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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 000-23815
REGENCY BANCORP
(Exact name of registrant as specified in its charter)
STATE OF CALIFORNIA 77-0378956
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
7060 N. Fresno Street, Fresno, California 93720
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(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code (209) 438-2600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock None
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 such 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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 18,1998 was $ 24,854,000.
As of March 18, 1998, the registrant had 2,621,624 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this Form 10-K:
(1) Portions of the definitive Proxy Statement for the 1997 annual meeting of
shareholders into Part III. Items 10-13.
The Index to Exhibits is located at page 89. Page 1 of 104 Pages.
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PART I
Item 1. BUSINESS
Certain matters discussed or incorporated by reference in this Annual
Report on Form 10-K including, but not limited to, matters described in "Item
7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations," are forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. Changes to such risks and uncertainties, which could impact
future financial performance, include, among others, (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 securities markets.
Therefore, the information set forth therein should be carefully considered
when evaluating the business prospects of the Company and the Bank.
GENERAL DEVELOPMENT OF BUSINESS
Regency Bancorp (the "Company") is a California corporation organized to
act as the holding company for Regency Bank (the "Bank"), and Regency
Investment Advisors, Inc. ("RIA"), a SEC registered investment advisor. The
Company and the Bank maintain their administrative headquarters and banking
offices in Fresno, California. The Bank also maintains a full service
banking office in Madera, California and a loan production office in Modesto,
California. In 1995, upon its formation, the Company acquired all of the
outstanding common stock of the Bank. Other than its investment in the Bank
and RIA, the Company currently conducts no other significant business
activities, although it is authorized to engage in a variety of activities
which are deemed closely related to the business of banking upon prior
approval of the Board of Governors of the Federal Reserve System (the "Board
of Governors"), the Company's principal regulator.
The Bank is a California banking corporation which has served small and
medium-sized businesses, professionals, merchants and individuals located in
and adjacent to Fresno, California since 1980. The Company and Bank operate
through the administrative headquarters office and Herndon Branch banking
office located at 7060 N. Fresno St., Fresno, California, and offer a full
range of commercial banking services, including the acceptance of demand,
savings and time deposits, and the making of commercial, real estate
(including real estate construction and residential mortgage), Small Business
Administration, personal, home improvement, automobile and other installment
and term loans. It also offers Visa credit cards, traveler's checks, safe
deposit boxes, notary public, courier service and other customary bank
services.
The Bank's Herndon branch office is open from 9:00 a.m. to 5:00 p.m.,
Monday through Friday. In addition to its Herndon Office, the Bank operates
a full service banking office at 126 N. "D" Street in Madera, California.
The Madera office hours are 9:00 a.m. to 5:00 p.m. Monday through Thursday,
9:00 a.m. to 6:00 p.m. on Friday and 9:00 a.m. to 1:00 p.m. on Saturday. The
Bank also operates a limited service facility in the Fig Garden Village
Shopping Center, 726 W. Shaw Avenue, Fresno, California. The facility is
open from 10:00 a.m. to 6:00 p.m., Monday through Friday and 9:00 a.m. to
1:00 p.m. on Saturday. Additionally, the Bank operates loan production
offices located at 5240 N. Palm Ave., Fresno, California and has established
a loan production office in Modesto, California. The Bank has automated
teller machines located at its headquarters office, its limited service
facility and its Madera office. The Bank is insured under the
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Federal Deposit Insurance Act and each depositor's account is insured up to
the legal limits thereon. The Bank is chartered (licensed) by the California
Commissioner of Financial Institutions ("Commissioner") and has chosen not to
become a member of the Federal Reserve System.
The Bank has one subsidiary, Regency Service Corporation ("RSC"), a
California corporation which engages in the business of real estate
development primarily in the Fresno/Clovis area. For more information on
RSC, see, "Real Estate Development Activities" under this section and
additionally, under notes 4 and 11 of the Company's audited consolidated
financial statements included in item 8.
The Company's second subsidiary, Regency Investment Advisors ("RIA"),
provides investment management and consulting services from offices located
in the Company's headquarters office at 7060 N. Fresno St., Fresno,
California. For more information on RIA, see, "Investment Management
Activities" under this section.
The three areas in which the Bank has directed virtually all of its
lending activities are: (i) commercial loans; (ii) real estate loans
(including residential construction and mortgage loans); and (iii) consumer
loans. As of December 31, 1997, these three categories accounted for
approximately 58 percent, 35 percent and 7 percent, respectively, of the
Bank's loan portfolio.
The Bank's deposits are attracted primarily from small and medium-sized
businesses, professionals, merchants and individuals. The Bank's deposits
are not received from a single depositor or group of affiliated depositors
the loss of any one of which would have a material adverse effect on the
business of the Bank, nor is a material portion of the Bank's loans
concentrated within a single industry or group of related industries.
As of December 31, 1997, the Bank had total deposits of $176,279,000. Of
this total, $46,744,000 represented noninterest-bearing demand deposits,
$85,114,000 represented interest-bearing demand deposits and interest-bearing
savings deposits, and $44,421,000 represented time deposits.
REAL ESTATE DEVELOPMENT ACTIVITIES
The Bank, through RSC and pursuant to California Financial Code Section
751.3 has engaged in real estate development activities since 1986. RSC's
real estate development activities, which have generally involved the
acquisition, development and sale of the properties (but which sometimes
involve the sale of properties prior to their development) historically have
been structured as limited partnerships in which RSC is the limited partner
and a local developer is the general partner. The Bank, in accordance with
internal policies and restrictions which limit the amount of loans that may
be made to such partnerships and other parties involved in RSC's real estate
projects, from time to time have made loans to such parties. RSC also from
time to time made loans to the partnerships. In exchange for its investment
in the partnerships, RSC typically received 50% of the income generated from
the sale of the partnership assets, as well as interest on invested capital.
Under FDIC regulations, banks were required to divest their real estate
development investments as quickly as prudently possible but in no event
later than December 19, 1996, and submit a plan to the FDIC regarding
divestiture of such investments. Such regulations also
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permitted banks to apply for the FDIC's consent to continue, on a limited
basis, certain real estate development activities.
In 1994, the Bank and RSC submitted a divestiture plan (the "Divestiture
Plan") to the FDIC. The Divestiture Plan provided for RSC to divest itself of
all real estate development investments by year-end 1996; however, since RSC was
a limited partner in the majority of its real estate development projects and,
thus, did not control the operation of such projects, there was no assurance
that such divestiture would occur by year-end 1996. In December 1995, the Bank
and RSC submitted a request to extend the mandatory time period in which it must
divest of its real estate development interests. In December 1996, the FDIC,
responding to the Bank's request, granted the Bank and RSC a two year extension,
until December 31, 1998, to continue its divestiture activities.
For more information regarding RSC and its financial performance, see
"Item 7 - Regency Service Corporation", below and additionally, see notes 4 and
11 of the Company's audited financial statements included in Item 8 for
additional information regarding RSC and real estate development activities.
INVESTMENT MANAGEMENT ACTIVITIES
RIA was formed in August 1993 through the acquisition by the Bank of the
assets, including 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's account. For more information
regarding RIA and its financial performance, see "Item 7 - Regency Investment
Advisors", below.
SUPERVISION AND REGULATION
The common stock of the Company is subject to the registration
requirements of the Securities Act of 1933, as amended, and the qualification
requirements of the California Corporate Securities Law of 1968, as amended.
The Bank's common stock, however, which is owned 100% by the Company, is
exempt from such requirements. The Company is also subject to the periodic
reporting requirements of Section 13 of the Securities Exchange Act of 1934,
as amended, which include, but are not limited to, filing annual, quarterly
and other current reports with the Securities and Exchange Commission.
The Bank is licensed by the Commissioner, its deposits are insured by
the FDIC, and it has chosen not to become a member of the Federal Reserve
System. Consequently, the Bank is subject to the supervision of, and is
regularly examined by, the Commissioner and the FDIC. Such supervision and
regulation include comprehensive reviews of all major aspects of the Bank's
business and condition, including its capital ratios, subsidiary operations,
allowance for possible loan losses and other factors. However, no inference
should be drawn that such authorities have approved any such factors. The
Company and the Bank are required to file reports with the Commissioner, the
FDIC and the Board of Governors and provide such additional information as
the Commissioner, FDIC and the Board of Governors may require.
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and
is registered as such
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with, and subject to the supervision of, the Board of Governors. The Company
is required to obtain the approval of the Board of Governors before it may
acquire all or substantially all of the assets of any bank, or ownership or
control of the voting shares of any bank if, after giving effect to such
acquisition of shares, the Company would own or control more than 5% of the
voting shares of such bank. The Bank Holding Company Act prohibits the
Company from acquiring any voting shares of, or interest in, all or
substantially all of the assets of, a bank located outside the State of
California unless such an acquisition is specifically authorized by the laws
of the state in which such bank is located. Any such interstate acquisition
is also subject to the provisions of the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 discussed below.
The Company, and any subsidiaries which it may acquire or organize, are
deemed to be "affiliates" of the Bank within the meaning of that term as
defined in the Federal Reserve Act. This means, for example, that there are
limitations (a) on loans by the Bank to affiliates, and (b) on investments by
the Bank in affiliates' stock as collateral for loans to any borrower. The
Company and its subsidiary are also subject to certain restrictions with
respect to engaging in the underwriting, public sale and distribution of
securities.
In addition, regulations of the Board of Governors promulgated under the
Federal Reserve Act require that reserves be maintained by the Bank in
conjunction with any liability of the Company under any obligation
(promissory note, acknowledgment of advance, banker's acceptance or similar
obligation) with a weighted average maturity of less than seven (7) years to
the extent that the proceeds of such obligations are used for the purpose of
supplying funds to the Bank for use in its banking business, or to maintain
the availability of such funds.
The Board of Governors and the FDIC have adopted risk-based capital
guidelines for evaluating the capital adequacy of bank holding companies and
banks. The guidelines are designed to make capital requirements sensitive to
differences in risk profiles among banking organizations, to take into
account off-balance sheet exposures and to aid in making the definition of
bank capital uniform internationally. Under the guidelines, the Company and
the Bank are required to maintain capital equal to at least 8.0% of its
assets and commitments to extend credit, weighted by risk, of which at least
4.0% must consist primarily of common equity (including retained earnings)
and the remainder may consist of subordinated debt, cumulative preferred
stock, or a limited amount of loan loss reserves.
Assets, commitments to extend credit, and off-balance sheet items are
categorized according to risk and certain assets considered to present less
risk than others permit maintenance of capital at less than the 8% ratio.
For example, most home mortgage loans are placed in a 50% risk category and
therefore require maintenance of capital equal to 4% of such loans, while
commercial loans are placed in a 100% risk category and therefore require
maintenance of capital equal to 8% of such loans.
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
shareholders' 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
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2 capital includes, among other items, limited life (and in the case of
banks, cumulative) preferred stock, mandatory convertible securities,
subordinated debt and a limited amount of reserve for credit losses.
The Board of Governors and the FDIC also adopted minimum leverage ratios
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 leverage ratio establishes a limit on the ability of banking
organizations, including the Company and the Bank, to increase assets and
liabilities without increasing capital proportionately.
The Board of Governors emphasized that the leverage ratio constitutes a
minimum requirement for well-run banking organizations having diversified
risk, including no undue interest rate risk exposure, excellent asset
quality, high liquidity, good earnings and a composite rating of 1 under the
regulatory rating system for banks and 1 under the regulatory rating system
for bank holding companies. 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
described 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 which established (i) a 3 percent Tier 1 minimum capital leverage ratio
for highly-rated banks (those with a composite regulatory rating of 1 and not
experiencing or anticipating significant growth); and (ii) a 4 to 5 percent
Tier 1 minimum capital leverage ratio for all other banks, as a supplement to
the risk-based capital guidelines.
The federal banking agencies during 1996 issued a joint agency policy
statement regarding the management of interest-rate risk exposure (interest
rate risk is the risk that changes in market interest rates might adversely
affect a bank's financial condition) with the goal of ensuring that
institutions with high levels of interest-rate risk have sufficient capital
to cover their exposures. This policy statement reflected the agencies'
decision at that time not to promulgate a standardized measure and explicit
capital charge for interest rate risk in the expectation that industry
techniques for measurement of such risk will evolve.
However, the Federal Financial Institution Examination Counsel ("FFIEC")
on December 13, 1996, approved an updated Uniform Financial Institutions
Rating System ("UFIRS"). In addition to the five components traditionally in
the so-called "CAMEL" rating system which has been used by bank examiners for
a number of years to classify and evaluate the soundness of financial
institutions (including capital adequacy, asset quality, management, earnings
and liquidity), UFIRS includes for all bank regulatory examinations conducted
on or after January 1, 1997, a new rating for a sixth category identified as
sensitivity to market risk. Ratings in this category are intended to reflect
the degree to which changes in interest rates, foreign exchange rates,
commodity prices or equity prices may adversely affect an institution's
earnings and capital. The rating system henceforth will be identified as the
"CAMELS" system.
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
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the Federal Deposit Insurance Act, and violation of the FDIC Order by the
Bank can give rise to enforcement proceedings under Section 8 of the Federal
Deposit Insurance Act.
The FDIC Order provides that the Bank must: (a) retain qualified
management; (b) increase on or before December 31, 1997 and thereafter
maintain Tier 1 capital equal to the greater of $14,000,000 or the equivalent
of a Tier 1 capital to average assets ratio of at least 7.0%; (c) eliminate
from its books classified assets not previously collected or charged off; (d)
not extend additional credit to borrowers with previous classified or charged
off credits which are uncollected; (e) not engage in any activities not
permissible for a national bank subsidiary, except that the Bank and RSC may
continue real estate activities as permitted by the FDIC's letter of November
29, 1996, to the Bank requiring, among other things, that RSC divest all
properties held by it not later than December 31, 1998; (f) review the
adequacy of the Bank's allowance for loan and lease losses and establish a
comprehensive policy for determining its adequacy on a quarterly basis; (g)
develop a plan to control overhead and other expenses and restore the Bank to
profitability; (h) prepare a business/strategic plan for the operation of the
Bank acceptable to the FDIC; (i) not pay cash dividends in any amount except
with the prior written consent of the FDIC and the Commissioner; and (j)
furnish quarterly written progress reports to the FDIC and the Commissioner
detailing the form and manner of any actions taken to comply with the
Administrative Orders.
As a result of an examination of the Bank as of June 30, 1997, the
Department of Financial Institutions and the Bank have stipulated to the
issuance of the State Order by the California Department of Financial
Institutions ("CDFI") which State Order is a final order pursuant to Section
1913 of the California Financial Code.
The State Order provides that the Bank must: (a) retain management and
maintain a Board of Directors for the Bank and RSC acceptable to the
Commissioner and FDIC; (b) increase and maintain tangible shareholders'
equity (shareholders' equity less intangible assets) to an amount not less
than the greater of (i) 7% of its tangible assets (total assets less
intangible assets) or (ii) $14,000,000; (c) maintain an adequate allowance
for loan and lease losses; (d) cause RSC to maintain an adequate reserve for
losses on its real estate investments; (e) cause RSC to reduce the assets
classified as substandard so that the amount of such assets shall not exceed
$10,115,000 by December 31, 1997, $8,750,000 by March 31, 1998, $7,100,000 by
June 30, 1998 and $4,900,000 by September 30, 1998; (f) develop, adopt and
implement a plan acceptable to the Commissioner for divestiture of RSC and
all of RSC's real estate investments by not later than December 31, 1998; (g)
not make any distribution to shareholders except with the prior written
approval of the Commissioner; and (h) furnish written progress reports within
thirty (30) days after the end of each quarter to the Commissioner and the
FDIC describing actions to comply with the State Order.
Management believes the Bank is in substantial compliance with the terms
and conditions of the FDIC Order and the State Order as of December 31, 1997.
See "Item 7 - Capital Resources" for more information regarding the FDIC Order
and the State Order.
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COMPETITION
The banking business in California generally, and in the Bank's primary
service area specifically is highly competitive with respect to both loans
and deposits, and is dominated by a relatively small number of major banks
with many offices operating over a wide geographic area. Among the
advantages such major banks have over the Bank are their ability to finance
wide-ranging advertising campaigns and to allocate their investment assets to
geographic regions of higher yield and demand. Such banks offer certain
services such as trust services and international banking services which are
not offered directly by the Bank and, by virtue of their greater total
capitalization upon which legal lending limits are based, such banks have
substantially higher limits than the Bank. At December 31, 1997, the Bank's
legal lending limits to a single borrower and such borrower's related
interests were $2,400,000 on an unsecured basis and $4,000,000 on a fully
secured basis based on regulatory capital of $16,003,000.
The Bank's primary service area encompasses Fresno County and Madera
County. As cited in "The 1997 Bank and Thrift Branch Office Data Book"
published by the FDIC, as of June 30, 1997, there were 26 banks and savings
and loans operating in Fresno County with total deposits of $5,292,217,000.
At that time, the Bank held a total of $156,304,000 in deposits at it's
Fresno branches representing approximately 2.95% of total bank and savings
and loan deposits in Fresno County. Additionally, there were 13 banks and
savings and loans operating in Madera County with total deposits of
$535,395,000. At that time, the Bank held a total of $15,846,000 in
deposits, representing approximately 2.96% of total bank and savings and loan
deposits in Madera County.
In order to compete with the major financial institutions in its primary
service area, the Bank uses to the fullest extent possible the flexibility
which is accorded by its independent status. This includes an emphasis on
specialized services, local promotional activity, and personal contacts by
the Bank's officers, directors and employees. The Bank also seeks to provide
special services and programs for individuals in its primary service area who
are employed in the professional and business fields, such as loans for
equipment, furniture, tools of the trade or expansion of practices or
businesses. In the event there are customers whose loan demands exceed the
Bank's lending limits, the Bank seeks to arrange for such loans on a
participation basis with other financial institutions. The Bank also assists
those customers requiring services not offered by the Bank to obtain such
services from correspondent banks.
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest rate paid by the Bank to obtain
its deposits and its other borrowings and the interest rate received by the
Bank on loans extended to its customers and on securities held in the Bank's
portfolio comprise the major portion of the Bank's earnings.
Commercial banks compete with savings and loan associations, credit
unions, other financial institutions and other entities for funds. For
instance, yields on corporate and government debt securities and other
commercial paper affect the ability of commercial banks to attract and hold
deposits. Commercial banks also compete for loans with savings and loan
associations, credit unions, consumer finance companies, mortgage companies
and other lending institutions.
The interest rate differentials of the Bank, and therefore its earnings,
are affected not only by general economic conditions, both domestic and
foreign, but also by the monetary and fiscal
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policies of the United States as set by statutes and as implemented by
federal agencies, particularly the Federal Reserve Board. This agency can
and does implement national monetary policy, such as seeking to curb
inflation and combat recession, by its open market operations in United
States government securities, adjustments in the amount of interest free
reserves that banks and other financial institutions are required to
maintain, and adjustments to the discount rates applicable to borrowing by
banks from the Federal Reserve Board. These activities influence the growth
of bank loans, investments and deposits and also affect interest rates
charged on loans and paid on deposits. The nature and timing of any future
changes in monetary policies and their impact on the Bank can't be predicted.
On December 19, 1991, President Bush signed the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). The FDICIA
substantially revised banking regulations, certain aspects of the Federal
Deposit Insurance Act and established a framework for determination of
capital adequacy of financial institutions, among other matters. Under the
FDICIA, financial institutions are placed into five capital adequacy
categories as follows: (1) well capitalized, (2) adequately capitalized, (3)
undercapitalized, (4) significantly undercapitalized, and (5) critically
undercapitalized. The FDICIA authorized the Board of Governors, the
Comptroller and FDIC to establish limits below which financial institutions
will be deemed critically undercapitalized, provided that such limits can not
be less than two percent (2%) of the ratio of tangible equity to total assets
or sixty-five percent (65%) of the minimum leverage ratio established by
regulation. Financial institutions classified as undercapitalized or below
are subject to limitations including restrictions related to (i) growth of
assets, (ii) payment of interest on subordinated indebtedness, (iii) capital
distributions, and (iv) payment of management fees to a parent holding
company.
The FDICIA requires the Board of Governors, the Comptroller and FDIC to
initiate corrective action regarding financial institutions which fail to
meet minimum capital requirements. Such action may result in orders to
augment capital such as through sale of voting stock, reduction in total
assets, and restrictions related to correspondent bank deposits. 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 1995 the FDIC, pursuant to Congressional mandate, reduced bank
deposit insurance assessment rates to a range from $0 to $0.27 per $100 of
deposits, dependent upon bank's risk. The FDIC has continued these reduced
assessment rates through the first semiannual assessment period of 1998.
Based upon the above risk-based assessment rate schedule, the Bank's current
capital ratios, the Bank's current level of deposits, and assuming no further
change in the assessment rate applicable to the Bank during 1998, the Bank
estimates that its annual noninterest expense attributed to assessments will
increase during 1998 by approximately $245,000.
The Board of Governors, the Comptroller and FDIC adopted regulations
effective December 19, 1992, implementing a system of prompt corrective
action pursuant to Section 38 of the Federal Deposit Insurance Act and
Section 131 of the FDICIA. The regulations establish five capital categories
with the following characteristics: (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
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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%.
The regulations established procedures for classification of financial
institutions within the capital categories, filing and reviewing capital
restoration plans required under the regulations and procedures for issuance
of directives by the appropriate regulatory agency, among other matters. The
regulations impose restrictions upon all institutions to refrain from certain
actions which would cause an institution to be classified within any one of
the three "undercapitalized" categories, such as declaration of dividends or
other capital distributions or payment of management fees, if following the
distribution or payment the institution would be classified within one of the
"undercapitalized" categories. In addition, institutions which are
classified in one of the three "undercapitalized" categories are subject to
certain mandatory and discretionary supervisory actions. Mandatory
supervisory actions include (1) increased monitoring and review by the
appropriate federal banking agency; (2) implementation of a capital
restoration plan; (3) total asset growth restrictions; and (4) limitation
upon acquisitions, branch expansion, and new business activities without
prior approval of the appropriate federal banking agency. Discretionary
supervisory actions may include (1) requirements to augment capital; (2)
restrictions upon affiliate transactions; (3) restrictions upon deposit
gathering activities and interest rates paid; (4) replacement of senior
executive officers and directors; (5) restrictions upon activities of the
institution and its affiliates; (6) requiring divestiture or sale of the
institution; and (7) any other supervisory action that the appropriate
federal banking agency determines is necessary to further the purposes of the
regulations. Further, the federal banking agencies may not accept a capital
restoration plan without determining, among other things, that the plan is
based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital. In addition, for a capital restoration
plan to be acceptable, the depository institution's parent holding company
must guarantee that the institution will comply with such capital restoration
plan. The aggregate liability of the parent holding company under the
guaranty is limited to the lesser of (i) an amount equal to 5 percent of the
depository institution's total assets at the time it became undercapitalized,
and (ii) the amount that is necessary (or would have been necessary) to bring
the institution into compliance with all capital standards applicable with
respect to such institution as of the time it fails to comply with the plan.
If a depository institution fails to submit an acceptable plan, it is treated
as if it were "significantly undercapitalized." The FDICIA also restricts
the solicitation and acceptance of and interest rates payable on brokered
deposits by insured depository institutions that are not "well capitalized."
An "undercapitalized" institution is not allowed to solicit deposits by
offering rates of interest that are significantly higher than the prevailing
rates of interest on insured deposits in the particular institution's normal
market areas or in the market areas in which such deposits would otherwise be
accepted.
Any financial institution which is classified as "critically
undercapitalized" must be placed in conservatorship or receivership within 90
days of such determination unless it is also determined that some other
course of action would better serve the purposes of the regulations.
Critically undercapitalized institutions are also prohibited from making (but
not accruing) any
10
<PAGE>
payment of principal or interest on subordinated debt without the prior
approval of the FDIC and the FDIC must prohibit a critically undercapitalized
institution from taking certain other actions without its prior approval,
including (1) entering into any material transaction other than in the usual
course of business, including investment expansion, acquisition, sale of
assets or other similar actions; (2) extending credit for any highly
leveraged transaction; (3) amending articles or bylaws unless required to do
so to comply with any law, regulation or order; (4) making any material
change in accounting methods; (5) engaging in certain affiliate transactions;
(6) paying excessive compensation or bonuses; and (7) paying interest on new
or renewed liabilities at rates which would increase the weighted average
costs of funds beyond prevailing rates in the institution's normal market
areas.
The capital ratio requirements for the "adequately capitalized" category
generally are the same as the existing minimum risk-based capital ratios
applicable to the Company and the Bank. It is not possible to predict what
effect the prompt corrective action regulation will have upon the Company and
the Bank or the banking industry taken as a whole in the foreseeable future.
Under the FDICIA, the federal financial institution agencies have
adopted regulations which require institutions to establish and maintain
comprehensive written real estate policies which address certain lending
considerations, including loan-to-value limits, loan administrative policies,
portfolio diversification standards, and documentation, approval and
reporting requirements. The FDICIA further generally prohibits an insured
state bank from engaging as a principal in any activity that is impermissible
for a national bank, absent FDIC determination that the activity would not
pose a significant risk to the Bank Insurance Fund, and that the bank is, and
will continue to be, within applicable capital standards. Similar
restrictions apply to subsidiaries of insured state banks. The Company does
not currently intend to engage in any activities which would be restricted or
prohibited under the FDICIA.
The federal financial institution agencies have established safety and
soundness standards for insured financial institutions covering (1) internal
controls, information systems and internal audit systems; (2) loan
documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset
growth; (6) compensation, fees and benefits; and (7) excessive compensation
for executive officers, directors or principal shareholders which could lead
to material financial loss. If the agency determines that an institution
fails to meet any standard, the agency may require the financial institution
to submit to the agency an acceptable plan to achieve compliance with the
standard. If the agency requires submission of a compliance plan and the
institution fails to timely submit an acceptable plan or to implement an
accepted plan, the agency must require the institution to correct the
deficiency. Under the final rule, an institution must file a compliance plan
within 30 days of a request to do so from the institution's primary federal
regulatory agency. The agencies may elect to initiate enforcement action in
certain cases rather than rely on an existing plan particularly where failure
to meet one or more of the standards could threaten the safe and sound
operation of the institution.
The Board of Governors issued final amendments to its risk-based capital
guidelines to be effective December 31, 1994, requiring that net unrealized
holding gains and losses on securities available for sale determined in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," are not to be included in the Tier 1 capital component
consisting of common stockholders' equity. Net unrealized losses on
marketable equity securities (equity securities with a readily determinable
fair value), however, will continue to be deducted from Tier 1 capital. This
rule has the general effect of valuing available for sale
11
<PAGE>
securities as amortized cost (based on historical cost) rather than at fair
value (generally at market value) for purposes of calculating the risk-based
and leverage capital ratios.
On December 13, 1994, the Board of Governors issued amendments to its
risk-based capital guidelines regarding concentration of credit risk and
risks of non-traditional activities, which were effective January 17, 1995.
As amended, the risk-based capital guidelines identify concentrations of
credit risk and evaluate an institution's ability to manage such risks and
the risk posed by non-traditional activities as important factors in
assessing an institution's overall capital adequacy.
Since 1986, California has permitted California banks and bank holding
companies to be acquired by banking organizations based in other states on a
"reciprocal" basis (i.e., provided the other state's laws permit California
banking organizations to acquire banking organizations in that state on
substantially the same terms and conditions applicable to local banking
organizations). Some increase in merger and acquisition activity among
California and out-of-state banking organizations has occurred as a result of
this law, as well as increased competition for loans and deposits. Since
October 2, 1995, California law implementing certain provisions of prior
federal law has (1) permitted interstate merger transactions; (2) prohibited
interstate branching through the acquisition of a branch business unit
located in California without acquisition of the whole business unit of the
California bank; and (3) prohibited interstate branching through de novo
establishment of California branch offices. Initial entry into California by
an out-of-state institution must be accomplished by acquisition of or merger
with an existing whole bank which has been in existence for at least five
years.
Community Reinvestment Act ("CRA") regulations effective as of July 1,
1995 evaluate banks' lending to low and moderate income individuals and
businesses across a four-point scale from "outstanding" to "substantial
noncompliance," and are a factor in regulatory review of applications to
merge, establish new branches or form bank holding companies. In addition,
any bank rated in "substantial noncompliance" with the CRA regulations may be
subject to enforcement proceedings.
The Bank has a current rating of "satisfactory" CRA compliance, and is
scheduled for further examination for CRA compliance during 1998.
Recently, the Federal banking agencies, especially the OCC and the Board
of Governors, have taken steps to increase the types of activities in which
national banks and bank holding companies can engage, and to make it easier
to engage in such activities. On November 20, 1996, the OCC issued final
regulations permitting national banks to engage in a wider range of
activities through subsidiaries. "Eligible institution" (those national banks
that are well capitalized, have a high overall rating and a satisfactory CRA
rating, and are not subject to an enforcement order) may engage in activities
related to banking through operating subsidiaries after going through a new
expedited application process. In addition, the new regulations include a
provision whereby a national bank may apply to the OCC to engage in an
activity through a subsidiary in which the bank itself may not engage. This
OCC regulation could be advantageous to national banks depending on the
extent to which the OCC permits national banks to engage in new lines of
business.
Certain legislative and regulatory proposals that could affect the Bank
and the banking business in general are pending or may be introduced before
the United States Congress, the
12
<PAGE>
California State Legislature and Federal and state government agencies. The
United States Congress is considering numerous bills that could reform
banking laws substantially. For example, proposed bank modernization
legislation under consideration would, among other matters, include a repeal
of the Glass-Steagall Act restrictions on banks that now prohibit the
combination of commercial and investment banks.
It is not known to what extent, if any, the legislative proposals will
be enacted and what effect such legislation would have on the structure,
regulation and competitive relationships of financial institutions. It is
likely, however, that many of these proposals would subject the Company and
the Bank to increased regulation, disclosure and reporting requirements and
would increase competition and the cost of doing business.
In addition to pending legislative changes, the various banking
regulatory agencies frequently propose rules and regulations to implement and
enforce already existing legislation. It cannot be predicted whether or in
what form any such rules or regulations will be enacted or the effect that
such rules and regulations may have on the business of the Company and the
Bank.
Item 2. PROPERTIES
The Company leases land and a building at 5240 N. Palm Avenue, Fresno,
California, under a lease agreement having an initial term of approximately
30 years with 2 five year options. The lease is accounted for as an
operating lease for the land and a capital lease for the building. The
facility is approximately 9,000 square feet with rental payments of $1.05 per
square foot per month. The lease calls for rent payment increases of 25%
every five years. The foregoing description of the lease is qualified by
reference to the lease agreement dated December 22, 1988 attached as exhibit
10.10 to the Company's Registration Statement on Form S-4 filed with the
Securities and Exchange Commission on July 27, 1994.
On February 20, 1995, the Bank entered into a lease agreement for its
SBA loan production office located at 3501 Coffee Road, Suite 3, Modesto,
California. The lease is for a period of 5 years on facilities of 1,072
square feet at a lease rate of $1.35 per square foot. The lease calls for
annual rent adjustments based on changes in the consumer price index of not
less than 3% and not more than 5%. The foregoing description of the lease is
qualified by reference to the lease agreement dated February 20, 1995 and
attached as exhibit 10.19 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995.
On August 17, 1995, the Company entered into a sale-leaseback of its
corporate headquarters located at 7060 N. Fresno Street, Fresno, California.
The leaseback is accounted for as an operating lease with a term of 15 years
and contains provisions for periodic rent increases every three years based
on changes in the consumer price index not to exceed 12% per year. The
facility is approximately 24,100 square feet with the initial rental rate set
at $1.35 per square foot. The foregoing description of the lease is qualified
by reference to the lease agreement dated August 17, 1995 and attached as
exhibit 10.21 to the Company's Form 10-K for the year ended December 31, 1995.
On December 14, 1995, the Bank renewed the lease on its limited service
facility, commonly referred to as the Mini Branch, at 726 W. Shaw Avenue,
Fresno, California. The term of the lease is for five years with provisions
for rent rate increases in years 2 and 4 as specified in the lease agreement.
The facility is approximately 350 square feet in size with the initial rental
13
<PAGE>
rate set at $1,875 per month. The foregoing description of the lease is
qualified by reference to the lease agreement dated December 14, 1995 and
attached as exhibit 10.23 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995.
On May 13, 1996, the Bank entered into a lease for its fourth branch
office, commonly referred to as the Madera Branch, at 126 North "D" Street,
Madera, California. The initial term of the lease is for three years at a
fixed rate of $2,091 per month with an option for an additional three years
at a rate of $2,510 per month. The facility is approximately 2,500 square
feet in size and is located in the primary downtown business district in
Madera. The foregoing description of the lease is qualified by reference to
the lease agreement dated May 13, 1996 and attached as exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
Rent expense under all operating lease agreements was $528,000, $540,000
and $273,000, for the years ended December 31, 1997, 1996 and 1995,
respectively.
At December 31, 1997, the aggregate minimum future lease commitments
under capital leases and noncancelable operating leases with terms of one
year or more consist of the following:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
<S> <C> <C>
1998 $ 48 $ 516
1999 48 506
2000 76 477
2001 76 457
2002 76 456
------ --------
Thereafter 2,526 4,476
------ --------
Total minimum lease payments 2,850 $ 6,888
Amount representing interest (2,341)
------ --------
Net present value of minimum
lease payments $ 509
------
</TABLE>
Item 3. LEGAL PROCEEDINGS
There are no material proceedings adverse to the Company or the Bank to
which any director, officer, affiliate of the Company or 5% shareholder of
the Company or the Bank, or any associate of any such director, officer,
affiliate or 5% shareholder of the Company or Bank is a party, and none of
the above persons has a material interest adverse to the Company or the Bank.
Neither the Company nor the Bank is a party to any pending legal or
administrative proceedings (other than ordinary routine litigation incidental
to the Company's or the Bank's business) and no such proceedings are known to
be contemplated.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
14
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) MARKET INFORMATION
There is limited trading in and no established public market for the
Company's Common Stock. As of March 18, 1998 the Company's Common Stock was
not listed on any exchange, however, the Company has filed an application
with Nasdaq to list its common stock on the Nasdaq National Market System.
Management anticipates the Company's application will be approved and its
common stock will begin trading on Nasdaq during the second quarter of 1998.
Hoefer & Arnett, Incorporated, Sutro & Co., Banc Stock Exchange and Van
Kasper & Company facilitate trades in the Company's Common Stock. Based on
information provided to the Company from these sources, the range of high and
low bids for the Company's Common Stock for the two most recent fiscal years
are set forth below. Such bid prices represent inter-dealer prices without
retail mark-up, mark-down or commission and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
CALENDAR YEAR LOW HIGH
<S> <C> <C>
1996
First Quarter $7.000 $ 8.000
Second Quarter 7.500 9.000
Third Quarter 7.000 8.500
Fourth Quarter 7.250 9.875
1997
First Quarter 9.125 10.625
Second Quarter 9.000 10.000
Third Quarter 8.250 10.125
Fourth Quarter 9.250 11.000
</TABLE>
The bid price for the Company's Common Stock was $14.00 as of March 18, 1998.
(b) HOLDERS
As of March 18, 1998, there were approximately 690 holders of the Common
Stock of the Company. There are no other classes of common equity
outstanding.
(c) DIVIDENDS
The Company's shareholders are entitled to receive dividends when and as
declared by its Board of Directors, out of funds legally available therefor,
subject to the restrictions set forth in the California General Corporation
Law (the "Corporation Law"). The Corporation Law provides that a corporation
may make a distribution to its shareholders if the corporation's retained
earnings equal at least the amount of the proposed distribution. The
Corporation Law further provides that, in the event that sufficient retained
earnings are not available for the proposed distribution, a corporation may
nevertheless make a distribution to its shareholders if it
15
<PAGE>
meets two conditions, which generally stated are as follows: (1) the
corporation's assets equal at least 1-1/4 times its liabilities; and (2) the
corporation's current assets equal at least its current liabilities or, if
the average of the corporation's earnings before taxes on income and before
interest expenses for the two preceding fiscal years was less than the
average of the corporation's interest expenses for such fiscal years, then
the corporation's current assets must equal at least 1-1/4 times its current
liabilities. Funds for payment of any cash dividends by the Company would be
obtained from its investments as well as dividends and/or management fees
from the Bank. The payment of cash dividends by the Bank is subject to
restrictions set forth in the California Financial Code (the "Financial
Code"). The Financial Code provides that banks may not make a cash
distribution to its shareholders in excess of the lesser of (a) the bank's
retained earnings; or (b) the bank's net income for its last three fiscal
years, less the amount of any distributions made by the bank or by any
majority-owned subsidiary of the bank to the shareholders of the bank during
such period. However, a bank may, with the approval of the Commissioner,
make a distribution to its shareholders in an amount not exceeding the
greater of (a) its retained earnings; (b) its net income for its last fiscal
year; or (c) its net income for its current fiscal year. In the event that
the Commissioner determines that the shareholder's equity of a bank is
inadequate or that the making of a distribution by the bank would be unsafe
or unsound, the Commissioner may order the bank to refrain from making a
proposed distribution.
The FDIC may also restrict the payment of dividends if such payment
would be deemed unsafe or unsound or if after the payment of such dividends,
the Bank would be included in one of the "undercapitalized" categories for
capital adequacy purposes pursuant to the Federal Deposit Insurance
Corporation Improvement Act of 1991. Additionally, while the Board of
Governors has no general restriction with respect to the payment of cash
dividends by an adequately capitalized bank to its parent holding company,
the Board of Governors might, under certain circumstances, place restrictions
on the ability of a particular bank to pay dividends based upon peer group
averages and the performance and maturity of the particular bank, or object
to management fees on the basis that such fees cannot be supported by the
value of the services rendered or are not the result of an arm's length
transaction.
Under these provisions and considering minimum regulatory capital
requirements, at December 31, 1997, further dividends from the Bank to the
Company would need prior approval of the Commissioner. Additionally, the
Company's Board of Directors, have consented to orders with the FDIC and the
CDFI that among other matters, provide that the Company will not declare
additional cash dividends without the prior approval of the FDIC and CDFI.
See "Item 1 - Supervision and Regulation" for additional information
regarding the FDIC Order and State Order.
During 1997, the Company paid no cash dividends. During 1996, the
Company paid four quarterly cash dividends of $.06 per common share and
during 1995, the Company paid four cash dividends of $.05 per common share,
as well as a 5% stock dividend to shareholders of record on May 12, 1995.
There can be no assurance that the Company will pay dividends in the future.
The determination to pay dividends is subject to regulatory restrictions
applicable to the Bank and the Company, the financial condition of the Bank
and the Company and such other factors as the Board of Directors of the
Company may consider.
16
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The following table presents certain consolidated financial information
concerning the business of the Company and the Bank. This information should
be read in conjunction with the Consolidated Financial Statements and the
notes thereto, and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained elsewhere herein.
<TABLE>
<CAPTION>
(In thousands, except
percentages, share and per share data) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Interest income $ 15,285 $ 13,227 $ 12,841 $ 10,708 $ 8,952
Interest expense 5,320 4,694 5,092 2,989 2,509
-------- -------- -------- -------- --------
Net interest income 9,965 8,533 7,749 7,719 6,443
Provision for loan loss 1,353 - 470 487 37
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 8,612 8,533 7,279 7,232 6,406
Non-interest income $ 2,687 $ 3,109 $ 1,883 $ 4,026 $ 3,604
Non-interest expense 13,406 9,902 12,105 8,327 6,660
-------- -------- -------- -------- --------
Income (loss) before income taxes (2,107) 1,740 (2,943) 2,931 3,350
Income taxes (benefit) (833) 732 (1,176) 1,195 1,388
-------- -------- -------- -------- --------
Net Income (loss) (1,274) 1,008 (1,767) 1,736 1,962
FINANCIAL CONDITION AND CAPITAL
YEAR END BALANCES:
Total assets $198,241 $181,058 $163,682 $155,802 $144,012
Net loans 126,430 99,770 94,529 89,589 85,453
Investments in real estate 4,338 16,926 17,954 16,209 13,797
Deposits 176,279 159,802 143,745 137,889 123,529
Shareholders' equity 18,734 13,470 12,942 14,327 12,945
FINANCIAL CONDITION AND CAPITAL
AVERAGE BALANCES:
Total assets $186,243 $166,532 $160,215 $144,734 $124,259
Net loans 110,025 98,333 91,046 83,230 70,984
Investments in real estate 12,538 17,892 17,801 15,667 12,034
Deposits 168,296 143,723 142,943 128,288 110,272
Shareholders' equity 13,272 13,358 14,948 13,737 11,950
FINANCIAL RATIOS:
Return on average assets (0.68%) 0.61% (1.10%) 1.20% 1.58%
Return on average equity (9.60%) 7.55% (11.82%) 12.64% 16.42%
Average equity to average assets 7.13% 8.02% 9.33% 9.49% 9.62%
Dividend payout ratio - 43.33% (19.93%) 9.50% -
Allowance for loan losses to total loans 1.71% 1.58% 1.85% 1.69% 1.54%
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (.68) $ .55 $ (.98) $ 1.00 $ 1.14
Diluted $ (.68) $ .54 $ (.98) $ .94 $ 1.08
Shares on which earnings (loss) per common
share were based:
Basic 1,860,000 1,818,000 1,805,000 1,734,000 1,716,000
Diluted 1,860,000 1,872,000 1,805,000 1,841,000 1,821,000
Cash dividends declared per common share: - $ 0.24 $ 0.20 $ 0.10 -
</TABLE>
17
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed or incorporated by reference in this Annual
Report on Form 10-K including, but not limited to, matters described in Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. Changes to such risks and uncertainties, which could impact future
financial performance, include, among others, (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 securities markets. Therefore, the information set forth therein
should be carefully considered when evaluating the business prospects of the
Company and the Bank.
BUSINESS ORGANIZATION
Regency Bancorp (the "Company") is a California corporation organized to
act as the holding company for Regency Bank (the "Bank") and Regency
Investment Advisors, Inc. ("RIA"), a SEC registered investment advisor. In
1995, upon its formation, the Company acquired all of the outstanding common
stock of the Bank. Other than its investment in the Bank and RIA, the
Company currently conducts no other significant business activities, although
it is authorized to engage in a variety of activities which are deemed
closely related to the business of banking upon prior approval of the Board
of Governors, the Company's principal regulator.
The Bank engages in commercial and consumer banking, offering a diverse
range of traditional banking products and services to the business,
professional and consumer markets, with emphasis on business and professional
accounts. The Bank emphasizes the delivery of these products within its
primary service areas consisting of Fresno County and Madera County.
RIA provides investment management and consulting services from offices
located in the Company's headquarters office at 7060 N. Fresno St., Fresno,
California.
The following analysis is designed to enhance the reader's understanding
of the Company's financial condition and the results of its operations as
reported in the Consolidated Financial Statements included in this Annual
Report. Reference should be made to those statements and the Selected
Financial Data presented elsewhere in this report for additional detailed
information.
OVERVIEW
The 1997 fiscal year was a year of significant changes for Regency
Bancorp. Highlights included overall asset growth of 9.5% which allowed the
Company to reach nearly 200 million in total assets, substantial progress in
reducing RSC's real estate holdings, growth in interest earning assets of
more than 20%, a private placement capital offering of 750,000 shares which
netted the Company $5.9 million in new capital and an overall loss for the
year caused by significant losses in RSC related to the divestiture of its
holdings. Additionally, during the fourth quarter the board consented to
administrative orders imposed by the FDIC and CDFI.
18
<PAGE>
For the year ended December 31, 1997, total assets increased by
$17,183,000 or 9.5%, to $198,241,000 from $181,058,000 at December 31, 1996.
During 1996, total assets increased $17,376,000 or 10.6% from $163,682,000 at
December 31, 1995. For 1997, total loans increased $27,332,000 or 26.7% as a
result of the Company's decision to hold newly originated SBA loans rather
than sell the guaranteed portion in the secondary market. In 1996, total
loans increased 5.3% or $5,166,000 to $102,303,000 from $97,137,000 at
December 31, 1995.
During 1997, the Company significantly reduced its investments in real
estate, reducing its holdings by 73.7% or $12,151,000 to $4,338,000 from
$16,489,000 at December 31, 1996 and from $17,954,000 at December 31, 1995.
With the reduction in real estate at December 31, 1997, the Company was able
to increase its interest earning assets by $29,662,000 or 21.1% to
$168,909,000 from $139,793,000 at December 31, 1996 and from $128,108,000 at
December 31, 1995.
For the fiscal year ended December 31, 1997, the Company recorded a net
loss of $1,274,000 representing a decrease of $2,282,000 from 1996's net
income of $1,008,000. For the fiscal year ended December 31, 1996, the
Company had a net income of $1,008,000 representing an increase of
$2,775,000 from 1995's net loss of $1,767,000. On a per common and common
equivalent share basis, the net loss for 1997 was $(.68) compared to net
income of $.55 per share in 1996 and a net loss of $(.98) per share in 1995.
The net loss in 1997 was primarily the result of losses totaling $5.7
million related to the dissolution of RSC's real estate development
activities. The net income recorded in 1996 was primarily a result of lower
losses related to RSC's real estate development activities, as well as, an
increase of income from the sale of loans. 1995's loss was also primarily
attributable to losses from RSC's real estate development activities of $3.4
million. Additional discussion of RSC's activities and the losses related
to the divestiture of it's holdings can be found in more detail later in this
analysis.
Common shareholder's equity increased by $5,264,000 during 1997 to
$18,734,000, primarily as a result of the private placement capital offering
completed by the Company in December 1997. In 1996, shareholder's equity
increased by $528,000 to $13,470,000, primarily as a result of the retention
of earnings net of four cash dividends totaling $437,000. In 1995,
shareholders equity declined by $1,385,000 to $12,942,000 primarily as a
result of losses experienced by RSC. During 1997, the Company paid no cash
dividends. During 1996, the Company declared and paid four quarterly cash
dividends of $.06 per common share. The Company paid four cash dividends of
$.05 in 1995. It is the objective of management to maintain adequate capital
for future growth through the retention of earnings. Additionally, the Bank
and Company have agreed to administrative orders which require the approval
of the FDIC and CDFI prior to declaration and payment of additional cash
dividends. Therefore, there can be no assurance that the Company will pay
dividends in the future. See "Item 5 - Market For Registrant's Common Equity
and Related Stockholder Matters", for discussion of dividend restrictions
applicable to the Company and Bank. The Company's ratio of common
shareholders' equity to total assets was 9.45% at December 31, 1997 compared
to 7.44% at December 31, 1996 and 7.91% at December 31, 1995. In addition
to the cash dividends paid in 1996 and 1995, respectively, the Company
distributed a five percent stock dividend during 1995. Per share earnings
have been adjusted to reflect any stock dividends and any dilutive effect of
common stock equivalents (stock options outstanding but not exercised)
calculated on the treasury stock method.
19
<PAGE>
INVESTMENT SECURITIES
The provisions of Statement of Financial Accounting Standards (SFAS)
115 require, among other things, that certain investments in debt and equity
securities be classified under three categories: securities held-to-maturity;
trading securities; and securities available-for-sale. Securities classified
as held-to-maturity are to be reported at amortized cost; securities
classified as trading securities are to be reported at fair value with
unrealized gains and losses included in operations; and securities classified
as available-for-sale are to be reported at fair value with unrealized gains
and losses excluded from earnings and reported as a separate component of
shareholders' equity, net of tax. The Company has not classified securities
as held-to-maturity or trading securities.
Although the Company currently has the ability to hold its entire
investment portfolio until maturity, management makes a determination at the
time of purchase as to which classification is most appropriate based on
various factors. Securities classified as held-to-maturity are stated at
amortized cost, adjusted for amortization of premiums and accretion of
discounts. Such amortization and accretion is included in investment income.
Interest on securities classified as held-to-maturity is included in
investment income.
Securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a separate
component of shareholders' equity. The amortized cost of debt securities in
this category is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization and accretion is included in
investment income. Realized gains and losses and declines in value judged to
be other-than-temporary on available-for-sale securities are included in
investment income. The cost of securities sold is based on the specific
identification method. Interest on securities classified as
available-for-sale is included in investment income.
During the period between December 31, 1996 and December 31, 1997, the
Company recorded a net increase in the value of its available-for-sale
portfolio of $203,000 net of applicable taxes. This change is reflected as a
change in shareholders' equity in the Consolidated Statements of
Shareholders' Equity. This change in value is primarily the result of an
overall decline in interest rates resulting in higher market values of the
Company's security portfolio.
20
<PAGE>
The following is a comparison of the amortized cost and approximate fair value
of securities available-for-sale:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
AVAILABLE -FOR-SALE SECURITIES DECEMBER 1997 DECEMBER 1996 DECEMBER 1995
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands) Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasuries $ 2,007 $ 2,012 $ 2,020 $ 2,030 $ 2,003 $ 2,004
U.S. Government Agencies 17,431 17,489 21,408 21,383 20,474 20,459
Mortgage-backed Securities 11,541 11,647 7,972 7,948 7,655 7,686
State and Political Subdivisions 5,441 5,624 1,517 1,559 1,540 1,601
Equity Securities 214 214 350 350 - -
- -----------------------------------------------------------------------------------------------------------------------------
$36,634 $36,986 $33,267 $33,270 $31,672 $31,750
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the securities available-for-sale as of December
31, 1997 and weighted average yields of such securities.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
SECURITIES WITHIN THROUGH THROUGH AFTER
AVAILABLE-FOR-SALE (1) ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasuries $2,007 6.05% $ - 0.00% $ - $ - 0.00% $ 2,007 6.05%
U.S. Government agencies - -% 10,811 6.48% 6,620 7.21% - 0.00% 17,431 6.75%
Mortgage-backed securities - -% 575 7.07% 1,934 6.92% 9,032 6.57% 11,541 6.68%
State and political subdivisions 200 5.25% 776 5.90% 104 4.95% 4,361 5.18% 5,441 5.28%
Equity Securities 214 5.57% - 0.00% - 0.00% - 0.00% 214 5.57%
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL $2,421 6.52% $12,162 6.49% $8,658 7.10% $13,393 6.11% $36,634 6.46%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Yields calculated on nontaxable securities have not considered tax
equivalent effects.
There were no investment securities classified as held-to-maturity at December
31, 1997 and 1996.
NET INTEREST INCOME
The Company's operating results depend primarily on net interest income
(the difference between the interest earned on loans, investment securities
and federal funds sold 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.
21
<PAGE>
CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND INTEREST RATES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
(In thousands, except
percentages) AVERAGE YIELD/ INTEREST AVERAGE YIELD/ INTEREST AVERAGE YIELD/ INTEREST
BALANCE RATE BALANCE RATE BALANCE RATE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans (1) $111,891 11.18% $12,506 $100,052 11.25% $11,255 $ 92,501 11.69% $10,815
Investment securities (2) 35,879 6.49% 2,328 29,013 6.22% 1,805 30,665 6.27% 1,923
Federal funds sold & other 8,417 5.36% 452 3,254 5.13% 167 1,907 5.40% 103
- --------------------------------------------------------------------------------------------------------------
Total interest-
earning assets 156,187 9.79% 15,286 132,319 10.00% 13,227 125,073 10.27% 12,841
- --------------------------------------------------------------------------------------------------------------
Noninterest-earning assets:
Allowances for credit losses (1,866) (1,719) (1,455)
Cash and due from banks 9,562 8,482 7,920
Real estate investments 12,538 17,518 17,399
Other real estate owned 462 374 402
Premises and equipment, net 2,041 2,296 4,769
Cash surrender value of
life insurance 2,965 2,829 2,699
Accrued interest receivable
and other assets 4,354 4,435 3,408
- --------------------------------------------------------------------------------------------------------------
Total average assets $186,243 $166,534 $160,215
- --------------------------------------------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Transaction accounts $ 50,240 2.52% $1,264 $ 46,237 2.67% $1,235 $ 51,759 3.33% $ 1,721
Savings accounts 34,150 4.09% 1,397 25,327 4.18% 1,058 22,518 4.76% 1,071
Time deposits 47,223 5.47% 2,580 41,791 5.36% 2,241 40,379 5.51% 2,225
Federal funds purchased
and other (3) 3,104 2.58% 80 6,795 2.36% 160 1,635 4.59% 75
- --------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 134,717 3.95% 5,321 120,150 3.91% 4,694 116,291 4.38% 5,092
- --------------------------------------------------------------------------------------------------------------
Noninterest-bearing
liabilities:
Transaction accounts 36,683 30,369 26,652
Other liabilities 1,571 2,657 2,324
- --------------------------------------------------------------------------------------------------------------
Total liabilities 172,971 153,176 145,267
- --------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock 9,202 8,868 8,500
Retained earnings 4,029 4,529 6,678
Unrealized gain/(loss) on
investment securities 41 (39) (230)
- --------------------------------------------------------------------------------------------------------------
Total shareholders' equity 13,272 13,358 14,948
- --------------------------------------------------------------------------------------------------------------
Total average liabilities
and shareholders' equity $186,243 $166,534 $160,215
- --------------------------------------------------------------------------------------------------------------
Net interest income $9,965 $ 8,533 $ 7,749
- --------------------------------------------------------------------------------------------------------------
Interest income as a
percentage of average
interest-earning assets 9.79% 10.00% 10.27%
Interest expense as a
percentage of average
interest-earning assets (3.41%) (3.55%) (4.07%)
- --------------------------------------------------------------------------------------------------------------
Net interest margin 6.38% 6.45% 6.20%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Loan amounts include nonaccrual loans, but the related interest income
has been included only for the period prior to the loan being placed on a
nonaccrual basis. Loan interest income includes loan fees of approximately
$1,252,000, $1,232,000 and $1,220,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
(2) Applicable nontaxable securities yields have not been calculated on a
taxable-equivalent basis because they are not material to the Company's
results of operations.
(3) Interest expense has been reduced by capitalized interest on real estate
projects of approximately $0, $0 and $55,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
22
<PAGE>
Changes in the net interest income can be attributed to changes in the
yield on interest-earning assets, the rate paid on interest-bearing liabilities,
as well as changes in the volume of interest-earning assets and interest-bearing
liabilities. The following table presents the dollar amount of certain changes
in interest income and expense for each major component of interest-earning
assets and interest-bearing liabilities and the difference attributable to
changes in average rates and volumes for the periods indicated.
VOLUME/RATE ANALYSIS
<TABLE>
<CAPTION>
(In thousands) 1997 - 1996 1996 - 1995
- --------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET INTEREST EARNINGS VARIANCE ANALYSIS: (1)
Increase (decrease) in interest income:
Loans 1,323 (72) 1,251 820 (381) 439
Investment securities (2) 443 80 523 (103) (15) (118)
Federal funds sold and other 277 8 285 69 (5) 64
- --------------------------------------------------------------------------------------------------------------------
Total 2,043 16 2,059 786 (401) 385
- --------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Transaction accounts 88 (59) 29 (171) (315) (486)
Savings accounts 360 (21) 339 (533) 520 (13)
Time deposits 295 44 339 69 (53) 16
Federal funds purchased and other (97) 17 (80) 100 (15) 85
- --------------------------------------------------------------------------------------------------------------------
Total 646 (19) 627 (535) 137 (398)
- --------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income 1,397 35 1,432 1,321 (538) 783
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A change due to both volume and rate has been allocated to the change in
volume and rate in proportion to the relationship of the dollar amount of the
change in each.
(2) Changes calculated on nontaxable securities have not considered tax
equivalent effects.
Total interest income increased $2,059,000 or 15.6% in 1997 to
$15,286,000. During 1996, interest income before the provision for loan
losses increased by $386,000 or 3.00% to $13,227,000 from $12,842,000 in
1995. Interest expense in 1997 increased by $627,000 or 13.4% to $5,321,000.
Interest expense in 1996 declined by $398,000 or 7.81% to $4,694,000 for the
year compared to $5,092,000 for 1995. The Company's net interest margin
declined to 6.38% in 1997 from 6.45% in 1996 and 6.20% in 1995. The primary
reason for the decline in net interest margin was a drop in the average yield
on earning assets of .21% which offset a .14% decline in interest expense to
average earning assets.
Average interest-earning assets increased $23,868,000 to $156,187,000
in 1997 compared to $132,319,000 in 1996 and $125,073,000 in 1995. Growth in
average interest earning assets was spread over all earning asset categories
with federal funds sold increasing 158.7%, investments increasing 23.7% and
loans increasing 11.8%. Average interest bearing liabilities grew by
$14,569,000 in 1997 to $134,719,000 from $120,150,000 in 1996 and
$116,291,000 in 1995. All major interest bearing liabilities grew during 1997
with the exception of federal funds purchased and other. During 1997, the
Company was able to retire all debt incurred as a result of the acquisition
of limited partnership properties involving RSC. In April 1997, in an effort
to improve it's interest margin and overall interest income, the Company
began to accumulate SBA loans that previously had been sold to generate
noninterest income. For the quarter ended December 31, 1997, the Company had
increased its net interest margin to 6.60%.
23
<PAGE>
INTEREST-EARNING ASSET MIX
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(In thousands except 1997 1996 1995
percentages)
- --------------------------------------------------------------------------------------------------------------------
(Percentage of average interest Average Percentage Average Percentage Average Percentage
earning assets) Balance of Total Balance of Total Balance of Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSET MIX:
Loans $ 111,891 71.6% $ 100,052 75.61% $ 92,501 73.96%
Investment securities 35,879 23.0% 29,013 21.93% 30,665 24.52%
Federal funds sold and other 8,417 5.4% 3,254 2.46% 1,907 1.52%
- --------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS $ 156,187 100.0% $ 132,319 100.0% $ 125,073 100.0%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
NONINTEREST INCOME
The Company receives a significant portion of its income from
noninterest sources related both to activities conducted by the Bank (SBA
loan origination's, servicing and depositor service charges), as well as from
RIA (income from investment management services).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NONINTEREST INCOME:
Gain on sale of loans $ 608 $ 1,315 $ 590
Depositor service charges 397 338 271
Income from investment management
services 810 682 471
Gain (loss) on sale of securities (19) - (25)
Gain on sale of assets 252 18 7
Servicing fees on loans sold 329 322 321
Other 310 434 248
- --------------------------------------------------------------------------------------------------------------------
TOTAL $ 2,687 $ 3,109 $ 1,883
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Other income decreased $422,000 to $2,687,000 in 1997 from $3,109,000 in
1996. Other income for the year ended December 31, 1995 was $1,883,000.
The greatest decrease occurred in the gain on sale of loans, down $707,000
primarily as a result of the Company's decision to retain the guaranteed
portion of SBA loans originated in its loan portfolio rather than sell the
SBA loans to generate immediate noninterest income. Income from investment
management services (RIA) was up $128,000 in 1997 to $810,000 from $682,000
in 1996 and $471,000 in 1995, respectively. The primary reason for the
increase in income from investment management services was a larger asset
base under management at RIA. In 1996, other income increased $1,226,000 to
$3,109,000 from $1,883,000 for 1995. The increase in 1996 was primarily due
to the gain on sale of SBA loans and an increase in income from investment
management services (RIA).
LOAN ORIGINATION & SALES
The Bank originates various types of loans with the intention of selling
the loan on secondary markets to generate noninterest income. Types of loans
originated and sold include; loans made under the U.S. Small Business
Administration ("SBA") program that generally provides for SBA guarantees of
70% to 90% of each loan, loans made under the U.S. Department of
Agriculture's Business and Industry loans program and conventional real
estate mortgage loans. Historically, the majority of the Banks gain on the
sale of loans has come from SBA loan sales. During 1997, the Company decided
to discontinue sales of new SBA originations in an effort to more rapidly
build its loan portfolio and increase interest income.
An additional source of income related to the Bank's loan origination
activities is reflected in income from the ongoing servicing of loans sold.
For 1997, servicing fee income increased
24
<PAGE>
$7,000 to $329,000. For 1996, servicing fee income increased $1,000 to
$322,000 from $321,000 for the comparable period in 1995. These increases
are the result of a larger servicing portfolio of loans.
REGENCY SERVICE CORPORATION
The Bank's wholly owned subsidiary, Regency Service Corporation ("RSC"),
has engaged in real estate development activities since 1986. Such
activities, which typically involve the acquisition, development and sale of
residential real properties (but which sometimes involve the sale of
properties prior to development), historically have been structured as
limited partnerships in which RSC is the limited partner and a local
developer is the general partner. Partnerships are accounted for under the
equity method. Sales of properties are recognized on the accrual method and
are allocated between the partners based on the provisions of the various
partnership agreements.
Under FDIC regulations, banks were required to divest their real estate
development investments as quickly as prudently possible but in no event
later than December 19, 1996, and submit a plan to the FDIC regarding
divestiture of such investments. Such regulations also permitted banks to
apply for the FDIC's consent to continue, on a limited basis, certain real
estate development activities.
In 1994, the Bank and RSC submitted a divestiture plan (the "Divestiture
Plan") to the FDIC. The Divestiture Plan provided for RSC to divest itself
of all real estate development investments by year-end 1996; however, since
RSC was a limited partner in the majority of its real estate development
projects and, thus, did not control the operation of such projects, there was
no assurance that such divestiture would occur by year-end 1996. In December
1995, the Bank and RSC submitted a request to extend the mandatory time
period in which it must divest of its real estate development interests. In
December 1996, the FDIC, responding to the Bank's request, granted the Bank
and RSC a two year extension, until December 31, 1998, to continue its
divestiture activities.
For the year ended December 31, 1997, RSC experienced a loss from
investments in real estate in the amount of $3,973,000 compared to a loss of
$351,000 for the year ended December 31, 1996, an increase of $3,622,000. The
increased loss resulted from the sale of properties at discounted prices, as
well as, the writedown of several properties to reflect RSC's anticipated
sales proceeds. During the year ended December 31, 1995, losses from
investments in real estate were $3,441,000 primarily as a result of the
establishment of a reserve for future losses. For the year ended December 31,
1997, on a stand alone basis, RSC's activities (including losses from the
sale of properties, additions to RSC's provision for real estate losses and
provision for credit losses, plus operating expenses), reduced the Company's
overall pre-tax income by $5,720,000 compared to $1,499,000 in 1996, and
$4,014,000 in 1995, respectively.
Additional discussion of loans made by RSC is contained in this report
under the heading, "Nonperforming Loans".
25
<PAGE>
REGENCY INVESTMENT ADVISORS
The Bank's wholly-owned subsidiary, Regency Investment Advisors,
Inc. ("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 as of December 31, 1997 increased to $810,000 from
$682,000 in the same period of 1996, an increase of $128,000. Income from RIA
as of December 31, 1995 was $471,000. The increased revenue over the past two
years was primarily the result of a larger asset base managed by RIA. On a
stand alone basis, RIA provided the Company with pre-tax net income of
$181,000 and $55,000 in the years ended December 31, 1997 and 1996,
respectively, compared to a pre-tax loss of $163,000 for the year ended
December 31, 1995.
As of December 31, 1997, RIA had $86.5 million in assets under
management an increase of $9.3 million or 12.0% over 1996. As of December 31,
1996, RIA had $77.2 million in assets under management, an increase of $20.4
million compared to $56.8 million as of December 31, 1995. Assets in client
accounts managed by RIA are not reflected in the consolidated assets of the
Company.
26
<PAGE>
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:
NONINTEREST EXPENSE TO AVERAGE ASSETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(In thousands, except percentages) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NONINTEREST EXPENSE:
Loss from investments in real estate $ 3,973 2.13% $ 351 .21% $ 3,441 2.15%
Salaries and related benefits 4,782 2.57% 4,560 2.74% 4,441 2.77%
Occupancy 1,639 .88% 1,567 .94% 1,366 .85%
FDIC insurance and regulatory assessments 120 .06% 63 .04% 175 .11%
Marketing 450 .24% 428 .26% 382 .24%
Professional services 461 .25% 749 .45% 521 .33%
Directors' fees and expenses 270 .15% 383 .23% 298 .18%
Management fees for real estate projects 120 .07% 488 .29% 243 .15%
Supplies, telephone and postage 329 .18% 350 .21% 294 .18%
Other 1,262 .68% 963 .58% 945 .59%
- --------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSE $ 13,406 7.20% $ 9,902 5.95% $12,106 7.55%
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest expenses increased by $3,504,000 to $13,406,000 for the
year ended December 31, 1997 from $9,902,000 in 1996. The primary cause of
the increase related to losses from investments in real estate which
increased by $3,622,000 during 1997. Noninterest expenses for the year ended
December 31, 1995 were $12,106,000 which also included high expense related
to real estate development activities (RSC). When compared to average assets
for the respective periods, other expenses increased to 7.20% for 1997 as
compared to 5.95% for 1996 and 7.55% for 1995.
Salaries and related benefits increased by $222,000 or 4.87% in 1997
to $4,782,000, primarily as a result of higher commissions paid to staff on
incentive based compensation. During 1996, salaries and related benefits
increased by $119,000 to $4,560,000. Salaries and related benefits were
$4,441,000 in 1995. The primary cause of the increase in 1996 related to
additional staff hired to support the Bank's Madera office opened in August
1996. As a percentage of average assets, salaries and related benefits have
declined over the past three years and were 2.57%, 2.74% and 2.77% in 1997,
1996 and 1995, respectively.
Occupancy expense increased by $72,000 in 1997 to $1,639,000
compared to $1,567,000 in 1996 and $1,366,000 in 1995. The increase in 1997
was primarily the result of a full year's rental expense related to the
Bank's Madera office, as well as, higher maintenance and utility expense.
During 1996, occupancy expense increased due to higher rent expense related
to the Company's headquarters building which was sold and subsequently leased
back during 1995. As a percentage of average assets, occupancy expense was
.88%, .94% and .85% in 1997, 1996 and 1995, respectively.
During 1997, the Company's FDIC insurance and regulatory assessments
increased as a result of the administrative orders issued the Bank and lower
capital levels at the mid-year assessment period. With the completion of the
Company's private placement stock offering, the capital component of the
FDIC's insurance assessment has been improved, however, higher than
historical expense related to regulatory assessments in 1998 are possible,
pending relief from the administrative orders. FDIC assessments increased by
$57,000 to $120,000 in 1997 compared to
27
<PAGE>
$63,000 in 1996. FDIC and regulatory assessment in 1996 declined from
$175,000 in 1995 as a result of the FDIC reducing the rate at which banks pay
FDIC insurance. As a percentage of average assets, FDIC insurance and
regulatory assessments were .06%, .04% and .11% in 1997, 1996 and 1995,
respectively.
Professional services consist primarily of fees paid for legal,
accounting and consulting services to third party professionals. During 1997,
professional services declined by $288,000 to $461,000 from $749,000 for the
year ended December 31, 1996. The primary result of the decrease was lower
legal and accounting expenses related to RSC. During 1996, professional
services increased by $228,000 from $521,000 in 1995 as a result of higher
consulting fees and legal expenses related to the disposal of RSC related
properties. As a percentage of average assets, professional services were
.25%, .45% and .33% in 1997, 1996 and 1995, respectively.
Management fees paid for real estate projects in 1997 decreased by
$368,000 to $120,000 from $488,000 in 1996. During 1995, management fees paid
for real estate projects were $298,000. As a percentage of average assets,
management fees for real estate projects were .07%, .29% and .15% in 1997,
1996 and 1995, respectively. The decrease in fees paid for real estate
projects during 1997 was the result of a restructured management contract
with RSC's project manager.
Supplies, telephone and postage declined in 1997 by $21,000 to
$329,000 from $350,000 in 1996. Expense for supplies, telephone and postage
was $294,000 in 1995. Over the past three years, supplies, telephone and
postage as a percentage of average assets have remained fairly constant at
.18%, .21% and .18% in 1997, 1996 and 1995, respectively.
Other expenses increased by $299,000 in 1997 to $1,262,000 primarily
as a result of a one time expense related to the write-off of an unsecured
account receivable held by RSC. In 1996, other expenses increased $18,000 to
$963,000 from $945,000 in 1995. The primary cause of the increase in 1996 was
the one time expense of $140,000 related to the expiration of an option to
purchase the property immediately contiguous to the Company's headquarters
building. As a percentage of average assets, other expenses were .68%, .58%
and .59% in 1997, 1996 and 1995, respectively.
BALANCE SHEET ANALYSIS
For the year ended December 31, 1997, total assets increased by
$17,183,000 or 9.5%, to $198,241,000 from $181,058,000 at December 31, 1996.
During 1996, total assets increased $17,376,000 or 10.6% from $163,682,000 at
December 31, 1995. For 1997, total loans increased $27,333,000 or 26.7% as a
result of the Company's decision to hold newly originated SBA loans rather
than sell the guaranteed portion in the secondary market. In 1996, total
loans increased 5.3% or $5,166,000 to $102,303,000 from $97,137,000 at
December 31, 1995. Cash and cash equivalents were virtually the same at
December 31, 1997 and 1996 at $19,893,000 and $19,833,000, respectively,
while investment securities increased 11.2% to $36,986,000 at December 31,
1997 from $33,270,000 at December 31, 1996. During 1996, cash and cash
equivalents increased $10,909,000 or 122.2% as the Company increased its cash
liquidity to meet anticipated seasonal funding needs during the Company's
first quarter.
During 1997, the Company significantly reduced its investments in
real estate, reducing its holdings 73.7% or $12,151,000 to $4,338,000 from
$16,489,000 at December 31, 1996 and from
28
<PAGE>
$17,954,000 at December 31, 1995. With the reduction in real estate at
December 31, 1997, the Company was able to increase its interest earning
assets by $29,116,000 or 20.1% to $168,909,000 from $139,793,000 at December
31, 1996 and from $128,108,000 at December 31, 1995.
Deposits increased during 1997 by $16,477,000 or 10.3% to
$176,279,000 from $159,802,000 at December 31, 1996. Deposits increased
during 1996 by $16,057,000 or 11.2% from $143,745,000 at December 31, 1995.
All categories of deposits showed an increase in 1997 with the largest growth
in noninterest bearing deposits. Notes payable and capital lease obligations
decreased 90.7% or $4,943,000 to $509,000 at December 31, 1997 from
$5,452,000 at December 31, 1996 as the Company paid off all debts related to
the acquisition of real estate properties from RSC's former partners. The
remaining $509,000 classified under notes payable and capital lease
obligations relates to the Bank's capital lease on its Palm branch facility.
<TABLE>
<CAPTION>
LOANS COMPOSITION:
- ---------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS,
EXCEPT PERCENTAGES) DECEMBER 1997 DECEMBER 1996 DECEMBER 1995 DECEMBER 1994 DECEMBER 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 75,487 58.3% $56,625 55.4% $54,150 55.7% $46,374 50.3% $43,422 49.5%
Real estate:
Construction 30,128 23.2% 23,640 23.1% 23,706 24.4% 29,857 32.4% 29,351 33.4%
Real estate 14,900 11.5% 13,260 12.9% 10,389 10.7% 9,318 10.1% 9,225 10.5%
mortgage 9,120 7.0% 8,778 8.6% 8,892 9.2% 6,559 7.2% 5,754 6.6%
Consumer and other
- ---------------------------------------------------------------------------------------------------------------------
SUBTOTAL 129,635 100% 102,303 100% 97,137 100% 92,108 100% 87,752 100%
- ---------------------------------------------------------------------------------------------------------------------
Less:
Allowances
for credit losses 2,219 1,615 1,784 1,541 1,338
Deferred loan fees 364 392 356 542 605
Unearned discount 623 526 468 436 356
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LOANS, NET $126,430 $99,770 $94,529 $89,589 $85,453
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table represents the maturity distribution of the loan portfolio
as of December 31, 1997.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
AFTER ONE
WITHIN THROUGH AFTER
MATURITY DISTRIBUTION OF LOAN PORTFOLIO ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans:
Commercial $ 23,185 $ 13,682 $ 38,620 $ 75,487
Real estate construction 27,627 1,773 728 30,128
Real estate mortgage 1,397 7,736 5,767 14,900
Consumer and other 2,691 3,192 3,237 9,120
- ---------------------------------------------------------------------------------------------------------------------
TOTAL 54,900 26,383 48,352 129,635
- ---------------------------------------------------------------------------------------------------------------------
Fixed rate 14,388 6,545 7,938 28,871
Variable rate 40,512 19,838 40,414 100,764
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $ 54,900 $ 26,383 $ 48,352 $ 129,635
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
During 1997, the Bank continued its success in SBA lending, leading
the 16 county Fresno SBA district in loans made for the fifth consecutive
year. In addition, the Bank continued to actively participate in the U.S.
Department of Agriculture Business and Industry Loan program. Business and
Industry loans, ("B&I"), contain a government guarantee on a portion of the
loan similar to that of a SBA loan guarantee. In its second year offering
loans under the B&I program, the Bank was the third largest B&I lender in
California in new loans made in 1997.
Commercial loans, including SBA and B&I loans, comprised
approximately 58.3% of the Company's loan portfolio at December 31, 1997
compared to 55.4% at December 31, 1996, and
29
<PAGE>
55.7% of the Company's loan portfolio at December 31, 1995. 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 23.2% of the Company's
loan portfolio at December 31, 1997, compared to 23.1% of the Company's loan
portfolio at December 31, 1996, and 24.4% at December 31, 1995. 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 11.5% of the loan portfolio at
December 31, 1997, compared to 12.9% at December 31, 1996 and 10.7% of the
loan portfolio at December 31, 1995. Real estate mortgage loans are made up
of non-residential properties (75%) and single-family residential mortgages
(25%). The non-residential loans generally are "mini-perm" (medium-term)
commercial real estate mortgages with maturities under seven years. The
residential mortgages are secured by first trust deeds and have varying
maturities. Both types of loans may have either fixed or floating rates. The
majority are floating. Risks associated with non-residential loans include
the decline in value of commercial property values; economic conditions
surrounding commercial real estate properties; and vacancy rates. The
repayment of single-family residential mortgage loans is generally dependent
upon the income of the borrower from other sources, however, declines in the
underlying property value may create risk in these loans.
Consumer loans represented the remainder of the loan portfolio at
December 31, 1997, comprising 7.0% of the loan portfolio compared to 8.6% of
total loans at December 31, 1996 and 9.2% at December 31, 1995. 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
30
<PAGE>
portfolio. Additionally, management believes its ability to manage portfolio
credit risk is enhanced by the knowledge of the Bank's service area by the
lending personnel and Board of Directors.
31
<PAGE>
NONPERFORMING LOANS
The Company's current policy is to cease accruing interest when a
loan becomes 90-days past due as to principal or interest; when the full,
timely collection of interest or principal becomes uncertain; or when a
portion of the principal balance has been charged off, unless the loan is
well secured and in the process of collection. When a loan is placed on
nonaccrual status, the accrued and uncollected interest receivable is
reversed and the loan is accounted for on the cash or cost recovery method
thereafter, until qualifying for return to accrual status. Generally, a loan
may be returned to accrual status when all delinquent interest and principal
become current in accordance with the terms of the loan agreement or when the
loan is both well secured and in process of collection.
At December 31, 1997, nonaccrual loans totaled $1,736,000 or 1.34%
of total loans compared to $3,301,000 or 3.23% of total loans at December 31,
1996 and $581,000 or .60% at December 31, 1995. Of the total nonaccrual
loans, $1,138,000 represented loans RSC has made to facilitate the sale of
former partnerships. During 1997 these loans RSC made to facilitate the sale
of former partnerships decreased by $2,112,000 or 65.0% from $3,250,000 at
December 31, 1996. During the divestiture process of RSC's real estate
holdings, RSC has made several loans to facilitate the sale of former
partnerships that have loan to value ratios higher than would normally be
made by the Bank. Due to the higher loan to value ratios, the Company has
placed these loans on non-accrual status and is accounting for them on the
cost recovery method. At December 31, 1995, of the $581,000 in non-accrual
loans, $505,000 represented loans RSC had outstanding to real estate limited
partnerships. At December 31, 1994 and 1993 the Company had $391,000 and
$604,000 in non-accrual loans respectively, all of which were associated with
the Bank's lending function.
Without the non-accrual loans made by RSC, the Bank's loan portfolio
at December 31, 1997 had $598,000 in non-accrual loans or .46%, compared to
$51,000 in non-accrual loans or .05% at December 31, 1996. Of the Bank's
non-accrual loans (excluding RSC loans) at December 31, 1997, $473,000
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 a SBA guaranteed loan, the originating
bank is required to buy the guaranteed portion back and hold it in its
portfolio until collection efforts are exhausted. While this guaranteed
portion is backed by the full faith and credit of the U.S. government and
poses little risk of loss to the Bank, the Bank does incur loss of the use of
the funds while awaiting payoff from the SBA or other loan collateral.
Expense from the loss of use of the funds is expected to be minimal; however,
due to this new requirement, it is expected that SBA non-accrual loan levels
will be slightly higher. Bank only non-accrual loans at December 31, 1995,
1994 and 1993 were $76,000, or .08%, $391,000 or .43% and $604,000 or .70%
respectively.
The gross interest income that would have been recorded for loans
placed on nonaccrual status was $254,000, $276,000 and $82,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
32
<PAGE>
Other real estate owned was $503,000 at December 31, 1997 compared
to $437,000 at December 31, 1996, and $341,000 at December 31, 1995. There
were no troubled debt restructured loans as defined in SFAS 15 at December
31, 1997, 1996 or 1995 respectively.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(In thousands, except percentages) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NONPERFORMING ASSETS:
Nonaccrual RSC loans $ 1,138 $ 3,250 $505 $ - $ -
Nonaccrual Bank loans 598 51 76 391 604
- --------------------------------------------------------------------------------------------------------------------
Nonperforming loans 1,736 3,301 581 391 604
Other real estate owned 503 437 341 299 696
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming assets 2,239 3,738 922 690 1,300
- --------------------------------------------------------------------------------------------------------------------
Accruing loans 90 days past due 48 19 725 58 268
- --------------------------------------------------------------------------------------------------------------------
Total loans before allowance for losses $129,635 $102,303 $ 97,137 $ 91,130 $ 86,791
Total assets 198,241 181,058 163,682 155,802 144,012
Allowance for possible credit losses (2,219) (1,615) (1,784) (1,541) (1,338)
- --------------------------------------------------------------------------------------------------------------------
RATIOS:
Nonperforming loans to total loans 1.34% 3.23% .60% .43% .70%
Nonperforming loans to total loans
(excluding RSC loans) .46% .05% .08% .43% .70%
Nonperforming assets to:
Total loans 1.73% 3.65% .95% .76% 1.50%
Total loans and OREO 1.72% 3.64% .95% .75% 1.49%
Total assets 1.13% 2.06% .56% 44% .90%
Allowance for possible credit losses to
total nonperforming assets 99.11% 43.20% 193.5% 223.3% 102.9%
Allowance for possible credit losses to 1.71% 1.58% 1.85% 1.69% 1.54%
loans
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Management is not aware of any potential problem loans, which were
accruing and current at December 31, 1997, where serious doubt exists as to
the ability of the borrower to comply with present repayment terms.
The Company does not believe there to be any concentration of loans
in excess of 10% of total loans which are not disclosed above which would
cause them to be significantly impacted by economic or other conditions. For
further discussion of the impact of California economic conditions upon the
loan portfolio, see "Allowance for Credit Losses" in the section below.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses reflects management's judgment as to
the level which is considered adequate to absorb potential losses inherent in
the loan portfolio. This allowance is increased by provisions charged to
expense and reduced by loan charge-offs net of recoveries. Management
determines an appropriate provision based on information currently available
to analyze credit loss potential, including: (1) the loan portfolio growth in
the period, (2) a comprehensive grading and review of new and existing loans
outstanding, (3) actual previous charge-offs, and (4) changes in economic
conditions.
The allowance for credit losses totaled $2,219,000 or 1.71% of total
loans at December 31, 1997 compared to $1,615,000 or 1.58% of total loans at
December 31, 1996 and $1,784,000 or 1.85% of total loans at December 31,
1995. Charge-offs during 1997 were $895,000 while recoveries were $146,000.
Of the $895,000 charged off in 1997, $601,000 represented write downs of
loans made by RSC. During 1997, $1,353,000 in additional provision for credit
losses was added to reserves. Charge-offs during 1996 were $258,000 while
recoveries were $89,000. During 1996, no additional provision for credit
losses was added to reserves. It is the policy of
33
<PAGE>
management to maintain the allowance for credit losses at a level deemed
adequate for known and currently anticipated future risks inherent in the
loan portfolio. Based on information currently available to analyze credit
loss potential, including economic factors, overall credit quality,
historical delinquency and a history of actual charge-offs, management
believes that the credit loss provision and allowance is adequate. However,
no prediction of the ultimate level of loans charged-off in future years can
be made with any certainty.
Although management is of the opinion that the allowance for credit
losses is maintained at an adequate level for known and currently anticipated
future risks inherent in the loan portfolio, the Fresno economy and real estate
market remain stagnant. The Bank's loan portfolio could be adversely affected if
economic conditions and the real estate market in the Bank's market area
deteriorate. The effect of such events, although uncertain at this time, could
result in an increase in the level of nonperforming loans and OREO and the level
of the allowance for loan losses, which could adversely affect the Company's and
the Bank's future growth and profitability.
Following is a table presenting the activity within the Company's provision for
credit losses for the period between December 31, 1993 and December 31, 1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
BALANCE, (beginning of year) $ 1,615 $ 1,784 $ 1,541 $ 1,338 $ 1,289
Provision charged to expense 1,353 - 470 487 37
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Charge-offs:
Commercial (132) (193) (211) (259) (100)
Real estate construction (663) - (8) - -
Real estate mortgage - - - - -
Consumer and other (100) (65) (46) (54) (5)
- --------------------------------------------------------------------------------------------------------------------
Total Charge-offs (895) (258) (265) (313) (105)
- --------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial 122 76 37 27 117
Real Estate construction - - - 2 -
Real estate mortgage - - - - -
Consumer and other 24 13 1 - -
- --------------------------------------------------------------------------------------------------------------------
TOTAL RECOVERIES 146 89 38 29 117
- --------------------------------------------------------------------------------------------------------------------
Net Charge-offs (749) (169) (227) (284) 12
- --------------------------------------------------------------------------------------------------------------------
BALANCE, (end of year) $ 2,219 $ 1,615 $ 1,784 $ 1,541 $1,338
- --------------------------------------------------------------------------------------------------------------------
Net charge-offs to average loans
outstanding .66% .17% .24% .34% (.01)%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table represents the allocation of the allowance for loan losses
for the period between December 1993 and December 1997.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
(In thousands, to total to total to total to total to total
except percentages) Amount loans Amount loans Amount loans Amount loans Amount loans
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $1,184 58.2% $1,069 54.6% $1,005 55.7% $1,001 50.3% $1,000 49.5%
Real estate
construction 506 23.2% 208 23.6% 215 24.4% 135 32.4% 135 33.4%
Real estate mortgage 121 11.5% 100 13.1% 78 10.7% 65 10.1% 69 10.5%
Consumer and other 226 7.1% 238 8.7% 221 9.2% 184 7.2% 134 6.6%
Unallocated 182 - - - 265 - 156 - - -
- -----------------------------------------------------------------------------------------------------------------------
Total $ 2,219 100.0% $1,615 100.0% $1,784 100.0% $1,541 100.0% $1,338 100.0%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
FUNDING SOURCES
Deposits represent the Bank's primary source of funds for investment.
Deposits are primarily core deposits in that they are demand, savings, and time
deposits generated from local businesses and individuals. These sources are
considered to be relatively more stable, long-term deposit relationships thereby
enhancing steady growth of the deposit base without major fluctuations in
overall deposit balances. The Bank normally experiences a seasonal decline in
deposits in the first quarter of each year. In order to assist in meeting its
funding needs the Bank maintains Fed Funds lines with correspondent banks in the
amount of $5,000,000 in addition to using its investment portfolio to raise
funds through repurchase agreements. In addition, the Bank may, from time to
time, obtain additional deposits through the use of brokered time deposits. As
of December 31, 1997, the Bank held no institutional brokered time deposits.
In August 1996, the Bank opened its first full service branch office
outside of Fresno, California approximately 20 miles north in the city of
Madera. Through 1997, it's first full year of operation, the Madera branch had
obtained deposits of approximately $20 million.
The following table presents the composition of the deposit mix at December 31,
1993 through December 31, 1997, respectively.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
(In thousands, except
percentages) AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DEPOSITS:
Noninterest-bearing $ 46,744 26.5% $36,613 22.9% $32,672 22.7% $30,589 22.2% $30,422 24.6%
Interest-bearing
deposits 85,114 48.3% 73,390 45.9% 75,539 52.6% 72,615 52.7% 63,137 51.1%
Time under $100,000 15,778 9.0% 19,032 11.9% 12,229 8.5% 12,852 9.3% 12,607 10.2%
Time $100,000
and over 28,643 16.2% 30,766 19.3% 23,305 16.2% 21,833 15.8% 17,363 14.1%
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 129,535 73.5% 123,189 77.1% 111,073 77.3% 107,300 77.8% 93,107 75.4%
- ------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 176,279 100% 159,802 100% 143,745 100% 137,889 100% 123,529 100%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table represents maturities of time deposits of $100,000 or more
at December 31, 1997.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Over Three
Three Months Though Over
(In thousands) Or Less Twelve Months Twelve Months Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturities of Time Deposits Greater
Than $100,000 $ 17,846 $ 8,957 $ 1,840 $ 28,643
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
LIQUIDITY
Liquidity management refers to the Bank's ability to provide funds on
an ongoing basis to meet fluctuations in deposit levels as well as the credit
needs and requirements of its clients. Both assets and liabilities contribute to
the Bank's liquidity position. Federal Funds lines, short-term investments and
securities, and loan repayments contribute to liquidity, along with deposit
increases, while loan funding and deposit withdrawals decrease liquidity. The
Bank assesses the likelihood of projected funding requirements by reviewing
historical funding patterns, current and forecasted economic conditions and
individual client funding needs. The Bank maintains lines of credit with two
correspondent banks for up to $5,000,000 available on a short-term basis.
35
<PAGE>
Additionally, the Bank generally maintains a portfolio of SBA loans either
available-for-sale or in its portfolio that could be sold should additional
liquidity be required.
36
<PAGE>
INTEREST RATE SENSITIVITY
Interest rate sensitivity is a measure of the exposure to fluctuations
in the Bank's future earnings caused by fluctuations in interest rates.
Generally, if assets and liabilities do not reprice simultaneously and in equal
volumes, the potential for such exposure exists. It is management's objective to
maintain stability in the net interest margin in times of fluctuating interest
rates by maintaining an appropriate mix of interest sensitive assets and
liabilities. To achieve this goal, the Bank prices the majority of its interest
bearing liabilities at variable rates. At the same time, the majority of its
interest-earning assets are also priced at variable rates. This pricing
structure tends to stabilize the net interest margin percentage achieved by the
Bank.
The following table sets forth the interest rate sensitivity and repricing
schedule of the Company's interest-earning assets and interest-bearing
liabilities, the interest rate sensitivity gap, the cumulative interest rate
sensitivity gap, and the cumulative interest rate sensitivity gap ratio.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Next Day After After One
But Within Three Year After
(In thousands, except percentages) Three Months But Five Years
As of December 31, 1997 Immediately Months But Within Within Total
12 Months Five Years
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Sensitivity Gap:
Loans $ 46,712 $ 50,957 $ 12,737 $ 10,455 $ 7,038 $ 127,899
Investment securities and other 213 15,229 11,334 4,918 4,940 36,634
Federal funds sold 3,000 - - - - 3,000
- --------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 49,925 $ 66,186 $ 24,071 $ 15,373 $ 11,978 $ 167,533
- --------------------------------------------------------------------------------------------------------------------
Interest-bearing transaction accounts 48,616 - - - - 48,616
Savings accounts 33,662 2,836 - - - 36,498
Time deposits - 25,316 15,250 2,951 904 44,421
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 82,278 $ 28,152 $ 15,250 $ 2,951 $ 904 $ 129,535
- --------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap (32,350) 38,034 8,821 12,422 11,074
Cumulative gap (32,350) 5,681 14,502 26,924 37,998
Cumulative gap percentage to
interest earning assets (19.31%) 3.39% 8.66% 16.07% 22.68%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts exclude nonaccrual loans of $1,736,000.
The table indicates the time periods in which interest-earning
assets and interest-bearing liabilities will mature or reprice in accordance
with their contractual terms. The table does not necessarily indicate the
impact of general interest rate movements on the net interest margin since
the repricing of various categories of assets and liabilities is subject to
competitive pressures. Additionally, this table does not take into
consideration changing balances in forward periods as a result of normal
amortization, principal paydowns, changes in deposit mix or other such
movements of funds as a result of changing interest rate environments.
37
<PAGE>
INFLATION
The impact of inflation on a financial institution differs
significantly from that exerted on manufacturing, or other commercial
concerns, primarily because its assets and liabilities are largely monetary.
In general, inflation primarily affects the Company indirectly through its
effect on the ability of its customers to repay loans, or its impact on
market rates of interest, and thus the ability of the Bank to attract loan
customers. Inflation affects the growth of total assets by increasing the
level of loan demand, and potentially adversely affects the Company's capital
adequacy because loan growth in inflationary periods may increase more
rapidly than capital. Interest rates in particular are significantly affected
by inflation, but neither the timing nor the magnitude of the changes
coincides with changes in the Consumer Price Index, which is one of the
indicators used to measure the rate of inflation. Adjustments in interest
rates may be delayed because of the possible imposition of regulatory
constraints. In addition to its effects on interest rates, inflation directly
affects the Company by increasing the Company's operating expenses. The
effect of inflation during the three-year period ended December 31, 1997 has
not been significant to the Company's financial position or results of
operations.
CAPITAL RESOURCES
The Company has historically been able to sustain its growth in
capital through profit retention. Beginning in September 1994, the Company
began paying quarterly cash dividends. Although, cash dividends have been
paid on a regular basis in the past, there can be no assurance that the
Company will pay dividends in the future. See "Item 5 - Market For
Registrant's Common Equity and Related Stockholder Matters", regarding
dividend restrictions applicable to the Bank and the Company and the
restrictions imposed under the FDIC and CDFI Orders.
The Board of Governors issued final amendments to its risk-based
capital guidelines to be effective December 31, 1994, requiring that net
unrealized holding gains and losses on securities available-for-sale
determined in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," are not to be included in the Tier 1 capital component
consisting of common shareholders equity. Net unrealized losses on marketable
equity securities (equity securities with a readily determinable fair value),
however, will continue to be deducted from Tier 1 capital. This rule has the
general effect of valuing available-for-sale securities at amortized cost
(based on historical cost) rather than at fair value (generally at market
value) for purposes of calculating the risk-based and leverage capital ratios.
The Board of Governors and the FDIC have adopted risk-based capital
guidelines for evaluating the capital adequacy of bank holding companies and
banks. The guidelines are designed to make capital requirements sensitive to
differences in risk profiles among banking organizations, to take into
account off-balance sheet exposures and to aid in making the definition of
bank capital uniform internationally. Under the guidelines, the Company and
the Bank are required to maintain capital equal to at least 8.0% of its
assets and commitments to extend credit, weighted by risk, of which at least
4.0%, must consist primarily of common equity (including retained earnings)
and the remainder may consist of subordinated debt, cumulative preferred
stock, or a limited amount of loan loss reserves. Assets, commitments to
extend credit and off-balance sheet items are categorized according to risk
and certain assets considered to present less risk than other permit
maintenance of capital at less than the 8% ratio.
38
<PAGE>
The guidelines establish two categories of qualifying capital: Tier
1 capital comprising core capital elements and Tier 2 comprising
supplementary capital requirements. At least one-half of the required capital
must be maintained in the form of Tier 1 capital. Tier 1 capital includes
common shareholder's equity and qualifying perpetual preferred stock less
intangible assets and certain other adjustments. However, no more than 25% of
the Company's total Tier 1 capital may consist of perpetual preferred stock.
The definition of Tier 1 capital for the Bank is the same, except that
perpetual preferred stock may be included only if it is noncumulative. Tier 2
capital includes, among other items, limited life (and in the case of banks,
cumulative) preferred stock, mandatory convertible securities, subordinated
debt and a limited amount of reserve for credit losses.
The Board of Governors also adopted a 3.0% minimum leverage ratio
for banking organizations as a supplement to the risk-weighted capital
guidelines. The leverage ratio is generally calculated using Tier 1 capital
(as defined under risk-based capital guidelines) divided by quarterly average
net total assets (excluding intangible assets and certain other adjustments).
The Board of Governors emphasized that the leverage ratio
constitutes a minimum requirement for well-run banking organizations having
diversified risk. Banking organizations experiencing or anticipating
significant growth, as well as those organizations which do not exhibit the
characteristics of a strong, well-run banking organization above, will be
required to maintain minimum capital ranging generally from 100 to 200 basis
points in excess of the leverage ratio. The FDIC adopted a substantially
similar leverage ratio for state non-member banks.
On December 19, 1991, the President signed the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). The FDICIA, among
other matters, substantially revised banking regulations and established a
framework for determination of capital adequacy of financial institutions.
Under the FDICIA, financial institutions are placed into one of five capital
adequacy categories as follows: (1) "Well capitalized" consisting of
institutions with a total risk-based capital ratio of 10% or greater, a Tier
1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or
greater, and the institution is not subject to an order, written agreement,
capital directive or prompt corrective action directive; (2) "Adequately
capitalized" - consisting of institutions with a total risk-based capital ratio
of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater and a
leverage ratio of 4% or greater, and the institution does not meet the
definition of a "well capitalized" institution; (3) "Undercapitalized" -
consisting of institutions with a total risk-based capital ratio less than
8%, a Tier 1 risk-based capital ratio of less than 4%, or a leverage ratio of
less than 4%; (4) "Significantly undercapitalized" - consisting of
institutions with a total risk-based capital ratio of less than 6%, a Tier 1
risk-based capital ratio of less than 3%, or a leverage ratio of less than
3%; (5) "Critically undercapitalized" - consisting of an institution with a
ratio of tangible equity to total assets that is equal to or less than 2%.
Financial institutions classified as undercapitalized or below are
subject to various limitations including, among other matters, certain
supervisory actions by bank regulatory authorities and restrictions related
to (i) growth of assets, (ii) payment of interest on subordinated
indebtedness, (iii) payment of dividends or other capital distributions, and
(iv) payment of management fees to a parent holding company. The FDICIA
requires the bank regulatory authorities to initiate corrective action
regarding financial institutions which fail to meet minimum capital
requirements. Such action may be taken in order to, among other matters,
augment capital and reduce total assets. Critically undercapitalized
financial institutions may also be subject to
39
<PAGE>
appointment of a receiver or conservator unless the financial institution
submits an adequate capitalization plan.
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 are
also presented in the following table:
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES: ACTION PROVISIONS:
--------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997
Total Capital (to Risk Weighted
Assets):
Company $18,779 13.87% >=$10,828 >=8.00% N/A
Regency Bank $16,003 11.79% >=$10,860 >=8.00% >=$ 13,576 >=10.00%
Tier 1 Capital (to Risk Weighted
Assets):
Company $ 17,081 12.62% >=$ 5,414 >=4.00% N/A
Regency Bank $ 14,300 10.53% >=$ 5,430 >=4.00% >=$ 8,145 >= 6.00%
Tier 1 Capital (to Average Assets):
Company $ 17,081 8.89% >=$ 7,686 >=4.00% N/A
Regency Bank $ 14,300 7.46% >=$ 7,663 >=4.00% >=$ 9,579 >= 5.00%
<CAPTION>
TO BE ADEQUATELY
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES: ACTION PROVISIONS:
--------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996
Total Capital (to Risk Weighted
Assets):
Company $14,306 10.21% >=$11,207 >=8.00% N/A
Regency Bank $13,944 9.97% >=$11,193 >=8.00% >=$ 11,193 >=8.00%
Tier 1 Capital (to Risk Weighted
Assets):
Company $ 12,691 9.06% >=$ 5,604 >=4.00% N/A
Regency Bank $ 12,329 8.81% >=$ 5,596 >=4.00% >=$ 5,596 >=4.00%
Tier 1 Capital (to Average Assets):
Company $ 12,691 7.66% >=$ 6,630 >=4.00% N/A
Regency Bank $ 12,329 7.12% >=$ 6,923 >=4.00% >=$ 6,923 >=4.00%
</TABLE>
40
<PAGE>
OTHER MATTERS
As discussed in "Item 1 - Supervision and Regulation", during the
fourth quarter of 1997, the Company's Board of Directors consented to
administrative orders issued by the FDIC and CDFI. In regard to the two most
significant issues raised in each order, specifically the mandate to (1)
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%; and (2) 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.
On December 31, 1997, the Company completed its private placement
capital offering of approximately $5.7 million allowing the Bank to reflect
Tier 1 capital of $14.3 million and a capital to assets ratio of 7.46% at
year-end. Both measurements are above required levels and are considered
"Well Capitalized" under FDICIA standards. See "Capital Resources" in this
section. Additionally, approximately $2.4 million of capital remained at the
Bank's parent company, Regency Bancorp, which could be contributed to further
augment the Bank's capital if required. In January 1998, the Company filed a
progress report with the FDIC and CDFI indicating the Bank's progress to date
in complying with the administrative orders. The progress report indicated
that at December 31, 1997, RSC had reduced total classified assets to
$4,831,000, well below levels required at year-end. Subsequent to year end
1997, RSC completed the sale of several additional units and at January 15,
1998 had further reduced its level of classified assets to $3,826,000. The
remainder of the items specified in the administrative orders are more
subjective in nature and "compliance" can only be defined by the appropriate
regulatory agency, however, management believes they are in full compliance
with both orders.
NEW ACCOUNTING PRONOUNCEMENTS
The Company implemented SFAS No. 125 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" in
January 1997. The Statement establishes standards for when transfers of
financial assets, including those with continuing involvement by the
transferor, should be considered a sale. SFAS No. 125 also establishes
standards for when a liability should be considered extinguished. This
statement is effective for transfers of assets and extinguishments of
liabilities after December 31, 1996, applied prospectively. In December 1996,
the FASB reconsidered certain provisions of SFAS No. 125 and issued a SFAS
No. 127 to defer for one year the effective date of implementation for
transactions related to repurchase agreements, dollar-roll repurchase
agreements, securities lending and similar transactions.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share", ("EPS"). SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS. In addition,
entities with complex capital structures are required to provide disclosure
of diluted EPS. Basic earnings (loss) per share is computed by dividing net
income (loss) available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted earnings (loss) per
share is computed by dividing net income (loss) available to common
stockholders adjusted for the effects of preferred dividends, interest on
convertible debt, and other changes in income or loss resulting from the
presumed conversion of potential common shares, if any, by the weighted
average common shares outstanding during the period plus potential common
shares outstanding. Diluted EPS
41
<PAGE>
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 at December 31, 1997 and 1995 because the effect of potentially
dilutive securities under the stock option plans were antidilutive.
In June 1997, the FASB adopted SFAS No. 130 , "Reporting of
Comprehensive Income", which requires than an enterprise report, by major
components and as a single total, the change in its net assets during the
period from nonowner sources; and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which establishes annual and
interim reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas, and major
customers. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows. Both
statements are effective for fiscal years after December 15, 1997, with
earlier application permitted.
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 vender 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 the 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
material 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.
42
<PAGE>
MARKET RISK
The Company utilizes a vendor-purchased simulation model to analyze
net interest income sensitivity to movements in interest rates. The
simulation model projects net interest income based on a 200 basis point rise
and a 200 basis point fall in interest rates ramped over a twelve month
period, with net interest impacts projected out as far as twenty four months.
The model is based on the actual maturity and repricing characteristics of
the Company's interest-sensitive assets and liabilities. The model
incorporates assumptions regarding the impact of changing interest rates on
the prepayment of certain assets and liabilities. Projected net interest
income is calculated assuming customers will reinvest maturing deposit
accounts and the Company will originate a certain amount of new loans. The
balance sheet growth assumptions utilized correspond closely to the Company's
strategic growth plans and annual budget. Excess cash is invested in
overnight funds or other short-term investment such as U.S. Treasuries. Cash
shortfalls are covered through additional borrowing of overnight funds. Based
on the information and assumptions in effect at December 31, 1997, management
believes that a 200 basis point rate shock over a twelve month period, up or
down, would not significantly affect the Company's annualized net interest
income.
The Company also utilizes the same vendor-purchased simulation model
to project the impact of changes in interest rates on the underlying market
value of all the Company's assets, liabilities, and off-balance sheet account
under alternative interest rate scenarios. The resultant net value, as
impacted under each projected interest rate scenario, in referred to as the
market value of equity ("MV of Equity"). This technique captures the interest
rate risk of the Company's business mix across all maturities. The market
analysis is performed using an immediate rate shock of 200 basis points up
and down calculating the present value of expected cash flows under each rate
environment at applicable discount rates. The market value of loans is
calculated by discounting the expected future cash flows over either the term
to maturity for fixed rate loans or scheduled repricing for floating rate
loans using the current rate at which similar loans would be made to borrows
with similar credit ratings. The market value of investment securities is
based on quoted market prices obtained from reliable independent brokers. The
market value of time deposits is calculated by discounting the expected cash
flows using current rates for similar instruments of comparable maturities.
For non-interest sensitive assets and liabilities, as well as deposits with
no defined maturites, including interest-bearing checking, money market and
savings accounts, the market value is equal to their carrying value amounts
at the reporting date.
43
<PAGE>
The following table sets forth the analysis of the Company's market
value risk inherent in its interest-sensitive financial instruments as they
relate to the entire balance sheet at December 31, 1997. Fair value estimates
are subjective in nature and involve uncertainties and significant judgment and,
therefore, cannot be determined with absolute precision. Assumptions have been
made as to appropriate discount rates, prepayment speeds, expected cash flows
and other variables. Changes in these assumptions significantly affect the
estimates and as such, the obtained fair value may not be indicative of the
value negotiated in the actual sale or liquidation of such financial
instruments, nor comparable to that reported by other financial institutions. In
addition, fair value estimates are based on existing financial instruments
without attempting to estimate future business.
<TABLE>
<CAPTION>
($ in thousands)
Change in Estimated MV Change in MV Change in MV
Rates of Equity of Equity $ of Equity %
- --------------------------- -------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
+200 BP $ 21,014 $ 800 3.96%
0 BP $ 20,214 0 0.00%
-200 BP $ 18,668 $ (1,546) -7.65%
</TABLE>
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Non Applicable
44
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
<S> <C>
Independent Auditors' Report of Deloitte & Touche LLP 45
Consolidated Balance Sheets, December 31, 1997 and 1996 46
Consolidated Statements of Operations for the three years ended 48
December 31, 1997, 1996, and 1995
Consolidated Statements of Shareholders' Equity for the three years ended 49
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the three years ended 50
December 31, 1997, 1996, and 1995
Notes to Consolidated Financial Statements 51
</TABLE>
45
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996, AND FOR
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997 AND INDEPENDENT
AUDITORS' REPORT
46
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Regency Bancorp
Fresno, California
We have audited the accompanying consolidated balance sheets of Regency
Bancorp and subsidiaries (the "Company"), as of December 31, 1997 and 1996,
and the related consolidated statements of operations, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Regency Bancorp and subsidiaries
as of December 31, 1997 and 1996, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP /s/
Fresno, California
February 4, 1998
47
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARES) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS $ 16,893 $ 14,833
FEDERAL FUNDS SOLD 3,000 5,000
---------- ----------
Cash and cash equivalents 19,893 19,833
INTEREST BEARING DEPOSITS IN OTHER BANKS 232 98
INVESTMENT SECURITIES (Note 2):
Available-for-sale at fair value (cost of $36,634 36,986 33,270
in 1997 and $33,267 in 1996)
LOANS, net of allowance for credit losses of $2,219
and $1,615 (Notes 3 and 11) 126,430 98,294
LOANS HELD FOR SALE - 1,476
---------- ----------
Total loans, net 126,430 99,770
INVESTMENTS IN REAL ESTATE (Note 4) 4,338 16,489
OTHER REAL ESTATE OWNED 503 437
PREMISES AND EQUIPMENT, net (Note 5) 1,751 2,262
CASH SURRENDER VALUE OF LIFE INSURANCE (Note 9) 3,038 2,903
INTEREST RECEIVABLE, DEFERRED INCOME TAXES
AND OTHER ASSETS (Note 8) 5,070 5,996
---------- ----------
$ 198,241 $ 181,058
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
48
<PAGE>
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS (Note 6):
Noninterest bearing deposits $ 46,744 $ 36,613
Interest bearing deposits 129,535 123,189
---------- ----------
Total deposits 176,279 159,802
NOTES PAYABLE AND CAPITAL LEASE OBLIGATION 509 5,452
(Notes 4 and 7)
ACCRUED INTEREST AND OTHER
LIABILITIES (Note 9) 2,719 2,334
---------- ----------
Total liabilities 179,507 167,588
COMMITMENTS AND CONTINGENCIES (Notes 3, 4 and 7)
SHAREHOLDERS' EQUITY (Notes 9, 10 and 13):
Preferred stock, no par value;
1,000,000 shares authorized;
no shares issued
Common stock, no par value; 5,000,000
shares authorized, 2,621,125 and 1,818,160
shares outstanding 15,203 8,868
Retained earnings 3,327 4,601
Net unrealized gain (loss) on available for sale
securities, net of taxes of $148 and $1 204 1
---------- ----------
Total shareholders' equity 18,734 13,470
---------- ----------
$ 198,241 $ 181,058
---------- ----------
---------- ----------
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands, except per share data)
INTEREST INCOME:
Interest and fees on loans $ 12,506 $ 11,255 $ 10,815
Interest on investment securities:
Taxable 2,163 1,718 1,834
Nontaxable 165 87 89
-----------------------------------------
2,328 1,805 1,923
Other 452 167 103
-----------------------------------------
Total interest income 15,286 13,227 12,841
INTEREST EXPENSE:
Interest on deposits 5,241 4,534 5,017
Interest on borrowings 80 160 75
-----------------------------------------
Total interest expense 5,321 4,694 5,092
NET INTEREST INCOME 9,965 8,533 7,749
PROVISION FOR CREDIT LOSSES 1,353 - 470
-----------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 8,612 8,533 7,279
NONINTEREST INCOME:
Gain on sale of loans (Note 3) 608 1,315 590
Depositor service charges 397 338 271
Income from investment management services 810 682 471
Gain (loss) on sale of investment securities (Note 2) (19) - (25)
Gain on sale of assets 252 18 7
Servicing fees on loans sold 329 322 321
Other 310 434 248
-----------------------------------------
Total noninterest income 2,687 3,109 1,883
NONINTEREST EXPENSES:
Loss from investments in real estate
partnerships (Note 4) 3,973 351 3,441
Salaries and related benefits (Notes 9 and 11) 4,782 4,561 4,441
Occupancy 1,639 1,568 1,366
FDIC insurance and regulatory assessments 120 63 175
Marketing 450 428 381
Professional services 461 749 521
Directors' fees and expenses 270 383 298
Management fees for real estate projects (Note 11) 120 488 243
Supplies, telephone and postage 329 349 294
Other 1,262 962 945
-----------------------------------------
Total noninterest expenses 13,406 9,902 12,105
-----------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (2,107) 1,740 (2,943)
INCOME TAX EXPENSE (BENEFIT) (Note 8) (833) 732 (1,176)
-----------------------------------------
NET INCOME (LOSS) $ (1,274) $ 1,008 $ (1,767)
-----------------------------------------
EARNINGS (LOSS) PER COMMON SHARE (Note 10)
Basic $ (0.68) $ 0.55 $ (0.98)
Diluted $ (0.68) $ 0.54 $ (0.98)
-----------------------------------------
SHARES ON WHICH EARNINGS (LOSS) PER COMMON SHARE
WERE BASED (Note 10)
Basic 1,860 1,818 1,805
Diluted 1,860 1,872 1,805
-----------------------------------------
</TABLE>
See notes to consolidated financial statements.
50
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ NET
NUMBER OF RETAINED UNREALIZED
SHARES AMOUNT EARNINGS GAIN (LOSS) TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 1,711 $ 7,950 $ 7,017 (640) $ 14,327
--------- -------- --------- ---------- ---------
--------- -------- --------- ---------- ---------
Issuance of common stock under stock
option plan (Note 9) 22 19 - - 19
Issuance of 5% common stock dividend - - - - -
including fractional shares 85 866 (868) - (2)
Tax benefit of stock option transactions - 33 - - 33
Cash dividends ($0.20 per share) - - (352) - (352)
Net change in unrealized gain (loss) on
available-for-sale securities (net of taxes
of $496) - - - 684 684
Net loss - - (1,767) - (1,767)
--------- -------- --------- ---------- ---------
BALANCE, DECEMBER 31, 1995 1,818 8,868 4,030 44 12,942
--------- -------- --------- ---------- ---------
--------- -------- --------- ---------- ---------
Cash dividends ($0.24 per share) - - (437) - (437)
Net change in unrealized gain (loss) on
available-for-sale securities (net of taxes
of $31) - - - (43) (43)
Net income - - 1,008 - 1,008
--------- -------- --------- ---------- ---------
- - - - -
BALANCE, DECEMBER 31, 1996 1,818 8,868 4,601 1 13,470
--------- -------- --------- ---------- ---------
--------- -------- --------- ---------- ---------
Issuance of common stock to
employee stock ownership plan (Note 9) 36 333 - - 333
Issuance of common stock under
stock option plan (Note 9) 17 75 - - 75
Net change in unrealized gain (loss) on
available-for-sale securities (net of
taxes of $148) - - - 203 203
Issuance of common stock in private placement
captial offering, net of expenses (Note 10) 750 5,927 - - 5,927
Net loss - - (1,274) - (1,274)
--------- -------- --------- ---------- ---------
BALANCE, DECEMBER 31, 1997 2,621 $ 15,203 $ 3,327 $ 204 $ 18,734
--------- -------- --------- ---------- ---------
--------- -------- --------- ---------- ---------
</TABLE>
See notes to consolidated financial statements.
51
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,274) $ 1,008 $ (1,767)
Adjustments:
Provision for credit losses 1,353 - 470
Provision for losses on investments in real estate - - 2,798
Provision for OREO losses 121 - 110
Depreciation and amortization 653 632 606
Deferred income taxes (428) 831 (1,403)
Decrease (increase) in interest receivable and
other assets 1,209 (1,491) 1,530
Increase in surrender value of life insurance (135) (139) (125)
Distributions of income from real estate partnerships 232 103 158
Equity in (income) loss of real estate partnerships 436 (151) (32)
Decrease in real estate held for sale 10,783 7,170 3,472
Increase (decrease) in other liabilities 418 (790) (1,490)
Loss on sale of securities 19 - 25
Gain on sale of loans held for sale (607) (1,315) (590)
Proceeds from sale of loans held for sale 18,537 13,904 7,522
Additions to loans held for sale (16,454) (11,313) (8,919)
Loss (gain) on sale of premises and equipment and OREO 11 (1) (4)
----------- ---------- ---------
Net cash provided by operating activities 14,874 8,448 2,361
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (21,059) (21,596) (16,001)
Proceeds from sales of available-for-sale securities 2,353 1,000 3,105
Proceeds from maturities of available-for-sale securities 15,262 18,881 11,091
Purchases of held-to-maturity securities - - (7,898)
Proceeds from maturities of held-to-maturity securities - - 6,000
Loan participations purchased - (1,750) (750)
Loan participations sold 2,039 4,842 810
Net increase in loans (31,918) (7,802) (1,565)
Net (increase) decrease in interest bearing deposits
in other banks (134) (95) 199
Cash received through acquisition of partnerships - 804 276
Proceeds from sale of OREO 208 123 76
Capital contributions to real estate partnerships - (397) (1,443)
Capital distributions from real estate partnerships 700 1,012 687
Payments towards the acquisition and development of
investments in real estate - - (3,383)
Purchases of premises and equipment (136) (435) (207)
Proceeds from sale of premises and equipment 34 - 1,682
----------- ---------- ---------
Net cash used in investing activities (32,651) (5,413) (7,321)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in time deposits (5,377) 14,265 849
Net increase in other deposits 21,855 1,791 5,007
Cash dividends paid - (437) (352)
Payments for fractional shares related to stock dividends - - (2)
Payments on notes payable (7,155) (8,131) (321)
Proceeds from notes payable 2,179 385 368
Proceeds from the issuance of common stock under
employee stock option plan 75 - 19
Proceeds from the issuance of common stock to
employee stock ownership plan 333 - -
Net proceeds from the issuance of common stock 5,927 - -
----------- ---------- ---------
Net cash provided by financing activities 17,837 7,873 5,568
NET INCREASE IN CASH AND CASH EQUIVALENTS 60 10,908 608
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 19,833 8,925 8,317
----------- ---------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 19,893 $ 19,833 $ 8,925
----------- ---------- ---------
----------- ---------- ---------
</TABLE>
See notes to consolidated financial statements.
52
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Regency Bancorp and its wholly-owned subsidiaries, hereinafter
referred to as the ("Company"). Regency Bancorp is a California
corporation organized to act as the holding company for Regency Bank
("Bank"), with headquarters and branches in Fresno, a branch in Madera and a
loan production office in Modesto, and Regency Investment Advisors Inc.
("RIA") an SEC registered investment advisor. The Bank has one wholly-
owned subsidiary, Regency Service Corporation, a California corporation
("RSC"), that engages in the business of real estate development primarily
in the Fresno/Clovis area. In 1995, upon formation of the holding company,
the Company acquired all of the outstanding common stock of the Bank. Other
than its investment in the Bank and RIA, the Company currently conducts no
other significant business activities, although it is authorized to engage
in a variety of activities which are deemed closely related to the business
of banking upon prior approval of the Board of Governors of the Federal
Reserve System ("Board of Governors"), the Company's principal regulator.
All significant intercompany balances and transactions have been eliminated
in consolidation.
NATURE OF OPERATIONS - The Company operates three bank branches through its
bank subsidiary in Fresno, California and one branch in Madera, California.
The Bank is a California banking corporation which has served individuals,
merchants, small and medium-sized businesses and professionals located in
and adjacent to Fresno, California, since 1980. The Bank offers a full
range of commercial banking services including the acceptance of demand,
savings and time deposits, and the making of commercial, real estate
(including real estate construction and residential mortgage), Small
Business Administration ("SBA"), personal, home improvement, automobile and
other installment and term loans. It also offers Visa credit cards,
traveler's checks, safe deposit boxes, notary public, customer courier and
other customary bank services. The Bank's primary source of revenue is
interest generated by providing loans to customers. Additionally, the Bank
generates revenue from the sale and servicing of loans made under government
guaranteed programs. A significant portion of the Bank's operating expenses
have been generated by the divestiture of properties held by RSC. As
discussed further in Note 4 to the consolidated financial statements, RSC is
in the process of divesting all of its real estate investments.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
SIGNIFICANT ACCOUNTING POLICIES - The accounting and reporting policies of
the Company conform to generally accepted accounting principles and to
prevailing practices within the banking industry. The following is a
summary of significant policies:
a. CASH AND CASH EQUIVALENTS - The Company considers cash and cash
equivalents to include cash, federal funds sold, and other short-term
investments consisting of deposits in other banks. Generally, federal
funds are sold for one-day periods.
53
<PAGE>
b. INVESTMENT SECURITIES - The Company's investment policy, as established
by its investment committee, governs the type and quality of securities
in which management may invest with the objective of achieving an optimum
balance between credit quality, liquidity and income.
The Company has classified its investment securities as available-for-
sale. These securities are recorded at their fair value. Unrealized
gains or losses are included in shareholders' equity, net of tax. Gain
or loss on the sale of available-for-sale securities is based on the
specific identification method.
c. LOANS - Loans are stated at the outstanding unpaid principal balance
reduced by any charge-offs or specific valuation allowances. Interest on
loans is accrued daily based on outstanding loan balances. The
recognition of interest income on a loan is discontinued, and previously
accrued interest is reversed, when the payment of interest or principal
is ninety days past due, unless the outstanding loan is adequately
secured and is in the process of collection. The loan is accounted for
thereafter on the cash or cost recovery method until qualifying for
return to accrual status.
Impaired loans are measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or as a
practical expedient at the loan's observable market rate or the fair
value of the collateral if the loan is collateral dependent. Impaired
loans are accounted for as loans until foreclosure.
Nonrefundable fees and related direct costs associated with the
origination or purchase of loans are deferred and netted against
outstanding loan balances. The net deferred fees and costs are
generally amortized into interest income over the loan term using a
method which approximates the interest method. Other credit-related
fees, such as standby letter of credit fees, loan placement fees and
annual credit card fees are recognized as noninterest income over the
commitment period or over the period the related service is performed.
The Company originates loans to customers under a Small Business
Administration program that generally provides for SBA guarantees of 75%
to 90% of each loan. Loans held for sale are carried at the lower of
cost or estimated market value in the aggregate. Historically, the
Company has sold the guaranteed portion of each loan to a third-party
and has retained the unguaranteed portion in its own portfolio. The
Company allocates basis of the loans sold and the retained portions
based upon their relative fair market value. The Company may be
required to refund a portion of the sales premium received, if the
borrower defaults or the loan prepays within 90 days of the settlement
date. At December 31, 1997 and 1996, the Company had received premiums
of $104,000 and $169,000, respectively, subject to such recourse.
The Company retains a servicing spread on the sale of SBA guaranteed
loans that creates loan servicing income. Under Statement of Financial
Accounting Standards ("SFAS") No. 125, which was implemented by the
Company as of January 1, 1997, the servicing spread is recognized as a
servicing asset to the extent the contractual servicing fee in the loan
sale agreement exceeds adequate compensation for the servicing.
Servicing spread in excess of the contractual fee, formerly known as
excess servicing is recognized as an interest only strip. The Company
measures the servicing assets and interest only strip by discounting the
respective cash flow for the estimated expected life of the loan. The
Company uses prepayment statistics and its own prepayment experience in
estimating the expected life of the loans. Both the servicing asset and
the interest only strip represent the discounted present values of cash
flows that are recorded as loan servicing income. These assets are
amortized
54
<PAGE>
as an offset to loan servicing income over the estimated expected life of
the loans, as well as the capitalized excess servicing in prior years.
SFAS No. 125 requires periodic measurements of the fair value for
servicing assets and interest only strips as well as loan prepayment
experience. The statement further requires that these assets be
stratified by one or more predominant risk characteristics of the
underlying loans. The Company stratifies the servicing portfolio by
date of origination. Fair value is measured by discounting the
respective cash flows for the servicing assets and interest only strips
over this remaining period.
At December 31, 1997, there was no material difference between the
Company's amortized carrying value for servicing assets and the fair
value.
The Company measures the fair value of its interest only ("IO") strips
following the same stratification and discounted cash flow methods used
for servicing assets. The IO strip is treated as a financial asset in
substance, similar to an available-for-sale security under SFAS No. 115.
Differences between the fair value of the strip and its amortized
carrying value are recorded as unrealized gains or losses, and recorded
net of the related tax effect as a separate component of shareholders'
equity. At December 31, 1997, there was no material difference between
the carrying value and the fair value of the IO strip.
d. ALLOWANCE FOR CREDIT LOSSES - The allowance for credit losses represents
management's recognition of the risks assumed when extending credit and
its evaluation of the quality of the loan portfolio. The allowance is
maintained at a level considered to be adequate for potential credit
losses based on management's assessment of various factors affecting the
loan portfolio, which include a review of problem loans, business
conditions and an overall evaluation of the quality of the portfolio.
The allowance is increased by provisions for credit losses charged to
operations and reduced by charges to the allowance net of recoveries.
Management considers the allowance for credit losses adequate to cover
any losses that may be inherent in the loan portfolio.
In evaluating the probability of collection, management is required to
make estimates and assumptions that affect the reported amounts of
loans, allowance for credit losses and the provision for credit losses
charged to operations. Actual results could differ significantly from
those estimates.
e. PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed on a straight-line
basis over the estimated useful lives of the assets as follows:
Buildings 30 years
Leasehold improvements Life of the lease
Furniture and equipment 3 - 10 years
f. LONG LIVED ASSETS - The Company periodically evaluates the carrying value
of long-lived assets to be held and used, including goodwill and other
intangible assets. Based on such an evaluation, the Company
determined that there is no impairment loss to be recognized in 1997 or
1996.
g. OTHER REAL ESTATE OWNED - Real estate properties acquired through, or in
lieu of, loan foreclosure are to be sold and are initially recorded at
fair value at the date of foreclosure establishing a new cost basis.
After foreclosure, valuations are periodically performed by
55
<PAGE>
management and the real estate is carried at the lower of carrying
amount or fair value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in
noninterest expenses.
h. INVESTMENTS IN REAL ESTATE - Investments in real estate represent RSC's
equity interests in real estate development partnerships and certain
other real estate holdings held for sale or development (see Note 4).
All investments in real estate are valued at net realizable value.
Revenue recognition on the disposition of real estate, including other
real estate owned, is dependent upon the transaction meeting certain
criteria relating to the nature of the property sold and the terms of the
sale. Under certain circumstances, revenue recognition may be deferred
until these criteria are met. Interest and other carrying charges
related to property held for development are capitalized during the
construction period. The Company capitalizes interest on qualifying
expenditures at its average cost of funds. Capitalization of interest
ceases when the qualifying asset is substantially complete and ready for
sale or when activities related to development cease. For 1997, 1996 and
1995, the Company capitalized interest of $0, $0 and $55,000,
respectively.
i. INCOME TAXES - The Company files a consolidated federal income tax return
and a combined California tax return. Deferred income taxes are provided
for temporary differences between the financial reporting basis and the
tax basis of the Company's assets and liabilities in accordance with
Statement of Financial Accounting Standards No. 109.
j. NET INCOME (LOSS) PER SHARE - In February 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share",
("EPS"). SFAS No. 128 replaces the presentation of primary EPS with a
presentation of basic EPS. In addition, entities with complex capital
structures are required to provide disclosure of diluted EPS. Basic
earnings (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings (loss) per share
is computed by dividing net income (loss) available to common
stockholders 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 at December 31, 1997 and 1995 because the effect of
potentially dilutive securities under the stock option plans were
antidilutive.
k. STOCK-BASED COMPENSATION - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees".
l. NEW ACCOUNTING PRONOUNCEMENTS - In June 1997, the FASB issued SFAS No.
130 , "Reporting of Comprehensive Income", which requires than an
enterprise report, by major components and as a single total, the change
in its net assets during the period from nonowner sources; and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information", which establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas, and major customers. Adoption of
these statements will not impact the Company's consolidated financial
position, results of operations or cash flows.
56
<PAGE>
m. RECLASSIFICATIONS - Certain reclassifications have been made to prior
year balances to conform to current year classifications.
2. INVESTMENT SECURITIES
Investment securities are comprised of the following (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Treasuries $ 2,007 $ 5 $ - $ 2,012
U.S. Government agencies 17,431 91 (33) 17,489
Mortgage-backed securities 11,541 142 (36) 11,647
State and political subdivisions 5,441 183 - 5,624
Equity securities 214 - - 214
--------- ------- ------ -------
$36,634 $421 $ (69) $36,986
--------- ------- ------ -------
--------- ------- ------ -------
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Treasuries $ 2,020 $ 10 $ - $ 2,030
U.S. Government agencies 21,408 37 (62) 21,383
Mortgage-backed securities 7,972 54 (78) 7,948
State and political subdivisions 1,517 42 - 1,559
Equity securities 350 - - 350
--------- ------- ------ -------
$ 33,267 $ 143 $(140) $ 33,270
--------- ------- ------ -------
--------- ------- ------ -------
</TABLE>
There were no investment securities classified as held-to-maturity at
December 31, 1997 or December 31, 1996.
57
<PAGE>
Gross realized gains and losses on sales of available-for-sale securities in
1997, 1996 and 1995 are as follows (In thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1997 1996 1995
<S> <C> <C> <C>
Gross realized gains $ 21 $ - $ 3
Gross realized losses (40) - (28)
---- ---- ----
-
Net gain (loss) $(19) $ - $(25)
---- ---- ----
---- ---- ----
</TABLE>
Actual maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. The amortized cost and fair value of debt securities
available for sale at December 31, 1997, by contractual maturity, are shown
below. (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
AVAILABLE-FOR-SALE:
Due in one year or less $ 2,421 $ 2,426
Due after one year through five years 12,162 12,219
Due after five years through ten years 8,658 8,752
Due after ten years 13,393 13,589
------- -------
$36,634 $36,986
------- -------
------- -------
</TABLE>
At December 31, 1997 and 1996, investment securities with carrying values of
approximately $4,007,000 and $3,020,000 (market value of $4,011,000 and
$3,027,000, respectively), were pledged as collateral to secure public funds
and for other purposes as required by law or contract.
58
<PAGE>
3. LOANS
Loans are comprised of the following (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------
1997 1996
PERCENT PERCENT
OF TOTAL OF TOTAL
AMOUNT LOANS AMOUNT LOANS
<S> <C> <C> <C> <C>
Commercial $ 75,487 58% $ 55,149 54%
Real estate:
Mortgage 14,900 12% 13,260 13%
Construction 30,128 23% 23,640 24%
Consumer and other 9,120 7% 8,778 9%
-------- -------- ----
Total loans 129,635 100% 100,827 100%
-------- ---- -------- ----
Less:
Unearned discount 623 526
Deferred loan fees 363 392
Allowance for credit losses 2,219 1,615
-------- ---------
Loans, net 126,430 98,294
Loans held-for-sale - 1,476
-------- ---------
Total loans, net $126,430 $ 99,770
-------- ---------
-------- ---------
</TABLE>
The Company's business activity is with customers primarily located within
Fresno and Madera counties. The Company grants real estate, commercial and
installment loans to these customers. The Company's commercial portfolio is
highly diversified among industry groups within the Company's service area.
The Company's largest concentration of loans is in real estate mortgages and
real estate construction lending. A significant portion of its customers'
ability to repay these loans is dependent upon the economic sectors of
residential real estate development and construction. Generally, loans are
secured by various forms of collateral. The loans are expected to be repaid
from income of the borrower or with proceeds from the sale of assets securing
the loans. The Company's loan policy requires sufficient collateral to meet
the Company's relative risk criteria for each borrower. The Company's
collateral mainly consists of real estate, cash, accounts receivable,
inventory and other financial instruments. The Company either maintains
possession of the collateral in safekeeping or perfects a security interest
with the State of California.
59
<PAGE>
At December 31, 1997 and 1996, the following information related to
nonperforming assets. (In thousands, except percentages)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1997 1996
Nonperforming Assets:
Nonaccrual RSC loans $ 1,138 $ 3,250
Nonaccrual Bank loans 598 51
----------------------
Nonperforming loans 1,736 3,301
Other real estate owned 503 437
----------------------
Total nonperforming assets $ 2,239 $ 3,738
----------------------
----------------------
Total loans before allowance for losses $129,635 $102,303
Total assets 198,241 181,058
Allowance for possible credit losses (2,219) (1,615)
----------------------
Ratios:
Nonperforming loans to total loans 1.34% 3.23%
Nonperforming loans to total loans
(excluding RSC loans) .46% .05%
Nonperforming assets to:
Total loans 1.73% 3.65%
Total loans and OREO 1.73% 3.64%
Total assets 1.13% 2.06%
Allowance for possible credit losses to total
nonperforming assets 99.11% 43.20%
----------------------
</TABLE>
The gross interest income that would have been recorded for loans placed on
nonaccrual status was $254,000, $276,000 and $82,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. Other real estate owned was
$503,000 at December 31, 1997 compared to $437,000 at December 31, 1996.
There were no troubled debt restructured loans as defined in Statement of
Financial Accounting Standards No. 15 at December 31, 1997.
The Company is not aware of any potential problem loans, which were accruing
interest at December 31, 1997, where serious doubt exists as to the ability
of the borrower to comply with present repayment terms.
The Company does not believe there to be any concentration of loans in
excess of 10% of total loans which are not disclosed above which would cause
them to be significantly impacted by economic or other conditions.
60
<PAGE>
At December 31, 1997 and 1996, the following information related to impaired
loans under SFAS 114 was included in the total loan balance (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
<S> <C> <C>
Total impaired loans $1,410 $242
Impaired loans without specified SFAS 114
allowance for credit losses 598 129
------ ----
Impaired loans with specific SFAS 114
allowance for credit losses $ 812 $113
------ ----
------ ----
Specific allowance for credit losses on impaired loans $ 194 $ 89
------ ----
------ ----
</TABLE>
Average impaired loans were $689,000 and $188,000 for December 31, 1997 and
1996, respectively. The Company uses the cash basis method of income
recognition for impaired loans. For the years ended December 31, 1997 and
1996, the Company did not recognize any income on such loans.
An analysis of the changes in the allowance for credit losses is as follows
(In thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1997 1996 1995
<S> <C> <C> <C>
Balance, beginning of the year $1,615 $1,784 $1,541
Provision charged to operations 1,353 - 470
Losses charged to the allowance (895) (258) (265)
Recoveries of amounts charged off 146 89 38
------ ------ ------
Balance, end of the year $2,219 $1,615 $1,784
------ ------ ------
------ ------ ------
</TABLE>
Included in commercial loans are SBA loans with unguaranteed balances of
$18,567,000 and $13,084,042 at December 31, 1997 and 1996, respectively.
The activity in the asset accounts related to the servicing spread retained
on SBA guaranteed loan sales for the three years ended December 31, 1997,
1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------
SERVICING
ASSETS IO STRIPS
<S> <C> <C> <C> <C>
Balance, beginning of the year $ 595 $ - $290 $122
SFAS 125 reclassification (143) 143 - -
Servicing assets and IO strips recognized
on SBA loans sold 61 13 396 195
Amortization (126) (19) (91) (27)
------ ---- ---- ----
Balance, end of the year $ 387 $137 $595 $290
------ ---- ---- ----
------ ---- ---- ----
</TABLE>
61
<PAGE>
In the ordinary course of business, the Company enters into various types of
transactions which involve financial instruments with off-balance sheet
risk. These instruments include commitments to extend credit and standby
letters of credit which are not reflected in the accompanying balance
sheets. These transactions may involve, to varying degrees, liquidity,
credit and interest rate risk in excess of the amount, if any, recognized in
the balance sheets. The Company's off-balance sheet credit risk exposure is
the contractual amount of commitments to extend credit and standby letters
of credit. The Company applies the same credit standards to these contracts
as it uses in its lending process.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
<S> <C> <C>
Financial instruments whose contractual
amount may represent additional risk
if funded (In thousands):
Commitments to extend credit $44,139 $57,927
Standby letters of credit $ 795 $ 1,267
</TABLE>
Commitments to extend credit are agreements to lend to customers. These
commitments have specified interest rates and generally have fixed
expiration dates but may be terminated by the Company if certain conditions
of the contract are violated. Many of these commitments are expected to
expire or terminate without funding. Therefore, the total commitment
amounts do not necessarily represent future cash requirements. Collateral
relating to these commitments varies, but may include cash, securities and
real estate.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Credit risk
arises in these transactions from the possibility that a customer may not be
able to repay the Company upon default of performance. Collateral held for
standby letters of credit is based on an individual evaluation of each
customers' credit worthiness, but may include cash, securities or other
guarantees.
4. REAL ESTATE ACTIVITIES
Regency Service Corporation is involved in residential real estate
development in the Fresno/Clovis area through both limited partnership
investments and direct investments in real estate projects. These real
estate activities consist of residential subdivisions being developed into
lots and homes. Limited partnership investments are accounted for under the
equity method. Gains on sales of limited partnership properties are
recognized on the accrual method and are allocated between the partners
based on the provisions of the partnership agreements.
62
<PAGE>
In 1996, RSC dissolved six limited partnerships and acquired their assets
and liabilities. Accordingly, the accompanying consolidated financial
statements include the total assets and liabilities of these six dissolved
partnerships from the date of acquisition. The condensed financial
information of the acquired entities as of the acquisition dates were as
follows (In thousands):
<TABLE>
<S> <C>
Assets:
Cash $ 804
Notes receivable 2,205
Land and real estate under construction 15,898
Other residential property -
Other assets 227
-------
Total assets 19,134
Liabilities:
Notes payable 8,614
Accrued interest and other liabilities 714
-------
Total liabilities 9,328
-------
Equity $ 9,806
-------
-------
</TABLE>
63
<PAGE>
At December 31, 1996, the Company's consolidated financial statements
included $4,976,000 in notes payable from debt incurred as a result of the
acquisition of former limited partnerships. In 1997 the notes payable were
paid in full.
Included in the investments in real estate balances are acquisition,
development and construction loans held by the Bank totaling $271,000 and
$209,000 at December 31, 1997 and 1996, respectively. The remaining
investments in real estate balances of $4,067,000 and $16,280,000 represent
RSC's investments in real estate at December 31, 1997 and 1996.
Condensed financial information relative to RSC included in the Company's
consolidated financial statements at December 31, 1997 and 1996,
respectively, is as follows (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1997 1996
-------- ---------
<S> <C> <C>
Financial position:
Investments in real estate:
Real estate held for sale $ 4,420 $15,520
Equity in partnerships 702 2,070
------- -------
Investment in real estate before allowance 5,122 17,590
Allowance for real estate losses (1,055) (1,310)
------- -------
Investment in real estate 4,067 16,280
Loans to real estate partnerships and projects 1,768 3,988
Allowance for loan losses (364) (110)
------- -------
Net loans 1,404 3,878
Other assets 2,524 1,733
Liabilities (144) (6,219)
------- -------
Bank's investment in RSC $ 7,851 $15,672
------- -------
------- -------
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Summary of loss:
Income (loss) from partnerships accounted for on
the equity method (before amortization of
capitalized interest and eliminating entries of
$0 in 1997, $0 in 1996 and $368 in 1995 $ (436) $ 151 $ 32
Loss from direct investments in real estate (3,565) (583) (348)
Provision for real estate losses - - (2,798)
Provision for loan losses (855) - (110)
------- ------- -------
Net loss from real estate projects (4,856) (432) (3,224)
Other income 102 249 85
Other expenses (966) (1,316) (875)
------- ------- -------
Total loss from RSC (excluding
income tax benefits) $(5,720) $(1,499) $(4,014)
------- ------- -------
------- ------- -------
</TABLE>
During 1997, the Company accelerated the disposition of RSC's real estate
holdings. Based upon the Company's decision to pursue the bulk sale of
several projects, as well as discounting other holdings to reflect RSC's
current anticipated sales proceeds, several properties were written down to
their estimated net realizable value. The amount of the writedown in 1997
was $2,342,000.
Condensed unaudited financial information relative to investments in real
estate limited partnerships accounted for under the equity method, before
eliminations, are as follows (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
-------- -------
<S> <C> <C>
Assets:
Real estate $2,755 $6,883
Other assets 657 1,412
------ ------
Total $3,412 $8,295
------ ------
------ ------
Liabilities and Equity:
Liabilities (primarily third-party debt) $1,895 $4,967
RSC's equity (before write down of $213 in 1997) 915 2,070
Others' equity 602 1,258
------ ------
Total $3,412 $8,295
------ ------
------ ------
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
Summary of partnerships' income (loss):
Sales of real estate $ 9,493 $ 11,930 $ 28,896
Cost of sales and expenses (9,930) (11,635) (29,128)
------- -------- --------
Net income (loss) $ (437) $ 295 $ (232)
------- -------- --------
------- -------- --------
RSC's share of net income (loss) in limited
partnerships $ (223) $ 151 $ 32
Write down of RSC's investment in limited
partnerships (213) - -
------- -------- --------
Total $ (436) $ 151 $ 32
Increases (decreases) to RSC's share of
net income:
Amortization of capitalized interest - - (368)
Loss from direct investments in real estate (3,565) (583) (348)
Provision to reduce partnerships' carrying
value of land and real estate under
development - - (2,798)
Other 28 81 41
------- -------- --------
Total (3,537) (502) (3,473)
------- -------- --------
Loss from investments in real estate $(3,973) $ (351) $ (3,441)
------- -------- --------
------- -------- --------
</TABLE>
The FDIC has adopted final regulations under the Federal Deposit Insurance
Corporation Improvement Act of 1991 regarding real estate investment and
development activities of insured state banks and their majority-owned
subsidiaries.
Under the FDIC regulations, banks were required to divest their real estate
development investments as quickly as prudently possible but in no event
later than December 19, 1996, and submit a plan to the FDIC regarding
divestiture of such investments. Such regulations also permitted banks to
apply for the FDIC's consent to continue, on a limited basis, certain real
estate development activities.
In 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. Management believes they will be in full compliance
with the FDIC mandated divestiture by December 1998.
66
<PAGE>
5. PREMISES AND EQUIPMENT
Bank premises and equipment consists of the following (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
------- --------
<S> <C> <C>
Land $ - $ -
Buildings 250 245
Leasehold improvements 1,253 1,253
Furniture and equipment 3,465 3,421
------- -------
4,968 4,919
Accumulated depreciation and amortization (3,217) (2,658)
------- -------
Total premises and equipment $ 1,751 $ 2,261
------- -------
------- -------
</TABLE>
6. DEPOSITS
Deposits are comprised of the following (In thousands):
<TABLE>
<CAPTION> DECEMBER 31
---------------------
1997 1996
--------- ---------
<S> <C> <C>
Noninterest bearing deposits $ 46,744 $ 36,613
Interest bearing deposits:
NOW and money market accounts 48,616 47,851
Savings accounts 36,498 25,540
Time deposits:
Under $100,000 15,778 19,032
$100,000 and over 28,643 30,766
-------- --------
Total interest bearing deposits 129,535 123,189
-------- --------
Total deposits $176,279 $159,802
-------- --------
-------- --------
</TABLE>
At December 31, 1997, time deposits of $100,000 or more include
approximately $17,846,000 maturing in 3 months or less, $8,957,000 maturing
in 3 to 12 months and $1,840,000 maturing after 12 months.
At December 31, 1997, the scheduled maturities of all certificates of
deposits and other time deposits are as follows (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------
<S> <C>
1998 $40,568
1999 2,369
2000 582
2001 806
2002 and thereafter 96
-------
$44,421
-------
-------
</TABLE>
67
<PAGE>
7. SHORT-TERM BORROWINGS, LEASE COMMITMENTS, AND CONTINGENCIES
At December 31, 1997 and 1996, the Company had no federal funds purchased or
securities sold under repurchase agreements outstanding.
At December 31, 1997, the Company had unsecured federal funds lines of
credit available providing for short-term borrowings up to an aggregate of
$5,000,000. Borrowings under federal funds lines are generally on an
overnight basis with interest rates determined by market conditions.
Interest rates ranged between 5.125% and 5.625% at December 31, 1997. The
agreements are subject to annual renewal. Information concerning federal
funds lines is summarized as follows (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1997 1996
<S> <C> <C>
Average balance during the year $ - $ 869
Average interest rate during the year - 5.69%
Maximum month-end balance during the year $ - $ 3,500
</TABLE>
In addition to its federal funds lines, the Company uses unpledged
securities in its investment portfolio as a source of short-term liquidity
by selling securities under repurchase agreements. Securities sold under
repurchase agreements generally mature within one to seven days from the
transaction date. Securities sold under repurchase agreements are delivered
to broker dealers who arrange the transactions. The broker dealers may
sell, loan or otherwise dispose of such securities to other parties in the
normal course of their operations and agree to resell to the Company
substantially identical securities at the maturities of the agreements.
There were no such outstanding agreements at December 31, 1997 and 1996.
Information concerning securities sold under agreements to repurchase is
summarized as follows (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1997 1996
<S> <C> <C>
Average balance during the year $ - $ 617
Average interest rate during the year - 5.79%
Maximum month-end balance during the year $ - $ 4,954
</TABLE>
The Company leases land and a building under a lease agreement having an
initial term of approximately 30 years. The lease is accounted for as an
operating lease for the land and a capital lease for the building.
During 1995, the Company entered into a sale-leaseback of its corporate
headquarters. The leaseback is accounted for as an operating lease with a
term of 15 years. Additionally, the Bank has lease commitments related to
certain other properties which are accounted for as operating leases. Rent
expense under all operating lease agreements was $528,000, $540,000 and
$273,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
68
<PAGE>
At December 31, 1997, the aggregate minimum future lease commitments under
capital leases and noncancelable operating leases with terms of one year or
more consist of the following (In thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------------------
<S> <C> <C>
1998 $ 48 $ 516
1999 48 506
2000 76 477
2001 76 457
2002 76 456
Thereafter 2,526 4,476
--------- ---------
Total minimum lease payments 2,850 $ 6,888
Amount representing interest (2,341) ---------
--------- ---------
Net present value of minimum lease payments $ 509
---------
---------
</TABLE>
The Company is party to legal proceedings and claims which arise during the
ordinary course of business. In the opinion of management, the ultimate
outcome of such litigation and claims will not have a material adverse
effect on the Company's financial position or results of its operations.
8. INCOME TAXES
Income tax expense (benefit) is summarized as follows (In thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $ (358) $ (149) $ 135
State (47) 54 92
------- ------- --------
Total current $ (405) (95) 227
Deferred:
Federal (280) 688 (1,634)
State (148) 139 231
------- ------- --------
Total deferred (428) 827 (1,403)
------- ------- --------
$ (833) $ 732 $(1,176)
------- ------- --------
------- ------- --------
</TABLE>
69
<PAGE>
A reconciliation of the statutory federal income tax rate with the effective
tax rate is as follows:
<TABLE>
<CAPTION>
PERCENT OF PRE-TAX INCOME
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Statutory rate (35.0)% 35.0 % (35.0)%
State taxes, net of federal benefit (6.1)% 7.3 % (6.8)%
Other, net 1.6 % (0.3)% 1.9 %
------- ------ ------
Effective rate (39.5)% 42.0 % (39.9)%
------- ------ ------
------- ------ ------
</TABLE>
Income tax expense (benefit) related to unrealized investment security gains
and losses were $(8,000), $0 and $(10,000) for the years ended December 31,
1997, 1996 and 1995, respectively and were based on the effective tax rates
for those years.
The Company's net deferred tax asset (included in other assets) is comprised
of the following (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1997 1996
<S> <C> <C>
Deferred tax assets:
Bad debt reserves $ 871 $ 519
Lease financing 150 132
Deferred compensation 340 313
Nonaccrual loan interest 259 143
Gain on sale-leaseback - 21
Allowance for real estate losses 802 606
Other 231 83
-------- --------
Total deferred tax assets 2,653 1,817
-------- --------
Deferred tax liabilities:
State taxes (205) (141)
Depreciation (32) (92)
Unrealized investment gains (148) (1)
Other (610) (206)
-------- --------
Total deferred tax liabilities (995) (440)
-------- --------
Net deferred tax asset $ 1,658 $ 1,377
-------- --------
-------- --------
</TABLE>
The Company's net deferred tax asset is expected to be fully recognized.
Accordingly, for the years ended December 31, 1997 and 1996 no valuation
allowance related to the net deferred tax asset was considered necessary.
70
<PAGE>
9. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN - The Company has reserved 545,448 shares of its common
stock for issuance under its amended 1990 stock option plan. Options
granted under the plan may either be immediately exercisable for the full
number of shares granted thereunder or may become exercisable in cumulative
increments over a period of months or years as determined by the
Compensation Committee of the Board of Directors but, in no event less than
20% of the shares subject to the option per year during the five years from
the date of grant. All options are granted at prices not less than 100% of
the fair value of the stock at the date of grant.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
----------- ---------------
<S> <S> <S>
OUTSTANDING, JANUARY 1, 1995 164,872 $4.91
-----------
Options exercised (3,500) $5.33
Effect of 5% stock dividend 8,066 $4.67
Options exercised (47,724) $5.58
-----------
OUTSTANDING, DECEMBER 31, 1995
(121,714 exercisable at a weighted average
price of $4.31) 121,714 $4.31
-----------
Options granted (weighted average fair value
of $9.23) 167,000 $9.23
-----------
OUTSTANDING, DECEMBER 31, 1996 288,714 $7.15
-----------
(150,964 exercisable at a weighted average
price of $5.21)
Options exercised (17,387) $4.31
Options expired (12,500) $9.49
-----------
OUTSTANDING, DECEMBER 31, 1997 258,827 $7.23
-----------
(173,577 exercisable at a weighted average
price of $6.20)
</TABLE>
At December 31, 1997 and 1996, 190,994 and 178,494 shares were available
for grant, respectively.
71
<PAGE>
Additional information regarding options outstanding as of December 31, 1997
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------- ----------------------------
WEIGHTED AVG.
REMAINING
RANGE OF NUMBER CONTRACTUAL WEIGHTED AVG. NUMBER WEIGHTED AVG.
EXERCISE PRICES OUTSTANDING LIFE & (YRS.) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$4.31 104,327 2.40 yrs. $4.31 104,327 $4.31
$8.94 94,500 8.96 yrs. $8.94 57,250 $8.94
$9.63 60,000 8.34 yrs. $9.63 12,000 $9.63
---------------------------------------------------------------- ----------------------------
$ 4.31 - $9.63 258,827 6.17 yrs $7.23 173,577 $6.20
</TABLE>
EMPLOYEE STOCK OWNERSHIP PLAN - The Company has an employee stock ownership
plan covering substantially all full-time employees meeting certain
requirements. Contributions to the plan are discretionary as determined by
the Board of Directors. The employee stock ownership plan expense was
$200,000, $173,500 and $156,000 for the years ended December 31, 1997, 1996
and 1995, respectively. The plan owned 161,239 and 138,466 shares of the
Company's common stock at December 31, 1997 and 1996, respectively.
ADDITIONAL STOCK PLAN INFORMATION - As discussed in Note 1, the Company
continues to account for its stock-based awards using the intrinsic value
method in accordance with APB No. 25, "Accounting for Stock Issued to
Employees", and its related interpretations and no compensation expense has
been recognized in the financial statements for employee stock arrangements.
SFAS No. 123, "Accounting for Stock-Based Compensation", (SFAS 123) requires
the disclosure of pro forma net income and earnings per share had the
Company adopted the fair value method as of the beginning of fiscal 1995.
Under SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, although such models
were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. Such models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using a binomial option pricing model with the
following weighted average assumptions: expected life, 36 to 120 months:
stock volatility, 20%; risk free interest rates, 6.10% to 6.50%; and
quarterly dividends of 2.5% of earnings during the expected term. The
Company's calculations are based on a multiple option valuation approach and
forfeitures are recognized as they occur. There were no stock options
granted in 1995 or 1997. If the computed fair values of the 1996 awards had
been amortized to expense over the vesting period of the awards, pro forma
net loss would have been $(1,330,000), ($(0.71) basic and diluted earnings
per share) in 1997 and pro forma net income would have been $959,000 ($0.53
basic earnings per share; $0.51 diluted earnings per share) in 1996.
However, the impact of outstanding stock options granted prior to 1995 has
been excluded from the pro forma calculation; accordingly, the 1997 and 1996
pro forma adjustments are not indicative of future period pro forma
adjustments, when the calculation will apply to all applicable stock
options.
OTHER PLANS - The Company has also established the Regency Bancorp Cash or
Deferred Retirement Plan which qualifies under the Internal Revenue Code
Section 401(k). Employee contributions to the Plan may be matched by the
Company at the discretion of the Board of Directors. Employee contributions
to the Plan are immediately vested while any matching
72
<PAGE>
contributions made by the Bank vest at different percentages based on
years of service. For the years ended December 31, 1997, 1996 and 1995,
the Company contributed approximately $47,000, $27,100 and $38,000,
respectively, to the Plan.
The Company has a nonqualified Deferred Compensation Plan providing
directors with the opportunity to participate in an unfunded, deferred
compensation program. Under the plan, directors may elect to defer some or
all of their current compensation. At December 31, 1997 and 1996, the total
net deferrals included in other liabilities was approximately $515,000 and
$518,000, respectively. In addition, in 1994, the Company established a
salary continuation plan for three of the Bank's key executives which
provides that upon retirement the Bank will continue to provide compensation
to these executives for a period of 15 years. Future compensation under the
Plan is earned by the executives for services rendered through retirement
and vests at a rate of 10% per year. The Company accrues for the
compensation based on anticipated years of service and the vesting schedule
provided in the Plan. At December 31, 1997 and 1996, $242,000 and $172,000,
respectively, has been accrued. In connection with the implementation of
the Deferred Compensation and Salary Continuation Plans, single premium
universal life insurance policies on the life of each participant were
purchased by the Bank, which is beneficiary and owner of the policies. The
cash surrender value of the policies was $3,038,000 and $2,903,000 at
December 31, 1997 and 1996. The current annual tax-free interest rates on
these policies range from 3.34% to 6.03%. The assets of the Plan, under
Internal Revenue Service regulations, are the property of the Company and
are available to satisfy the Company's general creditors.
10. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
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 (In thousands, except
per share data):
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
BASIC EPS COMPUTATION
Net income (loss) $ (1,274) $ 1,008 $ (1,767)
Average common shares outstanding 1,860 1,818 1,805
-------------------------------------
Basic EPS $ (0.68) $ 0.55 $ (0.98)
-------------------------------------
-------------------------------------
DILUTED EPS COMPUTATION
Net income (loss) $ (1,274) $ 1,008 $ (1,767)
Average common shares outstanding 1,860 1,818 1,805
Stock options (Anti dilutive in 1997 and 1995) 54
-------------------------------------
1,860 1,872 1,805
-------------------------------------
Diluted EPS $ (0.68) $ 0.54 $ (0.98)
-------------------------------------
-------------------------------------
</TABLE>
On December 31, 1997, the Company completed a private placement offering of
750,000 new shares of its common stock. The net proceeds of $5,927,000 were
used to contribute capital to the Bank. Warrants to purchase 26,211 shares
of common stock at $9.90 and 150,000 shares of common stock at $10.00 per
share were outstanding at December 31, 1997 but were not included in the
computation of diluted EPS because the warrants exercise price was greater
than the average market price of the common shares. The warrants expire on
January 1, 2003. Options to purchase 60,000, 167,000, and 0 shares of
common stock at various prices per share were outstanding at December 31,
1997, 1996 and 1995, respectively but were not included in diluted EPS
because the
73
<PAGE>
options exercise price was greater than the average market price of the common
shares for the years then ended.
11. RELATED PARTY TRANSACTIONS
Certain officers and directors of the Company and affiliates are customers
of and have had other transactions with the Bank in the ordinary course of
business. In management's opinion, all loans and commitments included in
such transactions were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and did not involve more than
normal risk of collectibility or present other unfavorable features.
Changes in loans outstanding to directors, officers and affiliates were as
follows (In thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31
1997 1996
<S> <C> <C>
Balance, beginning of year $ 998 $ 1,042
New loans 87 367
Payments (576) (411)
--------- -----------
Balance, end of year $ 509 $ 998
--------- -----------
--------- -----------
</TABLE>
Gary L. McDonald, a former director of the Company, owns Gary L. McDonald
Real Estate and Development Inc., ("GLMRED"). During 1996, GLMRED was
retained by RSC to manage the real estate projects in which RSC has an
investment. Prior to 1996, Mr. McDonald through Peachwood Park
("Peachwood"), a California Limited Partnership in which McDonald
Construction Inc. is the sole general partner, was retained by RSC to manage
the real estate projects in which RSC had made an investment. In 1997, 1996
and 1995, the Company paid approximately $120,000, $488,000 and $243,000 to
GLMRED and Peachwood respectively for these services. In April 1997, the
Company issued a press release which stated that Gary McDonald, a founding
member of the board of Regency Bank and its parent holding company, Regency
Bancorp, announced his decision to not stand for re-election and leave the
board of both companies effective May 13, 1997. Subsequent to year end
1997, RSC completed the sale of 33 residential lots to GLMRED for an amount
that approximated the adjusted book value of approximately $1.2 million
under terms and conditions substantially the same as those of previous
comparable RSC transactions, including the partial financing of the sale
through a loan from RSC that is subordinate to GLMRED's primary financing on
the property.
The Company's Vice Chairman, David N. Price, administers the Company's
401(k) and ESOP plans. In 1997, 1996 and 1995, the Company paid
approximately $19,000, $18,000 and $15,400, respectively, for these
services.
12. FINANCIAL INSTRUMENTS FAIR VALUE DISCLOSURE
The following summary disclosures are made in accordance with the provisions
of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
which requires the disclosure of fair value information about both on- and
off- balance sheet financial instruments where it is practical to estimate
that value. Fair value is defined in SFAS No. 107 as the amount at which an
instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. It is not the
Company's intent to enter into such exchanges.
74
<PAGE>
In cases where quoted market prices were not available, fair values were
estimated using present value or other valuation methods, as described
below. The use of different assumptions (e.g., discount rates and cash flow
estimates) and estimation methods could have a significant effect on fair
value amounts. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. Because SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure
requirements, any aggregation of the fair value amounts presented would not
represent the underlying value of the Company.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------- --------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 19,893 $ 19,893 $ 19,833 $ 19,833
Investment securities 36,986 36,986 33,270 33,270
Loans, net 126,430 127,730 99,770 101,744
Servicing asset 507 507 595 595
Interest only strip 417 426 - -
Liabilities:
Deposits 176,279 176,190 159,802 159,578
Notes payable and capital lease
obligation 509 509 5,452 5,326
Commitments to extend credit - - - -
</TABLE>
The following methods and assumptions were used in estimating the fair
values of financial instruments:
CASH AND DUE FROM BANKS - The carrying amounts reported in the balance
sheets for cash and cash equivalents approximate their estimated fair
values.
INVESTMENT SECURITIES - Fair values for investment securities, including
mortgage-backed securities, are based on quoted market prices.
LOANS - Fair values of variable rate loans which reprice frequently and with
no significant change in credit risk are discounted to their next repricing
date. Fair values for all other loans are estimated using discounted cash
flow analyses over their remaining maturities, using a build-up approach
which views the discount rate as consisting of the risk-free rate, credit
quality, operating expense and prepayment option price.
SERVICING ASSET AND INTEREST ONLY STRIP - The servicing asset and interest
only strip related to the sale of SBA loans are valued at the estimated
current rate paid by the market for SBA servicing assets and interest only
strips at December 31, 1997.
DEPOSITS - Fair values for transactions and savings accounts are equal to
the respective amounts payable on demand at December 31, 1997 and 1996
(i.e., carrying amounts). Fair values of fixed-maturity certificates of
deposit were estimated using discounted cash flows over their remaining
maturities, using a build-up approach as discussed above with no component
assigned for credit quality.
75
<PAGE>
NOTES - Fair values of notes payable were estimated using discounted cash
flows over their remaining maturities using a build-up approach consisting
of the risk free rate and operating expense components.
COMMITMENTS TO EXTEND CREDIT - Fair values of commitments to extend credit
are estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the present counterparties' credit standing. Fair values of standby letters
of credit are based on fees currently charged for similar agreements. There
was no material difference between the carrying amount and the estimated
value of commitments to extend credit at December 31, 1997 and 1996.
13. REGULATORY MATTERS
CAPITAL GUIDELINES - The Company and Bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory and
possible additional discretionary actions by regulators that, if undertaken,
could have a material direct effect on the Company's financial statements.
Capital adequacy guidelines for the Company and the Bank and the regulatory
framework for prompt corrective action for the Bank require that the Company
and Bank meet specific capital guidelines that involve quantitative measures
of the Company's and the Bank's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital classification as well as the Company's and the Bank's
capital adequacy are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Bank to maintain minimum ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital to average assets
(as defined). As of December 31, 1997 and 1996, the Company and Bank meet
all capital adequacy requirements to which they are subject and management
believes that, under the current regulations, both will continue to meet
their minimum capital requirements in the foreseeable future.
76
<PAGE>
As of December 31, 1997 and 1996 respectively, the Bank's capital ratios
are considered "Well Capitalized" and "Adequately Capitalized" under the
regulatory framework for prompt corrective action. The Company and Bank's
actual capital amounts (in thousands) and ratios are also presented in the
following table:
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES: ACTION PROVISIONS:
-----------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-----------------------------------------------------------------------------
AS OF DECEMBER 31, 1997
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets:)
Company $ 18,779 13.87% >=$10,828 >=8.00% N/A
Regency Bank $ 16,003 11.79% >=$10,860 >=8.00% >=$ 13,576 >=10.00%
Tier 1 Capital (to Risk Weighted Assets):
Company $ 17,081 12.62% >=$ 5,414 >=4.00% N/A
Regency Bank $ 14,300 10.53% >=$ 5,430 >=4.00% >=$ 8,145 >= 6.00%
Tier 1 Capital (to Average Assets):
Company $ 17,081 8.89% >=$ 7,686 >=4.00% N/A
Regency Bank $ 14,300 7.46% >=$ 7,663 >=4.00% >=$ 9,579 >= 5.00%
TO BE ADEQUATELY
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES: ACTION PROVISIONS:
-----------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-----------------------------------------------------------------------------
AS OF DECEMBER 31, 1996
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets:)
Company $14,306 10.21% >=$11,207 >=8.00% N/A
Regency Bank $13,944 9.97% >=$11,193 >=8.00% >=$11,193 >=8.00%
Tier 1 Capital (to Risk Weighted Assets):
Company $12,691 9.06% >=$ 5,604 >=4.00% N/A
Regency Bank $12,329 8.81% >=$ 5,596 >=4.00% >=$ 5,596 >=4.00%
Tier 1 Capital (to Average Assets):
Company $ 12,691 7.66% >=$ 6,630 >=4.00% N/A
Regency Bank $ 12,329 7.12% >=$ 6,923 >=4.00% >=$ 6,923 >=4.00%
</TABLE>
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
77
<PAGE>
requiring, among other things, that RSC divest all properties held by it
not later than December, 31, 1998; (f) review the adequacy of the
Bank's allowance for loan and lease losses and establish a
comprehensive policy for determining its adequacy on a quarterly basis;
(g) develop a plan to control overhead and other expenses and restore
the Bank to profitability; (h) prepare a business/strategic plan for the
operation of the Bank acceptable to the FDIC; (i) not pay cash dividends
in any amount except with the prior written consent of the FDIC and the
Commissioner; and (j) furnish quarterly written progress reports to the
FDIC and the Commissioner detailing the form and manner of any actions
taken to comply with the Administrative Orders.
As a result of an examination of the Bank as of June 30, 1997, the
Department of Financial Institutions and the Bank have stipulated to the
issuance of the State Order by the Department of Financial Institutions
which State Order is a final order pursuant to Section 1913 of the
California Financial Code.
The State Order provides that the Bank must: (a) retain management and
maintain a Board of Directors for the Bank and RSC acceptable to the
Commissioner and FDIC; (b) increase and maintain tangible shareholders'
equity (shareholders' equity less intangible assets) to an amount not less
than the greater of (i) 7% of its tangible assets (total assets less
intangible assets) or (ii) $14,000,000; (c) maintain an adequate allowance
for loan and lease losses; (d) cause RSC to maintain an adequate reserve
for losses on its real estate investments; (e) cause RSC to reduce the
assets classified as substandard so that the amount of such assets shall not
exceed $10,115,000 by December 31, 1997, $8,750,000 by March 31, 1998,
$7,100,000 by June 30, 1998 and $4,900,000 by September 30, 1998; (f)
develop, adopt and implement a plan acceptable to the Commissioner for
divestiture of RSC and all of RSC's real estate investments by not later
than December 31, 1998; (g) not make any distribution to shareholders except
with the prior written approval of the Commissioner; and (h) furnish written
progress reports within thirty (30) days after the end of each quarter to
the Commissioner and the FDIC describing actions to comply with the State
Order.
Management believes the Bank is in substantial compliance with the terms and
conditions of the agreements as of December 31, 1997.
DIVIDENDS - As indicated in Note 1, effective March 1, 1995, the Bank became
a wholly-owned subsidiary of the Company. Under California law,
shareholders of the Company may receive dividends when and as declared by
its Board of Directors out of funds legally available. With certain
exceptions, a California corporation may not pay a dividend to its
shareholders unless its retained earnings equal at least the amount of the
proposed dividend. California law further provides that, in the event that
sufficient retained earnings are not available for the proposed
distribution, a corporation may nevertheless make a distribution to its
shareholders if it meets the following two generally stated conditions: (i)
the corporation's assets equal at least 1 1/4 times its liabilities; and
(ii) the corporation's current assets equal at least its current liabilities
or, if the average of the corporation's earnings before taxes on income and
before interest expense for the two preceding fiscal years was less than the
average of the corporation's interest expense for such fiscal years, then
the corporation's current assets must equal at least 1 1/4 times its current
liabilities.
The Company expects to receive substantially all of its income initially
from dividends from the Bank and/or RIA. Under California state banking
law, the Bank may not pay cash dividends in an amount which exceeds the
lesser of the retained earnings of the Bank or the Bank's net income for its
last three fiscal years (less the amount of any distributions to
shareholders made during that period). If the above test is not met, cash
dividends may only be paid with the prior approval of the California State
Department of Financial Institutions ("DFI"), in an amount not exceeding the
Bank's net income for its last fiscal year or the amount of its net income
for its current fiscal year.
78
<PAGE>
Accordingly, the future payment of cash dividends may depend on the Bank's
earnings, its ability to meet capital requirements and/or the Company's
ability to generate income from other sources. At December 31, 1997, based
on the criteria set forth above, as well as certain agreements between the
Bank and the DFI, additional dividends from the Bank to the parent company
must be approved by the DFI.
CASH RESTRICTION - The FDIC requires banks to maintain average reserve
balances on deposits, consisting of vault cash and actual balances held by
the Federal Reserve Bank of San Francisco. The Bank's average FDIC reserve
requirements were $1,683,000 and $1,261,000 in 1997 and 1996, respectively.
The Bank maintained average balances of $1,815,000 and $1,629,000 in 1997
and 1996, respectively.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Following is a summary of amounts paid for interest and taxes and of non-
cash transactions for the years ended 1997, 1996 and 1995 (In thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
-------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Cash paid during the period for:
Interest on deposits and other borrowings $ 5,328 $ 4,597 $ 5,062
Income taxes - 316 21
Noncash transactions:
Transfer of loans to other real
estate owned 390 218 232
Stock dividend - - 866
Net assets acquired through acquisition of
partnerships less cash received:
Land and real estate under construction - 6,272 4,265
Notes receivable - 2,025 -
Other residential property - - 291
Other assets - 227 342
Notes payable - 8,614 4,062
Accrued interest and other liabilities - 714 560
Loan made to finance sale of building - - 2,150
Deferred gain on sale of building - - 264
</TABLE>
79
<PAGE>
15. PARENT COMPANY ONLY FINANCIAL STATEMENTS
As discussed in Note 1, Regency Bancorp was formed on March 1, 1995 to act
as a holding company for Regency Bank and subsequently Regency Investment
Advisors. Following are the condensed balance sheets of Regency Bancorp at
December 31, 1997, and 1996, and condensed statements of income and cash
flow statements for the years ended December 31, 1997 and 1996, and for the
period from March 1 to December 31, 1995 (In thousands):
<TABLE>
<CAPTION>
BALANCE SHEETS
DECEMBER 31
-------------------
1997 1996
<S> <C> <C>
ASSETS
Cash and short-term investments $ 2,794 $ 192
Investment in bank subsidiary 15,805 13,149
Investment in investment subsidiary 308 -
Other assets 107 129
------- -------
- -
Total assets $19,014 $13,470
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 280 $ -
------- -------
Total liabilities
SHAREHOLDERS' EQUITY:
Common stock 15,203 8,868
Retained earnings 3,327 4,601
Unrealized gain on securities 204 1
------- -------
Total shareholders' equity 18,734 13,470
------- -------
Total liabilities and shareholders' equity $19,014 $13,470
------- -------
------- -------
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
(In thousands) DECEMBER 31,
-----------------------------
1997 1996 1995
<S> <C> <C> <C>
INCOME:
Regency Bank income (loss) $(1,291) $1,122 $(1,637)
Regency Investment Advisors income 103 - -
------- ------ -------
Total income (1,188) 1,122 (1,637)
EXPENSES:
Management fees to bank subsidiary 66 66 55
Other 79 133 167
------- ------ -------
Total expenses 145 199 222
NET INCOME (LOSS) BEFORE INCOME TAXES (1,333) 923 (1,859)
INCOME TAX (BENEFIT) (59) (85) (92)
------- ------ -------
NET INCOME (LOSS) $(1,274) $1,008 $(1,767)
------- ------ -------
------- ------ -------
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
(In thousands) DECEMBER 31,
-----------------------------
1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(1,274) $ 1,008 $(1,767)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Equity in undistributed (income) losses of bank subsidiary 1,291 (1,122) 1,637
Equity in undistributed (income) loss of Investment subsidiary (103) - -
Decrease (increase) in other assets 22 (11) (6)
Increase (decrease) in other liabilities 281 (10) 9
------- ------- -------
Net cash (used in) provided by operating activities 217 (135) (127)
INVESTING ACTIVITIES:
Capital contribution to subsidiary bank (3,950) - -
Capital distribution from subsidiary bank - 491 750
------- ------- -------
Net cash (used in) provided by investing activities (3,950) 491 750
FINANCING ACTIVITIES:
Issuance of common stock 5,927 - 31
Cash dividends - (437) (266)
Proceeds from the issuance of common stock under the
employee stock option plan 75 - -
Proceeds from the issuance of common stock to
employee stock ownership plan 333 - -
Payments on notes payable - - (150)
------- ------- -------
Net cash (used in) provided by financing activities 6,335 (437) (385)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,602 (81) 238
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 192 273 35
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,794 $ 192 $ 273
------- ------- -------
------- ------- -------
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ - $ - $ 113
Stock dividend $ - $ - $ 866
Transfer of Bank's equity in undistributed income
in investment subsidiary to Regency Bancorp $ 205 $ - $ -
</TABLE>
* * * * * *
82
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 of Form 10-K is incorporated by
reference to the information contained in the Company's definitive proxy
statement for the 1998 Annual Meeting of Shareholders which will be filed
pursuant to Regulation 14A.
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by
reference to the information contained in the Company's definitive proxy
statement for the 1998 Annual Meeting of Shareholders which will be filed
pursuant to Regulation 14A.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by
reference to the information contained in the Company's definitive proxy
statement for the 1998 Annual Meeting of Shareholders which will be filed
pursuant to Regulation 14A.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by
reference to the information contained in the Company's definitive proxy
statement for the 1998 Annual Meeting of Shareholders which will be filed
pursuant to Regulation 14A.
83
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM-8-K
(a) (1) Financial Statements. Listed and included in Part II, Item 8.
(2) Financial Statement Schedules. Not Applicable.
(3) Exhibits.
(2) Plan of Reorganization and Merger Agreement dated July 21, 1994
by and among Regency Bank, Regency Merger Corporation and Regency
Bancorp, incorporated by reference from exhibit 2 of registration
statement number 33-82150 on Form S-4, filed with the Commission
on July 27, 1994.
(3.1) Articles of Incorporation dated June 9, 1994, incorporated by
reference from exhibit 3.1 of registrant's Annual Report on Form
10-K for the year ended December 31, 1994, filed with the
Commission on February 27, 1995.
(3.2) Bylaws, as amended, incorporated by reference from exhibit 3.2
of registrant's Annual Report on Form 10-K for the year ended
December 31, 1994, filed with the Commission on February 27,
1995.
(4.1) Specimen form of Regency Bancorp stock certificate incorporated
by reference from exhibit 4.1 of registrant's Annual Report on
Form 10-K for the year ended December 31, 1994, filed with the
Commission on February 27, 1995.
*(10.1) 401(k) Pension and Profit Sharing Plan, incorporated by reference
from exhibit 10.3 of registration statement number 33-82150 on
Form S-4, filed with the Commission on July 27, 1994.
*(10.2) Employee Stock Ownership Plan, incorporated by reference from
exhibit 10.4 of registration statement number 33-82150 on Form
S-4, filed with the Commission on July 27, 1994.
*(10.3) Directors Deferred Fee Plan, incorporated by reference from
exhibit 10.5 of registration statement number 33-82150 on
Form S-4, filed with the Commission on July 27, 1994.
*(10.4) Form of Directors Deferred Fees Agreement for Regency Bank,
incorporated by reference from exhibit 10.6 of registration
statement number 33-82150 on Form S-4, filed with the Commission
on July 27, 1994.
84
<PAGE>
(10.5) Lease agreement dated December 22, 1988 for premises located at
5240 N. Palm Avenue, Fresno, California, incorporated by
reference from exhibit 10.10 of registration statement number
33-82150 on Form S-4, filed with the Commission on July 27, 1994.
(10.6) Electronic Financial Services Agreement dated June 9, 1992,
between Regency Bank and Fiserv, incorporated by reference from
exhibit 10.12 of registration statement number 33-82150 on Form
S-4, filed with the Commission on July 27, 1994.
(10.7) Comprehensive Banking System License and Service Agreement dated
April 13, 1992, between Regency Bank and Fiserv, incorporated by
reference from exhibit 10.13 of registration statement number
33-82150 on Form S-4, filed with the Commission on July 27, 1994.
(10.8) Lease agreement dated February 20, 1995 for premises located at
3501 Coffee Road, Suite 3, Modesto, California, incorporated by
reference from exhibit 10.19 of registrant's Annual Report on
Form 10-K for the year ended December 21, 1995, filed with the
Commission on March 29, 1996.
(10.9) Lease agreement dated August 17, 1995 for premises located at
7060 N. Fresno Street, Fresno, California, incorporated by
reference from exhibit 10.21 of registrant's Annual Report on
Form 10-K for the year ended December 21, 1995, filed with the
Commission on March 29, 1996.
(10.10) Lease agreement dated December 14, 1995 for premises located at
726 W. Shaw Avenue, Fresno, California., incorporated by
reference from exhibit 10.23 of registrant's Annual Report on
Form 10-K for the year ended December 21, 1995, filed with the
Commission on March 29, 1996.
* (10.11) Form of Indemnification Agreement, incorporated by reference from
exhibit 10.3 of registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, filed with the Commission on
August 2, 1996.
(10.12) Lease agreement dated May 13, 1996 for premises located at 126
"D" Street, Madera, California, incorporated by reference from
exhibit 10.4 of registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, filed with the Commission on
August 2, 1996.
*(10.13) Employment Agreement made and entered into as of August 22, 1996
between Regency Bank, a California Corporation, and Steven F.
Hertel, President/Chief Executive Officer, incorporated by
reference from exhibit 10.2 of registrant's Quarterly Report on
Form 10-Q/A-1 for the quarter ended September 31, 1996, filed
with the Commission on November 16, 1996.
85
<PAGE>
*(10.14) Employment Agreement made and entered into as of August 22, 1996
between Regency Bank, a California Corporation, and Steven R.
Canfield, Executive Vice President/Chief Financial Officer
incorporated by reference from exhibit 10.3 of registrant's
Quarterly Report on Form 10-Q/A-1 for the quarter ended September
31, 1996, filed with the Commission on November 16, 1996.
*(10.15) Employment Agreement made and entered into as of August 22, 1996
between Regency Bank, a California Corporation, and Robert J.
Longatti, Executive Vice President/Chief Credit Officer
incorporated by reference from exhibit 10.4 of registrant's
Quarterly Report on Form 10-Q/A-1 for the quarter ended
September 31, 1996, filed with the Commission on November 16,
1996.
*(10.16) Employment Agreement made and entered into as of August 22, 1996
between Regency Bank, a California Corporation, and Regency
Investment Advisors Incorporated, a California Corporation, and
Alan R. Graas, President, Incorporated by reference from exhibit
10.5 of registrant's Quarterly Report on Form 10-Q/A-1 for the
quarter ended September 31, 1996, filed with the Commission on
November 16, 1996.
*(10.17) Regency Bancorp 1990 Stock Option Plan, as amended, and Form of
Nonstatatory Stock Option Agreement, Form of Incentive Stock
Option Agreement and Form of Nonstatutory Stock Option Agreement
for Outside Directors, under the Regency Bancorp 1990 Stock
Option Plan, as amended, incorporated by reference on
registration statement number 33-3848 on Form S-8, filed with
the Commission on April 19, 1996.
*(10.18) Incentive Stock Option Agreement entered into with Steven F.
Hertel, dated December 16, 1996 incorporated by reference from
exhibit 10.29 of registrant's Annual Report on Form 10-K for the
year ended December 31, 1996, filed with the Commission on March
31, 1997.
*(10.19) Incentive Stock Option Agreement entered into with Steven R.
Canfield, dated December 16, 1996 incorporated by reference from
exhibit 10.30 of registrant's Annual Report on Form 10-K for the
year ended December 31, 1996, filed with the Commission on March
31, 1997.
*(10.20) Incentive Stock Option Agreement entered into with Robert J.
Longatti, dated December 16, 1996 incorporated by reference from
exhibit 10.31 of registrant's Annual Report on Form 10-K for the
year ended December 31, 1996, filed with the Commission on
March 31, 1997.
*(10.21) Form of Director Deferred Fees Agreement for Regency Bancorp
incorporated by reference from exhibit 10.32 of registrant's
Annual Report on Form 10-K for the year ended December 31, 1996,
filed with the Commission on March 31, 1997.
86
<PAGE>
*(10.22) Form of Director Deferred Fees Agreement for Regency Service
Corporation incorporated by reference from exhibit 10.33 of
registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, filed with the Commission on March 31, 1997.
(10.23) Construction and Sales Agreement, dated March 31, 1997,
incorporated by reference from exhibit 10.1 of registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1997, filed with the Commission on May 14, 1997.
*(10.24) Amended and Restated Executive Salary Continuation Agreement
dated September 23, 1997, made by and between Regency Bank and
Steven F. Hertel, incorporated by reference from exhibit 99.1
of registrant's current report on Form 8-K, filed with the
Commission on October 9, 1997.
*(10.25) Amended and Restated Executive Salary Continuation Agreement
dated September 26, 1997, made by and between Regency Bank
and Robert J. Longatti, incorporated by reference from exhibit
99.2 of the Form 8-K, filed with the Commission on October 9,
1997.
*(10.26) Amended and Restated Executive Salary Continuation Agreement
dated September 30, 1997, made by and between Regency Bank
and Steven R. Canfield, incorporated by reference from exhibit
99.3 of the Form 8-K, filed with the Commission on October 9,
1997.
(10.27) Stipulation and Consent to the Issuance of an Order to Cease
and Desist and Order to Cease and Desist executed by the
registrant and the FDIC, incorporated by reference from
exhibit 99.1 of the Form 8-K, filed with the Commission on
December 12, 1997.
(10.28) Waiver and Consent and Final Order, executed by the registrant
and the California Department of Financial Institutions,
incorporated by reference from exhibit 99.2 of the Form 8-K,
filed with the Commission on December 12, 1997.
(10.29) Form of Warrant Agreement and Warrant Certificate.
(21.1) The Company has two subsidiaries, Regency Bank (the "Bank"),
a California banking corporation and Regency Investment Advisors
("RIA"), which provides investment management and consulting
services. The Bank has only one subsidiary, Regency Service
Corporation, a California corporation ("RSC") which engages in
the business of real estate development primarily in the
Fresno/Clovis area.
(23.1) Consent of Deloitte & Touche LLP.
(27.1) Financial Data Schedule
87
<PAGE>
* Denotes management contracts, compensatory plans or arrangements.
(b) Reports on Form 8-K
The Company filed a Form 8-K dated November 6, 1997, in which it
reported its third quarter results of operations and consent to orders
issued by the Federal Deposit Insurance Corporation and the California
Department of Financial Institutions.
88
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
REGENCY BANCORP
Date: March 26, 1998 By: /s/ STEVEN F. HERTEL
-----------------------------------
Steven F. Hertel
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 26, 1998 By: /s/ STEVEN R. CANFIELD
-----------------------------------
Steven R. Canfield
Executive Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
89
<PAGE>
Pursuant to the requirements of the Securities exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Date Title
---- ---- -----
<S> <C> <C>
/s/ STEVEN F. HERTEL March 26, 1998 Director, Chairman of the Board,
- ----------------------- President & CEO
Steven F. Hertel
/s/ DAVID N. PRICE March 26, 1998 Director and Vice Chairman
- -----------------------
David N. Price
/s/ ROY JURA March 26, 1998 Director and Secretary
- -----------------------
Roy Jura
/s/ JOSEPH L. CASTANOS March 26, 1998 Director
- -----------------------
Joseph L. Castanos
/s/ WAYMON E. WATTS March 26, 1998 Director
- -----------------------
Waymon E. Watts
/s/ DANIEL R. SUCHY March 26, 1998 Director
- -----------------------
Daniel R. Suchy
/s/ BARBARA PALMQUIST March 26, 1998 Director
- -----------------------
Barbara Palmquist
/s/ DANIEL RAY March 26, 1998 Director
- -----------------------
Daniel Ray
/s/ WILLIAM J. ALESSINI March 26, 1998 Director
- -----------------------
William J. Alessini
/s/ WILLIAM J. RUH March 26, 1998 Director
- -----------------------
William J. Ruh
</TABLE>
90
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Number Description Page Number
- -------------- ----------- ------------
<S> <C> <C>
10.29 Form of Warrant Agreement and Warrant Certificate. 90-102
23.1 Consent of Deloitte & Touche LLP 103
27.1 Financial Data Schedule 104
</TABLE>
91
<PAGE>
EXHIBIT 10.29
WARRANT AGREEMENT
This WARRANT AGREEMENT, dated as of December __, 1997, is made and
entered into by and among REGENCY BANCORP, a California corporation
("Bancorp"), and ____________________________(the "Warrantholder"), with
reference to the following facts:
WHEREAS, Bancorp has completed a private offering of common stock
of Bancorp ("Common Stock") to certain investors (the "1997 Private
Offering") pursuant to a certain Confidential Private Offering Circular (the
"1997 Private Offering Circular");
WHEREAS, Bancorp has agreed to issue to Warrantholder warrants to
purchase __________ shares of Common Stock;
NOW, THEREFORE, in consideration of the foregoing and of the
representations, warranties, covenants, agreements and conditions contained
herein, and intending to be legally bound hereby, the parties hereto agree as
follows:
SECTION 1. CERTAIN DEFINITIONS.
For the purposes of this Agreement,
(a) "CLOSING PRICE" means the average of the closing bid and
asked prices of a share of Common Stock as reported by Bancorp's principal
market maker, or if Bancorp does not have a principal market maker, book
value per share of Common Stock as of the last business day of the previous
calendar month.
(b) "COMMON STOCK EQUIVALENTS" means securities that are
convertible into or exercisable for shares of Common Stock.
(c) "EXERCISE PERIOD" means the period during which the
Warrants may be exercised.
(d) "EXERCISE PRICE" has the meaning specified in Section
4.1(b) hereof.
(e) "EXPIRATION DATE" has the meaning specified in Section
4.1(a) hereof.
(f) "WARRANTS" means this Warrant and all other Warrants
issued pursuant to the 1997 Private Offering Circular.
(g) "WARRANT CERTIFICATE" has the meaning specified in
Section 2.1 hereof.
<PAGE>
(h) "WARRANT SHARES" means the Common Stock and "WARRANT
SHARE" means one share of Common Stock purchased or purchasable upon exercise
of the Warrants.
SECTION 2. FORM OF WARRANT CERTIFICATE; PURCHASE PRICE.
2.1 The certificates evidencing the Warrants (the "Warrant
Certificates") (and the forms of election to purchase Warrant Shares and of
assignment) shall be substantially in the form set forth in Exhibit A hereto
and may have such letters, numbers or other marks of identification or
designation and such legends, summaries or endorsements printed, lithographed
or engraved thereon as Bancorp may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any law or with any rule or regulation made pursuant thereto.
2.2 Each Warrant shall entitle the holder thereof to purchase one
(1) Warrant Share upon the exercise thereof at the applicable Exercise Price
subject to adjustment as provided in Section 10 hereof during the time period
specified in Section 4 hereof and subject to the limitations specified in
Section 12(a) hereof; PROVIDED, HOWEVER, that the Warrants are exercisable
only for whole shares; cash will be paid in lieu of fractional shares in
accordance with Section 4.3. Each Warrant Certificate shall be executed on
behalf of Bancorp by the manual or facsimile signature of the present or any
future President or any authorized officer of Bancorp, under its corporate
seal, affixed or in facsimile, attested by the manual or facsimile signature
of the present or any future Secretary or Assistant Secretary of Bancorp.
Warrants shall be dated as of the date of their initial issuance.
SECTION 3. REGISTRATION AND COUNTERSIGNATURE.
Prior to due presentment for registration or transfer of the
Warrant Certificates, Bancorp may deem and treat the registered holder
thereof as the absolute owner of the Warrant Certificates (notwithstanding
any notation of ownership or other writing thereon made by anyone other than
Bancorp), for the purpose of any exercise thereof and for all other purposes,
and Bancorp shall not be affected by any notice to the contrary.
SECTION 4. DURATION AND EXERCISE OF WARRANTS.
4.1 (a) The Warrants may be exercised on or after January 1,
1998, at any time or from time to time and will expire at 5:00 P.M., Pacific
Standard Time, on January 1, 2003 (the "Expiration Date"). On the Expiration
Date, all rights evidenced by the Warrants shall cease and the Warrants shall
become void.
(b) Subject to the provisions of this Agreement, the
registered holder of each Warrant shall have the right to purchase from
Bancorp (and Bancorp shall issue and sell to such registered holder) the
number of fully paid and nonassessable Warrant Shares set forth on such
holder's Warrant Certificate (or such number of Warrant Shares as may result
from
-2-
<PAGE>
adjustments made from time to time as provided in this Agreement), at the
price of $_______ per Warrant Share in lawful money of the United States of
America (such exercise price per Warrant Share, as adjusted from time to time
as provided herein, being referred to herein as the "Exercise Price"), upon
(i) surrender of the Warrant Certificate to Bancorp at Bancorp's principal
office in Fresno, California with the exercise form duly completed and signed
by the registered holder or holders thereof, and (ii) payment by wire
transfer or other immediately available funds, in lawful money of the United
States of America, of the Exercise Price for the Warrant Shares in respect of
which such Warrant is then being exercised.
Upon surrender of the Warrant Certificate, and payment of the Exercise
Price as provided above, Bancorp shall issue and cause to be delivered to or
upon the written order of the registered holder of such Warrants and in such
name or names as such registered holder may designate, a certificate or
certificates for the number of Warrant Shares so purchased upon the exercise
of such Warrants, together with payment in respect of any fraction of a
Warrant Share issuable upon such surrender pursuant to Section 4.3 hereof.
Upon the exercise of any Warrant, Bancorp may require the registered holder
of any Warrant, or the party or parties in whose name or names the
certificate or certificates for the Warrant Shares to be so purchased upon
exercise of such Warrant will be issued, to make such representations, and
may place such legends on certificates representing the Warrant Shares, as
may be reasonably required (in the opinion of counsel to Bancorp) to permit
the Warrant Shares to be issued without the prior written consent of the
California Department of Corporations.
(c) Each person in whose name any certificate for Warrant
Shares is issued upon the exercise of Warrants shall for all purposes be
deemed to have become the holder of record of the Warrant Shares represented
thereby, and such certificate shall be dated the date upon which the Warrant
Certificate evidencing such Warrants was duly surrendered and payment of the
Exercise Price (and any applicable transfer taxes pursuant to Section 5
hereof) was made; PROVIDED, HOWEVER, that if the date of such surrender and
payment is a date upon which the Common Stock transfer books of Bancorp are
closed, such person shall be deemed to have become the record holder of such
Warrant Shares on, and such certificate shall be dated, the next succeeding
business day on which the Common Stock transfer books of Bancorp are open.
4.2 In the event that less than all of the Warrants represented by
a Warrant Certificate are exercised on or prior to the Expiration Date, a new
Warrant Certificate, duly executed by Bancorp, will be issued and delivered
to the registered holder for the remaining number of Warrants exercisable
pursuant to the Warrant Certificate so surrendered.
4.3 No fractional shares of Common Stock or scrip shall be issued
to any holder in connection with the exercise of a Warrant. Instead of any
fractional shares of Common Stock that would otherwise be issuable to such
holder, Bancorp will pay to such holder a cash adjustment in respect of such
fractional interest in an amount equal to that fractional interest of the
then current Closing Price per share of Common Stock.
-3-
<PAGE>
4.4 The number of Warrant Shares to be received upon the exercise
of a Warrant and the price to be paid for Warrant Share are subject to
adjustment from time to time as hereinafter set forth.
SECTION 5. PAYMENT OF TAXES
Bancorp will pay all documentary stamp taxes attributable to the
original issuance of the Warrants and of the Warrant Shares issuable upon the
exercise of Warrants; PROVIDED, HOWEVER, that Bancorp shall not be required
to (a) pay any tax which may be payable in respect of any transfer involving
the transfer and delivery of Warrant Certificates or the issuance or delivery
of certificates for Warrant Shares in a name other than that of the
registered holder of the Warrant Certificate surrendered upon the exercise of
a Warrant or (b) issue or deliver any certificate for Warrant Shares upon the
exercise of any Warrants until any such tax required to be paid under clause
(a) shall have been paid, all such tax being payable by the holder of such
Warrant at the time of surrender.
SECTION 6. MUTILATED OR MISSING WARRANTS.
In case any of the Warrants shall be mutilated, lost, stolen or
destroyed, Bancorp may in its discretion issue and deliver in exchange and
substitution for and upon cancellation of, the mutilated Warrant Certificate,
or in substitution for the lost, stolen or destroyed Warrant Certificate, a
new Warrant Certificate of like tenor evidencing the number of Warrant Shares
purchasable upon exercise of the Warrant Certificate so mutilated, lost,
stolen or destroyed, but only upon receipt of evidence satisfactory to
Bancorp of such loss, theft or destruction of such Warrant Certificate and an
indemnity, if requested, reasonably satisfactory to Bancorp, PROVIDED that no
indemnity will be requested from Warrantholder, any partner of Warrantholder
or any family member or trust for the benefit of any family member of any
partner of Warrantholder. Applicants for such substitute Warrant
Certificates shall also comply with such other reasonable regulations and pay
such other reasonable charges as Bancorp may prescribe. Any such new Warrant
Certificate shall constitute an original contractual obligation of Bancorp,
whether or not the allegedly lost, stolen, mutilated or destroyed Warrant
Certificate shall be at any time enforceable by anyone.
SECTION 7. RESERVATION OF WARRANT SHARES
Bancorp shall at all times reserve for issuance and delivery upon
exercise of the Warrants, such number of Warrant Shares or other shares of
capital stock of Bancorp from time to time issuable upon exercise of the
Warrants. All such shares shall be duly authorized and, when issued upon
such exercise, shall be validly issued, fully paid and free and clear of all
liens, security interests, charges and other encumbrances and free and clear
of all preemptive rights. After 5:00 P.M., Pacific Standard Time, on the
Expiration Date, no shares of Common Stock shall be subject to reservation in
respect of such Warrants.
-4-
<PAGE>
SECTION 8. RESTRICTIONS ON TRANSFER
Neither the Warrants nor the Warrant Shares may be disposed of,
transferred or encumbered (any such action, a "Transfer") other than by will
or pursuant to the laws of descent and distribution, except to a partner or
employee of Warrantholder when Warrantholder is a partnership, to a
stockholder, officer or director of Warrantholder or beneficiary of a trust
which is a stockholder of Warrantholder when Warrantholder is a corporation,
or to a member or employee of Warrantholder when Warrantholder is a limited
liability company; however, after one year from the date of issuance of the
Warrants a Transfer may occur providing the Warrants are exercised
immediately upon such Transfer. If not exercised immediately upon a
Transfer, the Warrants shall lapse.
SECTION 9. RIGHTS OF WARRANT CERTIFICATE HOLDER
The holder of any Warrant Certificate or Warrant shall not, by
virtue thereof, be entitled to any rights of a stockholder of Bancorp, either
at law or in equity, and the rights of the holder are limited to those
expressed in this Agreement.
SECTION 10. ANTIDILUTION PROVISIONS.
The Exercise Price and the number of Warrant Shares that may be
purchased upon the exercise of a Warrant and the number of Warrants
outstanding will be subject to change or adjustment as follows:
(a) STOCK DIVIDENDS AND STOCK SPLITS. If at any time after
the date of issuance of the Warrants and before 5:00 P.M., Pacific Standard
Time, on the Expiration Date, (i) Bancorp shall fix a record date for the
issuance of any dividend payable in shares of its capital stock or (ii) the
number of shares of Common Stock shall have been increased by a subdivision
or split-up of shares of Common Stock, then, on the record date fixed for the
determination of holders of Common Stock entitled to receive such dividend or
immediately after the effective date of such subdivision or split-up, as the
case may be, the number of shares to be delivered upon exercise of any
unexercised Warrant will be appropriately increased so that each holder
thereafter will be entitled to receive the number of shares of Common Stock
that such holder would have owned immediately following such action had the
Warrant been exercised immediately prior thereto, and the Exercise Price will
be appropriately adjusted. The time of occurrence of an event giving rise to
an adjustment made pursuant to this Section 10(a) shall, in the case of a
subdivision or split-up, be the effective date thereof and shall, in the case
of a stock dividend, be the record date thereof.
(b) COMBINATION OF STOCK. If the number of shares of Common
Stock outstanding at any time after the date of the issuance of the Warrants
and before 5:00 P.M., Pacific Standard Time, on the Expiration Date shall
have been decreased by a combination of the outstanding shares of Common
Stock, then, immediately after the effective date of such combination, the
number of shares of Common Stock to be delivered upon exercise of any
-5-
<PAGE>
unexercised Warrant will be appropriately decreased so that each holder
thereafter will be entitled to receive the number of shares of Common Stock
that such holder would have owned immediately following such action had the
Warrant been exercised immediately prior thereto, and the Exercise Price will
be appropriately adjusted.
(c) REORGANIZATION. If any capital reorganization of
Bancorp, or any reclassification of the Common Stock, or any consolidation of
Bancorp with or merger of Bancorp with or into any other corporation or any
sale, lease or other transfer of all or substantially all of the assets of
Bancorp to any other person (including any individual, partnership, joint
venture, corporation, trust or group thereof) shall be effected in such a way
that the holders of the Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock, then,
upon exercise of the Warrants in accordance with the terms of this Agreement
and the Warrant Certificate, each holder shall have the right to receive the
kind and amount of stock, securities or assets receivable upon such
reorganization, reclassification, consolidation, merger or sale, lease or
other transfer by a holder of the number of shares of Common Stock that such
Warrant holder would have been entitled to receive upon exercise of the
Warrants pursuant to Section 2 hereof had the Warrants been exercised
immediately prior to such reorganization, reclassification, consolidation,
merger or sale, lease or other transfer.
(d) SPECIAL DIVIDENDS. If (other than in a dissolution or
liquidation) securities of Bancorp or assets (other than cash) are issued by
the way of a dividend on outstanding shares of Common Stock, then the
Exercise Price shall be adjusted so that immediately after the date fixed by
Bancorp as the record date in respect of such issuance, it shall equal the
price determined by multiplying the Exercise Price in effect immediately
prior to the close of business on the record date for the determination of
the shareholders entitled to receive such dividend by a fraction, the
numerator of which shall be the Closing Price on such record date less the
then fair market value of the portion of the securities or assets distributed
applicable to one share of Common Stock as determined by the Board of
Directors of Bancorp, whose determination shall be conclusive, and the
denominator of which shall be such Closing Price. Such adjustment shall
become effective immediately prior to the opening of business on the day
following such record date.
(e) NO ADJUSTMENTS TO EXERCISE PRICE. No adjustment in the
Exercise Price in accordance with the provisions of paragraphs (a), (b), (c)
or (d) above need be made if such adjustment would amount to a change in such
Exercise Price of less than $.01; PROVIDED, HOWEVER, that the amount by which
any adjustment is not made by reason of the provisions of this section shall
be carried forward and taken into account at the time of any subsequent
adjustment in the Exercise Price.
(f) READJUSTMENT, ETC. If an adjustment is made under
paragraph (a), (b), (c) or (d) above, and the event to which the adjustment
relates does not occur, then any adjustments in the Exercise Price or Warrant
Shares that were made in accordance with such
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<PAGE>
paragraphs shall be adjusted back to the Exercise Price and the number of
Warrant Shares that were in effect immediately prior to the record date for
such event.
(g) NO ADJUSTMENTS FOR REGULAR CASH DIVIDENDS. There shall
be no adjustment in the Exercise Price as a result of any cash dividends paid
out of earnings in respect of the Common Stock during the Exercise Period.
SECTION 11. OFFICER'S CERTIFICATE.
Whenever the number of Warrant Shares that may be purchased upon
exercise of the Warrants is adjusted as required by the provisions of this
Agreement, Bancorp will forthwith file in the custody of its Secretary or an
Assistant Secretary at its principal office a certificate executed by an
authorized officer of Bancorp showing the adjusted number of Warrant Shares
that may be purchased upon exercise of the Warrants and the adjusted Exercise
Price (if any), determined as herein provided, setting forth in reasonable
detail the facts requiring such adjustment and the manner of computing such
adjustment. Each such officer's certificate shall be made available at all
reasonable times for inspection by the registered holder of each outstanding
Warrant Certificate. Bancorp shall, forthwith after each such adjustment,
cause a copy of such certificate to be mailed to each such registered holder
of an outstanding Warrant Certificate.
SECTION 12. LIMITATIONS ON EXERCISABILITY OF WARRANTS.
Notwithstanding anything to the contrary contained herein, Bancorp
may decline to issue any shares of Common Stock upon a requested exercise of
any Warrant if, in Bancorp's reasonable determination based on an opinion of
Bancorp's counsel, the holder desiring to exercise such Warrant is required
to obtain prior clearance, approval or nondisapproval from any state or
federal regulatory authority to acquire such shares and has not, prior to the
date of requested exercise, provided evidence of such clearance, approval or
nondisapproval to Bancorp. In the event Bancorp declines to issue any shares
of Common Stock upon a requested exercise of any Warrant pursuant to the
provisions of this Section 12, Bancorp shall use its best efforts to obtain
any clearance or approval which is required to be obtained by Bancorp for
Bancorp to so issue such shares. In the event Bancorp has not obtained such
clearance or approval within 60 days after the exercise of any Warrant has
been requested, the Warrant Certificate shall be returned to the registered
holder thereof subject to such further exercise as may be permitted by this
Agreement.
SECTION 13. AVAILABILITY OF INFORMATION.
Bancorp will comply with all applicable periodic public information
reporting requirements of the Securities Exchange Act of 1934 and the
California Corporations Code to which it may from time to time be subject.
-7-
<PAGE>
SECTION 14. SUCCESSORS.
All covenants and provisions of this Agreement by or for the
benefit of Bancorp or the holders of the Warrants shall bind and inure to the
benefit of their respective successors, assigns, heirs and personal
representatives.
SECTION 15. TERMINATION.
This Agreement shall terminate at 5:00 P.M., Pacific Standard Time,
on the Expiration Date or upon such earlier date on which all Warrants have
been exercised.
SECTION 16. COUNTERPARTS.
This Agreement may be executed in any number of counterparts and
each of such counterparts shall for all purposes be deemed to be an original,
and all such counterparts shall together constitute but one and the same
agreement.
SECTION 17. HEADINGS.
The headings of sections of this Agreement have been inserted for
convenience of reference only, are not to be considered a part hereof and
shall in no way modify or restrict any of the terms or provisions hereof.
SECTION 18. AMENDMENTS.
This Agreement may be amended by the written consent of Bancorp and
the affirmative vote or the written consent of the holders of not less than a
majority in interest of the then outstanding Warrants: PROVIDED, HOWEVER,
that, except as expressly provided herein, this Agreement may not be amended
to change (a) the Exercise Price, (b) the Exercise Period, (c) the number or
type of securities to be issued upon the exercise of the Warrants, or (d) the
provisions of this Section 18, without the consent of each holder of the
Warrants so affected.
SECTION 19. NOTICES.
Any notice pursuant to this Agreement to be given by the registered
holder of any Warrant to Bancorp shall be sufficiently given if sent by
first-class mail, postage prepaid, addressed as follows:
REGENCY BANCORP
7060 North Fresno Street
Fresno, CA 93720
Attention: Chief Executive Officer
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<PAGE>
Any notice pursuant to this Agreement required to be given to the
Warrantholder shall be sufficiently given if sent by first-class mail,
postage prepaid, addressed as follows, or to such other address as the
registered holder shall provide to Bancorp in writing:
_____________________________
_____________________________
_____________________________
SECTION 20. BENEFITS OF THIS AGREEMENT.
Nothing in this Agreement shall be construed to give any person or
corporation, other than Bancorp and the registered holders of the Warrant
Certificates, any legal or equitable right, remedy or claim under this
Agreement; but this Agreement shall be for the sole and exclusive benefit of
Bancorp and the registered holders of the Warrants.
SECTION 21. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance
with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed as of the first date written above.
REGENCY BANCORP
By: _____________________________________
Name: ___________________________________
Title: __________________________________
WARRANTHOLDER
By: ______________________________________
Name: ____________________________________
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<PAGE>
THE WARRANTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "1933 ACT") OR THE SECURITIES LAWS OF
CALIFORNIA OR OTHER STATES AND WERE OFFERED AND SOLD IN RELIANCE UPON
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE 1933 ACT AND SUCH OTHER
LAWS. THE WARRANTS ARE NON-TRANSFERABLE EXCEPT AS PERMITTED BY THE WARRANT
AGREEMENT REFERRED TO IN THIS CERTIFICATE.
NO. ___ _________ WARRANTS
NON-TRANSFERABLE
WARRANTS TO PURCHASE COMMON STOCK
REGENCY BANCORP
VOID AFTER 5:00 P.M., PACIFIC STANDARD TIME,
ON JANUARY 1, 2003
THIS CERTIFIES THAT, FOR VALUE RECEIVED,
__________________________________________________________________________
__________________________________________________________ ("Warrantholder"),
or its registered assigns, is the registered holder of the number of Warrants
(the "Warrants") set forth above. Each Warrant entitles the holder thereof
to purchase from Regency Bancorp, a California corporation ("Bancorp"),
subject to the terms and conditions set forth hereinafter and in the Warrant
Agreement hereinafter referred to, one fully paid share of Common Stock, no
par value, of Bancorp (the "Common Stock").
The Warrants may be exercised on or after the date hereof at any
time or from time to time and will expire at 5:00 P.M., Pacific Standard
Time, on January 1, 2003 (the "Expiration Date"). Upon the Expiration Date,
all rights evidenced by the Warrants shall cease and the Warrants shall
become void.
Subject to the provisions of the Warrant Agreement, the holder of
each Warrant shall have the right to purchase from Bancorp until the
Expiration Date (and Bancorp shall issue and sell to such holder of a
Warrant) one fully paid share of Common Stock (a "Warrant Share") at an
exercise price (the "Exercise Price") of $_______ per share upon surrender of
this Warrant Certificate to Bancorp at Bancorp's offices in Fresno,
California, together with the form of election to purchase included with this
Warrant Certificate duly completed and signed, and payment of the Exercise
Price by wire transfer or other immediately available funds in lawful money
of the United States.
The Exercise Price and the number of Warrant Shares for which the
Warrants are exercisable are subject to change or adjustment upon the
occurrence of certain events set forth in the Warrant Agreement.
REFERENCE IS MADE TO THE PROVISIONS OF THIS WARRANT CERTIFICATE SET
FORTH BELOW, AND SUCH FURTHER PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME
EFFECT AS THOUGH FULLY SET FORTH ON THE FRONT OF THIS CERTIFICATE.
This Warrant shall be governed by and construed in accordance with
the laws of the State of California.
<PAGE>
IN WITNESS WHEREOF, Bancorp has caused this Warrant Certificate
to be executed by its duly authorized officers.
DATED: REGENCY BANCORP
By:
Name:
Title:
ATTEST:
By:
This Warrant Certificate is subject to all of the terms and
conditions of the Warrant Agreement, dated as of December __, 1997 (the
"Warrant Agreement"), between Bancorp and the Warrantholder, to all of which
terms and conditions the registered holder of the Warrant consents by
acceptance hereof. The Warrant Agreement is incorporated herein by reference
and made a part hereof and reference is made to the Warrant Agreement for a
full description of the rights, limitations of rights, obligations, duties
and immunities of Bancorp and the registered holders of Warrant Certificates.
Copies of the Warrant Agreement are available for inspection at the offices
of Bancorp or may be obtained upon written request addressed to Bancorp at
its offices in Fresno, California.
Bancorp shall not be required upon the exercise of the Warrants
evidenced by this Warrant Certificate to issue fractional shares, but shall
make adjustment therefor in cash as provided in the Warrant Agreement.
If the Warrants evidenced by this Warrant Certificate shall be
exercised in part, the holder hereof shall be entitled to receive upon
surrender hereof another Warrant Certificate or Certificates evidencing the
number of Warrants not so exercised.
The holder of this Warrant Certificate shall not, by virtue hereof,
be entitled to any of the rights of a stockholder in Bancorp, either at law
or in equity, and the rights of the holder are limited to those expressed in
the Warrant Agreement.
If this Warrant Certificate shall be surrendered for exercise
within any period during which the transfer books for Bancorp's Common Stock
are closed for any reasonable purpose, Bancorp shall not be required to make
delivery of certificates for shares purchasable upon such transfer until the
date of the reopening of said transfer books.
Every holder of this Warrant Certificate, by accepting the same,
consents and agrees with Bancorp and with every other holder of a Warrant
Certificate that:
(a) this Warrant Certificate is transferable on the registry books
of Bancorp only upon the terms and conditions set forth in the Warrant
Agreement; and
(b) Bancorp may deem and treat the person in whose name this
Warrant Certificate is registered as the absolute owner hereof
(notwithstanding any notation of ownership or other writing hereon made by
anyone other than Bancorp) for all purposes whatever and Bancorp shall not be
affected by any notice to the contrary.
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<PAGE>
The following abbreviations, when used in the inscription on the
face of this certificate, shall be construed as though they were written out
in full according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants in
common
UNIF TRAN MIN ACT -
_____ Custodian _____ under Uniform Transfers to Minors Act
(Cust) (Minor) (State)
Additional abbreviations may also be used though not in the above
list.
Deliver to: REGENCY BANCORP
7060 North Fresno Street
Fresno, California 93720
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<PAGE>
ELECTION TO PURCHASE
Dated: _____________, ____
To Regency Bancorp:
The undersigned hereby irrevocably elects to exercise this Warrant
to purchase ______________ shares of Common Stock and herewith makes payment
of $_____ in payment of the Exercise Price thereof on the terms and
conditions specified in this Warrant Certificate, surrenders this Warrant
Certificate and all right, title and interest herein to Bancorp and directs
that the Warrant Shares deliverable upon the exercise of such Warrants be
registered in the name and at the address specified below and delivered
thereto.
Name:_____________________________________________________________
(Please Print)
Address:__________________________________________________________
City, State and Zip Code:_________________________________________
If such number of Warrant Shares is less than the aggregate number of Warrant
Shares purchasable hereunder, the undersigned requests that a new Warrant
Certificate representing the balance of such Warrant Shares to be registered in
the name and at the address specified below and delivered thereto.
Name:_____________________________________________________________
(Please Print)
Address:__________________________________________________________
City, State and Zip Code:_________________________________________
Taxpayer Identification or Social Security Number:________________
Signature:______________________________
NOTE: The above signature must correspond with the name as written upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatsoever.
-4-
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 333-3848 of Regency Bancorp on Form S-8 of our report dated February 4,
1998, appearing in this Annual Report on Form 10-K of Regency Bancorp for the
year ended December 31, 1997.
/s/ Deloitte & Touche
Fresno, California
March 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 16,893
<INT-BEARING-DEPOSITS> 232
<FED-FUNDS-SOLD> 3,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 36,986
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 129,635
<ALLOWANCE> 2,219
<TOTAL-ASSETS> 198,241
<DEPOSITS> 176,279
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,228
<LONG-TERM> 0
0
0
<COMMON> 15,203
<OTHER-SE> 3,327
<TOTAL-LIABILITIES-AND-EQUITY> 198,241
<INTEREST-LOAN> 12,506
<INTEREST-INVEST> 2,328
<INTEREST-OTHER> 452
<INTEREST-TOTAL> 15,286
<INTEREST-DEPOSIT> 5,241
<INTEREST-EXPENSE> 5,321
<INTEREST-INCOME-NET> 9,965
<LOAN-LOSSES> 1,353
<SECURITIES-GAINS> (19)
<EXPENSE-OTHER> 3,406
<INCOME-PRETAX> (2,107)
<INCOME-PRE-EXTRAORDINARY> (2,339)
<EXTRAORDINARY> 135
<CHANGES> 0
<NET-INCOME> (1,274)
<EPS-PRIMARY> (0.68)
<EPS-DILUTED> (0.68)
<YIELD-ACTUAL> 6.38
<LOANS-NON> 1,736
<LOANS-PAST> 48
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,615
<CHARGE-OFFS> 895
<RECOVERIES> 146
<ALLOWANCE-CLOSE> 2,219
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,219
</TABLE>
