<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 September 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 November 6, 1997, the registrant had 1,871,125 shares of Common Stock
outstanding.
The Exhibit Index is located on page 34.
This report contains a total of 35 pages of which this is page one.
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
PART I, ITEM 1. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA) SEPTEMBER 30, 1997 DECEMBER 31, 1996
- ------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 13,710 $ 14,833
Federal funds sold 2,500 5,000
- ------------------------------------------------------------------------------
Total Cash and Equivalents 16,210 19,833
- ------------------------------------------------------------------------------
Interest bearing deposits in other banks - 98
Securities available-for-sale 37,460 33,270
- ------------------------------------------------------------------------------
Loans 119,836 102,458
Allowance for credit losses (2,211) (1,615)
Deferred loan fees & discounts (1,057) (1,073)
- ------------------------------------------------------------------------------
Net Loans 116,568 99,770
- ------------------------------------------------------------------------------
Investments in real estate 8,911 16,489
Other real estate owned 519 437
Cash surrender value of life insurance 3,002 2,903
Premises and equipment, net 1,877 2,262
Accrued interest receivable and other assets 4,401 5,996
- ------------------------------------------------------------------------------
Total Assets $ 188,948 $ 181,058
- ------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing transaction accounts $ 41,204 $ 36,613
Interest bearing transaction accounts 53,559 47,850
Savings accounts 35,434 25,540
Time deposits $100,000 or over 27,280 30,766
Other time deposits 17,501 19,033
- ------------------------------------------------------------------------------
Total Deposits $ 174,978 $ 159,802
- ------------------------------------------------------------------------------
Short term borrowings - -
Notes payable - 4,976
Other liabilities 1,525 2,810
- ------------------------------------------------------------------------------
Total Liabilities $ 176,503 $ 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
2,995 4,601
Retained earnings
Net unrealized gain (loss) on available-for-sale
securities, net of taxes of $126,000 in 1997 and
$1,000 in 1996 174 1
- ------------------------------------------------------------------------------
Total Shareholders' Equity 12,445 13,470
- ------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 188,948 $ 181,058
- ------------------------------------------------------------------------------
See notes to consolidated financial statements
2
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER COMMON AND EQUIVALENT SHARE DATA) FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans (including fees) $ 3,330 $ 2,884 $ 9,034 $ 8,380
Investment securities:
Taxable 557 430 1,651 1,272
Tax exempt 45 99 99 66
- ----------------------------------------------------------------------------------------------------------------------------
Total Investment Interest Income 602 451 1,750 1,338
Other 99 17 354 60
- ----------------------------------------------------------------------------------------------------------------------------
Total Interest Income 4,031 3,352 11,138 9,778
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 1,331 1,130 3,900 3,296
Other 20 41 60 141
- ----------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 1,351 1,171 3,960 3,437
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 2,680 2,181 7,178 6,341
Provision for credit losses 460 - 1,295 -
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for credit losses 2,220 2,181 5,883 6,341
- ----------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Gain on sale of loans 26 231 512 1,119
Depositor service charges 101 83 295 244
Income from investment management services 198 174 600 500
Gain/(loss) on sale of securities - - (34) -
Gain on sale of assets 248 5 252 14
Servicing fees on loans sold 83 92 250 231
Other 68 90 249 342
- ----------------------------------------------------------------------------------------------------------------------------
Total Noninterest Income 724 675 2,124 2,450
- ----------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Loss (gain) from investments in real estate partnerships (21) (12) 3,569 170
Salaries and related benefits 1,216 1,154 3,613 3,340
Occupancy & equipment 399 438 1,213 1,231
FDIC insurance and regulatory assessments 47 15 91 47
Marketing 102 117 334 328
Professional services 56 178 334 601
Director's fees and expenses 44 90 220 258
Management fees for real estate projects 9 126 121 359
Supplies, telephone & postage 78 94 241 272
Other 490 171 1,035 730
- ----------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expense 2,420 2,371 10,771 7,336
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 524 485 (2,764) 1,455
Provision (benefit) for income taxes 223 203 (1,158) 613
- ----------------------------------------------------------------------------------------------------------------------------
Net Income (loss) $301 $282 $ (1,606) $ 842
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common and
common equivalent share $ .16 $ .15 $ (.84) $ .45
Shares used in computation 1,926 1,869 1,912 1,869
- ----------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
</TABLE>
3
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock Common Net
Number of Stock Retained Unrealized
(In thousands) 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 - - (327) - (327)
Net change in unrealized gain (loss) on
available-for-sale securities (net of
taxes of $135,000) - - - (186) (186)
Net Income (loss) - - 842 - 842
- ----------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 1,818 $ 8,868 $ 4,544 $ (141) $ 13,271
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock Common Net
Number of Stock Retained Unrealized
(In thousands) 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 - - - 173 173
taxes of $126,000)
Net Income (loss) - - (1,606) - (1,606)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 1,871 $ 9,276 $ 2,995 $ 174 $ 12,445
- ----------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
</TABLE>
4
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
- ----------------------------------------------------------------------------------------
(IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Increase (decrease) in cash equivalents:
Net income/(loss) $ (1,606) $ 842
Adjustments:
Provision for credit losses 1,295 -
Provision for losses on real estate 364 -
Provision for OREO losses 80 -
Depreciation and amortization 467 535
Deferred income taxes (171) 490
(Increase) decrease in interest receivable and other assets 1,641 (92)
Increase in surrender value of life insurance (99) (104)
Distributions of income from real estate partnerships 7 103
Equity in (income) loss of real estate partnerships 397 (10)
(Increase) decrease in real estate held for sale 6,110 6,417
(Gain)/loss on acquisition of partnerships - (63)
Increase (decrease) in other liabilities (1,285) (566)
Gain on sale of loans held-for-sale (512) (1,119)
Proceeds from sale of loans held-for-sale 14,475 11,619
Additions to loans held-for-sale (14,065) (8,253)
Loss (gain) on sale of premises and equipment and OREO (22) (1)
Loss (gain) on sale of furniture and equipment 16 -
(Gain)/loss on sale of investment securities 33 -
- ----------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ 7,125 $ 9,798
- ----------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of available-for-sale securities (15,612) (12,109)
Proceeds from sales of available-for-sale securities 4,341 1,000
Proceeds from maturities of available-for-sale securities 7,303 14,094
Loan participations purchased - -
Loan participations sold - -
Net (increase) decrease in loans (18,355) (5,839)
Net decrease (increase) in other short-term investments 98 -
Cash received through acquisition of partnerships - 441
Proceeds from sale of OREO 224 123
Capital contributions to real estate partnerships - (397)
Capital distributions from real estate partnerships 700 1,012
Purchases of premises and equipment (89) (357)
Proceeds from sale of premises and equipment 34 -
- ----------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities $ (21,356) $ (2,032)
- ----------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in time deposits accounts (5,018) 9,949
Net increase (decrease) in other deposits 20,194 (1,626)
Net increase (decrease) on short term borrowings - -
Cash dividends paid - (327)
Payments for fractional shares related to stock dividends - -
Payments on notes payable (7,155) (7,059)
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 10,608 1,317
- ----------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,623) 9,083
- ----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,833 8,925
- ----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,210 $ 18,008
- ----------------------------------------------------------------------------------------
See notes to consolidated financial statements
</TABLE>
<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
6
<PAGE>
EPS with a presentation of basic EPS. In addition, all entities with complex
capital structures are 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:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------------------------------
1997 1996 1997 1996
------ ------ ------ ------
Proforma basic EPS .16 .16 (.87) .15
Proforma diluted EPS .16 .15 (.84) .45
In June 1997, the FASB adopted SFAS 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 SFAS 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 September 30, 1997, the
Company recorded a net increase in the value of its available-for-sale
portfolio of $173,000 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 lower interest rates
in the bond market at September 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 SEPTEMBER 30, 1997 DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasuries $ 2,010 $ 2,017 $ 2,020 $ 2,029
U.S. Government Agencies 19,679 19,772 21,408 21,384
Mortgage-backed securities 10,695 10,784 7,972 7,948
State and Political Subdivisions 4,563 4,673 1,518 1,559
Equity Securities 214 214 350 350
- -----------------------------------------------------------------------------------------------------
Total $ 37,161 $ 37,460 $ 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 No. 2 - Management's
Discussion and Analysis, Balance Sheet Analysis.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) SEPTEMBER 30, 1997 DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------
Percent of Percent of
Amount Total Loans Amount Total Loans
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 67,182 56.1% $ 56,625 55.3%
Real estate mortgage 15,443 12.9% 13,260 12.9%
Real estate construction 28,188 23.5% 23,795 23.2%
Consumer and other 9,023 7.5% 8,778 8.6%
- -----------------------------------------------------------------------------------------------------
Subtotal $ 119,836 100.0% $ 102,458 100.0%
- -----------------------------------------------------------------------------------------------------
Less:
Unearned discount 668 681
Deferred loan fees 389 392
Allowances for credit losses 2,211 1,615
- -----------------------------------------------------------------------------------------------------
Total loans, net $ 116,568 $ 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 nine months ended September 30, 1997 and 1996:
- ------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------------
Cash paid during the period for:
Interest on deposits and other borrowings $ 3,039 $ 3,387
Income taxes - 316
- ------------------------------------------------------------------------------
Non cash transactions:
Transfer of loans to other real estate owned $ 364 $ -
- ------------------------------------------------------------------------------
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. Changes to such risks and uncertainties, which could impact
future financial performance, include, among other things, (1) competitive
pressures in the banking industry; (2) changes in the interest rate
environment; (3) general economic conditions, either nationally or
regionally; (4) changes in the regulatory environment; (5) changes in
business conditions and inflation; and (6) changes in security markets.
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 nine months ended
September 30, 1997, was $1,606,000, compared to net income of $842,000 for
the period ended September 30, 1996. Net income for the third quarter of
1997 was $301,000 as compared to income of $282,000 in the third quarter of
1996. The net loss for the first nine 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 efforts to pursue the bulk
sale of several projects, as well as discounting other holdings to reflect
RSC's anticipated sales proceeds during the second quarter of 1997, several
properties were written down in value and additional reserves were added to
allow for potential future losses on the sale of real estate. The Company's
profitability during the third quarter of 1997 is primarily a result of these
actions taken during the second quarter. Further discussion regarding RSC
and the impact its losses have had on the Company can be found on pages 18 -
19.
Earnings/(loss) per weighted average common share were $.16 in the
third quarter of 1997, and $(.84) for the nine month period ended September
30, 1997, compared to $0.15 per share in the third quarter of 1996 and $0.45
for the nine month period ended September 30, 1996. The Company paid no cash
dividends in the third quarter of 1997, while a cash dividend of $0.06 per
share was paid in the third quarter of 1996. The Company's net income,
excluding losses from RSC, would have been $1,436,000 or $.75 per share for
the nine months ended September 30, 1997.
The Company's return on average assets was (1.17)% for the first
nine months of 1997 compared to 0.69% for the first nine months of 1996.
Return on average common equity for the first nine months of 1997 was
(16.04)% compared to 8.46% for the same period in 1996. For the quarter ended
September 30, 1997, the Company's return on average assets was 0.63% compared
to 0.68% for the third quarter of 1996. Return on average common equity for
the third quarter of 1997 was 9.58% compared to 8.51% for the same period in
1996.
9
<PAGE>
During the third quarter of 1997, RSC continued the divestiture of
its remaining real estate holdings through various transactions. During the
third quarter, RSC sold 36 homes and lots and as of September 30, 1997 had
entered into escrow or sales agreements for the sale of 190 of the remaining
220 homes and lots in which RSC has an interest. The majority of the 190
units in escrow are expected to close during the fourth quarter of 1997.
At September 30, 1997, the Company's total capital to risk weighted
assets was 9.42%, while the Tier 1 capital to average assets (leverage
capital) ratio was 5.87%. Capital ratios at these levels are normally
considered adequate under FDICIA regulatory guidelines, however, under the
Prompt Corrective Action ("PCA") guidelines, any institution that has
consented to a formal order as described below under "Administrative Orders"
cannot be technically considered "Adequately Capitalized". Capital
guidelines under the PCA are discussed in greater detail on page 29.
During the third quarter, the Company continued to pursue the
acquisition of additional capital. It is anticipated that a private
placement offering will be completed during the fourth quarter of 1997,
resulting in the Company receiving additional capital of approximately
$6,000,000.
ADMINISTRATIVE ORDERS
As a result of an examination of the Bank as of June 30, 1997, the
FDIC determined that the Company required special supervisory attention. The
Bank consented to an FDIC Order on October 28, 1997. The FDIC Order is a
"cease-and-desist order" for the purposes of Section 8 of the Federal Deposit
Insurance Act, and violation of the FDIC Order by the Bank can give rise to
enforcement proceedings under Section 8 of the Federal Deposit Insurance Act.
The FDIC Order provides that the Bank must: (a) retain qualified
management; (b) increase on or before December 31, 1997, and thereafter
maintain Tier 1 capital equal to the greater of $14,000,000 or the equivalent
of a Tier 1 capital to average assets ratio of at least 7.0%; (c) eliminate
from its books classified assets not previously collected or charged off; (d)
not extend additional credit to borrowers with previous classified or charged
off credits which are uncollected; (e) not engage in any activities not
permissible for a national bank subsidiary, except that the Bank and RSC may
continue real estate activities as permitted by the FDIC's letter of November
29, 1996, to the Bank requiring, among other things, that RSC divest all
properties held by it not later than December, 31, 1998; (f) review the
adequacy of the Bank's allowance for loan and lease losses and establish a
comprehensive policy for determining its adequacy on a quarterly basis; (g)
develop a plan to control overhead and other expenses and restore the Bank to
profitability; (h) prepare a business/strategic plan for the operation of the
Bank acceptable to the FDIC; (i) not pay cash dividends in any amount except
with the prior written consent of the FDIC and the Commissioner; and (j)
furnish quarterly written progress reports to the FDIC and the Commissioner
detailing the form and manner of any actions taken to comply with the
Administrative Orders.
As a result of an examination of the Bank as of June 30, 1997, the
Department of Financial Institutions and the Bank have stipulated to the
issuance of the State Order by the Department of
10
<PAGE>
Financial Institutions which State Order is a final order pursuant to Section
1913 of the California Financial Code.
The State Order provides that the Bank must: (a) retain management
and maintain a Board of Directors for the Bank and RSC acceptable to the
Commissioner and FDIC; (b) increase and maintain tangible shareholders'
equity (shareholders' equity less intangible assets) to an amount not less
than the greater of (i) 7% of its tangible assets (total assets less
intangible assets) or (ii) $14,000,000; (c) maintain an adequate allowance
for loan and lease losses; (d) cause RSC to maintain an adequate reserve for
losses on its real estate investments; (e) cause RSC to reduce the assets
classified as substandard so that the amount of such assets shall not exceed
$10,115,000 by December 31, 1997, $8,750,000 by March 31, 1998, $7,100,000 by
June 30, 1998 and $4,900,000 by September 30, 1998; (f) develop, adopt and
implement a plan acceptable to the Commissioner for divestiture of RSC and
all of RSC's real estate investments by not later than December 31, 1998; (g)
not make any distribution to shareholders except with the prior written
approval of the Commissioner; and (h) furnish written progress reports within
thirty (30) days after the end of each quarter to the Commissioner and the
FDIC describing actions to comply with the State Order.
As of the date of this Form 10-Q, the Company and the Bank have
taken certain actions to comply with the Administrative Orders, including
initiating action to raise capital through a private offering, which is
expected to close in the fourth quarter 1997, in order to comply with the
capital requirements.
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 tables present, 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 tables also set forth the net interest income and
the net earning balance for the periods indicated.
11
<PAGE>
CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND
INTEREST RATES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
FOR THE THREE MONTHS ENDED SEPTEMBER 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) $ 115,239 11.46% $ 3,330 $ 103,154 11.13% $ 2,884
Investment securities (2) 37,003 6.45% 602 28,221 6.36% 451
Federal funds sold & other 7,250 5.42% 99 1,620 4.17% 17
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest-earning Assets $ 159,492 10.03% $ 4,031 $ 132,995 10.03% $ 3,352
- ----------------------------------------------------------------------------------------------------------------------------------
Noninterest -earning assets:
Allowance for credit losses (1,912) (1,690)
Cash and due from banks 10,220 8,668
Real estate investments 11,112 16,677
Premises and equivalent, net 1,965 2,313
Cash surrender value of life insurance 2,979 2,845
Accrued interest receivable and other assets 4,450 4,171
- ----------------------------------------------------------------------------------------------------------------------------------
Total Average Assets $ 188,306 $ 165,980
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Transaction accounts $ 51,613 2.47% 321 $ 46,326 2.68% 312
Savings accounts 35,491 4.09% 366 23,976 4.25% 256
Time deposits 46,183 5.53% 644 42,306 5.29% 562
Federal funds purchased, notes payable
and other 1,956 4.06% 20 7,219 2.26% 41
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing Liabilities $ 135,243 3.96% $ 1,351 $ 119,828 3.89% $ 1,171
- ----------------------------------------------------------------------------------------------------------------------------------
Noninterest -bearing liabilities:
Transaction accounts 38,807 30,622
Other liabilities 1,787 2,350
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities $ 175,837 $ 152,800
- ----------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Common stock 9,274 8,868
Retained earnings 3,061 4,452
Unrealized gain / (loss) on investment
securities 134 (141)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 12,469 13,179
- ----------------------------------------------------------------------------------------------------------------------------------
Total average liabilities and
shareholders' equity $ 188,306 $165,980
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 2,680 $ 2,181
- ----------------------------------------------------------------------------------------------------------------------------------
Interest income as a percentage of average
interest-earning assets 10.03% 10.03%
Interest expense as a percentage of average
interest-earning assets (3.36%) (3.51%)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Margin 6.67% 6.52%
- ----------------------------------------------------------------------------------------------------------------------------------
</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
$344,000 and $321,000 for the three months ended September 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>
CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND
INTEREST RATES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
FOR THE NINE MONTHS ENDED SEPTEMBER 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) $ 107,893 11.19% $ 9,034 $ 98,964 11.31% $ 8,380
Investment securities (2) 35,736 6.55% 1,750 28,702 6.23% 1,338
Federal funds sold & other 8,763 5.40% 354 1,640 4.89% 60
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest-earning Assets $ 152,392 9.77% $ 11,138 $ 129,306 10.10% $ 9,778
- ----------------------------------------------------------------------------------------------------------------------------------
Noninterest -earning assets:
Allowance for credit losses (1,755) (1,743)
Cash and due from banks 9,301 8,300
Real estate investments 14,457 18,723
Premises and equivalent, net 2,118 2,297
Cash surrender value of life insurance 2,948 2,811
Accrued interest receivable and other assets 4,324 4,428
- ----------------------------------------------------------------------------------------------------------------------------------
Total Average Assets $ 183,785 $ 164,122
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Transaction accounts $ 49,217 2.52% $ 928 $ 45,604 2.69% $ 919
Savings accounts 32,764 4.08% 1,000 25,383 4.19% 796
Time deposits 47,845 5.51% 1,972 39,740 5.32% 1,581
Federal funds purchased, notes payable
and other 3,483 2.30% 60 7,888 2.39% 141
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing Liabilities $ 133,309 3.97% $ 3,960 $ 118,615 3.87% $ 3,437
- ----------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Transaction accounts 34,971 29,653
Other liabilities 2,121 2,554
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities $ 170,401 $ 150,822
- ----------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Common stock 9,156 8,868
Retained earnings 4,224 4,468
Unrealized gain / (loss) on investment
securities 4 (36)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 13,384 $ 13,300
- ----------------------------------------------------------------------------------------------------------------------------------
Total average liabilities and
shareholders' equity $ 183,785 $164,122
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 7,178 $ 6,341
- ----------------------------------------------------------------------------------------------------------------------------------
Interest income as a percentage of average
interest-earning assets 9.77% 10.10%
Interest expense as a percentage of average
interest-earning assets (3.47%) (3.55%)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Margin 6.30% 6.55%
- ----------------------------------------------------------------------------------------------------------------------------------
</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
$950,000 and $935,000 for the nine months ended September 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.
13
<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) AMOUNT RESULTING FROM CHANGES IN
- ----------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPT. 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 347 99 446
Investment securities (2) 143 8 151
Federal funds sold and other 75 7 82
- ----------------------------------------------------------------------------------------------------------------------
Total 565 114 679
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Transaction accounts 27 (18) 9
Savings accounts 118 (8) 110
Time deposits 53 29 81
Federal funds purchased, notes payable and other 215 (236) (21)
- ----------------------------------------------------------------------------------------------------------------------
Total 414 (234) 180
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income 151 348 499
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AMOUNT RESULTING FROM CHANGES IN
- ----------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPT. 30, 1997 COMPARED TO 1996 VOLUME (1) RATE (1) TOTAL
- ----------------------------------------------------------------------------------------------------------------------
Net Interest Earnings Variance Analysis
Increase (decrease) in interest income:
Loans 746 (92) 654
Investment securities (2) 342 70 412
Federal funds sold and other 287 7 294
- ----------------------------------------------------------------------------------------------------------------------
Total 1,375 (15) 1,360
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Transaction accounts 48 (39) 9
Savings accounts 225 (21) 204
Time deposits 332 59 391
Federal funds purchased , notes payable and other (76) (5) (81)
- ----------------------------------------------------------------------------------------------------------------------
Total 529 (6) 523
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income 846 (9) 837
- ----------------------------------------------------------------------------------------------------------------------
</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 $2,680,000
for the third quarter of 1997 as compared to $2,181,000 for the comparable
period of 1996, an increase of $499,000 or 22.9%. This increase was primarily
attributable to a larger earning assets base as well as lower rates on
deposit accounts. The Company's net interest margin in the third quarter of
1997 (based on average interest earning assets) was 6.67% as compared to
6.52% for the same period in 1996. Average interest earning assets grew
19.9% between the third quarter of 1997 and the third
14
<PAGE>
quarter of 1996 while interest bearing liabilities grew only 12.9% over the
same period. The Company's earning asset mix shifted between comparable
periods with federal funds sold increasing from 1.2% of interest earning
assets during the third quarter of 1996 to 4.5% of interest earning assets
during the third quarter of 1997. As a percentage of average assets, loans
dropped from 77.6% to 72.3% between the third quarter of 1996 and the third
quarter of 1997 respectively, while investments increased from 21.2% to 23.2%
of average earning assets. Although there was a shift of interest earning
assets from higher yielding loans to lower yielding federal funds sold and
investments, both loans and investments yielded higher earnings in 1997 as
compared to 1996. Overall the yield on earning assets for both third
quarters was 10.03%. With the growth in earning assets outpacing the growth
in interest bearing liabilities, the overall interest margin improved by .15%
between the third quarter of 1996 and the third quarter of 1997, respectively.
Net interest income before the provision for credit losses for the first
nine months of 1997 was $7,178,000 as compared to $6,341,000 for the
comparable period of 1996, an increase of $837,000 or 13.2%. This increase
was primarily attributable to a larger earning asset portfolio. The
Company's net interest margin for the nine month period ended September 30,
1997 (based on average interest-earning assets) was 6.30% as compared to
6.55% for the same period in 1996. Average interest-earning assets grew
17.9% for the nine month period ended September 30, 1997 as compared to the
nine month period ended September 30, 1996, while interest-bearing
liabilities grew 12.4% over the comparable periods. The Company's earning
asset mix showed an increased level of Federal 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
The following tables set forth, for the periods indicated, the average
balance and percentages of the Company's principal categories of interest
earning assets.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 1996
- ----------------------------------------------------------------------------------------------------
Average Percent Average Percent
Balance of Total Balance of Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-Earning Asset Mix:
Loans $ 115,239 72.3% $ 103,154 77.6%
Investment securities 37,003 23.2% 28,221 21.2%
Federal funds sold and other 7,250 4.5% 1,620 1.2%
- ----------------------------------------------------------------------------------------------------
Total Interest-earning Assets $ 159,492 100.0% $ 132,995 100.0%
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 1996
- ----------------------------------------------------------------------------------------------------
Average Percent Average Percent
Balance of Total Balance of Total
- ----------------------------------------------------------------------------------------------------
Interest -Earning Asset Mix:
Loans $ 107,893 70.8% $ 98,964 76.5%
Investment securities 35,736 23.5% 28,702 22.2%
Federal funds sold and other 8,763 5.7% 1,640 1.3%
- ----------------------------------------------------------------------------------------------------
Total Interest-earning Assets $ 152,392 100.0% $ 129,306 100.0%
- ----------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Average interest-earning assets for the third quarter ended September 30,
1997 increased to $159,492,000 from $132,995,000 for the comparable period in
1996, an increase of $26,497,000 or 19.9%. Average loans increased by
$12,085,000 to $115,239,000 representing 72.3% of average interest-earning
assets for the third quarter of 1997, compared to $103,154,000 or 77.6% for
the third quarter of 1996. The yield on average loans increased to 11.46% at
September 30, 1997, from 11.12% at September 30, 1996, primarily due to the
Company's decision to hold higher yielding SBA loans in its loan portfolio
rather than selling them into the secondary market. Average investment
balances increased 31.1% between the third quarter of 1996 and the third
quarter of 1997 while average federal funds sold increased by 347.6% during
the same time periods. Increased liquidity from the growth in deposits
providing a large amount of funds for investment was the primary cause of the
large increase in investments and federal funds sold.
Average interest-bearing liabilities for the third quarter ended
September 30, 1997 increased to $135,243,000 from $119,828,000 for the
comparable period in 1996, an increase of $15,415,000 or 12.9%. 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 quarter ended
September 30, 1997, the average interest rate paid on interest-bearing
liabilities increased to 3.96% from an average rate of 3.89% paid during the
third quarter of 1996.
Average interest-earning assets for the nine months ended September 30,
1997 increased to $152,392,000 from $129,306,000 for the comparable period in
1996, an increase of $23,086,000 or 17.9%. Average loans increased by
$8,929,000 to $107,893,000 representing 70.8% of average interest-earning
assets for the first nine months of 1997, compared to $98,964,000 or 76.5%
for the first nine months of 1996. The yield on average loans declined to
11.19% for the nine months ended September 30, 1997, from 11.31%, for the
nine months ended September 30, 1996, primarily due to competitive pressure
from other banks. Average investment balances increased 24.5% for the nine
months ended September 30, 1997, compared to the same period in 1996 while
average federal funds sold increased by 434.3% during the same time periods.
Increased liquidity providing a large amount of funds for investment was the
primary cause of the large increase in investments and federal funds sold.
Average interest-bearing liabilities for the nine months ended September
30, 1997 increased to $133,309,000 from $118,615,000 for the comparable
period in 1996, an increase of $14,694,000 or 12.4%. Exceptionally strong
growth in deposits attributable to the Bank's Madera branch opening as well
as new deposits resulting from business acquired as a result of the
Westamerica acquisition of locally based Valliwide Bank were the primary
causes of the increase. For the first nine months ended September 30, 1997,
the average interest rate paid on interest-bearing liabilities increased to
3.97% from an average rate of 3.87% paid during the first nine months of
1996.
16
<PAGE>
NONINTEREST INCOME
The Company receives a significant portion of its income from noninterest
sources related both to activities conducted by the Bank (loan originations
and servicing, depositor service charges), as well as from the Company's
investment advisory firm, RIA.
The following table sets forth, for the periods indicated, the principal
categories of noninterest income received by the Company.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(IN THOUSANDS) FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest Income:
Gain on sale of loans $ 26 $ 231 $ 512 $ 1,119
Depositor service charges 101 83 295 244
Income from investment management services 198 174 600 500
Gain on sale of securities - - (34) -
Gain on sale of assets 248 5 252 14
Servicing fees on loans sold 83 92 250 231
Other 68 90 249 342
- -----------------------------------------------------------------------------------------------------
Total $ 724 $ 675 $ 2,124 $ 2,450
- -----------------------------------------------------------------------------------------------------
(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>
Noninterest income for the third quarter of 1997 increased by $49,000 or
7.3% to $724,000 compared to $675,000 for the same period during 1996. The
increase resulted primarily from the recognition of approximately $230,000 in
income related to the deferred gain on the sale of the Company's headquarters
building which was sold in the third quarter of 1995. The recognition of the
gain on sale of assets was partially offset by a decline in income related to
the sale of loans of $205,000 related to the Company's decision to hold SBA
loans originated in portfolio rather than sell them in the secondary market.
For the first nine months of 1997, noninterest income was $2,124,000,
compared to $2,450,000 for the first nine months of 1996, a decrease of
$326,000 or 13.3%. This decline was primarily attributable to lower gains on
sale of 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
and the one time gain from the sale of the Company's headquarters building.
LOAN ORIGINATION & SALES
The Bank originates various types of loans that may be sold in
active secondary markets. Included in loans originated and sold are
permanent mortgage loans, Business and Industry loans guaranteed by the
United States Department of Agriculture ("USDA") and Small Business
Administration ("SBA") loans. The majority of loans available for sale are
originated under the ("SBA") program which generally provides for SBA
guarantees of 70% to 90% of each loan. Historically, the Bank has sold the
guaranteed portion of the loan in the secondary market while retaining the
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
17
<PAGE>
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 September 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.
Income from the sale of other types of loans and income from the recognition
of deferred gains on sale from loans sold in prior periods was $26,000 in the
third quarter of 1997, a decrease of $205,000 compared to $231,000 in the
third quarter of 1996. For the nine months ended September 30, 1997, gain
on the sale of loans was $512,000 compared to $1,119,000 during the first
nine months of 1996, a decrease of $607,000.
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 third quarter ended September 30, 1997, servicing
income totaled $83,000, a decrease of $9,000 compared to $92,000 in
servicing income during the quarter ended September 30, 1996. For the nine
months ended September 30, 1997, servicing income totaled $250,000, an
increase of $19,000 compared to $231,000 during the first nine months of
1996. The servicing income increase for the first nine months of 1997 was
the result of a larger portfolio of loans serviced.
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
request, granted the Bank and RSC a two year extension, until December 31,
1998, to continue its divestiture activities.
18
<PAGE>
For the third quarter ended September 30, 1997, RSC generated income
from investments in real estate in an amount of $21,000 compared to income of
$12,000 for the same period in 1996. During the third quarter of 1997, RSC
sold 36 homes and lots and had entered into escrow or sales agreements for
the sale of 190 additional homes and lots which are anticipated to close
during the fourth quarter 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 $331,000 in the third quarter
of 1997 compared to a loss of $282,000 in the third quarter of 1996. These
operating expenses have been consolidated with similar operating expenses in
the Company's consolidated statement of income.
For the nine months ended September 30, 1997, RSC experienced a loss
from investments in real estate partnerships in the amount of $3,569,000
compared to a loss of $170,000 for the same period in 1996, an increase of
$3,399,000. The increased loss resulted from the sale of properties at
discounted prices, as well as the writedown of several properties to reflect
RSC's anticipated sales proceeds. For the nine months ended September 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 $5,246,000 compared to $1,053,000 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 third quarter of 1997 increased to $198,000
from $174,000 in the same period of 1996, an increase of $24,000 or 13.8%.
On a stand alone basis, RIA's activities, (income from investment management
activities less operating expenses), provided the Company with after-tax
income of $29,000 in the third quarter of 1997 compared to after-tax income
of $8,000 in the third quarter of 1996. RIA's operating expenses have been
consolidated with similar operating expenses in the Company's consolidated
statement of income.
For the nine months ended September 30, 1997, revenue from RIA
increased to $600,000 from $500,000 for the same period in 1996, an increase
of $100,000 or 20.0%. On a stand alone basis, RIA's activities (income from
investment management activities less operating expenses), provided the
Company with after-tax income of $77,000 for the nine months ended September
30, 1997, compared to $12,000 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 September 30, 1997, RIA had
$86.2 million in assets under management, an increase of $13.7 million, or
18.9% compared to $72.5 million as of September
19
<PAGE>
30, 1996. Assets in client accounts managed by RIA are not reflected in the
consolidated balance sheet of the Company.
NONINTEREST EXPENSE
Noninterest expense reflects the costs of products and services, systems,
facilities and personnel for the Company. The following tables set forth,
for the period indicated, the major components of other operating expenses
stated both as dollars and as a percentage of average assets:
NONINTEREST OPERATING EXPENSE TO AVERAGE ASSETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Percent of Percent of
Average Average
Amount Assets Amount Assets
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest Expense:
Loss (gain) from investments in real estate partnerships $ (21) (0.04%) $ (12) (0.03)%
Salaries and related benefits 1,216 2.56% 1,154 2.76%
Occupancy 399 0.84% 438 1.05%
FDIC insurance and regulatory assessments 47 0.10% 15 0.04%
Marketing 102 0.21% 117 0.28%
Professional services 56 0.12% 178 0.43%
Director's fees and expenses 44 0.09% 90 0.22%
Management fees for real estate projects 9 0.02% 126 0.30%
Supplies, telephone & postage 78 0.16% 94 0.23%
Other 490 1.03% 171 0.41%
- -------------------------------------------------------------------------------------------------------------------
TOTAL 2,420 5.09% $2,371 5.69%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
For the third quarter ended September 30, 1997, noninterest expenses
increased 2.1% or $49,000 to $2,420,000, up from $2,371,000 during the
comparable period in 1996. The principal causes of the increase were
increases in salaries and related benefits of $62,000 and an increase in
other expense of $319,000. The increase in other expenses related primarily
to the writedown of an OREO property and RSC related expenses. In contrast,
several expense categories showed marked improvement during the third quarter
of 1997 compared to the same period in 1996, including professional services
which declined primarily due to lower legal and accounting expense related to
RSC and directors fees which declined as a result of reduced fees paid to
directors for board and committee meetings. For the third quarter ended
September 30, 1997, noninterest expense to average assets declined to 5.09%
compared to 5.69% for the comparable period in 1996.
20
<PAGE>
NONINTEREST OPERATING EXPENSE TO AVERAGE ASSETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 1996
- ------------------------------------------------------------------------------------------------------
Percent of Percent of
Average Average
Amount Assets Amount Assets
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest Expense:
Loss (gain) from investments in real estate
partnerships $ 3,569 2.60% $ 170 0.14%
Salaries and related benefits 3,613 2.63% 3,340 2.72%
Occupancy 1,213 0.88% 1,231 1.00%
FDIC insurance and regulatory assessments 91 0.07% 47 0.04%
Marketing 334 0.24% 328 0.27%
Professional services 334 0.24% 601 0.49%
Director's fees and expenses 220 0.16% 258 0.21%
Management fees for real estate projects 121 0.09% 359 0.29%
Supplies, telephone & postage 241 0.18% 272 0.22%
Other 1,035 0.75% 730 0.59%
- ------------------------------------------------------------------------------------------------------
TOTAL 10,771 7.84% $ 7,336 5.97%
- ------------------------------------------------------------------------------------------------------
</TABLE>
For the nine months ended September 30, 1997, noninterest expenses
increased 46.8% or $3,435,000 to $10,771,000, up from $7,336,000 during the
comparable period in 1996. The primary cause of the increase was due to
losses from RSC investments in real estate of $3,569,000. When compared to
average assets for the respective periods, other expenses increased to 7.84%
versus 5.97% in 1996. In addition to the loss from RSC, categories with an
increase included salaries and related benefits, up $273,000 or 8.2%,
primarily due to additional staff related to the Bank's new Madera branch, as
well as commissions paid to staff on incentive based compensation programs;
FDIC insurance and regulatory assessments, up $44,000 or 93.6%, primarily due
to a larger deposit base and a higher assessment rate; and other expenses, up
$305,000 or 41.2%, related to charges taken by RSC. Expense categories
showing improvement in the nine months ended September 30, 1997 compared to
the nine months ended September 30, 1996 include professional services, down
$267,000 or 44.4%, primarily due to lower legal and accounting expense
related to RSC and management fees for real estate projects, down $238,000 or
66.3%, primarily as a result of a restructured sales and building program
initiated by RSC.
LOANS
The Company's loans are primarily made within its defined market area of
Fresno and Madera counties. Additionally, the Company operates a loan
production office in Modesto which generates SBA and Business & Industry
loans.
Commercial loans, including SBA loans, comprised approximately 56.1% of
the Company's loan portfolio at September 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,
21
<PAGE>
accounts receivable, inventory or other financial instruments is often
obtained as a secondary source of repayment.
Real Estate Construction lending comprised 23.5% of the Company's loan
portfolio at September 30, 1997, consisting of loans primarily for the
construction of single family residential housing. Loans in this category may
be extended 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 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 12.9% of the loan portfolio at
September 30, 1997, and are made up of (63%) non-residential properties and
(37%) 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 September 30, 1997, comprising 7.5% of total loans. This
category includes traditional Consumer Installment Loans (53%), Home Equity
Lines of Credit (39%), and Visa Card Loans (8%). Consumer installment loans
are generally secured by third 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.
22
<PAGE>
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 with the terms of the loan agreement or when the loan is both
well secured and in process of collection.
At September 30, 1997, non-performing loans amounted to $2,013,000 or
1.68% of total loans compared to $3,301,000 or 3.22% at December 31, 1996 and
$3,524,000 or 3.43% at September 30, 1996. Other real estate owned was
$519,000 at September 30, 1997 compared to $437,000 at December 31, 1996. Of
the total non-performing loans, $1,370,000 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. Without the non-accrual
loans made by RSC, the Bank's loan portfolio at September 30, 1997 had
$612,000 in non-accrual loans or .51%, compared to $51,000 in non-accrual
loans or .05% at December 31, 1996. Of the Bank's non-accrual loans
(excluding RSC loans) at September 30, 1997, $470,000 represents 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 in 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 SBA non-accrual loan levels will be slightly
higher.
23
<PAGE>
The following table presents information concerning the nonperforming
loans for the periods ending September 30, 1997 and December 31, 1996,
respectively.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) SEPTEMBER 30, 1997 DECEMBER 31, 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nonperforming Assets:
Nonaccrual RSC loans $ 1,370 $ 3,250
Nonaccrual bank loans 612 51
Restructured loans 31 -
- -------------------------------------------------------------------------------------------------------------
Nonperforming loans 2,013 3,301
Other real estate owned 519 437
- -------------------------------------------------------------------------------------------------------------
Total nonperforming assets 2,532 3,738
- -------------------------------------------------------------------------------------------------------------
Accruing loans 90 days past due 184 19
- -------------------------------------------------------------------------------------------------------------
Total loans before allowance for losses 119,836 102,458
Total assets 188,948 181,058
Allowance for possible credit losses (2,211) (1,615)
- -------------------------------------------------------------------------------------------------------------
Ratios:
Nonperforming loans to total loans consolidated 1.68% 3.22%
Nonperforming loans to total loans bank only
(excluding RSC loans) 0.51% 0.05%
Nonperforming assets to:
Total loans 2.11% 3.65%
Total loans and OREO 2.10% 3.63%
Total assets 1.34% 2.06%
Allowance for possible credit losses to total
nonperforming assets 87.32% 43.20%
Allowance for possible credit losses to loans 1.85% 1.58%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1997 and December 31, 1996, the Company's recorded
investment in loans for which an impairment has been recognized totaled
$273,000 and $242,000, respectively. These amounts were evaluated for
impairment using the fair value of collateral. At September 30, 1997, the
related SFAS No. 114 allowance for credit losses considered impaired was
$63,000. The Company uses the cash basis method of income recognition for
impaired loans. For the nine months ended September 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 $2,211,000 or 1.85% of total
loans at September 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 $699,000
during the first nine months of 1997 with an additional provision for credit
losses of $1,295,000. 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,
24
<PAGE>
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
September 30, 1997.
- ----------------------------------------------------------------------------
Balance, December 31, 1996 (In thousands) $ 1,615
- ----------------------------------------------------------------------------
Provision charged to expense 1,295
Loans charged-off (820)
Recoveries 121
- ----------------------------------------------------------------------------
Balance, September 30, 1997 $ 2,211
- ----------------------------------------------------------------------------
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 September 30, 1997 are acquisition,
development and construction loans held by the Bank totaling $275,000. The
remaining investments in real estate balance of $8,636,000 represents RSC's
investments in real estate.
The following table represents the condensed financial information
relative to RSC for the periods ended September 30, 1997 and December 31,
1996, respectively.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS) SEPTEMBER 30, 1997 DECEMBER 31, 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial Position:
Investments in real estate
Real estate held-for-sale $ 8,700 $ 15,520
Equity in partnerships 966 2,070
- ----------------------------------------------------------------------------------------------------
Investment in real estate before allowance 9,666 17,590
Allowance for real estate losses (1,030) (1,310)
- ----------------------------------------------------------------------------------------------------
Investment in real estate $ 8,636 $ 16,280
- ----------------------------------------------------------------------------------------------------
Loans to real estate partnerships and projects 1,552 3,988
Allowance for loan losses (364) (110)
- ----------------------------------------------------------------------------------------------------
Net Loans 1,188 3,878
- ----------------------------------------------------------------------------------------------------
Other Assets 1,889 1,733
- ----------------------------------------------------------------------------------------------------
Liabilities (387) (6,219)
- ----------------------------------------------------------------------------------------------------
Bank's investment in RSC $ 11,326 $ 15,672
- ----------------------------------------------------------------------------------------------------
</TABLE>
<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
September 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 September 30, 1997 and December 31, 1996, respectively.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) SEPTEMBER 30, 1997 DECEMBER 31, 1996
- ----------------------------------------------------------------------------------------------------------------
Percent of Percent of
Amount Total Deposits Amount Total Deposits
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing transaction accounts $ 41,204 23.5% $ 36,613 22.9%
Now and MMI 53,559 30.6% 47,850 29.9%
Savings 35,434 20.3% 25,540 16.0%
Time $100,000 and over 27,280 15.6% 30,766 19.3%
Time under $100,000 17,501 10.0% 19,033 11.9%
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 133,774 76.5% 123,189 77.1%
- ----------------------------------------------------------------------------------------------------------------
Total Deposits $ 174,978 100.0% $ 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
a line of credit with a correspondent bank for up to $5,000,000 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.
<PAGE>
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 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 SEPTEMBER 30, 1997 IMMEDIATELY MONTHS 12 MONTHS FIVE YEARS FIVE YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Sensitivity Gap:
Loans (1) 48,664 40,029 10,314 12,170 7,148 118,325
Investment securities and other 214 17,142 7,137 8,739 3,933 37,165
- ------------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets $ 51,378 $ 57,171 $ 17,451 $ 20,909 $ 11,081 $ 157,990
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing transaction accounts 53,559 53,559
Savings accounts 32,627 2,807 35,434
Time deposits - 14,286 26,392 3,297 806 44,781
Federal funds purchased - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities $ 86,186 $ 17,093 $ 26,392 $ 3,297 $ 806 $ 133,774
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap (34,808) 40,078 (8,941) 17,612 10,275
Cumulative gap (34,808) 5,270 (3,671) 13,941 24,216
Cumulative gap percentage to
interest earning assets (22.03%) 3.34% (2.32%) 8.82% 15.33%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts exclude nonaccrual loans of $1,982,000.
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, principle paydowns, changes in deposit mix or other such
movements of funds as a result of changing interest rate environments.
27
<PAGE>
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 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.
28
<PAGE>
The table below presents the Company's and the Bank's risk-based and leverage
capital ratios as of September 30, 1997.
<TABLE>
<CAPTION>
TO BE ADEQUATELY
CAPITALIZED UNDER
FOR CAPITAL ADEQUACY PROMPT CORRECTIVE
(IN THOUSANDS, EXCEPT PERCENTAGES) ACTUAL PURPOSES ACTION PROVISIONS
- ---------------------------------------------------------------------------------------------------------------------
AS OF SEPTEMBER 30, 1997 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets:)
Company $12,668 9.42% >=$10,761 >=8.00% N/A
Regency Bank $12,293 9.18% >=$10,709 >=8.00% >=$ 10,709 >=8.00%
Tier 1 Capital (to Risk Weighted Assets):
Company $10,980 8.16% >=$ 5,380 >=4.00% N/A
Regency Bank $10,613 7.93% >=$ 5,354 >=4.00% >=$ 5,354 >=4.00%
Tier 1 Capital (to Average Assets):
Company $ 10,980 5.87% >=$ 7,481 >=4.00% N/A
Regency Bank $ 10,613 5.68% >=$ 7,474 >=4.00% >=$ 7,474 >=4.00%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
As indicated in the table above, at September 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
29
<PAGE>
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.
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Return on average assets .63% 0.68% (1.17%) 0.69%
- --------------------------------------------------------------------------------------------
Return on average shareholders' equity 9.58% 8.51% (16.04%) 8.46%
- --------------------------------------------------------------------------------------------
Average shareholders' equity to
average assets 6.62% 7.94% 7.28% 8.10%
- --------------------------------------------------------------------------------------------
Dividend payout ratio 0.00% 38.68% 0.00% 38.87%
- --------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
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
None
Item 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
*(10.1) Amended and Restated Executive Salary Continuation Agreement
dated September 23, 1997, made by and between Regency Bank and
Steven F. Hertel, incorporated by reference from exhibit 99.1
of the Form 8-K, filed with the Commission on October 9, 1997.
*(10.2) Amended and Restated Executive Salary Continuation Agreement
dated September 26, 1997, made by and between Regency Bank and
Robert J. Longatti, incorporated by reference from exhibit 99.2
of the Form 8-K, filed with the Commission on October 9, 1997.
*(10.3) Amended and Restated Executive Salary Continuation Agreement
dated September 30, 1997, made by and between Regency Bank and
Steven R. Canfield, incorporated by reference from exhibit 99.3
of the Form 8-K, filed with the Commission on October 9, 1997.
(27.1) Financial Data Schedule
* Denotes management contracts, compensatory plans or arrangement.
31
<PAGE>
(b) Reports on Form 8-K
The Company filed a Form 8-K dated October 9, 1997, in which it
reported that on October 6, 1997, the Registrant Amended and
Restated the Executive Salary Continuation Agreements between
Regency Bank and Steven F. Hertel, Robert J. Longatti and Steven
R. Canfield.
32
<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: November 7, 1997 By: /s/ Steven F. Hertel
-------------------------------- ------------------------------
Steven F. Hertel
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 7, 1997 By: /s/ Steven R. Canfield
-------------------------------- ------------------------------
Steven R. Canfield
Executive Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
33
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
27.1 Financial Data Schedule 35
34
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 13,710
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,460
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 119,836
<ALLOWANCE> 2,211
<TOTAL-ASSETS> 188,948
<DEPOSITS> 174,978
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,525
<LONG-TERM> 0
0
0
<COMMON> 9,276
<OTHER-SE> 2,995
<TOTAL-LIABILITIES-AND-EQUITY> 188,948
<INTEREST-LOAN> 9,034
<INTEREST-INVEST> 1,750
<INTEREST-OTHER> 354
<INTEREST-TOTAL> 11,138
<INTEREST-DEPOSIT> 3,900
<INTEREST-EXPENSE> 3,960
<INTEREST-INCOME-NET> 7,178
<LOAN-LOSSES> 1,295
<SECURITIES-GAINS> (34)
<EXPENSE-OTHER> 10,771
<INCOME-PRETAX> (2,764)
<INCOME-PRE-EXTRAORDINARY> (2,996)
<EXTRAORDINARY> 135
<CHANGES> 0
<NET-INCOME> (1,606)
<EPS-PRIMARY> (0.87)
<EPS-DILUTED> (0.84)
<YIELD-ACTUAL> 6.30
<LOANS-NON> 2,013
<LOANS-PAST> 184
<LOANS-TROUBLED> 31
<LOANS-PROBLEM> 273
<ALLOWANCE-OPEN> 1,615
<CHARGE-OFFS> 820
<RECOVERIES> 121
<ALLOWANCE-CLOSE> 2,211
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,211
</TABLE>
