<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________ .
COMMISSION FILE NUMBER 000-23815
REGENCY BANCORP
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0378956
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organizations) Identification No.)
7060 N. FRESNO STREET, FRESNO, CALIFORNIA 93720
- ----------------------------------------- -----
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (209) 438-2600.
None
----
(Former name, former address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for the shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
As of April 30, 1998, the registrant had 2,624,374 shares of Common Stock
outstanding.
The Exhibit Index is located on page 32.
This report contains a total of 33 pages of which this is page one.
<PAGE>
REGENCY BANCORP
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
March 31, 1998, and December 31, 1997 . . . . . . . . . . . 3
Consolidated Statements of Income and Comprehensive
Income Three Months Ended March 31, 1998 and 1997 . . . . . 4
Consolidated Statements of Shareholders' Equity
Three Months Ended March 31, 1998 and 1997. . . . . . . . . 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997. . . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 10
PART II. OTHER INFORMATION 30
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 30
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . 30
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . 30
Item 4. Submission of Matters to a Vote of Security Holders . . . . 30
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . 30
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 30
2
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
PART I. ITEM 1. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA) MARCH 31, 1998 DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 12,343 $ 16,893
Federal funds sold - 3,000
- ------------------------------------------------------------------------------------------------------
Total Cash and Equivalents 12,343 19,893
- ------------------------------------------------------------------------------------------------------
Interest bearing deposits in other banks 388 232
Securities available-for-sale 34,387 36,986
- ------------------------------------------------------------------------------------------------------
Loans 136,043 129,635
Allowance for credit losses (2,335) (2,219)
Deferred loan fees & discounts (943) (986)
- ------------------------------------------------------------------------------------------------------
Net Loans 132,765 126,430
- ------------------------------------------------------------------------------------------------------
Investments in real estate 1,798 4,338
Other real estate owned 477 503
Cash surrender value of life insurance 3,073 3,038
Premises and equipment, net 1,703 1,751
Accrued interest receivable and other assets 5,193 5,070
- ------------------------------------------------------------------------------------------------------
Total Assets $ 192,127 $ 198,241
- ------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing transaction accounts $ 37,915 $ 46,744
Interest bearing transaction accounts 48,683 48,616
Savings accounts 37,098 36,498
Time deposits $100,000 or over 30,680 28,643
Other time deposits 15,385 15,778
- ------------------------------------------------------------------------------------------------------
Total deposits 169,761 176,279
Short term borrowings - -
Notes payable and capital lease obligations 518 509
Other liabilities 2,575 2,719
- ------------------------------------------------------------------------------------------------------
Total Liabilities $ 172,854 $ 179,507
- ------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Preferred stock, no par value;
1,000,000 shares authorized;
no shares issued or outstanding
Common stock, no par value; 5,000,000
shares authorized, 2,623,124 and 2,621,125
shares issued and outstanding in 1998 and
1997, respectively 15,218 15,203
Retained earnings 3,846 3,327
Net unrealized gain on available-for-sale securities,
net of taxes of $150 in 1998 and $148 in 1997 209 204
- ------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 19,273 18,734
- ------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 192,127 $ 198,241
- ------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
</TABLE>
3
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME
Loans (including fees) $ 3,543 $ 2,800
Investment securities:
Taxable 476 514
Tax exempt 71 20
- --------------------------------------------------------------------------------
Total investment interest income 547 534
Other 34 114
- --------------------------------------------------------------------------------
Total Interest Income 4,124 3,448
- --------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 1,243 1,259
Other 40 20
- --------------------------------------------------------------------------------
Total Interest Expense 1,283 1,279
- --------------------------------------------------------------------------------
Net interest income 2,841 2,169
Provision for credit losses 125 -
- --------------------------------------------------------------------------------
Net interest income after
provision for credit losses 2,716 2,169
- --------------------------------------------------------------------------------
NONINTEREST INCOME
Gain on sale of loans 15 270
Depositor service charges 112 98
Income from investment management services 216 214
Gain on sale of securities 5 2
Gain on sale of assets - 4
Servicing fees on loans sold 69 86
Other 70 107
- --------------------------------------------------------------------------------
Total Noninterest Income 487 781
- --------------------------------------------------------------------------------
NONINTEREST EXPENSE
(Income)/loss from investments in real (7) 240
estate partnerships 1,196 1,164
Salaries and related benefits 360 403
Occupancy 113 22
FDIC insurance and regulatory assessments 126 90
Marketing 172 121
Professional services 53 96
Director's fees and expenses - 108
Management fees for real estate projects 81 79
Supplies, telephone and postage 210 222
Other
- --------------------------------------------------------------------------------
Total Noninterest Expense 2,304 2,545
- --------------------------------------------------------------------------------
Income before income taxes 899 405
Provision for income taxes 380 170
- --------------------------------------------------------------------------------
Net income $ 519 $ 235
Other comprehensive income, net of tax:
Unrealized gains/(losses) on securities 5 (141)
- --------------------------------------------------------------------------------
Comprehensive Income $ 524 $ 94
- --------------------------------------------------------------------------------
Earnings per common share
Basic $ .20 $ .13
Diluted .19 .12
Shares on which earnings per common share
were based 2,621,000 1,831,000
Basic 2,784,000 1,902,000
Diluted
- --------------------------------------------------------------------------------
See notes to consolidated financial statements
</TABLE>
4
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
- -----------------------------------------------------------------------------------------------------------------------
Common Common Net
Stock Number Stock Retained Unrealized
(In thousands) of Shares Amount Earnings Gain (Loss) Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 1,818 $ 8,868 $ 4,601 $ 1 $ 13,470
- -----------------------------------------------------------------------------------------------------------------------
Issuance of common stock
to employee stock ownership plan 36 333 - - 333
Cash dividends - - - - -
Net change in unrealized gain (loss) on
available-for-sale securities net of
taxes of $(102,000) - - - (141) (141)
Net Income - - 235 - 235
- -----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 1,854 $ 9,201 $ 4,836 $ (140) $ 13,897
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Common Common Net
Stock Number Stock Retained Unrealized
(In thousands) of Shares Amount Earnings Gain (Loss) Total
- -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 2,621 $ 15,203 $ 3,327 $ 204 $ 18,734
- -----------------------------------------------------------------------------------------------------------------------
Issuance of common stock
under stock option plan 2 15 - - 15
Net change in unrealized gain on
available-for-sale securities net of
taxes of $(3,400) - - - 5 5
Net Income - - 519 - 519
- -----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 2,623 $ 15,218 $ 3,846 $ 209 $ 19,273
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
- ----------------------------------------------------------------------------------------------
(IN THOUSANDS) FOR THE THREE MONTHS ENDED MARCH 31, 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 519 $ 235
Adjustments:
Provision for credit losses 125 -
Provision for OREO losses 22 26
Depreciation and amortization 132 139
Deferred income taxes 200 94
(Increase) decrease in interest receivable and other assets (326) 592
Increase in cash surrender value of life insurance (35) (35)
Decrease in real estate held-for-sale 2,540 1,318
(Decrease) in other liabilities (135) (643)
(Gain)/loss on sale of securities (5) 2
Gain on sale of loans held-for-sale (15) (270)
Proceeds from sale of loans held-for-sale 4,237 5,651
Additions to loans held-for-sale (5,237) (4,936)
Net cash provided by (used in) operating activities 2,022 2,173
- ----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of available-for-sale securities (5,821) (6,199)
Proceeds from sales of available-for-sale securities 5 -
Proceeds from maturities of available-for-sale securities 8,406 3,394
Net (increase) decrease in loans (5,444) 1,084
Net decrease (increase) in other short-term investments (156) 3
Proceeds from sale of OREO 4 18
Purchases of premises and equipment (63) (59)
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (3,069) (1,759)
- ----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in time deposits 1,644 2,973
Net (decrease) in other deposits (8,162) (1,299)
Payments on notes payable - (964)
Proceeds from issuance of common stock under stock
option plan 15 -
Proceeds from the issuance of common stock to employee
stock ownership plan - 333
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (6,503) 1,043
- ----------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,550) 1,457
- ----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,893 19,833
- ----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,343 $ 21,290
- ----------------------------------------------------------------------------------------------
CASH PAID DURING THE PERIOD:
Interest $ 1,566 $ 1,308
Income taxes - -
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Transfer of loans to other real estate owned - 6
- ----------------------------------------------------------------------------------------------
See notes to consolidated financial statements
</TABLE>
6
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Regency Bancorp and its wholly-owned subsidiaries (the "Company"). Regency
Bancorp is a California corporation organized to act as the holding company for
Regency Bank (the "Bank") and Regency Investment Advisors, Inc. ("RIA"). RIA
provides investment management and consulting services. The Bank has one
wholly-owned subsidiary, Regency Service Corporation, a California corporation
("RSC"), that engages in the business of real estate development primarily in
the Fresno/Clovis area. All significant intercompany balances and transactions
have been eliminated in consolidation.
These unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles on a basis consistent
with the accounting policies reflected in the audited consolidated financial
statements of the Company included in the Annual Report on Form 10-K for the
year ended December 31, 1997. They do not, however, include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the unaudited
interim consolidated financial statements reflect all adjustments (all of which
are of a normal, recurring nature) necessary for a fair presentation of the
results for the interim periods presented. Operating results for the interim
periods presented are not necessarily indicative of the results that may be
expected for any other interim period or for the year as a whole.
NOTE 2. - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Financial Accounting
Standards No. 130, "Reporting of Comprehensive Income." This statement requires
that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
statement also requires that an entity classify items of other comprehensive
earnings by their nature in an annual financial statement. Accordingly, the
Company included unrealized gains and losses on available-for-sale securities in
comprehensive earnings in the accompanying statement of operations for the three
months ended March 31, 1998 and 1997.
In June 1997, the FASB adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes annual and interim
reporting standards for an enterprises business segments and related disclosures
about its products, services, geographic areas and major customers. This
statement is effective for fiscal years after December 15, 1997. In the initial
year of adoption, the statement applied to annual financial statements only and
did not apply to interim financial statements. In the subsequent year to
adoption, interim financial statements will be required to include segment
information. Adoption of this statement will not impact the Company's
consolidated financial position, results of operations or cash flows.
7
<PAGE>
NOTE 3. - SECURITIES
During the period between December 31, 1997, and March 31, 1998, the
Company recorded a net increase in the value of its available-for-sale portfolio
of $5,000 net of applicable taxes. This change is reflected as a change in
shareholders' equity in the Consolidated Statement of Shareholders' Equity.
This increase in value is primarily the result of lower interest rates in the
bond market at March 31, 1998, as compared to rates at December 31, 1997.
Following is a comparison of the amortized cost and approximate fair value of
securities available-for-sale:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES MARCH 31, 1998 DECEMBER 31, 1997
- --------------------------------------------------------------------------------
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasuries $ 2,003 $ 2,008 $ 2,007 $ 2,012
U.S. Government Agencies 13,709 13,786 17,431 17,489
Mortgage-backed securities 6,146 6,317 11,541 11,647
State and Political subdivision 11,956 12,062 5,441 5,624
Equity Securities 214 214 214 214
- --------------------------------------------------------------------------------
Total $ 34,028 $ 34,387 $ 36,634 $ 36,986
- --------------------------------------------------------------------------------
</TABLE>
At March 31, 1998, and December 31, 1997, the Company held no securities
classified as held-to-maturity.
NOTE 4. - LOANS
The following table presents a breakdown of the Company's loan portfolio in both
dollars outstanding as well as a percentage of total loans. Further discussion
of the Company's loan portfolio can be found in "Item No. 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Balance Sheet Analysis".
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) MARCH 31, 1998 DECEMBER 31, 1997
- --------------------------------------------------------------------------------
Percent of Percent of
Amount Total Loans Amount Total Loans
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 82,019 60.3% $ 75,487 58.3 %
Real estate mortgage 17,751 13.0% 14,900 11.5%
Real estate construction 26,706 19.6% 30,128 23.2%
Consumer and other 9,567 7.1% 9,120 7.0%
- --------------------------------------------------------------------------------
Subtotal $ 136,043 100.0% $ 129,635 100.0%
- --------------------------------------------------------------------------------
Less:
Unearned discount 588 623
Deferred loan fees 355 363
Allowances for credit losses 2,335 2,219
- --------------------------------------------------------------------------------
Total loans, net $ 132,765 $ 126,430
- --------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
NOTE 5. - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to
common shareholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing net income
available to common shareholders by the weighted average common shares
outstanding during the period plus potential common shares outstanding. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
Company.
The following table provides a reconciliation of the numerator and
denominator of the basic EPS computation with the numerator and denominator of
the diluted EPS computation for the three months ended March 31, 1998, and 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Basic EPS Computation:
Net income $ 519 $ 235
Average common shares outstanding 2,621 1,831
- --------------------------------------------------------------------------------
Basic EPS $ .20 $ .13
- --------------------------------------------------------------------------------
Diluted EPS Computation:
Net income $ 519 $ 235
Average common shares outstanding 2,621 1,835
Stock options and warrants 163 67
- --------------------------------------------------------------------------------
2,784 1,902
- --------------------------------------------------------------------------------
Diluted EPS $ .19 $ .12
- --------------------------------------------------------------------------------
</TABLE>
Options to purchase 48,500 and 70,000 shares of common stock at various
prices per share were outstanding at March 31, 1998 and 1997, respectively, but
were not included in diluted EPS because the options exercise price was greater
than the average market price of the common shares for the periods then ended.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed in this Report on Form 10-Q are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Such risks and uncertainties
include, but are not limited to, those described in Management's Discussion and
Analysis of Financial Condition and Results of Operations. Changes to such
risks and uncertainties, which could impact future financial performance,
include, among other things, (1) competitive pressures in the banking industry;
(2) changes in the interest rate environment; (3) general economic conditions,
either nationally or regionally; (4) changes in the regulatory environment; (5)
changes in business conditions and inflation; and (6) changes in security
markets. Therefore, the information set forth therein should be carefully
considered when evaluating the business prospects of the Company and the Bank.
FINANCIAL SUMMARY
The Company's 1998 first quarter, ended March 31, 1998, was marked by
substantially improved earnings, continued reduction of RSC real estate assets,
strong loan growth, continued excellent Bank credit quality and a 36% increase
in the price of Regency Bancorp stock. Consolidated net income for the three
months ended March 31, 1997, was $519,000, a 121% increase when compared to
earnings of $235,000 for the period ended March 31, 1997. The increased
earnings were the result of an improved interest margin as well as lower
noninterest expense. During the first quarter of 1998, interest income
increased by $676,000 while interest expense increased by only $4,000 when
compared to the first quarter of 1997. Additionally, the Company was able to
reduce noninterest expense by $241,000 or 9.5%. The improved net interest
margin combined with the reduction in noninterest expense improved the Company's
efficiency ratio to 64.2% during the first quarter of 1998 from 81.6% during
1997's first quarter. Basic earnings per share increased to $0.20 compared to
$0.13 for the quarter's ended March 31, 1998 and 1997, respectively. The
Company paid no cash dividends in the first quarters of 1998 or 1997.
The divestiture of RSC's real estate holdings continued during the first
quarter of 1998 with the number of units remaining for sale dropping to 19 down
from 66 at December 31, 1997 and 291 one year ago. During the last twelve
months, RSC's real estate investments have dropped from $14,954,000 to
$1,529,000, a decrease of 89.8% or $13,425,000. During the first quarter of
1998, the total noninterest expense related to RSC's activities was $46,000
compared to $487,000 during 1997's first quarter. Additionally, as cash from
the sale of RSC's properties has become available, the Bank has been able to use
this resource to fund additional loans and other earning assets with only a
minimal increase in interest expense.
At March 31, 1998, the Company's loan portfolio had grown to $136,043,000,
an increase of $34,851,000 or 34.4% since March 31, 1997, and an increase of
$6,408,000 since December 31, 1997. This loan growth was substantially a result
of the decision to hold newly originated SBA loans, rather than sell them on the
secondary market, in an effort to increase higher yielding assets and interest
income. Total assets at March 31, 1998 were $192,127,000 an increase of 5.8% or
10
<PAGE>
$10,575,000, from $181,552,000 at March 31, 1997, however, assets were down
$6,114,000 from December 31, 1997 as a result of a seasonal decline in
deposits. Total deposits were $169,761,000 at March 31, 1998 up $8,285,000 or
5.1% from March 31, 1997 but down $6,518,000 from December 31, 1997. While loan
growth has been substantial, nonperforming loans to total loans have declined to
1.52% at March 31, 1998, down 55.4% from 3.41% at March 31, 1997. Excluding
loans RSC has made to facilitate the sale of real estate the Bank's
nonperforming loans to total loans were .65% of which .39% were guaranteed by
the U.S. Small Business Administration.
The Company's return on average assets was 1.11% for the first three months
of 1998 compared to 0.54% for the first three months of 1997. Return on average
common equity for the first quarter was 11.07% compared to 6.97% for the same
period in 1997. During the first quarter, the bid price of Regency Bancorp
stock increased 36% from a quote of $10.25 at December 31, 1997 to a quote of
$14.00 at March 31, 1998. Additionally, the Company has filed an application to
have its stock listed on the NASDAQ national market system.
RIA continued to improve earnings and increase assets under management.
During the quarter ended March 31, 1998, RIA on a stand alone basis produced
pre-tax income of $55,000 compared to pre-tax income of $46,000 for the first
quarter of 1997. At March 31, 1998, RIA's assets under management had increased
to $96,200,000 from $78,900,000 at March 31, 1997.
ADMINISTRATIVE ORDERS
As a result of an examination of the Bank as of June 30, 1997, the FDIC
determined that the Company required special supervisory attention. The Bank
consented to an FDIC Order on October 28, 1997. The FDIC Order is a
"cease-and-desist order" for the purposes of Section 8 of the Federal Deposit
Insurance Act, and violation of the FDIC Order by the Bank can give rise to
enforcement proceedings under Section 8 of the Federal Deposit Insurance Act.
The FDIC Order provides that the Bank must: (a) retain qualified
management; (b) increase on or before December 31, 1997, and thereafter maintain
Tier 1 capital equal to the greater of $14,000,000 or the equivalent of a Tier 1
capital to average assets ratio of at least 7.0%; (c) eliminate from its books
classified assets not previously collected or charged off; (d) not extend
additional credit to borrowers with previous classified or charged off credits
which are uncollected; (e) not engage in any activities not permissible for a
national bank subsidiary, except that the Bank and RSC may continue real estate
activities as permitted by the FDIC's letter of November 29, 1996, to the Bank
requiring, among other things, that RSC divest all properties held by it not
later than December 31, 1998; (f) review the adequacy of the Bank's allowance
for loan and lease losses and establish a comprehensive policy for determining
its adequacy on a quarterly basis; (g) develop a plan to control overhead and
other expenses and restore the Bank to profitability; (h) prepare a
business/strategic plan for the operation of the Bank acceptable to the FDIC;
(i) not pay cash dividends in any amount except with the prior written consent
of the FDIC and the Commissioner; and (j) furnish quarterly written progress
reports to the FDIC and the Commissioner detailing the form and manner of any
actions taken to comply with the Administrative Orders.
11
<PAGE>
As a result of an examination of the Bank as of June 30, 1997, the
California Department of Financial Institutions ("CDFI") and the Bank have
stipulated to the issuance of the State Order by the Department of Financial
Institutions which State Order is a final order pursuant to Section 1913 of the
California Financial Code.
The State Order provides that the Bank must: (a) retain management and
maintain a Board of Directors for the Bank and RSC acceptable to the
Commissioner and FDIC; (b) increase and maintain tangible shareholders' equity
(shareholders' equity less intangible assets) to an amount not less than the
greater of (i) 7% of its tangible assets (total assets less intangible assets)
or (ii) $14,000,000; (c) maintain an adequate allowance for loan and lease
losses; (d) cause RSC to maintain an adequate reserve for losses on its real
estate investments; (e) cause RSC to reduce the assets classified as substandard
so that the amount of such assets shall not exceed $10,115,000 by December 31,
1997, $8,750,000 by March 31, 1998, $7,100,000 by June 30, 1998 and $4,900,000
by September 30, 1998; (f) develop, adopt and implement a plan acceptable to the
Commissioner for divestiture of RSC and all of RSC's real estate investments by
not later than December 31, 1998; (g) not make any distribution to shareholders
except with the prior written approval of the Commissioner; and (h) furnish
written progress reports within thirty (30) days after the end of each quarter
to the Commissioner and the FDIC describing actions to comply with the State
Order.
As of the date of this Form 10-Q, the Company and the Bank had taken
certain actions to comply with the Administrative Orders, which included raising
capital through a private offering, which closed in the fourth quarter 1997.
In April 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 March 31, 1998, RSC had reduced
total classified assets to $2,342,000 from $4,831,000 at December 31, 1997, well
below levels mandated in the orders. Additionally, capital levels were well
above mandated levels and the Bank had increased income and decreased
non-interest expense in the first quarter. 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.
12
<PAGE>
NET INTEREST INCOME
The Company's operating results depend primarily on net interest income
(the difference between the interest earned on loans and investments less
interest expense on deposit accounts and borrowings). A primary factor
affecting the level of net interest income is the Company's interest rate
margin, the difference between the yield earned on interest earning assets and
the rate paid on interest bearing liabilities, as well as the difference between
the relative amounts of average interest earning assets and interest bearing
liabilities.
The following table presents, for the periods indicated, the Company's total
dollar amount of interest income from average interest earning assets and the
resultant yields, as well as the interest expense on average interest bearing
liabilities and the resultant cost, expressed both in dollars and rates. The
table also sets forth the net interest income and the net earning balance for
the periods indicated.
13
<PAGE>
CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND
INTEREST RATES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES) 1998 1997
FOR THE THREE MONTHS ENDED MARCH 31,
- ------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Rate Interest Balance Rate Interest
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) $ 130,883 10.98% $ 3,543 $ 102,568 11.07% $ 2,800
Investment securities (2) 35,582 6.24% 547 32,778 6.61% 534
Federal funds sold & other 2,674 5.11% 34 8,782 5.26% 114
- ------------------------------------------------------------------------------------------------------------------------
Total Interest-earning Assets 169,139 9.89% 4,124 144,128 9.70% 3,448
- ------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets:
Allowance for credit losses (2,284) (1,673)
Cash and due from banks 10,876 8,666
Real estate investments 2,770 16,038
OREO 503 417
Premises and equivalent, net 1,749 2,249
Cash surrender value of life insurance 3,050 2,915
Accrued interest receivable and other assets 4,862 3,947
- ------------------------------------------------------------------------------------------------------------------------
Total Average Assets $ 190,665 $ 176,687
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities:
Transaction accounts 47,333 2.35% 275 47,075 2.60% 302
Savings accounts 36,589 4.07% 367 29,180 4.11% 296
Time deposits 45,375 5.37% 601 48,791 5.49% 661
Federal funds purchased and other 1,831 8.86% 40 4,658 1.74% 20
- ------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing 131,128 3.98% 1,283 129,704 4.00% 1,279
- ------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Transaction accounts 38,342 30,978
Other liabilities 2,164 2,325
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 171,634 163,007
Shareholders' equity:
Common stock 15,183 8,983
Retained earnings 3,595 4,706
Unrealized gain / (loss) on investment
securities 253 (9)
- ------------------------------------------------------------------------------------------------------------------------
Total Shareholders Equity 19,031 13,680
- ------------------------------------------------------------------------------------------------------------------------
Total average liabilities and
shareholders' equity $ 190,665 $ 176,687
- ------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 2,841 $ 2,169
- ------------------------------------------------------------------------------------------------------------------------
Interest income as a percentage of average
interest-earning assets 9.89% 9.70%
Interest expense as a percentage of average
interest-earning assets (3.08%) (3.60%)
- ------------------------------------------------------------------------------------------------------------------------
Net Interest Margin 6.81% 6.10%
- ------------------------------------------------------------------------------------------------------------------------
</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
$278,000 and $286,000 for the three months ended March 31, 1998, and 1997,
respectively.
(2) Applicable nontaxable securities' yields have not been calculated on a
taxable-equivalent basis because they are not material to the Company's results
of operations.
14
<PAGE>
Changes in the interest margin can be attributed to changes in the yield on
interest earning assets, the rate paid on interest bearing liabilities, as well
as changes in the volume of interest earning assets and interest bearing
liabilities. The following table presents the dollar amount of certain changes
in interest income and expense for each major component of interest earning
assets and interest bearing liabilities and the difference attributable to
changes in average rates and volumes for the periods indicated.
VOLUME/RATE ANALYSIS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 VOLUME (1) RATE (1) TOTAL
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Interest Earnings Variance Analysis
Increase (decrease) in interest income:
Loans $ 766 $ (23) $ 743
Investment securities (2) 38 (25) 13
Federal funds sold and other (78) (2) (80)
- ---------------------------------------------------------------------------------------------------
Total 726 (50) 676
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Transaction accounts 2 (29) (27)
Savings accounts 74 (3) 71
Certificates of deposit (45) (15) (60)
Federal funds purchased and other (3) 23 20
- ---------------------------------------------------------------------------------------------------
Total 28 (24) 4
- ---------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Interest Income $ 698 $ (26) $ 672
- ---------------------------------------------------------------------------------------------------
</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.
While overall rates have been stable to slightly lower during the past
twelve months, the Company has been able to increase net interest income and
improve its interest margin through careful balance sheet management. Net
interest income before the provision for credit losses was $2,841,000 for the
first quarter of 1998 as compared to $2,169,000 for the comparable period of
1997, an increase of $672,000 or 31.0%. This increase was primarily attributable
to a significantly larger loan portfolio and a larger overall earning asset
portfolio. Average interest earning assets grew $25,011,000 or 17.4% between
March 31, 1998, and March 31, 1997, while average interest bearing liabilities
grew only $1,424,000 or 1.1% over the same period. Over the past twelve months,
the Company has used growth from noninterest bearing liabilities, as well as
cash flow from RSC property sales as its primary means of funding earning
assets. Secondarily, the Company decided in 1997 to hold a larger portfolio of
SBA loans, rather than sell SBA loans on the secondary market, in an effort to
shift a larger percentage of its earning assets into higher yielding loans from
lower yielding federal funds sold and investment securities. While in the short
term the effect of ceasing SBA loan sales reduced noninterest income (see "Loan
Origination & Sales" below), long term, the Company's improved net interest
margin should increase earnings.
The Company's net interest margin in the first quarter of 1998 (based on
average interest earning assets) increased to 6.81% as compared to 6.10% for the
same period in 1997 as a result of the greater number of higher yielding loans.
The Company's earning asset mix changed
15
<PAGE>
substantially between comparable periods with loans increasing to 77.4% of
earning assets in the first quarter of 1998, compared to 71.2% during the first
quarter of 1997. Investment securities dropped slightly as a percentage of
average earning assets while federal funds sold declined to 1.6% during the
first quarter of 1998 compared to 6.1% of average interest earning assets during
the first quarter of 1997.
INTEREST EARNING ASSET MIX
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 1997
- ------------------------------------------------------------------------------------------------------
Average Percent Average Percent
Balance of Total Balance of Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Earning Asset Mix:
Loans $ 130,883 77.4% $ 102,568 71.2%
Investment securities 35,582 21.0% 32,778 22.7%
Federal funds sold and other 2,674 1.6% 8,782 6.1%
- ------------------------------------------------------------------------------------------------------
Total Interest-earning Assets $ 169,139 100.0% $ 144,128 100.0%
- ------------------------------------------------------------------------------------------------------
</TABLE>
Although the yield on all earning asset categories decreased from the first
quarter of 1997 to the first quarter of 1998, the shift of assets from lower
yielding federal funds sold and investments, into higher yielding loans, allowed
the company to increase its overall yield on earning assets. The cost of
interest bearing liabilities was virtually unchanged at $1,283,000 or 3.98%
during the quarter ended March 31, 1998, compared to $1,279,000 or 4.00% for the
period ended March 31, 1997.
NONINTEREST INCOME
The Company receives a significant portion of its income from noninterest
sources related both to activities conducted by the Bank (loan originations and
servicing and depositor service charges), as well as from its subsidiaries, RSC
and RIA.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(IN THOUSANDS) FOR THE THREE MONTHS ENDED MARCH 31, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Other Income:
Gain-on-sale of loans $ 15 $ 270
Depositor service charges 112 98
Income from investment management services 216 214
Gain-on-sale of securities 5 2
Gain-on-sale of assets - 4
Servicing fees on loans sold 69 86
Other 70 107
- --------------------------------------------------------------------------------
Total $ 487 $ 781
- --------------------------------------------------------------------------------
</TABLE>
(Income from RIA in these consolidated financial statements is included in
noninterest income. A further discussion of RSC and RIA is set forth below.)
During the first quarter of 1998, the Company recognized noninterest income
of $487,000 compared to $781,000 for the same period during 1997, a decrease of
$294,000 or 37.6%. The decrease is primarily attributable to a $255,000 decline
in income from the sale of loans (see "Loan Origination & Sales" below). This
drop in gain on sale of loans is substantially the result of a decision made in
mid-year 1997 to discontinue the sale of SBA loans in an effort to increase
16
<PAGE>
interest income and interest margin. Depositor service charges increased in the
first quarter of 1998 to $112,000, an increase of $14,000 or 14.3% from income
of $98,000 in the first quarter of 1997. The increase is primarily the result
of growth in the Bank's deposit account base over the past year.
LOAN ORIGINATION & SALES
The Bank originates various types of loans with the intention of selling
the loans 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 ("B & I") loans program; and conventional real estate
mortgage loans. Historically, the majority of the Bank's 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.
During the quarter ended March 31, 1998, the Company recognized gains on
sale of loans of $15,000, a decrease of $255,000 or 94.4% from $270,000 in the
comparable period of 1997. During the first quarter of 1998, gain-on-sale of
loan income was the result of real estate mortgage loan originations and sales
with no SBA loan sales taking place. In 1997, gain-on-sale of loan income was
almost exclusively the result of SBA loan sales.
An additional source of income related to the Bank's loan origination
activities is reflected in income from the ongoing servicing of loans sold.
During the quarter ended March 31, 1998, servicing income totaled $69,000, a
decrease of $17,000 or 19.8% from income of $86,000 during the quarter ended
March 31, 1997. The decrease was primarily the result of a smaller servicing
portfolio during the first quarter of 1998 as compared to the first quarter of
1997.
REGENCY SERVICE CORPORATION
The Bank's wholly owned subsidiary, Regency Service Corporation ("RSC"),
has engaged in real estate development activities since 1986. Under FDIC
regulations, banks were required to divest their real estate development
investments as quickly as prudently possible but in no event later than December
19, 1996, and submit a plan to the FDIC regarding divestiture of such
investments. In December 1995, the Bank and RSC submitted a request to extend
the mandatory time period in which it must divest its real estate development
interests. In December 1996, the FDIC, responding to the Bank's request,
granted the Bank and RSC a two-year extension, until December 31, 1998, to
continue its divestiture activities.
During the first quarter of 1998, RSC continued its effort toward total
divestiture of its real estate holdings with the sale of 47 additional homes and
lots. As of March 31, 1998, RSC had only 19 units remaining with 12 of these
units in escrow compared to 66 units remaining at December 31, 1997, and 291
units remaining at March 31, 1998.
In the quarter ended March 31, 1998, RSC recorded a gain from the
sale of the 47 properties of $7,000 compared to a loss of $240,000 in the first
quarter of 1997. The reduction in
17
<PAGE>
loss was the result of the writedown of the remaining properties owned by RSC
during the second quarter of 1997. On a stand alone basis, RSC's activities
(losses from the sale of properties plus operating expenses), reduced the
Company's overall pre-tax income by $46,000 in the first quarter of 1998
compared to a loss of $487,000 in the first quarter of 1997. These operating
expenses have been consolidated with similar operating expenses in the Company's
consolidated statements of income. Reflected on a stand alone basis, RSC's
overall operating expense as a percentage of average assets was .09% in the
first quarter of 1998 compared to 1.10% in the first quarter of 1997.
Additional discussion of loans made by RSC to facilitate the sale of its
properties and, in general, of the Company's investment in RSC, is contained in
this report under the headings, "Nonperforming Loans" and "Investments in Real
Estate."
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. Effective in the first quarter 1997, the Company and Bank
received regulatory permission for the transfer of RIA, as a subsidiary of the
Bank, to become a separate subsidiary of the Company. RIA provides investment
management and consulting services, including comprehensive financial and
retirement planning, and investment advice, to individuals and corporate clients
for an annual fee that varies depending upon the size of a client account.
Revenue from RIA for the first quarter 1998 increased to $216,000 from
$214,000 in the same period of 1997, an increase of $2,000 or 1.0%. On a stand
alone basis, RIA's activities (income from investment management activities less
operating expenses), provided the Company with pre-tax income of $55,000 in the
first quarter of 1998, an increase of 19.6% compared to a pre-tax income of
$46,000 in the first quarter of 1997. The primary reason for the increase in
pre-tax income was the result of lower compensation expense related to
commissions and bonuses paid in the first quarter of 1998 as compared to the
first quarter of 1997. RIA's operating expenses have been consolidated with
similar operating expenses in the Company's consolidated statements of income.
RIA's ability to generate and increase income comes, in large part, from
the volume of assets under management. As of March 31, 1997, RIA had $96,200,000
in assets under management, an increase of $9,700,000 or 11.2% compared to
$86,500,000 as of December 31, 1997, and an increase of $17,300,000 or 21.9%
compared to $78,900,000 as of March 31, 1996. Assets in client accounts managed
by RIA are not reflected in the consolidated assets of the Company.
18
<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:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------
Percent of Percent of
Average Average
Amount Assets Amount Assets
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest Expense:
Loss (gain) from investments in real estate $ (7) (.01)% $ 240 .55%
Salaries and related benefits 1,196 2.54% 1,164 2.67%
Occupancy 360 .77% 403 .93%
FDIC insurance and regulatory assessments 113 .24% 22 .05%
Marketing 126 .27% 90 .21%
Professional services 172 .37% 121 .28%
Director's fees and expenses 53 .11% 96 .22%
Management fees for real estate projects - - 108 .25%
Supplies, telephone and postage 81 .17% 79 .18%
Other 210 .44% 222 .51%
- -------------------------------------------------------------------------------------------------------------
TOTAL $ 2,304 4.90% $ 2,545 5.85%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest expense decreased by $241,000 or 9.5% to $2,304,000 for the
three months ended March 31, 1998, compared to $2,545,000 during the same period
of 1997, primarily due to the fact that no losses were incurred on the sale of
investments in real estate. The reduction in losses related to the sale of
RSC's real estate assets was the direct result of writedowns and reserves taken
during the second quarter of 1997. When compared to average assets for the
respective periods, noninterest expense decreased to 4.90% in the first quarter
of 1998 compared to 5.85% in the comparable period in 1997.
As part of the Company's overall plan to increase earnings, improving the
Company's efficiency while controlling expenses is a significant factor. As a
percentage of average assets, most expense categories decreased over the past
twelve months. However, certain categories showed an increase: FDIC insurance
and regulatory assessments increased by 414% or $91,000 to $113,000 for the
first three months of 1998 compared to only $22,000 during the first three
months of 1997. This substantial increase is the direct result of the FDIC and
CDFI administrative orders, as well as, the Bank's average capital level during
the third and fourth quarter's of 1997. Management expects the Bank's insurance
premiums to decrease during the second half of 1998 due to higher capital levels
and progress made related to the disposal of RSC assets. Other noninterest
expense categories increasing slightly were Marketing, which includes public
relations and charitable contributions and Professional services. Professional
services increased as a result of the Company's fourth quarter capital offering,
as well as higher accounting and legal fees as a result of the administrative
orders.
Salaries and related benefits increased slightly in real dollars in the
first quarter of 1998. However, as a percentage of average assets, salaries
declined to 2.54% compared to 2.67% during
19
<PAGE>
the first quarter of 1997. Occupancy expense decreased both in dollars and as a
percentage of average assets, while management fees for real estate projects
were completely eliminated. Management fees will no longer be an expense to the
Company as all RSC projects in which an outside manager was employed have been
sold.
BALANCE SHEET ANALYSIS
Total assets at March 31, 1998 were $192,127,000 an increase of 5.8% or
$10,575,000 from $181,552,000 at March 31, 1997. However, assets were down
$6,114,000 from December 31, 1997, as a result of a seasonal decline in
deposits. At March 31, 1998, the Company's loan portfolio had grown to
$136,043,000, an increase of $34,851,000 or 34.4% since March 31, 1997, and an
increase of $6,408,000 since December 31, 1997. This loan growth was
substantially a result of the decision to hold newly originated SBA loans,
rather than sell them on the secondary market, in an effort to increase higher
yielding assets and interest income. Total deposits were $169,761,000 at March
31, 1998, up $8,285,000 or 5.1% from March 31, 1997, but down $6,518,000 from
December 31, 1997.
LOANS
The three areas in which the Bank has directed virtually all of its lending
activities are: (a) commercial loans; (b) real estate loans (including
residential construction and mortgage loans); and (c) consumer loans. The
Company's loans are primarily made within its defined market area of Fresno and
Madera counties. The Bank also maintains a loan production office in Modesto,
California.
Commercial loans, including SBA and B&I loans, comprised approximately
60.3% of the Company's loan portfolio at March 31, 1998, compared to 58.3% at
December 31, 1997, and 55.9% of the Company's loan portfolio at March 31, 1997.
These loans are generally made to small and mid-size businesses and
professionals. Commercial loans are diversified as to industries and types of
business with no material industry concentrations. Most of these loans have
floating rates based upon underwriting analysis. The primary source of repayment
on most commercial loans is cash flow from the primary business. Additional
collateral in the form of real estate, cash, accounts receivable, inventory or
other financial instruments is often obtained as a secondary source of
repayment.
Real estate construction lending comprised 19.6% of the Company's loan
portfolio at March 31, 1998, compared to 23.2% of the Company's loan portfolio
at December 31, 1997, and 22.8% at March 31, 1997. These loans are primarily
made for the construction of single family residential housing. Loans in this
category may be made to the home buyer or to the developer. Construction loans
are secured by deeds of trust on the primary property. The majority of
construction loans have floating rates based upon underwriting analysis. A
significant portion of the borrowers' ability to repay these loans is dependent
upon the sale of the property which is affected by, among other factors, the
residential real estate market. In this regard, the Company's potential risks
include a general decline in the value of the underlying property as well as
cost overruns or delays in the sale or completion of a property.
20
<PAGE>
Real estate mortgage loans comprised 13.0% of the loan portfolio at March
31, 1998, compared to 11.5% at December 31, 1997, and 12.7% of the loan
portfolio at March 31, 1997. Real estate mortgage loans are made up of
approximately 75% non-residential properties and 25% single-family, residential
mortgages. The non-residential loans generally are "mini-perm" (medium-term)
commercial real estate mortgages with maturities under seven years. The
residential mortgages are secured by first trust deeds and have varying
maturities. Both types of loans may 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 March 31,
1998, comprising 7.1% of the loan portfolio compared to 7.0% of total loans at
December 31, 1997 and 8.6% at March 31, 1997. This category includes traditional
consumer loans, home equity lines of credit, and Visa card loans. Consumer
loans are generally secured by third trust deeds on single-family residences or
personal property, while Visa cards are unsecured.
RISK ELEMENTS
The Company assesses and manages credit risk on an ongoing basis through
stringent credit review and approval policies, extensive internal monitoring,
and established formal lending policies. Additionally, the Bank contracts with
an outside loan review consultant to periodically grade new loans and to review
the existing loan portfolio. Management believes its ability to identify and
assess risk and return characteristics of the Company's loan portfolio is
critical for profitability and growth. Management strives to continue the
historically low level of credit losses by continuing its emphasis on credit
quality in the loan approval process, active credit administration, and regular
monitoring. With this in mind, management has designed and implemented a
comprehensive loan review and grading system that functions to continually
assess the credit risk inherent in the loan portfolio. Additionally,
management believes its ability to manage portfolio credit risk is enhanced by
the knowledge of the Bank's service area, by the lending personnel and Board of
Directors.
NONPERFORMING LOANS
The Company's current policy is to cease accruing interest when a loan
becomes 90-days past due as to principal or interest; when the full, timely
collection of interest or principal becomes uncertain; or when a portion of the
principal balance has been charged off, unless the loan is well secured and in
the process of collection. When a loan is placed on nonaccrual status, the
accrued and uncollected interest receivable is reversed and the loan is
accounted for on the cash or cost recovery method thereafter, until qualifying
for return to accrual status. Generally, a loan may be returned to accrual
status when all delinquent interest and principal become current in accordance
with the terms of the loan agreement or when the loan is both well secured and
in process of collection.
21
<PAGE>
At March 31, 1998, nonperforming loans amounted to $2,063,000 or 1.52% of
total loans compared to $1,736,000 or 1.34% at December 31, 1997, and $3,442,000
or 3.40% at March 31, 1997. Other real estate owned was $477,000 at March 31,
1998, compared to $503,000 at December 31, 1997. The slight increase in
nonperforming loans between December 31, 1997, and March 31, 1998, was the
result of an additional property RSC sold and financed, as well as an increase
in Bank SBA loans on nonaccrual. Of the total nonperforming loans, $1,189,000
represented loans RSC has made to facilitate the sale of former properties that
have loan to value ratios higher than would normally be made by the Bank.
Without the non-accrual loans made by RSC, the Bank's loan portfolio at March
31, 1998, had $874,000 in non-accrual loans or .65%, compared to $598,000 in
non-accrual loans or .46% at December 31, 1997. Of the Bank's non-accrual loans
(excluding RSC loans) at March 31, 1998, $524,000 represents the portion of SBA
loans that are guaranteed by the SBA. Beginning in 1997, the SBA changed the
requirements for Bank's originating SBA loans which are subsequently sold in the
secondary market. Under the new requirement, if a borrower defaults on an SBA
guaranteed loan, the originating bank is required to buy the guaranteed portion
back and hold it in its portfolio until collection efforts are exhausted. While
this guaranteed portion is backed by the full faith and credit of the U.S.
government and poses little risk of loss to the bank, the bank does incur loss
of the use of the funds while awaiting payoff from the SBA or other loan
collateral. Expense from the loss of use of the funds is expected to be
minimal; however, due to this new requirement, it is expected that SBA
non-accrual loan levels will be slightly higher.
The following table presents information concerning the nonperforming loans
for the periods ending March 31, 1998 and December 31, 1997, respectively.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) MARCH 31, 1998 DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Nonperforming Assets:
Nonaccrual RSC loans $ 1,189 $ 1,138
Nonaccrual Bank loans 874 598
- ---------------------------------------------------------------------------------------
Nonperforming loans 2,063 1,736
Other real estate owned 477 503
- ---------------------------------------------------------------------------------------
Total nonperforming assets 2,540 2,239
- ---------------------------------------------------------------------------------------
Accruing loans 90 days past due 28 48
- ---------------------------------------------------------------------------------------
Total loans before allowance for credit losses $ 136,043 $ 129,635
Total assets 192,127 198,241
Allowance for possible credit losses (2,335) (2,219)
- ---------------------------------------------------------------------------------------
Ratios:
Nonperforming loans to total loans 1.52% 1.34%
Nonperforming loans to total loans
(excluding RSC loans) .65% .46%
Nonperforming assets to:
Total loans 1.87% 1.73%
Total loans and OREO 1.86% 1.72%
Total assets 1.32% 1.13%
Allowance for possible credit losses to
total nonperforming assets 91.91% 99.11%
Allowance for possible credit losses to loans 1.72% 1.71%
- ---------------------------------------------------------------------------------------
</TABLE>
At March 31, 1998 and December 31, 1997, the Company's recorded investment
in loans for which an impairment has been recognized totaled $1,609,000 and
$1,410,000, respectively. These amounts were evaluated for impairment using the
fair value of collateral. At March 31,
22
<PAGE>
1998, the SFAS No. 114 allowance for credit losses related to impaired loans was
$246,000. The Company uses the cash basis method of income recognition for
impaired loans. For the three months ended March 31, 1998 and 1997, the Company
did not recognize any income on such loans.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses reflects management's judgment as to the
level which is considered adequate to absorb potential losses inherent in the
loan portfolio. This allowance is increased by provisions charged to expense
and reduced by loan charge-offs net of recoveries. Management determines an
appropriate provision based on information currently available to analyze credit
loss potential, including: (a) the loan portfolio growth in the period, (b) a
comprehensive grading and review of new and existing loans outstanding, (c)
actual previous charge-offs, and (d) changes in economic conditions.
The allowance for credit losses totaled $2,335,000 or 1.72% of total loans
at March 31, 1998, compared to $2,219,000 or 1.71% at December 31, 1997. The
increase is the result of additional provision for credit losses of $125,000 in
the first quarter of 1998 along with charge-offs net of recoveries of $9,000.
It is the policy of management to maintain the allowance for credit losses at a
level adequate for known and future risks inherent in the loan portfolio. Based
on information currently available to analyze credit loss potential, including
economic factors, overall credit quality, historical delinquency and a history
of actual charge-offs, management believes that the credit loss provision and
allowance is adequate. However, no prediction of the ultimate level of loans
charged-off in future years can be made with any certainty.
Following is a table presenting the activity within the Company's provision for
credit losses for the period between December 31, 1997, and March 31, 1998.
<TABLE>
- --------------------------------------------------------------------------------
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<S> <C>
Balance, December 31, 1997 $ 2,219
- --------------------------------------------------------------------------------
Provision charged to expense 125
Loans charged off (21)
Recoveries 12
- --------------------------------------------------------------------------------
Balance, March 31, 1998 $ 2,335
- --------------------------------------------------------------------------------
</TABLE>
INVESTMENTS IN REAL ESTATE
The Company's investment in real estate consists of the Bank's investment
of capital and retained earnings in RSC. RSC is currently the sole owner of 19
single-family units and is a limited partner in two projects. The number of
units remaining for sale declined to 19, from 66 at December 31, 1997, and 291
one-year ago. During the first quarter of 1998, RSC's real estate investments
have decreased to $1,529,000 from $4,067,000 at December 31, 1997, and since
March 31, 1997, investment in real estate has decreased 89.8% or $13,425,000.
23
<PAGE>
The following table represents the condensed financial information relative to
RSC as of March 31, 1998 and December 31, 1997, respectively.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
(IN THOUSANDS) MARCH 31, 1998 DECEMBER 31, 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Financial Position:
Investments in real estate
Real estate held-for-sale $ 1,442 $ 4,420
Equity in partnerships 702 702
- ---------------------------------------------------------------------------------
Investment in real estate before allowance 2,144 5,122
Allowance for real estate losses (615) (1,055)
- ---------------------------------------------------------------------------------
Investment in real estate $ 1,529 $ 4,067
- ---------------------------------------------------------------------------------
Loans to real estate partnerships and projects 1,819 1,768
Allowance for loan losses (364) (364)
- ---------------------------------------------------------------------------------
Net loans 1,455 1,404
- ---------------------------------------------------------------------------------
Cash and other assets 926 2,524
- ---------------------------------------------------------------------------------
Liabilities (103) (144)
- ---------------------------------------------------------------------------------
Bank's investment in RSC $ 3,807 $ 7,851
- ---------------------------------------------------------------------------------
</TABLE>
FUNDING SOURCES
Deposits represent the Bank's principal source of funds for investment.
Deposits are primarily core deposits in that they are demand, savings, and time
deposits generated from local businesses and individuals. These sources are
considered to be relatively more stable, long-term deposit relationships thereby
enhancing steady growth of the deposit base without major fluctuations in
overall deposit balances. In order to assist in meeting its funding needs, the
Bank maintains federal funds lines with correspondent banks in addition to using
its investment portfolio to raise funds through repurchase agreements. In
addition, the Bank may, from time to time, obtain additional deposits through
the use of brokered time deposits. As of March 31, 1998, the Bank held no
brokered time deposits and had no borrowings from correspondent banks against
its federal funds lines.
The following table presents the composition of the deposit mix for the period
ending March 31, 1998 and December 31, 1997, respectively.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) MARCH 31, 1998 DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------
Percent of Percent of
Amount Total Deposits Amount Total Deposits
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing transaction accounts $ 37,915 22.3% $46,744 26.5%
Now and MMI 48,683 28.7% 48,616 27.6%
Savings 37,098 21.8% 36,498 20.7%
Time under $100,000 15,385 9.1% 15,778 9.0%
Time $100,000 and over 30,680 18.1% 28,643 16.2%
- ------------------------------------------------------------------------------------------------
Total Interest-bearing Deposits 131,846 77.7% 129,535 73.5%
- ------------------------------------------------------------------------------------------------
Total Deposits $ 169,761 100.0% $ 176,279 100.0%
- ------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
LIQUIDITY
Liquidity management refers to the Bank's ability to provide funds on an
ongoing basis to meet fluctuations in deposit levels, as well as, the credit
needs and requirements of its clients. Both assets and liabilities contribute
to the Bank's liquidity position. Federal funds lines, short-term investments
and securities, and loan repayments contribute to liquidity, along with deposit
increases, while loan funding and deposit withdrawals decrease liquidity. The
Bank assesses the likelihood of projected funding requirements by reviewing
historical funding patterns, current and forecasted economic conditions, and
individual client funding needs. The Bank maintains a line of credit with a
correspondent bank for up to $5,000,000 available on a short-term basis.
Additionally, the Bank generally maintains a portfolio of SBA loans either
available-for-sale or in its portfolio that could be sold should additional
liquidity be required.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is a measure of the exposure to fluctuations in
the Bank's future earnings caused by fluctuations in interest rates. Generally,
if assets and liabilities do not reprice simultaneously and in equal volumes,
the potential for such exposure exists. It is management's objective to
maintain stability in the net interest margin in times of fluctuating interest
rates by maintaining an appropriate mix of interest sensitive assets and
liabilities. To achieve this goal, the Bank prices the majority of its interest
bearing liabilities at variable rates. At the same time, the majority of its
interest earning assets are also priced at variable rates, the majority of which
float with the Prime Rate. This pricing structure tends to stabilize the net
interest margin percentage earned by the Bank.
The following table sets forth the interest rate sensitivity and repricing
schedule of the Company's interest-earning assets and interest-bearing
liabilities, the interest rate sensitivity gap, the cumulative interest rate
sensitivity gap, and the cumulative interest rate sensitivity gap ratio.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
NEXT DAY AFTER THREE AFTER
BUT WITHIN MONTHS ONE YEAR
(IN THOUSANDS, EXCEPT PERCENTAGES) THREE BUT WITHIN BUT WITHIN AFTER
AS OF MARCH 31, 1997 IMMEDIATELY MONTHS 12 MONTHS FIVE YEARS FIVE YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Sensitivity Gap:
Loans (1) $ 51,207 $ 49,401 $ 9,296 $ 15,558 $ 8,518 $ 133,980
Investment securities and other 214 12,113 7,921 6,745 7,035 34,028
- -------------------------------------------------------------------------------------------------------------------------
Total Earning Assets $ 51,421 $61,514 $ 17,217 $ 22,303 $ 15,553 $ 168,008
- -------------------------------------------------------------------------------------------------------------------------
Interest-bearing transaction accounts 48,683 - - - - 48,683
Savings accounts 34,307 2,791 - - 37,098
Time deposits - 15,692 21,066 8,526 780 46,065
Federal funds purchased - - - - - -
- -------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities $ 82,990 $ 18,483 $ 21,066 $ 8,526 $ 780 $ 131,846
- -------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap (31,569) 43,031 (3,849) 13,777 14,773
Cumulative gap (31,569) 11,462 7,613 21,390 36,163
Cumulative gap percentage to
interest earning assets (18.79%) 6.82% 4.53% 12.73% 21.52%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts exclude nonaccrual loans of $2,063,000.
25
<PAGE>
The above table indicates the time periods in which interest-earning assets
and interest-bearing liabilities will mature or reprice in accordance with their
contractual terms. The table does not necessarily indicate the impact of
general interest rate movements on the net interest margin since the repricing
of various categories of assets and liabilities is subject to competitive
pressures. Additionally, this table does not take into consideration changing
balances in forward periods as a result of normal amortization, principal
paydowns, changes in deposit mix, or other such movements of funds as a result
of changing interest rate environments.
CAPITAL RESOURCES
The Board of Governors of the Federal Reserve System and the FDIC have
adopted risk-based capital guidelines for evaluating the capital adequacy of
bank holding companies and banks. The guidelines are designed to make capital
requirements sensitive to differences in risk profiles among banking
organizations, to take into account off-balance sheet exposures, and to aid in
making the definition of bank capital uniform internationally. Under the
guidelines, the Company and the Bank are required to maintain capital equal to
at least 8.0% of its assets and commitments to extend credit, weighted by risk,
of which at least 4.0%, must consist primarily of common equity (including
retained earnings) and the remainder may consist of subordinated debt,
cumulative preferred stock, or a limited amount of loan loss reserves. Assets,
commitments to extend credit, and off-balance sheet items are categorized
according to risk and certain assets considered to present less risk than others
permit maintenance of capital at less than the 8% ratio.
The guidelines establish two categories of qualifying capital: Tier 1
capital comprising core capital elements and Tier 2 comprising supplementary
capital requirements. At least one-half of the required capital must be
maintained in the form of Tier 1 capital. Tier 1 capital includes common
shareholder's equity and qualifying perpetual preferred stock less intangible
assets and certain other adjustments. However, no more than 25% of the
Company's total Tier 1 capital may consist of perpetual preferred stock. The
definition of Tier 1 capital for the Bank is the same, except that perpetual
preferred stock may be included only if it is noncumulative. Tier 2 capital
includes, among other items, limited life (and in the case of banks, cumulative)
preferred stock, mandatory convertible securities, subordinated debt, and a
limited amount of reserves for credit losses.
The Board of Governors also adopted a 3.0% minimum leverage ratio for
banking organizations as a supplement to the risk-weighted capital guidelines.
The leverage ratio is generally calculated using Tier 1 capital (as defined
under risk-based capital guidelines) divided by quarterly average net total
assets (excluding intangible assets and certain other adjustments).
The Board of Governors emphasized that the leverage ratio constitutes a
minimum requirement for well-run banking organizations having diversified risk.
Banking organizations experiencing or anticipating significant growth, as well
as those organizations which do not exhibit the characteristics of a strong,
well-run banking organization above, will be required to maintain minimum
capital ranging generally from 100 to 200 basis points in excess of the leverage
ratio. The FDIC adopted a substantially similar leverage ratio for state
non-member banks.
26
<PAGE>
On December 19, 1991, the President signed the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). The FDICIA, among other
matters, substantially revised banking regulations and established a framework
for determination of capital adequacy of financial institutions. Under the
FDICIA, financial institutions are placed into one of five capital adequacy
categories as follows: (1) "Well capitalized" - consisting of institutions with
a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital
ratio of 6% or greater, and a leverage ratio of 5% or greater, and the
institution is not subject to an order, written agreement, capital directive or
prompt corrective action directive; (2) "Adequately capitalized" - consisting of
institutions with a total risk-based capital ratio of 8% or greater, a Tier 1
risk-based capital ratio of 4% or greater and a leverage ratio of 4% or greater,
and the institution does not meet the definition of a "well capitalized"
institution; (3) "Undercapitalized" - consisting of institutions with a total
risk-based capital ratio less than 8%, a Tier 1 risk-based capital ratio of less
than 4%, or a leverage ratio of less than 4%; (4) "Significantly
undercapitalized" - consisting of institutions with a total risk-based capital
ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a
leverage ratio of less than 3%; (5) "Critically undercapitalized" - consisting
of an institution with a ratio of tangible equity to total assets that is equal
to or less than 2%.
Financial institutions classified as undercapitalized or below are subject
to various limitations including, among other matters, certain supervisory
actions by bank regulatory authorities and restrictions related to (a) growth of
assets, (b) payment of interest on subordinated indebtedness, (c) payment of
dividends or other capital distributions, and (d) payment of management fees to
a parent holding company. The FDICIA requires the bank regulatory authorities
to initiate corrective action regarding financial institutions which fail to
meet minimum capital requirements. Such action may be taken in order to, among
other matters, augment capital and reduce total assets. Critically
undercapitalized financial institutions may also be subject to appointment of a
receiver or conservator unless the financial institution submits an adequate
capitalization plan.
27
<PAGE>
In addition to the capital guidelines described above, the Company and
Bank's Board of Directors, in consenting to administrative orders issued by the
FDIC and CDFI, have agreed that the Bank will maintain Tier 1 capital equal to
the greater of $14,000,000 or the equivalent of a Tier 1 capital to average
assets ratio of at least 7.0%.
The Company and Bank's actual capital amounts (in thousands) and ratios, as
of March 31, 1998, are also presented in the following table:
<TABLE>
<CAPTION>
FOR CAPITAL ADEQUACY
ACTUAL PURPOSES
- -------------------------------------------------------------------------------------------------------------
AS OF MARCH 31, 1998 AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets:) GREATER THAN GREATER THAN
Company $19,264 14.31% OR EQUAL TO $10,768 OR EQUAL TO 8.00%
GREATER THAN GREATER THAN
Regency Bank $16,392 12.42% OR EQUAL TO $10,558 OR EQUAL TO 8.00%
Tier 1 Capital (to Risk Weighted Assets): GREATER THAN GREATER THAN
Company $17,573 13.06% OR EQUAL TO $5,384 OR EQUAL TO 4.00%
GREATER THAN GREATER THAN
Regency Bank $14,734 11.16% OR EQUAL TO $5,279 OR EQUAL TO 4.00%
Tier 1 Capital (to Average Assets): GREATER THAN GREATER THAN
Company $17,573 9.29% OR EQUAL TO $7,567 OR EQUAL TO 4.00%
GREATER THAN GREATER THAN
Regency Bank $14,734 7.82% OR EQUAL TO $7,535 OR EQUAL TO 4.00%
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
- -----------------------------------------------------------------------------------------
AS OF MARCH 31, 1998 AMOUNT RATIO
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Total Capital (to Risk Weighted Assets:)
Company N/A
GREATER THAN GREATER THAN
Regency Bank OR EQUAL TO $13,198 OR EQUAL TO 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Company N/A
GREATER THAN GREATER THAN
Regency Bank OR EQUAL TO $7,919 OR EQUAL TO 6.00%
Tier 1 Capital (to Average Assets):
Company N/A
GREATER THAN GREATER THAN
Regency Bank OR EQUAL TO $9,418 OR EQUAL TO 5.00%
- -----------------------------------------------------------------------------------------
</TABLE>
RETURN ON EQUITY AND ASSETS
The following table sets forth the ratios of net income to average assets and
average shareholders' equity, and average shareholders' equity to average
assets. Also indicated is the Company's dividend payout ratio. (For purposes
of calculating average Shareholders' equity as used in these ratios, unrealized
losses on the Company's available-for-sale securities portfolio have been
included and the percentages shown have been annualized).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
QUARTER ENDED QUARTER ENDED
MARCH 31, 1998 MARCH 31, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Return on average assets 1.11% .54%
- --------------------------------------------------------------------------------
Return on average shareholders' equity 11.07% 6.97%
- --------------------------------------------------------------------------------
Average shareholders' equity to average assets 9.98% 7.74%
- --------------------------------------------------------------------------------
Dividend payout ratio - -
- --------------------------------------------------------------------------------
</TABLE>
YEAR 2000 COMPLIANCE
The inability of most computers, software, and other equipment utilizing
microprocessors to distinguish the year 1900 from the year 2000 poses
substantial risks to all financial institutions including the Company. The year
2000 problem is pervasive and complex. Virtually every financial institution,
service provider, and vendor will have its computing operations affected in some
way by the rollover of the two-digit year value to 00 if action is not taken to
fix the problem before the year 2000 arrives.
28
<PAGE>
The Company is currently engaged in a five-phase management program which
includes awareness, assessment, renovation, validation, and implementation. The
Company has identified all major applications and systems that may require
modification to ensure "Year 2000 Compliance." The scope of the project covers
all computer systems including PC and network hardware and software, and
mainframe and mainframe software. It also covers all equipment and other
systems utilized in bank operations or in the premises from which the Company
operates.
In addition, the Company has communicated with its large borrowers,
corporate customers, and major vendors upon which it relies to determine the
extent to which the Company is vulnerable to those third parties if they fail to
resolve their Year 2000 issues. However, there can be no guarantee that the
systems of other companies on which the Company's systems rely will be converted
on time, or that a failure to convert by another company, or a conversion that
is incompatible with the Company's systems, would not have a materially adverse
effect on the Company.
The Company will utilize both internal and external resources to implement
its Year 2000 Project. The Company expects to complete the majority of its
efforts by the end of 1998, leaving adequate time to assess and correct any
significant issues that may materialize. Purchased hardware and software will
be capitalized in accordance with normal policy. Personnel and all other costs
related to the project are being expensed as incurred. The majority of these
costs are expected to be incurred during 1998, and are not expected to have a
material impact on the Company's cash flows, results of operations, or financial
condition.
29
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27.1) Financial Data Schedule
(b) Reports on Form 8-K
(i) The Company filed a Form 8-K dated January 8, 1998, in
which it reported that the Registrant had successfully
completed its efforts to raise capital through a private
placement of common stock, providing a net infusion of
$5.9 million to the bank holding company. Also
announced, was the appointment of two new members to its
board, William J. Alessini and William J. Ruh.
(ii) The Company filed a Form 8-K dated February 10, 1998, in
which it reported that the Registrant issued a press
release announcing its fourth quarter results, which
states earnings of $333,000 or $0.18 per share in the
fourth quarter of 1997.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGENCY BANCORP
Date: May 5, 1998 By: /s/ Steven F. Hertel
----------------------------------
Steven F. Hertel
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 5, 1998 By: /s/ Steven R. Canfield
----------------------------------
Steven R. Canfield
Executive Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
31
<PAGE>
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
27.1 Financial Data Schedule 33
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 12,343
<INT-BEARING-DEPOSITS> 388
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,387
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 136,043
<ALLOWANCE> 2,335
<TOTAL-ASSETS> 192,127
<DEPOSITS> 169,761
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,093
<LONG-TERM> 0
0
0
<COMMON> 15,218
<OTHER-SE> 3,846
<TOTAL-LIABILITIES-AND-EQUITY> 192,127
<INTEREST-LOAN> 3,543
<INTEREST-INVEST> 547
<INTEREST-OTHER> 34
<INTEREST-TOTAL> 4,124
<INTEREST-DEPOSIT> 1,243
<INTEREST-EXPENSE> 1,283
<INTEREST-INCOME-NET> 2,841
<LOAN-LOSSES> 125
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 2,304
<INCOME-PRETAX> 899
<INCOME-PRE-EXTRAORDINARY> 899
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 519
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.19
<YIELD-ACTUAL> 6.81
<LOANS-NON> 2,063
<LOANS-PAST> 28
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,219
<CHARGE-OFFS> 21
<RECOVERIES> 12
<ALLOWANCE-CLOSE> 2,335
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,335
</TABLE>
