<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998 .
---------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
---------------------- ----------
COMMISSION FILE NUMBER 000-23815
------------
REGENCY BANCORP
---------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0378956
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organizations) Identification No.)
7060 N. FRESNO STREET, FRESNO, CALIFORNIA 93720
----------------------------------------- -----
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (209) 438-2600.
----------------
None
----
(Former name, former address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for the shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
---- ----
As of July 28,1998, the registrant had 2,624,374 shares of Common Stock
outstanding.
The Exhibit Index is located on page 37.
This report contains a total of 47 pages of which this is page one.
<PAGE>
REGENCY BANCORP
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
June 30, 1998, and December 31, 1997. . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income and Comprehensive Income
Three Months Ended and Six Months Ended June 30, 1998 and 1997 . . . . 4
Consolidated Statements of Shareholders' Equity
Six Months Ended June 30, 1998 and 1997 . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997 . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . 34
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . 34
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . 34
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 35
</TABLE>
2
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
PART I ITEM 1. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA) JUNE 30, 1998 DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 13,608 $ 16,893
Federal funds sold 3,500 3,000
- ----------------------------------------------------------------------------------------------------
Total Cash and Equivalents 17,108 19,893
- ----------------------------------------------------------------------------------------------------
Interest bearing deposits in other banks 76 232
Securities available-for-sale 37,098 36,986
Loans 142,381 129,635
Allowance for credit losses (2,614) (2,219)
Deferred loan fees & discounts (979) (986)
- ----------------------------------------------------------------------------------------------------
Net Loans 138,788 126,430
- ----------------------------------------------------------------------------------------------------
Investments in real estate - 4,338
Other real estate owned 572 503
Cash surrender value of life insurance 3,108 3,038
Premises and equipment, net 1,639 1,751
Accrued interest receivable and other assets 7,243 5,070
- ----------------------------------------------------------------------------------------------------
Total Assets $ 205,632 $ 198,241
- ----------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing transaction accounts $ 44,448 $ 46,744
Interest bearing transaction accounts 51,731 48,616
Savings accounts 38,546 36,498
Time Deposits $100,000 and over 31,524 28,643
Other time deposits 16,069 15,778
- ----------------------------------------------------------------------------------------------------
Total Deposits 182,318 176,279
Short term borrowings - -
Notes Payable and capital lease obligation 528 509
Other liabilities 2,868 2,719
- ----------------------------------------------------------------------------------------------------
Total Liabilities $ 185,714 $ 179,507
- ----------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Note 6)
Shareholders' Equity:
Preferred stock, no par value;
1,000,000 shares authorized;
no shares issued or outstanding
Common stock, no par value; 5,000,000
shares authorized, 2,624,374 and 2,621,125 shares 15,229 15,203
issued and outstanding in 1998 and 1997,
respectively 4,475 3,327
Retained earnings 214 204
Net unrealized gain on available-for-sale securities,
net of taxes of $155 in 1998 and $148 in 1997
- ----------------------------------------------------------------------------------------------------
Total Shareholders' Equity 19,918 18,734
- ----------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 205,632 $ 198,241
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA) FOR THE THREE MONTHS FOR THE SIX MONTHS
- ------------------------------------------------------------------------------------------------------------------
ENDED JUNE 30, ENDED JUNE 30,
- ------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans (including fees) $ 4,111 $ 2,904 $ 7,654 $ 5,704
Investment securities:
Taxable 431 580 907 1,094
Tax exempt 80 34 151 54
- ------------------------------------------------------------------------------------------------------------------
Total Investment Interest Income 511 614 1,058 1,148
Other 72 141 106 255
- ------------------------------------------------------------------------------------------------------------------
Total Interest Income 4,694 3,659 8,818 7,107
- ------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 1,292 1,310 2,534 2,569
Other 21 20 62 40
- ------------------------------------------------------------------------------------------------------------------
Total Interest Expense 1,313 1,330 2,596 2,609
- ------------------------------------------------------------------------------------------------------------------
Net interest income 3,381 2,329 6,222 4,498
Provision for credit losses 150 835 275 835
- ------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for credit losses 3,231 1,494 5,947 3,663
- ------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Gain-on-sale of loans 207 216 222 486
Depositor service charges 118 96 230 194
Income from investment management services 229 188 445 402
Gain (loss) on-sale of securities - (36) 5 (34)
Gain-on-sale of assets - - - 4
Servicing fees on loans sold 10 81 79 167
Other 112 74 182 181
- ------------------------------------------------------------------------------------------------------------------
Total Noninterest Income 676 619 1,163 1,400
- ------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Loss from investments in real estate 221 3,350 214 3,590
Salaries and related benefits 1,245 1,233 2,441 2,397
Occupancy 379 411 739 814
FDIC insurance and regulatory assessments 115 22 228 44
Marketing 144 142 270 232
Professional services 159 157 331 278
Director's fees and expenses 46 80 99 176
Management fees for real estate projects - 4 - 112
Supplies, telephone & postage 83 84 164 163
Other 423 323 633 545
- ------------------------------------------------------------------------------------------------------------------
Total Noninterest Expense 2,815 5,806 5,119 8,351
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes (benefit) 1,092 (3,693) 1,991 (3,288)
Provision (benefit) for income taxes 463 (1,551) 843 (1,381)
- ------------------------------------------------------------------------------------------------------------------
Net Income/(loss) 629 (2,142) 1,148 (1,907)
Other comprehensive income, net of tax:
Unrealized gain on securities 5 215 10 74
- ------------------------------------------------------------------------------------------------------------------
Comprehensive income/(loss) $ 634 $ (1,927) $ 1,158 $ (1,833)
Earnings (loss) per common share $ .24 $ (1.15) $ .44 $ (1.03)
Basic $ .22 $ (1.15) $ .41 $ (1.03)
Diluted
Shares on which earnings per common share were based 2,624,000 1,859,000 2,623,000 1,845,000
Basic 2,807,000 1,859,000 2,796,000 1,845,000
Diluted
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------------------------------------------------
Common Common Net
Stock Stock Retained Unrealized
(In thousands) Number of Shares Amount Earnings Gain (Loss) Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 1,818 $ 8,868 $ 4,601 $ 1 $ 13,470
- --------------------------------------------------------------------------------------------------------------------------
Issuance of common stock
to employee stock ownership plan 36 333 - - 333
Issuance of common stock
under stock option plan 17 75 - - 75
Net change in unrealized gain on
available-for-sale securities net of
taxes of $53,000 - - - 74 74
Net (loss) - - (1,907) - (1,907)
- --------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 1,871 $ 9,276 $ 2,694 $ 75 $ 12,045
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Common Common Net
Stock Number of Stock Retained Unrealized
(In thousands) Shares Amount Earnings Gain (Loss) Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 2,621 $ 15,203 $ 3,327 $ 204 $ 18,734
- --------------------------------------------------------------------------------------------------------------------------
Issuance of common stock
under stock option plan 3 26 - - 26
Net change in unrealized gain on
available-for-sale securities net of
taxes of $7,000 - - - 10 10
Net Income - - 1,148 - 1,148
- --------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 2,624 $ 15,229 $ 4,475 $ 214 $ 19,918
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS) FOR THE SIX MONTHS ENDED JUNE 30, 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Increase (decrease) in cash equivalents:
Net income/(loss) $ 1,148 $ (1,907)
Adjustments:
Provision for credit losses 275 835
Provision for losses on real estate - 635
Provision for OREO losses 131 29
Depreciation and amortization 263 315
Deferred income taxes 359 (286)
(Increase) decrease in interest receivable and other assets (188) 1,096
Increase in surrender value of life insurance (70) (65)
Distributions of income from real estate partnerships 213 7
Equity in loss of real estate partnerships 38 218
Decrease in real estate held for sale 4,087 4,169
Increase (decrease) in other liabilities 168 (1,392)
Gain on sale of loans held-for-sale (221) (227)
Proceeds from sale of loans held-for-sale 7,481 5,587
Additions to loans held-for-sale (10,202) (3,884)
Gain on sale of premises and equipment and OREO - (6)
Loss on sale of furniture and equipment - 16
(Gain)/loss on sale of investment securities (5) 36
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 3,477 5,176
- ----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of available-for-sale securities (12,422) (12,820)
Proceeds from sales of available-for-sale securities 5 2,102
Proceeds from maturities of available-for-sale securities 12,283 6,848
Net increase in loans (12,686) (12,159)
Net decrease (increase) in other short-term investments 156 98
Proceeds from sale of OREO 444 203
Capital distributions from real estate partnerships - 200
Purchases of premises and equipment (107) (82)
Proceeds from sale of premises and equipment - 34
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (12,327) (15,576)
- ----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in time deposits accounts 3,171 13,875
Net increase (decrease) in other deposits 2,868 (2,815)
Payments on notes payable - (4,610)
Proceeds from notes payable - 2,179
Proceeds from the issuance of common stock under
employee stock option plan 26 75
Proceeds from the issuance of common stock to
employee stock ownership plan - 333
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 6,065 9,037
- ----------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,785) (1,363)
- ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,893 19,833
- ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 17,108 $ 18,470
- ----------------------------------------------------------------------------------------------------
CASH PAID DURING THE PERIOD:
Interest $ 2,875 $ 1,762
Income taxes 28 -
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Transfer of loans held-for-sale to accounts receivable 2,350 -
Transfer of loans to other real estate owned 644 233
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of Regency Bancorp and its wholly-owned subsidiaries (the
"Company"). Regency Bancorp is a California corporation organized to act as
the holding company for Regency Bank (the "Bank") and Regency Investment
Advisors, Inc. ("RIA"). RIA provides investment management and consulting
services. The Bank has one wholly-owned subsidiary, Regency Service
Corporation, a California corporation ("RSC"), that has engaged in the
business of real estate development primarily in the Fresno/Clovis area. All
significant intercompany balances and transactions have been eliminated in
consolidation.
These unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles on a basis
consistent with the accounting policies reflected in the audited consolidated
financial statements of the Company included in the Annual Report on Form
10-K for the year ended December 31, 1997. They do not, however, include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
the unaudited interim consolidated financial statements reflect all
adjustments (all of which are of a normal, recurring nature) necessary for a
fair presentation of the results for the interim periods presented.
Operating results for the interim periods presented are not necessarily
indicative of the results that may be expected for any other interim period
or for the year as a whole.
NOTE 2. - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting of Comprehensive Income."
This Statement requires that all items recognized under accounting standards
as components of comprehensive earnings be reported in an annual financial
statement that is displayed with the same prominence as other annual
financial statements. This Statement also requires that an entity classify
items of other comprehensive earnings by their nature in an annual financial
statement. Accordingly, the Company included unrealized gains and losses on
available-for-sale securities in comprehensive earnings in the accompanying
statement of operations for the three and six months ended June 30, 1998 and
1997.
In June 1997, the FASB adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes annual
and interim reporting standards for an enterprises business segments and
related disclosures about its products, services, geographic areas and major
customers. This Statement is effective for fiscal years after December 15,
1997. In the initial year of adoption, the Statement applies to annual
financial statements only and does not apply to interim financial statements.
In the year subsequent to adoption, interim financial statements will be
required to include segment information. Adoption
7
<PAGE>
of this Statement will not impact the Company's consolidated financial
position, results of operations or cash flows.
NOTE 3. - Investment Securities
During the period between December 31, 1997, and June 30, 1998, the
Company recorded a net increase in the value of its available-for-sale
portfolio of $10,000 net of applicable taxes. This change is reflected as a
change in shareholders' equity in the Consolidated Statement of Shareholders'
Equity.
Following is a comparison of the amortized cost and approximate fair value of
securities available-for-sale:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES JUNE 30, 1998 DECEMBER 31, 1997
- --------------------------------------------------------------------------------
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasuries $ 2,000 $ 2,002 $ 2,007 $ 2,012
U.S. Government Agencies 16,449 16,520 17,431 17,489
Mortgage-backed securities 11,157 7,104 11,541 11,647
State and Political Subdivisions 6,909 11,258 5,441 5,624
Equity Securities 214 214 214 214
- --------------------------------------------------------------------------------
Total $ 36,729 $ 37,098 $ 36,634 $ 36,986
- --------------------------------------------------------------------------------
</TABLE>
At June 30, 1998 and December 31, 1997, the Company held no securities
classified as held-to-maturity.
8
<PAGE>
NOTE 4. - LOANS
The following table presents a breakdown of the Company's loan portfolio in
both dollars outstanding, as well as, a percentage of total loans. Further
discussion of the Company's loan portfolio can be found in "Item No. 2
- -Management's Discussion and Analysis of Financial Condition and Results of
Operations - Balance Sheet Analysis".
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) JUNE 30, 1998 DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------
Percent of Percent of
Amount Total Loans Amount Total Loans
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 92,438 64.9% $ 75,487 58.3%
Real estate mortgage 17,181 12.1% 14,900 11.5%
Real estate construction 22,972 16.1% 30,128 23.2%
Consumer and other 9,790 6.9% 9,120 7.0%
Subtotal $142,381 100.0% $ 129,635 100.0%
- ---------------------------------------------------------------------------------------------
Less:
Unearned discount 547 623
Deferred loan fees 432 363
Allowances for credit losses 2,614 2,219
- ---------------------------------------------------------------------------------------------
Total loans, net $138,788 $ 126,430
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
NOTE 5. - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available
to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing net income available to common shareholders by the weighted average
common shares outstanding during the period plus potential common shares
outstanding. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. Diluted loss per common share
is equal to basic loss per common share for the three and six month periods
ended June 30, 1997 because the effect of potentially dilutive securities
under the stock option plans were antidilutive.
9
<PAGE>
The following table provides a reconciliation of the numerator and
denominator of the basic EPS computation with the numerator and denominator
of the diluted EPS computation for the three and six month periods ended June
30, 1998 and 1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE SIX MONTHS
(IN THOUSANDS, EXCEPT PER SHARE DATA) ENDED JUNE 30, ENDED JUNE 30,
- ------------------------------------------------- ----------------------- ----------------------
1998 1997 1998 1997
- ------------------------------------------------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic EPS Computation:
Net income (loss) $ 629 $ (2,142) $ 1,148 $ (1,907)
Average common shares outstanding 2,624,000 1,859,000 2,623,000 1,845,000
- ------------------------------------------------- ---------- --------- --------- ---------
Basic EPS $ .24 $ (1.15) $ .44 $ (1.03)
- ------------------------------------------------- ---------- --------- --------- ---------
Diluted EPS Computation:
Net income (loss) $ 629 $ (2,142) $ 1,148 $ (1,907)
Average common shares outstanding 2,624,000 1,859,000 2,623,000 1,845,000
Stock options and warrants 183,000 - 173,000 -
- ------------------------------------------------- ---------- --------- --------- ---------
2,807,000 1,859,000 2,796,000 1,845,000
- ------------------------------------------------- ---------- --------- --------- ---------
Diluted EPS $ .22 $ (1.15) $.41 $ (1.03)
- ------------------------------------------------- ---------- --------- --------- ---------
- ------------------------------------------------- ---------- --------- --------- ---------
</TABLE>
Options to purchase 40,000 and 70,000 shares of common stock
at various prices per share were outstanding at June 30, 1998 and 1997,
respectively, but were not included in diluted EPS because the options
exercise price was greater than the average market price of the common shares
for the periods then ended.
NOTE 6. - COMMITMENTS AND CONTINGENT LIABILITIES
As a result of an examination of the Bank as of June 30, 1997, the
FDIC determined that the Company required special supervisory attention. The
Bank consented to an FDIC Order on October 28, 1997. The FDIC Order is a
"cease-and-desist order" for the purposes of Section 8 of the Federal Deposit
Insurance Act, and violation of the FDIC Order by the Bank can give rise to
enforcement proceedings under Section 8 of the Federal Deposit Insurance Act.
In addition, as a result of an examination of the Bank as of June 30, 1997,
the California Department of Financial Institutions ("CDFI") and the Bank
have stipulated to the issuance of the State Order by the Department of
Financial Institutions which State Order is a final order pursuant to Section
1913 of the California Financial Code. These orders, their specific
conditions, and the Banks actions to comply are discussed in greater detail
under the heading "Administrative Orders" on pages 12 and 13, below.
10
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed in this Report on Form 10-Q are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. Such
risks and uncertainties include, but are not limited to, those described in
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Changes to such risks and uncertainties, which could impact
future financial performance, include, among other things, (1) competitive
pressures in the banking industry; (2) changes in the interest rate
environment; (3) general economic conditions, either nationally or
regionally; (4) changes in the regulatory environment; (5) changes in
business conditions and inflation; and (6) changes in security markets.
Therefore, the information set forth therein should be carefully considered
when evaluating the business prospects of the Company and the Bank.
FINANCIAL SUMMARY
The first six months of 1998 were marked by substantially improved
earnings, record asset levels, record loan levels, and the reduction of RSC's
real estate investment assets from $11 million at June 30, 1997 to a net
balance of $0 at June 30, 1998. Additionally, RIA's client assets under
management topped $100 million for the first time, the Bank took steps to
become both a Federal Reserve and Federal Home Loan Bank member, and Regency
Bancorp stock began trading on the Nasdaq national market system.
At June 30, 1997, RSC held 260 single family real estate units for sale
representing assets of $11,000,000. During the last twelve months, RSC has
sold 255 of these homes and lots leaving five units remaining at June 30,
1998. More importantly the carrying value of the five units remaining has
been reduced to $0 on the Company's books. This is the first time since the
end of 1984, thirteen and a half years ago, that the Company has not carried
real estate investment assets on its balance sheet.
The reduction of RSC's holdings has allowed the Company to increase its
earning assets, most significantly in the loan portfolio. Total loans
increased to $142,381,000 at June 30, 1998, up 9.9% from year-end and up
26.6% in the last twelve months. During the last twelve months ending June
30, 1998, interest earning assets have increased by $27,200,000, while the
Company's total assets have grown by $18,700,000 reaching a record
$205,632,000 at quarter end. The tremendous growth in loans and other
earning assets has allowed the Company to improve its interest margin and
subsequently its bottom line income.
For the first six months ending June 30, 1998, consolidated net income
totaled $1,148,000 compared to a net loss of $(1,907,000) for the period
ended June 30, 1997, an increase of $3,052,000. Net income for the second
quarter of 1998 increased to $629,000 as compared to a net loss of
$(2,142,000) in the second quarter of 1997. Earnings/(loss) per weighted
average common share were $.24 for the second quarter of 1998 and $.44 for
the first six months of 1998, compared to a $(1.15) per share loss in the
second quarter of 1997 and $(1.03) for the six month period ended
11
<PAGE>
June 30, 1997. The Company paid no cash dividends in either the second
quarter of 1998 or 1997. The Company's return on average assets improved to
1.19% for the first six months of 1998 compared to (2.12)% for the first six
months of 1997. Return on average common equity for the first six months of
1998 was 12.0% compared to (27.8)% for the same period in 1997.
In addition to improving the revenue side of the income statement,
management and staff have focused attention on expenses with the goal to
continually improve efficiency by controlling operating expense as the
Company grows. Over the past year, operating efficiency has shown steady
improvement. Noninterest expense to average assets, one measurement of
efficiency, has dropped from 9.28% for the first six months of 1997 to 5.31%
for the first six months of 1998. Detail for the various expense items that
make up total noninterest expense can be found on pages 23 and 24. At June
30, 1998, the Company's total risk-based capital ratio was 14.90% while the
leverage ratio was 9.20%.
During the second quarter of 1998, the Bank filed an application to
become a member of the Federal Reserve System. In May 1998, the Federal
Reserve Bank ("FRB") conducted a pre-membership examination and concurrently
the California Department of Financial Institutions ("CDFI") conducted their
regularly scheduled exam as well. Based upon the comments made at the
conclusion of the examination, the Bank anticipates becoming a member of the
Federal Reserve System during the third quarter of 1998. Additionally,
management anticipates that the administrative orders, described below, will
be removed prior to year end 1998.
ADMINISTRATIVE ORDERS
As a result of an examination of the Bank as of June 30, 1997, the FDIC
determined that the Company required special supervisory attention. The Bank
consented to an FDIC Order on October 28, 1997. The FDIC Order is a
"cease-and-desist order" for the purposes of Section 8 of the Federal Deposit
Insurance Act, and violation of the FDIC Order by the Bank can give rise to
enforcement proceedings under Section 8 of the Federal Deposit Insurance Act.
The FDIC Order provides that the Bank must: (a) retain qualified
management; (b) increase on or before December 31, 1997, and thereafter
maintain Tier 1 capital equal to the greater of $14,000,000 or the equivalent
of a Tier 1 capital to average assets ratio of at least 7.0%; (c) eliminate
from its books classified assets not previously collected or charged off; (d)
not extend additional credit to borrowers with previous classified or charged
off credits which are uncollected; (e) not engage in any activities not
permissible for a national bank subsidiary, except that the Bank and RSC may
continue real estate activities as permitted by the FDIC's letter of November
29, 1996, to the Bank requiring, among other things, that RSC divest all
properties held by it not later than December 31, 1998; (f) review the
adequacy of the Bank's allowance for loan and lease losses and establish a
comprehensive policy for determining its adequacy on a quarterly basis; (g)
develop a plan to control overhead and other expenses and restore the Bank to
profitability; (h) prepare a business/strategic plan for the operation of the
Bank acceptable to the FDIC; (i) not pay cash dividends in any amount except
with the prior written consent of the FDIC and the CDFI; and (j) furnish
quarterly written progress reports to
12
<PAGE>
the FDIC and the CDFI detailing the form and manner of any actions taken to
comply with the Administrative Orders.
As a result of an examination of the Bank as of June 30, 1997, the CDFI
and the Bank have stipulated to the issuance of the State Order by the
Department of Financial Institutions which State Order is a final order
pursuant to Section 1913 of the California Financial Code.
The State Order provides that the Bank must: (a) retain management and
maintain a Board of Directors for the Bank and RSC acceptable to the CDFI and
FDIC; (b) increase and maintain tangible shareholders' equity (shareholders'
equity less intangible assets) to an amount not less than the greater of (i)
7% of its tangible assets (total assets less intangible assets) or (ii)
$14,000,000; (c) maintain an adequate allowance for loan and lease losses;
(d) cause RSC to maintain an adequate reserve for losses on its real estate
investments; (e) cause RSC to reduce the assets classified as substandard so
that the amount of such assets shall not exceed $10,115,000 by December 31,
1997, $8,750,000 by March 31, 1998, $7,100,000 by June 30, 1998 and
$4,900,000 by September 30, 1998; (f) develop, adopt and implement a plan
acceptable to the CDFI for divestiture of RSC and all of RSC's real estate
investments by not later than December 31, 1998; (g) not make any
distribution to shareholders except with the prior written approval of the
CDFI; and (h) furnish written progress reports within thirty (30) days after
the end of each quarter to the CDFI and the FDIC describing actions to comply
with the State Order.
As of the date of this Form 10-Q, the Company and the Bank have taken
certain actions to comply with the Administrative Orders, which included
raising capital through a private offering, which closed in the fourth
quarter of 1997. Based upon comments made at the conclusion of the FRB/CDFI
joint examination in the second quarter of 1998, management believes the Bank
is in full compliance with the orders and anticipates the orders being
removed prior to year-end 1998.
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.
13
<PAGE>
CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND INTEREST RATES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
FOR THE THREE MONTHS ENDED JUNE 30, 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Rate Interest Balance Rate Interest
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (1) $ 137,823 11.96% $ 4,111 $ 105,732 11.02% $ 2,904
Investment securities (2) 34,140 6.01% 511 37,381 6.59% 614
Federal funds sold & other 5,315 5.49% 72 10,274 5.50% 141
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest-earning assets $ 177,278 10.62% $ 4,694 $ 153,387 9.57% $ 3,659
- ---------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets:
Allowance for credit losses (2,386) (1,677)
Cash and due from banks 11,486 9,000
Real estate investments 1,118 15,453
OREO 872 409
Premises and equivalent, net 1,678 2,143
Cash surrender value of life insurance 3,086 2,949
Accrued interest receivable and other assets 4,967 4,570
- ---------------------------------------------------------------------------------------------------------------------------
Total Average Assets $ 198,099 $ 186,234
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities:
Transaction accounts $ 48,977 2.35% $ 286 $ 48,913 2.50% $ 305
Savings accounts 37,849 4.04% 381 33,552 4.04% 338
Time deposits 46,532 5.38% 625 48,590 5.51% 667
Federal funds purchased , notes payable
and other 522 16.48% 21 3,864 2.08% 20
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing liabilities $ 133,880 3.94% $ 1,313 $ 134,919 3.95% $ 1,330
- ---------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Transaction accounts 41,416 35,042
Other liabilities 3,140 2,257
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 178,436 172,218
Shareholders' Equity:
Common stock 15,230 9,208
Retained earnings 4,243 4,922
Unrealized gain / (loss) on investment
securities 190 (114)
- ---------------------------------------------------------------------------------------------------------------------------
Total Shareholders Equity 19,663 $ 14,016
- ---------------------------------------------------------------------------------------------------------------------------
Total average liabilities and
shareholders' equity $ 198,099 $ 186,234
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 3,381 $ 2,329
- ---------------------------------------------------------------------------------------------------------------------------
Interest income as a percentage of average
interest-earning assets 10.62% 9.57%
Interest expense as a percentage of average
interest-earning assets (2.97%) (3.48%)
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Margin 7.65% 6.09%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</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
$298,000 and $320,000 for the three months ended June 30, 1998 and 1997,
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.
14
<PAGE>
CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND INTEREST RATES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
FOR THE THREE MONTHS ENDED JUNE 30, 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Rate Interest Balance Rate Interest
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (1) $ 134,362 11.49% $7,654 $ 104,159 11.04% $ 5,704
Investment securities (2) 34,881 6.12% 1,058 35,092 6.60% 1,148
Federal funds sold & other 3,969 5.39% 106 9,532 5.39% 255
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest-earning assets $ 173,212 10.26% $ 8,818 $ 148,783 9.63% $ 7,107
- ---------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets:
Allowance for credit losses (2,335) (1,675)
Cash and due from banks 11,056 8,834
Real estate investments 1,952 15,744
OREO 686 413
Premises and equivalent, net 1,714 2,196
Cash surrender value of life insurance 3,068 2,932
Accrued interest receivable and other assets 4,917 4,260
- ---------------------------------------------------------------------------------------------------------------------------
Total Average Assets 194,270 $ 181,487
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities:
Transaction accounts $ 48,146 2.35% $ 561 $ 47,999 2.55% $ 607
Savings accounts 37,220 4.05% 748 31,378 4.07% 634
Time deposits 45,950 5.38% 1,225 48,690 5.50% 1,328
Federal funds purchased, notes payable
and other 1,212 10.67% 62 4,259 1.89% 40
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing liabilities $ 132,528 3.95% $ 2,596 $ 132,326 3.98% $ 2,609
- ---------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Transaction accounts 39,733 33,021
Other liabilities 2,652 2,291
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 174,913 167,638
Shareholders' Equity:
Common stock 15,217 9,096
Retained earnings 3,919 4,815
Unrealized gain / (loss) on investment
securities 221 (62)
- ---------------------------------------------------------------------------------------------------------------------------
Total Shareholders Equity $ 19,357 $ 13,849
- ---------------------------------------------------------------------------------------------------------------------------
Total average liabilities and
shareholders' equity $ 194,270 $ 181,487
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 6,222 $ 4,498
- ---------------------------------------------------------------------------------------------------------------------------
Interest income as a percentage of average
interest-earning assets 10.26% 9.63%
Interest expense as a percentage of average
interest-earning assets (3.02%) (3.54%)
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Margin 7.24% 6.09%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</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
$576,000 and $606,000 for the six months ended June 30, 1998, and 1997,
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.
15
<PAGE>
Changes in the interest margin can be attributed to changes in the yield
on interest earning assets, the rate paid on interest bearing liabilities, as
well as, changes in the volume of interest earning assets and interest
bearing liabilities. The following tables present the dollar amount of
certain changes in interest income and expense for each major component of
interest earning assets and interest bearing liabilities and the difference
attributable to changes in average rates and volumes for the periods
indicated.
VOLUME/RATE ANALYSIS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO 1997 VOLUME (1) RATE (1) TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Interest Earnings Variance Analysis
Increase (decrease) in interest income:
Loans $ 940 $ 267 $ 1,207
Investment securities (2) (51) (52) (103)
Federal funds sold and other (67) (2) (69)
- -----------------------------------------------------------------------------------------------------
Total 822 213 1,035
- -----------------------------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Transaction accounts - (19) (19)
Savings accounts 43 - 43
Certificates of deposit (28) (14) (42)
Federal funds purchased and other - 1 1
- -----------------------------------------------------------------------------------------------------
Total 15 (32) (17)
- -----------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income $ 807 $ 245 $ 1,052
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) A change due to both volume and rate has been allocated to the change in
volume and rate in proportion to the relationship of the dollar amount of the
change in each.
(2) Changes calculated on nontaxable securities have not considered tax
equivalent effects.
Net interest income before the provision for credit losses was
$3,381,000 for the second quarter of 1998 as compared to $2,329,000 for the
comparable period of 1997, an increase of $1,052,000 or 45.2%. The net
interest margin for the second quarter ended June 30, 1998 was 7.65% compared
to 6.09% during the comparable period in 1997. The increase in net interest
income and net interest margin was primarily attributable to a larger earning
asset base, as well as, a significant increase in the net interest margin.
The increase in earning assets, primarily in the loan portfolio, was the
result of the Bank holding new production SBA and B&I loans rather than
selling these loans on the secondary market. This shift to a greater
proportion of loans compared to lower yielding investments and federal funds
sold resulted in the Company's earning asset yield rising to 10.62% during
the second quarter of 1998, compared to 9.57% in the second quarter of 1997.
The yield on earning assets was also augmented by a lower number of
nonaccrual loans and the recovery of a significant amount of interest on RSC
loans that had previously been on nonaccrual. This recovery of interest
during 1998's second quarter had the effect of increasing the net interest
margin approximately 67 basis points on average. In addition to the
increase in earning assets and earning asset yield, the Company was able to
lower its cost of funds primarily through the use of cash liberated from the
sale of RSC's real estate investments.
16
<PAGE>
Average interest-earning assets for the second quarter ended June 30,
1998 increased to $177,278,000 from $153,387,000 for the comparable period in
1997 an increase of $23,891,000 or 15.6%. Average loans increased by
$32,091,000 to $137,823,000 representing 77.7% of average interest-earning
assets for the second quarter of 1998, compared to $105,732,000 or 68.9% for
the second quarter of 1997. The yield on average loans increased to 11.96%
for the second quarter of 1998, from 11.02% for the comparable period in
1997, primarily due to recoveries of nonaccrued interest on RSC loans.
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 decreased to 6.01% for the
second quarter ended June 30, 1998, from 6.59% in the comparable period in
1997. On a fully tax equivalent basis the yield on investments was 6.55% for
the second quarter ended June 30, 1998 compared to 6.74% for the second
quarter ended June 30, 1997. The primary causes of the decline in investment
yield were older, higher yielding bonds maturing and being replaced by lower
yielding investments due to lower interest rates in the bond market and a
flat yield curve. Excess liquidity is invested in federal funds sold on an
overnight basis. During 1998, lower balances were maintained in federal
funds sold in an effort to maximize the net interest margin. The yield on
federal funds sold was 5.49% in the second quarter of 1998 compared to 5.50%
in the comparable period in 1997.
Average interest-bearing liabilities for the second quarter ended June
30, 1998 decreased to $133,880,000 from $134,919,000 for the comparable
period in 1997, a decline of $1,039,000 or 0.8%. For the second quarter
ended June 30, 1998, the average interest rate paid on interest-bearing
liabilities decreased slightly to 3.94% from an average rate of 3.95% paid
during the second quarter of 1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO 1997 VOLUME (1) RATE (1) TOTAL
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Interest Earnings Variance Analysis
Increase (decrease) in interest income:
Loans $ 1,712 $ 238 $ 1,950
Investment securities (2) (7) (83) (90)
Federal funds sold and other (149) - (149)
- --------------------------------------------------------------------------------------------------------
Total 1,556 155 1,711
- --------------------------------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Transaction accounts 2 (48) (46)
Savings accounts 117 (3) 114
Certificates of deposit (74) (29) (103)
Federal funds purchased and other (4) 26 22
- --------------------------------------------------------------------------------------------------------
Total 41 (54) (13)
- --------------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income $ 1,515 $ 209 $ 1,724
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</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.
17
<PAGE>
Net interest income before the provision for credit losses was
$6,222,000 for the first six months of 1998 as compared to $4,498,000 for the
first six months of 1997, an increase of $1,724,000 or 38.3%. The increase
was primarily attributable to a larger earning asset base, as well as, an
increase in the net interest margin. The increase in earning assets,
primarily in the loan portfolio, was the result of the Bank retaining SBA and
B&I loans rather than selling these loans on the secondary market. This
shift of assets into a larger loan portfolio resulted in the Company's
earning asset yield rising to 10.26% during the first six months of 1998,
compared to 9.63% for the first six months of 1997. The net interest margin
for the six months ended June 30, 1998 was 7.24% compared to 6.09% during the
comparable period in 1997. The increased yield on earning assets and net
interest margin was augmented by a lower number of nonaccrual loans and the
recovery of interest that had previously been on nonaccrual. This recovery
of interest during 1998's second quarter had the effect of increasing the net
interest margin approximately 34 basis points on average for the first six
months of 1998
Average interest-earning assets for the six months ended June 30, 1998
increased to $173,212,000 from $148,783,000 for the comparable period in
1997, an increase of $24,429,000 or 16.4%. Average loans increased by
$30,203,000 to $134,362,000 representing 77.6% of average interest-earning
assets for the first six months of 1998, compared to $104,159,000 or 70.0%
for the first six months of 1997. The yield on average loans increased to
11.49% for the first six months of 1998, from 11.04% for the comparable
period in 1997, primarily due to recoveries of nonaccrued interest on RSC
loans.
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 decreased to 6.12% for the
six-month period ended June 30, 1998, from 6.60% in the comparable period in
1997. On a fully tax equivalent basis the yield on investments was 6.57% for
the six months ended June 30, 1998, compared to 6.76% for the six months
ended June 30, 1997. The primary cause of the decline in investment yield
was lower interest rates in the bond market and a flat yield curve.
Additionally, the Company increased the percentage of tax free municipal
bonds held in its investment portfolio. These bonds typically carry lower
coupons, however the interest earned is exempt from federal tax. Excess
liquidity is invested in federal funds sold on an overnight basis. During
1998, lower balances were maintained in federal funds sold in an effort to
maximize the net interest margin. The yield on federal funds sold for the
first six months of 1998 and 1997 was identical at 5.39%.
Average interest-bearing liabilities for the six months ended June 30,
1998 grew very little to $132,528,000 from $132,326,000 for the comparable
period in 1997, an increase of $202,000 or 0.2%. For the first six months
ended June 30, 1998, the average interest rate paid on interest-bearing
liabilities decreased to 3.95% from an average rate of 3.98% paid during the
first six months of 1997.
18
<PAGE>
NONINTEREST INCOME
The Company receives a significant portion of its income from
noninterest sources related both to activities conducted by the Bank (SBA
loan originations and servicing and depositor service charges), as well as,
from the Company's investment advisory firm, RIA.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE SIX MONTHS
(IN THOUSANDS) ENDED JUNE 30, ENDED JUNE 30,
- --------------------------------------------------- --------- ------------ ------------ -------------
1998 1997 1998 1997
- --------------------------------------------------- --------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Other Noninterest Income:
Gain-on-sale of loans $ 207 $ 216 $ 222 $ 486
Depositor service charges 118 96 230 194
Income from investment management services 229 188 445 402
Gain/(loss)-on-sale of securities - (36) 5 (34)
Gain-on-sale of assets - - - 4
Servicing fees on loans sold 10 81 79 167
Other 112 74 182 181
- --------------------------------------------------- --------- ------------ ------------ -------------
Total $ 676 $ 619 $ 1,163 $ 1,400
- --------------------------------------------------- --------- ------------ ------------ -------------
- --------------------------------------------------- --------- ------------ ------------ -------------
</TABLE>
During the second quarter of 1998, the Company recognized noninterest
income of $676,000, compared to $619,000 for the same period in 1997, an
increase of $57,000 or 9.2%. For the first six months of 1998, noninterest
income was $1,163,000, compared to $1,400,000 for the first six months of
1997, a decrease of $237,000 or 16.9%. The decline for the first six months
was primarily attributable to lower gains on the sale of loans due to the
decision to retain a larger portfolio of these loans in the Bank's loan
portfolio, as well as, a decline in income from servicing fees on the loans
sold.
LOAN ORIGINATION & SALES
The Bank originates various types of loans that may be sold on active
secondary markets. Types of loans originated that are saleable include: loans
made under the U.S. Small Business Administration ("SBA") program that
generally provide for SBA guarantees of 70% to 90% of each loan; loans made
under the U.S. Department of Agriculture's Business and Industry ("B & I")
loan program; and conventional real estate mortgage loans. Historically, the
majority of the Bank's gain on sale of loans has come from SBA loan sales.
During 1997, the Company decided to hold the majority of SBA and B&I loans
originated to more rapidly build its loan portfolio and increase interest
income.
From time to time the Bank evaluates the valuations available on various
groups of loans and may sell groups of loans in an effort to maximize value.
During the quarter ended June 30, 1998, the Bank sold one pool of SBA loans
totaling approximately $2,300,000, in addition to its mortgage origination
activity. Net income from loans sold in the second quarter of 1998 was
$207,000 compared to $216,000 in the second quarter of 1997. For the six
months ended June 30, 1998, gains on the sale of loans was $222,000 compared
to $486,000 during the first six months of 1997, a decrease of $264,000. The
primary cause of the decline in income from the sale of loans for the first
six months of 1998 compared to the first six months of 1997 was the decision
to hold a larger portfolio of SBA guaranteed loans in the Bank's portfolio.
19
<PAGE>
An additional source of income related to the Bank's SBA loan
origination activities is reflected in income from the ongoing servicing of
loans sold. During the second quarter ended June 30, 1998, servicing income
totaled $10,000, compared to servicing income of $81,000 during the quarter
ended June 30, 1997. For the six months ended June 30, 1998, servicing income
totaled $79,000, a decrease of $88,000 compared to $167,000 during the first
six months of 1997. The decline in servicing income in 1998 compared to 1997
was the result of a smaller portfolio of loans serviced during 1998 and the
amortization of capitalized servicing fees on previously sold loans that have
pre-paid at an accelerated rate.
REGENCY SERVICE CORPORATION
The Bank's wholly owned subsidiary, Regency Service Corporation ("RSC"),
has engaged in real estate development activities since 1986. Under FDIC
regulations, banks were required to divest their real estate development
investments as quickly as prudently possible but in no event later than
December 19, 1996, and submit a plan to the FDIC regarding divestiture of
such investments. In December 1995, the Bank and RSC submitted a request to
extend the mandatory time period in which it must divest 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.
During the second quarter of 1998, RSC continued its effort toward total
divestiture of its real estate holdings with the sale of 14 additional homes
and lots. As of June 30, 1998, RSC had only five units remaining compared to
66 units remaining at December 31, 1997 and 260 units remaining at June 30,
1997. In the quarter ended June 30, 1998, RSC recorded a loss from the sale
of the 14 properties of $221,000 compared to a loss of $3,350,000 in the
second quarter of 1997.
When viewed on a stand-alone basis, RSC's activities (losses from the
sale of properties plus operating expenses plus income) combined to produce a
net loss at RSC of only $8,000 for the first six months of 1998. During the
most recent quarter RSC was able to recover interest from loans previously on
nonaccrual as well as $125,000 of principal from previously charged-off
loans. The recovery of principal increased the Company and RSC's reserve for
credit losses.
Management expects that RSC's performance for the remainder of 1998 will
be similar to the first six months and that any losses recorded on the sale
of properties will be generally offset by income or previously established
reserves. Additional discussion of loans made by RSC to facilitate the sale
of its properties and, in general, of the Company's investment in RSC, is
contained in this report under the headings, "Nonperforming Loans" and
"Investments in Real Estate."
20
<PAGE>
REGENCY INVESTMENT ADVISORS
The Company's other wholly-owned subsidiary, Regency Investment Advisors
("RIA"), was formed in August 1993 through the acquisition by the Bank of the
assets, including the client list, of a fee-only investment management and
consulting firm. RIA provides investment management and consulting services,
including comprehensive financial and retirement planning and investment
advice to individuals and corporate clients for an annual fee that varies
depending upon the size of a client account.
Revenue from RIA for the second quarter of 1998 increased to $229,000
from $188,000 in the same period of 1997, an increase of $41,000 or 21.8%.
On a stand alone basis, RIA's activities, (income from investment management
activities less operating expenses), provided the Company with after-tax
income of $37,000 in the second quarter of 1998 compared to after-tax income
of $21,000 in the second quarter of 1997.
For the six months ended June 30, 1998, revenue from RIA increased to
$445,000 from $402,000 for the same period in 1997, an increase of $43,000
or 10.7%. On a stand alone basis, RIA's activities, (income from investment
management activities less operating expenses), provided the Company with
after-tax income of $69,000 for the six months ended June 30, 1998, compared
to after tax income of $48,000 for the same period in 1997, and increase of
43.8%. RIA's operating expenses have been consolidated with similar
operating expenses in the Company's consolidated statement of income.
RIA's ability to generate and increase income comes, in large part, from
the volume of assets under management. As of June 30, 1998, RIA had
$100,200,000 in assets under management, an increase of $19,900,000, or 24.8%
compared to $80,300,000 as of June 30, 1997. Assets in client accounts
managed by RIA are not reflected in the consolidated assets of the Company.
21
<PAGE>
SECOND QUARTER NONINTEREST 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:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
FOR THE THREE MONTHS ENDED JUNE 30, 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Percent of Percent of
Average Average
Amount Assets Amount Assets
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest Expense:
Loss from investments in real estate $ 221 .45% $ 3,350 7.21%
Salaries and related benefits 1,245 2.51% 1,233 2.65%
Occupancy 379 .77% 411 0.88%
FDIC insurance and regulatory assessments 115 .23% 22 0.05%
Marketing 144 .29% 142 0.31%
Professional services 159 .32% 157 0.34%
Director's fees and expenses 46 .09% 80 0.17%
Management fees for real estate projects - - 4 0.01%
Supplies, telephone & postage 83 .17% 84 0.18%
Other 423 .86% 323 0.70%
- ----------------------------------------------------------------------------------------------------------------
TOTAL $ 2,815 5.69% $ 5,806 12.50%
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest expense decreased substantially by $2,991,000 or 51.5% to
$2,815,000 for the three months ended June 30, 1998, compared to $5,806,000
during the same period of 1997. The large drop in noninterest expense
between the second quarter of 1997 and 1998 was due to significantly lower
losses on RSC's investment in real estate between the two periods. The loss
in 1997 on investments in real estate resulted from expense for additional
reserves as well as the direct writedown of properties to facilitate the
rapid disposition of RSC's remaining assets. When compared to average assets
for the respective periods, noninterest expense decreased to 5.69% in the
second quarter of 1998 compared to 12.50% in the comparable period in 1997.
The reduction of noninterest expense as a percentage of average assets
is a central part of the Company's overall plan to increase earnings through
improved efficiency. As a percentage of average assets, most expense
categories decreased over the past twelve months. However, certain
categories showed an increase; FDIC insurance and regulatory assessments
increased by more than 400% or $93,000 to $115,000 for the quarter ended June
30, 1998, compared to only $22,000 during the comparable quarter in 1997.
This substantial increase is the direct result of the FDIC and CDFI
administrative orders, as well as, the Bank's average capital level during
the third and fourth quarters of 1997. Management expects the Bank's
insurance premiums to decrease during the second half of 1998 due to higher
capital levels and progress made related to the disposal of RSC assets. The
other category of noninterest expense increased to $423,000, for the second
quarter of 1998, an increase of $100,000, or 31% from $323,000 in the
comparable period of 1997. The primary cause of this increase was related to
costs associated with the Bank's OREO properties which were $103,000 higher
in the second quarter of 1998 compared to the same period in 1997.
22
<PAGE>
All other noninterest expense categories declined as a percentage of
average assets with salaries and related benefits, the Company's largest
noninterest expense category, declining from 2.66% in the second quarter of
1997 to 2.53% in the second quarter of 1998. The Company has been able to
maintain the number of full time equivalent employees at or near levels of a
year ago while average assets have grown by 6.4%.
NONINTEREST EXPENSE YEAR-TO-DATE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
FOR THE Six MONTHS ENDED JUNE 30, 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Percent of Percent of
Average Average
Amount Assets Amount Assets
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Other Expense:
Loss from investments in real estate $ 214 .22% $ 3,590 3.99%
Salaries and related benefits 2,441 2.53% 2,397 2.66%
Occupancy 739 .77% 814 0.90%
FDIC insurance and regulatory assessments 228 .24% 44 0.05%
Marketing 270 .28% 232 0.26%
Professional services 331 .34% 278 0.31%
Director's fees and expenses 99 .10% 176 0.20%
Management fees for real estate projects - - 112 0.12%
Supplies, telephone & postage 164 .17% 163 0.18%
Other 633 .66% 545 0.61%
- ------------------------------------------------------------------------------------------------------------------
TOTAL $ 5,119 5.31% $ 8,351 9.28%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
As with the second quarter, 1998's year-to-date noninterest expense
decreased substantially primarily as a result of lower losses from
investments in real estate. For the first six months of 1998, RSC's losses
on real estate were $214,000, a decline of $3,376,000 or 94% from $3,590,000
in the first six months of 1997. The large losses in 1997 resulted from
expense for reserves and the writedown of properties to facilitate the rapid
disposition of RSC's remaining assets. FDIC insurance and regulatory
assessments increased by more than 400% or $184,000 to $228,000 for the first
six months of 1998, compared to $44,000 during the comparable period in 1997.
This substantial increase is the direct result of the FDIC and CDFI
administrative orders, as well as, the Bank's average capital level during
the third and fourth quarters of 1997. Salaries and related benefits,
professional services and marketing grew modestly in the six months ended
June 30, 1998 compared to 1997 respectively, however, as a percentage of
average assets they declined by a cumulative .08%. The Other noninterest
expense category increased to $633,000, for the first six months of 1998, an
increase of $88,000 compared to the first six months of 1997, as a result of
higher expenses related to the sale of Bank OREO properties. Occupancy
expense, director fees and expense, and management fees for real estate
projects all declined. Overall, the Company's non-interest expense to
average assets for the first six months of 1998 declined to 5.31% compared to
9.28% for the comparable period of 1997.
23
<PAGE>
BALANCE SHEET ANALYSIS
Total assets at June 30, 1998 were $205,632,000 an increase of 4.0% or
$7,391,000 from $198,241,000 at December 31, 1997. At June 30, 1998, the
Company's loan portfolio grew to $142,381,000, an increase of $12,746,000 or
9.8% since December 31, 1997. Loan growth was substantially a result of the
decision to hold the majority of newly originated SBA and B&I loans, rather
than sell them on the secondary market, in an effort to increase higher
yielding assets and interest income. Total deposits were $182,318,000 at
June 30, 1998, up $6,039,000 or 3.4% from $176,279,000 at December 31, 1997.
At June 30, 1998, the Company's net investment in real estate was reduced to
$0 from $4,338,000 at December 31, 1997.
LOANS
The three areas in which the Bank has directed virtually all of its
lending activities are: (a) commercial loans; (b) real estate loans
(including residential construction and mortgage loans); and (c) consumer
loans. The Company's loans are primarily made within its defined market area
of Fresno and Madera counties. The Bank also maintains a loan production
office in Modesto, California.
Commercial loans, including SBA and B&I loans, comprised approximately
64.9% of the Company's loan portfolio at June 30, 1998, compared to 58.3% at
December 31, 1997 and 58.2% at June 30, 1997. 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 have floating rates based upon
underwriting analysis. 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 16.1% of the Company's loan
portfolio at June 30, 1998, compared to 23.2% of the Company's loan portfolio
at December 31, 1997, and 21.4% at June 30, 1997. 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.
The majority of construction loans have floating rates based upon
underwriting analysis. 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 12.1% of the loan portfolio at June
30, 1998, compared to 11.5% at December 31, 1997, and 12.4% of the loan
portfolio at June 30, 1997. Real estate mortgage loans are made up of
approximately 75% non-residential properties and 25% single-family,
residential mortgages. The non-residential loans generally are "mini-perm"
(medium-term) commercial real estate mortgages with maturities under seven
years. The residential mortgages are secured by first trust deeds and have
varying maturities. Both types of loans may
24
<PAGE>
have either fixed or floating rates, of which, 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
June 30, 1998, comprising 6.9% of the loan portfolio compared to 7.0% of
total loans at December 31, 1997 and 8.0% at June 30, 1997. This category
includes traditional consumer loans, home equity lines of credit, and Visa
card loans. Consumer loans are generally secured by third trust deeds on
single-family residences or personal property, 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 knowledge of the Bank's service area by
the Bank's lending personnel and Board of Directors.
NONPERFORMING LOANS
The Company's current policy is to cease accruing interest when a loan
becomes 90-days past due as to principal or interest; when the full, timely
collection of interest or principal becomes uncertain; or when a portion of
the principal balance has been charged off, unless the loan is well secured
and in the process of collection. When a loan is placed on nonaccrual
status, the accrued and uncollected interest receivable is reversed and the
loan is accounted for on the cash or cost recovery method thereafter, until
qualifying for return to accrual status. Generally, a loan may be returned
to accrual status when all delinquent interest and principal become current
in accordance with the terms of the loan agreement or when the loan is both
well secured and in process of collection.
At June 30, 1998, nonperforming loans amounted to $1,752,000 or 1.23% of
total loans compared to $1,736,000 or 1.34% at December 31, 1997, and
$2,496,000 or 2.22% at June 30, 1997. Other real estate owned was $572,000
at June 30, 1998, compared to $503,000 at December 31, 1997. Total
nonperforming loans at June 30, 1998, compared to December 31, 1997, were
little changed in terms of dollars outstanding, however, as a percentage of
total loans, nonperformings dropped slightly as a result of growth in the
loan portfolio. Of the total nonperforming loans,
25
<PAGE>
$1,012,000 represented loans RSC made to facilitate the sale of former
partnership properties that have loan to value ratios higher than would
normally be made by the Bank. Without the non-accrual loans made by RSC, the
Bank's loan portfolio at June 30, 1998 had $740,000 in non-accrual loans or
0.52%, compared to $598,000 in non-accrual loans or 0.46% at December 31,
1997. Of the Bank's non-accrual loans (excluding RSC loans) at June 30, 1998,
$431,000 represented the portion of SBA loans that are guaranteed by the SBA.
Beginning in 1997, the SBA changed the requirements for Bank's originating
SBA loans which are subsequently sold in the secondary market. Under the new
requirement, if a borrower defaults on an SBA guaranteed loan, the
originating bank is required to buy the guaranteed portion back and hold it
in its portfolio until collection efforts are exhausted. While this
guaranteed portion is backed by the full faith and credit of the U.S.
government and poses little risk of loss to the originating bank, the
originating bank does incur loss of the use of the funds while awaiting
payoff from the SBA or other loan collateral. Expense from the loss of use
of the funds is expected to be minimal; however, due to this new requirement,
it is expected that SBA non-accrual loan levels will be slightly higher.
Following is a table presenting the nonperforming loans for the periods
ending June 30, 1998 and December 31, 1997, respectively.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) JUNE 30, 1998 DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nonperforming Assets:
Nonaccrual RSC loans $ 1,012 $ 1,138
Nonaccrual bank loans 740 598
- ---------------------------------------------------------------------------------------------------------------
Nonperforming loans 1,752 1,736
Other real estate owned 572 503
- ---------------------------------------------------------------------------------------------------------------
Total nonperforming assets 2,324 2,239
- ---------------------------------------------------------------------------------------------------------------
Accruing loans 90 days past due 141 48
- ---------------------------------------------------------------------------------------------------------------
Total loans before allowance for credit losses $ 142,381 $ 129,635
Total assets 205,632 198,241
Allowance for possible credit losses (2,614) (2,219)
- ---------------------------------------------------------------------------------------------------------------
Ratios:
Nonperforming loans to total loans 1.23% 1.34%
Nonperforming loans to total loans (excluding RSC loans) .52% .46%
Nonperforming assets to:
Total loans 1.63% 1.73%
Total loans and OREO 1.62% 1.72%
Total assets 1.13% 1.13%
Allowance for possible credit losses to total nonperforming 112.47% 99.11%
assets
Allowance for possible credit losses to loans 1.84% 1.71%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1998 and December 31, 1997, the Company's recorded
investments in loans for which an impairment had been recognized totaled
$1,498,000 and $1,410,000, respectively. These amounts were evaluated for
impairment using the fair value of collateral. At June 30, 1998, the related
SFAS No. 114 allowance for credit losses considered impaired was $320,000.
The Company uses the cash basis method of income recognition for impaired
loans. For the six months ended June 30, 1998 and 1997, the Company did not
recognize any income on such loans.
26
<PAGE>
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses reflects management's judgment as to the
level which is considered adequate to absorb potential losses inherent in the
loan portfolio. This allowance is increased by provisions charged to expense
and reduced by loan charge-offs net of recoveries. Management determines an
appropriate provision based on information currently available to analyze
credit loss potential, including: (a) the loan portfolio growth in the
period, (b) a comprehensive grading and review of new and existing loans
outstanding, (c) actual previous charge-offs, and (d) changes in economic
conditions.
The allowance for credit losses totaled $2,614,000 or 1.84% of total
loans at June 30, 1998, compared to $2,219,000 or 1.71% at December 31, 1997.
This increase is the result of additional provisions for credit losses of
$275,000 in the six months ended June 30, 1998, along with net recoveries of
previously charged off loans of $120,000. During the second quarter of 1998,
RSC recovered $125,000 that had been charged off in prior years. It is the
policy of management to maintain the allowance for credit losses at a level
adequate for known and future risks inherent in the loan portfolio. Based on
information currently available to analyze credit loss potential, including
economic factors, overall credit quality, historical delinquency and a
history of actual charge-offs, management believes that the credit loss
provision and allowance is adequate. However, no prediction of the ultimate
level of loans charged-off in future years can be made with any certainty.
Following is a table presenting the activity within the Company's provision
for credit losses for the period between December 31, 1997 and June 30, 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
(In thousands)
- ------------------------------------------------------------
<S> <C>
Balance, December 31, 1997 $ 2,219
- ------------------------------------------------------------
Provision charged to expense 275
Loans charged off (67)
Recoveries 187
- ------------------------------------------------------------
Balance, June 30, 1998 2,614
- ------------------------------------------------------------
- ------------------------------------------------------------
</TABLE>
INVESTMENTS IN REAL ESTATE
The Company's investment in real estate consists of the Bank's
investment of capital and retained earnings in RSC. RSC is currently the
sole owner of one residential lot and is a limited partner in two projects
with a total of four model homes remaining for sale. The number of units
remaining for sale declined to five at June 30, 1998, from 66 at December 31,
1997, and 260 units one year ago. During the six month period ended June 30,
1998, RSC reduced its net investment in real estate to $0, from $4,067,000 at
December 31, 1997 and from $10,989,000 at June 30, 1997.
27
<PAGE>
The following table represents the condensed financial information relative
to RSC for the period ending June 30, 1998 and December 31, 1997,
respectively.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
(IN THOUSANDS) JUNE 30, 1998 DECEMBER 31, 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Financial Position:
Investments in real estate
Real estate held-for-sale $ 147 $ 4,420
Equity in partnerships 450 702
- -------------------------------------------------------------------------------------
Investment in real estate before allowance 597 5,122
Allowance for real estate losses (597) (1,055)
- -------------------------------------------------------------------------------------
Investment in real estate $ 0 $ 4,067
- -------------------------------------------------------------------------------------
Loans to real estate partnerships and projects 1,329 1,768
Allowance for loan losses (490) (364)
- -------------------------------------------------------------------------------------
Net Loans 839 1,404
- -------------------------------------------------------------------------------------
Other Assets 1,242 2,524
- -------------------------------------------------------------------------------------
Liabilities (147) (144)
- -------------------------------------------------------------------------------------
Bank's investment in RSC $1,934 $ 7,851
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
FUNDING SOURCES
Deposits represent the Bank's principal source of funds for investment.
Deposits are primarily core deposits in that they are demand, savings, and
time deposits generated from local businesses and individuals. These sources
are considered to be relatively more stable, long-term deposit relationships
thereby enhancing steady growth of the deposit base without major
fluctuations in overall deposit balances. In order to assist in meeting its
funding needs, the Bank maintains federal funds lines with correspondent
banks in addition to using its investment portfolio to raise funds through
repurchase agreements. In addition, the Bank may, from time to time, obtain
additional deposits through the use of brokered time deposits. As of June
30, 1998, the Bank held no brokered time deposits and had no borrowings from
correspondent banks against its federal funds lines.
The following table presents the composition of the deposit mix for the
period ending June 30, 1998 and December 31, 1997, respectively.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) JUNE 30, 1998 DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------------------
Percent of Percent of
Amount Total Deposits Amount Total Deposits
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing transaction accounts $ 44,448 24.4% $ 46,744 26.5%
Now and MMI 51,731 28.3% 48,616 27.6%
Savings 38,546 21.2% 36,498 20.7%
Time under $100,000 16,069 8.8% 15,778 9.0%
Time $100,000 and over 31,524 17.3% 28,643 16.2%
- --------------------------------------------------------------------------------------------------------------
Total Interest-bearing Deposits 137,870 75.6% 129,535 73.5%
- --------------------------------------------------------------------------------------------------------------
Total Deposits $182,318 100.0% $ 176,279 100.0%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
LIQUIDITY
Liquidity management refers to the Bank's ability to provide funds on an
ongoing basis to meet fluctuations in deposit levels as well as the credit
needs and requirements of its clients. Both assets and liabilities
contribute to the Bank's liquidity position. Federal funds lines, short-term
investments and securities, and loan repayments contribute to liquidity,
along with deposit increases, while loan funding and deposit withdrawals
decrease liquidity. The Bank assesses the likelihood of projected funding
requirements by reviewing historical funding patterns, current and forecasted
economic conditions and individual client funding needs. The Bank maintains
a line of credit with a correspondent bank for up to $5,000,000 available on
a short-term basis and has applied for membership to the Federal Home Loan
Bank ("FHLB") which will provide additional borrowing capacity in the future.
Additionally, the Bank maintains a substantial 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 Prime Rate. This pricing
structure tends to stabilize the net interest margin percentage earned by the
Bank.
The following table sets forth the interest rate sensitivity and repricing
schedule of the Company's interest-earning assets and interest-bearing
liabilities, the interest rate sensitivity gap, the cumulative interest rate
sensitivity gap, and the cumulative interest rate sensitivity gap ratio.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
NEXT DAY AFTER THREE AFTER
BUT WITHIN MONTHS ONE YEAR
(IN THOUSANDS, EXCEPT PERCENTAGES) THREE BUT WITHIN BUT WITHIN AFTER
AS OF JUNE 30, 1998 IMMEDIATELY MONTHS 12 MONTHS FIVE YEARS FIVE YEARS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Sensitivity Gap:
Loans (1) $ 52,194 $ 51,181 $ 8,617 $ 23,362 $ 5,275 $ 140,629
Investment securities and other 214 13,063 10,411 6,679 6,362 36,729
- -----------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets $ 52,408 $ 64,244 $ 19,028 $ 30,041 $ 11,637 $ 177,358
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing transaction accounts 51,732 - - - - 51,732
Savings accounts 35,460 3,086 - - - 38,546
Time deposits - 17,045 20,331 9,297 919 47,592
Federal funds purchased - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities $ 87,192 $ 20,131 $ 20,331 $ 9,297 $ 919 $ 137,870
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap (34,784) 44,113 (1,303) 20,744 10,718
Cumulative gap (34,784) 9,329 8,026 28,770 39,488
Cumulative gap percentage to
interest earning assets (19.61%) 5.26% 4.53% 16.22% 22.26%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts exclude nonaccrual loans of $1,752,000.
29
<PAGE>
The above table indicates the time periods in which interest-earning
assets and interest-bearing liabilities will mature or reprice in accordance
with their contractual terms. The table does not necessarily indicate the
impact of general interest rate movements on the net interest margin since
the repricing of various categories of assets and liabilities is subject to
competitive pressures. Additionally, this table does not take into
consideration changing balances in forward periods as a result of normal
amortization, principal paydowns, changes in deposit mix or other such
movements of funds as a result of changing interest rate environments.
CAPITAL RESOURCES
The Board of Governors of the Federal Reserve System and the FDIC have
adopted risk-based capital guidelines for evaluating the capital adequacy of
bank holding companies and banks. The guidelines are designed to make
capital requirements sensitive to differences in risk profiles among banking
organizations, to take into account off-balance sheet exposures, and to aid
in making the definition of bank capital uniform internationally. Under the
guidelines, the Company and the Bank are required to maintain capital equal
to at least 8.0% of its assets and commitments to extend credit, weighted by
risk, of which at least 4.0%, must consist primarily of common equity
(including retained earnings) and the remainder may consist of subordinated
debt, cumulative preferred stock, or a limited amount of loan loss reserves.
Assets, commitments to extend credit, and off-balance sheet items are
categorized according to risk and certain assets considered to present less
risk than others permit maintenance of capital at less than the 8% ratio.
The guidelines establish two categories of qualifying capital: Tier 1
capital comprising core capital elements and Tier 2 comprising supplementary
capital requirements. At least one-half of the required capital must be
maintained in the form of Tier 1 capital. Tier 1 capital includes common
shareholder's equity and qualifying perpetual preferred stock less intangible
assets and certain other adjustments. However, no more than 25% of the
Company's total Tier 1 capital may consist of perpetual preferred stock. The
definition of Tier 1 capital for the Bank is the same, except that perpetual
preferred stock may be included only if it is noncumulative. Tier 2 capital
includes, among other items, limited life (and in the case of banks,
cumulative) preferred stock, mandatory convertible securities, subordinated
debt, and a limited amount of reserves for credit losses.
The Board of Governors also adopted a 3.0% minimum leverage ratio for
banking organizations as a supplement to the risk-weighted capital
guidelines. The leverage ratio is generally calculated using Tier 1 capital
(as defined under risk-based capital guidelines) divided by quarterly average
net total assets (excluding intangible assets and certain other adjustments).
The Board of Governors emphasized that the leverage ratio constitutes a
minimum requirement for well-run banking organizations having diversified
risk. Banking organizations experiencing or anticipating significant growth,
as well as those organizations which do not exhibit the characteristics of a
strong, well-run banking organization above, will be required to maintain
minimum capital ranging generally from 100 to 200 basis points in excess of
the leverage ratio. The FDIC adopted a substantially similar leverage ratio
for state non-member banks.
30
<PAGE>
On December 19, 1991, the President signed the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). The FDICIA, among other
matters, substantially revised banking regulations and established a
framework for determination of capital adequacy of financial institutions.
Under the FDICIA, financial institutions are placed into one of five capital
adequacy categories as follows: (1) "Well capitalized" - consisting of
institutions with a total risk-based capital ratio of 10% or greater, a Tier
1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or
greater, and the institution is not subject to an order, written agreement,
capital directive or prompt corrective action directive; (2) "Adequately
capitalized" - consisting of institutions with a total risk-based capital
ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater
and a leverage ratio of 4% or greater, and the institution does not meet the
definition of a "well capitalized" institution; (3) "Undercapitalized" -
consisting of institutions with a total risk-based capital ratio less than
8%, a Tier 1 risk-based capital ratio of less than 4%, or a leverage ratio of
less than 4%; (4) "Significantly undercapitalized" - consisting of
institutions with a total risk-based capital ratio of less than 6%, a Tier 1
risk-based capital ratio of less than 3%, or a leverage ratio of less than
3%; (5) "Critically undercapitalized" - consisting of an institution with a
ratio of tangible equity to total assets that is equal to or less than 2%.
31
<PAGE>
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 (a) growth of assets, (b) payment of interest on subordinated
indebtedness, (c) payment of dividends or other capital distributions, and
(d) 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.
In addition to the capital guidelines described above, the Company and
Bank's Board of Directors, in consenting to administrative orders issued by
the FDIC and CDFI, have agreed that the Bank will maintain Tier 1 capital
equal to the greater of $14,000,000 or the equivalent of a Tier 1 capital to
average assets ratio of at least 7.0%.
The Company and Bank's actual capital amounts (in thousands) and ratios,
as of June 30, 1998, are also presented in the following table:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL ADEQUACY PROMPT CORRECTIVE
PURPOSES ACTION PROVISIONS
- ------------------------------------------------------------------------------------------------------------------------------
AS OF JUNE 30, 1998 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets:)
Company $19,750 14.90% >=$10,603 >=8.00% N/A
Regency Bank $16,919 12.76% >=$10,608 >=8.00% >=$ 13,260 >=10.00%
Tier 1 Capital (to Risk Weighted Assets):
Company $18,081 13.64% >=$ 5,302 >=4.00% N/A
Regency Bank $15,250 11.50% >=$ 5,304 >=4.00% >=$ 7,956 >=6.00%
Tier 1 Capital (to Average Assets):
Company $18,081 9.20% >=$ 7,859 >=4.00% N/A
Regency Bank $15,250 7.78% >=$ 7,843 >=4.00% >=$ 9,804 >=5.00%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
RETURN ON EQUITY AND ASSETS
The following table sets forth the ratios of net income to average assets and
average shareholders' equity, and average shareholders' equity to average
assets. Also indicated is the Company's dividend payout ratio. (For
purposes of calculating average shareholders' equity as used in these ratios,
unrealized losses on the Company's available-for-sale securities portfolio
have been included and the percentages shown have been annualized).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Return on average assets 1.27% (4.61)% 1.19% (2.12)%
- --------------------------------------------------------------------------------------------------------------------
Return on average shareholders' equity 12.82% (61.30)% 11.96% (27.77)%
- --------------------------------------------------------------------------------------------------------------------
Average shareholders' equity to average assets 9.93% 7.53% 9.96% 7.63%
- --------------------------------------------------------------------------------------------------------------------
Dividend payout ratio - - - -
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
YEAR 2000 COMPLIANCE
The inability of most computers, software, and other equipment utilizing
microprocessors to distinguish the year 1900 from the year 2000 poses
substantial risks to all financial institutions including the Company. The
year 2000 problem is pervasive and complex. Virtually every financial
institution, service provider, and vendor will have its computing operations
affected in some way by the rollover of the two-digit year value to 00 if
action is not taken to fix the problem before the year 2000 arrives.
The Company is currently engaged in a five-phase management program
which includes awareness, assessment, renovation, validation, and
implementation. The Company has identified all major applications and
systems that may require modification to ensure "Year 2000 Compliance." The
scope of the project covers all computer systems including PC and network
hardware and software, and mainframe and mainframe software. It also covers
all equipment and other systems utilized in bank operations or in the
premises from which the Company operates.
In addition, the Company has communicated with its large borrowers,
corporate customers, and major vendors upon which it relies to determine the
extent to which the Company is vulnerable to those third parties if they fail
to resolve their Year 2000 issues. However, there can be no guarantee that
the systems of other companies on which the Company's systems rely will be
converted on time, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems, would not have a
materially adverse effect on the Company.
The Company will utilize both internal and external resources to
implement its Year 2000 Project. The Company expects to complete the
majority of its efforts by the end of 1998, leaving adequate time to assess
and correct any significant issues that may materialize. Purchased hardware
and software will be capitalized in accordance with normal policy. Personnel
and all other costs related to the project are being expensed as incurred.
The majority of these costs are expected to be incurred during 1998, and are
not expected to have a material impact on the Company's cash flows, results
of operations, or financial condition.
33
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO VOTE OF SECURITY HOLDERS
(a) The 1998 Annual Meeting of Shareholders (the "Annual Meeting")
was held on May 12, 1998.
(b) The following nine directors, all of whom are incumbent
directors, and Mr. Steve Freeland (the employee director
nominee) were elected at the Annual Meeting by the following
vote:
<TABLE>
<CAPTION>
VOTES AGAINST
VOTES FOR OR WITHHELD
--------- --------------
<S> <C> <C>
William J. Alessini 1,655,727 2,100
Joseph L, Castanos 1,655,727 2,100
Steve D. Freeland 1,655,727 2,100
Steven F. Hertel 1,655,727 2,100
Roy Jura 1,655,727 2,100
Barbara Palmquist 1,655,727 2,100
David N. Price 1,655,727 2,100
William J. Ruh 1,655,727 2,100
Daniel R. Suchy 1,655,727 2,100
Waymon E. Watts 1,655,727 2,100
</TABLE>
(c) The appointment of Deloitte & Touche LLP as the Company's
independent public accountants for the 1998 fiscal year was
ratified by the following vote:
Votes for - 1,656,677 Votes against or withheld - 1,150
ITEM 5. OTHER INFORMATION
None
34
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10.1) Agreement between Regency Bancorp and Belle
Plaine Financial, LLC, to act as the exclusive
financial advisor to Regency Bancorp and its
various entities in connection with its efforts
to acquire, invest in, or sell depository
and/or other businesses. William J. Ruh, a
director of Regency Bancorp is also a principal
in Belle Plaine Financial, LLC.
(27.1) Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K dated May 8, 1998, in which it
reported that the Registrant received approval from NASDAQ to
begin trading on the NASDAQ national market system effective
May 8, 1998.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGENCY BANCORP
<TABLE>
<S> <C>
Date: July 28, 1998 By: /s/ STEVEN F. HERTEL
--------------------------------------
Steven F. Hertel
President and Chief Executive Officer
(Principal Executive Officer)
Date: July 28, 1998 By: /s/ STEVEN R. CANFIELD
--------------------------------------
Steven R. Canfield
Executive Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
</TABLE>
36
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
<S> <C> <C>
10.1 Agreement between Regency Bancorp and Belle Plaine 38
Financial, LLC
27.1 Financial Data Schedule 47
</TABLE>
37
<PAGE>
EXHIBIT 10.1
Bell Plaine Financial LLC
June 26, 1998
Mr. Steven Hertel
President & Chief Executive Officer
Regency Bancorp
7060 North Fresno Street
P.O. Box 16279
Fresno, CA 93755-6279
Dear Mr. Hertel:
This letter will confirm that Regency Bancorp ("Regency") has engaged
Belle Plaine Financial, LLC ("Belle Plaine") as the exclusive financial
advisor to Regency and any entities it may form, acquire or invest in
(collectively, the "Company") in connection with the Company's efforts to (a)
acquire or invest in other depository institutions, excepting therefrom the
opening of individual bank branches in the ordinary course of business; (b)
acquire, invest or sell businesses other than depository institutions,
excepting therefrom transactions between such businesses and the Company that
have a Transaction Value (as defined below) of less than $1 million, (c)
effect a sale of the Company or a material amount of its assets; or (d)
pursue a financing or recapitalization transaction (collectively, the
"Transaction").
1. In connection with a proposed Transaction, at the request of the Company,
Belle Plaine will provide such services as the Company shall reasonably
request including: (i) assisting the Company in the structuring of the
financial aspects of a Transaction; (ii) identifying alternative potential
parties and contacting such parties as the Company may designate; (iii)
negotiating the terms of a Transaction with such parties; (iv) assisting
the Company in communicating the strategic implications of the Transaction
to the investment community; and (v) advising the Company in connection
with its efforts to raise any additional capital that may be required to
facilitate the Transaction.
2. In connection with a proposed Transaction, you will furnish Belle Plaine
with such material regarding the business and financial condition of the
Company as we request, all of which will be accurate and complete in all
material respects at the time furnished. The Company will also use its
best efforts to assure that its personnel, consultants, experts, attorneys
and accountants are made available to Belle Plaine upon Belle Plaine's
reasonable request in connection with services provided or to be provided
by Belle Plaine. During the term of this agreement, the Company shall
promptly notify Belle Plaine of (i) any material changes in the business or
financial condition of the Company from the information provided to Belle
Plaine, and (ii) any material events or developments relating to the
financial condition or business operations or prospects of the Company and
promptly make available for Belle Plaine's review copies of all filings
made by the Company with any regulatory agency and copies of all press
releases issued by the Company. We are relying, without independent
verification, on the accuracy and completeness of all
<PAGE>
BPF
Regency Bancorp June 3, 1998
Page 2 of 7
information furnished to us by the Company or any other party or potential
party to any Transaction. Belle Plaine agrees that all requests for
information from the Company will be directed only to the President or
Chairman of the Board of the Company or such other persons as the
President or Chairman shall specifically designate and that it will not
treat information obtained from any other person or source as having been
provided by the Company. In addition, Belle Plaine agrees to keep any
such non-public information confidential so long as it remains non-public,
unless disclosure is required by law or requested by any governmental or
regulatory agency or body, and Belle Plaine will not make any use thereof,
except in connection with our services hereunder for the Company. Any
advice rendered by Belle Plaine pursuant to this letter shall not be
disclosed in any manner without Belle Plaine's prior written approval and
will be treated by the Company and Belle Plaine as confidential.
3. In consideration of the services to be provided hereunder, the Company
agrees to pay to Belle Plaine the following cash fees:
(A) $5,000 upon the signing of this letter agreement and $5,000 at the
beginning of each fiscal quarter beginning July 1, 1998,
(B) In the event that a sale of the Company is completed, an amount equal
to one and one-half percent (1.5%) of the Transaction Value (as
defined below) for the Transaction, net the cost of a "fairness
opinion" if such opinion is deemed necessary,
(C) In the event that an acquisition of or investment in another financial
institution is completed by the Company, an amount based upon the
following schedule will be owed to Belle Plaine upon the consummation
of the acquisition based upon the Transaction Value for the
Transaction, net the cost of a "fairness opinion" if such opinion is
deemed necessary:
<TABLE>
<CAPTION>
Deal Value
($ in millions) Fees
--------------- ----
<S> <C> <C> <C> <C> <C>
(1) If $ 0 LESS THAN $20 then 2.0%
(2) If $20 LESS THAN $50 then $400,000, plus 1.5% of amount in
OR EQUAL TO excess of $20 million, up to $50
million
(3) If $50 GREATER THAN then $850,000, plus 1.0% of amount in
excess of $50 million
</TABLE>
(D) In the event of a financing or recapitalization, the fees will be
determined in accordance with paragraph 8 below.
<PAGE>
BPF
Regency Bancorp June 3, 1998
Page 3 of 7
(E) Fees payable pursuant to paragraphs 3 (B), (C) and (D) shall be paid
upon and only upon the closing of the Transaction.
For purposes of this agreement, "Transaction Value" means the sum of (i)
with respect to each class of capital stock of the Company in the event of a
sale of the Company or of the financial institution which is acquired by the
Company or in which the Company invests, the product of (a) the highest
consideration paid or payable for a share of such class of capital stock
determined as described in the following paragraph and (b) the sum of (1) the
total number of shares of such class of capital stock of the Company or such
financial institution plus (2) the number of shares of such class issuable
upon exercise of options, warrants or other rights, or conversion or exchange
of securities to the extent that such options are then exercisable; (ii) the
aggregate liquidation value of any preferred stock or other preferential
interests redeemed or remaining outstanding; (iii) the fair market value of
any assets distributed to the shareholders of the Company or such financial
institution that are purchased; and (iv) the consideration paid or payable
for the assets of the Company or the assets of another financial institution,
as the case may be.
The determination of the "consideration paid or payable for a share of
such class of capital stock" in connection with the Transaction shall include
cash, securities (valued in accordance with the following paragraph), or
other assets or consideration paid or payable by the purchaser or any of its
affiliates, as the case may be, determined without regard to any allocations
between the Company or its affiliates in the event of a sale of the Company
or between the financial institution or its affiliates in the event such
financial institution is acquired by the Company or the Company invests in
such financial institution, including but not limited to (i) assets (net of
debt or payables) of the Company or such financial institution retained by
the Company or such financial institution or their respective stockholders
and affiliates, as the case may be, (ii) any deferred installments of the
purchase price, (iii) any portion of the purchase price held in escrow
subsequent to closing which is payable pursuant to the terms of the escrow
arrangement, irrespective of whether such amounts are in fact paid, (iv) any
extraordinary compensation paid directly or indirectly by the purchaser to
principals, management or employees of the Company or affiliates of the
Company in connection with or in anticipation of the Transaction or by the
Company to principals, management or employees of a financial institution
acquired by the Company or in which the Company invests, including but not
limited to cash payments, stock or option grants, consulting arrangements and
non-competition arrangements, (v) any payments to the Company or the
financial institution and their respective affiliates for non-competition
agreements, (vi) any payments pursuant to earn-outs, royalties or other
similar arrangements, (vii) any payments payable after closing upon the
occurrence of certain contingencies or conditions or the satisfaction of
certain earnings, sales levels or other performance objectives which are
agreed to on or before the closing, irrespective of whether such amounts are
in fact paid, (vii) the amount of any dividends or other extraordinary
payments or distributions to stockholders of the Company or the financial
institution in connection with or in anticipation of the Transaction, and
(iv) consideration paid by the purchaser or its affiliates as a deposit,
reimbursement of expenses, liquidated damages, walk-away fee or other
arrangement.
In the event that all or any portion of the Transaction Value for a
Transaction is paid in stock or other securities, deferred installments or
other non-cash consideration, the amount of the fee payable
<PAGE>
BPF
Regency Bancorp June 3, 1998
Page 4 of 7
with respect to such items shall be determined on the basis of the fair
market cash equivalent value of such non-cash consideration as of the day
preceding the closing date of the Transaction as reasonably determined by
Belle Plaine and the Company, provided that the value of securities (received
as consideration) which have an existing public trading market shall be
determined by the average closing sale (trade) price for such securities
during the five trading days immediately preceding the closing date.
Any portion of the fee which is payable with respect to any earn-out,
royalty or similar arrangement where the amount payable is not a certain
amount, shall be calculated and paid at the closing based upon the estimated
net present value thereof as reasonably determined by Belle Plaine and the
Company.
If a Transaction takes the form of a purchase of assets and an
assumption of liabilities, then the "Transaction Value" of the Company or the
financial institution shall be deemed to include the amount of cash,
securities, or other consideration paid to the Company or the financial
institution and their respective shareholders, and affiliates, as the case
may be, in respect of the assets, plus the aggregate face amount of all
liabilities, including accounts payable, accruals, and income taxes payable
of the Company, or the financial institution, assumed by the purchaser and
its affiliates or the Company, as the case may be.
If a Transaction involves the acquisition of less than all of the
Company's outstanding equity securities, then the fee payable pursuant to
Section 3(B) shall nonetheless be calculated as though all such equity
securities had been so acquired by the purchaser.
4. Regardless of whether a Transaction is completed, the Company will
reimburse Belle Plaine, upon its demand, for all reasonable out-of-pocket
expenses (including travel expenses and fees and disbursements of counsel
retained by Belle Plaine in connection with this engagement). In addition
to professional fees, our billing statements include reimbursable expenses
normally incurred in the conduct of the work. The reimbursable expenses
will include a flat ten percent of Belle Plaine's monthly costs for data
services, telephone, fax, postage and general office expenses which will be
categorized on our statement as indirect expenses, but excluding any
allocation for employee costs or debt service costs.
5. The Company agrees to indemnify and hold Belle Plaine harmless in
accordance with the terms and conditions of Appendix A attached hereto
and made a part hereof as though fully set forth in this agreement. No
termination or modification hereof, or completion of Belle Plaine's
engagement hereunder, shall limit or affect such indemnification.
6. Belle Plaine's services hereunder may be terminated by the Company or Belle
Plaine at any time upon 30 days written notice, provided that Belle Plaine
shall be entitled to any fees payable pursuant to Section 3 and Section 8
hereof in the event that the Company completes a Transaction (i) on which
Belle Plaine provided advice or participated in discussions with any of the
investors in such Transaction or (ii) with any of the parties as to which
Belle Plaine advised the Company or with whom the Company engaged in
<PAGE>
BPF
Regency Bancorp June 3, 1998
Page 5 of 7
discussions regarding a possible Transaction prior to the termination of
this letter agreement, providing that (i) in the event the Company
terminated this agreement, such Transaction is completed within two years
following the termination of this letter agreement or (ii) in the event
Belle Plaine terminated this agreement, the Company executes an agreement
in connection with a proposed Transaction within one year following the
termination of this letter agreement. In addition, Belle Plaine shall
remain entitled to the reimbursement of fees and expenses under the terms
and conditions described in Section 4 hereof, to the extent the same have
been incurred on or prior to the date of such termination and to the
quarterly retainer fee under Section 3(A) to the extent payable prior to
the termination date. Furthermore, the provisions of this Section 6, and
Sections 2, 5 (including Appendix A), 8, 10, 12, 13, 14, and 15 shall
survive any termination of this agreement.
7. In order to coordinate our efforts with respect to any Transaction, during
the period of our engagement hereunder neither the Company nor any
representative thereof (other than Belle Plaine) will initiate discussions
regarding a Transaction except through Belle Plaine. If the Company or its
management receives an inquiry regarding a Transaction, they will promptly
advise Belle Plaine of such inquiry in order that we can evaluate such
prospective party and its interest and assist the Company in any resulting
negotiations.
8. It is understood and agreed that if the Company decides to pursue a
financing or recapitalization Transaction for which Belle Plaine provided
any of the financial advisory services described above in Section 1 hereof,
the Company and Belle Plaine shall negotiate in good faith acceptable
compensation for Belle Plaine in consideration of such services, which
compensation will take into account, among other things, the results
obtained and the custom and practice among investment bankers acting in
similar situations. In consideration of the financial services rendered
pursuant to a financing or recapitalization Transaction, the compensation
payable to Belle Plaine for such services rendered shall not exceed five
percent (5%) of the Transaction Value in cash compensation plus warrants to
purchase an aggregate amount of common stock equal to five percent (5%) of
the newly issued common stock to be outstanding subsequent to the
completion of the financing or recapitalization Transaction. The
compensation owed to Belle Plaine in accordance with the fee structure
agreed upon by the Company and Belle Plaine in respect of a financing or
recapitalization Transaction shall be paid to Belle Plaine in cash upon
the consummation of any such Transaction.
9. Except as expressly provided herein, no fee paid or payable to Belle Plaine
or any of its affiliates shall be used as an offset or credit against any
other fee paid or payable to Belle Plaine or any of its affiliates.
10. This agreement, including the indemnity in Appendix A, embodies the sole
terms of the agreement between the Company and Belle Plaine with respect to
the subject matter hereof and supersedes all previous agreements, whether
oral or written, between the Company and Belle Plaine with respect to the
subject matter hereof. This letter agreement shall be governed by and
construed in accordance with the laws of the State of California without
<PAGE>
BPF
Regency Bancorp June 3, 1998
Page 6 of 7
regard to principles of conflict of laws. Any right to trial by jury with
respect to any claim or proceeding related to or arising out of this
engagement or any transaction or conduct in connection herewith, is waived.
Any claim or dispute arising out of this agreement or the alleged breach
thereof shall be submitted by the parties to binding and nonappealable
arbitration by JAMS/Endispute ("JAMS") in Fresno, California, under the
commercial rules then in effect for JAMS, except as provided herein.
Provided that JAMS is not suitable to arbitrate such claim or dispute, then
such claim or dispute shall be submitted by the parties to binding and
nonappealable arbitration by the American Arbitration Association ("AAA")
in Fresno, California, under the commercial rules then in effect for the
AAA, except as provided herein. JAMS, or in the event that JAMS is deemed
unsuitable to arbitrate such claim or dispute, the AAA shall recommend
three arbitrators who are knowledgeable in the field of investment banking.
The parties shall agree upon one of the three arbitrators or, if no
arbitrator is mutually agreed upon, JAMS or the AAA, as the case may be,
shall appoint one of the three arbitrators within 30 days of such failure.
The award rendered by the arbitrator shall include costs of arbitration,
reasonable attorneys' fees and fees of experts and other witnesses, but
shall not include punitive damages against either party. Each party shall
have the right to request the arbitrator to order reasonable and limited
discovery. Notwithstanding this provision, appropriate injunctive relief
may be sought by either party.
11. This agreement may be executed in counterparts, each of which shall be
deemed an original and all of which shall continue one and the same
instrument.
12. The obligations of the Company hereunder shall be the joint and several
obligations of the entities comprising the term Company.
13. The Company expressly acknowledges that Belle Plaine has been retained
solely as an advisor to the Company, and not as an advisor to or agent of
any other person, and that the Company's engagement of Belle Plaine is not
intended to confer rights upon any persons not a party hereto (including
shareholders, employees or creditors of the Company) as against Belle
Plaine, Belle Plaine's affiliates or their respective directors, officers,
agents and employees. Any advice provided to the Company by Belle Plaine
pursuant to this agreement is solely for the information and assistance of
the Board of Directors of the Company. Such advice shall be treated as
confidential information, shall not be disclosed publicly in any manner
without Belle Plaine's prior written approval and shall not be relied upon
by the Company's shareholders or any third party. Any reference to Belle
Plaine or to any affiliate of Belle Plaine in any release or communication
to any party outside the Company is subject to Belle Plaine's prior written
approval, which approval shall not be unreasonably withheld or delayed. If
this agreement is terminated prior to any release or communication, no
reference shall be made to Belle Plaine without Belle Plaine's prior
written approval.
14. Belle Plaine represents that it has the necessary expertise to provide the
services contemplated by this agreement and that the compensation provided
for herein is fair and reasonable and comparable to the compensation which
would be charged by an
<PAGE>
BPF
Regency Bancorp June 3, 1998
Page 7 of 7
independent provider of such services with the same type, level and
quality of expertise. The Company acknowledges that the services
contemplated herein will meet legitimate needs of the Company and
that it is in the best interests of the Company to obtain such services.
15. After closing of a Transaction, Belle Plaine shall have the right to place
advertisements in financial and other newspapers and other newspapers and
journals at its own expense describing its services to the Company under
this agreement, provided that Belle Plaine shall have submitted a copy of
any such proposed advertisements to the Company for its prior approval,
which approval shall not be unreasonably withheld or delayed.
Please confirm that the foregoing is in accordance with your understanding by
signing and returning to us the duplicates of this agreement and the related
indemnification agreement which shall thereupon constitute binding agreements.
Very truly yours,
/s/ William J. Ruh
Belle Plaine Financial, LLC
William J. Ruh
Senior Vice President
Accepted and agreed:
- ---------------------
on its behalf and on behalf of the Company,
as defined above.
By: /s/ Steven F. Hertel
--------------------------------
Name: Steven F. Hertel
--------------------------------
Title: PRES & CEO
--------------------------------
Date: 7/23/98
--------------------------------
<PAGE>
BPF APPENDIX A
This Appendix A is a part of and is incorporated into that certain
letter agreement dated June 3, 1998, between Regency Bancorp (the "Company")
and Belle Plaine Partners, Inc. ("Belle Plaine") (the letter agreement and
this Appendix A are referred to herein as the "Agreement"). Capitalized
terms used herein without definition shall have the meanings ascribed to them
in such letter agreement.
The Company agrees to indemnify and hold harmless Belle Plaine, any
affiliates and the respective officers, directors, partners, representatives
and agents and any other persons controlling Belle Plaine or any of its
affiliates (Belle Plaine and each such other person or entity each being
referred to as an "Indemnified Person"), to the fullest extent lawful, from
and against all claims, liabilities, losses, damages, and expenses,
(including without limitation and as incurred, reimbursement of all
reasonable costs of investigating, preparing, pursuing, or defending any such
claim or action, including fees and expenses of counsel to, and the
reasonable per diem costs and expenses of personnel of, the Indemnified
Person, whether or not arising out of pending litigation, governmental
investigation, arbitration or other alternative dispute resolution, or other
action or proceeding or threatened litigation, governmental investigation,
arbitration or other alternative dispute resolution, or other action or
proceeding) directly or indirectly related to or arising out of, or in
connection with (i) actions taken or omitted to be taken by the Company, its
affiliates, employees, directors, partners, representatives or agents in
connection with any Transaction or activities contemplated by this Agreement;
(ii) actions taken or omitted to be taken by any Indemnified Person pursuant
to the terms of, or in connection with services rendered pursuant to, this
Agreement, provided that in the case of this subsection (ii), the Company
shall not be responsible for any claim, liability, loss, damage or expense
arising primarily out of or based primarily upon the willful misconduct or
gross negligence (as determined by the judgment of a court of competent
jurisdiction, no longer subject to appeal or further review) of or by such
Indemnified Person; and (iii) any untrue statement or alleged untrue
statement of a material fact contained in any information provided to Belle
Plaine by the Company under the Agreement or any omission or alleged omission
to state a material fact necessary to make the statements therein not
misleading (other than untrue statements or alleged untrue statements in, or
omissions or alleged omissions from, information relating to an Indemnified
Person furnished in writing by or on behalf of such Indemnified Person
expressly for use by the Company). If multiple claims are brought against an
Indemnified Person in an arbitration with respect to at least one of which
indemnification is permitted under applicable law and provided for under this
Agreement, the Company agrees that any arbitration award shall be
conclusively deemed to be based on claims as to which indemnification is
permitted and provided for, except to the extent that the arbitration award
expressly states that the award, or any portion thereof, is based solely on a
claim as to which indemnification is not available.
If the indemnification provided for herein is unavailable to an Indemnified
Person in respect of any claims, liabilities, losses, damages or expenses, then
the Company, in lieu of indemnifying such Indemnified Person, shall contribute
to the amount paid or payable by such Indemnified Person as a result of such
claims, liabilities, losses, damages or expenses (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Indemnified Person on the other, as well as any other relevant
equitable considerations. It is further agreed that the relative benefits to the
Company on the one hand and Belle Plaine on the other hand with respect to the
services rendered under this Agreement shall be deemed to be in the same
proportion as (i) the aggregate Transaction Value bears to (ii) the fees
actually paid to Belle Plaine with respect to the services provided pursuant to
this Agreement in connection with the Transaction. The Company also agrees that
no Indemnified Person shall have any liability to the Company for or in
connection with this Agreement and the engagement of Belle Plaine hereunder,
except for such
<PAGE>
BPF
claims, liabilities, losses, damages, or expenses incurred by the Company to
the extent they are appropriately judicially determined (without possibility
of appeal or review) to have resulted primarily from such Indemnified
Person's willful misconduct or gross negligence, and the Company agrees that
in no event shall the Indemnified Persons be required to contribute an amount
in the aggregate greater than the fees actually received by Belle Plaine for
its services performed under this Agreement.
If any action or other proceeding or investigation is commenced as to
which an Indemnified Person demands indemnification, the Indemnified Person
shall have the right to retain counsel of its own choice to represent it, the
Company shall pay the reasonable fees and expenses of such counsel, and such
counsel shall to the extent consistent with its professional responsibilities
cooperate with the Company and any counsel designated by the Company,
provided, that in no event shall the Company be required to pay fees and
expenses under this indemnity for more than one firm of attorneys for the
Indemnified Person in any jurisdiction in any one legal action or group or
related legal actions. The Company shall be liable as provided herein for any
settlement of any claim against Belle Plaine or any Indemnified Person made
with the Company's written consent, which consent shall not be unreasonably
withheld. The Company agrees that it will not, without the prior written
consent of Belle Plaine, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action or proceeding relating to
the matters contemplated by Belle Plaine's engagement (whether or not any
Indemnified Person is a party thereto) unless such settlement, compromise or
consent includes an unconditional release of Belle Plaine and each other
Indemnified Person from all liability arising or that may arise out of such
claim, action, or proceeding.
The indemnity and contribution obligations of the Company set forth
herein shall be in addition to any liability or obligation the Company may
otherwise have to any Indemnified Person. The Company hereby consents to
personal jurisdiction, service and venue in any court in which any claim
which is subject to this Agreement is brought against Belle Plaine or any
other Indemnified Person.
It is understood that, in addition to Belle Plaine's engagement pursuant
to this Agreement, Belle Plaine may also be engaged to act for the Company in
one or more additional capacities, and that the terms of such additional
engagements may be embodied in one or more separate written agreements. The
provisions of this Appendix A shall apply to any such separate agreements,
any modification so this Agreement, and any modifications of such separate
agreements, and the provisions of this Appendix A shall remain in full force
and effect following the completion, expiration or termination of this
Agreement or such additional agreements or modifications of any of the
foregoing.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 12,343
<INT-BEARING-DEPOSITS> 388
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,387
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 136,043
<ALLOWANCE> 2,335
<TOTAL-ASSETS> 192,127
<DEPOSITS> 169,761
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,093
<LONG-TERM> 0
0
0
<COMMON> 15,218
<OTHER-SE> 3,846
<TOTAL-LIABILITIES-AND-EQUITY> 192,127
<INTEREST-LOAN> 3,543
<INTEREST-INVEST> 547
<INTEREST-OTHER> 34
<INTEREST-TOTAL> 4,124
<INTEREST-DEPOSIT> 1,243
<INTEREST-EXPENSE> 1,283
<INTEREST-INCOME-NET> 2,841
<LOAN-LOSSES> 125
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 2,304
<INCOME-PRETAX> 899
<INCOME-PRE-EXTRAORDINARY> 899
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 519
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.19
<YIELD-ACTUAL> 6.81
<LOANS-NON> 2,063
<LOANS-PAST> 28
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,219
<CHARGE-OFFS> 21
<RECOVERIES> 12
<ALLOWANCE-CLOSE> 2,335
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,335
</TABLE>
