<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant / /
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE>
REGENCY BANCORP
AND
SUBSIDIARIES
CONSOLIDATED FINANCIAL REVIEW
AS OF AND FOR THE YEARS
ENDED DECEMBER 31, 1996, AND 1995
AND INDEPENDENT AUDITORS' REPORT
[LOGO]
<PAGE>
[LOGO]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TUESDAY MAY 13, 1997
To the Shareholders:
The Annual Meeting of Shareholders of Regency Bancorp will be held at
Piccadilly Inn Hotels, 2305 W. Shaw Avenue, Regency Room, Fresno, California, on
Tuesday, May 13, 1997 at 9:00 a.m. for the following purposes:
1. To elect directors.
2. To ratify the appointment of Deloitte & Touche LLP as the
Corporation's independent public accountants for the 1997 fiscal year.
3. To transact such other business as may properly come before the
Meeting.
The names of the Board of Directors' nominees to be directors of Regency
Bancorp are set forth in the accompanying Proxy Statement and incorporated
herein by reference.
Article II, Section 2.3 of the Bylaws of Regency Bancorp provides for the
nomination of directors in the following manner:
"Nomination for election of directors may be made by the Board of
Directors or by any holder of any outstanding class of capital stock
of the Corporation entitled to vote for the election of directors.
Notice of intention to make any nominations shall be made in writing
and shall be delivered or mailed to the President of the Corporation
not less than twenty-one (21) days nor more than sixty (60) days prior
to any meeting of shareholders called for the election of directors;
provided, however, that if less than twenty-one (21) days' notice of
the meeting is given to shareholders, such notice of intention to
nominate shall be mailed or delivered to the President of the
Corporation not later than the close of business on the tenth (10th)
day following the day on which the notice of meeting was mailed;
provided further, that if notice of such meeting is sent
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by third class mail (if permitted by law), no notice of intention to
make nominations shall be required. Such notification shall contain
the following information to the extent known to the notifying
shareholder:
(a) the name and address of each proposed nominee;
(b) the principal occupation of each proposed nominee;
(c) the number of shares of capital stock of the Corporation
owned by each proposed nominee;
(d) the name and residence address of the notifying shareholder;
and
(e) the number of shares of capital stock of the Corporation
owned by the notifying shareholder.
Nominations not made in accordance herewith may, in the
discretion of the Chairman of the meeting, be disregarded and upon the
Chairman's instructions the inspectors of election can disregard all
votes cast for each such nominee. A copy of this paragraph shall be
set forth in a notice to shareholders of any meeting at which
directors are to be elected."
Only shareholders of record at the close of business on April 11, 1997 are
entitled to notice of and to vote at this Meeting and at any postponements
or adjournments thereof.
By order of the Board of Directors
/s/ Roy Jura
----------------------------------
Roy Jura,
SECRETARY
Fresno, California
April 18, 1997
WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING PLEASE SIGN AND RETURN THE
ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
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<PAGE>
Mailed to Shareholders
on or about April 18, 1997
PROXY STATEMENT
INFORMATION CONCERNING THE SOLICITATION
This Proxy Statement is being furnished to the shareholders of Regency
Bancorp, a California corporation (the "Corporation"), in connection with the
solicitation of proxies by the Board of Directors for use at the Annual Meeting
of Shareholders to be held at Piccadilly Inn Hotels, 2305 W. Shaw Avenue,
Regency Room, Fresno, CA on May 13, 1997 (the "Meeting"). Only shareholders of
record on April 11, 1997 (the "Record Date") will be entitled to notice of the
Meeting and to vote at the Meeting. At the close of business on the Record
Date, the Corporation had outstanding and entitled to be voted 1,853,738 shares
of its no par value Common Stock (the "Common Stock").
Shareholders are entitled to one vote for each share held, except that for
the election of directors each shareholder has cumulative voting rights and is
entitled to as many votes as shall equal the number of shares held by such
shareholder multiplied by the number of directors to be elected. Each
shareholder may cast all his or her votes for a single candidate or distribute
such votes among any or all of the candidates as he or she chooses. However, no
shareholder shall be entitled to cumulate votes (in other words, cast for any
candidate a number of votes greater than the number of shares of stock held by
such shareholder) unless such candidate's name has been placed in nomination
prior to the voting and the shareholder has given notice at the Meeting prior to
the voting of the shareholder's intention to cumulate his or her votes. If any
shareholder has given such notice, all shareholders may cumulate their votes for
candidates in nomination. Prior to voting, an opportunity will be given for
shareholders or their proxies at the Meeting to announce their intention to
cumulative their votes. The proxy holders are given, under the terms of the
proxy, discretionary authority to cumulate votes on shares for which they hold a
proxy.
Any person giving a proxy in the form accompanying this Proxy Statement has
the power to revoke that proxy prior to its exercise. The proxy may be revoked
prior to the Meeting by delivering to the Secretary of the Corporation either a
written instrument revoking the proxy or a duly executed proxy bearing a later
date. The proxy may also be revoked by the shareholder by attending and voting
at the Meeting.
Votes cast by proxy or in person at the Meeting will be counted by the
Inspectors of Election for the Meeting. The Inspectors will treat abstentions
and "broker non-votes" (shares held by brokers or nominees as to which
instructions have not been received from the beneficial owners or persons
entitled to vote and the broker or nominee does not have discretionary voting
power under applicable rules of the stock exchange or other self regulatory
organization of which the broker or nominee is a member) as shares that are
present and entitled to vote for purposes of determining the presence of a
quorum. Abstentions and "broker non-votes" will not be counted as shares voted
for purposes of determining the outcome of any matter as may properly come
before the Meeting.
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Unless otherwise instructed, each valid proxy returned which is not revoked
will be voted in the election of directors "FOR" the nominees of the Board of
Directors, "FOR" proposal No. 2, and, at the proxy holders' discretion, on such
other matters, if any, which may come before the Meeting (including any proposal
to postpone or adjourn the Meeting).
The Corporation will bear the entire cost of preparing, assembling,
printing and mailing proxy materials furnished by the Board of Directors to
shareholders. Copies of proxy materials will be furnished to brokerage houses,
fiduciaries and custodians to be forwarded to the beneficial owners of the
Common Stock. In addition to the solicitation of proxies by use of the mail,
some of the officers, directors and regular employees of the Corporation and the
Corporation's subsidiary, Regency Bank (the "Bank"), may (without additional
compensation) solicit proxies by telephone or personal interview, the costs of
which will be borne by the Corporation.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of April 11, 1997, no individual known to the Corporation owned more
than five percent (5%) of the outstanding shares of its Common Stock except as
described below.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (2) CLASS (3)
-------------- -------------------- ------------------------ ----------
<S> <C> <C> <C>
Common Stock,
No Par Value Regency Bancorp ESOP 173,048 (4) 8.60%
Common Stock,
No Par Value Gary L. McDonald 139,204 (5) 6.92%
Common Stock,
No Par Value Daniel R. Suchy 112,152 (6) 5.57%
</TABLE>
(1) The address of each of the persons set forth in this table is the principal
office of the Corporation, 7060 N. Fresno Street, Fresno, CA 93720.
(2) Includes shares, if any, owned by a spouse (except where legally
separated), minor children, and relatives sharing the same home. Except as
otherwise noted, each person has sole voting and investment power with
respect to the shares listed.
(3) The percentage is calculated on the basis of the amount of outstanding
shares plus shares subject to stock options exercisable within 60 days of
the Record Date.
(4) All shares of the Corporation ESOP are held in a trust administered by a
trustee for the benefit of employee participants. The trustee votes the
shares as directed by the employee participants.
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(5) Mr. McDonald, currently a director of the corporation, is not standing for
re-election to the Board of Directors. Mr. McDonald will cease to be a
director of the corporation with the election and qualification of the
nominees listed in proposal number 1. Includes 19,387 shares which may be
acquired under stock options exercisable within 60 days of the Record Date.
(6) Includes 19,387 shares which may be acquired under stock options
exercisable within 60 days of the Record Date, 39,804 shares held by the
Daniel R. Suchy Pension Plan and Trust for which Dr. Suchy is the sole
trustee, 27,322 shares held by the Daniel R. Suchy Profit Sharing Plan for
which Dr. Suchy is the sole trustee, 3,150 shares held by Dr. Suchy's
daughter, Melissa Ann Suchy, 3,150 shares held by Dr. Suchy's daughter,
Michelle Christine Suchy, and 19,339 shares held by a joint trust for which
Dr. Suchy is a co-trustee with his wife.
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SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information as of April 11, 1997 concerning
the equity ownership of directors, nominees, and executive officers named in the
Summary Compensation Table and directors and executive officers of the
Corporation and the Bank as a group. Unless otherwise indicated, each director
and executive officer listed below possesses sole voting power and sole
investment power. All of the shares shown in the following table are owned both
of record and beneficially except as indicated in the notes to the table. The
Corporation has only one class of shares outstanding, Common Stock. There are
no current arrangements known to the Corporation, that may result in a change in
control of the Corporation.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (2) CLASS (3)
-------------- -------------------- ------------------------ ----------
<S> <C> <C> <C>
Common Stock, Steven R. Canfield 34,023(4) 1.69%
No Par Value
Common Stock, Joseph L. Castanos 58,932(5) 2.93%
No Par Value
Common Stock, Steven F. Hertel 45,080(6) 2.24%
No Par Value
Common Stock, Roy Jura 38,120 (7) 1.89%
No Par Value
Common Stock, Robert J. Longatti 16,836 (8) .84%
No Par Value
Common Stock, Gary L. McDonald 139,204 (9) 6.92%
No Par Value
Common Stock, Barbara Palmquist 44,299 (10) 2.20%
No Par Value
Common Stock, David N. Price 64,339 (11) 3.20%
No Par Value
Common Stock, JoAnn Price 2,733 (12) .14%
No Par Value
Common Stock, Daniel Ray 729 (13) .04%
No Par Value
Common Stock, Daniel R. Suchy 112,152 (14) 5.57%
No Par Value
Common Stock, Waymon E. Watts 58,707 (15) 2.92%
No Par Value
All directors and executive officers of the 615,154 (16) 30.56%
Corporation as a group (12 persons)
</TABLE>
(1) The address for beneficial owners, all of whom are incumbent directors,
executive officers or director nominees of the Corporation and the Bank, is
the address of the Corporation, 7060 N. Fresno Street, Fresno, CA 93720.
(2) Includes shares subject to stock options exercisable within 60 days of the
Record Date.
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(3) The percentage is calculated on the basis of the amount of outstanding
shares plus shares subject to stock options held by the named individual or
group and exercisable within 60 days of the Record Date.
(4) Includes 14,648 shares as to which Mr. Canfield has voting control under
the ESOP and 401(k) Plans, 5,000 shares which may be acquired under stock
options exercisable within 60 days of the Record Date and 13,645 owned
jointly with Jacquie Canfield.
(5) Includes 19,387 shares which may be acquired under stock options
exercisable within 60 days of the Record Date, 20,518 shares held in a
family trust of which Mr. Castanos is joint trustee and 19,027 shares held
by Castanos Associates, a corporation for which Mr. Castanos serves as
President.
(6) Includes 13,934 shares as to which Mr. Hertel has voting control under the
ESOP and 401(k) Plans, 10,000 shares which may be acquired under stock
options exercisable within 60 days of the Record Date and 15,112 shares
owned jointly with Susan Hertel.
(7) Includes 19,387 shares which may be acquired under stock options
exercisable within 60 days of the Record Date.
(8) Includes 7,123 shares as to which Mr. Longatti has voting control under the
ESOP and 401(k) Plans, 5,000 shares which may be acquired under stock
options exercisable within 60 days of the Record Date and 4,713 shares
owned jointly with Holly Longatti.
(9) Includes 19,387 shares which may be acquired under stock options
exercisable within 60 days of the Record Date and 9,190 shares owned
jointly with Beverly McDonald.
(10) Includes 19,387 shares which may be acquired under stock options
exercisable within 60 days of the Record Date and 24,912 shares held by a
Family Trust of which Barbara Palmquist is joint Trustee.
(11) Includes 19,387 shares which may be acquired under stock options
exercisable within 60 days of the Record Date and 44,952 shares held by
David N. Price Profit Sharing Plan, for which Mr. Price is the sole
trustee.
(12) Includes 2,733 shares as to which Mrs. Price has voting control under the
ESOP and 401(k) Plans.
(13) Mr. Ray has been nominated as the employee director for the 1997 year.
Includes 279 shares as to which Mr. Ray has voting control under the ESOP
and 401(k) Plans and 250 shares which may be acquired under stock options
exercisable within 60 days of the Record Date.
(14) Includes 19,387 shares which may be acquired under stock options
exercisable within 60 days of the Record Date, 39,804 shares held by the
Daniel R. Suchy Pension Plan and Trust for which Dr. Suchy is the sole
trustee, 27,322 shares held by the Daniel R. Suchy Profit Sharing Plan for
which Dr. Suchy
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is a sole trustee, 3,150 shares held by Dr. Suchy's daughter, Melissa Ann
Suchy, and 3,150 shares held by Dr. Suchy's daughter, Michelle Christine
Suchy and 19,339 shares held by a joint trust for which Dr. Suchy is a co-
trustee with his wife.
(15) Includes 19,387 shares which may be acquired under stock options
exercisable within 60 days of the Record Date and 39,320 shares held by the
Waymon E. Watts Corporation Group Profit Sharing Plan, for which Mr. Watts
is the sole trustee.
(16) Includes 155,959 shares of Common Stock subject to stock options
exercisable within 60 days of the Record Date.
PROPOSAL NO. 1
ELECTION OF DIRECTORS OF THE CORPORATION
The number of directors authorized for election at this meeting is eight
(8). The Board has nominated seven (7) incumbent directors and Mr. Daniel Ray
as the employee director/nominee to serve as the Corporation's directors. Each
director will hold office until the next Annual Meeting of Shareholders and
until his or her successor is elected and qualified.
All proxies will be voted for the election of the eight (8) nominees
recommended by the Board of Directors unless authority to vote for the election
of any directors is withheld. The nominees receiving the highest number of
affirmative votes of the shares entitled to be voted for them shall be elected
as directors. Abstentions and votes cast against nominees have no effect on the
election of directors. If any of the nominees should unexpectedly decline or be
unable to act as a director, their proxies may be voted for a substitute nominee
to be designated by the Board of Directors. The Board of Directors has no
reason to believe that any nominee will be become unavailable and has no present
intention to nominate persons in addition to or in lieu of those named below.
The following table sets forth certain information as of the Record Date,
April 11, 1997, with respect to those persons nominated by the Board of
Directors for election as directors, as well as all executive officers. The
Corporation knows of no arrangements, including any pledge by any person of
securities of the Corporation, the operation of which may, at a subsequent date,
result in a change in control of the Corporation. There are no arrangements or
understandings by which any of the executive officers or directors of either the
Corporation or the Bank were selected. There is no family relationship between
any of the directors or executive officers.
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NAME AGE POSITION
---- --- --------
Steven R. Canfield 37 Executive Vice President and Chief Financial
Officer of the Corporation and Bank since March
1995 and March 1991, respectively; Vice President
of the Bank, 1984 through 1991.
Joseph L. Castanos 68 Director of the Corporation and Bank since March
1995, and 1980, respectively; Director of Regency
Service Corporation since 1982.
Steven F. Hertel 47 Chairman of the Board of the Corporation and Bank
since November 1996, President, and Chief
Executive Officer of the Corporation and Bank
since March 1995 and December 1990, respectively;
Director, President and Chief Executive Officer of
Regency Service Corporation since December 1990;
Director and Chief Executive Officer of Regency
Investment Advisors since July 1993.
Roy Jura 68 Director and Secretary of the Corporation and Bank
since March 1995 and 1980, respectively; Director
of Regency Investment Advisors since July 1993;
Chairman of the Board of Regency Service
Corporation since 1982.
Robert J. Longatti 51 Executive Vice President and Chief Credit Officer
of the Bank since April 1995; Senior Vice
President and Chief Credit Officer of the Bank
since March 1991.
Barbara Palmquist 67 Director of the Corporation and Bank since March
1995, and 1980, respectively; Director of Regency
Service Corporation since 1982.
David N. Price 64 Vice-chairman of the Board of Directors of the
Corporation and Bank since March 1995, and 1980,
respectively; Vice Chairman and Director of
Regency Investment Advisors since July 1993.
Daniel Ray 34 Marketing Director of Regency Bancorp's
subsidiary, Regency Investment Advisors since
1995.
Daniel R. Suchy 54 Director of the Corporation and Bank since March
1995, and 1983, respectively.
Waymon E. Watts 61 Director of the Corporation and Bank since March
1995, and 1981, respectively.
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The following is a brief account of the business experience during the past
five years of each director/nominee and each executive officer listed above in
addition to the positions indicated.
BACKGROUND AND BUSINESS EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS
Steven R. Canfield has been actively involved in the banking industry since
1982. Prior to joining the Bank, he was employed by Guarantee Savings & Loan,
Fresno, CA. Mr. Canfield is a graduate of California State University, Fresno
with a Bachelor of Science Degree in Business Administration and has performed
postgraduate work in finance and banking law. Mr. Canfield is a member of KVPT
(Valley Public Television) Business Advisory Committee, and the Saint Agnes
Hospital Men's Association.
Joseph L. Castanos retired as president of his own insurance agency in
1993. He is a Fresno State graduate where be earned a degree in accounting. Mr.
Castanos is a member of the San Joaquin Memorial High School Board of Regents
and the St. John's Cathedral Restoration Advisory Board.
Steven F. Hertel has been employed in the banking industry for over 25
years. He is a past President, CEO and director of Pajaro Valley Bancorporation
and Pajaro Valley Bank (1986-1990); past President, CEO and director of Timber
Bancorp and Timber Community Bank in Roseburg, Oregon (1979-1986), and was a
manager and lending officer for U.S. National Bank of Oregon. Mr. Hertel earned
bachelor of arts degrees in both business and economics at Linfield College. Mr.
Hertel is a member of the North Fresno Rotary Club, Clovis School District
Foundation Board, Business Advisory Council of CSUF School of Education and
Human Development, Business Advisory Council of CSUF Sid Craig School of
Business and the Fresno Business Council.
Roy Jura is the former president of Producers Packing Corporation and
former secretary/treasurer, of Jura Farms, Inc. He serves on the Dried Fruit
Association of California Board of Directors as well as its Export Committee,
and the California Fig Advisory Board. He's a member of California State
University, Fresno Viticulture Alumni, the Fresno County Farm Bureau Blue Ribbon
Committee and the Chancellor Associates of the UCSF Medical School.
Robert J. Longatti has over 25 years of banking experience. Prior to
joining the Bank, Mr. Longatti was Vice President of the Business Banking
Division of Glendale Federal Bank, Fresno, CA (formally Guarantee Savings &
Loan), and has been a lending officer for California Valley Bank and Wells Fargo
Bank. Mr. Longatti is a graduate of Cal Poly, San Luis Obispo, with a Bachelor
of Science Degree in Agricultural Business Management. He is an active member of
the California Banking Association Legislative Committee and is also a member of
the Board of San Joaquin Memorial High School and is a past Board Chairman of
the Central Valley Chapter of the American Diabetes Association.
Barbara Palmquist, a founding director of Regency Bank has an extensive
background of over 30 years in the Fresno real estate market. As an agency
owner-broker, she was instrumental in establishing the Bank's involvement in the
real estate construction market.
David N. Price has been the President of David N. Price Associates, Inc., a
pension and retirement planning and administration company since February 26,
1971. He has established ESOP and 401(k) plans for a number of financial
institutions and was instrumental in establishing the Corporation's
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Employee Stock Ownership Plan. He is also an active member of the California
Bankers Association, the North Fresno Lions Club and the Tehran Temple Shrine.
Mr. Price is a graduate of California State University, Fresno and is a frequent
speaker on the subject of employee ownership and the benefits of ESOP'S.
Daniel Ray is a certified financial planner currently employed as the
Marketing Director for Regency Investment Advisors, Inc., a subsidiary of
Regency Bancorp. He is an active member in the San Joaquin Valley Planned Gifts
Council. He is also the Chairman of the Fig Garden Church Stewardship Committee
and a member of the Valley Children's Hospital Foundation Planned Giving
Advisory Committee.
Dr. Daniel R. Suchy is a practicing physician specializing in pulmonary
medicine since 1978. A graduate of the University of Minnesota medical school,
Dr. Suchy is a board certified specialist in pulmonary diseases. Dr. Suchy is a
member of the Fresno Community Hospitals' Century Circle, a Sponsor of the St.
Agnes Hospital Foundation and a Chancellor Associate of the UCSF Medical School.
Waymon E. Watts has been the President of Watts, Campbell and Anderson,
Certified Public Accountants since November 1, 1973. Mr. Watts is a graduate of
California State University, Fresno and has been a certified public accountant
since 1965. He is a past director of the Community Hospitals of Central
California and a member of the North Fresno Rotary Club where he was a director
for community service.
None of the Corporation's or Bank's Directors is a director of any other
company with a class of securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended, or subject to the requirements of
Section 15(d) of such Act or any company registered as an investment company
under the Investment Company Act of 1940.
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DIRECTORS
COMMITTEES OF THE BOARD OF DIRECTORS
The Corporation and the Bank have established the following standing
committees, with membership noted.
The Audit Committee has responsibility for recommending the appointment of
and overseeing a firm of independent certified public accountants whose duty is
to audit the books and records of the Corporation and its subsidiaries for the
fiscal year for which it is appointed, monitoring and analyzing the results of
internal and regulatory examinations, monitoring the Corporation and its
subsidiaries financial and accounting organization and their financial
reporting. The Audit Committee met eleven times in 1996 and is composed of the
following members: Mr. Watts, Chairman, Mr. Castanos and Mr. Jura, Mrs. Price,
Mr. Hertel, Mr. Canfield and Mr. Longatti are non-voting members.
The Executive Administrative Committee is responsible for reviewing the
day-to-day operations of the Corporation and Bank and makes recommendations to
the Board of Directors on such matters as (i) the approval of site locations,
budgets, new premises and personnel policies; (ii) compliance; (iii) strategic
planning; (iv) equity or debt financing and allocation of capital; (v)
evaluation, negotiation and consummation of merger and acquisition transactions;
and (vi) performing such other functions as the Board of Directors may
designate. The Executive Administrative Committee also serves as the nominating
and compensation committee for the Corporation and its subsidiaries. The
Executive Administrative Committee met thirteen times in 1996. From May 1996
until November 1996 the committee was composed of the following members: Mr.
McDonald, Chairman, Mr. Price, Mr. Jura and Mr. Hertel who is a non-voting
member. From November 1996 until the present the committee was composed of the
following members: Mr. Hertel, Chairman and a non-voting member, Mr. Price,
Mr. Jura and Mr. Watts.
The ESOP/401K Trustee Committee's primary responsibility is the review and
administration of the Corporation's ESOP and 401K Benefit Plans. This Committee
met one time during 1996 and is composed of the following members: Mr. Price,
Chairman, Mr. Hertel and Karen Murphy.
The Building Committee of the Bank advises the Board of Directors as to the
facility planning for the Bank. When building a new facility or remodeling an
existing one, the Building Committee meets regularly to monitor the progress of
the development. The Building Committee met two times in 1996 and is composed of
the following members: Mr. McDonald, Chairman, Mr. Price, Mr. Hertel and Mrs.
Palmquist. Mr. Canfield is a non-voting member.
The Board Marketing/Community Reinvestment Act (CRA) Committee's
responsibility is to oversee activities related to marketing, advertising and
public relations, as well as the marketing and liquidity of company stock and
market maker relations. In addition, the committee acts as the Community
Reinvestment Act (CRA) Committee, with duties including the review and approval
of the Bank's CRA policy and statement, as well as the Bank's CRA activity. The
Marketing/Community Reinvestment Act (CRA) Committee met twelve times in 1996
and is composed of the following members: Mr. Price,
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Chairman, Mrs. Palmquist, Mr. McDonald, Mrs. Price and Mr. Hertel. Mr.
Goodrich, Vice President and Director of Marketing of the Bank is a non-voting
member.
The Investment Committee's primary responsibility is to provide oversight
of the Bank's investment portfolio and policies. The Committee has the power to
discount and purchase bills, notes and other evidences of debt, and to buy and
sell bills of exchange. The Investment Committee met three times in 1996 and is
composed of the following members: Dr. Suchy, Chairman, Mr. Hertel, Mr. Canfield
and Mr. Watts. Mr. Alan Graas, president of the Bank's subsidiary, Regency
Investments Advisors, is a non-voting member.
The Loan Committee of the Bank provides oversight and approves the Bank's
lending policies. In addition, the Loan Committee has the power to examine and
approve loans and discounts and to exercise authority regarding loans and
discounts by the Bank. The Loan Committee of the Bank met twenty-four times in
1996 and is composed of the following members: Mr. Castanos, Chairman, Mrs.
Palmquist, Mr. Watts, Mr. McDonald and Mr. Hertel. Mr. Longatti is a non-voting
member.
During the last full fiscal year all directors attended at least seventy-
five percent (75%) of the aggregate of the total number of meetings of the Board
of Directors and the number of meetings of the committees on which they served.
COMPENSATION OF DIRECTORS
Directors were paid $1,000 monthly as compensation during 1996 for Board
meetings attended, except that the Chairman of the Board was paid $2,000 per
meeting attended and the Vice-Chairman of the Board received $1,500 for Board
meetings attended. Non-employee directors received $300 for Committee meetings
attended. The Chairman of each Committee received $450 for Committee meetings
attended.
In 1989, the Bank adopted a Directors' Deferred Fees Plan (the "DDF Plan")
whereby an eligible director, including an employee director, may voluntarily
elect to defer some or all of his or her compensation (salary or fees) in
exchange for the Bank's agreement to pay a deferred benefit in the future. The
deferred amount is not taxable to the director and is not a tax deductible
expense for the Bank until such amounts are actually paid to the director.
13
<PAGE>
Under the DDF Plan, each participating director has entered into a written
agreement with the Bank (a "DDF Agreement"), pursuant to which the director
agrees to defer the following amounts for the periods indicated, in exchange for
the Bank's agreement to provide the retirement benefits described below:
ESTIMATED
ANNUAL DEFERRED ANNUAL RETIREMENT
NAME FEE INCOME BENEFIT (1)
---- ---------- -----------------
Joseph Castanos (2) $38,350 $52,384
Steven Hertel (3) $ 9,600 $20,772
Roy Jura (4) $ 6,500 $12,251
Roy Jura (2) $ 6,800 $ 9,915
Gary McDonald (3) $15,000 $32,797
Gary McDonald (3) $ 6,000 $13,119
David Price (3) $ 6,500 $14,212
Daniel Suchy (3) $ 6,500 $14,212
Daniel Suchy (3) $15,300 $14,212
Waymon Watts (5) - $ 6,275
(1) Assumes that interest will accrue at the rate of eight percent (8%)
per annum. The Corporation's Board of Directors, in its sole
discretion, may change such interest rate from time to time.
(2) Such fees shall be deferred for five years from the date of the DDF
Agreement. At the end of the fifth year, the Bank will pay to the
director the estimated annual retirement benefit for five years, in 12
equal monthly installments per year.
(3) Such fees shall be deferred for ten years from the date of the DDF
Agreement. At the end of the tenth year, the Bank will pay to the
director the estimated annual retirement benefit for ten years, in 12
equal monthly installments per year.
(4) Such fees shall be deferred for nine years from the date of the DDF
Agreement. At the end of the ninth year, the Bank will pay to the
director the estimated annual retirement benefit for ten years, in 12
equal monthly installments per year.
(5) Mr. Watts participated in the DDF Plan for approximately 22 months in
1989, 1990 and 1991 and then elected to discontinue deferrals
thereunder. Based upon the amount deferred to date, the Bank will pay
to Mr. Watts the estimated annual retirement benefit for ten years
beginning in approximately 2002, in 12 equal monthly installments per
year.
If the director dies prior to or during his retirement, the directors
beneficiary will receive an amount equal to what the director would have
received if he or she had lived for the full term of the DDF Agreement. Such
amount will be paid in equal installments as indicated above or in one lump sum,
as determined by such beneficiary. If the director's service with the Bank is
terminated prior to his retirement for any reason other than death, he or she
will receive the balance in the deferred compensation account plus accrued
interest as described above within six months of such termination.
14
<PAGE>
The Bank has purchased single premium universal life insurance policies on
the life of each participant in the DDF Plan. The premium is paid at the
inception of the policy. There is also an annual mortality cost paid by the
Bank. For 1996 this cost totaled $28,300. In addition, the Bank recorded an
expense of $702 for the cash surrender charges that would be assessed if the
policies were canceled. The expense will be reversed when the policies have been
held approximately eight to ten years. The Bank is the owner and beneficiary of
such life insurance policies, which generally cover the Bank's contingent
liability associated with the possible premature death of the covered individual
and the cost of interest on the deferred amounts. If a participant in the DDF
Plan ceases to be a director of the Bank prior to retirement, the insurance
policy on such participant can be transferred to one or more of the Bank's other
employees or directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows for the three fiscal years ended
December 31, 1996, the compensation paid to the Chief Executive Officer and to
the two other executive officers whose aggregate salary and bonus compensation
exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
------------------- ------
(a) (b) (c) (d) (e) (g) (i)
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($) (#)(3) ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Steven F. Hertel 1996 155,500 84,362 11,800(4) 30,000 41,361(7)(8)(9)
Chairman of the 1995 157,658 73,464 10,200(4) - 24,811(7)(8)(9)
Board, President and 1994 143,715 71,030 10,200(4) - 24,099(7)(8)(9)
Chief Executive
Officer
Steven R. Canfield 1996 87,290 36,833 6,365(5) 15,000 8,604(7)(8)
Executive Vice 1995 82,850 30,027 3,000(5) - 6,435(7)(8)
President and Chief 1994 78,724 30,775 3,000(5) - 7,504(7)(8)
Financial Officer
Robert J. Longatti 1996 88,580 37,377 4,200(6) 15,000 8,264(7)(8)
Executive Vice 1995 86,364 31,300 4,200(6) - 6,479(7)(8)
President and Chief 1994 83,386 31,418 4,200(6) - 6,288(7)(8)
Credit Officer
</TABLE>
15
<PAGE>
(1) Includes cash and noncash compensation earned and received by executive
officers as well as amounts earned but deferred at the election of those
officers.
(2) Represents bonus amounts earned in 1996, 1995 and 1994, but paid in 1997,
1996 and 1995, respectively.
(3) The Bank adopted the Regency Bank 1990 Stock Option Plan on March 22, 1990.
The Plan was subsequently amended and on March 1, 1995, the Plan was converted
to the Regency Bancorp 1990 Stock Option Plan, as amended. The Plan was further
amended on May 21, 1995. Under the Plan, options are granted to directors, and
key, full-time salaried officers and employees of the Corporation and its direct
and indirect subsidiaries. Options granted under the Plan are either incentive
options or non-statutory options. Vesting may not extend beyond ten years from
the date of grant. Options granted prior to March 1, 1995 become fully
exercisable upon the sale, merger or consolidation of the Corporation in which
the Corporation is not a survivor notwithstanding the vesting provisions under
the Plan. Options granted under the Plan are adjusted to protect against
dilution in the event certain changes in the Corporation's capitalization,
including stock splits and stock dividends. Options have an exercise price
equal to the fair market value of the Corporation's Common Stock on the date of
grant. During 1996, 30,000 option shares were granted to Mr. Hertel and 15,000
option shares were granted to Mr. Canfield and Mr. Longatti, respectively. The
executive officer options included a vesting schedule over two years, an option
term of ten years and an option price of $8.94 per share.
(4) Represents an automobile allowance of $8,800 and country club dues of
$3,000 for 1996 and an automobile allowance of $7,200 and country club dues of
$3,000 for 1995 and 1994.
(5) Represents an automobile allowance of $3,000 for 1996, 1995 and 1994 and
country club dues of $3,365 for 1996.
(6) Represents an automobile allowance of $4,200 for 1996, 1995 and 1994.
(7) The Corporation has a 401(k) tax-deferred savings plan ('401(k) Plan") in
which, generally, all employees are eligible to participate. Participating
employees may defer a portion of their compensation in the 401(k) Plan. The
Corporation, at its option, may make matching contributions on participant
deferrals at a rate determined annually by the Corporation (25% in 1996, 25% in
1995 and 50% in 1994). The matching contribution vests over a period of seven
years. For the calendar years 1996, 1995 and 1994, the accrued contributions to
the 401(k) Plan were $27,925, $34,206 and $56,062, respectively. Matching
contributions under the 401(k) Plan for the three fiscal years ended
December 31, 1996, 1995, and 1994 with respect to the individuals named in the
table above and with respect to all executive officers as a group were: Steven
F. Hertel, $2,352, $2,012 and $4,721; Steven R. Canfield, $1,921, $1,313 and
$3,352; Robert J. Longatti, $1,483, $1,139 and $2,049; and all executive
officers as a group $5,756, $4,464 and $10,122.
(8) The Corporation has an ESOP in which, generally, all full-time salaried
employees over the age of 21 are eligible to participate. Each year, the
Corporation may contribute Common Stock and/or cash to the ESOP which is
allocated to each participant in proportion to his or her total annual regular
compensation for the year. The ESOP may borrow funds which, in addition to the
Corporation's cash contributions, may
16
<PAGE>
be used to purchase the Corporation's Common Stock from the Corporation or on
the open market. Vesting under the ESOP occurs on a graduated seven year
vesting schedule at the expiration of which the employee is 100% vested. The
total accrued contributions to the ESOP for the calendar years 1996, 1995 and
1994 were $173,546, $155,702 and $105,000, respectively. Contributions under the
ESOP for the three fiscal years ended December 31, 1996, with respect to the
individuals named in the table above and with respect to all executive officers
as a group were: Steven F. Hertel, $11,484, $9,274 and $7,453; Steven R.
Canfield, $6,683, $5,122 and $4,152; Robert J. Longatti, $6,781, $5,340 and
$4,239; and all executive officers as a group were $24,948, $19,736 and $15,844.
(9) Includes director fees of $27,000, $13,000 and $11,400 in 1996, 1995 and
1994, respectively, and a life insurance premium of $525 per year. Included in
the director's fees paid in 1996 was $9,600 contributed to Mr. Hertel's DDF
Plan.
(10) No executive officer received perquisites or other personal benefits in
excess of the lesser of $50,000 or 10% of each such officer's total annual
salary and bonus during 1994,1995, and 1996.
OPTION/SAR GRANTS TABLE
The following table provides information regarding stock options granted to
the named executive officers during 1996.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants 1/
--------------------
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base
Name Granted (#) Fiscal Year Price ($/Sh) Expiration date
---- ----------- ----------- ---------------- ---------------
Steven F. Hertel 30,000 30.93% $8.94 12/16/06
Steven R. Canfield 15,000 15.46% $8.94 12/16/06
Robert J. Longatti 15,000 15.46% $8.94 12/16/06
1/ Each option grant to the individuals named in the table has a term of
ten (10) years from the date of grant and vests over a two (2) year period
from the date of grant.
17
<PAGE>
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
The following table provides information regarding stock option exercises
in 1996 by the executive officers named in the Summary Compensation Table and
the value of such officers' unexercised options.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR, AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES VALUE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARs
ACQUIRED ON REALIZED OPTIONS/SARs AT FY-END (#) AT FY-END ($)
NAME EXERCISE (#) ($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (2)
---- ------------ -------- -------------------------- -----------------------------
<S> <C> <C> <C> <C>
Steven F. Hertel 0 $ 0 10,000 20,000 $ 3,100 $ 6,200
Steven R. Canfield 0 0 5,000 10,000 $ 1,550 $ 3,100
Robert J. Longatti 0 0 5,000 10,000 $ 1,550 $ 3,100
</TABLE>
(1) Value realized is calculated by multiplying the number of shares exercised
by the bid price on the date of exercise minus the exercise price.
(2) Value realized is calculated by the bid quotation of underlying securities
at December 31, 1996 of $9.25, multiplied by the number of exercisable or
unexercisable shares minus the exercise price.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
The Corporation entered into an employment agreement on August 22, 1996,
with Steven F. Hertel, Chairman, President and Chief Executive Officer of the
Corporation. The employment agreement is terminable at will by either Mr.
Hertel or the Corporation. If the agreement is terminated by the Corporation,
other than for cause, Mr. Hertel will be entitled to severance compensation
equal to twelve months of his then current base salary and bonus or profit-
sharing compensation, if any, for the year in which the termination occurs. Mr.
Hertel's starting annual base salary, as of August 22, 1996, is $155,500 per
year. Annual increases in Mr. Hertel's salary are at the discretion of the
Board of Directors. Mr. Hertel receives an automobile allowance, life
insurance, reimbursement of business expenses, standard health, dental and
disability insurance, and golf and country club expense reimbursement.
Additionally, Mr. Hertel will participate in the bonus program, ESOP, 401(k)
Plan and all such benefits as the Corporation or the Bank may in the future
establish for its employees and/or executive officers. In the event of a change
in control of the Corporation or Bank and following which time period Mr. Hertel
does not negotiate a new agreement acceptable to him, the employment agreement
shall terminate and he shall receive a payment equal to two times the average of
his last five years compensation.
The Corporation entered into employment agreements on August 22, 1996, with
Steven R. Canfield, Executive Vice President and Chief Financial Officer of the
Corporation and Robert J. Longatti, Executive Vice President and Chief Credit
Officer of the Corporation. The employment agreements are terminable at will by
either the Corporation or Mr. Canfield or Mr. Longatti, respectively. If their
18
<PAGE>
respective agreement is terminated by the Corporation, other than for cause, Mr.
Canfield or Mr. Longatti, respectively, will be entitled to severance
compensation equal to six months of their then current base salary and bonus or
profit-sharing compensation, if any, for the year in which the termination
occurs. Mr. Canfield and Mr. Longatti's starting annual base salaries, as of
August 22, 1996, were $85,500 and $89,000, respectively. Annual increases in
Mr. Canfield and Mr. Longatti's salary are at the discretion of the Board of
Directors or Chief Executive Officer. Mr. Canfield and Mr. Longatti receive an
automobile allowance, reimbursement of business expenses, standard health,
dental and disability insurance. Mr. Canfield receives reimbursement for golf
and country club expense. Additionally, Mr. Canfield and Mr. Longatti will
participate in the bonus program, ESOP, 401(k) Plan and all such benefits as the
Corporation or the Bank may in the future establish for its employees and/or
executive officers. In the event of a change in control of the Corporation or
Bank and following which time period Mr. Canfield or Mr. Longatti does not
negotiate a new agreement acceptable to them, the employment agreement shall
terminate and they shall receive a payment equal to one times the average of his
last five years compensation respectively.
Recognizing the importance of building and retaining a competent management
team, in November 1992, the Board of Directors purchased insurance policies on
the lives of Steven F. Hertel, Steven R. Canfield and Robert J. Longatti, in the
amounts of $470,000, $192,000 and $425,000, respectively, for the purpose of
providing death, disability and retirement benefits. The policies were purchased
through Bank Compensation Strategies Group and are endorsed by the California
Bankers Association, American Bankers Association and numerous other State
Banking associations. The Bank is the owner and beneficiary, under such
policies. Consistent therewith, the Bank agreed in 1993 to provide conditional
deferred compensation benefits to Steven F. Hertel, Steven R. Canfield and
Robert J. Longatti. The agreements with such executives are designed to provide
an incentive for each executive to remain with the Bank by defining and
increasing, over the executive's term of employment, the amount of the annual
benefit each executive is to receive. Payments are to be made only after
certain specified events have occurred, including formal retirement on or after
a specified age. While certain events may cause the amounts payable to be
reduced, the agreements provide for a maximum annual benefit payment of One
Hundred Thousand Dollars ($100,000) in the case of Steven F. Hertel, and Sixty
Thousand Dollars ($60,000) for each of Steven R. Canfield and Robert J.
Longatti. In each case, the annual benefit amount is to be paid in equal monthly
installments over fifteen (15) years (or such shorter period, as determined by
the Bank's Board of Directors in its sole and absolute discretion). In the
event of the executive's death prior to the receipt of all amounts due, the Bank
will pay to the executive's spouse or designated beneficiary the remaining
amounts over the remaining payout period. Other events which may alter when
payment of the annual benefit is to begin include: (i) "disability," as defined
in the agreement, in which case the executive will begin to receive the annual
benefit at the earlier of the defined retirement age or when he is no longer
entitled to receive disability benefits under his principal disability insurance
policy, and (ii) either termination of employment without cause or constructive
termination following a "change in control," in which case the executive is
entitled to all or a portion of the annual benefit depending upon length of
service prior to termination. If, however, the executive's employment is
terminated for cause, or if the executive voluntarily terminates his employment
prior to an event entitling him to benefits under the agreement, all rights and
benefits under the agreement are forfeited.
19
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Except as described below, there have been no transactions, or series of
similar transactions, during 1996, or any currently proposed transaction, or
series of similar transactions, to which the Corporation or the Bank was or is
to be a party, in which the amount involved exceeded or will exceed $60,000 and
in which any director (or nominee for director) of the Corporation or the Bank,
executive officer of the Corporation or the Bank, any shareholder owning of
record or beneficially 5% or more of the Corporation's Common Stock, or any
member of the immediate family of any of the foregoing persons, had, or will
have, a direct or indirect material interest.
Gary L. McDonald, a director of the Company, owns Gary L. McDonald Real Estate
and Development Inc., ("GLMRED"). During 1996, GLMRED was retained by RSC to
manage the real estate projects in which RSC has an investment. In 1996, the
Company paid approximately $488,000 for these services. Mr. McDonald,
currently a director of the Corporation, is not standing for re-election to
the Board of Directors. Mr. McDonald will cease to be a director of the
Corporation with the election and qualification of the nominees listed in
Proposal No. 1.
CERTAIN BUSINESS RELATIONSHIPS
There were no business relationships of the type requiring disclosure under
Item 404(b) of Regulation S-K.
INDEBTEDNESS OF MANAGEMENT
The Corporation, through the Bank, has had, and expects in the future to
have banking transactions in the ordinary course of its business with many of
the Corporation's directors and officers and their associates, including
transactions with corporations of which such persons are directors, officers or
controlling shareholders, on substantially the same terms (including interest
rates and collateral) as those prevailing for comparable transactions with
others. Management believes that in such transactions comprising loans did not
involve more than the normal risk of collectibility or present other unfavorable
features. Loans to executive officers of the Corporation and the Bank are
subject to limitations as to amount and purpose prescribed in part by the
Federal Reserve Act, as amended, and the regulations of the Federal Deposit
Insurance Corporation.
20
<PAGE>
PROPOSAL NO. 2
RATIFICATION AND APPOINTMENT
OF INDEPENDENT PUBLIC ACCOUNTANTS
The firm of Deloitte & Touche LLP served as independent public accountants
for the 1996 fiscal year. Deloitte & Touche LLP has no interest, financial or
otherwise, in the Corporation or the Bank. The services rendered by Deloitte &
Touche LLP during the 1996 fiscal year were audit services, consultation in
connection with various accounting matters and preparation of income tax
returns. The Board of Directors approved each professional service rendered by
Deloitte & Touche LLP during the fiscal year, and the possible effect of each
such service on the independence of that firm was considered by the Board of
Directors before such service was rendered.
Representatives of Deloitte & Touche LLP are expected to be present at the
Meeting and will have an opportunity to make a statement if they so desire and
to answer appropriate questions.
The Board of Directors of the Corporation has selected Deloitte & Touche
LLP to serve as the independent public accountants for the 1997 fiscal year and
recommend that the shareholders vote "FOR" Proposal No. 2 to ratify the
selection of Deloitte & Touche LLP as the Corporation's independent public
accountants for the 1997 fiscal year.
21
<PAGE>
ANNUAL REPORT
The Annual Report of the Corporation containing audited financial
statements for the fiscal year ended December 31, 1996 is included with this
Proxy Statement mailed to shareholders.
FORM 10-K
A COPY OF THE CORPORATION'S ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
IS AVAILABLE TO SHAREHOLDERS WITHOUT CHARGE UPON WRITTEN REQUEST TO ROY JURA,
SECRETARY, REGENCY BANCORP, 7060 N. FRESNO STREET, FRESNO, CALIFORNIA 93720.
SHAREHOLDER PROPOSALS
Next year's Annual Meeting of Shareholders will be held on May 12, 1998.
The deadline for Shareholders to submit proposals for inclusion in the Proxy
Statement and form of Proxy for the 1998 Annual Meeting of Shareholders is
December 20, 1997. All proposals should be submitted by Certified Mail - Return
Receipt Requested, to Roy Jura, Secretary, Regency Bancorp, 7060 N. Fresno
Street, Fresno, California 93720.
OTHER MATTERS
The Board of Directors knows of no other matters which will be brought
before the Meeting, but if such matters are properly presented to the Meeting,
proxies solicited hereby will be voted in accordance with the judgment of the
persons holding such proxies. All shares represented by duly executed proxies
will be voted at the Meeting in accordance with the terms of such proxies.
REGENCY BANCORP
/s/ Roy Jura
By: Roy Jura
SECRETARY
Fresno, California
April 18, 1997
22
<PAGE>
SELECTED FINANCIAL DATA
The following table presents certain consolidated financial information
concerning the business of the Company and the Bank. This information should be
read in conjunction with the Consolidated Financial Statements and the notes
thereto, and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained elsewhere herein.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
(In thousands, except
percentages, share and per share data) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Interest income $ 13,227 $ 12,841 $ 10,708 $ 8,952 $ 9,392
Interest expense 4,694 5,092 2,989 2,509 3,102
---------- ---------- ---------- ---------- ----------
Net interest income 8,533 7,749 7,719 6,443 6,290
Provision for Loan Loss - 470 487 37 327
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 8,533 7,279 7,232 6,406 5,963
Non-interest income $ 3,109 $ 1,883 $ 4,026 $ 3,604 $ 3,089
Non-interest expense 9,902 12,105 8,327 6,660 6,042
---------- ---------- ---------- ---------- ----------
Income/(Loss) before income taxes 1,740 (2,943) 2,931 3,350 3,010
Income taxes (Benefit) 732 (1,176) 1,195 1,388 1,196
---------- ---------- ---------- ---------- ----------
Net Income/(Loss) 1,008 (1,767) 1,736 1,962 1,814
FINANCIAL CONDITION AND CAPITAL
YEAR END BALANCES:
Total assets $ 181,058 $ 163,682 $ 155,802 $ 144,012 $ 118,776
Net loans 99,770 94,529 89,589 85,453 70,540
Investments in real estate 16,926 17,954 16,209 13,797 10,675
Deposits 159,802 143,745 137,889 123,529 106,225
Shareholders' equity 13,470 12,942 14,327 12,945 10,885
FINANCIAL CONDITION AND CAPITAL
AVERAGE BALANCES:
Total assets $ 166,532 $ 160,215 $ 144,734 $ 124,259 $ 115,745
Net loans 98,333 91,046 83,230 70,984 70,809
Investments in real estate 17,892 17,801 15,667 12,034 10,279
Deposits 143,723 142,943 128,288 110,272 102,187
Shareholders' equity 13,358 14,948 13,737 11,950 9,071
FINANCIAL RATIOS:
Return on average assets 0.61% (1.10%) 1.20% 1.58% 1.57%
Return on average equity 7.55% (11.82%) 12.64% 16.42% 20.00%
Average equity to average assets 8.02% 9.33% 9.49% 9.62% 7.84%
Dividend payout ratio 43.33% (19.93%) 9.50% - -
Allowance for loan losses to total loans 1.58% 1.85% 1.69% 1.54% 1.79%
PER SHARE:
Net Income/(Loss) $ .54 $ (.98) $ .94 $ 1.08 $ .99
Dividends declared .24 .20 .10 - -
Weighted average shares outstanding 1,871,671 1,805,270 1,841,421 1,821,916 1,832,702
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain matters discussed or incorporated by reference in this Annual
Report on Form 10-K 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, matters described in Item 7 - "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.
BUSINESS ORGANIZATION
Regency Bancorp (the "Company") is a California corporation organized to
act as the holding company for Regency Bank (the "Bank") and its
subsidiaries, with headquarters and branches in Fresno and Madera,
California. In 1995, upon formation of the holding company, the Company
acquired all of the outstanding common stock of the Bank. Other than its
investment in the Bank, the Company currently conducts no other significant
business activities, although it is authorized to engage in a variety of
activities which are deemed closely related to the business of banking upon
prior approval of the Board of Governors, the Company's principal regulator.
The Bank engages in basic commercial and consumer banking, offering a
diverse range of traditional banking products and services to the business,
professional and consumer markets, with emphasis on business and professional
accounts.
The Bank emphasizes the delivery of these products within its primary
service area consisting of Fresno County and Madera County.
The following analysis is designed to enhance the reader's understanding
of the Company's financial condition and the results of its operations as
reported in the Consolidated Financial Statements included in this Annual
Report. Reference should be made to those statements and the Selected
Financial Data presented elsewhere in this report for additional detailed
information.
OVERVIEW
For the fiscal year ended December 31, 1996 the Company recorded net
income of $1,008,000 representing an increase of $2,775,000 from 1995's net
loss of $1,767,000. For the fiscal year ended December 31, 1995 the Company
had a net loss of $1,767,000 representing a decline of $3,503,000 or 201.7
% from 1994 net income of $1,736,000. On a per common and common equivalent
share basis, net income for 1996 was $.54 compared to a net loss of $(.98)
and to net income of $.94 per share for the preceding two years. The
increase in net income in 1996 was primarily the result of lower losses
related to RSC's real estate development activities as well as an increase of
income from the sale of SBA loans. The net loss recorded in 1995 was
primarily a result of losses experienced by RSC, the Bank's real estate
development subsidiary. For the year ended December 31, 1995, RSC recorded a
pre-tax net loss of $3,441,000 primarily as a result of expenses of
$2,908,000 incurred for the establishment of a reserve for potential future
project losses. These factors are discussed in more detail later in this
analysis.
<PAGE>
Common shareholder's equity increased by $528,000 during 1996 to
$13,470,000, primarily as a result of the retention of retained earnings net
of four cash dividends totaling $437,000. In 1995, shareholders equity
declined by $1,385,000 to $12,942,000 primarily as a result of losses
experienced by RSC. In 1994, common shareholders' equity increased by
$1,382,000 primarily through retention of earnings. During 1996, the Company
declared and paid four quarterly cash dividends of $.06 per common share. In
1995 and 1994, the Company paid four and two cash dividends of $.05
respectively. It is the objective of management to maintain adequate capital
for future growth through retention of earnings and by board resolution to
maintain a minimum tier one leverage capital ratio of 7.00% or greater.
Therefore, there can be no assurance that the Company will pay dividends in
the future. See Item 5 -"Market For Registrant's Common Equity and Related
Stockholder Matters", for discussion of dividend restriction applicable to
the Company and Bank. The Company's ratio of common shareholders' equity to
total assets was 7.44% at December 31, 1996 compared to 7.91% at December 31,
1995 and 9.20% at December 31, 1994. In addition to the cash dividends
paid, the Company distributed a five percent stock dividend during 1995. Per
share earnings have been adjusted to reflect any stock dividends and any
dilutive effect of common stock equivalents (stock options outstanding but
not exercised) calculated on the treasury stock method.
INVESTMENT SECURITIES
The provisions of Statement of Financial Accounting Standards (SFAS) 115
require, among other things, that certain investments in debt and equity
securities be classified under three categories: securities held-to-maturity;
trading securities; and securities available-for-sale. Securities classified
as held-to-maturity are to be reported at amortized cost; securities
classified as trading securities are to be reported at fair value with
unrealized gains and losses included in operations; and securities classified
as available-for-sale are to be reported at fair value with unrealized gains
and losses excluded from earnings and reported as a separate component of
shareholders' equity, net of tax. The Company has not classified securities
as trading securities.
Although the Company currently has the ability to hold its entire
investment portfolio until maturity, management makes a determination at the
time of purchase as to which classification is most appropriate based on
various factors. Securities classified as held-to-maturity are stated at
amortized cost, adjusted for amortization of premiums and accretion of
discounts. Such amortization and accretion is included in investment income.
Interest on securities classified as held-to-maturity is included in
investment income.
Securities not classified as held-to-maturity are classified as available-
for-sale. Available-for-sale securities are carried at fair value, with the
unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity. The amortized cost of debt securities in this category
is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization and accretion is included in investment income.
Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in
investment income. The cost of securities sold is based on the specific
identification method. Interest on securities classified as
available-for-sale is included in investment income.
<PAGE>
During the period between December 31, 1995 and December 31, 1996, the
Company recorded a net decrease in the value of its available-for-sale
portfolio of $43,467 net of applicable taxes. This change is reflected as a
change in shareholders' equity in the Consolidated Statement of Shareholders'
Equity. This change in value is primarily the result of an overall decline in
interest rates resulting in higher market values of the Company's security
portfolio.
The following is a comparison of the amortized cost and approximate fair value
of securities available-for-sale:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES DECEMBER 1996 DECEMBER 1995 DECEMBER 1994
- --------------------------------------------------------------------------------------------------------------
(In thousands) Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasuries $ 2,020 $ 2,029 $ 2,003 $ 2,004 $ 1,998 $ 1,964
U.S. Government Agencies 21,409 21,380 20,474 20,459 15,942 15,082
State and Political Subdivisions 1,518 1,559 1,540 1,601 - -
Mortgage-backed Securities 7,972 7,952 7,655 7,686 3,054 2,846
Equity Securities 350 350
- --------------------------------------------------------------------------------------------------------------
$ 33,269 $ 33,270 $ 31,672 $ 31,750 $ 20,994 $ 19,892
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the securities available-for-sale as of
December 31, 1996 and weighted average yields of such securities.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
SECURITIES AVAILABLE-FOR-SALE (1) ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
- --------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasuries - 0% 2,020 6.05% - 0% - 0% 2,020 6.05%
U.S. Government agencies 2,993 5.44% 13,416 6.23% 5,000 7.17% - 0% 21,409 6.34&
Mortgage-backed securities 57 6.97% 879 8.19% 533 8.56% 6,503 6.38% 7,972 6.70%
State and political subdivisions 330 5.91% 883 6.01% 305 5.37% - 0% 1,518 5.86%
Equity Securities 350 5.57% - 0% - 0% - 0% 350 5.70%
- --------------------------------------------------------------------------------------------------------------------------
TOTAL 3,730 5.52% 17,198 6.30% 5,838 7.20% 6,503 6.38% 33,269 6.39%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Yields calculated on nontaxable securities have not considered tax
equivalent effects.
The following is a comparison of the amortized cost and approximate fair
value of securities held-to-maturity:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES DECEMBER 1996 DECEMBER 1995 DECEMBER 1994
- --------------------------------------------------------------------------------------------------------------
(In thousands) Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasuries - - - - - -
U.S. Government Agencies - - - - 5,988 5,612
State and Political Subdivisions - - - - 1,065 1,077
Mortgage-backed Securities - - - - - -
Equity Securities
- --------------------------------------------------------------------------------------------------------------
- - - - $ 7,053 $ 6,689
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<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.
<PAGE>
CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND INTEREST RATES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except percentages) AVERAGE YIELD/ INTEREST AVERAGE YIELD/ INTEREST AVERAGE YIELD/ INTEREST
BALANCE RATE BALANCE RATE BALANCE RATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans (1) $ 100,052 11.25% $ 11,255 $ 92,501 11.69% $ 10,816 $ 84,559 10.95% $ 9,255
Investment securities (2) 29,013 6.22% 1,805 30,665 6.27% 1,923 25,313 5.55% 1,406
Federal funds sold & other 3,254 5.13% 167 1,907 5.40% 103 1,099 4.28% 47
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 132,319 10.00% 13,227 125,073 10.27% 12,842 110,971 9.65% 10,708
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets:
Allowances for credit losses (1,719) (1,455) (1,329)
Cash and due from banks 8,482 7,920 7,090
Real estate investments 17,892 17,801 15,667
Premises and equipment, net 2,296 4,769 6,138
Cash surrender value of
life insurance 2,829 2,699 2,655
Accrued interest receivable
and other assets 4,435 3,408 3,542
- ------------------------------------------------------------------------------------------------------------------------------------
Total average assets $ 166,534 $ 160,215 $ 144,734
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Transaction accounts $ 46,237 2.67% $ 1,235 $ 51,759 3.33% $ 1,721 $ 58,285 2.76% $ 1,607
Savings accounts 25,327 4.18% 1,058 22,518 4.76% 1,071 7,515 3.79% 285
Time deposits 41,791 5.36% 2,241 40,379 5.51% 2,225 33,165 3.72% 1,234
Federal funds purchased
and other (3) 6,795 2.36% 160 1,635 4.59% 75 4,016 (3.41%) (137)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 120,150 3.91% 4,694 116,291 4.38% 5,092 102,981 2.90% 2,989
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Transaction accounts 30,369 26,652 25,307
Other liabilities 2,657 2,324 2,709
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 153,176 145,267 130,997
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock 8,868 8,500 7,014
Retained earnings 4,529 6,678 6,907
Unrealized gain/(loss) on
investment securities (39) (230) (184)
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 13,358 14,948 13,737
- ------------------------------------------------------------------------------------------------------------------------------------
Total average liabilities and
shareholders' equity $ 166,534 $ 160,215 $ 144,734
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 8,533 $ 7,750 $ 7,719
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income as a
percentage of average
interest-earning assets 10.00% 10.27% 9.65%
Interest expense as a
percentage of average
interest-earning assets (3.55%) (4.07%) (2.69%)
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin 6.45% 6.20% 6.96%
- ------------------------------------------------------------------------------------------------------------------------------------
</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
$1,232,090, $1,220,000 and $1,456,000 for the years ended December 31,
1996, 1995 and 1994, 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.
(3) Interest expense has been reduced by capitalized interest on real estate
projects of approximately $0, $55,000 and $299,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
<PAGE>
Changes in the net interest income 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) 1996 - 1995 1995 - 1994
- --------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET INTEREST EARNINGS VARIANCE ANALYSIS: (1)
Increase (decrease) in interest income:
Loans 820 (381) 439 903 658 1,561
Investment securities (2) (103) (15) (118) 321 196 517
Federal funds sold and other 69 (5) 64 41 15 56
- --------------------------------------------------------------------------------------------------------------
Total 786 (401) 385 1,265 869 2,134
- --------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Transaction accounts (171) (315) (486) (136) 250 114
Savings accounts (533) 520 (13) 697 89 786
Time deposits 69 (53) 16 309 682 991
Federal funds purchased and other 100 (15) 85 43 169 212
- --------------------------------------------------------------------------------------------------------------
Total (535) 137 (398) 913 1,190 2,103
- --------------------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income 1,321 (538) 783 352 (321) 31
- --------------------------------------------------------------------------------------------------------------
</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.
Total interest income before the provision for loan losses increased
$386,000 or 3.00% in 1996 to $13,227,000. During 1995, interest income
before the provision for loan losses increased by $2,134,000 or 19.93% to
$12,842,000 from $10,708,000 in 1994. Interest expense in 1996 declined by
$398,000 or 7.81% to $4,694,000. Interest expense in 1995 increased by
$2,103,000 to $5,092,000 for the year compared to $2,989,000 for 1994. Net
interest margin increased to 6.45% in 1996 from 6.20% in 1995 and 6.96% in
1994. The primary reasons for the increase in net interest margin were lower
rates paid on deposit accounts, as well as the growth of the Bank's
interest-earning assets.
Average interest-earning assets increased $7,246,000 to $132,319,000 in
1996 compared to $125,073,000 in 1995 and $110,971,000 in 1994. Growth in
interest earning assets was primarily centered in the Company's loan
portfolio. Average interest bearing liabilities grew by $3,859,000 in 1996
to $120,150,000 from $116,291,000 in 1995 and $102,981,000 in 1994. Higher
rate savings accounts and growth in other borrowings primarily related to the
dissolution of several RSC limited partnerships and the Company's subsequent
assumption of the debt underlying the properties. During the past 3 years,
the overall interest rate environment has been somewhat volatile. During
1994, rates rose most of the year with overall increases in the prime rate,
the rate that most of the Banks loans are tied to, as well as deposit rates
in general. In 1995, rates reversed course and trended downward with the
prime rate dropping and deposit rates declining as well albeit at a slower
rate. In 1996, rates stabilized and trended slightly lower. In general, in
a rising
<PAGE>
rate environment like 1994, the Bank's loan products tend to reprice more
quickly while its deposit products tend to lag. As rates level off, loan
repricing tends to slow down while deposits continue to reprice to higher
rates as CD's mature and various other products seek market equilibrium.
Consequently, in a rising rate environment the net interest margin tends to
first expand, as reflected by a larger than normal net interest margin of
6.96% during 1994, and then contracts, as reflected by the 6.20% net interest
margin in 1995. In 1996, as rates continued to trend lower the Bank
continued to fine tune its rates paid on deposit accounts while loan rates
and fees decreased only slightly. The result of these actions was an
improved net interest margin of 6.45% for the 1996 year. During the fourth
quarter of 1996, the Bank's net interest margin declined to 6.17% as a result
of competitive pressures driving loan rates and fees lower.
INTEREST-EARNING ASSET MIX
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
(In thousands except percentages) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
(Percentage of average interest Average Percentage Average Percentage Average Percentage
earning assets) Balance of Total Balance of Total Balance of Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSET MIX:
Loans 100,052 75.61% 92,501 73.96% 84,559 76.20%
Investment securities 29,013 21.93% 30,665 24.52% 25,313 22.81%
Federal funds sold and other 3,254 2.46% 1,907 1.52% 1,099 0.99%
- -----------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets $132,319 100.0% $125,073 100.0% $110,971 100.0%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Average interest-earning assets increased $7,246,000 to $132,319,000 in
1996, compared to $125,073,000 in 1995 and $110,971,000 in 1994. Average
loans increased by $7.5 million to $100.1 million representing 75.61% of
average interest-earning assets in 1996, compared to $92.5 million or 73.96%
in 1995 and $84.6 million or 76.20% in 1994. The yield on average loans
decreased to 11.25% in 1996 from 11.69% in 1995 and 10.95% in 1994. The
primary reason for the decrease in the average interest rate on loans in 1996
was a lower prime rate effective for most of the year and intense
competition from major bank lenders.
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 declined slightly to 6.22% for the
period ended December 31, 1996 from 6.27% for the period ended December 31,
1995. The yield on investments was 5.55% for the period ended December 31,
1994. The change in 1996 was primarily attributed to lower interest rates
during 1996 as reflected by the yield curve. The change in 1994 from 1993 was
primarily the result of higher interest rates during 1995 compared to 1994 as
reflected by the yield curve.
Interest expense decreased in 1996 primarily as a result of lower rates
paid for interest bearing deposit accounts. The average rate paid on
interest bearing liabilities in 1996 declined 47 basis points to 3.91% from
4.38% in 1995 and 2.90% in 1994. Interest expense increased in 1995 as a
result of an increase in volume and an increase in the average rate paid on
interest-bearing liabilities from 2.90% in 1994 to 4.38% in 1995.
NONINTEREST INCOME
The Company receives a significant portion of its income from noninterest
sources related both to activities conducted by the Bank (SBA loan
origination's, servicing and depositor service
<PAGE>
charges), as well as from the Bank's two subsidiaries, RSC (income from real
estate partnerships), and RIA (income from investment management services).
OTHER INCOME
- -------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
OTHER INCOME:
Income from investments
in real estate partnerships - - 1,784
Gain on sale of SBA loans 1,315 590 887
Depositor service charges 338 271 244
Income from investment management
services 682 471 351
Gain (loss) on sale of securities - (25) -
Gain on sale of assets 18 7 47
Servicing fees on loans sold 322 321 276
Other 434 248 437
- -------------------------------------------------------------------------------
TOTAL $ 3,109 $ 1,883 $ 4,026
- -------------------------------------------------------------------------------
Other income increased $1,226,000 to $3,109,000 in 1996 from $1,883,000 in
1995. All categories of other income increased in 1996 with the greatest
increases occurring in gain on sale of SBA loans, up $725,000, and income
from investment management services (RIA), $211,000. In 1995 other income
decreased $2,143,000 to $1,883,000 from $4,026,000 for 1994. The decrease in
1995 was primarily the result of a decline in income from RSC's real estate
investment activities. During 1995, RSC set aside $2,798,000 as a reserve
against future losses in the real estate limited partnerships and reserves
for loan losses totaling $110,000.
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 1996, 1995 and 1994 the Company sold SBA guaranteed loans of
approximately $12,794,000, $6,850,000 and $12,631,000 respectively.
During the year ended December 31, 1996, the Company recognized gains on
sale of SBA loans of $1,315,000, an increase of $725,000 from $590,000 in the
comparable period of 1995. This increase was primarily the result of
additional loans available for sale during 1996. During the year ended
December 31, 1995, the Company recognized gains on sale of SBA loans of
$590,000, a decrease of $297,000 from $887,000 in the comparable period of
1994. The decrease was primarily the result of timing related to the number
and volume of loans available for sale in the respective periods.
The third source of income related to the Bank's SBA loan origination
activities is reflected in income from the ongoing servicing of loans sold.
For 1996, servicing fee income increased $1,000 to $322,000. For 1995,
servicing fee income increased $45,000 to $321,000 from $276,000 for the
comparable period in 1994. These increases are the result of a larger
servicing portfolio of loans.
<PAGE>
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.
The Company's investment in real estate consists of the Bank's investment
of capital and retained earnings in RSC. As of December 31, 1996, RSC is the
limited partner in two projects and the sole owner of seven additional
projects that were acquired through the dissolution of various limited
partnerships. The Company had $16,489,000 invested in these projects compared
to $17,954,000 at December 31, 1995 and $16,208,600 at December 31, 1994. In
addition, $4,164,000 in loans from RSC to various entities have been
classified as construction loans on the consolidated balance sheet of which
$3,250,000 have been placed on nonaccrual status at December 31, 1996.
The FDIC has adopted final regulations under the Federal Deposit Insurance
Corporation Improvement Act of 1991 regarding real estate investment and
development activities of insured state banks and their majority-owned
subsidiaries.
Under the 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 Banks request, granted the Bank
and RSC a two year extension, until December 31, 1998, to continue its
divestiture activities.
Through this divestiture process, RSC has obtained sole ownership of seven
projects and has financed the sale of two projects to former joint venture
partners. As of December 31, 1996 RSC has two remaining joint venture
projects in which RSC is the limited partner.
Income from RSC is affected by both the timing of sales as well as the
price paid for the partnerships' properties. The timing of sales can be
affected by economic conditions such as financing availability and
competition in the marketplace, as well as seasonal variations such as the
effect that inclement weather may have on development.
<PAGE>
Increased competition from a large supply of homes and lots in the
Fresno/Clovis market have slowed sales over the past three years.
Additionally, many home sellers, including some of the partnerships, have
offered incentives to buyers in an effort to increase sales further eroding
profit margins.
During the year ended December 31, 1996, the loss from real estate
development activity was $351,000 compared to a loss of $3,441,000 in 1995
and compared to income of $1,784,000 in 1994. The $3,090,000 improvement in
losses related to real estate development was the primary reason for the
Company's improved earnings in 1996. Conversely, the loss of $3,441,000 in
1995 was the primary reason for the Company's loss in 1995.
In 1995, the Company established a reserve for losses related to the sale
of real estate of $2,798,000. During 1996, as actual sales took place and
losses were realized, the reserve was reduced by $1,488,000. As of
December 31, 1996, the balance of the reserve for potential future losses is
$1,310,000.
On a stand alone basis, RSC's net loss including operating expenses,
reduced the Company's overall pre-tax income by $1,499,000 in the year ended
December 31, 1996 and by $4,014,000 in the year ended December 31, 1995.
Operating expenses related to RSC's activities are discussed further under
"Other Expense" below.
See notes 4 and 10 of the Company's audited financial statements included
in item 8 for additional information regarding RSC and real estate development
activities
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 as of December 31, of 1996 increased to $682,000 from
$471,000 in the same period of 1995, an increase of $211,000. Income from
RIA as of December 31, of 1995 increased to $471,000 from $351,000 in the
same period of 1994, an increase of $120,000. Due to acquisition costs as
well as overhead expense incurred after acquisition, RIA had posted a net
loss on a stand alone basis since inception, however, in 1996 RIA posted not
only record revenue as indicated above, but net income on a stand alone basis
of $55,000 pre-tax. RIA's net pre-tax stand alone loss in 1995 and 1994 was
$163,000 and $204,000 respectively.
As of December 31, 1996, RIA had $77.2 million in assets under management
an increase of $20.4 million or 35.9% over 1995. As of December 31, 1995,
RIA had $56.8 million in assets under management, an increase of $17.0
million compared to $39.8 million as of December 31, 1994. Assets in client
accounts managed by RIA are not reflected in the consolidated assets of the
Company.
<PAGE>
OTHER EXPENSE
Noninterest expense reflects the costs of products and services, systems,
facilities and personnel for the Company. The major components of other
operating expenses stated both as dollars and as a percentage of average
assets are as follows:
OTHER OPERATING EXPENSE TO AVERAGE ASSETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(In thousands, except percentages) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OTHER EXPENSE:
Loss from investments in real estate partnerships 351 .21% 3,441 2.15% - .00%
Salaries and related benefits 4,560 2.74% 4,441 2.77% 3,920 2.71%
Occupancy 1,567 .94% 1,366 .85% 1,214 .84%
FDIC insurance and regulatory assessments 63 .04% 175 .11% 288 .20%
Marketing 428 .26% 382 .24% 505 .34%
Professional services 749 .45% 521 .33% 459 .32%
Directors' fees and expenses 383 .23% 298 .18% 294 .20%
Management fees for real estate projects 488 .29% 243 .15% 674 .47%
Supplies, telephone and postage 350 .21% 294 .18% 257 .18%
Other 963 .58% 945 .59% 716 .49%
- --------------------------------------------------------------------------------------------------------------
TOTAL $ 9,902 5.95% $12,106 7.55% $ 8,327 5.75%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Other expenses decreased by $2,204,000 or 18.2% to $9,902,000 in 1996 from
$12,106,000 in 1995 primarily as a result in a drop of $3,090,000 in expense
related to real estate development activities (RSC). In 1995, non-interest
expense increased by $3,779,000 or 45.4% compared to the same period of 1994,
primarily due to the inclusion of RSC's loss from investments in real estate
partnerships in the Other Operating Expense Category. When compared to
average assets for the respective periods, other expenses decreased to 5.95%
for 1996 as compared to 7.55% for 1995 and 5.75% in 1994.
Although expenses related to RSC decreased substantially in 1996, expenses
associated with the operation of RSC, reflected within various expense
categories above, totaled $1,317,000, $874,000 and $1,176,000 in 1996, 1995
and 1994 respectively. The increase in 1996 was primarily the result of
higher professional fees associated with the dissolution of limited
partnerships. 1995's decline in RSC's overall operating expenses resulted
from lower project management costs associated with a restructuring of the
project manager agreement. Reflected on a stand alone basis RSC's overall
operating expense as a percentage of average assets was .79%, .55% and .81%
in 1996, 1995 and 1994 respectively.
Salaries and related benefits increased by $119,000 or 2.68% in 1996 to
$4,560,000 primarily as additional staff related to the opening of the Madera
branch as well as higher commissions paid to staff on incentive based
compensation. During 1995, salaries and related benefits increased by
$521,000 to $4,441,000 from $3,920,000 in 1994 primarily as a result of
additional staff hired. As a percentage of average assets, salaries and
related benefits were 2.74%, 2.77% and 2.71% in 1996, 1995 and 1994,
respectively.
Occupancy expense increased by $201,000 in 1996 to $1,567,000 from
$1,366,000 in 1995 and $1,214,000 in 1994. The increase in 1996 was
primarily the result of a full year's rental expense in 1996 related to the
sale/leaseback transaction involving the Company's headquarters building in
August of 1995 and secondarily as a result of the Bank's opening of its
Madera branch
<PAGE>
mid-year. As a percentage of average assets, occupancy expense was .94%, .85%
and .84% in 1996, 1995 and 1994, respectively.
During 1995, the FDIC reduced the rate at which banks pay for FDIC
insurance to a range from $0 to $0.27 per $100 of deposits. Due to this
change in rates, the Company's FDIC insurance and regulatory assessments
declined by $112,000 to $63,000 in 1996. In 1995, FDIC insurance and
regulatory assessments declined by $113,000 to $175,000 from $288,000 in
1994. As a percentage of average assets, FDIC insurance and regulatory
assessments were .04%, .11% and .20% in 1996, 1995 and 1994, respectively.
Professional services consist primarily of fees paid for legal, accounting
and consulting services to third party professionals. During 1996,
professional services increased by $228,000 to $749,000 for the year ended
December 31, 1996 from $521,000 in 1995 and $459,000 in 1994. As a
percentage of average assets, professional services .45%, .33% and .32% in
1996, 1995 and 1994, respectively. The primary reason for the increase in
professional services in 1996 was additional expenses related to legal, audit
and consulting services for RSC.
Management fees paid for real estate projects increased by $245,000 to
$488,000 in 1996 from $243,000 in 1995 and $674,000 in 1994. As a percentage
of average assets, management fees for real estate projects were .29%, .15% and
.47% in 1996, 1995 and 1994, respectively.
Supplies, telephone and postage increased by $56,000 to $350,000 in 1996
from $294,000 in 1995 and $257,000 in 1994. The primary cause of the
increased expense in 1996 and 1995 related to higher postal rates as well as
a larger customer base in each year. As a percentage of average assets,
supplies, telephone and postage were .21%, .18% and .18% in 1996, 1995 and
1994, respectively.
Other expenses increased by $18,000 to $963,000 in 1996 from $945,000 in
1995 and $716,000 in 1994. The primary cause of the increase in 1996 was the
one time expense of $140,000 related to the expiration of an option to
purchase the property immediately contiguous to the Company's headquarters
building. As a percentage of average assets, other expenses were .58%, .59%
and .49% in 1996, 1995 and 1994, respectively.
BALANCE SHEET ANALYSIS
For the year ended December 31, 1996, total assets increased by $17,376,000
or 10.6% to $181,058,000 from $163,682,000 at December 31, 1995. For 1996,
net loans increased $5,241,000 or 5.5% while cash and cash equivalents
increased $10,909,000 or 122.2% as the company increased its cash liquidity.
During 1995, total assets increased $7,880,000 or 5.06% from $155,802,000 at
December 31, 1994. During 1995, the Company's loan portfolio increased by
$5,028,000 or 5.46%.
<PAGE>
Deposits increased during 1996 by $16,057,000 or 11.2% to $159,802,000
from $143,745,000 at December 31, 1995. Growth in deposits was split between
non-interest checking accounts, savings accounts and certificates of deposit.
During 1995, deposits increased $5,856,000 or 4.25% from $137,889,000 at
December 31, 1994. Deposit increases in 1995 primarily consisted of
increases in savings accounts and certificates of deposits. Notes payable
increased by $868,000 or 21.1% to $4,977,000 at December 31, 1996 from
$4,109,000 at December 31, 1995. The primary reason for the increase was the
dissolution of several RSC partnerships in which RSC obtained sole ownership
of the underlying property and assumed the debts of the partnership. At
December 31, 1994, all partnerships were accounted for on the equity method,
so the underlying partnership debt was not a direct obligation of RSC.
Loans are comprised of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands,
except percentages) DECEMBER 1996 DECEMBER 1995 DECEMBER 1994 DECEMBER 1993 DECEMBER 1992
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 56,625 55.3% $ 54,150 55.7% $ 46,374 50.3% $ 43,422 49.5% $ 34,787 48.0%
Real estate:
Construction 13,260 12.9% 23,706 24.4% 29,857 32.4% 29,351 33.4% 24,597 33.9%
Real estate mortgage 23,795 23.2% 10,389 10.7% 9,318 10.1% 9,225 10.5% 9,750 13.4%
Consumer and other 8,778 8.6% 8,892 9.2% 6,559 7.2% 5,754 6.6% 3,380 4.7%
- ----------------------------------------------------------------------------------------------------------------------------
SUBTOTAL 102,458 100% 97,137 100% 92,108 100% 87,752 100% 72,514 100%
- ----------------------------------------------------------------------------------------------------------------------------
Less:
Allowances
for credit losses 1,615 1,784 1,541 1,338 1,289
Deferred loan fees 392 356 542 605 563
Unearned discount 681 468 436 356 122
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS, NET $ 99,770 $ 94,529 $ 89,589 $ 85,453 $ 70,540
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table represents the maturity distribution of the loan portfolio
as of December 31, 1996.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
AFTER ONE
WITHIN BUT WITHIN AFTER
MATURITY DISTRIBUTION OF LOAN PORTFOLIO ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans:
Commercial $17,203 $14,418 $25,004 $ 56,625
Real estate construction 16,392 6,952 451 23,795
Real estate mortgage 3,072 6,028 4,160 13,260
Consumer and other 2,526 3,941 2,311 8,778
- --------------------------------------------------------------------------------------------------
TOTAL $39,193 $31,339 $31,926 $102,458
- --------------------------------------------------------------------------------------------------
Fixed rate 9,493 10,185 5,971 25,649
Variable rate 29,700 21,154 25,955 76,809
- --------------------------------------------------------------------------------------------------
TOTAL $39,193 $31,339 $31,926 $102,458
- --------------------------------------------------------------------------------------------------
</TABLE>
During 1996, the Bank continued its success in SBA lending, leading the 16
county Fresno SBA district in loans made for the fourth consecutive year. In
addition, the Bank introduced a new loan product made under a program sponsored
by the U.S. Department of Agriculture. Known as Business and Industry loans
("B&I"), these loans contain a government guarantee on a portion of the loan
similar to that of an SBA loan guarantee. In its first year offering loans
under the B&I program, the Bank led the state of California in new B&I loans
made in 1996.
Commercial loans, including SBA and B&I loans, comprised approximately
55.3% of the Company's loan portfolio at December 31, 1996, compared to 55.7%
of the Company's loan portfolio at December 31, 1995, and 50.3% at
December 31, 1994. These loans are generally made 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
<PAGE>
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 23.2% of the Company's loan
portfolio at December 31, 1996, compared to 24.4% of the Company's loan
portfolio at December 31, 1995, and 32.4% at December 31, 1994. These loans
are primarily made for the construction of single family residential housing.
Loans in this category may be made 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
$4,164,000 in loans RSC has made to its partnerships. 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 upon the sale of the property,
which is affected by, among other factors, the residential real estate
market. In this regard, the Company's potential risks include a general
decline in the value of the underlying property, as well as cost overruns or
delays in the sale or completion of a property.
Real estate mortgage loans comprised 12.9% of the loan portfolio at
December 31, 1996, compared to 10.7% at December 31, 1995 and 10.1% of the
loan portfolio at December 31, 1994. Real estate mortgage loans are made up
of non-residential properties (67%) and single-family residential mortgages
(33%). 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 upon the income of the borrower from other sources, however,
declines in the underlying property value may create risk in these loans.
Consumer loans represented the remainder of the loan portfolio at
December 31, 1996, comprising 8.6% of the loan portfolio compared to 9.2% of
total loans at December 31, 1995 and 7.2% at December 31, 1994. This category
includes traditional Consumer loans (42%), Home Equity Lines of Credit (48%),
and Visa Card loans (10%). Consumer loans are generally secured by third
trust deeds on single-family residences, while Visa Cards are unsecured.
RISK ELEMENTS
The Company assesses and manages credit risk on an ongoing basis through
stringent credit review and approval policies, extensive internal monitoring
and established formal lending policies. Additionally, the Bank contracts
with an outside loan review consultant to periodically grade new loans and to
review the existing loan portfolio. Management believes its ability to
identify and assess risk and return characteristics of the Company's loan
portfolio is critical for profitability and growth. Management strives to
continue the historically low level of credit losses by continuing its
emphasis on credit quality in the loan approval process, active credit
administration and regular monitoring. With this in mind, management has
designed and implemented a comprehensive loan review and grading system that
functions to continually assess the credit risk inherent in the loan
portfolio. Additionally, management believes its ability to manage portfolio
credit risk is enhanced by the knowledge of the Bank's service area by the
lending personnel and Board of Directors.
<PAGE>
NONPERFORMING LOANS
The Company's current policy is to cease accruing interest when a loan
becomes 90-days past due as to principal or interest; when the full, timely
collection of interest or principal becomes uncertain; or when a portion of the
principal balance has been charged off, unless the loan is well secured and in
the process of collection. When a loan is placed on nonaccrual status, the
accrued and uncollected interest receivable is reversed and the loan is
accounted for on the cash or cost recovery method thereafter, until qualifying
for return to accrual status. Generally, a loan may be returned to accrual
status when all delinquent interest and principal become current in accordance
with the terms of the loan agreement or when the loan is both well secured and
in process of collection.
At December 31, 1996, nonaccrual loans amounted to $3,301,000 or 3.22% of
total loans compared to $581,000 or .60% at December 31, 1995 and $391,000 or
.43% at December 31, 1994. Of the total nonaccrual loans, $3,250,000
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. At December 31, 1995, of the $581,000 in non-accrual loans, $505,000
represented loans RSC had outstanding to real estate limited partnerships.
Without the non-accrual loans made by RSC, the Bank's loan portfolio at
December 31, 1996 had $51,000 in non-accrual loans or .05%. Bank only
non-accrual loans at December 31, 1995 and 1994 were $76,000, or .08% and
391,000 or .43%, respectively. The gross interest income that would have
been recorded for loans placed on nonaccrual status was $276,000, $82,000 and
$43,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
<PAGE>
Other real estate owned was $437,000 at December 31, 1996 compared to
$341,000 at December 31, 1995, and $299,000 at December 31, 1994. There were
no troubled debt restructured loans as defined in SFAS 15 at December 31,
1996.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(In thousands, except percentages) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NONPERFORMING ASSETS:
Nonaccrual RSC loans $ 3,250 $ 505 $ - $ - $ -
Nonaccrual Bank loans 51 76 391 604 1,375
Restructured loans - - - - -
- ------------------------------------------------------------------------------------------------------------
Nonperforming loans 3,301 581 391 604 1,375
Other real estate owned 437 341 299 696 677
- ------------------------------------------------------------------------------------------------------------
Total nonperforming assets 3,738 922 690 1,300 2,052
- ------------------------------------------------------------------------------------------------------------
Accruing loans 90 days past due 19 725 58 268 64
- ------------------------------------------------------------------------------------------------------------
Total loans before allowance for losses (1) $102,458 $ 97,137 $ 91,130 $ 86,791 $ 71,829
Total assets 181,058 163,682 155,802 144,012 118,776
Allowance for possible credit losses (1,615) (1,784) (1,541) (1,338) (1,289)
- ------------------------------------------------------------------------------------------------------------
RATIOS:
Nonperforming loans to total loans 3.22% .60% .43% .70% 1.91%
Nonperforming loans to total loans
(excluding RSC loans) .05% .08% - - -
Nonperforming assets to:
Total loans 3.65% .95% .76% 1.50% 2.86%
Total loans and OREO 3.63% .95% .75% 1.49% 2.83%
Total assets 2.06% .56% 44% .90% 1.73%
Allowance for possible credit losses 43.20% 193.5% 223.3% 102.9% 62.8%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total loans include deferred loan fees and discounts on loans of
$1,074,000, $824,000, $978,000, $961,000 and $685,000 at December 31, 1996,
1995, 1994, 1993 and 1992, respectively.
Management is not aware of any potential problem loans, which were
accruing and current at December 31, 1996, where serious doubt exists as to
the ability of the borrower to comply with present repayment terms.
The Company does not believe there to be any concentration of loans in
excess of 10% of total loans which are not disclosed above which would cause
them to be significantly impacted by economic or other conditions. For
further discussion of California economic conditions, see "Allowance for
Credit Losses" in this section below.
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: (1) the loan portfolio growth in the
period, (2) a comprehensive grading and review of new and existing loans
outstanding, (3) actual previous charge-offs, and (4) changes in economic
conditions.
The allowance for credit losses totaled $1,615,000 or 1.58% of total
loans at December 31, 1996 compared to $1,784,000 or 1.85% of total loans at
December 31, 1995, and $1,541,000 or 1.69% at December 31, 1994. Charge-offs
during 1996 were $258,000 while recoveries were $89,000. During 1996, no
additional provision for credit losses was added to reserves. It is the
policy of management to maintain the allowance for credit losses at a level
adequate for known and
<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.
Although management is of the opinion that the allowance for credit losses
is maintained at an adequate level for known and currently anticipated future
risks inherent in the loan portfolio, the Fresno economy and real estate
market remain stagnant. The Bank loan portfolio could be adversely affected
if economic conditions and the real estate market in the Bank's market area
deteriorate. The effect of such events, although uncertain at this time
could result in an increase in the level of nonperforming loans and OREO and
the level of the allowance for loan losses, which could adversely affect the
Company's and the Bank's future growth and profitability.
Following is a table presenting the activity within the Company's provision
for credit losses for the period between December 31, 1994 and
December 31, 1996.
- -------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
Balance, (beginning of year) $ 1,784 $ 1,541 $ 1,338
Provision charged to expense - 470 487
- -------------------------------------------------------------------------------
Charge-offs:
Commercial (193) (211) (259)
Real estate construction - (8) -
Real estate mortgage - - -
Consumer and other (65) (46) (54)
- -------------------------------------------------------------------------------
Total Charge-offs (258) (265) (313)
- -------------------------------------------------------------------------------
Recoveries:
Commercial 76 37 27
Real Estate construction - - 2
Real state mortgage - - -
Consumer and other 13 1 -
- -------------------------------------------------------------------------------
Total Recoveries 89 38 29
- -------------------------------------------------------------------------------
Net Charge-offs (169) (227) (284)
- -------------------------------------------------------------------------------
Balance, (end of year) $ 1,615 $ 1,784 $ 1,541
- -------------------------------------------------------------------------------
The following table represents the allocation of the allowance for loan losses
for the period between December 1992 and December 1996.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
(IN THOUSANDS, TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
EXCEPT PERCENTAGES) AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL $1,069 54.6% $1,005 55.7% $1,001 50.3% $1,000 49.5% $873 48.0%
REAL ESTATE CONSTRUCTION 208 23.6% 215 24.4% 135 32.4% 135 33.4% 117 33.9%
REAL ESTATE MORTGAGE 100 13.1% 78 10.7% 65 10.1% 69 10.5% 73 13.4%
CONSUMER AND OTHER 238 8.7% 221 9.2% 184 7.2% 134 6.6% 91 4.7%
UNALLOCATED - - 265 - 156 - - - 135 -
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL $1,615 100.0% $1,784 100.0% $1,541 100.0% $1,338 100.0% $1,289 100.0%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
FUNDING SOURCES
Deposits represent the Bank's primary 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. The Bank normally experiences a
seasonal decline in deposits in the first quarter of each year. In order to
assist in meeting its funding needs the Bank maintains fed funds lines with
correspondent banks in the amount of $ 9,000,000 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 December 31, 1996, the Bank held no
institutional brokered time deposits.
In August 1996, the Bank opened its first full service branch office
outside of Fresno, California approximately 20 miles north in the city of
Madera. In it's first four months of operation the Madera branch had
obtained deposits in excess of $10 million.
The following table presents the composition of the deposit mix at December 31,
1992 through December 31, 1996, respectively.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands, except
percentages) Amount Percent Amount Percent Amount Percent AMOUNT PERCENT AMOUNT PERCENT
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DEPOSITS:
Noninterest-bearing $36,613 22.91% $32,672 22.73% $30,589 22.18% $30,422 24.63% $18,955 17.84%
Interest-bearing 73,390 45.93% 75,539 52.55% 72,615 52.66% 63,137 51.11% 58,376 54.96%
deposits 19,032 11.91% 12,229 8.51% 12,852 9.32% 12,607 10.21% 11,206 10.55%
Time under $100,000
Time $100,000 30,766 19.25% 23,305 16.21% 21,833 15.84% 17,363 14.05% 17,688 16.65%
and over
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 123,188 77.09% 111,073 77.27% 107,300 77.82% 93,107 75.37% 87,270 82.16%
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 159,801 100.0% 143,745 100.0% 137,889 100.0% 123,529 100.0% 106,225 100.0%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table represents maturities of time deposits of $100,000 or more
at December 31, 1996.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Over Three
Three Months Though Over
(In thousands) Or Less Twelve Months Twelve Months Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturities of Time Deposits Greater
Than $100,000 $ 16,171 $ 10,432 $ 4,163 $ 30,766
- -----------------------------------------------------------------------------------------------
</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.
<PAGE>
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 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 national Prime Rate as published
in the west coast edition of the Wall Street Journal. This pricing structure
tends to stabilize the net interest margin percentage achieved by the Bank.
The following table sets forth the interest rate sensitivity and repricing
schedule of the Company's interest-earning assets and interest-bearing
liabilities, the interest rate sensitivity gap, the cumulative interest rate
sensitivity gap, and the cumulative interest rate sensitivity gap ratio.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Next Day After Three After One
But Within Months But Year But
(In thousands, except percentages) Three Within 12 Within After Five
As of December 31, 1996 Immediately Months Months Five Years Years Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Sensitivity Gap:
Loans $ 40,318 $ 36,950 $ 7,293 $ 7,802 $ 6,794 $ 99,157
Investment securities and other 350 12,137 8,106 10,769 2,004 33,366
Federal funds sold 5,000 - - - - 5,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 45,668 $ 49,087 $ 15,399 $ 18,571 $ 8,798 $ 137,523
- ----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing transaction accounts 47,850 - - - -
Savings accounts 23,327 2,213 - - - 25,540
Time deposits - 22,867 18,589 8,343 47,850 49,799
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 71,177 $ 25,080 $ 18,589 $ 8,343 $ - $ 123,189
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap (25,509) 24,007 (3,190) 10,228 8,798
Cumulative gap (25,509) (1,502) (4,692) 5,536 14,334
Cumulative gap percentage to
interest earning assets (18.55%) (1.09%) (3.41%) 4.03% 10.42%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts exclude nonaccrual loans of $3,301,000.
The table indicates the time periods in which interest-earning assets and
interest-bearing liabilities will mature or reprice in accordance with their
contractual terms. The table does not necessarily indicate the impact of
general interest rate movements on the net interest margin since the
repricing of various categories of assets and liabilities is subject to
competitive pressures. Additionally, this table does not take into
consideration changing balances in forward periods as a result of normal
amortization, principal paydowns, changes in deposit mix or other such
movements of funds as a result of changing interest rate environments.
INFLATION
The impact of inflation on a financial institution differs significantly
from that exerted on manufacturing, or other commercial concerns, primarily
because its assets and liabilities are largely monetary. In general,
inflation primarily affects the Company indirectly through its effect on the
ability of its customers to repay loans, or its impact on market rates of
interest, and thus the ability
<PAGE>
of the Bank to attract loan customers. Inflation affects the growth of total
assets by increasing the level of loan demand, and potentially adversely
affects the Company's capital adequacy because loan growth in inflationary
periods may increase more rapidly than capital. Interest rates in particular
are significantly affected by inflation, but neither the timing nor the
magnitude of the changes coincides with changes in the Consumer Price Index,
which is one of the indicators used to measure the rate of inflation.
Adjustments in interest rates may be delayed because of the possible
imposition of regulatory constraints. In addition to its effects on interest
rates, inflation directly affects the Company by increasing the Company's
operating expenses. The effect of inflation during the three-year period
ended December 31, 1996 has not been significant to the Company's financial
position or results of operation.
CAPITAL RESOURCES
The Company has historically been able to sustain its growth in capital
through profit retention. Beginning in September 1994, the Company began
paying quarterly cash dividends. Although in the past cash dividends have
been paid on a regular basis, there can be no assurance that the Company will
pay dividends in the future. See Item 5 - "Market For Registrant's Common
Equity and Related Stockholder Matters", regarding dividend restrictions
applicable to the Bank and the Company, the financial condition of the Bank
and the Company.
The Board of Governors issued final amendments to its risk-based capital
guidelines to be effective December 31, 1994, requiring that net unrealized
holding gains and losses on securities available-for-sale determined in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," are not
to be included in the Tier 1 capital component consisting of common
shareholders equity. Net unrealized losses on marketable equity securities
(equity securities with a readily determinable fair value), however, will
continue to be deducted from Tier 1 capital. This rule has the general
effect of valuing available-for-sale securities at amortized cost (based on
historical cost) rather than at fair value (generally at market value) for
purposes of calculating the risk-based and leverage capital ratios.
The Board of Governors and the FDIC have adopted risk-based capital
guidelines for evaluating the capital adequacy of bank holding companies and
banks. The guidelines are designed to make capital requirements sensitive to
differences in risk profiles among banking organizations, to take into
account off-balance sheet exposures and to aid in making the definition of
bank capital uniform internationally. Under the guidelines, the Company and
the Bank are required to maintain capital equal to at least 8.0% of its
assets and commitments to extend credit, weighted by risk, of which at least
4.0%, must consist primarily of common equity (including retained earnings)
and the remainder may consist of subordinated debt, cumulative preferred
stock, or a limited amount of loan loss reserves. Assets, commitments to
extend credit and off-balance sheet items are categorized according to risk
and certain assets considered to present less risk than other permit
maintenance of capital at less than the 8% ratio.
The guidelines establish two categories of qualifying capital: Tier 1
capital comprising core capital elements and Tier 2 comprising supplementary
capital requirements. At least one-half of the required capital must be
maintained in the form of Tier 1 capital. Tier 1 capital includes common
shareholder's equity and qualifying perpetual preferred stock less intangible
assets and certain other adjustments. However, no more than 25% of the
Company's total Tier 1 capital may consist of perpetual preferred stock. The
definition of Tier 1 capital for the Bank is the same,
<PAGE>
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 reserve 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 Company and Bank's Board of Directors, responding to a request from
the Board of Governors and FDIC, have adopted resolutions that the Bank will
maintain a Tier 1 leverage ratio of 7 percent or greater and, that the
Company will not declare additional cash dividends, incur debt, repurchase
any of its stock or make major acquisitions without the prior approval of the
Board of Governors.
As of December 31, 1996 and 1995, the most recent notifications from the
Federal Deposit Insurance Corporation categorized the Bank as "adequately
capitalized" and "well capitalized" under the regulatory framework for prompt
corrective action, respectively. To be categorized as "well capitalized" the
Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table below. At December 31, 1996, due
to an increase in average risk weighted assets in the fourth quarter, the
Bank's total capital to risk weighted assets fell slightly below the level
considered "well capitalized", accordingly the Bank is considered "adequately
capitalized at December 31, 1996. Under the framework, the Bank's capital
levels do not allow the Bank to accept brokered deposits without prior
approval from the FDIC. As of December 31, 1996 and 1995 the Bank held no
institutional brokered deposits.
<PAGE>
The Company and Bank's actual capital amounts (in thousands) and ratios are
also presented in the following table:
<TABLE>
<CAPTION>
TO BE ADEQUATELY
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
-----------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996
Total Capital
(to Risk Weighted Assets):
Company $14,306 10.21% GREATER THAN=$11,207 GREATER THAN=8.00% N/A
Regency Bank $13,944 9.97% GREATER THAN=$11,193 GREATER THAN=8.00% GREATER THAN=$11,193 GREATER THAN=8.00%
Tier 1 Capital
(to Risk Weighted Assets):
Company $12,691 9.06% GREATER THAN=$ 5,604 GREATER THAN=4.00% N/A
Regency Bank $12,329 8.81% GREATER THAN=$ 5,596 GREATER THAN=4.00% GREATER THAN=$ 5,596 GREATER THAN=4.00%
Tier 1 Capital
(to Average Assets):
Company $12,691 7.66% GREATER THAN=$ 6,630 GREATER THAN=4.00% N/A
Regency Bank $12,329 7.12% GREATER THAN=$ 6,923 GREATER THAN=4.00% GREATER THAN=$ 6,923 GREATER THAN=4.00%
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
-----------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1995
Total Capital
(to Risk Weighted Assets):
Company $13,373 10.90% GREATER THAN=$ 9,818 GREATER THAN=8.00% N/A
Regency Bank $13,055 10.64% GREATER THAN=$ 9,814 GREATER THAN=8.00% GREATER THAN=$12,267 GREATER THAN=10.00%
Tier 1 Capital
(to Risk Weighted Assets):
Company $11,836 9.64% GREATER THAN=$ 4,909 GREATER THAN=4.00% N/A
Regency Bank $11,519 9.39% GREATER THAN=$ 4,907 GREATER THAN=4.00% GREATER THAN=$ 7,360 GREATER THAN=6.00%
Tier 1 Capital
(to Average Assets):
Company $11,836 7.15% GREATER THAN=$ 6,626 GREATER THAN=4.00% N/A
Regency Bank $11,519 6.95% GREATER THAN=$ 6,629 GREATER THAN=4.00% GREATER THAN=$ 8,286 GREATER THAN=5.00%
</TABLE>
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
<PAGE>
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, SFAS No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" was issued. The
Statement establishes standards for when transfers of financial assets,
including those with continuing involvement by the transferor, should be
considered a sale. SFAS No. 125 also establishes standards for when a
liability should be considered extinguished. This statement is effective for
transfers of assets and extinguishments of liabilities after December 31,
1996, applied prospectively. In December 1996, the FASB reconsidered certain
provisions of SFAS No. 125 and issued a SFAS No. 127 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. Earlier adoption or retroactive application of this statement
with respect to any of its provisions is not permitted. Management believes
that the effect of adoption on the Company's financial statements will not be
material.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
Independent Auditors' Report of Deloitte & Touche LLP 42
Consolidated Balance Sheets, December 31, 1996 and 1995 43
Consolidated Statements of Income for the three years ended
December 31, 1996, 1995, and 1994 45
Consolidated Statements of Shareholders' Equity for the three years ended
December 31, 1996, 1995 and 1994 46
Consolidated Statements of Cash Flows for the three years ended
December 31, 1996, 1995, and 1994 47
Notes to Consolidated Financial Statements 48
<PAGE>
REGENCY BANCORP
CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1996, 1995, AND 1994, AND INDEPENDENT AUDITORS' REPORT
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Regency Bancorp
Fresno, California
We have audited the accompanying consolidated balance sheets of Regency
Bancorp and subsidiaries (the "Company"), as of December 31, 1996 and 1995,
and the related consolidated statements of operations, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Regency Bancorp and its
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP /s/
Fresno, California
February 7, 1997
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
1996 1995
ASSETS
CASH AND DUE FROM BANKS $ 14,833,450 $ 8,924,803
FEDERAL FUNDS SOLD 5,000,000 -
------------- -------------
Cash and cash equivalents 19,833,450 8,924,803
INTEREST BEARING DEPOSITS IN OTHER BANKS 98,000 3,000
INVESTMENT SECURITIES (Note 2):
Available for sale at fair value (cost of
$33,267,184 in 1996 and $31,672,357 in 1995) 33,269,628 31,749,745
Held to maturity - -
------------- -------------
Total investment securities 33,269,628 31,749,745
LOANS, net of allowance for loan losses of
$1,614,742 and $1,784,264 (Notes 3 and 10) 98,293,633 91,777,439
LOANS HELD FOR SALE 1,476,322 2,751,920
------------- -------------
Total loans, net 99,769,955 94,529,359
INVESTMENTS IN REAL ESTATE (Note 4) 16,488,770 17,954,473
OTHER REAL ESTATE OWNED 436,918 341,266
PREMISES AND EQUIPMENT, net (Note 5) 2,261,704 2,338,609
CASH SURRENDER VALUE OF LIFE INSURANCE 2,903,036 2,763,952
INTEREST RECEIVABLE, INCOME TAXES
AND OTHER ASSETS (Note 8) 5,996,231 5,076,439
------------- -------------
$ 181,057,692 $ 163,681,646
------------- -------------
------------- -------------
See notes to consolidated financial statements.
<PAGE>
- -------------------------------------------------------------------------------
1996 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS (Note 6):
Noninterest bearing deposits $ 36,612,614 $ 32,672,533
Interest bearing deposits 123,188,926 111,072,511
------------- -------------
Total deposits 159,801,540 143,745,044
SHORT-TERM BORROWINGS (Note 7) - -
NOTES PAYABLE (Note 4) 4,976,634 4,108,820
ACCRUED INTEREST AND OTHER
LIABILITIES (Note 9) 2,809,859 2,886,064
------------- -------------
Total liabilities 167,588,033 150,739,928
COMMITMENTS AND CONTINGENCIES (Notes 3, 4 and 7)
SHAREHOLDERS' EQUITY (Notes 9 and 12):
Preferred stock, no par value;
1,000,000 shares authorized;
no shares issued
Common stock, no par value; 5,000,000
shares authorized, 1,818,160 shares
outstanding 8,867,550 8,867,550
Retained earnings 4,600,691 4,029,283
Net unrealized gain (loss) on available for
sale securities, net of taxes of $1,026
and $32,503 1,418 44,885
------------- -------------
Total shareholders' equity 13,469,659 12,941,718
------------- -------------
$ 181,057,692 $ 163,681,646
------------- -------------
------------- -------------
<PAGE>
<TABLE>
<CAPTION>
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $11,255,022 $ 10,815,578 $ 9,254,925
Interest on investment securities:
Taxable 1,717,912 1,833,517 1,332,761
Nontaxable 87,269 89,145 73,137
-------------------------------------------
1,805,181 1,922,662 1,405,898
Other 166,850 103,175 46,912
-------------------------------------------
Total interest income 13,227,053 12,841,415 10,707,735
INTEREST EXPENSE:
Interest on deposits 4,534,181 4,962,171 2,826,647
Interest on borrowings 160,268 129,822 162,173
-------------------------------------------
Total interest expense 4,694,449 5,091,993 2,988,820
NET INTEREST INCOME 8,532,604 7,749,422 7,718,915
PROVISION FOR CREDIT LOSSES - 470,000 487,065
-------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 8,532,604 7,279,422 7,231,850
NONINTEREST INCOME:
Income from investments in real estate partnerships (Note 4) - - 1,783,815
Gain on sale of SBA loans (Note 3) 1,314,536 590,025 886,678
Depositor service charges 338,495 271,145 244,296
Income from investment management services 682,484 471,126 350,624
Gain (loss) on sale of investment securities (Note 2) - (25,072) 315
Gain on sale of assets 18,018 7,007 47,184
Servicing fees on loans sold 321,733 320,526 276,206
Other 434,123 248,130 436,624
-------------------------------------------
Total noninterest income 3,109,389 1,882,887 4,025,742
NONINTEREST EXPENSES:
Loss from investments in real estate partnerships (Note 4) 351,044 3,441,290 -
Salaries and related benefits (Notes 9 and 10) 4,559,790 4,441,170 3,920,208
Occupancy 1,566,884 1,365,967 1,214,315
FDIC insurance and regulatory assessments 63,349 175,243 287,476
Marketing 428,213 381,272 505,466
Professional services 749,423 520,835 458,496
Directors' fees and expenses 382,579 297,750 294,207
Management fees for real estate projects (Note 10) 488,461 243,187 674,022
Supplies, telephone and postage 349,483 294,341 256,835
Other 962,354 944,647 715,907
-------------------------------------------
Total noninterest expenses 9,901,580 12,105,702 8,326,932
-------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 1,740,413 (2,943,393) 2,930,660
INCOME TAX EXPENSE (BENEFIT) (Note 8) 732,150 (1,176,000) 1,195,000
-------------------------------------------
NET INCOME (LOSS) $ 1,008,263 $ (1,767,393) $ 1,735,660
-------------------------------------------
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE $ 0.54 $ (0.98) $ 0.94
-------------------------------------------
SHARES USED IN COMPUTATION 1,871,671 1,805,270 1,841,421
-------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
------------------------- NET
NUMBER OF RETAINED UNREALIZED
SHARES AMOUNT EARNINGS GAIN (LOSS) TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 1,491,879 $ 6,007,618 $ 6,937,711 $ - $12,945,329
Unrealized gain on available for sale
securities at January 1, 1994, date of
adoption of new accounting principle
(net of taxes of $113,000) - - - 156,011 156,011
Issuance of common stock under stock
option plan (Note 9) 70,118 348,204 - - 348,204
Issuance of 10% common stock dividend
including fractional shares 149,020 1,490,200 (1,491,688) - (1,488)
Cash dividends ($0.10 per share) - - (164,918) - (164,918)
Net change in unrealized gain (loss) on
available for sale securities (net of taxes
of $576,000) - - - (795,951) (795,951)
Tax benefit of stock option transactions - 103,974 - - 103,974
Net income - - 1,735,660 - 1,735,660
--------- ----------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 1994 1,711,017 7,949,996 7,016,765 (639,940) 14,326,821
Issuance of common stock under stock
option plan (Note 9) 21,604 18,655 - - 18,655
Issuance of 5% common stock dividend
including fractional shares 85,539 866,082 (867,861) - (1,779)
Tax benefit of stock option transactions - 32,817 - - 32,817
Cash dividends ($0.20 per share) - - (352,228) - (352,228)
Net change in unrealized gain (loss) on
available for sale securities (net of taxes
of $496,000) - - - 684,825 684,825
Net loss - - (1,767,393) - (1,767,393)
--------- ----------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 1995 1,818,160 8,867,550 4,029,283 44,885 12,941,718
Cash dividends ($0.24 per share) (436,855) (436,855)
Net change in unrealized gain (loss) on
available for sale securities (net of taxes
of $ 31,477) (43,467) (43,467)
Net income 1,008,263 1,008,263
--------- ----------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 1996 1,818,160 $ 8,867,550 $ 4,600,691 $ 1,418 $13,469,659
--------- ----------- ----------- ------------ -----------
--------- ----------- ----------- ------------ -----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,008 $ (1,767) $ 1,736
Adjustments:
Provision for credit losses - 470 487
Provision for losses on real estate - 2,798 -
Provision for OREO losses - 110 61
Depreciation and amortization 632 606 633
Deferred income taxes 831 (1,403) (112)
Decrease (increase) in interest receivable and other assets (1,491) 1,530 (2,485)
Increase in surrender value of life insurance (139) (125) (44)
Distributions of income from real estate partnerships 103 158 1,504
Equity in (income) loss of real estate partnerships (151) (32) (1,784)
Decrease in real estate held for sale 7,233 3,472 132
Increase (decrease) in other liabilities (790) (1,490) (3,819)
Loss on sale of securities - 25 -
Gain on sale of loans held for sale (1,315) (590) (887)
Proceeds from sale of loans held for sale 13,904 7,522 12,631
Additions to loans held for sale (11,313) (8,919) (9,839)
Gain on aquisition of real estate partnerships (63) - -
Gain on sale of premises and equipment and OREO (1) (4) (28)
Net cash provided by (used in) operating activities 8,448 (2,361) (1,814)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (21,596) (16,001) (4,091)
Proceeds from sales of available-for-sale securities 1,000 3,105 5,141
Proceeds from maturities of available-for-sale securities 18,881 11,091 2,227
Purchases of held-to-maturity securities - (7,898) (5,000)
Proceeds from maturities of held-to-maturity securities - 6,000 170
Loan participations purchased (1,750) (750) (2,954)
Loan participations sold 4,842 810 5,101
Net increase in loans (7,802) (1,565) (8,675)
Net (increase) decrease in other short-term investments (95) 199 1,968
Cash received through acquisition of partnerships 804 276 -
Proceeds from sale of OREO 123 76 139
Capital contributions to real estate partnerships (397) (1,443) (4,481)
Capital distributions from real estate partnerships 1,012 687 2,717
Payments towards the acquisition and development of investments in real estate - (3,383) (501)
Purchases of premises and equipment (435) (207) (619)
Proceeds from sale of premises and equipment - 1,682 -
-------- -------- --------
Net cash used in investing activities (5,413) (7,321) (8,858)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in time deposits 14,265 849 4,715
Net increase in other deposits 1,791 5,007 9,644
Cash dividends paid (437) (352) (165)
Payments for fractional shares related to stock dividends - (2) (1)
Payments on notes payable (8,131) (321) -
Proceeds from notes payable 385 368 -
Proceeds from the issuance of common stock under employee stock option plan - 19 348
-------- -------- --------
Net cash provided by financing activities 7,873 5,568 14,541
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,908 608 3,869
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,925 8,317 4,448
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 19,833 $ 8,925 $ 8,317
-------- -------- --------
-------- -------- --------
</TABLE>
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Regency Bancorp and its wholly-owned subsidiaries, hereinafter
referred to as the ("Company"). Effective March 1, 1995, pursuant to an
internal reorganization, Regency Bancorp became a bank holding company for
Regency Bank (the "Bank") by the exchange of one share of Regency Bancorp
common stock for one share of Regency Bank common stock. Such
reorganization was treated similar to a pooling of interests for accounting
purposes and, accordingly, the historical cost basis of Regency Bank has
been carried forward. The Bank has two wholly-owned subsidiaries, Regency
Investment Advisors, Inc., a California corporation ("RIA"), which provides
investment management and consulting services, and 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.
NATURE OF OPERATIONS - The Company operates three bank branches through its
bank subsidiary in the North Fresno, California area and one branch in
Madera, California. The Bank is a California banking corporation which has
served individuals, merchants, small and medium-sized businesses and
professionals located in and adjacent to Fresno, California, since 1980.
The Bank offers a full range of commercial banking services including the
acceptance of demand, savings and time deposits, and the making of
commercial, real estate (including real estate construction and residential
mortgage), Small Business Administration, personal, home improvement,
automobile and other installment and term loans. It also offers Visa
credit cards, traveler's checks, safe deposit boxes, notary public,
customer courier and other customary bank services. The Bank's primary
source of revenue is interest generated by providing loans to customers.
Additionally, a substantial portion of the Company's revenues is from
origination of loans guaranteed by the Small Business Administration under
its Section 7 program and sale of the guaranteed portion of these loans.
Funding for the Section 7 program depends on annual appropriations by the
U.S. Congress. Another significant portion of the Company's operations is
derived from RSC through its real estate development activities. Such
activities consist primarily of acquisition, development and sale of
residential real properties and historically have been structured as
limited partnerships in which RSC is the limited partner and various local
developers are the general partners. As discussed further in Note 4 to the
consolidated financial statements, RSC is in the process of divesting all
of its real estate investments.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
SIGNIFICANT ACCOUNTING POLICIES - The accounting and reporting policies of
the Company conform to generally accepted accounting principles and to
prevailing practices within the banking industry. The following is a
summary of significant policies:
<PAGE>
a. INVESTMENT SECURITIES - The Company's investment policy, as
established by its investment committee, governs the type and quality
of securities in which management may invest with the objective of
achieving optimum balance between credit quality, liquidity and
income. At January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The initial effect of the
adoption on the Bank's financial position was to increase assets and
shareholders' equity by $156,011. The Company has classified its
investment securities as held to maturity or available for sale.
Securities held to maturity are carried at cost adjusted by the
accretion of discounts and amortization of premiums. The Company has
the ability and positive intent to hold these investment securities to
maturity. Securities available for sale may be sold to implement the
Bank's asset/liability management strategies and in response to
changes in interest rates, prepayment rates and similar factors.
These securities are recorded at their fair value. Unrealized gains
or losses are included in shareholders' equity, net of tax. Gain or
loss on the sale of available-for-sale securities is based on the
specific identification method.
b. LOANS - Loans are stated at the outstanding unpaid principal balance
reduced by any chargeoffs or specific valuation allowances. Interest
on loans is accrued daily based on outstanding loan balances. The
recognition of interest income on a loan is discontinued, and
previously accrued interest is reversed, when the payment of interest
or principal is ninety days past due, unless the outstanding loan is
adequately secured and is in the process of collection. The loan is
accounted for thereafter on the cash or cost recovery method until
qualifying for return to accrual status.
Nonrefundable fees and related direct costs associated with the
origination or purchase of loans are deferred and netted against
outstanding loan balances. The net deferred fees and costs are
generally amortized into interest income over the loan term using a
method which approximates the interest method. Other credit-related
fees, such as standby letter of credit fees, loan placement fees and
annual credit card fees are recognized as noninterest income over the
commitment period or over the period the related service is performed.
Effective January 1, 1995, the Company adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosure." SFAS No. 114 requires that impaired loans be
measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or as a practical
expedient at the loan's observable market rate or the fair value of
the collateral if the loan is collateral dependent. Under SFAS No.
114, a loan is considered impaired when, based on current information,
it is probable that the borrower will be unable to pay contractual
interest or principal payments as scheduled in the loan agreement.
SFAS No. 114 applies to all loans except smaller - balance homogeneous
consumer loans, loans carried at fair value or the lower of cost or
fair value, debt securities and leases. SFAS No. 114 also requires
that impaired loans for which foreclosure is probable should be
accounted for as loans. SFAS No. 118 amends SFAS No. 114 to allow a
creditor to use existing methods for recognizing interest income on
impaired loans and requires certain information to be disclosed. The
effect of adopting these standards was immaterial.
c. ALLOWANCE FOR CREDIT LOSSES - The allowance for credit losses
represents management's recognition of the risks assumed when
extending credit and its evaluation of the quality of the loan
portfolio. The allowance is maintained at a level considered to be
adequate for potential credit losses based on management's assessment
of various factors affecting the loan portfolio, which
<PAGE>
include a review of problem loans, business conditions and an overall
evaluation of the quality of the portfolio. The allowance is
increased by provisions for credit losses charged to operations and
reduced by charges to the allowance net of recoveries. Management
considers the allowance for loan losses adequate to cover any losses
that may be inherent in the loan portfolio.
In evaluating the probability of collection, management is required to
make estimates and assumptions that affect the reported amounts of
loans, allowance for credit losses and the provision for credit losses
charged to operations. Actual results could differ significantly from
those estimates.
d. SALES AND SERVICING OF SBA LOANS - The Company originates loans to
customers under a Small Business Administration ("SBA") program that
generally provides for SBA guarantees of 75% to 90% of each loan.
Loans held for sale are carried at the lower of cost or estimated
market value in the aggregate. The Company generally sells the
guaranteed portion of each loan to a third-party and retains the
unguaranteed portion in its own portfolio. The Company may be
required to refund a portion of the sales premium received, if the
borrower defaults or the loan prepays within 90 days of the settlement
date. At December 31, 1996 and 1995, the Company had received
premiums of $169,456 and $5,434, respectively, subject to such
recourse. A gain is recognized on these loans through collection on
sale of a premium over the adjusted carrying value, through retention
of an ongoing rate differential less a normal service fee (excess
servicing fee) between the rate paid by the borrower to the Company
and the rate paid by the Company to the purchaser, or both.
To calculate the gain (loss) on sale, the Company's investment in an
SBA loan is allocated among the retained portion of the loan, the
excess servicing retained and the sold portion of the loan, based on
the relative fair value of each portion. The gain (loss) on the sold
portion of the loan is recognized at the time of sale based on the
difference between the sale proceeds and the allocated investment. As
a result of the relative fair value allocation, the carrying value of
the retained portion is discounted, with the discount accreted to
interest income over the life of the loan. The excess servicing fee
is reflected as an asset which is amortized over an estimated life
using a method approximating the level yield method; in the event
future prepayments exceed management's estimates and future expected
cash flows are inadequate to cover the unamortized excess servicing
asset, additional amortization would be recognized. In its
calculation of excess servicing fees, the Bank is required to estimate
a "normal" servicing fee. In 1996 and 1995, the Company used .40% as
its estimate of a normal servicing fee. In 1994, the Bank used 1.0%
as its estimate. The effect of the change was not material.
e. PREMISES AND EQUIPMENT - Premises and equipment are stated at cost
less accumulated depreciation. Depreciation is computed on a
straight-line basis over the estimated useful lives of the assets as
follows:
Buildings 30 years
Leasehold improvements Life of the lease
Furniture and equipment 3 - 10 years
In 1995, the Company entered into a sale-leaseback of its corporate
headquarters building. The deferred gain recorded on the sale was
$270,252 and is being amortized over the leaseback period of 15 years.
<PAGE>
f. OTHER REAL ESTATE OWNED - Other real estate owned is comprised of
properties acquired through foreclosure proceedings or acceptance of
deeds in lieu of foreclosure. Real property so acquired is initially
recorded at the lower of its fair value (less estimated selling costs)
on the date of foreclosure or the recorded investment in the related
loan, establishing a new cost basis. After foreclosure, valuations
are periodically performed by management and the property is carried
at the lower of its cost or fair value less estimated selling costs
with related adjustments included in other noninterest expense.
g. INVESTMENTS IN REAL ESTATE - Investments in real estate represent
RSC's equity interests in real estate development partnerships and
certain other real estate holdings held for sale or development (see
Note 4). All investments in real estate are valued at net realizable
value. Revenue recognition on the disposition of real estate,
including other real estate owned, is dependent upon the transaction
meeting certain criteria relating to the nature of the property sold
and the terms of the sale. Under certain circumstances, revenue
recognition may be deferred until these criteria are met. Interest
and other carrying charges related to property held for development
are capitalized during the construction period. The Company
capitalizes interest on qualifying expenditures at its average cost of
funds. Capitalization of interest ceases when the qualifying asset is
substantially complete and ready for sale or when activities related
to development cease. For 1996, 1995 and 1994, the Company
capitalized interest of $ 0, $55,000 and $299,000, respectively.
h. INCOME TAXES - The Company files a consolidated federal income tax
return and a combined California tax return. Deferred income taxes
are provided for temporary differences between the financial reporting
basis and the tax basis of the Company's assets and liabilities in
accordance with Statement of Financial Accounting Standards No. 109.
i. CASH AND CASH EQUIVALENTS - The Company considers cash and cash
equivalents to include cash, federal funds sold, and other short-term
investments consisting of deposits in other banks. Generally, federal
funds are sold for one-day periods.
j. NET INCOME (LOSS) PER SHARE - Primary earnings (loss) per share is
computed by dividing net income (loss) by the weighted average number
of shares of common stock outstanding and dilutive common stock
equivalents (stock options) assumed to be outstanding during the year.
Stock options were antidilutive in 1995 and were therefore excluded
from weighted shares outstanding. Fully diluted earnings per share
did not differ significantly from primary earnings per share. All
share and per share amounts have been adjusted retroactively to
reflect the 5% stock dividend issued in 1995 and a 10% stock dividend
in 1994.
k. STOCK-BASED COMPENSATION - The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with APB
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
l. NEW ACCOUNTING PRONOUNCEMENTS - In June 1996, SFAS No. 125 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" was issued. The Statement establishes standards for when
transfers of financial assets, including those with continuing
involvement by the transferor, should be considered a sale. SFAS No.
125 also establishes standards for when a liability should be
considered extinguished. This statement is effective for transfers of
assets and extinguishments of liabilities after December 31, 1996,
applied prospectively. In December 1996, the FASB reconsidered
certain provisions of SFAS No. 125 and issued a SFAS No. 127 to defer
for one year the effective date of implementation for
<PAGE>
transactions related to repurchase agreements, dollar-roll repurchase
agreements, securities lending and similar transactions. Earlier
adoption or retroactive application of this statement with respect to
any of its provisions is not permitted. Management believes that the
effect of adoption on the Company's financial statements will not be
material.
In January 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." SFAS No. 121 establishes standards for accounting for
the impairment of long-lived assets, certain identifiable intangibles
and goodwill. It does not apply to financial instruments, long-term
customer relationships of a financial institution, mortgage and other
servicing rights, or deferred tax assets. The effect of adoption of
this statement was not material.
2. INVESTMENT SECURITIES
Investment securities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasuries $ 2,019,727 $ 9,752 $ - $ 2,029,479
U.S. Government agencies 21,407,763 37,031 (61,743) 21,383,051
Mortgage-backed securities 7,972,143 54,062 (78,031) 7,948,174
State and political subdivisions 1,517,647 41,373 - 1,559,020
Equity securities 349,904 - - 349,904
------------ --------- ---------- ------------
$ 33,267,184 $ 142,218 $ (139,774) $ 33,269,628
------------ --------- ---------- ------------
------------ --------- ---------- ------------
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasuries $ 2,003,041 $ 1,399 $ - $ 2,004,440
U.S. Government agencies 20,473,790 76,007 (90,434) 20,459,363
Mortgage-backed securities 7,655,313 96,329 (66,211) 7,685,431
State and political subdivisions 1,540,213 60,298 - 1,600,511
------------ --------- ---------- ------------
$ 31,672,357 $ 234,033 $ (156,645) $ 31,749,745
------------ --------- ---------- ------------
------------ --------- ---------- ------------
</TABLE>
There were no investment securities classified as held to maturity at
December 31, 1996 or December 31, 1995.
In November 1995, the FASB issued additional implementation guidance regarding
previously issued SFAS No. 115. In accordance with this guidance and prior to
December 31, 1995, companies were allowed a one-time reassessment of their
classification of securities and were required to account for any resulting
transfers at fair value. Transfers from the held-to-maturity category that
result from this
<PAGE>
one-time reassessment will not call into question the intent to hold other
securities to maturity in the future. The Company transferred approximately
$8,967,970 of securities from the held-to-maturity portfolio to the available
for sale portfolio. Available-for-sale securities were adjusted to fair value
and stockholders' equity was increased by $16,728, net of income taxes of
$12,113. This transfer was made to allow the Company greater flexibility in
managing its interest rate risk and liquidity.
Gross realized gains and losses on sales of available-for-sale securities in
1996, 1995 and 1994 are as follows:
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
Gross realized gains $ - $ 2,606 $ 9,328
Gross realized losses - (27,678) (9,013)
------- --------- ---------
Net gain (loss) $ - $ (25,072) $ 315
------- --------- ---------
The amortized cost and fair value of debt securities available for sale at
December 31, 1996, by contractual maturity, are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
DECEMBER 31, 1996
------------------------
AMORTIZED FAIR
COST VALUE
AVAILABLE FOR SALE:
Due in one year or less $ 3,730,901 $ 3,731,512
Due after one year through five years 16,310,621 16,311,232
Due after five years through ten years 5,837,968 5,838,579
Due after ten years 7,387,694 7,388,305
----------- -----------
$33,267,184 $33,269,628
----------- -----------
----------- -----------
At December 31, 1996 and 1995, investment securities with carrying values of
approximately $3,019,727 and $4,996,992 (market value of $3,026,930 and
$4,975,160, respectively), were pledged as collateral to secure public funds and
for other purposes as required by law or contract.
<PAGE>
3. LOANS
Loans are comprised of the following:
December 31
----------------------------------------------------
1996 1995
-------------------------- ----------------------
Percent Percent
of Total of Total
Amount Loans Amount Loans
Commercial $ 55,149,130 54% $ 51,397,988 55%
Real estate:
Mortgage 13,259,617 13% 10,389,320 11%
Construction 23,795,506 24% 23,705,602 25%
Consumer and other 8,777,703 9% 8,892,302 9%
------------- ---- ------------ ----
Total loans 100,981,956 100% 94,385,212 100%
---- ----
Less:
Unearned discount 681,262 468,241
Deferred loan fees 392,319 355,268
Allowance for credit losses 1,614,742 1,784,264
------------- ------------
Loans, net 98,293,633 91,777,439
Loans held for sale 1,476,322 2,751,920
------------- ------------
Total loans, net $ 99,769,955 $ 94,529,359
------------- ------------
------------- ------------
The Company's business activity is with customers primarily located within
Fresno and Madera counties. The Company grants real estate, commercial and
installment loans to these customers. The Company's commercial portfolio is
highly diversified among industry groups within the Company's service area.
The Company's largest concentration of loans is in real estate mortgages and
real estate construction lending. A significant portion of its customers'
ability to repay these loans is dependent upon the economic sectors of
residential real estate development and construction. Generally, loans are
secured by various forms of collateral. The loans are expected to be repaid
from income of the borrower or with proceeds from the sale of assets securing
the loans. The Company's loan policy requires sufficient collateral to meet
the Company's relative risk criteria for each borrower. The Company's
collateral mainly consists of real estate, cash, accounts receivable,
inventory and other financial instruments. The Company either maintains
possession of the collateral in safekeeping or perfects a security interest
with the State of California.
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.
<PAGE>
At December 31, 1996, nonaccrual loans amounted to $3,301,000 or
3.22% of total loans compared to $581,000 or .60% at December 31, 1995. Of
the total nonaccrual loans, $3,250,000 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. at December 31, 1995 of
the $581,000 in non-accrual loans, $505,000 represented loans RSC had
outstanding to real estate limited partnerships. the gross interest income
that would have been recorded for loans placed on nonaccrual status was
$276,000, $82,000 and $43,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
Other real estate owned was $437,000 at December 31, 1996 compared
to $341,000 at December 31, 1995. There were no troubled debt restructured
loans as defined in Statement of Financial Accounting Standards No. 15 at
December 31, 1996.
- ------------------------------------------------------------------------------
(In thousands, except percentages) 1996 1995
- ------------------------------------------------------------------------------
NONPERFORMING ASSETS:
Nonaccrual RSC loans $ 3,250 $505
Nonaccrual Bank loans 51 76
Restructured loans -- --
- ------------------------------------------------------------------------------
Nonperforming loans 3,301 581
Other real estate owned 437 341
- ------------------------------------------------------------------------------
Total nonperforming assets 3,738 922
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Total loans before allowance for losses (1) 102,458 97,137
Total assets 181,058 163,682
Allowance for possible credit losses (1,615) (1,784)
- ------------------------------------------------------------------------------
RATIOS: 3.22% .60%
Nonperforming loans to total loans
Nonperforming loans to total loans .05% .08%
(excluding RSC loans)
Nonperforming assets to:
Total loans 3.65% .95%
Total loans and OREO 3.63% .95%
Total assets 2.06% .56%
Allowance for possible credit losses 43.20% 193.5%
- ------------------------------------------------------------------------------
(1) Total loans include deferred loan fees and discounts on loans of
$1,074,000 and $824,000 at December 31, 1996 and 1995, respectively.
Management is not aware of any potential problem loans, which were accruing
interest at December 31, 1996, where serious doubt exists as to the ability
of the borrower to comply with present repayment terms.
The Company does not believe there to be any concentration of loans in
excess of 10% of total loans which are not disclosed above which would cause
them to be significantly impacted by economic or other conditions.
<PAGE>
At December 31, 1996 and 1995, the Company's recorded investment in loans for
which an impairment has been recognized totaled $242,000 and $673,000,
respectively. These amounts were evaluated for impairment using the fair
value of collateral. 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. At December 31, 1995, included in total impaired loans were
$162,000 of impaired loans for which the related SFAS No. 114 allowance was
$58,000, as well as $510,265 of impaired loans that, as a result of
write-downs or the fair value of collateral, did not have a SFAS No. 114
allowance. The average recorded investment in impaired loans was $188,000
for 1996 and $183,000 for 1995. The Company uses the cash basis method of
income recognition for impaired loans. For the years ended December 31, 1996
and 1995, the Company did not recognize any income on such loans.
An analysis of the changes in the allowance for credit losses is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of the year $ 1,784,264 $ 1,541,331 $ 1,337,800
Provision charged to operations -- 470,000 487,065
Losses charged to the allowance (258,205) (264,706) (313,012)
Recoveries of amounts charged off 88,683 37,639 29,478
------------ ------------ ------------
Balance, end of the year $ 1,614,742 $ 1,784,264 $ 1,541,331
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Loans held for sale consist of SBA loans complying with the Small Business
Administration loan program standards. It is the Bank's intention to sell
the guaranteed portion of these loans. Sales totaling approximately
$12,794,000, $6,850,000 and $12,631,000 in 1996, 1995 and 1994, resulted in
recognized gains of approximately $1,315,000, $590,000 and $887,000 in 1996,
1995 and 1994, respectively.
Included in commercial loans are SBA loans with unguaranteed balances of
$13,084,042 and $11,367,334 at December 31, 1996 and 1995, respectively.
Included in other assets is the excess servicing asset of $595,000 and
$290,000 at December 31, 1996 and 1995, respectively.
In the ordinary course of business, the Company enters into various types of
transactions which involve financial instruments with off-balance sheet risk.
These instruments include commitments to extend credit and standby letters of
credit which are not reflected in the accompanying balance sheets. These
transactions may involve, to varying degrees, liquidity, credit and interest
rate risk in excess of the amount, if any, recognized in the balance sheets.
The Company's off-balance sheet credit risk exposure is the contractual
amount of commitments to extend credit and standby letters of credit. The
Company applies the same credit standards to these contracts as it uses in
its lending process.
December 31
-------------
1996
Financial instruments whose contractual
amount may represent additional risk
if funded:
Commitments to extend credit $57,927,000
Standby letters of credit 1,267,000
<PAGE>
Commitments to extend credit are agreements to lend to customers. These
commitments have specified interest rates and generally have fixed
expiration dates but may be terminated by the Company if certain conditions
of the contract are violated. Many of these commitments are expected to
expire or terminate without funding. Therefore, the total commitment
amounts do not necessarily represent future cash requirements. Collateral
relating to these commitments varies, but may include cash, securities and
real estate.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Credit risk
arises in these transactions from the possibility that a customer may not
be able to repay the Company upon default of performance. Collateral held
for standby letters of credit is based on an individual evaluation of each
customers' credit worthiness, but may include cash, securities or other
guarantees.
4. REAL ESTATE ACTIVITIES
Regency Service Corporation ("RSC") is involved in residential real estate
development in the Fresno/Clovis area through both limited partnership
investments in joint ventures and direct investments in real estate
projects. These real estate activities consist primarily of residential
subdivisions being developed into lots and homes. Limited partnership
investments are accounted for under the equity method. Direct investments
in real estate projects are consolidated. Gains on sales of limited
partnership properties are recognized on the accrual method and are
allocated between the partners based on the provisions of the partnership
agreements.
In 1995, RSC acquired two partnerships resulting in 100% ownership of these
two entities by RSC. In 1996, RSC dissolved a total of six partnerships
and sold its investments in one property. As a result of these
transactions, RSC obtained sole ownership of five projects, closed one
project out completely and financed the sale of two properties.
Accordingly, the accompanying consolidated financial statements include
these as consolidated entities from the date of acquisition. The condensed
financial information of the acquired entities as of the acquisition dates
were as follows:
1996 1995
Assets:
Cash $ 803,907 $ 276,113
Notes Receivable 2,205,167 --
Land and real estate under construction 16,077,321 7,394,341
Other residential property -- 290,811
Other assets 227,212 342,157
----------- -----------
Total assets 19,133,607 8,303,422
Liabilities:
Notes payable 8,614,404 4,062,197
Accrued interest and other liabilities 713,693 559,517
------------ ------------
Total liabilities 9,328,097 4,621,714
------------ ------------
Equity $ 9,805,510 $ 3,681,708
------------ ------------
------------ ------------
<PAGE>
At December 31, 1996 and 1995, the following notes payable resulting from the
acquisition are included in the Company's consolidated financial statements:
<TABLE>
<CAPTION>
December 31
----------------------------
1996 1995
<S> <C> <C>
Construction notes payable to a bank, interest at prime plus 2%,
due on various dates in 1997, collateralized by residential lots
and homes under construction $ 126,750 $1,966,312
Acquisition and land development notes payable to a bank,
interest at prime plus 2%, due on various dates in 1997,
collateralized by residential lots 271,233 1,609,283
Mortgage notes payable, interest rates ranging from 5.7%
to 12%, due on various dates in 1996, collateralized by single
family residences with a carrying value of approximately
$288,000 -- 211,453
Other notes payable, interest rates ranging from 8% to 10%,
due on various dates in 1996, collateralized by residential lots -- 321,772
Acquisition and land development note payable to a bank,
interest at prime plus 2%, due in 1997,
collateralized by residential lots 1,570,455 --
Other note payable to a Foundation, interest at 10%, due in
1997, collateralized by residential lots 176,966 --
Acquisition and land development notes payable to a bank,
interest at 10.25%, due on various dates in 1997,
collateralized by residential lots 1,837,804 --
Construction notes payable to a bank, interest at 10.25%, due
on various dates in 1997, collateralized by residential lots
and homes under construction 993,426 --
--------------- -----------
$4,976,634 $4,108,820
--------------- -----------
--------------- -----------
</TABLE>
Under the terms of each note agreement, the Company is required to make loan
payments as lots are sold to obtain release of the lien on those lots.
<PAGE>
Included in the investments in real estate balance at December 31, 1996 are
acquisition, development and construction loans held by the Bank totaling
$208,856. The remaining investments in real estate balance of $16,279,914
represents RSC's investments in real estate.
Condensed financial information relative to RSC included in the Company's
consolidated financial statements at December 31, 1996 and 1995,
respectively, are as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------
1996 1995
<S> <C> <C>
Financial position:
Investments in real estate:
Real estate held for sale $15,520,293 $ 8,275,148
Equity in partnerships 2,069,621 12,476,868
------------ ------------
Investment in real estate before allowance 17,589,914 20,752,016
Allowance for real estate losses (1,310,000) (2,797,543)
------------ ------------
Investment in real estate 16,279,914 17,954,473
Loans to real estate partnerships and financial projects 3,987,530 2,577,050
Allowance for loan losses (110,000) (110,000)
------------ ------------
Net loans 3,877,530 2,467,050
Other assets 1,732,825 1,392,958
Liabilities (6,218,686) (5,338,796)
------------ ------------
Bank's investment in RSC $15,671,583 $16,475,685
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Summary of income (loss):
Income from partnerships accounted for on
the equity method (before amortization of
capitalized interest and eliminating entries of
$0 in 1996, $367,770 in 1995 and
$99,429 in 1994 $ 151,456 $ 31,139 $ 1,883,244
Loss from consolidated real estate
investments (583,486) (348,496) --
Provision for real estate losses -- (2,797,543) --
Provision for loan losses -- (110,000) --
------------- ------------- --------------
Net income (loss) from partnerships (432,030) (3,224,900) 1,883,244
Other income 249,101 85,203 194,842
Other expenses (1,316,540) (874,435) (1,175,840)
------------- ------------- -------------
Total income (loss) from RSC (excluding
income taxes) $(1,499,469) $(4,014,132) $ 902,246
------------- ------------- -------------
</TABLE>
<PAGE>
The general partners in RSC's joint venture investments have personally
guaranteed the amounts loaned to those ventures by RSC.
In December 1995, RSC recorded a provision of $2,797,543 to reflect estimated
excess costs of land and real estate under development over the expected
future sales prices.
Condensed unaudited financial information relative to the unconsolidated
investments in the real estate partnerships before eliminations, are as
follows:
(Unaudited)
December 31
------------------------------
1996 1995
Financial Position:
Real estate $ 6,882,374 $ 31,832,238
Other assets 1,412,310 4,602,829
------------ -------------
Total $ 8,294,684 $ 36,435,067
------------ -------------
------------ -------------
Liabilities and Equity:
Liabilities (primarily third-party debt) $ 4,967,164 $ 21,309,559
RSC's equity 2,069,621 12,476,868
Others' equity 1,257,899 2,648,640
------------ -------------
Total $ 8,294,684 $ 36,435,067
------------ -------------
------------ -------------
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Summary of partnerships' income (loss):
Sales of real estate $11,929,820 $28,895,811 $40,575,374
Cost of sales and expenses (11,634,514) (29,127,929) (37,947,604)
------------- ------------- -------------
Net income (loss) $ 295,306 $ (232,118) $ 2,627,770
------------- ------------- -------------
------------- ------------- -------------
RSC's share of net income in limited $ 151,456 $ 31,139 $ 1,907,865
partnerships
Increases (decreases) to RSC's share of
net income:
Amortization of capitalized interest - (367,770) (124,050)
Loss from consolidated real estate
investments (583,486) (348,496) -
Provision to reduce partnerships' carrying
value of land and real estate under
development - (2,797,543) -
Other 80,986 41,380 -
------------- ------------ -----------
Total (502,500) (3,472,429) (124,050)
------------- ------------ -----------
Income (loss) from investments in real
estate $ (351,044) $ (3,441,290) $ 1,783,815
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
The FDIC has adopted final regulations under the Federal Deposit Insurance
Corporation Improvement Act of 1991 regarding real estate investment and
development activities of insured state banks and their majority-owned
subsidiaries.
Under the 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.
Through this divestiture process, RSC has obtained sole ownership of seven
projects and has financed the sale of two projects to former joint
venture partners. As of December 31, 1996, RSC has two remaining joint
venture projects in which RSC is the limited partner.
<PAGE>
5. PREMISES AND EQUIPMENT
Bank premises and equipment consists of the following:
DECEMBER 31
-------------------------
1996 1995
Land $ - $ -
Buildings 245,000 245,000
Leasehold improvements 1,253,425 1,149,083
Furniture and equipment 3,421,063 3,090,537
---------- ----------
4,919,488 4,484,620
Accumulated depreciation and amortization (2,657,784) (2,146,011)
---------- ----------
Total premises and equipment $2,261,704 $2,338,609
---------- ----------
---------- ----------
6. DEPOSITS
Deposits are comprised of the following:
DECEMBER 31
-----------------------------
1996 1995
Noninterest bearing deposits $ 36,612,614 $ 32,672,533
Interest bearing deposits:
NOW and money market accounts 47,850,259 40,656,083
Savings accounts 25,539,983 34,882,487
Time deposits:
Under $100,000 19,032,426 12,228,879
$100,000 and over 30,766,258 23,305,062
------------- -------------
Total interest bearing deposits 123,188,926 111,072,511
------------- -------------
Total deposits $ 159,801,540 $ 143,745,044
------------- -------------
------------- -------------
At December 31, 1996, time deposits of $100,000 or more include
approximately $16,171,000 maturing in 3 months or less, $10,432,000
maturing in 3 to 12 months and $4,163,000 maturing after 12 months.
At December 31, 1996, the scheduled maturities of all certificates of
deposits and other time deposits are as follows:
DECEMBER 31, 1996
-----------------------------------------
1997 $ 41,455,266
1998 7,289,702
1999 333,571
2000 630,147
2001 and thereafter 89,998
------------
$49,798,684
------------
------------
<PAGE>
7. SHORT-TERM BORROWINGS AND LEASE COMMITMENTS
At December 31, 1996 and 1995 , the Company had no federal funds purchased
or securities sold under repurchase agreements outstanding.
At December 31, 1996, the Company had unsecured federal funds lines of
credit available providing for short-term borrowings up to an aggregate of
$9,000,000. Borrowings under federal funds lines are generally on an
overnight basis with interest rates determined by market conditions.
Interest rates ranged between 5.25% - 5.50% at December 31, 1996. The
agreements are subject to annual renewal. Information concerning federal
funds lines is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1996 1995
<S> <C> <C>
Average balance during the year $ 868,638 $ 495,000
Average interest rate during the year 5.69% 6.00%
Maximum month-end balance during the year $ 3,500,000 $ 1,000,000
</TABLE>
In addition to its federal funds lines, the Company uses unpledged
securities in its investment portfolio as a source of short-term liquidity
by selling securities under repurchase agreements. Securities sold under
repurchase agreements generally mature within one to seven days from the
transaction date. Securities sold under repurchase agreements are
delivered to broker dealers who arrange the transactions. The broker
dealers may sell, loan or otherwise dispose of such securities to other
parties in the normal course of their operations and agree to resell to
the Company substantially identical securities at the maturities of the
agreements. There were no such outstanding agreements at December 31,
1996 and 1995. Information concerning securities sold under agreements
to repurchase is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1996 1995
<S> <C> <C>
Average balance during the year $ 616,535 $ 418,000
Average interest rate during the year 5.79 % 6.41%
Maximum month-end balance during the year $4,953,750 $5,535,000
Securities underlying the agreements at year end:
Carrying value $ - $ -
Estimated fair value $ - $ -
</TABLE>
The Company leases land and a building under a lease agreement having an
initial term of approximately 30 years. The lease is accounted for as an
operating lease for the land and a capital lease for the building.
During 1995, the Company entered into a sale-leaseback of its corporate
headquarters. The leaseback is accounted for as an operating lease with
a term of 15 years. Additionally, the Bank has lease commitments related
to certain other properties which are accounted for as operating leases.
Rent expense under all operating lease agreements was $540,000, $273,000
and $214,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
<PAGE>
At December 31, 1996, the aggregate minimum future lease commitments under
capital leases and noncancelable operating leases with terms of one year or
more consist of the following:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------------------------
<S> <C> <C>
1997 $ 47,525 $ 516,479
1998 47,525 516,993
1999 47,525 506,170
2000 75,650 477,120
2001 75,650 457,417
Thereafter 2,603,155 4,931,448
----------- -----------
Total minimum lease payments 2,897,030 $ 7,405,627
Amount representing interest (2,652,030) -----------
----------- -----------
Net present value of minimum lease payments $ 245,000
-----------
-----------
</TABLE>
8. INCOME TAXES
Income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $ (149,114) $ 135,000 $ 953,000
State 54,424 92,000 354,000
---------- --------- ---------
Total current (94,690) 227,000 1,307,000
Deferred:
Federal 688,006 (1,634,000) (87,000)
State 138,834 231,000 (25,000)
---------- --------- ---------
Total deferred 826,840 (1,403,000) (112,000)
---------- --------- ---------
$ 732,150 $(1,176,000) $1,195,000
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
<PAGE>
A reconciliation of the statutory federal income tax rate (benefit) with
the effective tax rate is as follows:
PERCENT OF PRE-TAX INCOME
YEAR ENDED DECEMBER 31
----------------------------
1996 1995 1994
Statutory rate 35.0 % (35.0)% 35.0 %
State taxes, net of federal benefit 7.3 % (6.8)% 7.6 %
Tax-exempt interest (1.5)% (1.0)% (2.0)%
Life insurance (2.5)% (1.3)% (0.7)%
Other, net (3.7)% 4.2 % 0.8 %
----- ----- -----
42.0 % (39.9)% 40.7 %
----- ---- ----
----- ---- ----
Income taxes (benefit) related to investment security gains and losses were
$0 for the year ended December 31,1996, totaled approximately $(10,000) for
the year ended December 31, 1995, and were insignificant for the year ended
December 31, 1994, based on the effective tax rates for those years.
The Corporation's net deferred tax asset (included in other assets) is
comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1996 1995
<S> <C> <C>
Deferred tax assets:
Bad debt reserves $ 519,000 $ 566,000
Lease financing 132,000 117,000
Deferred compensation 313,000 261,000
Nonaccrual loan interest 143,000 22,000
Gain on sale-leaseback 21,000 119,000
Allowance for real estate losses 606,000 1,338,000
Other 83,000 81,000
---------- ----------
Total deferred tax assets 1,817,000 2,504,000
---------- ----------
Deferred tax liabilities:
State taxes (141,000) (158,000)
Depreciation (92,000) (92,000)
Unrealized investment gains (1,000) (32,000)
Other (206,000) (49,000)
---------- ----------
Total deferred tax liabilities (440,000) (331,000)
---------- ----------
Net deferred tax asset $1,377,000 $2,173,000
---------- ----------
---------- ----------
</TABLE>
<PAGE>
9. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN - The Company has reserved 545,448 shares of its common
stock for issuance under its amended 1990 stock option plan. Options
granted under the plan may either be immediately exercisable for the full
number of shares granted thereunder or may become exercisable in cumulative
increments over a period of months or years as determined by the Stock
Option Committee of the Board of Directors but, in no event less than 20%
of the shares subject to the option per year during the five years from the
date of grant. All options are granted at prices not less than 100% of the
fair value of the stock at the date of grant. The options began to expire
in 1995 and will continue to do so through 2006.
A summary of stock option activity follows:
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
OUTSTANDING, JANUARY 1, 1994 213,627 $5.42
Effect of 10% stock dividend 21,363 $4.93
Options exercised (70,118) $4.97
---------
OUTSTANDING, DECEMBER 31, 1994
(164,872 exercisable at a weighted average
price of $4.91) 164,872 $4.91
---------
Options exercised (3,500) $5.33
Effect of 5% stock dividend 8,066 $4.67
Options exercised (47,724) $5.58
---------
OUTSTANDING, DECEMBER 31, 1995
(121,714 exercisable at a weighted average
price of $4.31) 121,714 $4.31
---------
Options granted (weighted average fair value
of $9.23) 167,000 $9.23
OUTSTANDING, DECEMBER 31, 1996 288,714 $7.15
(150,964 exercisable at a weighted average ---------
price of $5.21)
At December 31, 1996 and 1995, 178,494 and 143,397 shares were available
for grant, respectively.
<PAGE>
Additional information regarding options outstanding as of December 31,1996
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------
WEIGHTED AVG. OPTIONS EXERCISABLE
REMAINING -----------------------------
RANGE OF NUMBER CONTRACTUAL WEIGHTED AVG. NUMBER WEIGHTED AVG.
EXERCISE PRICES OUTSTANDING LIFE & (YRS.) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$4.31 121,714 3.11 yrs. $4.31 121,714 $4.31
$8.94 97,000 9.96 yrs $8.94 29,250 $8.94
$9.63 70,000 6.67 yrs $9.63 - -
- -----------------------------------------------------------------------------------------------
$ 4.31 - $9.63 288,714 6.26 yrs $7.15 150,964 $5.21
</TABLE>
EMPLOYEE STOCK OWNERSHIP PLAN - The Company has a noncontributory
employee stock ownership plan covering substantially all full-time
employees meeting certain requirements. Contributions to the plan are
discretionary as determined by the Board of Directors. The employee
stock ownership plan expense was $173,500, $156,000 and $105,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. The plan
owned 138,466 and 109,555 shares of the Company's common stock at
December 31, 1996 and 1995, respectively.
ADDITIONAL STOCK PLAN INFORMATION - As discussed in Note 1, the Company
continues to account for its stock-based awards using the intrinsic
value method in accordance with Accounting Principles Board No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and its related
interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, (SFAS 123) requires the disclosure of pro
forma net income and earnings per share had the Company adopted the fair
value method as of the beginning of fiscal 1995. Under SFAS 123, the
fair value of stock-based awards to employees is calculated through the
use of option pricing models, even though such models were developed to
estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time
to exercise, which greatly affect the calculated values. The Company's
calculations were made using a binomial option pricing model with the
following weighted average assumptions: expected life, 36 to 120
months: stock volatility, 20%; risk free interest rates, 6.10% to 6.50%;
and quarterly dividends of 2.5% of earnings during the expected term.
The Company's calculations are based on a multiple option valuation
approach and forfeitures are recognized as they occur. If the computed
fair values of the 1996 awards had been amortized to expense over the
vesting period of the awards, pro forma net income would have been
$959,000 ($0.51 per share) in 1996. However, the impact of outstanding
stock options granted prior to 1995 has been excluded from the pro forma
calculation; accordingly, the 1996 pro forma adjustments are not
indicative of future period pro forma adjustments, when the calculation
will apply to all applicable stock options. There were no stock options
granted in 1995.
OTHER PLANS - The Company has also established the Regency Bancorp Cash
or Deferred Retirement Plan which qualifies under the Internal Revenue
Code Section 401(k). Employee contributions to the
<PAGE>
Plan may be matched by the Company at the discretion of the Board of
Directors. Employee contributions to the Plan are immediately vested
while any matching contributions made by the Bank vest at different
percentages based on years of service. For the years ended December 31,
1996, 1995 and 1994, the Company contributed approximately $27,100,
$38,000 and $57,000, respectively, to the Plan.
The Company has a nonqualified Deferred Compensation Plan providing
directors with the opportunity to participate in an unfunded, deferred
compensation program. Under the plan, directors may elect to defer some
or all of their current compensation. At December 31, 1996 and 1995,
the total net deferrals included in other liabilities was approximately
$518,000 and $467,000, respectively. In addition, in 1994, the Company
established a salary continuation plan for three of the Bank's key
executives which provides that upon retirement the Bank will continue to
provide compensation to these executives for a period of 15 years.
Future compensation under the Plan is earned by the executives for
services rendered through retirement and vests at a rate of 10% per
year. The Company accrues for the compensation based on anticipated
years of service and the vesting schedule provided in the Plan. At
December 31, 1996 and 1995, $172,000 and $109,000, respectively, has
been accrued.
In connection with the implementation of the Deferred Compensation and
Salary Continuation Plans, single premium universal life insurance
policies on the life of each participant were purchased by the Bank,
which is beneficiary and owner of the policies. The cash surrender
value of the policies was $2,903,036 and $2,763,952 at December 31, 1996
and 1995. The current annual tax-free interest rates on these policies
range from 5.75% to 6.00%. The assets of the Plan, under Internal
Revenue Service regulations, are the property of the Company and are
available to satisfy the Company's general creditors.
10. RELATED PARTY TRANSACTIONS
Certain officers and directors of the Company and affiliates are
customers of and have had other transactions with the Bank in the
ordinary course of business. In management's opinion, all loans and
commitments included in such transactions were made on substantially the
same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with other persons and did not
involve more than normal risk of collectibility or present other
unfavorable features. Changes in loans outstanding to directors,
officers and affiliates were as follows:
YEAR ENDED
DECEMBER 31
-----------
1996
Balance, beginning of year $ 1,042,275
New loans 366,805
Payments (411,576)
-----------
Balance, end of year $ 997,504
-----------
-----------
Gary L. McDonald, a director of the Company, owns Gary L. McDonald Real
Estate and Development Inc., ("GLMRED"). During 1996 GLMRED was
retained by RSC to manage the real estate projects in which RSC has an
investment. Prior to 1996, Mr. McDonald through Peachwood Park
("Peachwood"), a California Limited Partnership in which McDonald
Construction Inc. is the sole general partner, was retained by RSC to
manage the real estate projects in which RSC had made an investment.
<PAGE>
In 1996, 1995 and 1994, the Company paid approximately $488,000,
$243,000 and $674,000 to GLMRED and Peachwood respectively for these
services.
During 1995 the Company entered into an 18-month Option Agreement with
Gary L. McDonald, for the right to purchase a property contiguous to
the Company's headquarters. For the option Mr. McDonald was paid
$140,000 in 1995. During 1996 the option expired without the Company
exercising its right to purchase.
At December 31, 1995 the Company was in process of conducting an
analysis of the amounts that may be owed by either Peachwood or RSC for
the 1995 year under the terms of the project management agreement.
During 1995, the Company expensed $243,187 in management fees for
services performed by Peachwood. As of December 31, 1995, the Company
had recorded a receivable from Peachwood in the amount of $377,600. No
portion of the receivable related to the provision made for potential
RSC project losses. Pending completion of this analysis process the
Company fully reserved for the receivable at December 31, 1995 and
subsequently wrote these balances off during 1996.
The Vice Chairman, David N. Price, administers the Company's 401(k) and
ESOP plans. In 1996, 1995 and 1994, the Company paid approximately
$18,000, $15,400 and $15,300, respectively, for these services.
11. FINANCIAL INSTRUMENTS FAIR VALUE DISCLOSURE
The following summary disclosures are made in accordance with the
provisions of SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments," which requires the disclosure of fair value information
about both on- and off- balance sheet financial instruments where it is
practicable to estimate that value. Fair value is defined in SFAS No.
107 as the amount at which an instrument could be exchanged in a current
transaction between willing parties, other than in a forced or
liquidation sale. It is not the Company's intent to enter into such
exchanges.
In cases where quoted market prices were not available, fair values were
estimated using present value or other valuation methods, as described
below. The use of different assumptions (e.g., discount rates and cash
flow estimates) and estimation methods could have a significant effect
on fair value amounts. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company could realize in a
current market exchange. Because SFAS No. 107 excludes certain
financial instruments and all non-financial instruments from its
disclosure requirements, any aggregation of the fair value amounts
presented would not represent the underlying value of the Company.
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 19,833 $ 19,833 $ 8,925 $ 8,925
Investment securities 33,270 33,270 31,750 31,750
Loans, net 99,770 101,744 94,529 96,625
Liabilities:
Deposits 159,802 159,578 143,745 143,732
Notes payable and capital lease 5,222 5,096 4,354 4,279
obligation
Commitments to extend credit - - - -
</TABLE>
The following methods and assumptions were used in estimating the fair
values of financial instruments:
CASH AND DUE FROM BANKS - The carrying amounts reported in the balance
sheets for cash and cash equivalents approximate their estimated fair
values.
INVESTMENT SECURITIES - Fair values for investment securities, including
mortgage-backed securities, are based on quoted market prices.
LOANS - Fair values of variable rate loans which reprice frequently and
with no significant change in credit risk are discounted to their next
repricing date. Fair values for all other loans are estimated using
discounted cash flow analyses over their remaining maturities, using a
build-up approach which views the discount rate as consisting of the
risk-free rate, credit quality, operating expense and prepayment option
price.
DEPOSITS - Fair values for transactions and savings accounts are equal
to the respective amounts payable on demand at December 31, 1996 and
1995 (i.e., carrying amounts). Fair values of fixed-maturity
certificates of deposit were estimated using discounted cash flows over
their remaining maturities, using a build-up approach as discussed above
with no component assigned for credit quality.
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS - Fair values of notes
payable and capital lease obligations were estimated using discounted
cash flows over their remaining maturities using a build-up approach
consisting of the risk free rate and operating expense components.
COMMITMENTS TO EXTEND CREDIT - Fair values of commitments to extend
credit are estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present counterparties' credit standing. Fair values
of standby letters of credit are based on fees currently charged for
similar agreements. There was no material difference between the
carrying amount and the estimated value of commitments to extend credit
at December 31, 1996 and 1995.
<PAGE>
12. REGULATORY MATTERS
CAPITAL GUIDELINES - The Company and Bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory and
possible additional discretionary actions by regulators that, if
undertaken, could have a material direct effect on the Company's financial
statements. Capital adequacy guidelines for the Company and the Bank and
the regulatory framework for prompt corrective action for the Bank require
that the Company and Bank meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital classification as well as the
Company's and the Bank's capital adequacy are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Bank to maintain minimum ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital to average assets
(as defined). As of December 31, 1996, the Company and Bank meet all
capital adequacy requirements to which they are subject and management
believes that, under the current regulations, both will continue to meet
their minimum capital requirements in the foreseeable future.
As of December 31, 1996 and 1995, the most recent notifications from the
Federal Deposit Insurance Corporation categorized the Bank as "adequately
capitalized" and "well capitalized", respectively, under the regulatory
framework for prompt corrective action. At December 31, 1996, due to an
increase in average risk weighted assets in the fourth quarter, the Bank's
total capital to risk weighted assets fell slightly below the level
considered "well capitalized", accordingly the Bank is considered
"adequately capitalized" at December 31, 1996. Under the framework, the
Bank's capital levels do not allow the Bank to accept brokered deposits
without prior approval from the FDIC. As of December 31, 1996 and 1995,
the Bank held no institutional brokered deposits.
The Company and Bank's actual capital amounts (in thousands) and ratios are
also presented in the following table:
<TABLE>
<CAPTION>
FOR CAPITAL ADEQUACY
ACTUAL PURPOSES
------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996
Total Capital (to Risk Weighted Assets:)
Company. . . . . . . . . . . . . . . . . . . $ 14,306 10.21% greater than or equal to $11,207 greater than or equal to 8.00%
Regency Bank . . . . . . . . . . . . . . . . $ 13,944 9.97% greater than or equal to $11,193 greater than or equal to 8.00%
Tier 1 Capital (to Risk Weighted Assets):
Company. . . . . . . . . . . . . . . . . . . $ 12,691 9.06% greater than or equal to $ 5,604 greater than or equal to 4.00%
Regency Bank . . . . . . . . . . . . . . . . $ 12,329 8.81% greater than or equal to $ 5,596 greater than or equal to 4.00%
Tier 1 Capital (to Average Assets):
Company. . . . . . . . . . . . . . . . . . . $ 12,691 7.66% greater than or equal to $ 6,630 greater than or equal to 4.00%
Regency Bank . . . . . . . . . . . . . . . . $ 12,329 7.12% greater than or equal to $ 6,923 greater than or equal to 4.00%
</TABLE>
<TABLE>
<CAPTION>
TO BE ADEQUATELY
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
------------------------------------------------------------------------
AMOUNT RATIO
------------------------------------------------------------------------
<S> <C> <C>
AS OF DECEMBER 31, 1996
Total Capital (to Risk Weighted Assets:)
Company. . . . . . . . . . . . . . . . . . . . . N/A
Regency Bank . . . . . . . . . . . . . . . . . . greater than or equal to $ 11,193 greater than or equal to 8.00%
Tier 1 Capital (to Risk Weighted Assets):
Company. . . . . . . . . . . . . . . . . . . . . N/A
Regency Bank . . . . . . . . . . . . . . . . . . greater than or equal to $ 5,596 greater than or equal to 4.00%
Tier 1 Capital (to Average Assets):
Company. . . . . . . . . . . . . . . . . . . . . N/A
Regency Bank . . . . . . . . . . . . . . . . . . greater than or equal to $ 6,923 greater than or equal to 4.00%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FOR CAPITAL
ADEQUACY
ACTUAL PURPOSES:
-------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1995
Total Capital (to Risk Weighted Assets:)
Company. . . . . . . . . . . . . . . . . . . $ 13,373 10.90% greater than or equal to $ 9,818 greater than or equal to 8.00%
Regency Bank . . . . . . . . . . . . . . . . $ 13,055 10.64% greater than or equal to $ 9,814 greater than or equal to 8.00%
Tier 1 Capital (to Risk Weighted Assets):
Company. . . . . . . . . . . . . . . . . . . $ 11,836 9.64% greater than or equal to $ 4,909 greater than or equal to 4.00%
Regency Bank . . . . . . . . . . . . . . . . $ 11,519 9.39% greater than or equal to $ 4,907 greater than or equal to 4.00%
Tier 1 Capital (to Average Assets):
Company. . . . . . . . . . . . . . . . . . . $ 11,836 7.15% greater than or equal to $ 6,626 greater than or equal to 4.00%
Regency Bank . . . . . . . . . . . . . . . . $ 11,519 6.95% greater than or equal to $ 6,629 greater than or equal to 4.00%
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS:
-------------------------------------------------------------------------
AMOUNT RATIO
-------------------------------------------------------------------------
<S> <C> <C>
AS OF DECEMBER 31, 1995
Total Capital (to Risk Weighted Assets:)
Company. . . . . . . . . . . . . . . . . . . . . N/A
Regency Bank . . . . . . . . . . . . . . . . . . greater than or equal to $ 12,267 greater than or equal to 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Company. . . . . . . . . . . . . . . . . . . . . N/A
Regency Bank . . . . . . . . . . . . . . . . . . greater than or equal to $ 7,360 greater than or equal to 6.00%
Tier 1 Capital (to Average Assets):
Company. . . . . . . . . . . . . . . . . . . . . N/A
Regency Bank . . . . . . . . . . . . . . . . . . greater than or equal to $ 8,286 greater than or equal to 5.00%
</TABLE>
DIVIDENDS - As indicated in Note 1, effective March 1, 1995, the Bank
became a wholly-owned subsidiary of Bancorp. Under California law,
shareholders of Bancorp may receive dividends when and as declared by its
Board of Directors out of funds legally available. With certain
exceptions, a California corporation may not pay a dividend to its
shareholders unless its retained earnings equal at least the amount of the
proposed dividend. California law further provides that, in the event that
sufficient retained earnings are not available for the proposed
distribution, a corporation may nevertheless make a distribution to its
shareholders if it meets the following two generally stated conditions:
(i) the corporation's assets equal at least 1 1/4 times its liabilities;
and (ii) the corporation's current assets equal at least its current
liabilities or, if the average of the corporation's earnings before taxes
on income and before interest expense for the two preceding fiscal years
was less than the average of the corporation's interest expense for such
fiscal years, then the corporation's current assets must equal at least
1 1/4 times its current liabilities.
Bancorp expects to receive substantially all of its income initially from
dividends from the Bank. Under California state banking law, the Bank may
not pay cash dividends in an amount which exceeds the lesser of the
retained earnings of the Bank or the Bank's net income for its last three
fiscal years (less the amount of any distributions to shareholders made
during that period). If the above test is not met, cash dividends may only
be paid with the prior approval of the California Superintendent of Banks,
in an amount not exceeding the Bank's net income for its last fiscal year
or the amount of its net income for its current fiscal year. Accordingly,
the future payment of cash dividends will depend on the Bank's earnings,
its ability to meet capital requirements and/or Bancorp's ability to
generate income from other sources. At December 31, 1996, based on the
criteria set forth above, additional dividends from the Bank to the parent
company must be approved by the State Superintendent of Banking.
CASH RESTRICTION - The FDIC requires banks to maintain average reserve
balances on deposits, consisting of vault cash and actual balances held by
the Federal Reserve Bank of San Francisco. The Bank's average FDIC reserve
requirements were $1,261,000 and $933,000 in 1996 and 1995, respectively.
The Bank maintained average balances of $1,629,000 and $1,892,000 in 1996
and 1995, respectively.
<PAGE>
13. SUPPLEMENTAL CASH FLOW INFORMATION
Following is a summary of amounts paid for interest and taxes and of
non-cash transactions for the years ended 1996, 1995 and 1994 (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
-----------------------------------
1996 1995 1994
<S> <C> <C> <C>
Cash paid during the period for:
Interest on deposits and other borrowings. . . . . . $ 4,597 $ 5,062 $ 2,762
Income taxes . . . . . . . . . . . . . . . . . . . . 316 21 1,165
Noncash transactions:
Transfer of loans to other real
estate owned . . . . . . . . . . . . . . . . . . . 218 232 -
Stock dividend . . . . . . . . . . . . . . . . . . . - 866 1,490
Transfer of investments from
held to maturity to available for sale
upon adoption of SFAS No. 115. . . . . . . . . . . - - 24,386
Net assets acquired through acquisition of
partnerships less cash received:
Land and real estate under construction. . . . . . 6,272 4,265 -
Notes receivable . . . . . . . . . . . . . . . . . 2,025 - -
Other residential property . . . . . . . . . . . . - 291 -
Other assets . . . . . . . . . . . . . . . . . . . 227 342 -
Notes payable . . . . . . . . . . . . . . . . . . 8,614 4,062 -
Accrued interest and other liabilities . . . . . . 714 560 -
Loan made to finance sale of building. . . . . . . . - 2,150 -
Deferred gain on sale of building. . . . . . . . . . - 264 -
</TABLE>
<PAGE>
14. PARENT COMPANY ONLY FINANCIAL STATEMENTS
As discussed in Note 1, Regency Bancorp was formed on March 1, 1995 to act
as a holding company for Regency Bank. Following are the condensed balance
sheets of Regency Bancorp at December 31, 1996, and 1995, and condensed
income statements and cash flow statements for the year ended December 31,
1996 and for the period from March 1 to December 31, 1995:
BALANCE SHEETS
DECEMBER 31
-----------------------
1996 1995
(IN THOUSANDS)
ASSETS
Cash and short-term investments. . . . . . . . . . . . $ 192 $ 273
Investment in bank subsidiary. . . . . . . . . . . . . 13,149 12,561
Other assets . . . . . . . . . . . . . . . . . . . . . 129 118
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . $ 13,470 $ 12,952
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities . . . . . . . . . . . . . . . . . . $ - $ 10
-------- --------
Total liabilities. . . . . . . . . . . . . . . . . - 10
SHAREHOLDERS' EQUITY:
Common stock . . . . . . . . . . . . . . . . . . . . 8,868 8,868
Retained earnings . . . . . . . . . . . . . . . . . 4,601 4,029
Unrealized gain on securities. . . . . . . . . . . . 1 45
-------- --------
Total shareholders equity. . . . . . . . . . . . . 13,470 12,942
-------- --------
Total liabilities and shareholders' equity . . . . $ 13,470 $ 12,952
-------- --------
-------- --------
<PAGE>
STATEMENTS OF INCOME
DECEMBER 31
------------------------
1996 1995
(IN THOUSANDS)
INCOME. . . . . . . . . . . . . . . . . . . . . . . . $ - $ -
EXPENSES:
Interest. . . . . . . . . . . . . . . . . . . . . . $ - 2
Management fees to bank subsidiary. . . . . . . . . 66 55
Other . . . . . . . . . . . . . . . . . . . . . . . 133 165
-------- --------
Total expenses . . . . . . . . . . . . . . . . 199 222
Loss before income tax (benefit) and equity
in undistributed losses of bank subsidiary . . . (199) (222)
Income tax (benefit). . . . . . . . . . . . . . . . (85) 92
Equity in undistributed income (loss) of
bank subsidiary, net of income taxes. . . . . . . 1,122 (1,637)
-------- --------
Net Income (loss). . . . . . . . . . . . . . . $ 1,008 $ (1,767)
-------- --------
-------- --------
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
DECEMBER 31
----------------------------
1996 1995
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,008 $ (1,767)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Equity in undistributed (income) losses of bank subsidiary (1,122) 1,637
Increase in other assets (11) (6)
Increase (decrease) in other liabilities (10) 9
----------- -----------
Net cash used in operating activities (135) (127)
INVESTING ACTIVITIES:
Capital contribution from subsidiary bank 491 750
----------- -----------
Net cash provided by investing activities 491 750
FINANCING ACTIVITIES:
Issuance of common stock - 31
Cash dividends (437) (266)
Payments on notes payable - (150)
----------- -----------
Net cash (used in) provided by financing activities (437) (385)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (81) 238
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 273 36
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 192 $ 274
----------- -----------
----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ - $ 113
Stock dividend - 866
</TABLE>
* * * * * *
<PAGE>
REGENCY BANCORP
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 13, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned holder of Common Stock acknowledges receipt of a copy of
the Notice of Annual Meeting of Shareholders of Regency Bancorp and the
accompanying Proxy Statement dated April 18, 1997, and revoking any Proxy
heretofore given, hereby constitutes and appoints Steven F. Hertel and Roy Jura,
and each of them, with full power of substitution, as proxies to appear and vote
all of the shares of Common Stock of Regency Bancorp, a California corporation,
standing in the name of the undersigned which the undersigned could vote if
personally present and acting at the Annual Meeting of Shareholders of Regency
Bancorp, to be held at Piccadilly Inn Hotels, 2305 W. Shaw Avenue, Regency Room,
Fresno, California on Tuesday May 13, 1997 at 9:00 a.m. or at any postponements
of adjournments thereof, upon the following items set forth in the Notice of
Meeting and Proxy Statement and to vote according to their discretion on all
other matters which may be properly presented for action at the Meeting or any
postponements or adjournments thereof. The above-named proxy holders are hereby
granted discretionary authority to cumulate votes represented by the shares
covered by this Proxy in the election of directors.
UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED "FOR" THE FOLLOWING ITEMS:
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1 AND 2
PLEASE MARK YOUR VOTE AS INDICATED IN THIS EXAMPLE /X/
1. To elect directors.
/ / FOR all nominees listed below (except as marked to the contrary below).
/ / WITHHOLD authority to vote for all nominees listed below.
(INSTRUCTION: To withhold authority to vote for any individual nominee, strike
a line through the nominee's name listed below:
Joseph L. Castanos Steven F. Hertel Roy Jura
Barbara Palmquist David N. Price Daniel Ray
Daniel R. Suchy Wayman E. Watts
Item 2. To ratify the appointment of Deloitte & Touche LLP as the
Corporation's independent public accountants for the 1997 fiscal year.
FOR / / AGAINST / / ABSTAIN / /
*THIS PROXY IS SOLICITED BY AND ON BEHALF OF THE BOARD OF DIRECTORS AND
MAYBE REVOKED PRIOR TO ITS EXERCISE.
No. of Common Shares
We do/do not expect to attend this Meeting. DO / / DO NOT / /
Dated , 1997
---------------
SHAREHOLDER(S):
- ------------------------------
- ------------------------------
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE>
This has been a challenging year for Regency Bancorp, particularly concerning
the FDIC mandated divestiture of Regency Service Corporation's (RSC) real
estate investment activities. A significant reduction in the number of homes
and lots RSC needs to sell has been achieved, from 841 in 1994 to 310 at the
end of 1996. Late in the year, the FDIC acknowledged our efforts and extended
the deadline to be fully divested for up to two years.
Equally important was the continued growth and excellent performance of
Regency Bank and Regency Investment Advisors, Inc. (RIA). Not only did the
bank increase its deposit base 11.2 percent from the end of 1995, RIA's
pre-tax profitability grew 45 percent over 1995.
Based on the continuing strength of these two subsidiaries, the holding
company's 1996 net annual income was $1.01 million, a $2.78 million
improvement over our 1995 performance. Total assets grew 10.6 percent, ending
1996 with $181.1 million, the highest since Regency was founded in 1980.
Among other developments, it was with honor that I agreed to accept the
board's appointment as its chairman last November. However, at the same
meeting, the board regretfully granted Gary McDonald's request to step down
from the chairmanship of our company after 16 years at its helm. The board
and bank will forever be indebted to his tireless effort in making our
company the bank of choice for those in our marketplace who understand and
value local financial support and very personalized service.
Additionally, our company has been an Employee Stock Ownership Plan (ESOP)
company since 1987. In the last year, the ESOP, along with the employees'
401K plan, became the company's largest shareholder, now owning almost 13
percent of Regency's common stock. The large majority of the stock, however,
is still owned by local families and investors who trade over the counter
under symbol REFN.
For the few remaining years of this decade, we're excited about the many new
products and services we'll be introducing and the opportunities being
created in the financial services industry. We're confident our Regency
customers will enjoy the new choices they'll have in electronic banks growing
array of financial services. We look forward to the years ahead with optimism.
Respectfully Submitted,
Steven F. Hertel
Chairman of the Board
President and Chief Executive Officer
NEW DIRECTIONS
Regency Bank courier services continued to grow in 1996. The Regency couriers
now serve nearly 800 local businesses every week.
SMALL BUSINESS ADMINISTRATION LOAN LEADER
For the fourth straight year, the Regency Bank SBA Department led the 15-county
central California area in SBA guaranteed loans approved as well as the dollars
provided to fund local businesses. In addition, the bank was California's leader
in the number of loans guaranteed by the U.S. Department of Agriculture along
with two other community
<PAGE>
banks. These special credits encourage rural area development and are known
as Business and Industry Loans.
MADERA BRANCH EXCEEDS EXPECTATIONS
Regency Bancorp's Regency Bank opened its fourth banking office in mid-August
1996. The Madera branch is the bank's first full-service branch outside of
Fresno. It quickly grew and completed 1996 with more than $10 million in
deposits. The branch opened under the leadership of Jim Tustison, his staff
of professional bankers and with the assistance of Bill Alessini, owner of
William Carol Clothing and Fine Jewelry. Bill is a special advisor to the
bank, assisting in the introduction of Regency's specialized business
banking services.
REGENCY REWARDS FOR EXCELLENCE
Regency Bank was the financial industry representative to receive the first
annual "Excellence in Business Award for 1996" , presented by The Fresno Bee
and local chambers and business organizations. In July 1996, Steve Hertel,
President & CEO, was named the "1996 Central California Financial Services
Advocate of the Year" by the Fresno District Office of the SBA.
REGENCY INVESTMENT ADVISORS, INC.
Now a subsidiary of the holding company, Regency Investment Advisors, Inc.
(RIA) is an SEC-registered money management and financial consulting firm. It
had an outstanding year with a growth in profitability of almost 45 percent.
RIA's growth in assets under management was similarly successful. In August
1993, when established, the company managed $23.8 million for its clients.
Its goal for 1996 was to bring $75 million under management. At year end,
$77.2 million was achieved with more than $80 million under management by the
end of February 1997.
A strong asset base is vital to financial institutions as well as most
businesses. This chart reflects the consistent, positive growth Regency has
demonstrated since its inception. Note the significant increase that began
following the company's adoption of its ESOP in 1987.
Regency's deposits in 1996 grew at a healthy pace of 11.2 percent. This
infusion of dollars supported our ability to aggressively grow Commercial,
SBA, Real Estate Construction and other types of lending programs.
Reinvesting customer deposits locally provides jobs, improves our economy and
fulfills the objective of a community bank.
Loan quality at Regency Bank continued to set the standard for area banks. A
net total of $99.8 million in loans, an increase of 5.6 percent from 1995,
and a growth of almost 56 percent over the last five years was completed.
Though this is substantial growth, its importance, perhaps, is exceeded by
the quality of loans that have been made in the Fresno-Clovis-Madera areas.
In 1996, bank-only, non-accrual loans (exclusive of loans RSC has made to
facilitate divestiture) were only .05 percent. Year end, the bank-only,
non-accrual loan balance was just $51,000. Net charge-offs were less than
$170,000.
Within the total loan portfolio of $102.4 million at year's end, the bank had
approximately 55 percent in commercial credits; 23 percent in real estate
construction loans; 13 percent
<PAGE>
in term real estate loans, and 9 percent in consumer credits from VISA
cards, to auto, equity, and medical procedure loans.
Officers
Regency Bank
Steven F. Hertel
Chairman of the Board
President
Chief Executive Officer
Steven R. Canfield
Executive Vice President and
Chief Financial Officer
Robert J. Longatti
Executive Vice President and
Chief Credit Officer
Marvell French
Senior Vice President
Sales Administration Manager
William R. Goodrich
Vice President
Director of Marketing
Rick L. Hopkins
Vice President
Systems/Operations Manager
Karen S. Murphy
Vice President
Real Estate Loans
Kerin L. Nixon
Vice President
Bank Operations Manager
Frederick L. Sandow
Vice President
Modesto Loan Production Office
Scott C. Stanley
Vice President
Finance
Dorothy M. Thomas
Vice President
SBA Department Manager
James E. Tustison, Jr.
Vice President
Madera Area Manager
Louis H. Weaver
Vice President
Loan Supervision Manager
<PAGE>
Board of Directors
Steven F. Hertel
Chairman of the Board
David N. Price
Vice Chairman of the Board
Joseph L. Castanos
Director
Gary L. McDonald
Director
Roy Jura
Secretary
Barbara Palmquist
Director
JoAnn Price
Director
Daniel R. Suchy
Director
Wayman E. Watts
Director
Sumio Kubo
Director Emeritus
Subsidiaries
Regency Investment Advisors, Inc.
Alan R. Graas, President
7060 North Fresno Street
Fresno, CA 93720
(209) 438-2640
FAX (209) 438-2694
Regency Service Corp.
7060 N. Fresno Street
Fresno, CA 93720
(209) 438-2600
FAX (209) 438-2699
Branch
Offices
Herndon Office
Headquarters
7060 North Fresno Street
Fresno, CA 93720
(209) 438-2600
FAX (209) 438-2699
Palm Office
5240 North Palm Avenue
<PAGE>
Fresno, CA 93704
(209) 438-2650
FAX (209) 438-2687
Madera Branch
126 West "D" Street
Madera, CA 93638
(209) 673-9370
FAX (209) 673-9654
Mini Branch
Fig Garden Village
Shopping Center
726 West Shaw Avenue
Fresno, CA 93704
(209) 438-2680
FAX (209) 438-2690
Market
Makers
Van Kasper & Company
Jack Block
600 California Street, Suite 1700
San Francisco, CA 94108
(800) 652-1747
Hoefer & Arnett
Marc Arnett
353 Sacramento Street, 10th Floor
San Francisco, CA 94111
(800) 346-5544
Banc Stock Financial Services, Inc.
Anthony Reilly
6230 Busch Blvd. #201
Columbus, OH 43229
(800) 874-226
Sutro & Company, Inc.
5250 N. Palm Ave.
Fresno, CA 93704
(209) 447-8200
