<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 March 31, 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 May 8, 1997, the registrant had 1,853,738 shares of Common Stock
outstanding.
The Exhibit Index is located on page 30.
This report contains a total of 51 pages of which this is page one.
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
PART I. ITEM 1. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
(IN THOUSANDS) MARCH 31, 1997 DECEMBER 31, 1996
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 8,990 $ 14,833
Federal funds sold 12,300 5,000
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Total Cash and Equivalents 21,290 19,833
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Interest bearing deposits in other banks 95 98
Securities available-for-sale 35,829 33,270
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Loans 101,192 102,458
Allowance for credit losses (1,699) (1,615)
Deferred loan fees & discounts (1,252) (1,073)
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Net Loans 98,241 99,770
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Investments in real estate 15,165 16,489
Other real estate owned 399 437
Cash surrender value of life insurance 2,938 2,903
Premises and equipment, net 2,182 2,262
Accrued interest receivable and other assets 5,413 5,996
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Total Assets $ 181,552 $ 181,058
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing transaction accounts 33,814 $ 36,613
Interest bearing transaction accounts 48,460 47,850
Savings accounts 30,703 25,540
Time Deposits $100,000 or over 29,186 30,766
Other time deposits 19,313 19,033
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Total Deposits 161,476 159,802
Short term borrowings - -
Notes Payable 4,012 4,976
Other liabilities 2,167 2,810
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Total Liabilities $ 167,655 $ 167,588
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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; 1,853,738 and 1,818,160 shares issued and
outstanding in 1997 and 1996, respectively 9,201 8,868
Retained earnings 4,836 4,601
Net unrealized gain (loss) on available-for-sale securities,
net of taxes of $(102,000) in 1997 and $1,026 in 1996 (140) 1
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Total Shareholders' Equity 13,897 13,470
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Total Liabilities and Shareholders' Equity $ 181,552 $ 181,058
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</TABLE>
See notes to consolidated financial statements
2
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER COMMON AND EQUIVALENT SHARE DATA)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME
Loans (including fees) $ 2,800 $ 2,869
Investment securities:
Taxable 514 443
Tax exempt 20 23
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Total Investment Interest Income 534 466
Other 114 19
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Total Interest Income $ 3,448 $ 3,354
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INTEREST EXPENSE
Interest on deposits 1,259 1,128
Other 20 38
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Total Interest Expense 1,279 1,166
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Net interest income 2,169 2,188
Provision for credit losses - -
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Net interest income after
provision for credit losses 2,169 2,188
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NONINTEREST INCOME
Income from investments in real estate partnerships - -
Gain on sale of SBA loans 270 315
Depositor service charges 98 76
Income from investment management services 214 164
Gain/(loss) on sale of securities 2 -
Gain on sale of assets 4 5
Servicing fees on loans sold 86 58
Other 107 95
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Total Noninterest Income $ 781 $ 713
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NONINTEREST EXPENSE
Loss from investments in real estate partnerships 240 97
Salaries and related benefits 1,164 1,111
Occupancy 403 392
FDIC insurance and regulatory assessments 22 16
Marketing 90 90
Professional Services 121 154
Director's fees and expenses 96 76
Management fees for real estate projects 108 79
Supplies, telephone and postage 79 85
Other 222 242
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Total Noninterest Expense $ 2,545 $ 2,342
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Income before income taxes 405 559
Provision for income taxes 170 237
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Net Income $ 235 $ 322
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Net income per common and
common equivalent share $ .12 $ .17
Shares used in computation 1,902,000 1,869,000
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</TABLE>
See notes to consolidated financial statements
3
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Net
Common Stock Common Stock Retained Unrealized
(In thousands) Number of Shares Amount Earnings Gain (Loss) Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 1,818 $8,868 $4,029 $ 45 $12,942
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Issuance of common stock
under stock option plan - - - - -
Cash dividends - - (109) - (109)
Net change in unrealized gain (loss) on
available-for-sale securities net of
taxes of $(16,000) - - - (23) (23)
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Net Income - - 322 - 322
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Balance, March 31, 1996 1,818 $8,868 $4,242 $ 22 $13,132
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Net
Common Stock Common Stock Retained Unrealized
(In thousands) Number of Shares Amount Earnings Gain (Loss) Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Cash dividends - - - - -
Net change in unrealized gain (loss) on
available-for-sale securities net of
taxes of $(102,000) - - - $(141) (141)
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Net Income - - 235 - 235
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Balance, March 31, 1997 1,854 $9,201 $4,836 $(140) $13,897
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) FOR THE THREE MONTHS ENDED MARCH 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 235 $ 322
Adjustments:
Provisions for losses on real estate - 294
Provision for OREO losses 26 -
Depreciation and amortization 139 152
Deferred income taxes 94 222
(Increase) decrease in interest receivable and other assets 592 (531)
Increase in surrender value of life insurance (35) (35)
Distributions of income from real estate partnerships - 64
Equity in (income) loss of real estate partnerships - 97
Decrease in real estate held-for-sale 1,318 -
Increase (decrease) in other liabilities (643) (1,046)
(Gain)/loss on sale of securities 2 -
Gain on sale of loans held-for-sale (270) (315)
Proceeds from sale of loans held-for-sale 5,651 3,493
Additions to loans held-for-sale (4,936) (4,334)
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Net cash provided by (used in) operating activities 2,173 (1,617)
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INVESTING ACTIVITIES:
Purchase of available-for-sale securities (6,199) (6,737)
Proceeds from sales of available-for-sale securities - -
Purchases of held-to-maturity securities - -
Proceeds from maturities of available-for-sale securities 3,394 9,180
Loan participations purchased - -
Loan participations sold - -
Net (increase) decrease in loans 1,084 (521)
Net decrease (increase) in other short-term investments 3 -
Life insurance premiums paid - -
Cash received through acquisition of partnerships - 345
Proceeds from sale of OREO 18 -
Capital contributions to real estate partnerships - (397)
Capital distributions from real estate partnerships - 612
Payments towards the acquisition and development
of investments in real estate - (352)
Purchases of premises and equipment (59) (44)
Proceeds from sale of real estate held-for-sale -
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Net cash provided by (used in) investing activities 1,759 2,086
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FINANCING ACTIVITIES:
Net increase (decrease) in time deposits 2,973 2,425
Net increase (decrease) in other deposits (1,299) (4,834)
Net increase (decrease) on short term borrowings - 2,000
Cash dividends paid - (109)
Payments for fractional shares related to stock dividends - -
Payments on notes payable (964) (1,750)
Proceeds from notes payable - 378
Proceeds from the issuance of common stock to employee
stock ownership plan 333 -
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Net cash provided by (used in) financing activities 1,043 (1,890)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,457 (1,421)
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,833 8,925
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,290 $ 7,504
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Regency Bancorp and its wholly-owned subsidiaries (the "Company"). Regency
Bancorp is a California corporation organized to act as the holding company for
Regency Bank (the "Bank") and Regency Investment Advisors, Inc., ("RIA"). RIA
provides investment management and consulting services. The Bank has one
wholly-owned subsidiary, Regency Service Corporation, a California corporation
("RSC"), that engages in the business of real estate development primarily in
the Fresno/Clovis area. All significant intercompany balances and transactions
have been eliminated in consolidation.
These unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles on a basis consistent
with the accounting policies reflected in the audited consolidated financial
statements of the Company included in the Annual Report on Form 10-K for the
year ended December 31, 1996. They do not, however, include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the unaudited
interim consolidated financial statements reflect all adjustments (all of which
are of a normal, recurring nature) necessary for a fair presentation of the
results for the interim periods presented. Operating results for the interim
periods presented are not necessarily indicative of the results that may be
expected for any other interim period or for the year as a whole.
NOTE 2. - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This Statement establishes standards for when transfers of financial assets,
including those with continuing involvement by the transferor, should be
considered a sale. SFAS No. 125 also establishes standards for when a liability
should be considered extinguished. This statement is effective for transfers of
assets and extinguishments of liabilities after December 31, 1996. In December
1996, the FASB reconsidered certain provisions of SFAS No. 125 and issued SFAS
No. 127 "Deferral of the Effective Date of Certain Provisions of SFAS No. 125"
to defer for one year the effective date of implementation for transactions
related to repurchase agreements, dollar-roll repurchase agreements, securities
lending and similar transactions. Management determined that the effect of
adoption of SFAS No. 125 on the Company's financial statements was not material
and believes that the effect of adoption of SFAS No. 127 will also not be
material.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share". This
Statement simplifies the standards for computing earnings per share ("EPS") and
makes them comparable to international EPS standards. SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS. In addition, all
entities with complex capital structures
6
<PAGE>
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.
NOTE 3. - SECURITIES
During the period between December 31, 1996, and March 31, 1997, the
Company recorded a net decrease in the value of its available-for-sale portfolio
of $141,000 net of applicable taxes. This change is reflected as a change in
shareholders' equity in the Consolidated Statement of Shareholders' Equity.
This decrease in value is primarily the result of higher interest rates in the
bond market at March 31, 1997 as compared to rates at December 31, 1996.
Following is a comparison of the amortized cost and approximate fair
value of securities available-for-sale:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES MARCH 31, 1997 DECEMBER 31, 1996
- -------------------------------------------------------------------------------
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasuries $ 2,016 $ 2,017 $ 2,020 $ 2,029
U.S. Government Agencies 22,362 22,163 21,408 21,384
Mortgage-backed securities 1,317 1,352 7,972 7,948
State and Political Subdivision 10,023 9,944 1,518 1,559
Equity Securities 352 352 350 350
- -------------------------------------------------------------------------------
Total $36,070 $35,828 $33,268 $33,270
- -------------------------------------------------------------------------------
</TABLE>
At March 31, 1997 and December 31, 1996 the Company held no securities
classified as held-to-maturity.
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. 7 -
Management's Discussion and Analysis, Balance Sheet Analysis.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) MARCH 31, 1997 DECEMBER 31, 1996
- -------------------------------------------------------------------------------
Percent Percent
of of
Total Total
Amount Loans Amount Loans
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 56,589 55.9% $ 56,625 55.3%
Real estate mortgage 12,886 12.7% 13,260 12.9%
Real estate construction 23,047 22.8% 23,796 23.2%
Consumer and other 8,670 8.6% 8,778 8.6%
- -------------------------------------------------------------------------------
Subtotal $101,192 100.0% $102,459 100.0%
- -------------------------------------------------------------------------------
Less:
Unearned discount 838 681
Deferred loan fees 414 392
Allowances for credit losses 1,699 1,615
- -------------------------------------------------------------------------------
Total loans, net $ 98,241 $ 99,771
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
NOTE 5. - EARNINGS PER SHARE
Primary earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding and common stock
equivalents (stock options) assumed to be outstanding during the year. As of
March 31, 1997 and March 31, 1996, the Company had 1,902,000 and 1,869,000 total
shares of common and common stock equivalents outstanding.
NOTE 6 . - SUPPLEMENTAL CASH FLOW INFORMATION
Following is a summary of amounts paid for interest and taxes and of
non-cash transactions for the three months ended March 31, 1997 and 1996:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Cash paid during the period for:
Interest on deposits and other borrowings $ 1,308 $ 1,135
Income taxes - 310
- -------------------------------------------------------------------------------
Non cash transactions:
Transfer of loans to other real estate owned 6 -
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed in this Report on Form 10-Q are forward-
looking statements that are subject to risks and uncertainties that could cause
actual results to differ materially from those projected. Such risks and
uncertainties include, but are not limited to, those described in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Therefore, the information set forth therein should be carefully considered when
evaluating the business prospects of the Company and the Bank.
FINANCIAL SUMMARY
The Company's consolidated net income for the three months ended March
31, 1997, was $235,000 a 27% decrease when compared to earnings of $322,000 for
the period ended March 31, 1996. Earnings per share decreased to $0.12 in the
first quarter of 1997 compared to $0.17 in the first quarter of 1996. The
Company paid no cash dividends in the first quarter of 1997 while a cash
dividend of $0.06 per share was paid in the first quarter of 1996. The
decline in net income of $87,000 was primarily due to losses related to the sale
of properties owned by RSC and secondarily by higher interest expense on deposit
accounts.
The Company's return on average assets was 0.54% for the first three
months of 1997 compared to 0.79% for the first three months of 1996. Return on
average common equity for the first quarter was 6.97% compared to 9.56% for the
same period in 1996.
During the first quarter of 1997, RSC continued to pursue divestiture
of its remaining real estate projects through various transactions. Over the
past 18 months RSC has obtained control and sole ownership of all but two of its
former limited partnerships. On a stand alone basis, RSC lost ($487,000 pre-
tax) during the first quarter of 1997, substantially reducing the Company's
overall net income. While RSC's divestiture continues to be a costly burden for
the Company, management has taken steps to reduce expenses in future periods
through streamlined operations related to project management.
Regency Investment Advisors continued to produce better than
expected earnings during the quarter ended March 31, 1997. For the period,
RIA on a stand alone basis produced pre-tax income of $46,000 compared to
earnings of $5,000 for the first quarter of 1996. At March 31, 1997, RIA's
assets under management had increased to $78.9 million.
9
<PAGE>
NET INTEREST INCOME
The Company's operating results depend primarily on net interest
income (the difference between the interest earned on loans and investments less
interest expense on deposit accounts and borrowings). A primary factor
affecting the level of net interest income is the Company's interest rate
margin, the difference between the yield earned on interest earning assets and
the rate paid on interest bearing liabilities, as well as the difference between
the relative amounts of average interest earning assets and interest bearing
liabilities.
The following table presents, for the periods indicated, the
Company's total dollar amount of interest income from average interest
earning assets and the resultant yields, as well as the interest expense on
average interest bearing liabilities and the resultant cost, expressed both
in dollars and rates. The table also sets forth the net interest income and
the net earning balance for the periods indicated.
10
<PAGE>
CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND
INTEREST RATES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
FOR THE THREE MONTHS ENDED MARCH 31, 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) $ 102,568 11.07% $ 2,800 $ 95,048 12.14% $ 2,868
Investment securities (2) 32,778 6.61% 534 30,019 6.24% 466
Federal funds sold & other 8,782 5.26% 114 1,564 5.19% 20
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-earning assets $ 144,128 9.70% 3,448 126,631 10.66% 3,354
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets:
Allowance for credit losses (1,673) (1,791)
Cash and due from banks 8,666 8,179
Real estate investments 16,455 20,421
Premises and equivalent, net 2,249 2,327
Cash surrender value of life insurance 2,915 2,775
Accrued interest receivable and other assets 3,947 4,776
- -----------------------------------------------------------------------------------------------------------------------------------
Total Average Assets $ 176,687 $ 163,318
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Transaction accounts 47,075 2.60% 302 46,253 2.77% 317
Savings accounts 29,180 4.11% 296 27,498 4.26% 291
Time deposits 48,791 5.49% 661 38,183 5.48% 520
Federal funds purchased and other 4,658 1.74% 20 6,138 2.49% 38
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing 129,704 4.00% 1,279 118,072 3.98% 1,166
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Transaction accounts 30,978 28,762
Other liabilities 2,325 2,921
Total liabilities 163,007 149,755
Shareholders' Equity:
Common stock 8,983 8,924
Retained earnings 4,706 4,555
Unrealized gain/(loss) on investment
securities (9) 84
- -----------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 13,680 13,563
- -----------------------------------------------------------------------------------------------------------------------------------
Total average liabilities and
shareholders' equity $ 176,687 $ 163,318
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 2,169 $ 2,188
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income as a percentage of average
interest-earning assets 9.70% 10.66%
Interest expense as a percentage of average
interest-earning assets (3.60)% (3.71)%
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Margin 6.10% 6.95%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</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
$286,000 and $286,000 for the three months ended March 31, 1997, and 1996,
respectively.
(2) Applicable nontaxable securities yields have not been calculated on a
taxable-equivalent basis because they are not material to the Company's results
of operations.
11
<PAGE>
Changes in the interest margin can be attributed to changes in the yield on
interest earning assets, the rate paid on interest bearing liabilities, as well
as changes in the volume of interest earning assets and interest bearing
liabilities. The following table presents the dollar amount of certain changes
in interest income and expense for each major component of interest earning
assets and interest bearing liabilities and the difference attributable to
changes in average rates and volumes for the periods indicated.
VOLUME/RATE ANALYSIS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED MARCH 31, VOLUME(1) RATE(1) TOTAL
1997 AND 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Interest Earnings Variance Analysis
Increase (decrease) in interest income:
Loans 333 (401) (68)
Investment securities (2) 44 24 68
Federal funds sold and other 94 - 94
- -------------------------------------------------------------------------------
Total 471 (377) 94
- -------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Transaction accounts 5 (20) (15)
Savings accounts 16 (11) 5
Certificates of deposit 144 (3) 141
Federal funds purchased and other (8) (10) (18)
- -------------------------------------------------------------------------------
Total 157 (44) 113
- -------------------------------------------------------------------------------
Increase (decrease) in net interest 314 (333) (19)
income
- -------------------------------------------------------------------------------
</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 $2,169,000
for the first quarter of 1997 as compared to $2,188,000 for the comparable
period of 1996, a decrease of $19,000 or .87%. This decrease was primarily
attributable to lower overall yields on the loan portfolio as well as higher
interest expense related to a larger deposit base. The Company's net interest
margin in the first quarter of 1997 (based on average interest earning assets)
was 6.10% as compared to 6.95% for the same period in 1996. Interest earning
assets grew 13.8% between March 31, 1996 and March 31, 1997 primarily due to
higher amounts of federal funds sold. Interest bearing liabilities grew 9.9%
over the same period. The Company's earning asset mix changed slightly between
comparable periods with federal funds sold increasing from 1.2% of interest
earning assets during the first quarter of 1996 to 6.1% of interest earning
assets during the first quarter of 1997, while loans dropped from 75.1% to
71.2%. The shift of interest earning assets from higher yielding loans to lower
yielding federal funds sold is one of the components causing the decline in the
net interest margin between the quarters ending March 31, 1996 and 1997,
respectively.
12
<PAGE>
INTEREST EARNING ASSET MIX
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except percentages)
For the three months ended March 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Average Percent Average Percent
Balance of Total Balance of Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Earning Asset Mix:
Loans $ 102,568 71.2% $ 95,048 75.1%
Investment securities 32,778 22.7% 30,019 23.7%
Federal funds sold and other 8,782 6.1% 1,564 1.2%
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-earning Assets $ 144,128 100.0% $ 126,631 100.0%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Average interest earning assets increased to $144,128,000 at March 31,
1997, from $126,631,000 at March 31, 1996, an increase of $17,497,000 or 13.8%.
Average loans increased by $7,520,000 or 7.9% to $102,568,000 representing 71.2%
of average interest earning assets in the first quarter of 1997, compared to
$95,048,000 or 75.1% in the first quarter of 1996. The yield on average loans
declined to 11.07% at March 31, 1997, from 12.14% at March 31, 1996, due to
lower margins on adjustable rate loans as well as lower fees.
Other interest earning assets consist of investment securities, overnight
federal funds sold and other short term investments. These investments are
maintained to meet the liquidity requirements of the Company as well as pledging
requirements on certain deposits, and typically have a lower yield than loans.
The yield on investments increased to 6.61% for the period ended March 31, 1997,
from 6.24% in the comparable period in 1996. This change is primarily
attributed to lower yielding investment securities maturing and securities with
adjustable rate features repricing to higher interest rate levels.
Additionally, new securities purchased in the last year have generally had
higher yields than those in the portfolio in the first quarter of 1996.
Interest expense for the quarter ended March 31, 1997 was $1,279,000, an
increase of $113,000 or 9.7% from $1,166,000 in the quarter ended March 31,
1996. Interest bearing liabilities increased by $11,632,000 or 9.9%, in the
first quarter of 1997 as compared to the first quarter of 1996 as the increased
volume in interest bearing liabilities caused the overall interest expense to
increase.
NONINTEREST INCOME
The Company receives a significant portion of its income from noninterest
sources related both to activities conducted by the Bank (SBA loan originations
and servicing and depositor service charges), as well as from the subsidiaries,
RSC and RIA.
13
<PAGE>
NONINTEREST INCOME
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(IN THOUSANDS) FOR THE THREE MONTHS ENDED 1997 1996
MARCH 31,
- -------------------------------------------------------------------------------
<S> <C> <C>
Other Income:
Income from investments in real estate $ - $ -
partnerships 270 315
Gain on sale of SBA loans 98 76
Depositor service charges 214 164
Income from investment management services 2 -
Gain on sale of securities 4 5
Gain on sale of assets 86 58
Servicing fees on loans sold 107 95
Other
- -------------------------------------------------------------------------------
Total $ 781 $ 713
- -------------------------------------------------------------------------------
</TABLE>
(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.)
During the first quarter of 1997, the Company recognized noninterest income
of $781,000 compared to $713,000 for the same period during 1996 an increase of
$68,000, or 9.5%. The increase is primarily attributable to an increase in
income from investment management services (see "Regency Investment Advisors")
as well as an increase in income from servicing fees on loans sold.
Depositor service charges increased in the first quarter of 1997 to $98,000, an
increase of $22,000, or 28.9% from income of $76,000 in the first quarter of
1996. The increase is primarily the result of growth in the Bank's deposit
account base over the past year.
SBA LOAN ORIGINATION & SALES
The Bank originates loans to customers under a Small Business
Administration ("SBA") program that generally provides for SBA guarantees of 70%
to 90% of each loan. The Bank then sells the guaranteed portion of the loan in
the secondary market while retaining the unguaranteed portion of the loan as
well as the ongoing servicing. Income from the sale of the guaranteed portion is
affected by the timing and volume of sales (when loans are funded and available
for sale), as well as the premium paid in the secondary market. The premium paid
in the secondary market is further affected by the rate and terms of the loan as
well as the yield curve.
During the quarter ended March 31, 1997, the Company recognized gains
on sale of SBA loans of $270,000, a decrease of $45,000, or 14.3% from $315,000
in the comparable period of 1996. The decrease was primarily the result of the
volume of loans sold, as well as, an increase in the associated costs of
servicing and holding the loans on an ongoing basis.
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 quarter ended March 31, 1997, servicing income totaled
$86,000 an increase of $28,000 or 48.3% from income of $58,000 during the
quarter ended March 31, 1996. The increase was primarily the result of 1996's
first quarter income being reduced by payoffs of older loans in the Bank's
servicing portfolio which necessitated the amortization of previously recognized
capitalized servicing fees. Income from the
14
<PAGE>
servicing of SBA loans in the first quarter of 1997 is more reflective of the
Company's normal servicing fee income.
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 a local developer is the general
partner. Partnerships are accounted for under the equity method. Sales of
properties are recognized on the accrual method and are allocated between the
partners based on the provisions of the various partnership agreements.
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.
As of March 31, 1997, the loss from investments in real estate
partnerships amounted to $240,000 compared to a loss of $97,000 in the first
quarter ended March 31, 1996, an increase of $143,000. The increase resulted
from the sale of additional properties at a loss. On a stand alone basis,
RSC's activities, (losses from the sale of properties plus operating
expenses), reduced the Company's overall pre-tax income by $487,000 in the
first quarter of 1997 compared to a loss of $294,000 in the first quarter of
1996. These operating expenses have been consolidated with similar operating
expenses in the Company's consolidated statement of income and noninterest
expense. Reflected on a stand alone basis, RSC's overall operating expense
as a percentage of average assets was 1.10% and .72% in the quarter ended
March 31, 1997 and 1996, respectively.
Effective April 1, 1997, RSC entered into a new construction and
sales agreement with Gary McDonald Real Estate and Development Company
("GMREDCO") replacing the previous project management agreement. Under the
new agreement, GMREDCO will construct pre-sold homes and a limited number of
spec homes on lots selected by RSC's management as well as provide brokerage
services on the aforementioned homes. Management anticipates the new
15
<PAGE>
contract structure, as well as additional steps taken to reduce operating
expenses will reduce monthly RSC expenses by $25,000 to $40,000 per month
when fully implemented in June 1997.
In addition to the losses mentioned above, the reserve for
potential real estate losses was reduced by $383,000 during the first quarter
of 1997 to offset losses associated with the projects normal sales process.
At March 31, 1997, the Company had $927,000 reserved for potential future
losses from the sale of real estate.
Additional discussion of loans made by RSC to its partnerships and,
in general, of the Company's investment in RSC is contained in this report
under the headings, "Nonperforming Loans" and "Investments in Real Estate".
REGENCY INVESTMENT ADVISORS (RIA)
The Bank's 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.
Income from RIA for the first quarter 1997 increased to $214,000
from $164,000 in the same period of 1996, an increase of $50,000 or 30.5%.
On a stand alone basis, RIA's activities, (income from investment management
activities less operating expenses), provided the Company with pre-tax income
of $46,000 in the first quarter of 1997 compared to a pre-tax income of
$5,000 in the first quarter of 1996. These operating expenses have been
consolidated with similar operating expenses in the Company's consolidated
statement of income and noninterest expense.
RIA's ability to generate and increase income comes, in large part, from
the volume of assets under management. As of March 31, 1997, RIA had $78.9
million in assets under management, an increase of $14.9 million, or 23.3%
compared to $64.0 million as of March 31, 1996. Assets in client accounts
managed by RIA are not reflected in the consolidated assets of the Company.
Effective in the first quarter 1997, the Company and Bank received
regulatory permission for the transfer of RIA, as a subsidiary of the Bank,
to become a separate subsidiary of the Company. While consolidated financial
statements such as those included in this report on form 10-Q are not
affected by this transaction, certain regulatory reports such as the Bank's
quarterly Call Report will no longer include RIA's income or associated
expenses.
16
<PAGE>
NONINTEREST EXPENSE
Non-interest expense reflects the costs of products and services,
systems, facilities and personnel for the Company. The major components of
other operating expenses stated both as dollars and as a percentage of
average assets are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Percent of Percent of
Average Average
Amount Assets Amount Assets
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Other Expense:
Loss from investments in real estate partnerships $ 240 .55% $ 97 .24%
Salaries and related benefits 1,164 2.67% 1,111 2.74%
Occupancy 403 .93% 392 .97%
FDIC insurance and regulatory assessments 22 .05% 16 .04%
Marketing 90 .21% 90 .22%
Professional services 121 .28% 154 .38%
Director's fees and expenses 96 .22% 76 .19%
Management fees for real estate projects 108 .25% 79 .19%
Supplies, telephone and postage 79 .18% 85 .21%
Other 222 .51% 242 .59%
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 2,545 5.85% $ 2,342 5.77%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Other expenses increased by $203,000 or 8.67% to $2,545,000 for the three
months ended March 31, 1997, compared to $2,342,000 during the same period of
1996, primarily due to losses from RSC investments in real estate and
secondarily due to higher costs of management fees for RSC real estate
projects. When compared to average assets for the respective periods, other
expenses increased to 5.85% in 1997 versus 5.77% in 1996.
Losses related to RSC investments in real estate increased in the
first quarter of 1997 to $240,000 an increase of $143,000, or 147.4%, from
losses of $97,000 in the first quarter of 1996. The primary cause of the
increase in losses was due to the sale of several model homes.
Salaries and related benefits increased by $53,000 or 4.77% in the
quarter ended March 31, 1997 to $1,164,000 from $1,111,000 in the first quarter
of 1996. The primary cause of the increase can be attributed to additional
staff related to the opening of the Madera branch which was opened during the
third quarter of 1996. Salaries and related benefits decreased as a percentage
of average assets, to 2.67% for the first quarter of 1997 from 2.74% during the
first quarter of 1996.
Occupancy expense changed very little during the past year increasing
by $11,000, or 2.81%, to $403,000 during the quarter ended March 31, 1997 from
$392,000 for the quarter ended March 31, 1996. As a percentage of average
assets occupancy expense declined to .93% from .97% for the periods ending
March 31, 1997 and 1996, respectively.
17
<PAGE>
FDIC insurance and regulatory assessments increased 37.5% to $22,000
during the first quarter of 1997, an increase of $6,000 from $16,000 for the
quarter ended March 31, 1996. The primary cause of the increase was the larger
deposit portfolio maintained by the Bank over the last year.
Professional services consist primarily of fees paid for legal,
accounting and consulting services to third party professionals. During the
quarter ended March 31, 1997, professional services decreased by $33,000, or
21.4% to $121,000 from $154,000 during the first quarter of 1996. As a
percentage of average assets, professional services were .28% and .38% in the
first quarter of 1997 and 1996, respectively. The primary reason for the
decrease in professional services between the periods related to lower legal and
accounting costs for RSC.
Management fees paid for real estate projects increased by $29,000 to
$108,000 in the period ended March 31, 1997 from $79,000 during the first
quarter of 1996. As a percentage of average assets, management fees for real
estate projects were .25% and .19% for the quarters ended March 31, 1997 and
1996, respectively.
Supplies, telephone, postage and other expenses changed very little in the
first quarter of 1997 compared to the first quarter of 1996, with both
decreasing slightly. Supplies, telephone and postage declined by $6,000 to
$79,000 for the period ended March 31, 1997 from $85,000 during the first
quarter of 1996. As a percentage of average assets, supplies, telephone and
postage were .18% and .21% in the quarter ended March 31, 1997 and 1996,
respectively. Other expenses decreased by $20,000 to $222,000 for the period
ended March 31, 1997 from $242,000 during the first quarter of 1996. As a
percentage of average assets, other expenses were .51% and .60% for the
quarters ended March 31, 1997 and 1996, respectively.
BALANCE SHEET ANALYSIS
Total assets increased by $494,000 or .3% between December 31, 1996 and
March 31, 1997, primarily as a result of additional deposits acquired resulting
in additional liquidity for the Bank. The Company's loan portfolio decreased by
$1,266,000 or 1.2%, primarily as a result of payoffs in the Company's real
estate loan portfolio. Liquid funds in cash and federal funds sold increased
$1,457,000, or 7.3% during the first quarter of 1997, primarily as a result of
additional deposits with low loan demand. Securities increased by $2,559,000,
or 7.7%, as a portion of the additional deposits were invested in additional
securities. Deposits increased during the first quarter of 1997 by $1,674,000
or 1.0%.
18
<PAGE>
LOANS
The Company's loans are primarily made within its defined market area of
Fresno and Madera counties.
Commercial loans, including SBA loans, comprised approximately 55.9% of the
Company's loan portfolio at March 31, 1997. These loans are generally to small
and mid-size businesses and professionals. Commercial loans are diversified as
to industries and types of business, with no material industry concentrations.
Most of these loans have floating rates with the majority tied to the national
Prime Rate. The primary source of repayment on most commercial loans is cash
flow from the primary business. Additional collateral in the form of real
estate, cash, accounts receivable, inventory or other financial instruments is
often obtained as a secondary source of repayment.
Real Estate Construction lending comprised 22.8% of the Company's loan
portfolio at March 31, 1997, with these loans primarily for the construction of
single family residential housing. Loans in this category may be to the home
buyer or to the developer. Construction loans are secured by deeds of trust on
the primary property. As presented on these consolidated statements, this
category also contains $3.0 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 12.7% of the loan portfolio at March
31, 1997, and are made up of (68%) non-residential properties and (32%) 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 March 31, 1997, comprising 8.6% of total loans. This category includes
traditional Consumer Installment Loans (23%), Home Equity Lines of Credit (68%),
Leases (1%), and Visa Card Loans (8%). Consumer installment loans are generally
secured by second trust deeds on single-family residences, while Visa Cards are
unsecured.
19
<PAGE>
RISK ELEMENTS
The Company assesses and manages credit risk on an ongoing basis through
stringent credit review and approval policies, extensive internal monitoring and
established formal lending policies. Additionally, the Bank contracts with an
outside loan review consultant to periodically grade new loans and to review the
existing loan portfolio. Management believes its ability to identify and
assess risk and return characteristics of the Company's loan portfolio is
critical for profitability and growth. Management strives to continue the
historically low level of credit losses by continuing its emphasis on credit
quality in the loan approval process, active credit administration and regular
monitoring. With this in mind, management has designed and implemented a
comprehensive loan review and grading system that functions to continually
assess the credit risk inherent in the loan portfolio. Additionally,
management believes its ability to manage portfolio credit risk is enhanced by
the knowledge of the Bank's service area, by the lending personnel and Board of
Directors.
NONPERFORMING LOANS
The Company's current policy is to cease accruing interest when a loan
becomes 90-days past due as to principal or interest; when the full, timely
collection of interest or principal becomes uncertain; or when a portion of the
principal balance has been charged off, unless the loan is well secured and in
the process of collection. When a loan is placed on nonaccrual status, the
accrued and uncollected interest receivable is reversed and the loan is
accounted for on the cash or cost recovery method thereafter, until qualifying
for return to accrual status. Generally, a loan may be returned to accrual
status when all delinquent interest and principal become current in accordance
with the terms of the loan agreement or when the loan is both well secured and
in process of collection.
At March 31, 1997, nonaccrual loans amounted to $3,442,000 or 3.40% of
total loans compared to $3,301,000 or 3.22% at December 31, 1996 and $3,920,000
or 3.85% at March 31, 1996. Other real estate owned was $399,000 at March 31,
1997 compared to $437,000 at December 31, 1996. Of the total nonaccrual loans,
$2,957,000 represented loans RSC has made to facilitate the sale of former
partnerships that have loan to value ratios higher than would normally be made
by the Bank. While the Company has placed these loans on non-accrual, RSC
continues to receive principal and interest payments based on the terms of
individual notes. Without the non-accrual loans made by RSC, the Bank's loan
portfolio at March 31, 1997 had $485,000 in non-accrual loans or .48% of total
loans.
20
<PAGE>
There were no troubled debt restructured loans as defined in SFAS 15 at March
31, 1997.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) MARCH 31, 1997 DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nonperforming Assets:
Nonaccrual RSC loans $ 2,957 $ 3,250
Nonaccrual bank loans 485 51
Restructured loans - -
- -----------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans 3,442 3,301
Other real estate owned 399 437
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets 3,841 3,738
- -----------------------------------------------------------------------------------------------------------------------------------
Accruing loans 90 days past due 9 19
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans before allowance for losses 101,192 102,458
Total assets 181,552 181,058
Allowance for possible credit losses (1,699) (1,615)
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios:
Nonperforming loans to total loans consolidated 3.40% 3.22%
Nonperforming loans to total loans bank only (excluding RSC loans) .48% .05%
Nonperforming assets to: 3.80% 3.65%
Total loans 3.78% 3.63%
Total loans and OREO 2.12% 2.06%
Total assets 226.07% 231.46%
Allowance for possible credit losses
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At March 31, 1997 and December 31, 1996, the Company's recorded
investment in loans for which an impairment has been recognized totaled
$282,000 and $242,000, respectively. These amounts were evaluated for
impairment using the fair value of collateral. At March 31, 1997, the
related SFAS No. 114 allowance for credit losses considered impaired was
$78,000. At December 31, 1996, included in total impaired loans were $113,000
of impaired loans for which the related SFAS No. 114 allowance was $89,000 as
well as $129,000 of impaired loans, that as a result of writedown or the fair
value of the collateral, did not have a SFAS No. 114 allowance. The Company
uses the cash basis method of income recognition for impaired loans. For the
three months ended March 31, 1997 and 1996, the Company did not recognize any
income on such loans.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses reflects management's judgment as to the
level which is considered adequate to absorb potential losses inherent in the
loan portfolio. This allowance is increased by provisions charged to expense
and reduced by loan charge-offs net of recoveries. Management determines an
appropriate provision based on information currently available to analyze credit
loss potential, including: (a) the loan portfolio growth in the period, (b) a
comprehensive grading and review of new and existing loans outstanding, (c)
actual previous charge-offs, and (d) changes in economic conditions.
The allowance for credit losses totaled $1,699,000 or 1.68% of total loans
at March 31, 1997, compared to $1,615,000 or 1.58% at December 31, 1996. The
increase is the result of recoveries totaling $90,000 during the first quarter
while charge-offs totaled only $6,000. No additional provision was deemed
necessary during the quarter ending March 31, 1997. It is the policy of
management to maintain the allowance for credit losses at a level adequate for
known and
21
<PAGE>
future risks inherent in the loan portfolio. Based on information currently
available to analyze credit loss potential, including economic factors,
overall credit quality, historical delinquency and a history of actual
charge-offs, management believes that the credit loss provision and allowance
is adequate. However, no prediction of the ultimate level of loans
charged-off in future years can be made with any certainty.
Following is a table presenting the activity within the Company's
provision for credit losses for the period between December 31, 1996 and
March 31, 1997.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(IN THOUSANDS)
- -------------------------------------------------------------------------------
<S> <C>
Balance, December 31, 1996 $ 1,615
- -------------------------------------------------------------------------------
Provision charged to expense -
Loans charged off 6
Recoveries 90
- -------------------------------------------------------------------------------
Balance, March 31, 1997 $ 1,699
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
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 a limited partner in two projects. Included in the investments in
real estate balance at March 31, 1997 are acquisition, development and
construction loans held by the Bank totaling $211,572. The remaining investments
in real estate balance of $14,953,693 represents RSC's investments in real
estate.
The following table represents the condensed financial information
relative to RSC as of March 31, 1997.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) MARCH 31, 1997 DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial Position:
Investments in real estate
Real estate held-for-sale $ 13,890 $ 15,520
Equity in partnerships 1,991 2,070
- -----------------------------------------------------------------------------------------------------------------------------------
Investment in real estate before allowance 15,881 17,590
Allowance for real estate losses (927) (1,310)
- -----------------------------------------------------------------------------------------------------------------------------------
Investment in real estate $ 14,954 $ 16,280
- -----------------------------------------------------------------------------------------------------------------------------------
Loans to real estate partnerships and projects 3,486 3,988
Allowance for loan losses (110) (110)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Loans 3,376 3,878
- -----------------------------------------------------------------------------------------------------------------------------------
Other Assets 1,976 1,733
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities (4,222) (6,219)
- -----------------------------------------------------------------------------------------------------------------------------------
Bank's investment in RSC $ 16,084 $ 15,672
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<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 fed 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 March 31, 1997, the Bank held no brokered time
deposits and had no borrowings from correspondent banks against its fed funds
lines.
The following table presents the composition of the deposit mix for the
period ending March 31, 1997, and December 31, 1996, respectively.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) MARCH 31, 1997 DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Percent of Percent of
Amount Total Deposits Amount Total Deposits
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing transaction accounts $ 33,814 20.9% $ 36,613 22.9%
Now and MMI 48,460 30.0% 47,850 29.9%
Savings 30,703 19.0% 25,540 16.0%
Time under $100,000 19,313 12.0% 19,033 11.9%
Time $100,000 and over 29,186 18.1% 30,766 19.3%
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing Deposits 127,662 79.1% 123,189 77.1%
- -----------------------------------------------------------------------------------------------------------------------------------
Total Deposits $ 161,476 100% $ 159,802 100%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
LIQUIDITY
Liquidity management refers to the Bank's ability to provide funds on an
ongoing basis to meet fluctuations in deposit levels as well as the credit needs
and requirements of its clients. Both assets and liabilities contribute to the
Bank's liquidity position. Federal funds lines, short-term investments and
securities, and loan repayments contribute to liquidity, along with deposit
increases, while loan funding and deposit withdrawals decrease liquidity. The
Bank assesses the likelihood of projected funding requirements by reviewing
historical funding patterns, current and forecasted economic conditions and
individual client funding needs. The Bank maintains lines of credit with two
correspondent banks for up to $9,000,000 available on a short-term basis.
Additionally, the Bank generally maintains a portfolio of SBA loans either
available for sale or in its portfolio that could be sold should additional
liquidity be required.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is a measure of the exposure to fluctuations in
the Bank's future earnings caused by fluctuations in interest rates. Generally,
if assets and liabilities do not reprice simultaneously and in equal volumes,
the potential for such exposure exists. It is management's objective to
maintain stability in the net interest margin in times of fluctuating interest
rates by maintaining an appropriate mix of interest sensitive assets and
liabilities. To achieve this goal, the
23
<PAGE>
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>
- -----------------------------------------------------------------------------------------------------------------------------------
AFTER THREE AFTER
NEXT DAY MONTHS ONE YEAR
(IN THOUSANDS, EXCEPT PERCENTAGES) BUT WITHIN BUT WITHIN BUT WITHIN AFTER
AS OF MARCH 31, 1997 IMMEDIATELY THREE MONTHS 12 MONTHS FIVE YEARS FIVE YEARS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Sensitivity Gap:
Loans (1) $ 40,368 $ 37,097 $ 7,499 $ 6,549 $ 6,237 $ 97,750
Investment securities and other 352 17,305 6,830 10,065 1,613 36,165
- -----------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets $ 53,020 $ 54,402 $ 14,329 $ 16,614 $ 7,850 $ 146,215
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing transaction accounts 48,460 - - - - 48,460
Savings accounts 28,543 2,160 - - 30,703
Time deposits - 17,336 26,128 5,035 - 48,499
Federal funds purchased - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities $ 77,003 $ 19,496 $ 26,128 $ 5,035 - $ 127,662
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap (23,983) 34,906 (11,799) 11,579 7,850
Cumulative gap (23,983) 10,923 (876) 10,703 18,553
Cumulative gap percentage to
interest earning assets (16.40)% 7.47% (.60)% 7.32% 12.69%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts exclude nonaccrual loans of $3,442,000.
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.
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.
24
<PAGE>
The guidelines establish two categories of qualifying capital: Tier 1
capital comprising core capital elements and Tier 2 comprising supplementary
capital requirements. At least one-half of the required capital must be
maintained in the form of Tier 1 capital. Tier 1 capital includes common
shareholder's equity and qualifying perpetual preferred stock less intangible
assets and certain other adjustments. However, no more than 25% of the
Company's total Tier 1 capital may consist of perpetual preferred stock. The
definition of Tier 1 capital for the Bank is the same, except that perpetual
preferred stock may be included only if it is noncumulative. Tier 2 capital
includes, among other items, limited life (and in the case of banks, cumulative)
preferred stock, mandatory convertible securities, subordinated debt and a
limited amount of reserves for credit losses.
The Board of Governors also adopted a 3.0% minimum leverage ratio for
banking organizations as a supplement to the risk-weighted capital guidelines.
The leverage ratio is generally calculated using Tier 1 capital (as defined
under risk-based capital guidelines) divided by quarterly average net total
assets (excluding intangible assets and certain other adjustments).
The Board of Governors emphasized that the leverage ratio constitutes a
minimum requirement for well-run banking organizations having diversified risk.
Banking organizations experiencing or anticipating significant growth, as well
as those organizations which do not exhibit the characteristics of a strong,
well-run banking organization above, will be required to maintain minimum
capital ranging generally from 100 to 200 basis points in excess of the leverage
ratio. The FDIC adopted a substantially similar leverage ratio for state non-
member banks.
The table below presents the Company's and the Bank's risk-based and
leverage capital ratios as of March 31, 1997.
<TABLE>
<CAPTION>
FOR CAPITAL TO BE WELL
ACTUAL ADEQUACY PURPOSES PROMPT CORRECTIVE
- -------------------------------------------------------------------------------------------------------------------------------
AS OF MARCH 31, 1997 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets:)
Company $14,869 10.86% >=$10,950 >=8.00% N/A
Regency Bank $14,085 10.29% >=$10,952 >=8.00% >=$ 13,690 >=10.00%
Tier 1 Capital (to Risk Weighted Assets):
Company $13,170 9.62% >=$ 5,475 >=4.00% N/A
Regency Bank $12,386 9.05% >=$ 5,476 >=4.00% >=$ 8,214 >=6.00%
Tier 1 Capital (to Average Assets):
Company $13,170 7.49% >=$ 7,033 >=4.00% N/A
Regency Bank $12,386 7.05% >=$ 7,026 >=4.00% >=$ 8,782 >=5.00%
</TABLE>
25
<PAGE>
As indicated in the table above, at March 31, 1997, the Company's capital
ratios exceed the minimum capital levels required by current federal regulations
and the "Well Capitalized" standards of the prompt corrective action provision
of the FDICIA described below.
On December 19, 1991, the President signed the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). The FDICIA, among other
matters, substantially revised banking regulations and established a framework
for determination of capital adequacy of financial institutions. Under the
FDICIA, financial institutions are placed into one of five capital adequacy
categories as follows: (1) "Well capitalized" - consisting of institutions with
a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital
ratio of 6% or greater, and a leverage ratio of 5% or greater, and the
institution is not subject to an order, written agreement, capital directive or
prompt corrective action directive; (2) "Adequately capitalized" - consisting of
institutions with a total risk-based capital ratio of 8% or greater, a Tier 1
risk-based capital ratio of 4% or greater and a leverage ratio of 4% or greater,
and the institution does not meet the definition of a "well capitalized"
institution; (3) "Undercapitalized" - consisting of institutions with a total
risk-based capital ratio less than 8%, a Tier 1 risk-based capital ratio of less
than 4%, or a leverage ratio of less than 4%; (4) "Significantly
undercapitalized" - consisting of institutions with a total risk-based capital
ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a
leverage ratio of less than 3%; (5) "Critically undercapitalized" - consisting
of an institution with a ratio of tangible equity to total assets that is equal
to or less than 2%.
Financial institutions classified as undercapitalized or below are subject
to various limitations including, among other matters, certain supervisory
actions by bank regulatory authorities and restrictions related to (i) growth of
assets, (ii) payment of interest on subordinated indebtedness, (iii) payment of
dividends or other capital distributions, and (iv) payment of management fees to
a parent holding company. The FDICIA requires the bank regulatory authorities
to initiate corrective action regarding financial institutions which fail to
meet minimum capital requirements. Such action may be taken in order to, among
other matters, augment capital and reduce total assets. Critically
undercapitalized financial institutions may also be subject to appointment of a
receiver or conservator unless the financial institution submits an adequate
capitalization plan.
26
<PAGE>
RETURN ON EQUITY AND ASSETS
The following table sets forth the ratios of net income to average assets and
average shareholders' equity, and average shareholders' equity to average
assets. Also indicated is the Company's dividend payout ratio. (For purposes
of calculating average Shareholders' equity as used in these ratios, unrealized
losses on the Company's available-for-sale securities portfolio have been
included and the percentages shown have been annualized).
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
QUARTER ENDED QUARTER ENDED
MARCH 31, 1997 MARCH 31, 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Return on average assets .54% .79%
- -------------------------------------------------------------------------------
Return on average shareholders' equity 6.97% 9.56%
- -------------------------------------------------------------------------------
Average shareholders' equity to average 7.74% 8.30%
assets
- -------------------------------------------------------------------------------
Dividend payout ratio - 33.89%
- -------------------------------------------------------------------------------
</TABLE>
27
<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) Construction and Sales Agreement, dated March 31, 1997, made
and entered into by and between Regency Service Corporation, a
California corporation and Gary L. McDonald Real Estate and
Development Co., a California corporation.
(27.1) Financial Data Schedule
* Denotes management contracts, compensatory plans or arrangement.
(b) Reports on Form 8-K
The Company filed a Form 8-K dated March 10, 1997, in which
it reported that on March 4, 1997, the Registrant issued a
press release which described a net 1996 annual income of
$1.01 million, a $2.78 million improvement over the
Company's financial performance the previous year.
The Company filed a Form 8-K dated April 17, 1997, in which
it reported that on April 14, 1997, the Company issued a
press release which stated that Gary McDonald, a founding
member of the board of Regency Bank and its parent holding
company, Regency Bancorp, announced his decision to not
stand for election at the upcoming annual meeting. The
Company also reported that on April 11, 1997, the Company
issued a letter to shareholders notifying them of Gary
McDonald's decision to not stand for election at the
Company's 18th annual meeting, May 13, 1997.
28
<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: May 8, 1997 By: /s/ Steven F. Hertel
______________________________ ______________________________
Steven F. Hertel
President and Chief Executive
Officer
(Principal Executive Officer)
Date: May 8, 1997 By: /s/ Steven R. Canfield
______________________________ ______________________________
Steven R. Canfield
Executive Vice President and
Chief Financial Officer
(Principal
Financial and Accounting Officer)
29
<PAGE>
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
*10.1 Construction and Sales Agreement, dated March 31, 31-50
1997, made and entered into by and between Regency
Service Corporation, a California corporation, and
Gary L. McDonald Real Estate and Development Co., a
California corporation.
27.1 Financial Data Schedule 51
* Denotes management contracts, compensatory plans or arrangements.
30
<PAGE>
EXHIBIT *(10.1)
CONSTRUCTION AND SALES AGREEMENT
This Construction and Sales Agreement (the "AGREEMENT"), dated March 31,
1997, is made and entered into by and between REGENCY SERVICE CORPORATION, a
California corporation ("RSC"), and GARY L. MCDONALD REAL ESTATE AND DEVELOPMENT
CO., a California corporation ("GMREDCO").
RECITALS
A. RSC and GMREDCO are parties to that certain Project Management
Agreement, dated as of April 1, 1996, as amended by an Amendment to Project
Manager Agreement, dated August 21, 1996, a Contract Extension Agreement, dated
December 19, 1996, a Contract Extension Agreement Extension, dated January 31,
1997, and a Contract Extension Agreement Extension, dated March 1, 1997
(collectively, the "PROJECT MANAGEMENT AGREEMENT").
B. The term of the Project Management Agreement expires on March 31,
1997.
C. RSC desires to assume responsibility for the management and
disposition of the projects described in EXHIBIT A to this Agreement (the
"Projects") and to engage GMREDCO to provide construction and sales services as
designated by RSC and as provided in this Agreement.
AGREEMENT
Now, therefore, in consideration of the mutual covenants set forth below
and other valuable consideration, the receipt and sufficiency of which are
acknowledged, RSC and GMREDCO, intending to be legally bound, hereby agree as
follows:
1. BASIC PROVISIONS.
Date of Agreement: March 31, 1997.
Effective Date: April 1, 1997 (the "EFFECTIVE DATE").
Term: See section 8 below.
Compensation: See section 7 below.
Projects: Those projects listed on EXHIBIT A to this
Agreement for so long as RSC holds an interest,
direct or indirect, therein (the "PROJECTS")
<PAGE>
Address for Notices: RSC: Regency Service Corporation
Attention: Steve Hertel
P. O. Box 16279
Fresno, CA 93755-6279
Fax: 209-438-2699
Phone: 209-438-2600
GMREDCO: Gary L. McDonald Real Estate
and Development Co.
Attention: Gary L. McDonald
7120 North Whitney Avenue
Fresno, CA 93720-0513
Fax: 209-322-0603
Phone: 209-322-1700
2. PROJECT MANAGEMENT AGREEMENT EXPIRATION. The parties acknowledge and
agree that the Project Management Agreement shall expire on March 31, 1997. The
provisions of the Project Management Agreement which by their terms or context
survive the expiration or termination of the Project Management Agreement shall
continue in full force and effect. On or before April 30, 1997, GMREDCO shall
prepare and submit to RSC, for RSC's approval, a final accounting of expenses to
be paid by RSC through such expiration date. This Agreement also terminates and
supersedes any and all other agreements between RSC and GMREDCO pertaining to
the construction, marketing and/or sale of improved and unimproved lots within
the Projects.
3. APPOINTMENT. RSC engages GMREDCO to provide construction, marketing
and sales services on the terms described in this Agreement. GMREDCO accepts
such appointment and agrees to provide the services and perform the duties
assigned to GMREDCO in this Agreement. Construction, marketing and sales
services shall be provided only for those lots within the Projects as are
designated by RSC (the "LOTS"). Selection of Lots for construction and/or sale
by GMREDCO shall be in RSC's sole discretion. However, GMREDCO may confer with
RSC in determining the Lots to be designated. Nothing in this Agreement shall
be construed to obligate RSC to designate any Lot or Lots for improvement and/or
sale. GMREDCO's obligations under this Agreement with respect to a particular
Lot shall commence upon GMREDCO's receipt of written notice designating the Lot
or Lots to be improved and/or sold by GMREDCO.
4. CONSTRUCTION SERVICES. With respect to each Lot designated by RSC for
construction of improvements by GMREDCO, GMREDCO shall serve as the construction
manager and general contractor for the construction of single family residences
and related improvements on such Lots (the "CONSTRUCTION WORK"). All such
improvements shall be as designated by RSC.
4.1 PLANS AND SPECIFICATIONS. RSC shall furnish all plans, drawings
and specifications for the Construction Work. All such plans, drawings,
specifications and copies
2
<PAGE>
thereof furnished by RSC or its architect shall remain the property of RSC
and may not be used on any other project without the express written consent
of RSC. From time to time, supplemental drawings and specifications may be
provided by RSC either as part of the original construction documents or as
part of Change Orders (defined below) submitted after commencement of the
work. Such supplemental drawings and specifications shall modify and
supplement the previously existing drawings and specifications, PROVIDED that
GMREDCO shall have had a reasonable opportunity to review such documents.
4.2 DUTIES. In its capacity as construction manager, GMREDCO shall
provide the following services:
(a) schedule and attend regular meetings with RSC and its agents
during the development of conceptual and preliminary designs, and during the
course of the Construction Work and, in general, keep RSC fully informed on a
regular basis of the progress of the Construction Work, including the
preparation of such reports as may reasonably be requested by RSC;
(b) advise RSC and its agents on recommendations for site use,
improvements, selection of materials, building systems and equipment,
construction feasibility, availability of materials and labor, time requirements
for construction, and factors relating to costs, including costs of alternative
designs or materials, preliminary budgets and possible economics;
(c) assist RSC in obtaining (at RSC's expense), and maintain in
full force and effect during the course of construction, any and all
governmental permits, approvals and agreements required for the lawful
construction, completion and occupancy of the improvements included in the
Construction Work, including, without limitation, special permits for inspection
and temporary facilities required to be obtained by RSC, GMREDCO or the Trade
Contractors (defined below);
(d) comply, within a reasonable time after RSC's request, with
all terms and conditions applicable to RSC or the Projects contained in any (i)
loan agreement entered into in connection with any construction for the
Projects, (ii) permit, approval or agreement issued by or entered into with any
governmental authority relating to the terms and conditions of such
construction, (iii) insurance policy affecting or covering the Projects, or (iv)
surety bond obtained in connection with the work on the Projects; PROVIDED that
RSC has notified GMREDCO of such terms and conditions by providing GMREDCO with
either a written summary of the same or with a copy of such documents or
instruments;
(e) prepare or cause to be prepared and distribute to RSC, for
RSC's approval: (i) a critical path schedule for each Construction Work project
assigned to GMREDCO, and periodic updates thereto as required by RSC to reflect
any material changes to the critical path schedule, (ii) construction budgets
and cost estimates as required by RSC, and (iii) financial accounting reports,
including monthly progress reports. All such documents shall include such line
items, elements and other detail as may be reasonably required by RSC and shall
be substantially in the form of such reports as GMREDCO has previously been
required to
3
<PAGE>
furnish to RSC. In developing the construction budgets for the Construction
Work, GMREDCO shall obtain not less than two (2) independent, competitive
bids for all major trade items (e.g., electrical, plumbing, concrete,
roofing, cabinetry, painting, etc.) contained in the construction budget. In
the event that GMREDCO or an Affiliate (defined below) of GMREDCO submits a
bid for any such major trade item, then the bid of GMREDCO or its Affiliate
shall be in addition to the two (2) or more independent, competitive bids for
such work (for a total of not less than three (3) bids). All bids, the
construction budget and any changes to the construction budget shall be
subject to RSC's approval. If any contractor, subcontractor, materialman or
laborer (the "TRADE CONTRACTORS") whose bid has been accepted and
incorporated into the construction budget is thereafter determined by RSC not
to be able to comply with the terms of the bid, then GMREDCO shall obtain for
RSC's approval not less than two (2) additional independent, competitive bids
for such work or materials from qualified parties, and the Trade Contractor
whose bid is approved by RSC shall be substituted for the Trade Contractor
who was unable to perform in accordance with its bid;
(f) expedite the procurement of long lead-time items to ensure
their delivery by the date required in the critical path schedule; ensure the
adequacy of the work force, equipment and materials at the work site; maintain a
competent staff at the work site; provide on-site construction supervision;
coordinate and direct the work in progress of the Trade Contractors on the site;
provide all supervision, labor, materials, equipment, tools and supplies which
are necessary for completion of the Construction Work and which are not provided
by the Trade Contractors or by RSC; and, in general, perform or cause to be
performed the Construction Work in accordance with the approved critical path
schedule and construction budget (as the same may be modified during the course
of construction subject to RSC's approval) and in accordance with the dates
specified by RSC for substantial and final completion of the work;
(g) assist RSC in obtaining reimbursement of deposits and
prepaid fees from City of Fresno, City of Clovis, utility companies and others
holding deposits or prepaid fees;
(h) if requested by RSC, provide to RSC a complete list of all
Trade Contractors engaged by GMREDCO with respect to the Projects; check all
materials and labor entering into the work and keep a full detailed account
thereof;
(i) assist RSC in keeping the Projects free of all mechanics
liens, including, without limitation, by obtaining and delivering to RSC, prior
to making any progress or final payment to any Trade Contractor, conditional and
unconditional lien waivers in statutory form acceptable to RSC;
(j) maintain the job sites and the streets and sidewalks around
the job sites in a clean, orderly and safe condition; provide project site
security and safety as appropriate; establish procedures for minimizing
accumulation of dirt and dust on such areas; and, at the completion of the
Construction Work, remove all spillage, waste materials and debris arising from
the performance of the Construction Work and all of GMREDCO's and its Trade
Contractors' tools, equipment and surplus materials;
4
<PAGE>
(k) enforce strict discipline and good order among GMREDCO's
employees and the Trade Contractors, and maintain harmonious labor relations
among the Trade Contractors;
(l) maintain current progress payment system providing for the
review, processing and payment of all Trade Contractors consistent with the
applicable construction budget; respond to inquiries and resolve problems
concerning invoices from and payments to Trade Contractors; assist RSC in the
processing and distribution of payments; and
(m) assist RSC and its architect in determining the substantial
completion and final completion of the Construction Work (or designated portions
thereof); prepare reports of incomplete, defective or unsatisfactory work and
time schedules for their completion; ensure completion of punchlist items in
accordance with time schedules approved by RSC; apply for and obtain final
inspections and occupancy certificates; and cooperate with RSC in recording
notices of completion;
4.3 CHANGE ORDERS. RSC may order changes in the Construction Work (a
"CHANGE ORDER"), whether by addition, deletion or modification, to the plans and
specifications previously provided to GMREDCO. GMREDCO may request Change
Orders to accommodate on-site conditions, inability to obtain specified
materials or equipment within the necessary time frame or for reasonable cost,
governmental requirements, modifications requested by purchasers or other good
cause. GMREDCO shall provide to RSC written estimates of GMREDCO's profit and
overhead charge to implement the Change Order, the cost or credit to RSC
resulting from the Change Order and the impact on the critical path schedule for
the Construction Work. No Change Order shall be effective unless and until it
is approved in writing by RSC.
4.4 WARRANTY. GMREDCO warrants to RSC and to each purchaser of the
Lot on which the Construction Work was performed that (a) all equipment and
materials incorporated into the Construction Work for such Lot shall conform to
the plans and specifications therefor or, if no such specifications are provided
by RSC, that such equipment and materials shall be new and of good quality, and
(b) all equipment, materials, supplies and work furnished by or at the direction
of GMREDCO (either directly or through Trade Contractors) shall be free of
defects in materials or workmanship for a period of one (1) year after final
completion of such Construction Work. If a Trade Contractor provides a longer
warranty with respect to its portion of the work, the foregoing warranty by
GMREDCO shall be deemed extended to be co-extensive and coterminous with the
warranty of such Trade Contractor. The foregoing warranty shall not apply to
design defects unless the design was provided by or at the direction of GMREDCO.
Notwithstanding the foregoing, nothing in this Agreement shall be construed to
alter any limitations period that otherwise applies to GMREDCO or any Trade
Contractor.
5
<PAGE>
4.5 CORRECTIVE WORK. GMREDCO shall provide corrective work as
follows:
(a) GMREDCO'S WARRANTY CLAIMS. GMREDCO shall promptly correct
Construction Work that fails to conform to the plans and specifications, whether
or not the deficiency is observed before or after the Construction Work is
determined to be substantially completed, and shall promptly correct any
warranty claims made with respect to the Construction Work. All such warranty
work shall be at GMREDCO's sole expense (subject to GMREDCO's right to seek
reimbursement from responsible Trade Contractors). If, prior to final
completion, GMREDCO fails to correct Construction Work which is not in
accordance with the requirements of the plans and specifications, or
persistently fails to carry out the Construction Work in accordance with the
plans and specification or this Agreement, then RSC may, by written notice,
order GMREDCO to stop the Construction Work, or any portion thereof, until the
cause for such order has been eliminated; however, the right of RSC to stop the
Construction Work shall not give rise to a duty on RSC's part to exercise this
right for the benefit of GMREDCO or any other person.
(b) CONTRACT WARRANTY WORK. GMREDCO agrees to correct promptly
any construction deficiencies which are identified to GMREDCO by RSC in
improvements within the Project which were constructed by a general contractor
other than GMREDCO. In consideration for such services, RSC shall pay to
GMREDCO a fee as set forth in the Compensation Schedule attached as EXHIBIT B.
(c) PUNCH-OUT WORK. Following substantial completion of the
Construction Work on a Lot, GMREDCO shall cooperate with RSC in performing a
walk-through inspection of such Construction Work and preparing a punch-out list
of items requiring corrective or supplemental action. GMREDCO shall promptly
cause such corrective or supplemental action to be taken, to RSC's reasonable
satisfaction. In the event such corrective or supplemental action does not
constitute a claim against GMREDCO's warranty (i.e., such work is not required
as a result of any failure of the Construction Work to conform to the plans and
specifications), then RSC shall pay to GMREDCO a fee for such work as set forth
in the Compensation Schedule attached as EXHIBIT B.
4.6 DOCUMENTATION. GMREDCO shall provide to RSC and to any purchaser
of the Lots on which the Construction Work was performed, all warranty
documents, operating instructions and manuals, and equipment servicing and
replacement parts furnished by the supplier as part of the original unit
purchase for the work, equipment or improvement in question.
4.7 RSC'S RIGHTS AND RESPONSIBILITIES. RSC shall provide GMREDCO
with legal access to the construction site, by means of public roads or private
easements or licenses. RSC reserves the right to enter the job sites at any
time with its employees, agents and contractors; PROVIDED, that it shall conduct
its activities on the job site in a manner so as to minimize any interference
with the performance of the Construction Work by GMREDCO. RSC further reserves
the right to perform construction or operations related to any Project (whether
construction, marketing, sales or other) with its own forces or to award
separate contracts in
6
<PAGE>
connection with other portions of any Project. Any such work shall be
coordinated between RSC and GMREDCO.
5. MARKETING AND SALES. With respect to improved or unimproved Lots
designated by RSC for sale by GMREDCO, GMREDCO shall provide the following
marketing and sales services:
(a) assist RSC in RSC's development of its marketing strategy and
materials, and implement the approved marketing program;
(b) identify and make contact with potential buyers through a variety
of methods, including, without limitation, individual direct contact, and
appropriate group meetings (breakfasts/lunches) with builders and brokers
specializing in improved and unimproved residential properties;
(c) develop sales contracts and negotiate terms and conditions of
sales for RSC's approval;
(d) monitor performance of buyers pursuant to the terms and
conditions of the sales contracts and, with respect to improved Lots, coordinate
the sales effort with the scheduled completion dates of residences being
constructed;
(e) assist buyers in obtaining requisite financing;
(f) interface with brokers and escrow/title companies on Lot
marketing and sales, including, but not limited to, meetings, providing data
sheets and, if designated by RSC, listing Lots with the local real estate
board's multiple listing service; and
(g) schedule and attend regular meetings with RSC and its agents and
keep RSC fully informed on a regular basis of the progress of the sales and
marketing effort, including the preparation of such reports as may reasonably be
requested by RSC.
6. GENERAL DUTIES. GMREDCO further agrees as follows:
(a) to obtain and maintain during the term of this Agreement public
liability insurance covering personal injury and property damage which may arise
from or during the performance of this Agreement and course of completion
insurance, in such limits as RSC may reasonably approve, and automobile
liability, workers' compensation and such other insurance as may be required by
law, naming as additional insureds RSC, any mortgagee or deed of trust
beneficiary, and any other person or entity having an insurable interest in the
Projects and specified by RSC. RSC agrees to reimburse GMREDCO the cost, if
any, of adding such additional insureds to such policies. GMREDCO shall also
ensure that all Trade Contractors obtain and maintain during the course of their
respective work on the Projects such insurance as may be required by law;
7
<PAGE>
(b) to comply with all applicable present and future laws,
ordinances, orders, rules, regulations and requirements (hereinafter, "LAWS") of
all federal, state and municipal governments, courts, departments, commissions,
boards and offices, any national or local board of fire underwriters or
insurance services offices having jurisdiction in the county or counties in
which the Projects are situated, or any other body exercising functions similar
to those of any of the foregoing, or any insurance carriers providing any
insurance coverage for RSC or the Projects, which may be applicable to the
Projects. GMREDCO shall likewise ensure that all agreements between GMREDCO and
independent contractors performing work in connection with the Projects on
behalf of GMREDCO shall include the agreement of such independent contractors to
comply with all such applicable laws;
(c) to assemble and retain all contracts, agreements and other
records and data as may be necessary to carry out GMREDCO's functions under this
Agreement, and to permit RSC, any representative or auditor thereof or
supervisory or regulatory authority to inspect and copy such documents and data;
and
(d) to maintain at all times during the term of this Agreement all
books and records prepared or maintained by GMREDCO at the place or places
approved by RSC, and make such books and records available for and subject to
audit, inspection and copying by RSC, any representative or auditor thereof or
supervisory or regulatory authority. GMREDCO agrees that any supervisory or
regulatory authority shall also have the right, in connection with any
examination of RSC or the Projects, to examine and question GMREDCO and its
employees with respect to any such books and records, and GMREDCO agrees to
cooperate with all such supervisory or regulatory authorities.
7. COMPENSATION.
7.1 AMOUNT; PAYMENT. As compensation for the services rendered by
GMREDCO under this Agreement, RSC shall pay to GMREDCO a fee computed in
accordance with the Compensation Schedule attached as EXHIBIT B hereto.
7.2 FULL COMPENSATION. The compensation amount specified in section
7.1 above shall constitute full and complete payment to GMREDCO, and to any and
all of its officers, employees, agents, principals and affiliates, for all
services rendered under this Agreement. GMREDCO shall not be entitled to any
other payment or reimbursement from RSC for any expenses GMREDCO may incur in
the performance of this Agreement, including, without limitation, expenses for
wages, salaries, travel, insurance, rent, secretarial and clerical support,
duplication, copying, telephone, facsimile and other communication charges,
tools, equipment, supplies, furnishings, entertainment costs, and all other
related and unrelated costs and expenses, overhead and profit, except for such
expenses of GMREDCO which RSC may, in its discretion, expressly agree in writing
to reimburse to GMREDCO or pay on GMREDCO's behalf.
7.3 OFFSET RIGHT. Notwithstanding the provisions of this section 7
to the contrary, RSC shall have the right to offset against any compensation
otherwise due GMREDCO under this Agreement any amounts owing by GMREDCO to RSC,
whether under or pursuant to
8
<PAGE>
this Agreement, pursuant to applicable rules or regulations of regulatory
agencies or governmental authorities having jurisdiction, or otherwise.
Without limiting the foregoing, RSC shall have the right to withhold from any
compensation otherwise due GMREDCO hereunder sums expended by RSC, or
reasonably estimated by RSC to be expended, in the discharge of any
obligation of GMREDCO which is not performed in accordance with the terms of
this Agreement. To the extent GMREDCO has been paid by RSC for any work
which is the subject of any claim of lien , stop notice, equitable lien, lis
pendens or other encumbrance against any Project, then GMREDCO shall
immediately and at its expense procure and record appropriate lien release
bonds which will extinguish such claim, stop notice or lis pendens.
8. TERM AND TERMINATION.
8.1 TERM - CONSTRUCTION SERVICES. Unless sooner terminated in
accordance with section 8.4 below or extended pursuant to section 8.3 below, the
term of this Agreement with respect to the construction management services to
be rendered by GMREDCO under this Agreement shall commence on the Effective Date
and shall continue until December 31, 1997.
8.2 TERM - SALES AND MARKETING SERVICES. Unless sooner terminated in
accordance with section 8.4 below or extended pursuant to section 8.3 below, the
term of this Agreement with respect to the sales and marketing services to be
rendered by GMREDCO under this Agreement shall commence on the Effective Date
and shall continue, with respect to a particular Lot designated by RSC to be
marketed and sold by GMREDCO, until ninety (90) days after final completion of
the Construction Work on such Lot or, if the Lot is to be sold in an unimproved
condition, ninety (90) days after the date on which RSC notifies GMREDCO in
writing that it has designated such Lot to be sold by GMREDCO.
8.3 EXTENSION. RSC shall have the right to extend the term of this
Agreement, with respect to the construction services, the sales and marketing
services or both, and with respect to any or all remaining Lots within the
Projects, by giving written notice of such extension to GMREDCO at any time
prior to the expiration of the applicable term. If RSC exercises its right to
extend the term of this Agreement, then this Agreement shall continue in effect
for the extension period specified in such written notice of extension;
PROVIDED, HOWEVER, that in no event shall the term of this Agreement be extended
beyond December 31, 1998.
8.4 TERMINATION. This Agreement may be terminated prior to the
expiration of its term as follows:
(a) BY RSC. RSC may terminate this Agreement as follows:
(i) immediately upon written notice to GMREDCO in the event
of GMREDCO's default under this Agreement. A "default" by GMREDCO is defined
as the occurrence of one or more of the following events:
(A) GMREDCO fails to perform any of its services or
work under this Agreement in the manner or within the time required herein and
fails to cure such failure within fifteen (15) days after written notice
specifying the nature of such failure is
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<PAGE>
given by RSC to GMREDCO, or if such failure cannot reasonably be cured within
fifteen (15) days, fails to commence such cure within such fifteen (15) day
period or thereafter fails diligently to prosecute such cure to completion
within sixty (60) days thereafter; or
(B) GMREDCO shall file a voluntary petition in
bankruptcy; or shall be adjudicated a bankrupt or insolvent; or shall file any
petition or answer seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future federal or state law relating to bankruptcy, insolvency or other relief
for debtors; or shall seek, consent to or acquiesce in the appointment of any
trustee, receiver, conservator or liquidator of GMREDCO or of all or any
substantial part of its properties (the term "acquiesce", as used herein, being
deemed to include, but not be limited to, the failure to file a petition or
motion to vacate or discharge any order, judgment or decree providing for such
appointment within the time specified by law); or a court of competent
jurisdiction shall enter an order, judgment or decree approving a petition filed
against GMREDCO seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future federal or state law relating to bankruptcy, insolvency or other relief
for debtors, and GMREDCO shall consent to or acquiesce (as hereinabove defined)
in the entry of such order, judgment or decree, or the same shall remain
unvacated and unstayed for an aggregate of sixty (60) days from the date of
entry thereof; or any trustee, receiver, conservator or liquidator of GMREDCO or
of all or any substantial part of its properties shall be appointed without the
consent of or acquiescence of GMREDCO and such appointment shall remain
unvacated and unstayed for an aggregate of sixty (60) days; or
(ii) immediately upon written notice to GMREDCO that RSC has
fully divested itself of all of its interests in the Projects; or
(iii) immediately upon written notice to GMREDCO, in the
event that Gary L. McDonald ceases to be the chief executive officer of, and the
holder of a controlling equity interest in, GMREDCO, whether by death,
resignation, removal, sale or issuance of shares, or otherwise; or
(iv) immediately (or at such later date as specified by RSC
in writing) upon written notice to GMREDCO in the event that RSC receives an
order, directive or other formal or informal, oral or written, notice or
communication from any regulatory agency or other governmental authority having
or purporting to have jurisdiction over RSC or any of its Affiliates requiring
the termination or modification of this Agreement; or
(v) upon not less than thirty (30) days prior written
notice to GMREDCO for any reason, with or without cause, in RSC's sole and
absolute discretion; PROVIDED, HOWEVER, such termination shall be prospective
only and shall not affect GMREDCO's obligation to complete the Construction Work
or the sales and marketing of any Lots theretofore designated by RSC to GMREDCO
under this Agreement.; or
(vi) during the initial forty-five (45) days following the
Effective Date, upon five (5) days notice in the event that the board of
directors of RSC
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<PAGE>
determines, in its discretion, that termination of this Agreement is in the
best interests of RSC, its shareholders and Affiliates.
(b) BY GMREDCO. GMREDCO may terminate this Agreement as
follows:
(i) immediately upon written notice to RSC in the event of
RSC's default under this Agreement. A "default" by RSC is defined as the
occurrence of one or more of the following events:
A) RSC fails to perform any of its obligations under
this Agreement in the manner or within the time required herein and fails to
cure such failure within fifteen (15) days after written notice specifying the
nature of such failure is given by GMREDCO to RSC, or if such failure cannot
reasonably be cured within fifteen (15) days, fails to commence such cure within
such fifteen (15) day period or thereafter fails diligently to prosecute such
cure to completion within sixty (60) days thereafter; or
(B) RSC shall file a voluntary petition in bankruptcy;
or shall be adjudicated a bankrupt or insolvent; or shall file any petition or
answer seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future federal
or state law relating to bankruptcy, insolvency or other relief for debtors; or
shall seek, consent to or acquiesce in the appointment of any trustee, receiver,
conservator or liquidator of RSC or of all or any substantial part of its
properties (the term "acquiesce", as used herein, being deemed to include, but
not be limited to, the failure to file a petition or motion to vacate or
discharge any order, judgment or decree providing for such appointment within
the time specified by law); or a court of competent jurisdiction shall enter an
order, judgment or decree approving a petition filed against GMREDCO seeking any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any present or future federal or state law relating to
bankruptcy, insolvency or other relief for debtors, and RSC shall consent to or
acquiesce (as hereinabove defined) in the entry of such order, judgment or
decree, or the same shall remain unvacated and unstayed for an aggregate of
sixty (60) days from the date of entry thereof; or any trustee, receiver,
conservator or liquidator of RSC or of all or any substantial part of its
properties shall be appointed without the consent of or acquiescence of RSC and
such appointment shall remain unvacated and unstayed for an aggregate of sixty
(60) days; or
(ii) upon not less than thirty (30) days prior written
notice to RSC for any reason, with or without cause, in GMREDCO's sole and
absolute discretion; PROVIDED, HOWEVER, such termination shall be prospective
only and shall not affect GMREDCO's obligation to complete the Construction Work
or the sales and marketing of any Lots theretofore designated by RSC to GMREDCO
under this Agreement.
(c) ARBITRABLE DISPUTES. The failure or refusal of a Party to
acquiesce to the demand of the other Party over any matter which, by the terms
of this Agreement, is to be submitted to arbitration for resolution shall not
constitute the basis of a default for which this Agreement may be terminated.
11
<PAGE>
(d) EFFECT OF TERMINATION. The expiration or termination of
this Agreement shall not impair, waive or otherwise affect in any way the
respective liabilities or obligations of the Parties hereunder which arose or
accrued prior to the date of such expiration or termination or which, by their
terms, survive the expiration or termination of this Agreement.
9. INDEMNITIES. Each Party indemnifies the other Party as follows:
9.1 BY GMREDCO. GMREDCO hereby indemnifies and agrees to defend and
hold harmless RSC, its Affiliates, and their respective partners, principals,
shareholders, officers, directors and employees (collectively, the
"INDEMNITEES"), from and against any and all claims, demands, losses,
liabilities, actions, lawsuits and other proceedings, judgments, awards, costs
and expenses (including, without limitation, reasonable attorneys' fees, court
costs and witness fees), arising directly or indirectly, in whole or in part,
out of (a) the performance of the services rendered by GMREDCO under this
Agreement, (b) the breach of this Agreement by GMREDCO, or (c) any act or
omission of GMREDCO, any of its officers, directors, agents, employees, Trade
Contractors, or anyone directly employed by any of them, except to the extent
that the source or cause of the claim is a design deficiency and except to the
extent that the claim resulted solely from the negligence or misconduct of the
Indemnitee.
9.2 BY RSC. RSC hereby indemnifies and agrees to hold harmless
GMREDCO and its Affiliates, partners, principals, shareholders, officers,
directors, employees and agents from and against any and all claims, demands,
losses, liabilities, actions, lawsuits and other proceedings, judgments, awards,
costs and expenses (including, without limitation, reasonable attorneys' fees,
court costs and witness fees), relating to the construction and/or sale of
improved or unimproved lots within the Projects to the extent the improvements
on such lots were not constructed by or under the supervision of GMREDCO
10. OTHER BUSINESSES. Nothing contained in this Agreement shall be
construed so as to prohibit any party to this Agreement (each a "PARTY" and
together the "PARTIES") or any Affiliate (defined below) or related person or
entity of any Party from owning, operating or investing in any real estate
development, wherever located, not constituting a Project. Either Party, and
any Affiliate or related person or entity of such Party, may engage in or
possess an interest in another business venture or ventures of any nature and
description, independently or with others, including but not limited to the
ownership, financing, leasing, operation, management, syndication, brokerage and
development of real property, and neither Party shall have any rights by virtue
of this Agreement in and to such independent ventures or to the income or
profits derived therefrom. For purposes of this Agreement, an "AFFILIATE" shall
mean any individual, partnership, corporation, trust or other entity
(collectively, a "PERSON") that directly or indirectly through one or more
intermediaries controls or is controlled by or is under common control with a
Party, including without limitation, a limited partnership in which a Party is a
general partner, any Person that is a director, officer, employee, member of,
partner in or trustee of, or serve in a similar capacity with respect to a Party
or any Person with respect to which a Party is a director, officer, employee,
member, partner or trustee or with respect to such Party serves in a similar
capacity and, with respect to RSC, Regency Bancorp, Regency Bank, Regency
Investment Advisors, and their respective directors, officers, shareholders and
agents. A Person
12
<PAGE>
controls a corporation, for the purposes of this definition, when such Person
owns at least a majority of the outstanding voting shares of the corporation,
with the full right to vote such shares.
11. CONTRACTS AND EXPENDITURES. GMREDCO shall have no authority to
execute or otherwise enter into any agreement binding on RSC. GMREDCO shall
have no authority to incur any expense or make any payment on behalf of RSC, and
shall have no right to obtain reimbursement from RSC for any payment made by
GMREDCO.
12. NATURE OF AGENCY. It is expressly understood that RSC and GMREDCO are
and shall remain independent contractors. This Agreement shall not be construed
as creating a joint venture or partnership between them or their respective
successors in interests. Neither Party shall have any authority to create or
assume, in the name or on behalf of the other Party, any obligation, expressed
or implied, nor to act or purport to act as the agent or the legally empowered
representative of the other Party hereto for any purpose whatsoever except as
expressly set forth herein.
13. OWNERSHIP OF INFORMATION AND MATERIALS. Upon completion of GMREDCO's
services or any sooner termination of this Agreement, GMREDCO shall deliver to
RSC all written data and information generated by or for GMREDCO in connection
with the Projects or supplied to GMREDCO by RSC or RSC's contractors,
consultants or agents, and all drawings, plans, books, records, contracts,
agreements and all other documents and writings in its possession relating to
its services or the Projects. Such materials shall at all times be the property
of RSC and RSC shall have the right to use the same without further compensation
to GMREDCO.
14. COMPLIANCE WITH LAWS; LICENSES. At all times during the term of this
Agreement, GMREDCO shall perform its services and work in strict compliance with
applicable federal, state and local law. Without limiting the foregoing,
GMREDCO shall obtain and maintain such licenses as may be required for the
performance by GMREDCO of its services under this Agreement.
15. ARBITRATION. All claims or disputes between RSC and GMREDCO arising
out of this Agreement, the performance of the Construction Work or the rendition
of any other services to be provided by GMREDCO hereunder shall be settled and
finally determined by binding arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association, or its successor,
then in effect. In any case where the American Arbitration Association, or its
successor, is not in existence or fails or refuses to act within a reasonably
prompt period of time (but in no event exceeding 60 days from the date a request
for arbitration is filed), then the arbitration shall proceed in accordance with
the laws relating to arbitration then in effect in the State of California,
including but not limited to sections 1280 through 1294.2 of the California Code
of Civil Procedure, as the same may be amended or superseded from time to time.
The following provisions shall also govern any such arbitration:
15.1 INITIATION; PROCEDURES. Either Party may demand arbitration of
any dispute under this Agreement by giving written notice thereof to the other
Party at any time. The
13
<PAGE>
demand for arbitration shall contain a description of the dispute, the amount
involved and the relief sought. Any arbitration pursuant to this Agreement
shall be conducted before three neutral arbitrators having not less than ten
(10) years experience in real estate development, construction and sales.
Arbitration proceedings shall be conducted in Fresno, California. All
arbitration proceedings, including all evidence and statements, shall be
confidential and shall not be used or disclosed for any other purpose.
15.2 FINDINGS; AWARD; COSTS. The arbitrators' award shall be in
writing and shall specify in reasonable detail the legal and factual bases of
the award. Judgment on the award rendered in any such arbitration may be
entered in any court having jurisdiction thereof. The award shall be final and
binding on the parties unless vacated or corrected pursuant to applicable law or
proven to have been the result of a substantial error of law or fact. All fees
and expenses of the arbitrators shall be shared equally by the parties to such
arbitration. Each Party shall pay its own attorneys' fees, expenses and costs
of the arbitration. Notwithstanding the foregoing, (a) the arbitrators shall
have the authority to assess any of the foregoing costs against any Party acting
in bad faith, (b) if the prevailing Party is required to initiate proceedings to
enforce the award or confirming judgment, the prevailing Party shall be entitled
to recover its costs and attorneys' fees associated with such action, and (c) if
either Party brings any legal action by any method other than arbitration
against the other with respect to any dispute required to be arbitrated under
this Agreement, the other Party shall be entitled to recover from such Party all
damages, costs, expenses and attorneys' fees incurred as a result of such
action; PROVIDED, HOWEVER, each Party shall have the right to commence and
pursue, prior to the appointment of the arbitrators, a legal action for
injunctive or other protective relief in a court of competent jurisdiction.
15.3 PAYMENT OF AWARD. Any cash award shall be payable in United
States dollars through a bank in the United States. The award shall earn
interest from the date of the award until satisfied in full at the United States
prime interest rate as reported in the Western Edition of THE WALL STREET
JOURNAL on the business day immediately preceding the date of the award.
16. NOTICES. All notices, requests and communications required or
permitted to be given by one Party to the other under this Agreement shall be in
writing and shall be sent to the address of such Party set forth in section 1
above, or at such other address as the addressee may have provided to the other
Party by written notice given in accordance with this section. Such notices
shall be deemed to be duly given on the earliest of (a) actual receipt,
irrespective of whether sent by post, telex, cable, facsimile transmission
(followed by same day mailing of a hard copy), overnight courier or other
method, or (b) on the third business day after mailing by registered or
certified first class mail, return receipt requested and postage prepaid.
17. CONFIDENTIALITY. Except for such disclosures as are required to be
made by law or on demand of any governmental authority, GMREDCO shall keep
confidential all information regarding the Projects and GMREDCO's activities
under this Agreement unless authorized in writing by RSC to release such
information, in which event GMREDCO shall abide by RSC's reasonable
instructions.
14
<PAGE>
18. GENERAL PROVISIONS
18.1 GOVERNING LAW. This Agreement is entered into in the State of
California and shall be governed by the laws of the State of California
applicable to contracts made and to be wholly performed in that State.
18.2 SEVERABILITY. If any provision of this Agreement shall be
determined by a court, arbitrator or regulatory authority of competent
jurisdiction to be illegal or invalid for any reason whatsoever, such illegal or
invalid provision shall be deemed modified to the minimum extent necessary to
render it legal and valid and, if such provision is not susceptible to such
modification then such provision shall be severed from this Agreement and, in
either event, the remainder of this Agreement shall remain in full force and
effect; PROVIDED, HOWEVER, if such illegal or invalid provision cannot be
reasonably modified or stricken from this Agreement without substantial
impairment of a Party's rights and expectations under this Agreement, then this
Agreement shall be terminated.
18.3 WAIVER; CONSENTS. No consent or waiver, express or implied, by
either Party hereto to or of any breach or default by the other Party in the
performance by the other of its obligations hereunder shall be valid unless in
writing, and no such consent or waiver shall be deemed or construed to be a
consent or waiver to or of any other breach or default in the performance by
such other Party of the same or any other obligations of such Party hereunder.
Failure on the part of either Party to complain of any act or failure to act of
the other Party or to declare the other Party in default, irrespective of how
long such failure continues, shall not constitute a waiver by such Party of its
rights hereunder. The granting of any consent or approval in any one instance
by or on behalf of RSC or GMREDCO shall not be construed to waive or limit the
need for such consent in any other or subsequent instance.
18.4 TIME OF ESSENCE. Time is of the essence in the performance of
this Agreement.
18.5 FORCE MAJEURE. A delay in or failure of performance by either
Party of its obligations under this Agreement, other than with respect to the
payment of money, shall not constitute a default if and to the extent that such
delay or failure is caused by occurrences beyond the reasonable control of such
Party and its agents, employees, contractors, subcontractors and consultants,
including but not limited to expropriation or confiscation of facilities,
compliance with any order or request of any governmental authority or person
purporting to act therefor, acts of declared or undeclared war, public
disorders, rebellion, sabotage, earthquakes, floods, severe adverse weather
conditions, natural disasters, fire, explosions, riots, strikes, inability of a
Party to obtain necessary materials (or reasonable substitutions therefor),
permits or licenses due to existing or future laws, rules or regulations of
governmental authorities, or any other causes not within the reasonable control
of such Party or its agents, employees, contractors, subcontractors and
consultants, and which by the exercise of reasonable diligence such Party is
unable to prevent. However, (a) GMREDCO shall not be entitled to the benefits
of this section unless it gives prompt written notice to RSC of the existence of
any event, occurrence or condition which it believes permits a delay in the
performance of its obligations pursuant to this section, and (b)
15
<PAGE>
no such force majeure event shall prevent either Party from exercising any
right it may have to terminate this Agreement other than due to the default
of the other Party.
18.6 ASSIGNMENT AND SUBCONTRACTORS. By this Agreement, RSC has
specifically bargained for the unique and particular services of the GMREDCO
named in this Agreement and the personal services of Gary L. McDonald.
Therefore, GMREDCO shall have no right, power or authority to assign or delegate
any of its rights, duties or obligations under, or arising pursuant to, this
Agreement, or any portion hereof, either voluntarily, involuntarily or by
operation of law, without the prior written approval of RSC, which approval RSC
may grant or withhold in its sole and absolute discretion. Consent by RSC of
any particular assignment or delegation shall not constitute approval to any
subsequent assignment or delegation. Without limiting the foregoing, GMREDCO
shall not subcontract its services, or any portion thereof, without the prior
written approval of RSC. Any approval by RSC of any subcontract of GMREDCO's
services or any part thereof shall not be construed to make RSC a party to such
subcontract or to expose RSC to any claims or liabilities arising thereunder.
RSC shall have the right to assign this Agreement, but such assignment shall not
discharge or release RSC from its duties and obligations to GMREDCO in the event
that RSC's assignee does not perform such duties and obligations. Without
waiving the foregoing provisions, all of the rights, benefits, duties,
liabilities, and obligations of the Parties shall inure to the benefit of and be
binding upon the Parties and their respective successors and assigns.
18.7 ENTIRE AGREEMENT. This Agreement contains all of the
understandings and agreements of the Parties, and supersedes all prior written
and contemporaneous oral discussions, negotiations, understandings and
agreements of the Parties, with respect to the subject matter of this Agreement.
18.8 AMENDMENTS. This Agreement may not be amended except by a
written instrument signed by all of the Parties.
18.8 CAPTIONS AND HEADINGS. All captions and headings used in this
Agreement are provided for convenience and ease of reference only and are not to
be considered in the construction or interpretation of any provision of this
Agreement.
18.9 INTERPRETATION. Whenever the context requires, all words used in
the singular number shall be deemed to include the plural and vice versa, and
each gender shall include any other gender. The use of the word "including",
when following any general statement, shall not be construed to limit such
statement to the specific items or matters set forth immediately following such
word or to similar items or matters, whether or not nonlimiting language (such
as "without limitation," or "but not limited to," or words of similar import) is
used with reference thereto, but rather shall be deemed to refer to all other
items or matters that could reasonably fall within the broadest possible scope
of such general statement, term or matter. This Agreement has been negotiated
at arms-length between the Parties and shall be interpreted as if drafted by
both Parties. The Parties expressly waive any rule of construction that would
interpret any ambiguous provision against the Party responsible for drafting
such provision.
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<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
and delivered by their respective duly authorized representatives on the dates
set forth beneath their signatures hereto, effective as of the Effective Date.
"RSC" "GMREDCO"
REGENCY SERVICE CORPORATION, GARY L. McDONALD REAL ESTATE
a California corporation AND DEVELOPMENT CO.,
a California corporation
By: /s/ STEVE HERTEL By: /s/ GARY L. McDONALD
-------------------- -------------------------
Steve Hertel Name: Gary L. McDonald
President Title: President, Chief Executive Officer
Date: April 10, 1997 Date: April 10, 1997
-------------------- -------------------------
17
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EXHIBIT A
SCHEDULE OF PROJECTS
PARTNERSHIPS PROJECT TYPE
- ------------ ------------
Highlands at Fort Washington SFR
Glen Castle L.P. SFR
Excalibur Estates SFR/LOTS
RSC OWNED PROJECTS
- ------------------
Blackhorse I SFR
Blackhorse II SFR
Blackhorse III SFR
Seville Estates II LOTS
St. Andrews Green LOTS
Woodward Classics Estates II SFR
<PAGE>
EXHIBIT B
COMPENSATION SCHEDULE
In consideration for services actually rendered by GMREDCO to RSC under this
Agreement, RSC agrees to compensate GMREDCO according to the following terms:
CONSTRUCTION SERVICES FEE:
RSC shall pay GMREDCO a fee of $2.50 per square foot of floor area of each
residential unit (excluding garage and any out-buildings) included within the
Construction Work and completed by GMREDCO. The fee for each unit shall be paid
in three installments as follows:
(a) one-third of such sum shall be paid when the unit has been framed;
(b) one third of such sum shall be paid when the drywall installation for
such unit has been completed; and
(c) one-third of such sum shall be paid after recordation of the notice of
completion for such unit and either the unconditional waiver of all mechanics
lien rights for such unit has been received by RSC or the period by which such
liens may be asserted shall have expired.
At GMREDCO's request and in RSC's discretion, RSC may accelerate the
foregoing payment schedule.
With respect to any residential units under construction on April 1, 1997
and designated by RSC for completion by GMREDCO under this Agreement, GMREDCO
shall be paid a prorata portion of the foregoing fee based on the percentage of
completion of such units at that date (i.e., if the unit is 60% completed at
April 1, 1997, then GMREDCO shall be paid 40% of the product obtained by
multiplying the square footage of the unit by $$2.50).
With respect to any units under construction at the expiration or
termination of this Agreement, GMREDCO shall be paid a prorata portion of the
foregoing fee based on the percentage of completion of such units at the
expiration or termination date.
CONTRACT WARRANTY WORK FEE.
With respect to any warranty work provided by GMREDCO at RSC's request on
units constructed by a general contractor other than GMREDCO, whether or not
such units were completed before or after the Effective Date, RSC shall pay to
GMREDCO a fee based on the time and materials required to complete such warranty
work. The amount of such fee (or the formula for determining such fee) shall be
subject to the mutual agreement of the Parties.
PUNCHOUT LIST WORK
With respect to any punchout list work which does not constitute a claim
against GMREDCO's warranty (for which GMREDCO shall be solely responsible), RSC
shall pay to GMREDCO a fee based on the time and materials required to complete
such punchout work. The
<PAGE>
amount of such fee (or the formula for determining such fee) shall be subject
to the mutual agreement of the Parties.
MARKETING AND SALES FEE:
Except with respect to Lots within the St. Andrews Green Project, RSC
agrees to pay GMREDCO a commission of two and one-half percent (2_%) of the
sales price of each Lot designated by RSC for sale by GMREDCO and sold, whether
improved or unimproved. For Lots within the St. Andrews Green Project, the
commission amount shall be three percent (3%) of the sales price.
Notwithstanding the foregoing, if one or more other brokers participate in the
sale of a Lot, RSC agrees to pay the sales commission due such other broker(s),
not to exceed a total commission of six percent (6%).
Such commission will be paid at the close of escrow from the sales proceeds
actually received by RSC, if, as and when each sale is consummated, the purchase
price (net of fees, costs and prorations allocated to RSC) for such sale is
received by RSC, and title is transferred to the buyer of the Lot sold.
Notwithstanding the foregoing, no commission shall be due or payable to GMREDCO
with respect to a Lot if (a) the buyer of the Lot was procured by RSC or any RSC
Affiliate, or (b) the sale of such Lot is not finally consummated as provided
above, for any reason, including, without limitation, due to (i) the acts or
omissions of RSC, its agents, employees or representatives; (ii) the buyer's
failure or refusal to accept the title offered by RSC; or (iii) the
unmarketability or uninsurability of the title.
GMREDCO's right to receive, and RSC's obligation to pay, such commission
with respect to the sale of any particular Lot shall survive the expiration or
termination of this Agreement for a period of ninety (90) days; PROVIDED that
(a) on or before the termination of this Agreement (i) a binding contract of
sale shall have been entered into between RSC and the buyer of such Lot,
(ii) such contract shall be subject only to customary conditions of purchase
(e.g., buyer's approval of the condition of the property and title, and buyer's
ability to obtain financing), (iii) an escrow account shall have been opened and
the buyer shall have placed its initial deposit therein; (b) this Agreement
shall not have been terminated by RSC due to GMREDCO's default; and (c) payment
of such commission shall not violate or contravene the terms of any law, rule,
regulation, order or directive from any regulatory agency or other governmental
authority having or purporting to have jurisdiction over RSC or any of its
Affiliates. After the expiration of such ninety (90) day period, all rights of
GMREDCO to receive such commission shall terminate absolutely, notwithstanding
any role GMREDCO may have had in procuring a buyer for any Lot.
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
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0
0
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