was a limited partner in the majority of its real estate development
projects and, thus, did not control the operation of such projects, there was
no assurance that such divestiture would occur by year-end 1996. In December
1995, the Bank and RSC submitted a request to extend the mandatory time
period in which it must divest of its real estate development interests. In
December 1996, the FDIC, responding to the Bank's
16
<PAGE>
request, granted the Bank and RSC a two year extension, until December 31,
1998, to continue its divestiture activities.
Effective April 1, 1997, RSC entered into a new construction and sales
agreement with Gary McDonald Real Estate and Development Company ("GMREDCO")
replacing the previous project management agreement. Under the new
agreement, GMREDCO will construct pre-sold homes and a limited number of spec
homes on lots selected by RSC's management as well as provide brokerage
services on the aforementioned homes.
For the second quarter ended June 30, 1997, the loss from investments in
real estate amounted to $3,350,000 compared to a loss of $85,000 for the same
period in 1996, an increase of $3,265,000. The increased loss resulted from
the accelerated divestiture of properties at discounted prices as well as a
writedown of several properties to reflect RSC's currently anticipated sales
proceeds. The amount of the writedown of these properties was $2,342,000.
During the quarter RSC sold 51 homes and lots and had entered into escrow or
sales agreements for the sale of 97 additional homes and lots which are
expected to close during the third and fourth quarters of 1997. On a stand
alone basis, RSC's activities, (losses from the sale of properties, additions
to RSC's provision for real estate losses and provision for credit losses,
plus operating expenses), reduced the Company's overall pre-tax income by
$4,027,000 in the second quarter of 1997 compared to a loss of $472,000 in
the second quarter of 1996. These operating expenses have been consolidated
with similar operating expenses in the Company's consolidated statement of
income.
For the six months ended June 30, 1997, the loss from investments in real
estate partnerships amounted to $3,590,000 compared to a loss of $182,000 for
the same period in 1996, an increase of $3,408,000. As stated above, the
increased loss resulted from the sale of properties at discounted prices as
well as the writedown of several properties to reflect RSC's currently
anticipated sales proceeds. For the six months ended June 30, 1997, on a
stand alone basis, RSC's activities, (including losses from the sale of
properties, additions to RSC's provision for real estate losses and provision
for credit losses, plus operating expenses), reduced the Company's overall
pre-tax income by $4,915,000 compared to $771,000 in 1996.
REGENCY INVESTMENT ADVISORS (RIA)
The Company's other wholly-owned subsidiary, Regency Investment Advisors
("RIA"), was formed in August 1993 through the acquisition by the Bank of the
assets, including the client list, of a fee-only investment management and
consulting firm. RIA provides investment management and consulting services,
including comprehensive financial and retirement planning and investment
advice, to individuals and corporate clients for an annual fee that varies
depending upon the size of a client account.
Revenue from RIA for the second quarter of 1997 increased to $188,000
from $162,000 in the same period of 1996, an increase of $16,000 or 9.9%. On
a stand alone basis, RIA's activities, (income from investment management
activities less operating expenses), provided the Company with after-tax
income of $21,000 in the second quarter of 1997 compared to after-tax income
of
17
<PAGE>
$3,000 in the second quarter of 1996. RIA's operating expenses have been
consolidated with similar operating expenses in the Company's consolidated
statement of income.
For the six months ended June 30, 1997, revenue from RIA increased to
$402,000 from $326,000 for the same period in 1996, an increase of $76,000
or 23.3%. On a stand alone basis, RIA's activities, (income from investment
management activities less operating expenses), provided the Company with
after-tax income of $48,000 for the six months ended June 30, 1997, compared
to $3,600 for the same period in 1996. These operating expenses have been
consolidated with similar operating expenses in the Company's consolidated
statement of income.
RIA's ability to generate and increase income comes, in large part, from
the volume of assets under management. As of June 30, 1997, RIA had $80.3
million in assets under management, an increase of $11.3 million, or 16.4%
compared to $69.0 million as of June 30, 1996. Assets in client accounts
managed by RIA are not reflected in the consolidated assets of the Company.
OTHER EXPENSE
Noninterest expense reflects the costs of products and services,
systems, facilities and personnel for the Company. The major components of
other operating expenses stated both as dollars and as a percentage of
average assets are as follows:
OTHER OPERATING EXPENSE TO AVERAGE ASSETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
FOR THE THREE MONTHS ENDED JUNE 30, 1997 1996
- -------------------------------------------------------------------------------------------------
Percent of Percent of
Average Average
Amount Assets Amount Assets
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Other Expense:
Loss from investments in real estate partnerships $3,350 7.21% $ 85 0.21%
Salaries and related benefits 1,233 2.65% 1,075 2.65%
Occupancy 411 0.88% 401 0.99%
FDIC insurance and regulatory assessments 22 0.05% 16 0.04%
Marketing 142 0.31% 121 0.30%
Professional services 157 0.34% 269 0.66%
Director's fees and expenses 80 0.17% 92 0.23%
Management fees for real estate projects 4 0.01% 154 0.38%
Supplies, telephone & postage 84 0.18% 93 0.23%
Other 323 0.70% 317 0.78%
- -------------------------------------------------------------------------------------------------
TOTAL $5,806 12.50% $2,623 6.46%
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
For the second quarter ended June 30, 1997, other expenses increased
121.3% or $3,183,000 to $5,806,000, up from $2,623,000 during the comparable
period in 1996. The primary cause of the increase was due to losses from
investments in real estate. When compared to average assets for the
respective periods, other operating expenses increased to 12.50% versus 6.46%
in 1996.
18
<PAGE>
Losses related to RSC investments in real estate increased in the second
quarter of 1997 to $3,350,000 an increase of $3,265,000, from losses of
$85,000 in the second quarter of 1996. The increased loss resulted from the
sale of properties at discounted prices, as well as the writedown of
several properties to reflect RSC's currently anticipated sales proceeds
under its accelerated divestiture plan.
Salaries and related benefits increased by $158,000 or 14.7% in the
second quarter ended June 30, 1997 to $1,233,000 from $1,075,000 in the
second quarter of 1996. The primary cause of the increase can be attributed
to additional staff related to the Bank's Madera branch which was opened
during the third quarter of 1996. Salaries and related benefits, as a
percentage of average assets, were 2.65% during both the second quarter of
1997 and the comparable period in 1996.
Occupancy expense during the second quarter ended June 30, 1997
increased by $10,000, or 2.5%, to $411,000, from $401,000 for the comparable
period in 1996. As a percentage of average assets, occupancy expense
declined to .88% from .99% for the quarters ending June 30, 1997 and 1996,
respectively.
FDIC insurance and regulatory assessments increased 37.5% to $22,000
during the second quarter of 1997, an increase of $6,000 from $16,000 for the
quarter ended June 30, 1996. The primary cause of the increase was the
larger deposit portfolio maintained by the Bank over the last year.
Professional services consist primarily of fees paid for legal,
accounting and consulting services to third party professionals. During the
quarter ended June 30, 1997, professional services decreased by $112,000, or
41.6% to $157,000 from $269,000 during the second quarter of 1996. As a
percentage of average assets, professional services were .34% and .66% in
the second quarter of 1997 and 1996, respectively. The primary reason for
the decrease in professional services between the periods related to lower
legal and accounting costs for RSC as well as higher than normal consulting
expenses incurred in 1996.
Management fees paid for real estate projects decreased by $150,000 to
$4,000 in the period ended June 30, 1997 from $154,000 during the second
quarter of 1996. As a percentage of average assets, management fees for real
estate projects were .01% and .38% for the quarters ended June 30, 1997 and
1996, respectively. The primary cause of the decrease is related to a new
performance based construction and sales agreement entered into between RSC
and GMREDCO.
Supplies, telephone, postage and other expenses decreased slightly in
the second quarter of 1997 compared to the second quarter of 1996.
Supplies, telephone and postage declined by $9,000 to $84,000 for the period
ended June 30, 1997 from $93,000 during the comparable period in 1996. As a
percentage of average assets, supplies, telephone and postage were .18% and
.23% in the second quarter of 1997 and 1996, respectively. Other expenses
increased by $6,000 to $323,000 for the second quarter ended June 30, 1997
from $317,000 during the comparable period in 1996. As a percentage of
average assets, other expenses were .70% and .78% for the quarters ended,
June 30, 1997 and 1996, respectively.
19
<PAGE>
OTHER OPERATING EXPENSE TO AVERAGE ASSETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 1996
- -------------------------------------------------------------------------------------------------
Percent of Percent of
Average Average
Amount Assets Amount Assets
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Other Expense:
Loss from investments in real estate partnerships $3,590 3.99% $ 182 0.22%
Salaries and related benefits 2,397 2.66% 2,186 2.69%
Occupancy 814 0.90% 793 0.98%
FDIC insurance and regulatory assessments 44 0.05% 32 0.04%
Marketing 232 0.26% 211 0.26%
Professional services 278 0.31% 423 0.52%
Director's fees and expenses 176 0.20% 168 0.21%
Management fees for real estate projects 112 0.12% 233 0.29%
Supplies, telephone & postage 163 0.18% 178 0.22%
Other 545 0.61% 559 0.69%
- -------------------------------------------------------------------------------------------------
TOTAL $8,351 9.28% $4,965 6.12%
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
For the six months ended June 30, 1997, non-interest expenses increased
68.2% or $3,386,000 to $8,351,000, up from $4,965,000 during the comparable
period in 1996. The primary cause of the increase was due to losses from
RSC investments in real estate. When compared to average assets for the
respective periods, other expenses increased to 9.28% versus 6.12% in 1996.
Losses related to RSC investments in real estate increased in the six
months ended June 30, 1997 to $3,590,000 an increase of $3,408,000, from
losses of $182,000 in the comparable period of 1996. The increase resulted
from the sale of properties at discounted prices as well as the writedown of
several properties to reflect RSC's currently anticipated sales proceeds
under its accelerated divestiture plan. As a percentage of average assets,
losses related to real estate investments increased to 3.99% for the first
six months of 1997 from .22% during the comparable period in 1996.
Salaries and related benefits increased by $211,000 or 9.65% in the six
months ended June 30, 1997 to $2,397,000 from $2,186,000 in the comparable
period of 1996. The primary cause of the increase can be attributed to
additional staff related to the Bank's Madera branch which was opened during
the third quarter of 1996. Salaries and related benefits decreased as a
percentage of average assets, to 2.66% for the first six months of 1997 from
2.69% during the comparable period in 1996.
Occupancy expense during the six months ended June 30, 1997 increased by
$21,000, or 2.65%, to $814,000, from $793,000 for the comparable period in
1996. As a percentage of average assets occupancy expense declined to .90%
from .98% for the six months ending June 30, 1997 and 1996, respectively.
FDIC insurance and regulatory assessments increased 37.5% to $44,000
during the six months ending June 30, 1997, an increase of $12,000 from
$32,000 for the comparable period in
20
<PAGE>
1996. The primary cause of the increase was the larger deposit portfolio
maintained by the Bank over the last year.
Professional services decreased in the six months ended June 30, 1997,
by $145,000, or 34.3% to $278,000 from $423,000 during the comparable period
of 1996. As a percentage of average assets, professional services were .31%
and .52% in the second quarter of 1997 and 1996, respectively. The primary
reason for the decrease in professional services between the periods related
to lower legal and accounting costs for RSC.
Management fees paid for real estate projects decreased by $121,000 to
$112,000 in the six month period ended June 30, 1997 from $233,000 during the
comparable period of 1996. As a percentage of average assets, management
fees for real estate projects were .12% and .29% for the six months ended
June 30, 1997 and 1996, respectively. Supplies, telephone, postage and other
expenses decreased slightly in the six months ended June 30, 1997 compared to
the same period of 1996. Supplies, telephone and postage declined by $15,000
to $163,000 for the period ended June 30, 1997 from $178,000 during the
comparable period in 1996. As a percentage of average assets, supplies,
telephone and postage were .18% and .22% in the first six months of 1997 and
1996, respectively. Other expenses decreased by $14,000 to $545,000 for the
six months ended June 30, 1997 from $559,000 during the comparable period in
1996. As a percentage of average assets, other expenses were .61% and .69%
for the six months ended, June 30, 1997 and 1996, respectively.
LOANS
The Company's loans are primarily made within its defined market area of
Fresno and Madera counties. During the first quarter of 1995, the Company
opened an SBA loan production office in Modesto and additionally employs
business development officers targeting businesses in the northern and
southern San Joaquin Valley for SBA loans.
Commercial loans, including SBA loans, comprised approximately 58.2% of
the Company's loan portfolio at June 30, 1997. These loans are generally to
small and mid-size businesses and professionals. Commercial loans are
diversified as to industries and types of business, with no material industry
concentrations. Most of these loans have floating rates with the majority
tied to the national Prime Rate. The primary source of repayment on most
commercial loans is cash flow from the primary business. Additional
collateral in the form of real estate, cash, accounts receivable, inventory
or other financial instruments is often obtained as a secondary source of
repayment.
Real Estate Construction lending comprised 21.4% of the Company's loan
portfolio at June 30, 1997, consisting of loans primarily for the
construction of single family residential housing. Loans in this category may
be to the home buyer or to the developer. Construction loans are secured by
deeds of trust on the primary property. Such loans also contain $5.0 million
in loans RSC has made to its partnerships or to facilitate the sale of a
project. The majority of construction loans have floating rates tied to
either the national Prime Rate or Regency Bank's Reference Rate. A
significant portion of the borrowers' ability to repay these loans is
dependent on the residential
21
<PAGE>
real estate market, principally from the sale of the property. In this
regard, the Company's potential risks include a general decline in the value
of the underlying property, as well as cost overruns or delays in the sale or
completion of a property.
Real Estate Mortgage loans comprised 12.4% of the loan portfolio at June
30, 1997, and are made up of (62%) non-residential properties and (38%)
single-family residential mortgages. The non-residential loans generally are
"mini-perm" (medium-term) commercial real estate mortgages with maturities
under seven years. The residential mortgages are secured by first trust
deeds and have varying maturities. Both types of loans may have either fixed
or floating rates. The majority are floating. Risks associated with
non-residential loans include the decline in value of commercial property
values, economic conditions surrounding commercial real estate properties,
and vacancy rates. The repayment of single-family residential mortgage loans
is generally dependent on the income of the borrower from other sources;
however, declines in the underlying property value may create risk in these
loans.
Consumer installment loans represented the remainder of the loan
portfolio at June 30, 1997, comprising 8.0% of total loans. This category
includes traditional Consumer Installment Loans (54%), Home Equity Lines of
Credit (39%), and Visa Card Loans (7%). Consumer installment loans are
generally secured by second trust deeds on single-family residences, while
Visa Cards are unsecured.
RISK ELEMENTS
The Company assesses and manages credit risk on an ongoing basis through
stringent credit review and approval policies, extensive internal monitoring
and established formal lending policies. Additionally, the Bank contracts
with an outside loan review consultant to periodically grade new loans and to
review the existing loan portfolio. Management believes its ability to
identify and assess risk and return characteristics of the Company's loan
portfolio is critical for profitability and growth. Management strives to
continue the historically low level of credit losses by continuing its
emphasis on credit quality in the loan approval process, active credit
administration and regular monitoring. With this in mind, management has
designed and implemented a comprehensive loan review and grading system that
functions to continually assess the credit risk inherent in the loan
portfolio. Additionally, management believes its ability to manage portfolio
credit risk is enhanced by the knowledge of the Bank's service area by the
lending personnel and Board of Directors.
NONPERFORMING LOANS
The Company's current policy is to cease accruing interest when a loan
becomes 90-days past due as to principal or interest; when the full, timely
collection of interest or principal becomes uncertain; or when a portion of
the principal balance has been charged off, unless the loan is well secured
and in the process of collection. When a loan is placed on nonaccrual
status, the accrued and uncollected interest receivable is reversed and the
loan is accounted for on the cash or cost recovery method thereafter, until
qualifying for return to accrual status. Generally, a loan may be returned
to accrual status when all delinquent interest and principal become current
in accordance
22
<PAGE>
with the terms of the loan agreement or when the loan is both well secured
and in process of collection.
At June 30, 1997, nonperforming loans amounted to $2,496,000 or 2.22% of
total loans compared to $3,301,000 or 3.22% at December 31, 1996 and
$3,855,000 or 3.85% at June 30, 1996. Other real estate owned was $444,000
at June 30, 1997 compared to $437,000 at December 31, 1996. Of the total
nonaccrual loans, $1,636,000 represented loans RSC has made to facilitate the
sale of former partnerships that have loan to value ratios higher than would
normally be made by the Bank. While the Company has placed these loans on
non-accrual, RSC continues to receive principal and interest payments based
on the terms of individual notes. Without the non-accrual loans made by RSC,
the Bank's loan portfolio at June 30, 1997 had $829,000 in non-accrual loans
or .74%, compared to $51,000 in non-accrual loans or .05% at December 31,
1996. Of the Bank's non-accrual loans at June 30, 1997, $503,000 represent
the portion of SBA loans that are guaranteed by the SBA. Beginning in 1997,
the SBA changed the requirements for Bank's originating SBA loans which are
subsequently sold on the secondary market. Under the new requirement, if a
borrower defaults on an SBA guaranteed loan, the originating bank is required
to buy the guaranteed portion back and hold it in its portfolio until
collection efforts are exhausted. While this guaranteed portion is backed by
the full faith and credit of the U.S. government and poses little risk of
loss to the Bank, the Bank does incur loss of the use of the funds while
awaiting payoff from the SBA or other loan collateral. Expense from the loss
of use of the funds is expected to be minimal; however, due to this new
requirement, it is expected that non-accrual levels will be slightly higher.
Following is a table presenting the nonperforming loans for the periods
ending June 30, 1997 and December 31, 1996, respectively.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) JUNE 30, 1997 DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Nonperforming Assets:
Nonaccrual RSC loans $ 1,636 $ 3,250
Nonaccrual bank loans 829 51
Restructured loans 31 -
- ---------------------------------------------------------------------------------------------------
Nonperforming loans 2,496 3,301
Other real estate owned 444 437
- ---------------------------------------------------------------------------------------------------
Total nonperforming assets 2,940 3,738
- ---------------------------------------------------------------------------------------------------
Accruing loans 90 days past due 222 19
- ---------------------------------------------------------------------------------------------------
Total loans before allowance for losses 112,434 102,458
Total assets 186,870 181,058
Allowance for possible credit losses (1,891) (1,615)
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Ratios:
Nonperforming loans to total loans consolidated 2.22% 3.22%
Nonperforming loans to total loans bank only (excluding RSC loans) 0.74% 0.05%
Nonperforming assets to:
Total loans 2.61% 3.65%
Total loans and OREO 2.60% 3.63%
Total assets 1.57% 2.06%
Allowance for possible credit losses to total nonperforming assets 64.32% 43.23%
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1997 and December 31, 1996, the Company's recorded
investment in loans for which an impairment has been recognized totaled
$261,000 and $242,000, respectively.
23
<PAGE>
These amounts were evaluated for impairment using the fair value of
collateral. At June 30, 1997, the related SFAS No. 114 allowance for credit
losses considered impaired was $119,000. The Company uses the cash basis
method of income recognition for impaired loans. For the six months ended
June 30, 1997 and 1996, the Company did not recognize any income on such
loans.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses reflects management's judgment as to the
level which is considered adequate to absorb potential losses inherent in the
loan portfolio. This allowance is increased by provisions charged to expense
and reduced by loan charge-offs net of recoveries. Management determines an
appropriate provision based on information currently available to analyze
credit loss potential, including: (a) the loan portfolio growth in the
period, (b) a comprehensive grading and review of new and existing loans
outstanding, (c) actual previous charge-offs, and (d) changes in economic
conditions.
The allowance for credit losses totaled $1,891,000 or 1.68% of total
loans at June 30, 1997, compared to $1,615,000 or 1.58% at December 31, 1996.
The increase is the result of charge offs net of recoveries of $559,000
during the first six months of 1997 with additional provision for credit
losses of $835,000. It is the policy of management to maintain the allowance
for credit losses at a level adequate for known and future risks inherent in
the loan portfolio. Based on information currently available to analyze
credit loss potential, including economic factors, overall credit quality,
historical delinquency and a history of actual charge-offs, management
believes that the credit loss provision and allowance is adequate. However,
no prediction of the ultimate level of loans charged-off in future years can
be made with any certainty.
Following is a table presenting the activity within the Company's provision
for credit losses for the period between December 31, 1996 and June 30, 1997.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(IN THOUSANDS)
- -------------------------------------------------------------------------------
<S> <C>
Balance, December 31, 1996 $ 1,615
- -------------------------------------------------------------------------------
Provision charged to expense 835
Loans charged off (674)
Recoveries 115
- -------------------------------------------------------------------------------
Balance, June 30, 1997 $1,891
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
INVESTMENTS IN REAL ESTATE
The Company's investment in real estate consists of the Bank's
investment of capital and retained earnings in RSC. RSC is currently the
sole owner of six projects and is a limited partner in two projects.
Included in the investments in real estate balance at June 30, 1997 are
acquisition, development and construction loans held by the Bank totaling
$271,000. The remaining investments in real estate balance of $10,989,000
represents RSC's investments in real estate.
The following table represents the condensed financial information relative
to RSC for the period ending June 30, 1997 and December 31, 1996,
respectively.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
(IN THOUSANDS) JUNE 30, 1997 DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Financial Position:
Investments in real estate
Real estate held-for-sale $10,645 $15,520
Equity in partnerships 1,644 2,070
- ---------------------------------------------------------------------------------------
Investment in real estate before allowance 12,289 17,590
Allowance for real estate losses (1,300) (1,310)
- ---------------------------------------------------------------------------------------
Investment in real estate $10,989 $16,280
- ---------------------------------------------------------------------------------------
Loans to real estate partnerships and projects 2,109 3,988
Allowance for loan losses (344) (110)
- ---------------------------------------------------------------------------------------
Net Loans 1,765 3,878
- ---------------------------------------------------------------------------------------
Other Assets 1,827 1,733
- ---------------------------------------------------------------------------------------
Liabilities (2,924) (6,219)
- ---------------------------------------------------------------------------------------
Bank's investment in RSC $11,657 $15,672
- ---------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
FUNDING SOURCES
Deposits represent the Bank's principal source of funds for investment.
Deposits are primarily core deposits in that they are demand, savings, and
time deposits generated from local businesses and individuals. These sources
are considered to be relatively more stable, long-term deposit relationships
thereby enhancing steady growth of the deposit base without major
fluctuations in overall deposit balances. In order to assist in meeting its
funding needs, the Bank maintains federal funds lines with correspondent
banks in addition to using its investment portfolio to raise funds through
repurchase agreements. In addition, the Bank may, from time to time, obtain
additional deposits through the use of brokered time deposits. As of June
30, 1997, the Bank held no brokered time deposits and had no borrowings from
correspondent banks against its federal funds lines.
The following table presents the composition of the deposit mix for the
period ending June 30, 1997 and December 31, 1996, respectively.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
(IN THOUSANDS) JUNE 30, 1997 DECEMBER 31, 1996
- --------------------------------------------------------------------------------------------------
Percent of Percent of
Amount Total Deposits Amount Total Deposits
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing transaction accounts $ 39,161 22.9% $ 36,613 22.9%
Now and MMI 49,591 29.0% 47,850 29.9%
Savings 35,126 20.6% 25,540 16.0%
Time under $100,000 18,400 10.8% 19,033 11.9%
Time $100,000 and over 28,584 16.7% 30,766 19.3%
- --------------------------------------------------------------------------------------------------
Total interest-bearing deposits 131,701 77.1% 123,189 77.1%
- --------------------------------------------------------------------------------------------------
Total Deposits $170,862 100.0% $159,802 100.0%
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
LIQUIDITY
Liquidity management refers to the Bank's ability to provide funds on an
ongoing basis to meet fluctuations in deposit levels as well as the credit
needs and requirements of its clients. Both assets and liabilities
contribute to the Bank's liquidity position. Federal funds lines, short-term
investments and securities, and loan repayments contribute to liquidity,
along with deposit increases, while loan funding and deposit withdrawals
decrease liquidity. The Bank assesses the likelihood of projected funding
requirements by reviewing historical funding patterns, current and forecasted
economic conditions and individual client funding needs. The Bank maintains
lines of credit with two correspondent banks for up to $9,000,000 available
on a short-term basis. Additionally, the Bank generally maintains a portfolio
of SBA loans either available for sale or in its portfolio that could be sold
should additional liquidity be required.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is a measure of the exposure to fluctuations
in the Bank's future earnings caused by fluctuations in interest rates.
Generally, if assets and liabilities do not reprice simultaneously and in
equal volumes, the potential for such exposure exists. It is management's
objective to maintain stability in the net interest margin in times of
fluctuating interest rates by
26
<PAGE>
maintaining an appropriate mix of interest sensitive assets and liabilities.
To achieve this goal, the Bank prices the majority of its interest-bearing
liabilities at variable rates. At the same time, the majority of its
interest-earning assets are also priced at variable rates, the majority of
which float with the Prime Rate. This pricing structure tends to stabilize
the net interest margin percentage earned by the Bank.
The following table sets forth the interest rate sensitivity and repricing
schedule of the Company's interest-earning assets and interest-bearing
liabilities, the interest rate sensitivity gap, the cumulative interest rate
sensitivity gap, and the cumulative interest rate sensitivity gap ratio.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
NEXT DAY AFTER THREE AFTER
BUT WITHIN MONTHS ONE YEAR
(IN THOUSANDS, EXCEPT PERCENTAGES) THREE BUT WITHIN BUT WITHIN AFTER
AS OF JUNE 30, 1997 IMMEDIATELY MONTHS 12 MONTHS FIVE YEARS FIVE YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Sensitivity Gap:
Loans (1) 41,172 37,384 10,963 10,677 9,233 109,969
Investment securities and other 214 14,442 9,700 9,772 2,941 37,069
- -------------------------------------------------------------------------------------------------------------------------
Total Earning Assets $ 48,326 $51,826 $20,663 $20,449 $12,174 $153,438
- -------------------------------------------------------------------------------------------------------------------------
Interest-bearing transaction accounts 49,591 - - - - 49,591
Savings accounts 32,284 2,842 - - - 35,126
Time deposits - 14,274 28,220 3,529 961 46,984
Federal funds purchased - - - - - -
- -------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities $ 81,875 $17,116 $28,220 $ 3,529 $ 961 $131,701
- -------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap (33,549) 34,710 (7,557) 16,920 11,213
Cumulative gap (33,549) 1,161 (6,396) 10,524 21,737
Cumulative gap percentage to
interest earning assets (21.86%) 0.76% (4.17%) 6.86% 14.17%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts exclude nonaccrual loans of $2,465,000.
The above table indicates the time periods in which interest-earning
assets and interest-bearing liabilities will mature or reprice in accordance
with their contractual terms. The table does not necessarily indicate the
impact of general interest rate movements on the net interest margin since
the repricing of various categories of assets and liabilities is subject to
competitive pressures. Additionally, this table does not take into
consideration changing balances in forward periods as a result of normal
amortization, principal paydowns, changes in deposit mix or other such
movements of funds as a result of changing interest rate environments.
CAPITAL RESOURCES
The Board of Governors of the Federal Reserve System and the FDIC have
adopted risk-based capital guidelines for evaluating the capital adequacy of
bank holding companies and banks. The guidelines are designed to make
capital requirements sensitive to differences in risk profiles among banking
organizations, to take into account off-balance sheet exposures and to aid in
making the definition of bank capital uniform internationally. Under the
guidelines, the Company and the Bank are required to maintain capital equal
to at least 8.0% of its assets and commitments to extend credit, weighted by
risk, of which at least 4.0%, must consist primarily of common equity
(including retained earnings) and the remainder may consist of subordinated
debt, cumulative preferred stock, or a limited amount of loan loss reserves.
Assets, commitments to extend credit
27
<PAGE>
and off-balance sheet items are categorized according to risk and certain
assets considered to present less risk than other permit maintenance of
capital at less than the 8% ratio.
The guidelines establish two categories of qualifying capital: Tier 1
capital comprising core capital elements and Tier 2 comprising supplementary
capital requirements. At least one-half of the required capital must be
maintained in the form of Tier 1 capital. Tier 1 capital includes common
shareholder's equity and qualifying perpetual preferred stock less intangible
assets and certain other adjustments. However, no more than 25% of the
Company's total Tier 1 capital may consist of perpetual preferred stock. The
definition of Tier 1 capital for the Bank is the same, except that perpetual
preferred stock may be included only if it is noncumulative. Tier 2 capital
includes, among other items, limited life (and in the case of banks,
cumulative) preferred stock, mandatory convertible securities, subordinated
debt and a limited amount of reserves for credit losses.
The Board of Governors also adopted a 3.0% minimum leverage ratio for
banking organizations as a supplement to the risk-weighted capital
guidelines. The leverage ratio is generally calculated using Tier 1 capital
(as defined under risk-based capital guidelines) divided by quarterly average
net total assets (excluding intangible assets and certain other adjustments).
The Board of Governors emphasized that the leverage ratio constitutes a
minimum requirement for well-run banking organizations having diversified
risk. Banking organizations experiencing or anticipating significant growth,
as well as those organizations which do not exhibit the characteristics of a
strong, well-run banking organization above, will be required to maintain
minimum capital ranging generally from 100 to 200 basis points in excess of
the leverage ratio. The FDIC adopted a substantially similar leverage ratio
for state non-member banks.
The table below presents the Company's and the Bank's risk-based and leverage
capital ratios as of June 30, 1997.
<TABLE>
<CAPTION>
TO BE ADEQUATELY
CAPITALIZED UNDER
FOR CAPITAL ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
- -----------------------------------------------------------------------------------------------------------------
AS OF JUNE 30, 1997 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -----------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets:)
Company $12,352 9.21% > = $10,732 > = 8.00% N/A
Regency Bank $12,015 8.97% > = $10,721 > = 8.00% > = $10,721 > = 8.00%
Tier 1 Capital (to Risk Weighted Assets):
Company $10,674 7.96% > = $5,366 > = 4.00% N/A
Regency Bank $10,330 7.71% > = $5,361 > = 4.00% > = $5,361 > = 4.00%
Tier 1 Capital (to Average Assets):
Company $10,674 5.76% > = $7,408 > = 4.00% N/A
Regency Bank $10,330 5.58% > = $7,408 > = 4.00% > = $7,408 > = 4.00%
</TABLE>
28
<PAGE>
As indicated in the table above, at June 30, 1997, the Company's and
Bank's capital ratios are considered "Adequately Capitalized" by current
standards of the prompt corrective action provision of the FDICIA described
below.
On December 19, 1991, the President signed the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). The FDICIA, among other
matters, substantially revised banking regulations and established a
framework for determination of capital adequacy of financial institutions.
Under the FDICIA, financial institutions are placed into one of five capital
adequacy categories as follows: (1) "Well capitalized" - consisting of
institutions with a total risk-based capital ratio of 10% or greater, a Tier
1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or
greater, and the institution is not subject to an order, written agreement,
capital directive or prompt corrective action directive; (2) "Adequately
capitalized" - consisting of institutions with a total risk-based capital
ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater
and a leverage ratio of 4% or greater, and the institution does not meet the
definition of a "well capitalized" institution; (3) "Undercapitalized" -
consisting of institutions with a total risk-based capital ratio less than
8%, a Tier 1 risk-based capital ratio of less than 4%, or a leverage ratio of
less than 4%; (4) "Significantly undercapitalized" - consisting of
institutions with a total risk-based capital ratio of less than 6%, a Tier 1
risk-based capital ratio of less than 3%, or a leverage ratio of less than
3%; (5) "Critically undercapitalized" - consisting of an institution with a
ratio of tangible equity to total assets that is equal to or less than 2%.
Financial institutions classified as undercapitalized or below are
subject to various limitations including, among other matters, certain
supervisory actions by bank regulatory authorities and restrictions related
to (i) growth of assets, (ii) payment of interest on subordinated
indebtedness, (iii) payment of dividends or other capital distributions, and
(iv) payment of management fees to a parent holding company. The FDICIA
requires the bank regulatory authorities to initiate corrective action
regarding financial institutions which fail to meet minimum capital
requirements. Such action may be taken in order to, among other matters,
augment capital and reduce total assets. Critically undercapitalized
financial institutions may also be subject to appointment of a receiver or
conservator unless the financial institution submits an adequate
capitalization plan.
29
<PAGE>
RETURN ON EQUITY AND ASSETS
The following table sets forth the ratios of net income to average assets and
average shareholders' equity, and average shareholders' equity to average
assets. Also indicated is the Company's dividend payout ratio. (For
purposes of calculating average shareholders' equity as used in these ratios,
unrealized losses on the Company's available-for-sale securities portfolio
have been included and the percentages shown have been annualized).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
- --------------------------------------------------------------------------------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Return on average assets (4.61)% .59% (2.12)% .69%
- --------------------------------------------------------------------------------------------
Return on average shareholders' equity (61.30)% 7.25% (27.77)% 8.43%
- --------------------------------------------------------------------------------------------
Average shareholders' equity to average assets 7.53% 8.09% 7.63% 8.19%
- --------------------------------------------------------------------------------------------
Dividend payout ratio 0.00% 45.84% 0.00% 38.96%
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO VOTE OF SECURITY HOLDERS
(a) The 1997 Annual Meeting of Shareholders (the "Annual Meeting") was
held on May 13, 1997.
The following seven directors, all of whom are incumbent directors, and
Mr. Dan Ray (the employee director nominee) were elected at the Annual
Meeting by the following vote:
<TABLE>
<CAPTION>
VOTES AGAINST
VOTES FOR OR WITHHELD
--------- -------------
<S> <C> <C>
Joseph L, Castanos 1,520,000 2,838
Steven F. Hertel 1,520,000 2,838
Roy Jura 1,520,000 2,838
Barbara Palmquist 1,520,000 2,838
David N. Price 1,520,000 2,838
Daniel Ray 1,520,000 2,838
Daniel R. Suchy 1,520,000 2,838
Waymon E. Watts 1,520,000 2,838
</TABLE>
30
<PAGE>
(c) The appointment of Deloitte & Touche LLP as the Company's independent
public accountants for the 1997 fiscal year was ratified by the
following vote:
Votes for - 1,517,636 Votes against or withheld - 5,202
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27.1) Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K dated April 17, 1997, in which
it reported that on April 14, 1997, the Company issued a
press release which stated that Gary McDonald, a founding
member of the board of Regency Bank and its parent holding
company, Regency Bancorp, announced his decision to not
stand for election at the upcoming annual meeting. The
Company also reported that on April 11, 1997, the Company
issued a letter to shareholders notifying them of Gary
McDonald's decision to not stand for election at the
Company's 18th annual meeting, May 13, 1997
The Company filed a Form 8-K dated May 14, 1997, in which
it reported that on May 9, 1997, the Registrant issued a
press release which described earnings of $235,000 from
its consolidated operations during the first quarter of
1997. It also announced that total assets reached a
record level, $181.6 million, a growth of 8.9% from
$166.7 million a year earlier.
The Company filed a Form 8-K dated July 22, 1997, in which
it reported that on July 22, 1997, the Registrant issued a
press release and letter to shareholders announcing its
results of operations for the first six months of 1997 as
well as a capital augmentation program. The registrant
stated that it took action at June 30, 1997 resulting from
an analysis of strategic alternatives to make a special
adjustment to the balance sheet of registrant's subsidiary,
RSC and engaged Carruthers & Company to assist registrant
in raising additional capital.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGENCY BANCORP
Date: August 11, 1997 By: /s/ Steven F. Hertel
----------------------- ----------------------------------------
Steven F. Hertel
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 11, 1997 By: /s/ Steven R. Canfield
----------------------- ----------------------------------------
Steven R. Canfield
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
32
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
<S> <C> <C>
27.1 Financial Data Schedule 34
</TABLE>
33
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 12,070
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,199
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 112,434
<ALLOWANCE> 1,891
<TOTAL-ASSETS> 186,870
<DEPOSITS> 170,862
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,963
<LONG-TERM> 0
0
0
<COMMON> 9,276
<OTHER-SE> 2,694
<TOTAL-LIABILITIES-AND-EQUITY> 186,870
<INTEREST-LOAN> 5,704
<INTEREST-INVEST> 1,148
<INTEREST-OTHER> 255
<INTEREST-TOTAL> 7,107
<INTEREST-DEPOSIT> 2,569
<INTEREST-EXPENSE> 2,609
<INTEREST-INCOME-NET> 4,498
<LOAN-LOSSES> 835
<SECURITIES-GAINS> (34)
<EXPENSE-OTHER> 8,351
<INCOME-PRETAX> (3,288)
<INCOME-PRE-EXTRAORDINARY> (3,288)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,907)
<EPS-PRIMARY> (1.03)
<EPS-DILUTED> (1.00)
<YIELD-ACTUAL> 6.09
<LOANS-NON> 2,496
<LOANS-PAST> 222
<LOANS-TROUBLED> 31
<LOANS-PROBLEM> 261
<ALLOWANCE-OPEN> 1,615
<CHARGE-OFFS> 674
<RECOVERIES> 115
<ALLOWANCE-CLOSE> 1,891
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,891
</TABLE>
