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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, 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
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(Exact name of registrant as specified in its charter)
STATE OF CALIFORNIA 77-0378956
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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
- ------------------- -----------------------------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
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COMMON STOCK
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 [ ].
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 10,1999 was $26,263,000.
As of March 10, 1999, the registrant had 2,624,374 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 1998 annual meeting of
shareholders into Part III. Items 10-13.
The Index to Exhibits is located at page 90.
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REGENCY BANCORP
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
<S> <C>
Item 1. Business ....................................................... 3
Item 2. Description of Properties ...................................... 13
Item 3. Legal Proceedings .............................................. 14
Item 4. Submission of Matters to a Vote of Security Holders ............ 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ....................................................... 15
Item 6. Selected Financial Data ........................................ 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................... 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..... 40
Item 8. Financial Statements and Supplementary Data .................... 45
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ...................................... 83
PART III
Item 10. Directors and Executive Officers of the Registrant ............. 83
Item 11. Executive Compensation ......................................... 83
Item 12. Security Ownership of Certain Beneficial Owners and Management . 83
Item 13. Certain Relationships and Related Transactions ................. 83
PART IV
Item14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 84
</TABLE>
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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; (6) changes in securities markets; and (7)
Year 2000 compliance problems. 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 full service facility and loan production
office located at 5240 N. Palm Ave., Fresno, California. The facility is open
from 9:00 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 has established a loan production office
in Modesto, California. The Bank has automated teller machines located at its
headquarters office and its Madera office. The Bank is insured under the
Federal Deposit Insurance Act and each depositor's account is insured up to
the legal limits thereon. The Bank is chartered (licensed) by
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the California Commissioner of Financial Institutions ("Commissioner") and
became a member of the Federal Reserve System in the third quarter of 1998.
Additionally, in the fourth quarter of 1998, the Bank was accepted as a
member of the Federal Home Loan Bank.
The Bank has one subsidiary, Regency Service Corporation ("RSC"), a
California corporation which engaged 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 note 4 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, 1998, these three categories accounted for approximately 66
percent, 28 percent and 6 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, 1998, the Bank had total deposits of $206.6 million.
Of this total, $54.2 million represented noninterest-bearing demand deposits,
$101.3 million represented interest-bearing demand deposits and interest-bearing
savings deposits, and $51.1 million 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.
Such activities typically involved the acquisition, development and sale of
the properties (but sometimes involved the sale of properties prior to
development) and historically were structured as limited partnerships in
which RSC was the limited partner and a local developer 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 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.
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As of December 31, 1998, RSC had divested of all real estate
investments and loans with the exception of one limited partnership interest
with one completed home as its primary asset. At December 31, 1998, this one
remaining partnership investment had been fully reserved for. For more
information regarding RSC and its financial performance, see "Item 7 - Regency
Service Corporation", below and additionally, note 4 of the Company's audited
financial statements included in Item 8.
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 percent 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 became a member of the Federal Reserve System in the third
quarter of 1998. Consequently, the Bank is subject to the supervision of, and
is regularly examined by, the Commissioner and the Board of Governors. 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 credit 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 and the Board of Governors and provide such additional
information as the Commissioner 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 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 percent 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
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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.
In 1995, pursuant to Congressional mandate, the FDIC reduced bank
deposit insurance assessment rates to a range from $0 to $0.27 per $100 of
deposits, dependent upon a bank's risk. The FDIC has continued these reduced
assessment rates through the first semiannual assessment period of 1999.
The Board of Governors and other federal banking agencies 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 percent of its assets and commitments to extend credit,
weighted by risk, of which at least 4.0 percent 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
percent ratio. For example, most home mortgage loans are placed in a 50
percent risk category and therefore require maintenance of capital equal to 4
percent of such loans, while commercial loans are placed in a 100 percent
risk category and therefore require maintenance of capital equal to 8 percent
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 shareholder's equity and qualifying perpetual preferred stock less
intangible assets and certain other adjustments. However, no more than 25
percent 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. Effective October 1, 1998 the Board of Governors and other federal
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bank regulatory agencies approved including in Tier 2 capital up to 45
percent of the pretax net unrealized gains on certain available-for-sale
equity securities having readily determinable fair values (i.e. the excess,
if any, of fair market value over the book value or historical cost of the
investment security). The federal regulatory agencies reserve the right to
exclude all or a portion of the unrealized gains upon a determination that
the equity securities are not prudently valued. Unrealized gains and losses
on other types of assets, such as bank premises and available-for-sale debt
securities, are not included in Tier 2 capital, but may be taken into account
in the evaluation of overall capital adequacy and net unrealized losses on
available-for-sale equity securities will continue to be deducted from Tier 1
capital as a cushion against risk.
The Board of Governors and other federal banking agencies have
adopted a revised minimum leverage ratio for bank holding companies as a
supplement to the risk-weighted capital guidelines. The old rule established
a 3 percent minimum leverage standard for well-run banking organizations
(bank holding companies and banks) with diversified risk profiles. Banking
organizations which did not exhibit such characteristics or had greater risk
due to significant growth, among other factors, were required to maintain a
minimum leverage ratio 1 percent to 2 percent higher. The old rule did not
take into account the implementation of the market risk capital measure set
forth in the federal regulatory agency capital adequacy guidelines. The
revised leverage ratio establishes a minimum Tier 1 ratio of 3 percent (Tier
1 capital to total assets) for the highest rated bank holding companies and
banks. All other bank holding companies and banks must maintain a minimum
Tier 1 leverage ratio of 4 percent with higher leverage capital ratios
required for banking organizations that have significant financial and/or
operational weaknesses, a high risk profile, or are undergoing or
anticipating rapid growth.
On December 19, 1991, President Bush signed the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). The Board of
Governors and other federal banking agencies 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 percent or greater, a Tier 1 risk-based
capital ratio of 6 percent or greater and a leverage ratio of 5 percent 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 percent or greater, a Tier 1 risk-based capital ratio of 4 percent
or greater and a leverage ratio of 4 percent 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 percent, a Tier 1 risk-based capital ratio of less
than 4 percent, or a leverage ratio of less than 4 percent; (4)
"Significantly undercapitalized" - consisting of institutions with a total
risk-based capital ratio of less than 6 percent, a Tier 1 risk-based capital
ratio of less than 3 percent, or a leverage ratio of less than 3 percent; (5)
"Critically undercapitalized" - consisting of an institution with a ratio of
tangible equity to total assets that is equal to or less than 2 percent.
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
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"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 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.
Under the FDICIA, the Board of Governors and other federal agencies
have adopted regulations which require banks to establish and maintain
comprehensive written real estate policies which address certain lending
considerations, including loan-to-value limits, loan
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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 Board of Governors and other federal banking 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 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 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 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.
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 a bank's ability to manage such risks and the risk
posed by non-traditional activities as important factors in assessing a
bank's overall capital adequacy.
The Board of Governors and other federal banking agencies issued a
joint agency policy statement during 1996 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.
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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.
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, 1998, the Bank's
legal lending limits to a single borrower and such borrower's related
interests were $3.0 million on an unsecured basis and $5.0 million on a fully
secured basis based on regulatory capital of $20.0 million.
The Bank's primary service area encompasses Fresno County and Madera
County. As cited in "The Market Share Report" published by the FDIC, as of
June 30, 1998, there were 27 banks and savings and loans operating in Fresno
County with total deposits of $5.4 billion. At that time, the Bank held a
total of $164.5 million in deposits at its Fresno branches representing
approximately 3.1 percent of total bank and savings and loan deposits in
Fresno County. Additionally, there were 15 banks and savings and loans
operating in Madera County with total deposits of $601.6 million. At June 30,
1998, the Bank held a total of $21.1 million in deposits, representing
approximately 3.5 percent 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
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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 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.
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 1999.
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,
11
<PAGE>
1996, the OCC issued final regulations permitting national banks to engage in
a wider range of activities through subsidiaries. An "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 an expedited application process. In addition, the
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 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 federal and
state 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.
12
<PAGE>
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 percent 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
percent and not more than 5 percent. 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 percent per adjustment. 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 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 $636,000,
$528,000 and $540,000, for the years ended December 31, 1998, 1997 and 1996,
respectively.
13
<PAGE>
At December 31, 1998, 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 LEASES OPERATING LEASES
<S> <C> <C>
1999 $ 48 $ 573
2000 76 544
2001 76 492
2002 76 492
2003 76 492
Thereafter 2,450 4,294
------ -------
Total minimum lease payments 2,802 $ 6,887
Amount representing interest (2,255) -------
------ -------
------
Net present value of minimum
lease payments $ 547
------
</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 percent shareholder
of the Company or the Bank, or any associate of any such director, officer,
affiliate or 5 percent 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 1998.
14
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) MARKET INFORMATION
In May 1998, the Company's Stock began trading on the Nasdaq National
Market System under the symbol REFN. Prior to that date there was limited
trading in and no established public market for the Company's Common Stock.
Hoefer & Arnett, Incorporated, Sutro & Co., Banc Stock Exchange and Van Kasper &
Company act as market makers and facilitate trades in the Company's Common
Stock. Based on information provided by Nasdaq and the aforementioned market
makers, 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>
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
1998
First Quarter 10.250 14.875
Second Quarter 13.625 14.625
Third Quarter 11.000 16.125
Fourth Quarter 12.937 14.812
</TABLE>
The bid price for the Company's Common Stock was $14.50 as of March 10, 1999.
(b) HOLDERS
As of March 10, 1999, there were approximately 650 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 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
15
<PAGE>
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 shareholders' 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.
During 1998 and 1997, the Company paid no cash dividends. During
1996, the Company paid four quarterly cash dividends of $.06 per common
share. 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) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Interest income $ 18,636 $15,286 $ 13,227 $12,841 $ 10,708
Interest expense 5,452 5,321 4,694 5,092 2,989
------- ------ ----- ----- -----
Net interest income 13,184 9,965 8,533 7,749 7,719
Provision for credit losses 375 1,353 - 470 487
------- ------ ----- ----- -----
Net interest income after provision
for credit losses 12,809 8,612 8,533 7,279 7,232
Non-interest income $ 2,962 $ 2,687 $ 3,109 $ 1,883 $ 4,026
Non-interest expense 9,455 13,406 9,902 12,105 8,327
------- ------ ----- ----- -----
Income (loss) before income taxes 6,316 (2,107) 1,740 (2,943) 2,931
Income taxes (benefit) 2,643 (833) 732 (1,176) 1,195
------- ------ ----- ----- -----
Net Income (loss) $ 3,673 $ (1,274) $ 1,008 $ (1,767) $ 1,736
------- ------ ----- ----- -----
------- ------ ----- ----- -----
FINANCIAL CONDITION AND CAPITAL
YEAR END BALANCES:
Total assets $ 231,967 $198,241 $ 181,058 $ 163,682 $ 155,802
Net loans 147,588 126,430 99,770 94,529 89,589
Investments in real estate - 4,338 16,926 17,954 16,209
Deposits 206,637 176,279 159,802 143,745 137,889
Shareholders' equity 22,449 18,734 13,470 12,942 14,327
FINANCIAL CONDITION AND CAPITAL
AVERAGE BALANCES:
Total assets $ 207,481 $186,243 $ 166,534 $ 160,215 $ 144,734
Net loans 137,389 110,025 98,333 91,046 83,230
Investments in real estate 929 12,538 17,892 17,801 15,667
Deposits 183,466 168,296 143,723 142,943 128,288
Shareholders' equity 20,218 13,272 13,358 14,948 13,737
FINANCIAL RATIOS:
Return on average assets 1.77% (0.68%) 0.61% (1.10%) 1.20%
Return on average equity 18.17% (9.60%) 7.55% (11.82%) 12.64%
Average equity to average assets 9.75% 7.13% 8.02% 9.33% 9.49%
Dividend payout ratio - - 43.33% (19.93%) 9.50%
Allowance for loan losses to total loans 1.74% 1.71% 1.58% 1.85% 1.69%
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ 1.40 $ (.68) $ .55 $ (.98) $ 1.00
Diluted $ 1.31 $ (.68) $ .54 $ (.98) $ .94
SHARES ON WHICH EARNINGS (LOSS) PER
COMMON SHARE WERE BASED:
Basic 2,624,000 1,860,000 1,818,000 1,805,000 1,734,000
Diluted 2,800,000 1,860,000 1,872,000 1,805,000 1,841,000
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; (6)
changes in securities markets; and (7) Year 2000 compliance problems. Therefore,
the information set forth therein should be carefully considered when evaluating
the business prospects of the Company and the Bank.
OVERVIEW
The 1998 fiscal year was a year of growth and record profits for
Regency Bancorp. Highlights included overall asset growth of 17.0 percent with
total assets reaching $232.0 million at year end, completion of the divestiture
of RSC's real estate investment assets, a return to profitability with net
income after tax reaching $3.7 million for the year, and, in May the Company's
common stock began trading on the Nasdaq national market system under the symbol
REFN. In September 1998, the Bank received written acknowledgement from the
Federal Deposit Insurance Corporation ("FDIC") and California Department of
Financial Institutions ("CDFI") that the administrative orders issued in
November 1997 had been rescinded. Additionally, the Bank was accepted as a
member of both the Federal Reserve Bank and the Federal Home Loan Bank of San
Francisco.
For the year ended December 31, 1998, the Company recorded net income
of $3.7 million representing a $4.9 million improvement from a net loss of $1.3
million in 1997 and a $2.7 million increase from income of $1.0 million in 1996.
Record income for 1998 was primarily the result of a decrease in expenses
associated with RSC's divestiture, as well as a significantly larger earning
asset base resulting in greater interest income. 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.
Earnings per share for 1998 were $1.40 (basic) and $1.31 (diluted),
compared to a net loss per share for 1997 of $.68 (basic and diluted) and net
income per share of $.55 (basic) and $.54 (diluted) in 1996. For the year ended
December 31, 1998, return on average assets and average equity were 1.77 and
18.17 percent, respectively. Shareholders' equity increased in 1998 by $3.7
million or 19.8 percent, primarily as a result of income generated by the
Company's subsidiaries. Shareholders' equity increased by $5.3 million during
1997 primarily as a result of the Company's capital offering offset by the net
loss for the year. The Company's ratio of common shareholders' equity to total
assets was 9.7 percent at December 31, 1998, compared to 9.5 percent at December
31, 1997 and 7.4 percent at December 31, 1996. The Company's and Bank's levels
of risk based capital to assets were considered "well capitalized" at year-end.
18
<PAGE>
During 1998, the Company effectively completed divestiture of RSC's
real estate holdings reducing the Company's investment in real estate from
$4.1 million at December 31, 1997 to zero at year-end 1998. At December 31,
1996 the Company's investment in real estate was $16.3 million. The
elimination of nonperforming real estate assets had a significant effect on
the Company's overall increase in earning assets and an improved ratio of
earning assets to total assets. For the year ended December 31, 1998, the
Company's ratio of average earning assets to average total assets was 90.3
percent, compared to 83.9 percent in 1997 and 79.5 percent in 1996. The
higher levels of earning assets achieved in 1998 were a significant reason
for the increase in interest income, and subsequently the increase in overall
net income achieved during 1998.
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 years ended December 31, 1998,
1997 and 1996, 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 asset balances for the periods indicated.
19
<PAGE>
CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND INTEREST RATES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands, except AVERAGE YIELD/ INTEREST AVERAGE YIELD/ INTEREST AVERAGE YIELD/ INTEREST
percentages) BALANCE RATE BALANCE RATE BALANCE RATE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans (1) $ 139,891 11.29% $ 15,793 $ 111,891 11.18% $12,506 $ 100,052 11.25% $ 11,255
Investment securities (2) 39,149 6.17% 2,416 35,879 6.49% 2,328 29,013 6.22% 1,805
Federal funds sold & other 8,304 5.14% 427 8,417 5.36% 452 3,254 5.13% 167
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 187,344 9.95% 18,636 156,187 9.79% 15,286 132,319 10.00% 13,227
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets:
Allowances for credit losses (2,502) (1,866) (1,719)
Cash and due from banks 11,629 9,562 8,482
Real estate investments 929 12,538 17,518
Other real estate owned 673 462 374
Premises and equipment, net 1,649 2,041 2,296
Cash surrender value of
life insurance 3,104 2,965 2,829
Accrued interest receivable
and other assets 4,655 4,354 4,435
- --------------------------------------------------------------------------------------------------------------------------------
Total average assets $ 207,481 $ 186,243 $ 166,534
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Transaction accounts $ 50,218 2.32% $ 1,166 $ 50,240 2.52% $ 1,264 $ 46,237 2.67% $ 1,235
Savings accounts 42,223 3.85% 1,625 34,150 4.09% 1,397 25,327 4.18% 1,058
Time deposits 47,923 5.34% 2,557 47,223 5.47% 2,580 41,791 5.36% 2,241
Federal funds purchased
and other 874 11.94% 104 3,104 2.58% 80 6,795 2.36% 160
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 141,238 3.86% 5,452 134,717 3.95% 5,321 120,150 3.91% 4,694
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing
liabilities:
Transaction accounts 43,102 36,683 30,369
Other liabilities 2,923 1,571 2,657
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 46,025 172,971 153,176
- --------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock 15,176 9,202 8,868
Retained earnings 4,818 4,029 4,529
Accumulated other
comprehensive income 224 41 (39)
- --------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 20,218 13,272 13,358
- --------------------------------------------------------------------------------------------------------------------------------
Total average liabilities and
shareholders' equity $ 207,481 $ 186,243 $ 166,534
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 13,184 $ 9,965 $ 8,533
- --------------------------------------------------------------------------------------------------------------------------------
Interest income as a
percentage of average
interest-earning assets 9.95% 9.79% 10.00%
Interest expense as a
percentage of average
interest-earning assets 2.91% 3.41% 3.55%
- --------------------------------------------------------------------------------------------------------------------------------
Net interest margin 7.04% 6.38% 6.45%
- --------------------------------------------------------------------------------------------------------------------------------
</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 $1,331,000,
$1,252,000 and $1,232,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
(2) Applicable nontaxable securities yields have not been calculated on a
taxable-equivalent basis
20
<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) 1998 - 1997 1997 - 1996
- --------------------------------------------------------------------------------------------------------------------
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 $ 3,160 127 $ 3,287 $ 1,323 (72) 1,251
Investment securities (2) 190 (102) 88 443 80 523
Federal funds sold and other (6) (19) (25) 277 8 285
- --------------------------------------------------------------------------------------------------------------------
Total $ 3,344 6 $ 3,350 $ 2,043 16 $ 2,059
- --------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Transaction accounts (1) (97) (98) 88 (59) 29
Savings accounts 304 (76) 228 360 (21) 339
Time deposits 40 (63) (23) 295 44 339
Federal funds purchased and other (6) 30 24 (97) 17 (80)
- --------------------------------------------------------------------------------------------------------------------
Total 337 (206) 131 646 (19) 627
- --------------------------------------------------------------------------------------------------------------------
Increase in net interest income $ 3,007 212 $ 3,219 $ 1,397 35 $ 1,432
- --------------------------------------------------------------------------------------------------------------------
</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 $3.4 million or 21.9 percent in 1998 to
$18.6 million. During 1997, interest income increased $2.1 million or 15.6
percent to $15.3 million. Interest expense in 1998 increased $131,000 or 2.4
percent to $5.5 million from $5.3 million in 1997. In 1997, interest expense
increased by $627,000 or 13.4 percent. One of the primary reasons for the
Company's increased profitability in 1998 was the increase in net interest
income. Net interest income for 1998 increased by $3.2 million or 32.3 percent.
The Company's net interest margin increased to 7.04 percent in 1998 from 6.38
percent in 1997 and 6.45 percent in 1996. The higher margin for 1998 resulted
from a higher percentage of loans to earning assets and a recovery of nonaccrued
interest on loans RSC had carried on its books for several years. Management
expects the net interest margin will return to more normalized levels in 1999.
Average interest-earning assets increased by $31.2 million in 1998 to
$187.3 million compared to $156.2 million in 1997 and $132.3 million in 1996.
For the year ended December 31, 1998, growth in average interest earning assets
was paced by growth in average loans outstanding of 25.0 percent, growth in
average investments of 9.1 percent, and a decline in average federal funds sold
of 1.4 percent. Average interest bearing liabilities grew by 4.8 percent overall
in 1998 with the majority of growth occurring in the Bank's preferred savings
product, which experienced an increase of $8.1 million or 23.6 percent. The
other subcategories of deposits had only minor growth or, as was the case of
Federal Funds purchased, a decline on average for the year.
For the year ended December 31, 1997, average interest-earning assets
increased $23.9 million to $156.2 million, compared to $132.3 million in 1996.
In 1997, growth in average interest earning assets was spread over all earning
asset categories with federal funds sold increasing 158.7
21
<PAGE>
percent, investments increasing 23.7 percent and loans increasing 11.8
percent. Average interest bearing liabilities grew by $14.6 million in 1997
to $134.7 million from $120.2 million in 1996. All major interest bearing
liability categories grew during 1997 with the exception of federal funds
purchased. Of note in 1997 was a substantial reduction in Federal Funds
purchased and other borrowings. During 1997, the Company was able to retire
all debt incurred as a result of the acquisition of limited partnership
properties involving RSC.
NONINTEREST INCOME
The Company receives a significant portion of its income from
noninterest sources related both to activities conducted by the Bank (loan
originations, servicing and depositor service charges), as well as from RIA
(income from investment management services). The following table presents the
dollar amount of the Company's noninterest income for the years ended December
31, 1998, 1997 and 1996 respectively.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NONINTEREST INCOME:
Gain on sale of loans $356 $608 $ 1,315
Depositor service charges 500 397 338
Income from investment management services 916 810 682
Gain (loss) on sale of securities 15 (19) -
Gain on sale of premises & equipment 4 252 18
Servicing fees on loans sold 119 329 322
Other 1,052 310 434
- --------------------------------------------------------------------------------------------------------------------
TOTAL $2,962 $ 2,687 $ 3,109
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
NONINTEREST INCOME 1998 VS. 1997
Noninterest income increased $275,000 or 10.2 percent in 1998 to
$2.96 million. The increase was primarily the result of an increase of
$742,000 in other income resulting from recoveries of previously charged off
investments in real estate and loans made by Regency Service Corporation of
$739,000. Additional noninterest income categories reflecting an increase in
1998 included: depositor service charges, up $103,000 primarily as a result
of growth in the Company's deposit base; income from RIA investment
management services, up $106,000 as a result of increased assets under
management; and gains on the sale of securities, up $34,000. Noninterest
income categories with decreased income in 1998 were led by gain on sale of
loans with a decline of $252,000. Gain on sale of loans declined primarily as
a result of lower amounts of SBA loans sold throughout the year. The majority
of the income in this category in 1998 was the result of newly originated
mortgage loans generated by the Bank. Additional noninterest income
categories declining in 1998 included: gain on sale of premises and
equipment, down $248,000; and servicing fees on loans sold, down $210,000.
During 1997, the Company recognized a gain on the sale of certain facilities
resulting in greater than normal gain from the sale of premises & equipment.
The Company generally does not sell non-financial assets, consequently,
1997's gain of $252,000 was a nonrecurring event and 1998's reduced income
in this category should be more reflective of future income in this category.
Income from servicing fees on loans sold is dependent on the volume of loans
serviced and the speed at which serviced loans pre-pay their principal
balances. The Company's overall servicing portfolio declined in 1998 as older
loans in the servicing portfolio paid off while new loans originated were
held on the Company's balance sheet rather than sold and serviced. The
decline in portfolio size combined with the amortization of the
future-servicing asset
22
<PAGE>
associated with a number of loans that paid off at an accelerated rate
combined to reduce income in this category.
NONINTEREST INCOME 1997 VS. 1996
For the year ended December 31, 1997, noninterest income decreased
$422,000 or 13.6 percent to $2.7 million from $3.1 million in 1996. The overall
decrease in noninterest income was primarily the result of decreased income from
the sale of loans. For the year, gains on the sale of loans were down $707,000,
primarily as a result of the Company's decision to retain the guaranteed portion
of SBA loans originated to increase interest income, rather than sell the
guaranteed portion to generate immediate noninterest income. Additional
noninterest income categories reflecting declines in 1997 included: gain (loss)
on sale of investments down $19,000 from 1996; and other income declining
$124,000. The decline in other noninterest income was primarily a result of a
decrease in broker fees of $84,000. Noninterest income categories reflecting an
increase in 1997 included: gain on sale of premises & equipment, up $234,000 as
a result of the Company's recognition of the gain associated with the sale of
certain facilities; depositor service fee income, up $59,000 primarily as a
result of growth in the Bank's deposit base; income from RIA investment
management services, up $128,000 as a result of a larger asset base under
management; and servicing fee income, up $7,000 as a result of a larger
servicing portfolio of loans.
REGENCY INVESTMENT ADVISORS
As described above, Regency Investment Advisors is a wholly
owned subsidiary of Regency Bancorp providing investment management and
consulting services on a fee only basis. Revenue from RIA is primarily a
result of fees generated from assets under management. At December 31, 1998,
RIA's assets under management were $110.3 million, a 27.5 percent increase
from assets under management of $86.5 million at December 31, 1997. During
1997, assets under management increased $9.3 million or 12.0 percent from
$77.2 million at December 31, 1996. Assets in client accounts managed by RIA
are not reflected in the consolidated assets of the Company.
Revenue from RIA's operations increased $106,000 or 13.1 percent in 1998 to
$916,000 from $810,000 in 1997. In 1996, revenue from investment management
services was $682,000. 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 $217,000, $181,000
and $55,000 in the years ended December 31, 1998, 1997 and 1996, respectively.
23
<PAGE>
NONINTEREST EXPENSE
Noninterest expense reflects the costs of products, services, systems,
facilities and personnel for the Company. The following table presents the
Company's noninterest expense, stated both as dollars and as a percentage of
average assets, for the years ended December 31, 1998, 1997 and 1996
respectively.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(In thousands, except percentages) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NONINTEREST EXPENSE:
Salaries and related benefits $5,134 2.47% $4,782 2.57% $4,561 2.74%
Occupancy 1,559 .75% 1,639 .88% 1,568 .94%
FDIC insurance and regulatory assessments 270 .13% 120 .06% 63 .04%
Marketing 475 .23% 450 .24% 428 .26%
Professional services 684 .33% 461 .25% 749 .45%
Directors' fees and expenses 219 .11% 270 .15% 383 .23%
Management fees for real estate projects - - 120 .07% 488 .29%
Supplies, telephone and postage 312 .15% 329 .18% 349 .21%
(Gain) loss from investments in real estate (171) (.08%) 3,973 2.13% 351 .21%
Other 973 .47% 1,262 .68% 962 .58%
- --------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSE $9,455 4.56% $ 13,406 7.20% $9,902 5.95%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
NONINTEREST EXPENSE 1998 VS. 1997
Noninterest expenses decreased by $3.95 million or 29.5 percent to $9.5
million in 1998 from $13.4 million in 1997. The 1998 decrease in noninterest
expense resulted from a gain experienced by RSC on investments in real estate of
$171,000, compared to a loss of $3.97 million during 1997. When compared to
average assets for the respective periods, noninterest expense decreased to 4.56
percent from 7.20 percent.
Additional noninterest expense categories reflecting a decrease for the
year included: occupancy expense, down $80,000 to $1.6 million primarily as a
result of lower amounts of depreciation on fixed assets; director's fees and
expense, down $51,000 to $219,000 as a result of reduced board fees and a
streamlined meeting schedule; management fees for real estate projects, down
$120,000 to zero as a result of the cancellation of RSC's third party management
contract; and other noninterest expense, down $289,000. In 1997, other expense
was abnormally high due to expenses related to the charge-off of accounts
receivable at RSC. No similar expense occurred in 1998.
Noninterest expense categories reflecting an increase in 1998 included;
salaries and related benefits, up $352,000 or 7.4 percent due primarily to an
increase in bonuses paid under the Company's incentive compensation plan; FDIC
insurance and regulatory assessments, up $150,000 or 125.0 percent as a result
of the regulatory orders the Bank was under until September 1998; marketing, up
25,000 or 5.6 percent primarily as a result of increased radio advertising; and
professional services, up $223,000 or 48.4 percent as a result of increased
legal expense related to the Company's capital offering, Nasdaq listing,
regulatory orders, as well as, increased audit expense related to the Bank's
regulatory orders and increased consulting expense related to the Company's Year
2000 project. Management expects the expense categories of FDIC insurance and
professional services will be reduced in 1999 with the termination of the Bank's
regulatory orders and the nonrecurring professional fees related to the
Company's capital offering and Nasdaq listing.
24
<PAGE>
NONINTEREST EXPENSE 1997 VS. 1996
Noninterest expenses increased by $3.5 million to $13.4 million in 1997
from $9.9 million in 1996. This increase was a significant contributing factor
to the Company's overall net loss for the year. The primary cause of the
increase in noninterest expense came as a result of losses associated with RSC's
divestiture of investments in real estate, which increased by $3.6 million in
1997. When compared to average assets for the respective periods, noninterest
expense increased to 7.20 percent from 5.95 percent.
Additional noninterest expense categories increasing in 1997 included:
salaries and related benefits, up $222,000 or 4.9 percent to $4.8 million,
primarily as a result of higher commissions paid to staff on incentive based
compensation; occupancy expense, up $72,000 to $1.6 million, primarily as a
result of a full year's rental expense related to the Bank's Madera office
(opened in late 1996), as well as higher maintenance and utility expense; FDIC
insurance and regulatory assessments, up $57,000 to $120,000, primarily as a
result of the administrative orders issued to the Bank and lower capital levels
at the mid-year assessment period; and other expenses, up $299,000 to $1.3
million, primarily as a result of a one-time expense related to the write-off of
an unsecured account receivable held by RSC.
Noninterest expense categories that decreased in 1997 compared to 1996
included: professional services, down $288,000 to $461,000, primarily as a
result of lower legal and accounting expenses related to RSC; and management
fees paid for real estate projects, down $368,000 to $120,000 as a result of a
restructured management contract with RSC's project manager. Additionally,
supplies, telephone and postage declined by $21,000 in 1997.
REGENCY SERVICE CORPORATION
As described above, Regency Service Corporation is a wholly owned
subsidiary of Regency Bank and has engaged in real estate development activities
primarily in the Fresno/Clovis area since 1986.
For the year ended December 31, 1998, RSC experienced a gain from sales
of real estate in the amount of $171,000 compared to a loss of $4.0 million for
the year ended December 31, 1997, and a loss of $351,000 for the year ended
December 31, 1996. The gain in 1998 resulted from the sale of several properties
which had previously been written down to reflect RSC's anticipated sales
proceeds. For the year ended December 31, 1998, on a stand alone basis, RSC's
activities (including gains from the sale of properties, recoveries of RSC's
provision for real estate losses and credit losses, plus operating expenses),
increased the Company's overall pre-tax income by $1.6 million compared to a
decrease of $5.7 million in 1997 and a decrease of $1.5 million in 1996,
respectively.
BALANCE SHEET ANALYSIS
For the year ended December 31, 1998, total assets increased by $33.7
million or 17.0 percent to $232.0 million from $198.2 million at December 31,
1997. During 1997, total assets increased by $17.2 million or 9.5 percent, from
$181.0 million at December 31, 1996.
For 1998, total loans increased $21.5 million or 16.6 percent to $151.2
million from $129.6 million at December 31, 1997, primarily as a result of
growth in the SBA and B&I loan portfolios.
25
<PAGE>
During 1997, total loans increased $27.3 million or 26.7 percent as a result
of the Company's decision to hold newly originated SBA loans rather than sell
the guaranteed portion in the secondary market. Investment securities
increased 30.2 percent to $48.2 million at December 31, 1998, from $37.0
million at year-end 1997.
During 1998, the Company effectively completed divestiture of RSC's
real estate investments reducing the Company's investment in real estate from
$4.3 million at December 31, 1997, to zero at year-end 1998. At December 31,
1996, the Company's investment in real estate was $16.5 million. The
elimination of nonperforming real estate assets has been a significant cause
of the Company's overall increase in earning assets and an improved ratio of
earning assets to total assets. For the year ended December 31, 1998, the
Company's ratio of average earning assets to average total assets was 90.3
percent, compared to 83.9 percent in 1997, and 79.5 percent in 1996. The
higher levels of earning assets was a significant reason for the increase in
net interest income in 1998 compared to 1997.
Deposits increased during 1998 by $30.4 million or 17.2 percent to end
the year at $206.6 million. During 1997, deposits increased $16.5 million or
10.3 percent to $176.3 million from $159.8 million at December 31, 1996.
Interest-bearing deposits grew 17.7 percent in 1998 while noninterest-bearing
deposits grew 16.0 percent. Notes payable and capital lease obligations were
little changed during 1998 and represent the capital lease obligation on the
Company's Palm branch facility. During 1997, notes payable decreased 90.7
percent or $4.9 million as the Company paid off all debts related to the
acquisition of real estate properties from RSC's former partners.
Shareholders' equity increased in 1998 by $3.7 million or 19.8 percent
primarily as a result of income generated by the Company's subsidiaries.
Shareholders equity increased by $5.3 million during 1997 primarily as a result
of the Company's capital offering offset by a net loss for the year.
INVESTMENT SECURITIES
The Company maintains a securities portfolio consisting of U.S.
Treasury, U.S. Government agencies and corporations, state and political
subdivisions, asset-backed and other securities. An independent custodian holds
investment securities in safekeeping. The provisions of SFAS No. 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. If a security is sold, any gain or loss is recorded as a charge to earnings
and the equity adjustment is reversed. At December 31, 1998, the Bank held $46.9
million in securities classified as available for sale. At December 31, 1998, an
unrealized gain of $220,000, net of taxes of $159,000, related to these
securities, was reflected in shareholders' equity. The Company had no securities
classified as held-to-maturity or as trading securities at December 31, 1998 or
1997, respectively. For more information on investment securities, see Notes 1
and 2 to the consolidated financial statements.
26
<PAGE>
The following table reflects the carrying amount (fair value) of the Company's
investment securities available-for-sale as of December 31, 1998, 1997, and 1996
respectively.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
AVAILABLE -FOR-SALE SECURITIES 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
(In thousands) Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasuries $ 1,003 $ 1,008 $ 2,007 $ 2,012 $ 2,020 $ 2,030
U.S. Government Agencies 16,434 16,468 17,431 17,489 21,408 21,383
Mortgage-backed Securities 17,761 17,779 11,541 11,647 7,972 7,948
State and Political Subdivisions 11,166 11,488 5,441 5,624 1,517 1,559
Equity Securities 247 247 214 214 350 350
- -------------------------------------------------------------------------------------------------------------------
$46,611 $46,990 $ 36,634 $ 36,986 $33,267 $33,270
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the relative maturities and yields of the
Company's available-for-sale securities at December 31, 1998 based on amortized
cost. Weighted average yields have been computed by dividing annual interest
income, adjusted for amortization of premium and accretion of discount, by the
amortized value of the related security. Yields on state and political
subdivision securities have not been calculated on a fully taxable equivalent
basis.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN THROUGH THROUGH AFTER
SECURITIES AVAILABLE-FOR-SALE (1) ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasuries $ 1,003 5.47% - - - - - - $ 1,003 5.47%
U.S. Government agencies - - $ 1,049 6.11% $15,385 6.47% - - 16,434 6.45%
Mortgage-backed securities - - 278 8.47% 1,884 5.91% $15,599 6.37% 17,761 6.36%
State and political subdivisions 375 5.72% 743 5.96% 1,182 4.46% 8,866 4.84% 11,166 4.90%
Equity Securities 247 5.55% - - - - - - 247 5.55%
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,625 5.54% $ 2,070 6.37% $18,451 6.37% $24,465 5.82% $46,611 6.02%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Yields calculated on nontaxable securities have not considered tax
equivalent effects.
LOAN PORTFOLIO
The following table shows the composition of the Company's loan portfolio, by
type of loan, as of December 31, for the years indicated:
<TABLE>
<CAPTION>
LOAN PORTFOLIO COMPOSITION:
- -----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS,
EXCEPT PERCENTAGES) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $99,341 65.7% $ 75,487 58.3% $56,625 55.4% $54,150 55.7% $46,374 50.3%
Real estate:
Construction 25,192 16.7% 30,128 23.2% 23,640 23.1% 23,706 24.4% 29,857 32.4%
Real estate mortgage 16,682 11.0% 14,900 11.5% 13,260 12.9% 10,389 10.7% 9,318 10.1%
Consumer and other 9,936 6.6% 9,120 7.0% 8,778 8.6% 8,892 9.2% 6,559 7.2%
- -----------------------------------------------------------------------------------------------------------------------
SUBTOTAL 151,151 100% 129,635 100% 102,303 100% 97,137 100% 92,108 100%
- -----------------------------------------------------------------------------------------------------------------------
Less:
Allowances
for credit losses 2,631 2,219 1,615 1,784 1,541
Deferred loan fees 492 363 392 356 542
Unearned discount 440 623 526 468 436
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LOANS, NET $147,588 $126,430 $99,770 $94,529 $89,589
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
The following table represents the maturity distribution of the loan portfolio
as of December 31, 1998.
<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 $28,894 $14,134 $56,313 $99,341
Real estate construction 23,178 1,530 484 25,192
Real estate mortgage 3,115 7,164 6,403 16,682
Consumer and other 1,299 2,295 6,342 9,936
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $56,486 $25,123 $69,542 $151,151
- ---------------------------------------------------------------------------------------------------------------------
Fixed rate 2,217 2,390 2,261 6,868
Variable rate 54,269 22,733 67,281 144,283
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $56,486 $25,123 $69,542 $151,151
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
During 1998, the Bank continued its success in SBA lending, leading the
15 county Fresno SBA district in the dollar volume of loans made for the seventh
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 an SBA loan guarantee. For the B&I fiscal year ended
September 30, 1998, the Bank was the leading B&I lender in California in new
loans made.
Commercial loans, including SBA and B&I loans, comprised approximately
65.7 percent of the Company's loan portfolio at December 31, 1998, compared to
58.3 percent at December 31, 1997, primarily as a result of the Bank holding
newly originated SBA and B&I loans in its portfolio rather than selling these
loans on the secondary market. Commercial loans are generally made to small and
mid-size businesses and professionals. Commercial loans are diversified as to
industries and types of business, with no material industry concentrations. Most
of these loans have floating rates based upon underwriting analysis. The primary
source of repayment on most commercial loans is cash flow from the primary
business. Additional collateral in the form of real estate, cash, accounts
receivable, inventory or other financial instruments is often obtained as a
secondary source of repayment.
Real estate construction lending comprised 16.7 percent of the
Company's loan portfolio at December 31, 1998, compared to 23.2 percent of
the Company's loan portfolio at December 31, 1997. These loans are primarily
made for the construction of single family residential housing. Loans in this
category may be made to the homebuyer 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 11.0 percent of the loan portfolio
at December 31, 1998, compared to 11.5 percent at December 31, 1997. Real estate
mortgage loans are made up of non-residential properties and 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
28
<PAGE>
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, 1998, comprising 6.6 percent of the loan portfolio compared to 7.0
percent of total loans at December 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 AND CONCENTRATIONS
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 are 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.
Generally, loans are secured by various forms of collateral. The loans
are expected to be repaid from income of the borrower or with proceeds from the
sale of assets securing the loans. The Company's loan policy requires sufficient
collateral to meet the Company's relative risk criteria for each borrower. The
Company's collateral mainly consists of real estate, cash, accounts receivable,
inventory and other financial instruments. The Company either maintains
possession of the collateral in safekeeping or perfects a security interest with
the State of California. The Company's largest concentration of loans based on
collateral is in real estate mortgages, including commercial real estate, 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. If a significant decline
in real estate property values were to occur in Fresno County, loans associated
with these collateral types could become impaired as to their full
collectability should default occur.
The Company does not believe there to be any concentration of loans in
excess of 10 percent of total loans, other than those disclosed above, which
would 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" below.
29
<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, 1998, nonaccrual loans totaled $1.2 million or .79
percent of total loans, compared to $1.7 million or 1.34 percent at December 31,
1997, and $3.3 million or 3.23 percent at December 31, 1996. The decrease in
total nonaccrual loans was primarily the result of the Company's divestiture of
RSC's real estate development assets including loans made by RSC to facilitate
the divestiture of partnership properties. As of December 31, 1998, RSC had no
loans outstanding. Of the total nonaccrual loans at December 31, 1997, $1.1
million represented loans RSC had made to facilitate the sale of former
partnerships.
Of the nonaccrual loans at December 31, 1998, $831,000 represented the
portion of SBA loans that are guaranteed by the SBA. Beginning in 1997, the SBA
changed the requirements for banks originating SBA loans, which are subsequently
sold in the secondary market. Under the current 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 requirement it is expected that the Bank's
SBA non-accrual loan levels will be slightly higher than in prior years.
The gross interest income that would have been recorded for loans
placed on nonaccrual status was $103,000, $254,000 and $276,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
30
<PAGE>
The following table reflects the dollar value of various
nonperforming assets, allowance for credit losses, assets and loans, as well
as various nonperforming asset ratios as of December 31, 1998, 1997, 1996,
1995 and 1994, respectively.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(In thousands, except percentages) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NONPERFORMING ASSETS:
Nonaccrual RSC loans $- $ 1,138 $ 3,250 $505 $-
Nonaccrual Bank loans 1,197 598 51 76 391
- --------------------------------------------------------------------------------------------------------------------
Nonperforming loans 1,197 1,736 3,301 581 391
Other real estate owned 684 503 437 341 299
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming assets 1,881 2,239 3,738 922 690
- --------------------------------------------------------------------------------------------------------------------
Accruing loans 90 days past due 16 48 19 725 58
- --------------------------------------------------------------------------------------------------------------------
Total loans before allowance for losses $151,151 $ 129,635 $102,303 $97,137 $91,130
Total assets 231,967 198,241 181,058 163,682 155,802
Allowance for possible credit losses (2,631) (2,219) (1,615) (1,784) (1,541)
- --------------------------------------------------------------------------------------------------------------------
RATIOS:
Nonperforming loans to total loans .79% 1.34% 3.23% .60% .43%
Nonperforming loans to total loans
(excluding RSC loans) .79% .46% .05% .08% .43%
Nonperforming assets to:
Total loans 1.24% 1.73% 3.65% .95% .76%
Total loans and OREO 1.24% 1.73% 3.64% .95% .75%
Total assets .81% 1.13% 2.06% .56% 44%
Allowance for possible credit losses to
total nonperforming assets 139.91% 99.11% 43.20% 193.5% 223.3%
Allowance for possible credit losses to loans 1.74% 1.71% 1.58% 1.85% 1.69%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Management is not aware of any potential problem loans which were
accruing and current at December 31, 1998, where serious doubt exists as to the
ability of the borrower to comply with present repayment terms.
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.
For the year ended December 31, 1998, the Company had net recoveries of
$37,000 or (.03) percent of average loans. The net recoveries in 1998 were the
result of net charge-offs of $105,000 on the Bank's loan portfolio, offset by
recoveries of $142,000 on RSC's loan portfolio. During 1997, net charge-offs
totaled $749,000 with $148,000 in net charge-offs attributable to the Bank and
$601,000 attributable to RSC's real estate development divestiture activities.
Net charge-offs during 1996 were $169,000.
31
<PAGE>
The following table reflects loan charge-off and recovery activity for the
Bank and RSC respectively, as well as on a consolidated basis, for the years
indicated:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Charge-offs:
Bank $(217) $(294) $(258) $(265) $(313)
RSC - (601) - - -
- --------------------------------------------------------------------------------------------------------------------
Total charge-offs (217) (895) (258) (265) (313)
- --------------------------------------------------------------------------------------------------------------------
Recoveries:
Bank 112 146 89 38 29
RSC 142 - - - -
- --------------------------------------------------------------------------------------------------------------------
Total recoveries 254 146 89 38 29
- --------------------------------------------------------------------------------------------------------------------
Net charge-offs
Bank (105) (148) (169) (227) (284)
RSC 142 (601) - - -
- --------------------------------------------------------------------------------------------------------------------
Total net recoveries (charge-offs) $ 37 $(749) $(169) $(227) $(284)
- --------------------------------------------------------------------------------------------------------------------
Net recoveries (charge-offs) to average
loans outstanding
Bank Only .08% .14% .17% .24% .34%
Total (.03%) .66% .17% .24% .34%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's allowance for credit losses totaled $2.6 million or 1.74
percent of total loans at December 31, 1998, compared to $2.2 million or 1.71
percent of total loans at December 31, 1997, and $1.6 million or 1.58 percent at
December 31, 1996. It is the policy of 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 its real
estate market remain important factors when assessing risk. 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 credit losses,
which could adversely affect the Company's and the Bank's future growth and
profitability.
32
<PAGE>
Following is a table presenting the activity within the Company's allowance for
credit losses for the period between December 31, 1994 and December 31, 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, (beginning of year) $ 2,219 $ 1,615 $ 1,784 $ 1,541 $ 1,338
Provision charged to expense 375 1,353 - 470 487
- --------------------------------------------------------------------------------------------------------------------
Charge-offs:
Commercial (118) (132) (193) (211) (259)
Real estate construction (64) (663) - (8) -
Real estate mortgage - - - - -
Consumer and other (35) (100) (65) (46) (54)
- --------------------------------------------------------------------------------------------------------------------
Total Charge-offs (217) (895) (258) (265) (313)
- --------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial 40 122 76 37 27
Real Estate construction 203 - - - 2
Real estate mortgage - - - - -
Consumer and other 11 24 13 1 -
- --------------------------------------------------------------------------------------------------------------------
Total Recoveries 254 146 89 38 29
- --------------------------------------------------------------------------------------------------------------------
Net recoveries (charge-offs) 37 (749) (169) (227) (284)
- --------------------------------------------------------------------------------------------------------------------
Balance, (end of year) $ 2,631 $ 2,219 $ 1,615 $ 1,784 $ 1,541
- --------------------------------------------------------------------------------------------------------------------
Net (recoveries) charge-offs to average
loans outstanding (.03%) .66% .17% .24% .34%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table represents the allocation of the allowance for loan losses
for the period between December 31, 1994 and December 31, 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
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 $ 1,301 65.7% $ 1,184 58.3% $ 1,069 55.4% $ 1,005 55.7% $ 1,001 50.3%
Real estate construction 126 16.7% 506 23.2% 208 23.1% 215 24.4% 135 32.4%
Real estate mortgage 151 11.0% 121 11.5% 100 12.9% 78 10.7% 65 10.1%
Consumer and other 247 6.6% 226 7.0% 238 8.6% 221 9.2% 184 7.2%
Unallocated 806 - 182 - - - 265 - 156 -
- --------------------------------------------------------------------------------------------------------------------------
Total $ 2,631 100.0% $ 2,219 100.0% $ 1,615 100.0% $ 1,784 100.0% $ 1,541 100.0%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
DEPOSITS AND SHORT TERM BORROWINGS
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 a Fed Funds line with a correspondent bank in
the amount of $5.0 million. During 1998, the Bank applied for, and was accepted
as a member of the Federal Home Loan Bank of San Francisco (the " FHLB"). At
December 31, 1998, the Bank held stock in the FHLB which would allow the Bank to
borrow up to $11.5 million using various loans or securities as collateral. In
addition to these borrowing methods, the Bank from time to time uses its
investment portfolio to raise funds through repurchase agreements. The Bank may,
from time to time, obtain additional deposits through the use of brokered time
deposits. As of December 31, 1998, the Bank held no institutional brokered time
deposits. For more information on deposits and other short term borrowings, see
Notes 6 and 7 to the consolidated financial statements.
The following table presents the composition of the deposit mix at December 31,
1994, through December 31, 1998, respectively.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
(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 $ 54,236 26.2% $ 46,744 26.5% $ 36,613 22.9% $ 32,672 22.7% $ 30,589 22.2%
Interest-bearing
deposits 101,342 49.1% 85,114 48.3% 73,391 45.9% 75,539 52.6% 72,615 52.7%
Time under $100,000 17,682 8.6% 15,778 9.0% 19,032 11.9% 12,229 8.5% 12,852 9.3%
Time over $100,000 33,377 16.1% 28,643 16.2% 30,766 19.3% 23,305 16.2% 21,833 15.8%
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 152,401 73.8% 129,535 73.5% 123,189 77.1% 111,073 77.3% 107,300 77.8%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $206,637 100% $176,279 100% $159,802 100% $143,745 100% $137,889 100%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table represents maturities of time deposits of $100,000 or more
at December 31, 1998.
<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 $ 15,945 $ 12,480 $ 4,952 $ 33,377
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
CAPITAL RESOURCES
The Company and Bank are subject to various minimum capital
requirements as defined by regulation. For further discussion of the
requirements see "Item 1- Supervision and Regulation", of this report. The
current and projected capital position of the Company and the impact of capital
plans and long-term strategies are reviewed regularly by Management. The
Company's capital position represents the level of capital available to support
continued operations and expansion. The Company's primary capital resource is
shareholders' equity, which increased $3.7 million or 19.8 percent from the
previous year-end and increased $9.0 million or 66.7 percent from December 31,
1996. The ratio of total risk-based capital to risk-adjusted assets was 16.14
percent at December 31, 1998, compared to 13.87 percent at December 31, 1997.
Tier 1 risk-based capital to risk-adjusted assets was 14.89 percent at December
31, 1998, compared to 12.62 percent at December 31, 1997.
The Board of Governors of the Federal Reserve System and other
federal banking agencies 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 percent of its assets and commitments to extend credit, weighted by
risk, of which at least 4.0 percent, 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 percent 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
percent 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. Effective October 1, 1998 the Board of Governors and other federal
bank regulatory agencies approved including Tier 2 capital up to 45 percent
of the pretax net unrealized gains on certain available-for-sale equity
securities having readily determinable fair values (i.e. the excess, if any,
of fair market value over the book value or historical cost of the investment
security). The federal regulatory agencies reserve the right to exclude all
or a portion of the unrealized gains upon a determination that the equity
securities are not prudently valued. Unrealized gains and losses on other
types of assets, such as bank premises and available-for-sale debt
securities, are not included in Tier 2 capital, but may be taken into account
in the evaluation of overall capital adequacy and net unrealized losses on
available-for-sale equity securities will continue to be deducted from Tier 1
capital as a cushion against risk.
The Board of Governors and other federal banking agencies have adopted
a revised minimum leverage ratio for bank holding companies as a supplement to
the risk-weighted capital
35
<PAGE>
guidelines. The old rule established a 3 percent minimum leverage standard
for well-run banking organizations (bank holding companies and banks) with
diversified risk profiles. Banking organizations which did not exhibit such
characteristics or had greater risk due to significant growth, among other
factors, were required to maintain a minimum leverage ratio 1 percent to 2
percent higher. The old rule did not take into account the implementation of
the market risk capital measure set forth in the federal regulatory agency
capital adequacy guidelines. The revised leverage ratio establishes a minimum
Tier 1 ratio of 3 percent (Tier 1 capital to total assets) for the highest
rated bank holding companies or those that have implemented the risk-based
capital market risk measure. All other bank holding companies must maintain a
minimum Tier 1 leverage ratio of 4 percent higher leverage capital ratios
required for bank holding companies that have significant financial and/or
operational weaknesses, a high risk profile, or are undergoing or
anticipating rapid growth. The old rule remains in effect for banks, however,
the federal regulatory agencies are currently continuing work on a revised
leverage rule for banks.
On December 19, 1991, President Bush signed the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). The Board of
Governors and other federal banking agencies 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 percent or greater, a Tier 1 risk-based
capital ratio of 6 percent or greater and a leverage ratio of 5 percent 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 percent or greater, a Tier 1 risk-based capital ratio of 4 percent
or greater and a leverage ratio of 4 percent 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 percent, a Tier 1 risk-based capital ratio of less
than 4 percent, or a leverage ratio of less than 4 percent; (4)
"Significantly undercapitalized" - consisting of institutions with a total
risk-based capital ratio of less than 6 percent, a Tier 1 risk-based capital
ratio of less than 3 percent, or a leverage ratio of less than 3 percent; (5)
"Critically undercapitalized" - consisting of an institution with a ratio of
tangible equity to total assets that is equal to or less than 2 percent.
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.
36
<PAGE>
The following tables reflect the Company's and Bank's capital amounts
(in thousands) and ratios for the periods presented and applicable regulatory
capital requirements for such periods:
<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, 1998
Total Capital (to Risk Weighted
Assets):
Company $22,814 16.14% >=$11,309 >=8.00% N/A
Regency Bank $20,047 14.16% >=$11,327 >=8.00% >=$ 14,159 >=10.00%
Tier 1 Capital (to Risk Weighted
Assets):
Company $ 21,042 14.89% >=$ 5,654 >=4.00% N/A
Regency Bank $ 18,266 12.90% >=$ 5,664 >=4.00% >=$ 8,495 >= 6.00%
Tier 1 Capital (to Average Assets):
Company $ 21,042 9.22% >=$ 9,128 >=4.00% N/A
Regency Bank $ 18,266 8.02% >=$ 9,108 >=4.00% >=$ 11,385 >= 5.00%
</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%
</TABLE>
The risk-based capital ratios increased in 1998 as the increase in
equity outpaced the growth in total assets. Capital ratios are reviewed on a
regular basis to ensure that capital exceeds the prescribed regulatory minimums
and is adequate to meet the Company's future needs. All ratios are in excess of
the regulatory definition of "well capitalized."
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
37
<PAGE>
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, 1998 has not been significant to the Company's financial
position or results of operations.
OTHER MATTERS
As discussed in the Company's annual report on Form 10-K for the year
ended December 31, 1997, during the fourth quarter of 1997, the Bank's Board of
Directors consented to administrative orders issued by the FDIC and CDFI. As
reported in the Company's quarterly report on Form 10-Q for the period ended
September 30, 1998, during the third quarter of 1998, the Bank received written
notice from the FDIC and CDFI that both orders had been "terminated" and removed
in their entirety.
YEAR 2000 READINESS DISCLOSURE
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 their 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.
In 1997, the Company initiated a five-phase plan ("Plan") which
includes awareness, assessment, renovation, validation, and implementation. The
Company's Year 2000 Plan addresses the issues associated with the proper
functioning of the Company's computer hardware and software systems before, at,
and after the turn of the century and other date-related systems issues. 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. The Company is using the Year 2000 milestones
established to date by the Federal Financial Institutions Examination Council
(FFIEC) to benchmark and gauge its progress.
Awareness and Assessment Phases - The Company completed the Awareness
and Assessment Phases, as defined by the FFIEC, for its mission critical systems
and facilities in 1997 and continues to update its assessment as needed.
Non-mission critical systems have also been identified and assessed as to Y2K
readiness and plans and timelines for renovation of both mission critical and
non-mission critical systems have been prepared. Management of the Company
reports regularly to the Board of Directors on its Year 2000 efforts.
Renovation Phase - The FFIEC guideline date for institutions to
substantially complete program changes and system upgrades for mission critical
systems was December 31, 1998. By that date, the Company had completed repairs,
upgrades, or replacements of all hardware and software components with the
exception of one software program supplied by a third party to RIA, the
company's investment advisory subsidiary. The Company expects this one remaining
system to be Year 2000 ready in June of 1999 upon receipt and installation of
its scheduled
38
<PAGE>
software release. In addition to mission critical systems and applications,
the Company has completed redemption of all non-mission critical systems as
of December 31, 1998.
Validation and Implementation Phases - To reduce the possibility of
unexpected failure of the Company's systems during and after the century date
change, which could have an impact on the Company and its customers, the Company
continues to test its systems in accordance with a testing strategy and plan
developed in 1998.
The FFIEC guideline date for institutions to begin testing their
mission critical applications and systems was September 1, 1998. During March
1998, the Company began testing various mission critical and non-mission
critical systems. By December 31, 1998, the Company had substantially completed
this testing, including both remediated systems and systems presumed to be Year
2000 compliant. As a key part of the validation phase, the computer software
that operates the Bank's main customer and accounting system, the "Fiserv CBS
System," was thoroughly tested by Fiserv. Fiserv is one of the largest providers
of bank computer software nationwide. In addition to Fiserv's efforts, the Bank
has conducted additional testing of all components of the software through
January 3, 2001, and has detected no Year 2000 problems. All of the systems
referred to above have been implemented (i.e., placed into a production
environment). All mission critical systems will continue to be monitored and
tested throughout 1999 as releases of enhanced software become available.
Business Partner Relationships - As part of the Company's Plan, all
third party suppliers and service providers have been contacted and assessed as
to their Year 2000 preparedness. If their reliability cannot be reasonably
assured, alternative vendors, suppliers and other contingency plans have been,
or are, being prepared. In addition, the Bank has communicated with its large
borrowers and major vendors upon which it relies to determine the extent to
which the Company might be vulnerable if those third parties fail to resolve
their Year 2000 issues. Borrowers or large deposit customers are being
categorized based upon risk and are monitored on a regular basis. If a borrowing
customer is determined to have significant Year 2000 exposure that may impair
the quality or collectability of its loan, reserves for potential losses
resulting from such Year 2000 exposures are established accordingly.
Because the Company recognizes that its business and operations could
be adversely affected if key business partners fail to achieve timely Year 2000
compliance, the Company is evaluating strategies to manage and mitigate the risk
to the Company of their Year 2000 failures. However, although the Company is
establishing reasonable safeguards, there can be no assurance that all key
business partners will adequately address their Year 2000 issues. Therefore,
failures of third parties to adequately address their Year 2000 issues could
adversely affect the business and operations of the Company.
Contingency Plans - FFIEC guidelines indicate that contingency plans
covering mission critical systems in the event of Year 2000 problems are a
prudent business practice. The Company has developed high level contingency
plans for applications and systems used by the Bank and RIA that are deemed
mission critical as well as plans to cover many non-mission critical
applications and systems.
The contingency, or business resumption plan, is based on a review of
various emergency scenarios ranging from the Year 2000 failure of a single
software or hardware component to the total loss of systems and applications
should large-scale power or communications failures occur.
39
<PAGE>
The Company expects to have these plans substantially complete by June 30,
1999. Because business resumption planning is a dynamic process, the Company
expects to further refine and test these plans throughout 1999. As part of
the contingency planning process, the Company intends to take reasonable
steps to mitigate foreseeable and significant risks that can be identified
should key business partners fail to be Year 2000 compliant. The Bank's
contingency planning includes risk management options to insure adequate
liquidity availability for the Bank and its customers should the need arise.
Costs to Address Year 2000 Issues - The majority of costs associated
with the Company's Year 2000 preparedness efforts have been associated with the
use of existing staff to prepare, test and confirm the components of the plan.
In some cases, third parties have been used to assist with planning and testing
and certain new software and hardware products have been procured. The majority
of these costs would have been incurred in the normal course of business as the
company regularly upgrades its various systems in an effort to more efficiently
and effectively serve its clientele and conduct its operations. The Company
incurred costs of approximately $75,000 in 1998 related to the use of third
party consultants and other extraordinary Year 2000 expenses and expects to
expend a similar amount in 1999. The costs incurred in 1998 did not have a
material effect on the Company's net income for 1998, and the Company does not
expect the costs that will be incurred in 1999 to have a material impact on the
Company's net income for 1999.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK
The financial services industry in general and the banking industry
specifically encompass various forms and degrees of risk. As the primary source
of business, the intermediation of funds presents various degrees and types of
risk, which can be managed and controlled, however, can never be completely
eliminated. Management of the Company and its' Board of Directors have
established a framework of policies and procedures to manage risk by
identifying, measuring, monitoring, and controlling the risks involved in the
various products and lines of business of the Company.
Market risks comprise several of the risk factors encompassed in the
Company's risk management policy/program. Market risk is described as the risk
to a financial institution's condition resulting from adverse movements in
market rates or prices, such as interest rates, foreign exchange rates, or
equity prices. Further description of these components include:
Interest rate risk is the risk to earnings or capital arising from
movements in interest rates. The economic perspective focuses on a bank's value
given the current interest rate environment and sensitivity of that value to
changes in interest rates. Interest rate risk arises from the following:
repricing risk differences between the timing of rate changes and the timing of
cash flows; basis risk - changing rate relationships among different yield
curves affecting bank activities; yield curve risk - changing rate relationships
across the spectrum of maturities; options risk - interest-related options
embedded in bank products. The Company manages interest rate risk through a
comprehensive asset/liability policy.
40
<PAGE>
Price risk is the risk to earnings or capital arising from changes in
the value of portfolios of financial instruments. This risk arises from
market-making, dealing, and position-taking activities for interest rate,
foreign exchange, equity, and commodity markets. Price risk focuses on the
changes in market factors (e.g., interest rates, market liquidity, volatilities,
etc.) that affect traded instruments. The primary accounts affected by price
risk are the ones revalued for financial presentation. The Company does not
engage in trading activities and as a result does not have exposure to price
risk due to market-making, dealing, and position-taking activities for interest
rate, foreign exchange, equity, and commodity markets. Some price risk is
inherent in the Company's balance sheet based upon changes in interest rates,
market liquidity and volatilities. These risks are managed under the Company's
investment policy, and secondarily, by the asset/liability and liquidity
policies.
Foreign exchange risk a.k.a. transfer risk is the risk to earnings or
capital arising from movement of foreign exchange rates. It arises from accrual
accounts denominated in foreign currency, including loans, deposits, and equity
investments (i.e., cross-border investing). Under GAAP foreign-denominated
accounts are periodically revalued into U.S. dollar terms. This periodic
revaluation may reveal changes in the value of the investment related to the
relative value of the local currency versus the U.S. dollar. The Company does
not engage in foreign exchange trading or cross-border investing and has no
foreign exchange exposure as of December 31, 1998.
Liquidity risk is the risk to earnings or capital resulting from the
bank's inability to meet its obligations when they come due, without incurring
unacceptable losses, and includes the inability to manage unplanned decreases or
changes in funding sources. Liquidity risk also arises from a failure to
recognize or address changes in market conditions that affect the bank's ability
to liquidate assets quickly and with minimal loss in value. The Company manages
liquidity risk through the Bank's asset/liability and liquidity policies.
ASSET AND LIABILITY MANAGEMENT
The Company's asset/liability management policy is designed to ensure
that the Bank is managed to provide adequate liquidity, maintain adequate
capital, and, provide a satisfactory and consistent level of profits, within
suitable interest rate risk constraints. Generally, asset-liability ("A/L")
management is a comprehensive integrated process for overall financial
management. The major purpose of A/L management is to ensure that the Bank's
primary financial objectives; profitability, capital adequacy, risk tolerance,
and liquidity are achieved.
Through A/L management, the Bank develops a methodology, which can be
used to optimize the critical risk/return tradeoff that the institution faces in
pricing, maturity selection, funds allocation, and other decisions every day.
Doing so will result in earnings which are adequate and consistent, thereby
enabling the achievement of profitability and risk objectives.
The primary capital objective is capital preservation, which is
achieved by controlling interest rate and credit-related risk exposure, and by
the retention of ongoing earnings. The Bank will also strive to ensure that each
dollar of capital is optimally leveraged. The Bank's A/L management program
consists of four major disciplines; interest rate risk management, net interest
margin/spread management, capital management, and liquidity management
41
<PAGE>
The formal integration of these inter-related areas into an effective
A/L management program that includes a process of planning, organizing, and
controlling all of the Bank's financial resources will enable the Bank to
achieve a planned net interest margin over time within acceptable risk levels.
INTEREST RATE RISK
As a financial institution, the Company's most significant market risk
factor is interest rate risk. Fluctuations in interest rates will ultimately
impact both the level of income and expense recorded on a large portion of the
Bank's assets and liabilities, and the market value of all interest earning
assets, other than those which possess a short term to maturity. Since all of
the Company's interest bearing liabilities and virtually all of the Company's
interest earning assets are located at the Bank, virtually all of the Company's
interest rate risk exposure lies at the Bank level. As a result, all significant
interest rate risk management procedures are performed at the Bank level.
One approach to quantify interest rate risk is to use a simulation
model to project changes in net interest income that result from forecast
changes in interest rates. The primary analytical tool used by the Company to
gauge interest rate sensitivity is a simulation model used by many banks and
bank regulators. This industry standard model is used to simulate, based on the
current and projected portfolio mix, the effects on net interest income of
changes in market interest rates. This analysis calculates the difference
between a net interest income forecast over a 12-month period using a flat
interest rate scenario and a net interest income forecast using a rising (or
falling) rate scenario, where the National Prime rate, serving as a "driver" is
made to rise (or fall) by 200 basis points over the 12-month forecast interval
triggering a response in the other rates. According to the Company's policy, the
simulated changes in net interest income should always be less the 12.5 percent
or steps must be taken to reduce interest rate risk. Various strategies the Bank
will use to adjust its exposure to interest rate risk include: lengthen/shorten
asset maturities; lengthen/shorten liability maturities; new product
introductions; secondary marketing/sell newly originated assets; and
growth/contraction (overall). As can be seen from the results of the following
interest rate sensitivity analysis matrix, the simulated change in net interest
income, based on the 12-month period ending December 31, 1999, fall well within
the 12.5 percent risk limit. (In thousands)
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis Matrix
-------------------------------------------------------------------------------------------------
Change in Net Interest Change Change
Driver Rate Income $ %
-------------------------------------------------------------------------------------------------
<S> <C> <C>
+2.000 16,543 1,617 10.83%
+1.000 15,733 807 5.41%
0.000 14,926 0 0.00%
-1.000 14,121 -805 -5.39%
-2.000 13,318 -1,607 -10.77%
</TABLE>
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk, even though such activities may be
permitted with the approval of the Company's Board of Directors.
42
<PAGE>
INTEREST RATE SENSITIVITY AND GAP ANALYSIS
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. Generally, if assets and
liabilities do not reprice simultaneously and in equal volumes, the potential
for interest rate risk exposure exists. 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>
After Three After One
Immediately Months Year
(In thousands, except percentages) or Within But Within But Within After
As of December 31, 1998 Three Months 12 Months Five Years Five Years Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Rate Sensitivity Gap:
Loans (1) $ 105,140 $22,204 $11,754 $10,856 $149,954
Investment securities and other 12,433 5,631 1,869 26,678 46,611
Federal funds sold 5,000 - - - 5,000
- --------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 122,573 $27,835 $13,623 $37,534 $201,565
- --------------------------------------------------------------------------------------------------------------------
Interest-bearing transaction accounts 54,878 - - - 54,878
Savings accounts 46,464 - - - 46,464
Time deposits 22,092 19,695 9,272 - 51,059
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $123,434 $19,695 $ 9,272 $ - $152,401
- --------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ (861) $ 8,140 $ 4,351 $ 37,534
Cumulative gap $ (861) $ 7,279 $ 11,630 $ 49,164
Cumulative gap percentage to
interest earning assets -0.43% 3.61% 5.77% 24.39%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts exclude nonaccrual loans of $1,197,000.
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.
43
<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 lines of credit and other
wholesale funding sources as described above. Additionally, the Bank maintains a
portfolio of SBA loans either available-for-sale or in its portfolio that could
be sold should additional liquidity be required.
The Company generated significant liquidity from its operating
activities. In addition to net income in 1998 of $3.7 million, other operating
activities provided $4.9 million in additional cash flows for a total of $8.6
million in net cash provided by operating activities. Financing activities,
primarily the acceptance of customer deposits, provided additional cash flows.
Total cash flows provided by financing activities were $30.4 million as a result
of the increase in deposits for 1998. The Company uses cash flows to make
investments in loans and investment securities. The increase in loans was $22.1
million in 1998 while investment securities increased by $11.2 million. The
Company anticipates increasing its cash levels through the end of 1999 mainly
due to increased profitability and retained earnings. For the same period, it is
anticipated that the demand for loans will continue to moderately increase. The
growth in deposit balances is expected to be sufficient to fund loan growth with
excess funds available for investment in securities.
44
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
<S> <C>
Independent Auditors' Report of KPMG LLP 47
Consolidated Balance Sheets, December 31, 1998 and 1997 49
Consolidated Statements of Operations for each of the years in the three year period ended December 51
31, 1998
Consolidated Statements of Shareholders' Equity for each of the years in the three year period ended 52
December 31, 1998
Consolidated Statements of Cash Flows for each of the years in the three year period ended December 53
31, 1998
Notes to Consolidated Financial Statements 54
</TABLE>
45
<PAGE>
REGENCY BANCORP AND
SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,
1998 AND 1997, AND FOR EACH OF THE YEARS IN THE THREE
YEAR PERIOD ENDED DECEMBER 31, 1998 AND
INDEPENDENT AUDITORS' REPORT
46
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Regency Bancorp:
We have audited the accompanying consolidated balance sheet of Regency
Bancorp and subsidiaries as of December 31, 1998 and the related consolidated
statements of operations, stockholders' equity and cash flows for the year
then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. The consolidated
financial statements of Regency Bancorp and subsidiaries as of December 31,
1997 and for the years ended December 31, 1997 and 1997, were audited by
other auditors whose report dated February 20, 1998, expressed an unqualified
opinion on those statements.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Regency Bancorp and
subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
February 5, 1999
47
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Regency Bancorp
Fresno, California
We have audited the accompanying consolidated balance sheet of Regency
Bancorp and subsidiaries, as of December 31, 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows
for each of the two years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these 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 the results of their operations and their cash
flows for each of the two years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche
- ------------------------------
Fresno, California
February 4, 1998
48
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 AND 1997 (IN THOUSANDS, EXCEPT SHARES) 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS $ 20,220 $ 16,893
FEDERAL FUNDS SOLD 5,000 3,000
---------- ---------
Cash and cash equivalents 25,220 19,893
INTEREST BEARING DEPOSITS IN OTHER BANKS 869 232
INVESTMENT SECURITIES (Note 2):
Available-for-sale at fair value (cost of $46,611 and $36,634) 46,990 36,986
NON-MARKETABLE EQUITY SECURITIES (FRB & FHLB Stock), at cost 1,170 -
LOANS, net of allowance for credit losses of $2,631
and $2,219 (Notes 3 and 11) 147,588 126,430
INVESTMENTS IN REAL ESTATE (Note 4) - 4,338
OTHER REAL ESTATE OWNED 684 503
PREMISES AND EQUIPMENT, net (Note 5) 1,500 1,751
CASH SURRENDER VALUE OF LIFE INSURANCE (Note 9) 3,186 3,038
INTEREST RECEIVABLE, DEFERRED INCOME TAXES
AND OTHER ASSETS (Note 8) 4,760 5,070
---------- ----------
$ 231,967 $ 198,241
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
49
<PAGE>
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS (Note 6):
Noninterest bearing deposits $ 54,236 $ 46,744
Interest bearing deposits 152,401 129,535
---------- ----------
Total deposits 206,637 176,279
NOTES PAYABLE AND CAPITAL LEASE OBLIGATION 547 509
(Note 5)
ACCRUED INTEREST AND OTHER
LIABILITIES (Note 9) 2,334 2,719
---------- --------
Total liabilities 209,518 179,507
COMMITMENTS AND CONTINGENCIES (Notes 3 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, 2,624,374 and 2,621,125 shares outstanding 15,229 15,203
Retained earnings 7,000 3,327
Accumulated other comprehensive income:
Net unrealized gain on investment securities, net of
taxes of $159 and $148 220 204
---------- ----------
Total shareholders' equity 22,449 18,734
---------- ----------
$231,967 $198,241
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
50
<PAGE>
<TABLE>
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands, except per share data) INTEREST INCOME:
Interest and fees on loans $ 15,793 $ 12,506 $ 11,255
Interest on investment securities:
Taxable 2,071 2,163 1,718
Nontaxable 345 165 87
------------------------------------------------
2,416 2,328 1,805
Other 427 452 167
------------------------------------------------
Total interest income 18,636 15,286 13,227
INTEREST EXPENSE:
Interest on deposits 5,348 5,241 4,534
Interest on borrowings 104 80 160
------------------------------------------------
Total interest expense 5,452 5,321 4,694
Net interest income 13,184 9,965 8,533
Provision for credit losses 375 1,353 -
------------------------------------------------
Net interest income after provision for credit losses 12,809 8,612 8,533
NONINTEREST INCOME:
Gain on sale of loans (Note 3) 356 608 1,315
Depositor service charges 500 397 338
Income from investment management services 916 810 682
Gain (loss) on sale of investment securities (Note 2) 15 (19) -
Gain on sale of premises & equipment 4 252 18
Servicing fees on loans sold 119 329 322
Other 1,052 310 434
------------------------------------------------
Total noninterest income 2,962 2,687 3,109
NONINTEREST EXPENSES:
Salaries and related benefits (Notes 9 and 11) 5,134 4,782 4,561
Occupancy 1,559 1,639 1,568
FDIC insurance and regulatory assessments 270 120 63
Marketing 475 450 428
Professional services 684 461 749
Directors' fees and expenses 219 270 383
Management fees for real estate projects (Note 11) - 120 488
Supplies, telephone and postage 312 329 349
(Gain) loss from investments in real estate (Note 4) (171) 3,973 351
Other 973 1,262 962
------------------------------------------------
Total noninterest expenses 9,455 13,406 9,902
------------------------------------------------
Income (loss) before income tax expense (benefit) 6,316 (2,107) 1,740
Income tax expense (benefit) (Note 8) 2,643 (833) 732
------------------------------------------------
Net income (loss) $ 3,673 $ (1,274) $ 1,008
EARNINGS (LOSS) PER COMMON SHARE (Note 10)
Basic $ 1.40 $ (0.68) $ 0.55
Diluted $ 1.31 $ (0.68) $ 0.54
------------------------------------------------
SHARES ON WHICH EARNINGS (LOSS) PER COMMON SHARE
WERE BASED (Note 10)
Basic 2,624 1,860 1,818
Diluted 2,800 1,860 1,872
------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
51
<PAGE>
<TABLE>
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
SHARE- COMPRE- SHARE- COMPRE- SHARE- COMPRE-
HOLDERS' HENSIVE HOLDERS' HENSIVE HOLDERS' HENSIVE
EQUITY INCOME EQUITY INCOME EQUITY INCOME
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMON STOCK - SHARES
Balance, beginning of period 2,621 1,818 1,818
Issuance of common stock to
employee stock ownership plan (Note 9) - 36 -
Issuance of common stock under
stock option plan (Note 9) 3 17 -
Issuance of common stock in private placement
captial offering, net of expenses (Note 10) - 750 -
-------- --------- ---------
Balance, end of period 2,624 2,621 1,818
-------- --------- ---------
-------- --------- ---------
COMMON STOCK
Balance, beginning of period $ 15,203 $ 8,868 $ 8,868
Issuance of common stock to
employee stock ownership plan (Note 9) - 333 -
Issuance of common stock under
stock option plan (Note 9) 26 75 -
Issuance of common stock in private placement
captial offering, net of expenses (Note 10) - 5,927 -
-------- --------- ---------
Balance, end of period 15,229 15,203 8,868
-------- --------- ---------
RETAINED EARNINGS
Balance, beginning of period 3,327 4,601 4,030
Net Income (loss) 3,673 $ 3,673 (1,274) $ (1,274) 1,008 $ 1,008
Common stock dividends - - (437)
-------- --------- ---------
Balance, end of period 7,000 3,327 4,601
-------- --------- ---------
CUMULATIVE OTHER COMPREHENSIVE INCOME
Balance, beginning of period 204 1 44
Unrealized gain (loss) on investment
securities arising during the period, net of
tax (expense) benefit of $(21), $(161) and
$31. 31 31 184 184 (43) (43)
Reclassification adjustment for (gain) loss on
sale of securities included in net income, net
of tax benefit (expense) of $10, $(13) and
$0. (15) (15) 19 19 - -
-------- --------- ---------
Balance, end of period 220 204 1
- ------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 3,689 $ (1,071) $ 965
-------- --------- -------
------- -------- --------- --------- -------
Total shareholders' equity $ 22,449 $ 18,734 $ 13,470
-------- --------- ---------
-------- --------- ---------
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ 3,673 $ (1,274) $ 1,008
Adjustments:
Provision for credit losses 375 1,353 -
Provision for OREO losses 131 121 -
Depreciation and amortization 504 653 632
Deferred income taxes 372 (428) 827
(Increase) decrease in interest receivable and other assets (73) 1,209 (1,491)
Increase in surrender value of life insurance (148) (135) (139)
Distributions of income from real estate partnerships 452 232 103
Equity in loss (income) of real estate partnerships 17 436 (151)
Decrease in real estate held for sale 3,869 10,783 7,170
(Decrease) increase in other liabilities (347) 418 (790)
(Gain) loss on sale of securities (15) 19 -
Gain on sale of loans held for sale (356) (608) (1,315)
Proceeds from sale of loans held for sale 20,040 18,537 13,908
Additions to loans held for sale (19,907) (16,453) (11,313)
(Gain) loss on sale of premises and equipment and OREO (2) 11 (1)
--------- -------- --------
Net cash provided by operating activities 8,585 14,874 8,448
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (43,040) (21,059) (21,596)
Proceeds from sales of available-for-sale securities - 2,353 1,000
Proceeds from maturities of available-for-sale securities 32,995 15,262 18,881
Purchases of non marketable equity securities (1,170) - -
Loan participations purchased - - (1,750)
Loan participations sold - 2,039 4,842
Net increase in loans (22,123) (31,918) (7,802)
Net (increase) decrease in interest bearing deposits in other banks (636) (134) (95)
Cash received through acquisition of partnerships - - 804
Proceeds from sale of OREO 501 208 123
Capital contributions to real estate partnerships - - (397)
Capital distributions from real estate partnerships - 700 1,012
Purchases of premises and equipment (178) (136) (435)
Proceeds from sale of premises and equipment 10 34 -
--------- -------- --------
Net cash used in investing activities (33,641) (32,651) (5,413)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in time deposits 6,638 (5,377) 14,265
Net increase in other deposits 23,719 21,855 1,791
Cash dividends paid - - (437)
Payments on notes payable - (7,155) (8,131)
Proceeds from notes payable - 2,179 385
Proceeds from the issuance of common stock under employee stock option
plan 26 75 -
Proceeds from the issuance of common stock to employee stock ownership
plan - 333 -
Net proceeds from the issuance of common stock - 5,927 -
--------- -------- --------
Net cash provided by financing activities 30,383 17,837 7,873
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,327 60 10,908
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 19,893 19,833 8,925
--------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 25,220 $ 19,893 $ 19,833
--------- -------- --------
--------- -------- --------
</TABLE>
See notes to consolidated financial statements.
53
<PAGE>
REGENCY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ------------------------------------------------------------------------------
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")
a Securities Exchange Commision ("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. 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.
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.
54
<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. NON MARKETABLE EQUITY SECURITIES - The Bank became a member of both
the Federal Reserve Bank and Federal Home Loan Bank System in 1998 and
as such was required to own capital stock of these entities in amounts
specified by regulations. At December 31, 1998, the Bank owned 5,749
and 5,912 shares of $100 par value capital stock of the Federal
Reserve Bank and Federal Home Loan Bank of San Francisco,
respectively.
d. LOANS - Loans are stated at the outstanding unpaid principal balance
reduced by any partial charge-offs, valuation allowances and
nonrefundable fees and related direct costs associated with the
origination or purchase of loans. 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.
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 SBA program that
generally provides for guarantees of 75 percent to 90 percent 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, 1998 and 1997, the Company had received premiums of
$12,000 and $104,000, 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 ("IO") strip. The
Company
55
<PAGE>
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 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, 1998 and 1997, there was no material difference
between the Company's amortized carrying value for servicing assets
and their fair value.
The Company measures the fair value of its 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, 1998 and 1997, there was no
material difference between the carrying value and the fair value of
the IO strip.
e. 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. In addition, various regulatory
agencies, as an integral part of their examination process,
periodically review the Company's allowance for credit losses. Such
agencies may require the Company to recognize additions to the
allowance based on their judgement of information available to them at
the time of their examination. 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.
f. 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:
56
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Buildings 30 years
Leasehold improvements Life of the lease
Furniture and equipment 3 - 10 years
</TABLE>
g. 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 1998
or 1997.
h. 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
management and the real estate is carried at the lower of carrying
amount or fair value less costs to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in
noninterest expenses.
i. 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. All
investments in real estate are valued at net realizable value.
j. 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 SFAS No. 109.
k. NET INCOME (LOSS) PER SHARE - 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. For the year ended December 31,
1997, diluted loss per common share is equal to basic loss per common
share because the effect of potential common stock under the stock
option plan was antidilutive.
l. STOCK-BASED COMPENSATION - The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with
Accounting Principles Board opinion No. 25, "Accounting for Stock
Issued to Employees".
m. NEW ACCOUNTING PRONOUNCEMENTS - Statement of Financial Accounting
Standards ("SFAS") No. 130 "Reporting Comprehensive Income" was issued
in June 1997 and is effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components,
which included net income and changes in equity during the period
except those resulting from investments by, or distributed to
stockholders. As of January 1, 1998, the Company adopted the
provisions of SFAS No. 130, which have been applied retroactively to
all periods presented in these financial statements.
n. RECLASSIFICATIONS - Certain reclassifications have been made to prior
year balances to conform to current year classifications.
57
<PAGE>
2. INVESTMENT SECURITIES
Investment securities are comprised of the following (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Treasuries $ 1,003 $ 5 $ - $ 1,008
U.S. Government agencies 16,434 72 (38) 16,468
Mortgage-backed securities 17,761 109 (91) 17,779
State and political subdivisions 11,166 344 (22) 11,488
Equity securities 247 - - 247
--------- ------ ------ ---------
$ 46,611 $ 530 $ (151) $ 46,990
--------- ------ ------ ---------
--------- ------ ------ ---------
</TABLE>
<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
--------- ------ ------ ---------
--------- ------ ------ ---------
</TABLE>
There were no investment securities classified as held-to-maturity or
trading at December 31, 1998 or December 31, 1997.
Gross realized gains and losses on sales of available-for-sale securities
for the years ended December 31, 1998, 1997 and 1996 are as follows (In
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Gross realized gains $ 15 $ 21 $ -
Gross realized losses - (40) -
----- ----- ------
Net gain (loss) $ 15 $ (19) $ -
----- ----- ------
----- ----- ------
</TABLE>
58
<PAGE>
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, 1998, by contractual maturity, are shown
below. (In thousands):
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------------------------------------
<S> <C> <C>
AVAILABLE-FOR-SALE:
Due in one year or less $ 1,625 $ 1,633
Due after one year through five years 2,070 2,114
Due after five years through ten years 18,451 18,546
Due after ten years 24,465 24,697
------------------ -----------------
$ 46,611 $ 46,990
------------------ -----------------
------------------ -----------------
</TABLE>
At December 31, 1998 and 1997, investment securities with cost basis of
approximately $2,003,000 and $4,007,000 (market value of $2,015,000 and
$4,011,000, respectively), were pledged as collateral to secure public
funds and for other purposes as required by law or contract.
59
<PAGE>
3. LOANS
Loans are comprised of the following (In thousands, except percentages):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1998 1997
PERCENT PERCENT
OF TOTAL OF TOTAL
AMOUNT LOANS AMOUNT LOANS
<S> <C> <C> <C> <C>
Commercial $ 99,341 66% $ 75,487 58%
Real estate:
Mortgage 16,682 11% 14,900 12%
Construction 25,192 17% 30,128 23%
Consumer and other 6% 7%
9,936 9,120
--------------------------- ------------------------------
Total loans 151,151 100% 129,635 100%
--------------------------- ------------------------------
------ -----
Less:
Unearned discount
440 623
Deferred loan fees
492 363
Allowance for credit losses
2,631 2,219
---------------- -------------------
Total loans, net $ 147,588 $ 126,430
---------------- -------------------
---------------- -------------------
</TABLE>
Loans serviced for other institutions, principally SBA and Business &
Industry loans totaled approximately $34,700,000 and $44,500,000 at
December 31, 1998 and 1997, respectively.
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.
60
<PAGE>
At December 31, 1998 and 1997, the following information related to
nonperforming assets. (In thousands, except percentages)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1998 1997
<S> <C> <C>
Nonperforming Assets:
------------------------------------------------
Nonperforming loans $ 1,197 $ 1,736
Other real estate owned 684 503
------------------------------------------------
Total nonperforming assets 1,881 2,239
------------------------------------------------
------------------------------------------------
Total loans before allowance for credit losses 151,151 129,635
Total assets 231,967 198,241
Allowance for credit losses $ (2,631) $ (2,219)
------------------------------------------------
Ratios:
Nonperforming loans to total loans .79% 1.34%
Nonperforming assets to:
Total loans 1.24% 1.73%
Total loans and OREO 1.24% 1.72%
Total assets .81% 1.13%
Allowance for credit losses to total
nonperforming assets 139.91% 99.11%
Allowance for credit losses to loans 1.74% 1.71%
------------------------------------------------
</TABLE>
The gross interest income that would have been recorded for loans placed on
nonaccrual status was $103,000, $254,000 and $276,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
The Company is not aware of any potential problem loans, which were
accruing interest at December 31, 1998, or 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 percent of total loans which are not disclosed above which
would cause them to be significantly impacted by economic or other
conditions.
61
<PAGE>
At December 31, 1998 and 1997, the following information related to
impaired loans under SFAS No. 114 was included in the total loan balance
(In thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
<S> <C> <C>
Total impaired loans $ 1,519 $ 1,410
Impaired loans without specified SFAS No. 114
allowance for credit losses 567 598
-------- --------
Impaired loans with specific SFAS No. 114
allowance for credit losses $ 952 $ 812
-------- --------
-------- --------
Specific allowance for credit losses on impaired loans $ 88 $ 194
-------- --------
-------- --------
</TABLE>
Average impaired loans were $1,542,000, $689,000, and $188,000 for the
years ended December 31, 1998, 1997, and 1996, respectively. The Company
uses the cash basis method of income recognition for impaired loans. For
the years ended December 31, 1998, 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,
-----------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Balance, beginning of the year $ 2,219 $ 1,615 $ 1,784
Provision charged to operations 375 1,353 -
Losses charged to the allowance (217) (895) (258)
Recoveries of amounts charged off 254 146 89
-------- -------- --------
Balance, end of the year $ 2,631 $ 2,219 $ 1,615
-------- -------- --------
-------- -------- --------
</TABLE>
Included in commercial loans are SBA loans with guaranteed balances of
$25,368,000 and $13,045,000 at December 31, 1998 and 1997, respectively.
The unguaranteed balance of these loans was $18,261,000 and $18,567,000 at
December 31, 1998 and 1997, respectively.
62
<PAGE>
The activity in the asset accounts related to the servicing spread retained
on SBA guaranteed and Business & Industry loan sales for the three years
ended December 31, 1998, 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ---------------------------- -------------
SERVICING SERVICING SERVICING
ASSETS IO STRIPS ASSETS IO STRIPS ASSETS
-------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of the year $ 507 $ 418 $ 595 $ - $ 290
SFAS 125 reclassification - - (143) 143 -
Servicing assets and IO strips
recognized on loans sold 37 20 192 317 396
Amortization (199) (82) (137) (42) (91)
------- ------ ------- ------ ------
Balance, end of the year $ 345 $ 356 $ 507 $ 418 $ 595
------- ------ ------- ------ ------
------- ------ ------- ------ ------
</TABLE>
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 consolidated
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,
-------------------------------
1998 1997
<S> <C> <C>
Financial instruments whose contractual
amount may represent additional risk
if funded (In thousands):
Commitments to extend credit $ 55,376 $ 44,139
Standby letters of credit $ 1,557 $ 795
</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.
63
<PAGE>
4. REAL ESTATE ACTIVITIES
Regency Service Corporation was 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 consisted of residential subdivisions being developed
into lots and homes. Limited partnership investments were accounted for
under the equity method. Gains on sales of limited partnership properties
were recognized on the accrual method and were allocated between the
partners based on the provisions of the partnership agreements.
Included in the investments in real estate balances are acquisition,
development and construction loans held by the Bank totaling $0 and
$271,000 at December 31, 1998 and 1997, respectively. The remaining
investments in real estate balances of $0 and $4,067,000 represent RSC's
investments in real estate at December 31, 1998 and 1997.
Condensed financial information relative to RSC included in the Company's
consolidated financial statements at December 31, 1998 and 1997,
respectively, is as follows (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997
<S> <C> <C>
Financial position:
Investments in real estate:
Real estate held for sale $ - $ 4,420
Equity in partnerships 232 702
-------- ---------
Investment in real estate before allowance 232 5,122
Allowance for real estate losses (232) (1,055)
-------- ---------
Investment in real estate - 4,067
Loans to real estate partnerships and projects - 1,768
Allowance for loan losses - (364)
-------- ---------
Net loans - 1,404
Other assets 935 2,524
Liabilities (99) (144)
-------- ---------
Bank's investment in RSC $ 836 $ 7,851
-------- ---------
-------- ---------
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Summary of income (loss):
(Loss) income from partnerships accounted for on
the equity method $ (17) $ (436) $ 151
Income (loss) from direct investments in real estate 188 (3,565) (583)
Recovery of (provision) for loan losses 507 (855) -
-------- -------- -------
Net income (loss) from real estate projects 678 (4,856) (432)
Other income 1,145 102 249
Other expenses (188) (966) (1,316)
-------- -------- -------
Total income (loss) from RSC (excluding
income tax benefits) $ 1,635 $ (5,720) $(1,499)
-------- -------- -------
-------- -------- -------
</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 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,
-------------------------------
1998 1997
<S> <C> <C>
Assets:
Real estate $ 494 $ 2,755
Other assets 281 657
------- ----------
Total $ 775 $ 3,412
------- ----------
------- ----------
Liabilities and Equity:
Liabilities (primarily third-party debt) $ 221 $ 1,895
RSC's equity (before write down of $105 in 1998
and $213 in 1997) 337 915
Others' equity 217 602
------- ----------
Total $ 775 $ 3,412
------- ----------
------- ----------
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Summary of partnerships' income (loss):
Sales of real estate $ 3,276 $ 9,493 $ 11,930
Cost of sales and expenses (3,527) (9,930) (11,635)
-------- -------- --------
Net (loss) income $ (251) $ (437) $ 295
-------- -------- --------
-------- -------- --------
RSC's share of net (loss) income in limited
partnerships $ (125) $ (223) $ 151
Recovery (write down) of RSC's investment in limited
partnerships 108 (213) --
-------- -------- --------
Total $ (17) $ (436) $ 151
Increases (decreases) to RSC's share of net income:
Income (loss) from direct investments in real estate 188 (3,565) (583)
Other -- 28 81
-------- -------- --------
Total 188 (3,537) (502)
-------- -------- --------
Income (loss) from investments in real estate $ 171 $ (3,973) $ (351)
-------- -------- --------
-------- -------- --------
</TABLE>
5. PREMISES AND EQUIPMENT
Bank premises and equipment consists of the following (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
<S> <C> <C>
Buildings $ 245 $ 250
Leasehold improvements 1,196 1,253
Furniture and equipment 2,979 3,465
-------- --------
4,420 4,968
Accumulated depreciation and amortization (2,920) (3,217)
-------- --------
Total premises and equipment $ 1,500 $ 1,751
-------- --------
-------- --------
</TABLE>
66
<PAGE>
6. DEPOSITS
Deposits are comprised of the following (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
<S> <C> <C>
Noninterest bearing deposits $ 54,236 $ 46,744
Interest bearing deposits:
NOW and money market accounts 54,878 48,616
Savings accounts 46,464 36,498
Time deposits:
Under $100,000 17,682 15,778
$100,000 and over 33,377 28,643
---------- ----------
Total interest bearing deposits 152,401 129,535
---------- ----------
Total deposits $ 206,637 $ 176,279
---------- ----------
---------- ----------
</TABLE>
At December 31, 1998, time deposits of $100,000 or more include
approximately $15,945,000 maturing in 3 months or less, $12,480,000
maturing in 3 to 12 months and $4,952,000 maturing after 12 months.
At December 31, 1998, the scheduled maturities of all certificates of
deposits and other time deposits are as follows (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------
<S> <C>
1999 $ 41,432
2000 6,756
2001 1,577
2002 1,191
2003 and thereafter 103
----------
$ 51,059
----------
----------
</TABLE>
67
<PAGE>
7. SHORT-TERM BORROWINGS, LEASE COMMITMENTS, AND CONTINGENCIES
At December 31, 1998 and 1997, the Company had no federal funds purchased
or securities sold under repurchase agreements outstanding.
At December 31, 1998, 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 4.50 percent and 4.80 percent at December
31, 1998. The agreements are subject to annual renewal. Information
concerning federal funds lines is summarized as follows (In thousands,
except percentages):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
<S> <C> <C>
Average balance during the year $ 143 $ -
Average interest rate during the year 4.95% -
Maximum month-end balance during the year $ - $ -
</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, 1998 and 1997.
During 1998, the Bank applied for, and was accepted as a member of the
Federal Home Loan Bank of San Francisco (the " FHLB"). At December 31,
1998, the Bank held stock in the FHLB which would allow the Bank to borrow
up to $11.5 million using various loans or securities as collateral.
Information concerning securities sold under agreements to repurchase is
summarized as follows (In thousands, except percentages):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997
<S> <C> <C>
Average balance during the year $ 204 $ -
Average interest rate during the year 5.65% -
Maximum month-end balance during the year $ - $ -
</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 $636,000, $528,000 and
$540,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
68
<PAGE>
At December 31, 1998, 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>
1999 $ 48 $ 573
2000 76 544
2001 76 492
2002 76 492
2003 76 492
Thereafter 2,450 4,294
------- --------
Total minimum lease payments 2,802 $ 6,887
--------
--------
Amount representing interest (2,255)
-------
Net present value of minimum lease payments $ 547
-------
-------
</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>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Current:
Federal $ 1,784 $ (358) $ (149)
State 487 (47) 54
--------- --------- -------
Total current $ 2,271 $ (405) (95)
Deferred:
Federal 160 (280) 688
State 212 (148) 139
--------- --------- -------
Total deferred 372 (428) 827
--------- --------- -------
$ 2,643 $ (833) $ 732
--------- --------- -------
--------- --------- -------
</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,
-------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Statutory rate 35.0 % (35.0)% 35.0 %
State taxes, net of federal benefit 7.3 % (6.1)% 7.3 %
Other, net (0.5)% 1.6 % (0.3)%
------ ------- ------
Effective rate 41.8 % (39.5)% 42.0 %
------ ------- ------
------ ------- ------
</TABLE>
The Company's net deferred tax asset (included in other assets) is
comprised of the following (In thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses $ 1,062 $ 871
Lease financing 171 150
Deferred compensation 395 340
Nonaccrual loan interest 68 259
Allowance for real estate losses 105 802
Other 325 231
-------- -------
Total deferred tax assets 2,126 2,653
-------- -------
Deferred tax liabilities:
State taxes (157) (205)
Depreciation (34) (32)
Unrealized investment gains (159) (148)
Other (500) (610)
-------- -------
Total deferred tax liabilities (850) (995)
-------- -------
Net deferred tax asset $ 1,276 $ 1,658
-------- -------
-------- -------
</TABLE>
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences. Accordingly, for the
years ended December 31, 1998 and 1997, no valuation allowance related to
the 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 percent 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 percent of the fair value of the stock at the date of
grant. The maximum term of shares granted is set by the Compensation
Committee not to exceed ten years.
At December 31, 1998 and 1997, there were 124,495 and 190,994 additional
shares available for grant under the Plan. The per share weighted-average
fair value of stock options granted during 1998 was $2.96 on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions. 1998 - expected dividend yield 2.67
percent, risk-free interest rate of 5.71 percent, expected life of 9.6
years and a volatility assumption of 15 percent. There were no options
granted in 1997. In 1996 the calculated fair value of options granted was
$2.17 using the following assumptions; expected life, 36 to 120 months;
volitility 20 percent, risk free interest rates, 6.10 percent to 6.50
percent; and expected dividend yield of 2.5 percent.
The Company applies APB Opinion No. 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS
No. 123 "Accounting for Stock-Based Compensation", the Company's net income
would have been reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) As reported $3,673,000 $(1,274,000) $1,008,000
Pro forma $3,584,000 $(1,330,000) $ 959,000
Earnings (loss) per share
Basic As reported $1.40 $(.68) $.55
Diluted As reported $1.31 $(.68) $.54
Basic Pro forma $1.37 $(.71) $.53
Diluted Pro forma $1.28 $(.71) $.51
</TABLE>
Pro forma net income reflects only options granted since December 31, 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
options' vesting period of 5 years and compensation cost for options
granted prior to January 1, 1996 is not considered.
71
<PAGE>
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
<S> <C> <C>
--------------------------------------------
OUTSTANDING, JANUARY 1, 1996 121,714 $ 4.31
Granted 167,000 9.23
Exercised - -
Forfeited - -
Expired - -
--------------------------------------------
OUTSTANDING, DECEMBER 31, 1996 288,714 7.15
Granted - -
Exercised (17,387) 4.31
Forfeited - -
Expired (12,500) 9.49
--------------------------------------------
OUTSTANDING, DECEMBER 31, 1997 258,827 7.23
Granted 68,500 13.30
Exercised (3,249) 8.94
Forfeited (1,001) 8.94
Expired (1,000) 8.94
--------------------------------------------
OUTSTANDING, DECEMBER 31, 1998 322,077 $ 8.50
--------------------------------------------
--------------------------------------------
</TABLE>
Additional information regarding options outstanding as of December 31,
1998 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 EXERCISE PRICE EXERCISABLE EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$4.31 104,327 1.40 yrs. $ 4.31 104,327 $ 4.31
$8.94 89,250 7.96 yrs. $ 8.94 81,125 $ 8.94
$9.63 60,000 7.34 yrs. $ 9.63 24,000 $ 9.63
$10.50 - $14.50 68,500 9.13 yrs. $ 13.30 15,458 $ 14.46
- ------------------------------------------------------------------------ --------------------------------------
$ 4.31 - $14.50 322,077 5.97 yrs $ 8.50 224,910 $ 7.24
------- -------
------- -------
</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, $200,000 and $173,500 for the years ended December 31, 1998, 1997
and 1996, respectively. The plan owned 172,319 and 161,239 shares of the
Company's common stock at December 31, 1998 and 1997, respectively.
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
72
<PAGE>
Plan may be matched by the Company at the discretion of the Board of
Directors. Employee contributions to the Plan are immediately vested while
any matching contributions made by the Bank vest at different percentages
based on years of service. For the years ended December 31, 1998, 1997 and
1996, the Company contributed approximately $45,000, $47,000 and $27,100
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, 1998 and 1997, the
total net deferrals included in other liabilities was approximately
$557,000 and $515,000, 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 percent 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,
1998 and 1997, $323,000 and $242,000, 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 $3,186,000 and $3,038,000 at December 31, 1998 and
1997. The current annual tax-free interest rates on these policies range
from 5.50 percent to 5.70 percent. 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>
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
BASIC EPS COMPUTATION
Net income (loss) $ 3,673 $(1,274) $1,008
Average common shares outstanding 2,624 1,860 1,818
Basic EPS $ 1.40 $(0.68) $0.55
----------------------------------------------
DILUTED EPS COMPUTATION
Net income (loss) $ 3,673 $ (1,274) $1,008
Average common shares outstanding 2,624 1,860 1,818
Stock options (Anti dilutive in 1997) 126 - 54
Warrants (Anti dilutive in 1997) 50 - -
----------------------------------------------
2,800 1,860 1,872
----------------------------------------------
----------------------------------------------
Diluted EPS $ 1.31 $(0.68) $0.54
----------------------------------------------
----------------------------------------------
</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
73
<PAGE>
$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 49,000, 60,000,
and 167,000 shares of common stock at various prices per share were
outstanding at December 31, 1998, 1997 and 1996, 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 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 DECEMBER 31,
---------------------------------
1998 1997
<S> <C> <C>
Balance, beginning of year $ 509 $ 998
Additions 302 87
Reductions (476) (576)
----- -----
Balance, end of year $ 335 $ 509
----- -----
----- -----
</TABLE>
Prior to 1998, the Company's Vice Chairman, David N. Price, provided
administrative services for the Company's 401(k) and ESOP plans. In 1997
and 1996, the Company paid approximately $19,000 and $18,000, 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.
In cases where quoted market prices were not available, fair values were
estimated using present value of future cash flows 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.
74
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------- --------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 25,220 $ 25,220 $ 19,893 $ 19,893
Investment securities 46,990 46,990 36,986 36,986
Non marketable equity securities 1,170
1,170 - -
Loans, net 147,588 148,388 126,430 127,730
Servicing asset
245 245 507 507
Interest only strip
346 346 417 426
Liabilities:
Deposits 206,637 210,189 176,279 176,190
Commitments to extend credit and
standby letters of credit
- 195 - -
</TABLE>
The following methods and assumptions were used in estimating the fair
values of financial instruments:
CASH AND CASH EQUIVALENTS - 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.
NON MARKETABLE EQUITY SECURITIES - Fair values of non marketable equity
securities are based on the quoted par value of capital stock of the
Federal Reserve Bank and Federal Home Loan Bank.
LOANS - The fair value for loans, values both the principal and interest
cash flows to the present using discounting techniques. Principal cash
flows are defined in the maturity schedules. Income is calculated for each
month using the basis, the remaining balance, and the repricing rate for
that time period. If any portion of the account is scheduled to reprice,
the projected offering rate for that time period is used as the repricing
rate. The income is then multiplied by a discount factor to determine the
discounted fair value income amount.
SERVICING ASSET AND INTEREST ONLY STRIP - Fair values for servicing assets
and interest only strips are estimated based on the results of valuation
techniques which include the initial price paid, discounted cash flows,
prepayment statistics, and estimated expected lives of the underlying
loans.
DEPOSITS - Fair values for transactions and savings accounts are equal to
the respective amounts payable on demand at December 31, 1998 and 1997
(i.e., carrying amounts). Fair values of fixed-maturity certificates of
deposit were estimated using discounted cash flows over their remaining
maturities as discussed above.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT - Fair values of
commitments to extend credit are estimated using the fees currently charged
to enter into similar agreements, taking into
75
<PAGE>
account the remaining terms of the agreements and the present
creditworthiness of counterparties. The fair value of standby letters of
credit are based on fees currently charged for similar agreements or on
the estimated cost to terminate them or otherwise settle the obligation
with the counterparties at the reporting date.
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 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital to average assets
(as defined). As of December 31, 1998 and 1997, the Company and Bank meet
all capital adequacy requirements to which they are subject and management
believes that, under the current regulations, both will continue to meet
their minimum capital requirements in the foreseeable future.
As of December 31, 1998 and 1997 respectively, the Bank's capital ratios
are considered "Well 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
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998
Total Capital (to Risk Weighted
Assets:)
Company $22,814 16.14% >=$11,309 >=8.00% N/A
Regency Bank $20,047 14.16% >=$11,327 >=8.00% >=$14,159 >=10.00%
Tier 1 Capital (to Risk Weighted
Assets):
Company $21,042 14.89% >=$5,654 >=4.00% N/A
Regency Bank $18,266 12.90% >=$5,664 >=4.00% >=$ 8,495 >=6.00%
Tier 1 Capital (to Average Assets):
Company $21,042 9.22% >=$9,128 >=4.00% N/A
Regency Bank $18,266 8.02% >=$9,108 >=4.00% >=$11,385 >=5.00%
</TABLE>
76
<PAGE>
<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%
</TABLE>
DIVIDENDS - 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, in an amount not exceeding the Bank's
net income for its last fiscal year or the amount of its net income for its
current fiscal year. Accordingly, the future payment of cash dividends 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.
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 $2,601,000 and $1,683,000 in 1998 and 1997, respectively.
The Bank maintained average balances of $2,801,000 and $1,815,000 in 1998
and 1997, respectively.
77
<PAGE>
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 December 31, 1998, 1997 and 1996
(In thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Cash paid during the period for:
Interest on deposits and other borrowings $ 5,455 $ 5,328 $ 4,597
Income taxes 1,901 - 316
Noncash transactions:
Transfer of loans to other real
estate owned 813 390 218
Net assets acquired through acquisition of
partnerships less cash received:
Land and real estate under construction - - 6,272
Notes receivable - - 2,025
Other assets - - 227
Notes payable - - 8,614
Accrued interest and other liabilities - - 714
</TABLE>
78
<PAGE>
15. PARENT COMPANY ONLY FINANCIAL STATEMENTS
Condensed balance sheets of Regency Bancorp at December 31, 1998, and 1997,
and condensed statements of income and cash flows for the years ended
December 31, 1998, 1997 and 1996, respectively. (In thousands):
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
<S> <C> <C>
ASSETS
Cash and short-term investments $ 2,662 $ 2,794
Investment in bank subsidiary 19,506 15,805
Investment in investment subsidiary 220 308
Other assets 61 107
-------- -------
- -
Total assets $ 22,449 $19,014
-------- -------
-------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ - $ 280
-------- -------
Total liabilities - 280
SHAREHOLDERS' EQUITY:
Common stock 15,229 15,203
Retained earnings 7,000 3,327
Unrealized gain on securities 220 204
-------- -------
Total shareholders' equity 22,449 18,734
------- -------
Total liabilities and shareholders' equity $ 22,449 $19,014
-------- -------
-------- -------
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
(IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
INCOME:
Regency Bank income (loss) $ 3,685 $(1,291) $ 1,122
Regency Investment Advisors income 126 103 -
---------- ---------- ---------
Total income 3,811 (1,188) 1,122
EXPENSES:
Management fees to bank subsidiary 66 66 66
Other 150 79 133
---------- ---------- ---------
Total expenses 216 145 199
NET INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) 3,595 (1,333) 923
INCOME TAX (BENEFIT) (78) (59) (85)
---------- ---------- ---------
NET INCOME (LOSS) $ 3,673 $(1,274) $ 1,008
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
(IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 3,673 $ (1,274) $ 1,008
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Equity in undistributed (income) loss of bank subsidiary (3,684) 1,291 (1,122)
Equity in undistributed income of investment subsidiary (126) (103) -
Decrease (increase) in other assets 45 22 (11)
(Decrease) increase in other liabilities (281) 281 (10)
------- -------- -------
Net cash (used in) provided by operating activities (373) 217 (135)
INVESTING ACTIVITIES:
Capital contribution to subsidiary bank - (3,950) -
Capital distribution from subsidiary bank - - 491
Capital distribution from investment subsidiary 215 - -
------- -------- -------
Net cash provided by (used in) investing activities 215 (3,950) 491
FINANCING ACTIVITIES:
Issuance of common stock - 5,927 -
Cash dividends - - (437)
Proceeds from the issuance of common stock under the
employee stock option plan 26 75 -
Proceeds from the issuance of common stock to
employee stock ownership plan - 333 -
Net cash provided by (used in) financing activities 26 6,335 (437)
------- -------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (132) 2,602 (81)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,794 192 273
------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,662 $ 2,794 $ 192
------- -------- -------
------- -------- -------
SUPPLEMENTAL CASH FLOW INFORMATION:
Transfer of Bank's equity in undistributed income
in investment subsidiary to Regency Bancorp $ - $ 205 $ -
</TABLE>
81
<PAGE>
16. QUARTERLY FINANCIAL DATA
Following is selected quarterly financial information for the years ended
December 31, 1998 and 1997. (In thousands):
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
QUARTER ENDED QUARTER ENDED
Dec. 31 Sep. 30 Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30 Mar. 31
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 4,957 $ 4,861 $ 4,694 $ 4,124 $ 4,148 $ 4,031 $3,659 $3,448
Interest expense 1,447 1,409 1,313 1,283 1,361 1,351 1,330 1,279
-------------------------------------------------------------------------------------
Net interest income 3,510 3,452 3,381 2,841 2,787 2,680 2,329 2,169
Provision for credit losses - 100 150 125 58 460 835 -
-------------------------------------------------------------------------------------
Net interest income after provision 3,510 3,352 3,231 2,716 2,729 2,220 1,494 2,169
Non-interest income 1,028 771 676 487 563 724 619 781
Non-interest expense 2,076 2,260 2,815 2,304 2,635 2,420 5,806 2,545
-------------------------------------------------------------------------------------
Income (loss) before taxes 2,462 1,863 1,092 899 657 524 (3,693) 405
Income tax expense (benefit) 1,015 785 463 380 325 223 (1,551) 170
-------------------------------------------------------------------------------------
Net income (loss) 1,447 1,078 629 519 332 301 (2,142) 235
Basic earnings per share .55 .41 .24 .20 .18 .16 (1.15) .13
Diluted earnings per share .52 .38 .22 .19 .17 .16 (1.15) .12
Dividends paid per share - - - - - - - -
Price range, common stock
High 14.8125 16.1250 14.6250 14.8750 11.0000 10.1250 10.000 10.6250
Low $12.9375 $11.0000 $13.6250 $10.2500 $9.2500 $8.2500 $9.0000 $9.1250
Shares on which earnings (loss)
per common share were based:
Basic 2,624 2,624 2,624 2,621 1,879 1,871 1,859 1,831
Diluted 2,805 2,804 2,807 2,784 1,948 1,926 1,859 1,902
</TABLE>
* * * * * *
82
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The registrant's Board of Director's approved the dismissal of
Deloitte & Touche LLP as the registrant's independent accountant effective
August 1, 1998. There were no disagreements with Deloitte & Touche LLP on any
matter of accounting principals or practices, financial statement disclosure,
or auditing scope or procedure. During the past two years the accountant's
report contained no adverse opinion or disclaimer of opinion nor was it
qualified as to uncertainty, audit scope or accounting principles. The
decision to dismiss Deloitte & Touche LLP was a recommendation made by the
registrant's Board Audit Committee to the registrant's Board of Directors.
The registrant has engaged KPMG LLP as principal accountant to audit the
registrant's financial statements effective August 1, 1998. Regency Bancorp
received a letter from Deloitte and Touche LLP confirming their agreement
with the above disclosure which was filed as Exhibit 99.1 on Form 8-K dated
August 1, 1998 and filed on August 7, 1999.
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 1999 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 1999 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 1999 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 1999 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.
<TABLE>
<S> <C>
(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.
(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) 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.
(10.11) 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.
*(10.12) 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.
*(10.13) 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.
*(10.14) Employment Agreement made and entered into as of August 22,
1996 between Regency Bank, a California Corporation, and Robert
J. Longatti,
85
<PAGE>
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.
*(10.15) 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.
*(10.16) Regency Bancorp 1990 Stock Option Plan, as amended, and Form
of Nonstatutory 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.
*(10.17) 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.
*(10.18) 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.
*(10.19) 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.
*(10.20) 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.
*(10.21) 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.
*(10.22) 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.
86
<PAGE>
*(10.23) 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.
*(10.24) 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.
(10.25) Form of Warrant Agreement and Warrant Certificate, incorporated
by reference from exhibit 10.29 of registrant's Annual Report on
Form 10-K for the year ended December 31, 1997, filed with the
Commission on March 27, 1997.
(10.26) Belle Plaine Financial LLC Agreement, dated July 23, 1998,
incorporated by reference from exhibit 99.1 on Form 8-K, filed
with the Commission on July 29, 1998.
(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
(23.2) Consent of KPMG Peat Marwick LLP
(27.1) Financial Data Schedule
</TABLE>
* Denotes management contracts, compensatory plans or arrangements.
(b) Reports on Form 8-K
The Company filed a Form 8-K dated October 8, 1998, in which
it reported its third quarter earnings, which states record
net quarterly income of $1.08 million or $0.41 per share for
the third quarter of 1998.
87
<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 19, 1999 By: /s/ STEVEN F. HERTEL
-------------- -------------------------
Steven F. Hertel
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 19, 1999 By: /s/ STEVEN R. CANFIELD
-------------- -------------------------
Steven R. Canfield
Executive Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
88
<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 19, 1999 Director, Chairman of the Board,
- ------------------------------- President & CEO
Steven F. Hertel
/s/ DAVID N. PRICE March 19, 1999 Director and Vice
- ------------------------------- Chairman
David N. Price
/s/ ROY JURA March 19, 1999 Director and Secretary
- -------------------------------
Roy Jura
/s/ JOSEPH L. CASTANOS March 19, 1999 Director
- -------------------------------
Joseph L. Castanos
/s/ WAYMON E. WATTS March 19, 1999 Director
- -------------------------------
Waymon E. Watts
/s/ DANIEL R. SUCHY March 19, 1999 Director
- -------------------------------
Daniel R. Suchy
/s/ BARBARA PALMQUIST March 19, 1999 Director
- -------------------------------
Barbara Palmquist
/s/ STEVE FREELAND March 19, 1999 Director
- -------------------------------
Steve Freeland
/s/ WILLIAM J. ALESSINI March 19, 1999 Director
- -------------------------------
William J. Alessini
/s/ WILLIAM J. RUH March19, 1999 Director
- -------------------------------
William J. Ruh
</TABLE>
89
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Number Description Page Number
-------------- ----------- -----------
<S> <C> <C>
3.2 Bylaws, as amended 91-118
23.1 Consent of Deloitte & Touche LLP 119
23.2 Consent of KPMG Peat Marwick LLP 120
27.1 Financial Data Schedule 121
</TABLE>
90
<PAGE>
BYLAWS
OF
REGENCY BANCORP
(a California Corporation)
ARTICLE I
OFFICES
1.1 PRINCIPAL EXECUTIVE OFFICE. The principal executive office of the
Corporation (the "Head Office") is hereby fixed and located at 7060 N.
Fresno, Fresno, California 93720. The Board of Directors is hereby granted
full power and authority to change said Head Office from one location to
another within the State of California, subject to all necessary regulatory
approvals.
1.2 OTHER OFFICES. Branch offices or other places of business may at any
time be established by the Board of Directors at any place or places, subject
to all necessary regulatory approvals.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 PLACE OF MEETINGS. All meetings of shareholders shall be held at the
Head Office of the Corporation, or at any other place within the State of
California which may be designated either by the Board of Directors or by the
written consent of all persons entitled to vote thereat and not present at
the meeting, given either before or after the meeting and filed with the
Secretary of the Corporation.
2.2 ANNUAL MEETINGS
(a) TIME. The Annual Meeting of Shareholders shall be held each year
on a date and at a time designated by the Board of Directors. The date so
designated shall be within five (5) months after the end of the fiscal year
of the Corporation, and within fifteen (15) months after the last Annual
Meeting.
(b) BUSINESS TO BE TRANSACTED. At the Annual Meeting, directors shall
be elected, reports of the affairs of the Corporation shall be considered,
and any other business may
<PAGE>
be transacted which is within the powers of the shareholders.
(c) NOTICE, MEANS. Written notice of each Annual Meeting shall be
given to each shareholder entitled to vote, either personally or by
first-class mail or other means of written communication, charges prepaid,
addressed to such shareholder at his address appearing on the books of the
Corporation or given by him to the Corporation for the purpose of notice.
If any notice or report addressed to the shareholder at the address of such
shareholder appearing on the books of the Corporation is returned to the
Corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice or report to
the shareholder at such address, all future notices or reports shall be
deemed to have been duly given without further mailing if the same shall be
available for the shareholder upon written demand of the shareholder at the
Head Office of the Corporation for a period of one year from the date of
the giving of the notice or report to all other shareholders. If a
shareholder gives no address, notice shall be deemed to have been given him
if sent by mail or other means of written communication addressed to the
place where the Head Office of the Corporation is situated, or if published
at least once in some newspaper of general circulation in the county in
which said Head Office is located. An affidavit of the mailing or other
means of giving any notice of any Annual meeting shall be executed by the
Secretary, Assistant Secretary, or any transfer agent of the Corporation
giving the notice, and shall be filed and maintained in the minute book of
the Corporation.
(d) NOTICE, TIME AND CONTENT. All notices referred to in subsection
(c) above shall be given to each shareholder entitled thereto not less than
ten (10) days nor more than sixty (60) days before each Annual Meeting. Any
such notice shall be deemed to have been given at the time when delivered
personally or deposited in the mail or sent by other means of written
communication.
Such notices shall specify:
(i) The place, the date, and the hour of such meeting;
(ii) Those matters which the Board of Directors, at the time of
the mailing of the notice, intends to present for action by the
shareholders;
2
<PAGE>
(iii) If directors are to be elected, the names of nominees
intended at the time of the notice to be presented by the Board of
Directors for election;
(iv) The general nature of a proposal, if any to take action
with respect to approval of, (a) a contract or other transaction
with an interested director, (b) amendment of the articles of
incorporation, (c) a reorganization of the Corporation as defined in
Section 181 of the General Corporation Law, (d) voluntary
dissolution of the Corporation, or (e) a distribution in dissolution
other than in accordance with the rights of outstanding preferred
shares, if any; and,
(v) Such other matters, if any, as may be expressly required by
statute.
2.3 NOMINATIONS FOR DIRECTOR. Nominations for election of members of the
Board of Directors may be made by the Board of Directors or by any
shareholder of any outstanding class of voting stock of the Corporation
entitled to vote for the election of directors. Notice of intention to make
any nominations, other than by the Board of Directors, shall be made in
writing and shall be received by the President of the Corporation no more
than sixty (60) days prior to any meeting of shareholders called for the
election of directors, no more than ten (10) days after the date the notice
of such meeting is sent to shareholders pursuant to Section 2.2 of these
bylaws, and not later than the time fixed in the notice of the meeting for
the opening of the meeting. Such notification shall contain the following
information to the extent known to the notifying shareholder: (a) the name
and address of each proposed nominee; (b) the principal occupation of each
proposed nominee; (c) the number of shares of voting stock of the Corporation
owned by each proposed nominee; (d) the name and residence address of the
notifying shareholder; and (e) the number of shares of voting stock of the
Corporation owned by the notifying shareholder. Nominations not made in
accordance herewith may be disregarded by the then chairman of the meeting,
and the inspectors of election shall then disregard all votes cast for each
nominee.
The first paragraph of this Section 2.3 shall be set forth in any notice
of a shareholders' meeting, whether pursuant to Section 2.2 or Section 2.4 of
these Bylaws, at which meeting the election of directors is to be considered.
3
<PAGE>
2.4 SPECIAL MEETINGS
(a) CALLING OF. Special meetings of the shareholders, for the purpose
of taking any action permitted by the shareholders under the General
Corporation Law and the articles of incorporation of this Corporation, may
be called at any time by the Chairman of this Corporation, the President,
the Board of Directors, or by one or more shareholders holding not less
than ten percent (10 percent) of the outstanding shares entitled to vote.
(b) TIME AND NOTICE OF. Upon receipt of a request in writing that a
special meeting of shareholders be called for any proper purpose, directed
to the Chairman of the Board, President, Vice President or Secretary by any
person (other than the Board) entitled to call a special meeting of
shareholders, then such officer shall forthwith cause notice to be given to
shareholders entitled to vote that a meeting will be held at a time
requested by the person or persons calling the meeting, not less than
thirty-five (35) nor more than sixty (60) days after receipt of the
request. If such notice is not given within twenty (20) days after receipt
of such request, the persons calling for the meeting may give notice
thereof in the manner provided by these bylaws or apply to the Superior
Court as provided in the General Corporation Law, Section 601(c). Except in
special cases where other express provisions is made by statute, notice of
such special meetings shall be given in the same manner as for Annual
Meetings of Shareholders. In addition to the matters required by item (i)
and, if applicable, item (iii) of Section 2.2 of these Bylaws, notice of
any special meeting shall specify the general nature of the business to be
transacted at such meeting.
2.5 QUORUM. A majority of the shares entitled to vote, represented in
person or by proxy, shall constitute a quorum for the transaction of business
at any meeting of shareholders. The shareholders present at a duly called or
held meeting at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave
less than a quorum, if any action taken (other than adjournment) is approved
by at least a majority of the shares required to constitute a quorum.
2.6 ADJOURNED MEETING AND NOTICE THEREOF. Any shareholders' meeting,
annual or special, whether or not a quorum is present, may be adjourned from
time to time by the vote of a majority of the shares, the holders of which
are either present in person or represented by proxy thereat, but in the
absence of a quorum no other business may be transacted at such meeting,
4
<PAGE>
except as provided in Section 2.5 above. When any shareholders' meeting,
either annual or special, is adjourned for forty-five (45) days or more, or
if after adjournment, a new record date is fixed for the adjourned meeting,
notice of the adjourned meeting shall be given as in the case of an original
meeting. Except as provided above, it shall not be necessary to give any
notice of the time and place of the adjourned meeting or of the business to
be transacted thereat, other than by announcement of the time and place
thereof at the meeting at which such adjournment is taken.
2.7 VOTING
(a) RECORD DATE. Unless a record date for voting purposes is fixed as
provided in Section 5.1 of Article V of these Bylaws then, subject to the
provisions of Sections 702 through 704 of the General Corporation Law
(relating to voting of shares held by a fiduciary, in the name of a
corporation, or in joint ownership), only persons in whose names shares
entitled to vote stand on the stock records of the Corporation at the close
of business on the business day next preceding the day on which notice of
the meeting is given or if such notice is waived, at the close of business
on the business day next preceding the day on which the meeting of
shareholders is held, shall be entitled to vote at such meeting, and such
day shall be the record date for such meeting.
(b) BALLOT. All voting shall be by written ballot; provided, however,
that voting with respect to procedural matters may be oral unless any
shareholder demands voting by ballot. If a quorum is present, except with
respect to election of directors, the affirmative vote of the majority of
the shares represented at the meeting and entitled to vote on any matter
shall be the act of the shareholders, unless the vote of greater number or
voting by classes is required by the General Corporation Law or the
articles of incorporation.
(c) CUMULATIVE VOTING FOR ELECTION OF DIRECTORS. Subject to the
requirements contained in this subsection, every shareholder entitled to
vote at any election for directors shall have the right to cumulate his
votes and give one candidate a number of votes equal to the number of
directors to be elected multiplied by the number of votes to which his
shares are entitled, or to distribute his votes on the same principle among
as many candidates as he shall think fit. No shareholder shall be entitled
to cumulate his votes for any candidate unless the name of such candidate
or candidates for whom such votes would be cast has been placed in
nomination in accordance with the provisions of these bylaws and any
shareholder has given notice at the meeting
5
<PAGE>
prior to the voting of such shareholder's intent to cumulate his votes. The
candidates receiving the highest number of votes of shares entitled to be
voted for them, up to the number of directors to be elected, shall be
elected.
2.8 VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS. The
transactions of any meeting of shareholders, either Annual or special,
however called and noticed, and wherever held, shall be as valid as though
had at a meeting duly held after regular call and notice, if a quorum be
present either in person or by proxy, and if, either before or after the
meeting, each of the persons entitled to vote, who was not present in person
or by proxy, signs a written waiver of notice or a consent to a holding of
the meeting, or an approval of the minutes. The waiver of notice or consent
need not specify either the business to be transacted or the purpose of any
Annual or special meeting of shareholders, except that if action is taken or
proposed to be taken for approval of any of those matters specified in
Section 2.2(d)(iv) of Article II, the waiver of notice or consent shall state
the general nature of the proposal. All such waivers, consents or approvals
shall be filed with corporate records or made a part of minutes of the
meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of that meeting, except when the person objects, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened, and except that attendance at a meeting is not a
waiver of any right to object to the consideration of matters required by The
General Corporation Law to be included in the notice of the meeting but not
so included if that objection is expressly made at the meeting.
2.9 ACTION WITHOUT MEETING
(a) ELECTION OF DIRECTORS. Except as provided in Article III, Section
3.4(d), directors may be elected without a meeting by a consent in writing,
setting forth the action so taken signed by all of the persons who would be
entitled to vote for the election of directors, provided that, without
notice except as hereinafter set forth, a director may be elected at any
time to fill a vacancy not filled by the directors by the written consent
of persons holding a majority of the outstanding shares entitled to vote
for the election of directors.
(b) OTHER ACTION. Unless otherwise provided for in the articles, any
action which, under any provisions of the General Corporation Law may be
taken at a meeting of the shareholders, may be taken without a meeting, and
without notice except as hereinafter set forth, if a consent in
6
<PAGE>
writing, setting forth the action so taken, is signed by the holders of
outstanding shares having not less than the minimum number of votes that
would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted.
Unless the consents of all shareholders entitled to vote have been
solicited in writing: (i) notice of any proposed shareholder approval of (a)
a contract or other transaction with an interested director, (b)
indemnification of an agent of the Corporation as authorized by Section 3.17
of Article III of these bylaws, (c) a reorganization of the Corporation as
defined in Section 181 of the General Corporation Law, or (d) a distribution
in dissolution other than in accordance with the rights of outstanding
preferred shares, if any, without a meeting by less than unanimous written
consent, shall be given at least ten (10) days before the consummation of the
action authorized by such approval; and, (ii) prompt notice shall be given of
the taking of any other corporate action approved by shareholders without a
meeting by less than unanimous written consent, to those shareholders
entitled to vote who have not consented in writing. Such notices shall be
given in the manner and with the effect provided in Section 2.2 of Article II
of these bylaws.
Unless, as provided in Section 5.1 of Article V of these bylaws, the
Board of Directors has fixed a record date for the determination of
shareholders entitled to notice of and to give such written consent, the
record date for such determination shall be the day on which the first
written consent is given. All such written consents shall be filed with the
Secretary of the Corporation.
Any shareholder giving a written consent, or the shareholder's
proxyholders, or a transferee of the shares or a personal representative of
the shareholder or their respective proxyholders, may revoke the consent by a
writing received by the Corporation prior to the time that written consents
of the number of shares required to authorize the proposed action have been
filed with the Secretary of the Corporation, but may not do so thereafter.
Such revocation is effective upon its receipt by the Secretary of the
Corporation.
2.10 PROXIES. Every person entitled to vote or execute consents shall
have the right to do so either in person or by one or more agents authorized
by a written proxy executed by such person or his duly authorized agent and
filed with the Secretary of the Corporation. Any proxy duly executed is not
revoked and continues in full force and effect until (i) an instrument
revoking it or a duly executed proxy bearing a later date is filed with the
Secretary of the Corporation prior to the vote pursuant thereto, (ii) the
person executing the proxy attends the
7
<PAGE>
meeting and votes in person, or (iii) written notice of the death or
incapacity of the maker of such proxy is received by the Corporation before
said proxy is voted and counted; provided that no such proxy shall be valid
after the expiration of eleven (11) months from the date of its execution,
unless the person executing it specifies therein the length of time for which
such proxy is to continue in force.
2.11 INSPECTORS OF ELECTION.
(a) APPOINTMENT, NUMBER. In advance of any meeting of shareholders,
the Board of Directors may appoint any persons, other than nominees for
office, as inspectors of election to act at such meeting or any adjournment
thereof. If inspectors of election are not so appointed, or if any person
so appointed fails to appear or refuses to act, the chairman of any such
meeting may, and on the request of any shareholder or his proxy shall, make
such appointment at the meeting as provided in Section 707 of the General
Corporation Law. The number of inspectors shall be either one (1) or three
(3). If appointed at a meeting on the request of one or more shareholders
or proxies, the majority of shares represented in person or by proxy shall
determine whether one (1) or three (3) inspectors are to be appointed.
(b) DUTIES. The duties of such inspectors shall be as prescribed by
Section 707 of the General Corporation Law and shall include: determining
the number of shares outstanding and the voting power of each; the shares
represented at the meeting; the existence of a quorum; the authenticity,
validity and effect of proxies; receiving votes, ballots or consents;
hearing and determining all challenges and questions in any way arising in
connection with the right to vote; counting and tabulating all votes or
consents; determining when the polls shall close; determining the result;
and such acts as may be proper to conduct the election or vote with
fairness to all shareholders. In the determination of the validity and
effect of proxies, the dates contained on the forms of proxy shall
presumptively determine the order of execution of the proxies, regardless
of the postmark dates on the envelopes in which they are mailed. The
inspectors of election shall perform their duties impartially, in good
faith, to the best of their ability and as expeditiously as is practical.
If there are three (3) inspectors of election, the decision, or act or
certificate of a majority is effective in all respects as the decision, act
or certificate of all. Any report or certificate made by the inspectors of
election is PRIMA FACIE evidence of the facts stated therein.
8
<PAGE>
ARTICLE III
DIRECTORS
3.1 POWERS. Subject to any limitations of the articles of
incorporation and of the General Corporation Law to action to be authorized
or approved by the shareholders and subject to the duties of directors as
prescribed by these bylaws, all corporate powers shall be exercised by or
under the authority of, and the business and affairs of the Corporation shall
be controlled by, the Board of Directors. Without prejudice to such general
powers, but subject to the same limitations, it is hereby expressly declared
that the directors shall have the following powers, to wit:
FIRST - To select and remove all the officers, agents and employees of
the Corporation, prescribe such powers and duties for them as may not be
inconsistent with law, with the articles of incorporation or these bylaws,
fix their compensation and require from them security for faithful
service.
SECOND - To conduct, manage and control the affairs and business of
the Corporation, and to make such rules and regulations therefor not
inconsistent with law, or with the articles of incorporation or the bylaws,
as they may deem best.
THIRD - To change the Head Office of the Corporation from one location
to another as provided in Section 1.1 of Article 1 of these bylaws; to fix
and locate from time to time one or more branch offices of other places of
business of the Corporation, as provided in Section 1.2 of Article 1 of
these bylaws; to designate any place within the State of California for the
holding of any shareholders' meeting or meetings; and to adopt, make and
use a corporate seal, and to prescribe the forms of certificates of stock,
and to alter the form of such seal and of such certificates from time to
time, as in their judgment they may deem best, provided such seal and such
certificates shall at all times comply with the provisions of law.
FOURTH - To authorize the issue of shares of stock for the Corporation
from time to time, upon such terms as may be lawful.
FIFTH - To borrow money and incur indebtedness for the purposes of the
Corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, capital notes, debentures, deeds
of trust, mortgages,
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pledges, hypothecations or other evidences of debt and securities therefor,
to the extent permitted by law.
SIXTH - By resolution adopted by a majority of the authorized number
of directors, the Board may designate an executive and other committees,
each consisting of two or more directors, to serve at the pleasure of the
Board, and to prescribe the manner in which proceedings of such committee
shall be conducted. Unless the Board of Directors shall otherwise prescribe
the manner of proceedings of any such committee, meetings of such committee
may be regularly scheduled in advance and may be called at any time by any
two members thereof; otherwise, the provisions of these bylaws with respect
to notice and conduct of meetings of the Board shall govern. Any such
committee, to the extent provided in a resolution of the Board, shall have
all of the authority of the Board, except with respect to:
(i) the approval of any action for which the General Corporation
Law or the articles of incorporation also require shareholder
approval;
(ii) the filling of vacancies on the Board or on any committee;
(iii) the fixing of compensation of the directors for serving on
the Board or on any committee;
(iv) the adoption, amendment or repeal of bylaws;
(v) the amendment or repeal of any resolution of the Board;
(vi) any distribution to the shareholders, except at a rate or in
a periodic amount or within a price range determined by the Board;
(vii) the appointment of other committees of the Board or the
members thereof; or
(viii) the approval of any action which applicable law requires
be approved by a greater number of affirmative votes of directors than
were obtained or are obtainable on such committee.
SEVENTH- The Board may appoint a Stock Option Committee or Committees
composed of not less than two (2) directors, one of whom shall serve as
chairman. The duties of this committee shall be to manage this
Corporation's stock option plan(s), to make periodic reports to the Board
as to the status of the Plan, and, in addition to the power of the
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Board to grant options, to grant qualified and nonqualified options
pursuant to the Corporation's stock option plan(s).
3.2 NUMBER AND QUALIFICATION OF DIRECTORS. The number of directors of
the Corporation shall not be less than (8) nor more than fifteen (15) until
changed by amendment of the articles of incorporation or by a bylaw amending
this Section 3.2 duly adopted by the vote or written consent of holders of a
majority of the outstanding shares entitled to vote. The exact number of
directors shall be fixed from time to time, within the limits specified in
the articles of incorporation or in this Section 3.2, by a resolution duly
adopted by a vote of a majority of the shares entitled to vote represented at
a duly held meeting at which a quorum is present, or by the written consent
of the holders of a majority of the outstanding shares entitled to vote, or by
the Board of Directors.
Subject to the foregoing provisions for changing the number of
directors, the number of directors of this Corporation has been fixed at ten
(10).
3.3 ELECTION AND TERM OF OFFICE. The directors shall be elected at each
Annual Meeting of Shareholders but, in any such Annual Meeting is not held or
the directors are not elected thereat, the directors may be elected at any
special meeting of shareholders held for that purpose. All directors shall
hold office until the next Annual Meeting of Shareholders and until their
respective successors are elected and qualified, subject to the General
Corporation Law and the provisions of these bylaws with respect to vacancies
on the Board.
3.4 VACANCIES.
(a) WHEN A VACANCY EXISTS. A vacancy in the Board of Directors shall
be deemed to exist in case of the death, resignation or removal of any
director, if a director has been declared of unsound mind by order of
court, or if a director is convicted of a felony, if the authorized number
of directors be increased, of if the shareholders fail, at any Annual or
special meeting of shareholders at which any director or directors are
elected, to elect the full authorized number of directors to be voted for
at that meeting.
(b) FILLING OF VACANCIES BY DIRECTORS. Vacancies in the Board of
Directors, except for a vacancy created by the removal of director (see
subsection (d) below) may be filled by a majority of the remaining
directors, though less than a quorum, or by a sole remaining director, and
each director so elected shall hold office until his successor is elected
at an Annual or a special meeting of shareholders. If the
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Board of Directors accepts the resignation of a director tendered to take
effect at a future time, the Board of Directors (or the shareholders) may
elect a successor to take office when the resignation becomes effective.
(c) FILLING OF VACANCIES BY SHAREHOLDERS. The shareholders may elect a
director or directors at any time to fill any vacancy or vacancies not
filled by the directors. Any such election by written consent shall require
the consent of shareholders of a majority of the outstanding shares
entitled to vote.
(d) VACANCY DUE TO REMOVAL OF DIRECTOR. A vacancy in the Board of
Directors created by the removal of a director may only be filled by the
vote of a majority of the shares entitled to vote represented at a duly
held meeting at which a quorum is present, or by the written consent of the
holders of all the outstanding shares.
(e) WHEN REDUCTION IN NUMBER EFFECTIVE. No reduction of the authorized
number of directors shall have the effect of removing any director prior to
the expiration of his term of office.
3.5 PLACE OF MEETING. Regular meetings of the Board of Directors shall
be held at any place within the State of California which has been designated
from time to time by resolution of the Board. In the absence of such
designation, regular meetings shall be held at the Head Office of the
Corporation. Special meetings of the Board may be held either at a place so
designated or at the Head Office.
3.6 ORGANIZATION MEETING. Immediately following each Annual Meeting of
Shareholders the Board of Directors shall hold a regular meeting at the place
of said Annual Meeting or at such other place as shall be fixed by the Board
of Directors, for the purpose of organization, election of officers, and the
transaction of other business. Call and notice of such meetings are hereby
dispensed with.
3.7 OTHER REGULAR MEETINGS. Other regular meetings of the Board of
Directors shall be held not less than once each calendar quarter on the third
Thursday of the month at 11:00 a.m. at 7060 N. Fresno, Fresno, California or
at such other day, hour and place as shall be fixed from time to time by the
Board of Directors by resolution or in the bylaws. If such day falls upon a
legal holiday, then said meeting shall be held at the same time on the next
day thereafter ensuing which is a full business day. Notice of all such
regular meetings of the Board of Directors is hereby dispensed with.
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3.8 SPECIAL MEETINGS. Special meetings of the Board of Directors for any
purpose or purposes shall be called at any time by the Chairman of the Board,
the President, the Secretary or by any two directors. Written notice of the
time and place of special meetings shall be delivered personally to each
director or communicated to each director by telephone, or by telegraph or
mail, charges prepaid, addressed to him at his address as it is shown upon
the records of the Corporation or, if it is not so shown on such records or
it not readily ascertainable, at the place at which the meetings of the
directors are regularly held. In case such notice is mailed or telegraphed,
it shall be deposited in the United States mail or delivered to the telegraph
company in the place in which the Head Office of the Corporation is located
at least four (4) days prior to the time of the holding of the meeting. In
case such notice is delivered, personally or by telephone, as above provided,
it shall be so delivered at least twenty-four (24) hours prior to the time of
the holding of the meeting. Such mailing, telegraphing or delivery,
personally or by telephone, as above provided, shall be due, legal and
personal notice to such director. Any notice shall state the date, place and
hour of the meeting and the general nature of the business to be transacted,
and no other business may be transacted at the meeting.
3.9 ACTION WITHOUT MEETING. Any action by the Board of Directors may be
taken without a meeting if all members of the Board shall individually or
collectively consent in writing to such action. Such written consent or
consents shall be filed with the minutes of the proceedings of the Board and
shall have the same force and effect as a unanimous vote of such directors.
3.10 ACTION AT A MEETING; QUORUM AND REQUIRED VOTE. Presence of a
majority of the authorized number of directors at a meeting of the Board of
Directors constitutes a quorum for the transaction of business, except as
hereinafter provided. Members of the Board may participate in a meeting
through use of conference telephone or similar communications equipment, so
long as all members participating in such meeting can hear one another.
Participation in a meeting as permitted in the preceding sentence constitutes
presence in person at such meeting. Every act or decision done or made by a
majority of the directors present at a meeting duly held at which a quorum is
present shall be regarded as the act of the Board of Directors, unless a
greater number, or the same number after disqualifying one or more directors
from voting, is required by law, by the articles of incorporation, or by
these bylaws. A meeting at which a quorum is initially present may continue
to transact business notwithstanding the withdrawal of a director, provided
that any action taken is approved by at least a majority of the required
quorum for such meeting.
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3.11 WHEN NOTICE NOT REQUIRED. Notice of a meeting need not be given to
any director who signs a written waiver of notice or a consent to holding
such meeting or an approval of the minutes thereof, whether before or after
the meeting. All such waivers, consents or approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
3.12 WAIVER OF NOTICE BY ATTENDANCE. Attendance of a director at any
meeting shall constitute a waiver of notice of such meeting, unless a
director attends for the express purpose of objecting to the transaction of
any business because the meeting is not lawfully called, noticed, or
convened; provided, however, if after stating his objection, the objecting
director continues to attend and by his attendance participates in any matter
other than those to which he objected, he shall be deemed to have waived
notice of such meeting and withdrawn his objections.
3.13 ADJOURNMENT. A quorum of the directors may adjourn any directors'
meeting to meet again at a stated day and hour; provided, however, that in
the absence of a quorum a majority of the directors present and any
directors' meeting, either regular or special, may adjourn from time to time
until the time fixed for the next regular meeting of the Board.
3.14 NOTICE OF ADJOURNMENT. If the meeting is adjourned for more than
twenty-four (24) hours, notice of any adjournment to another time or place
shall be given prior to the time of the adjourned meeting to the directors
who were not present at the time of adjournment. Otherwise notice of the time
and place of holding any adjourned meeting need not be given to absent
directors if the time and place be fixed at the meeting adjourned.
3.15 FEES AND COMPENSATION. Directors and members of committees may
receive such compensation, if any, for their services, and such reimbursement
for expenses, as may be fixed or determined by resolution of the Board.
3.16 INDEMNIFICATION OF CORPORATE AGENTS. The Corporation may indemnify
each or its agents against expenses, judgments, fines, settlements and other
amounts, actually and reasonably incurred by such person having been made or
having been threatened to be made a party to a proceeding to the fullest
extent possible by the provisions of Section 317 of the General Corporation
Law and the Corporation may advance the expenses reasonably expected to be
incurred by such agent in defending any such proceeding upon receipt of the
undertaking required by Section 317(f). The terms "agent," "proceeding" and
"expense" made in this Section 3.16 shall have the same meaning as such terms
in said Section 317 of the General Corporation Law.
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3.17 TRANSACTIONS BETWEEN THE CORPORATION AND ITS DIRECTORS.
(a) CORPORATION AND DIRECTORS. No contract or other transaction
between the Corporation and one or more of its directors, or between the
Corporation and any corporation, firm or association in which one or more
of its directors has a material financial interest (a mere common
directorship shall not constitute a material financial interest), is either
void or voidable because such director or directors or such other
corporation, firm or association are parties or because such director or
directors are present at the meeting of the board or a committee thereof
which authorizes, approves or ratifies the contract or transaction, if
(1) the material facts as to the transaction and as to such
director's interest are fully disclosed or known to the shareholders
and such contract or transaction is approved in good faith by the
affirmative vote of a majority of shares entitled to vote represented
at a duly held meeting at which a quorum is present or by the written
consent of shareholders, with the shares owned by the interested
director or directors not being entitled to vote thereon;
(2) the material facts as to the transaction and as to such
director's interest are fully disclosed or known to the Board or
Committee, and the Board or committee authorizes, approves or ratifies
the contract or transaction in good faith by a vote sufficient without
counting the vote of the interested director or directors and the
contract or transaction is just and reasonable as to the Corporation
at the time it is authorized, approved or ratified; or
(3) as to contracts or transactions not approved as provided in
paragraph (ax or (b) of this subdivision, the person asserting the
validity of the contract or transaction sustains the burden of proving
that the contract or transaction was just and reasonable as to the
Corporation at the time it was authorized, approved or ratified.
(b) CORPORATIONS HAVING INTERRELATED DIRECTORS. No contract of other
transaction between the Corporation and any corporation or association of
which one or more of its directors are directors is either void or voidable
because such director or directors are present at the meeting of the
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Board or a committee thereof which authorizes, approves or ratifies the
contract or transaction, if
(1) the material facts as to the transaction and as to such
director's other directorship are fully disclosed or known to the
Board or committee, and the Board or committee authorizes, approves or
ratifies the contract or transaction in good faith by a vote
sufficient without counting the vote of the common director or
directors or the contract or transaction is approved by the
shareholders (Section 153 of the General Corporation Law) in good
faith, or
(2) As to contracts or other transactions not approved as
provided in paragraph (1) of this subdivision, the contract or
transaction is just and reasonable as to the Corporation at the time
it is authorized, approved or ratified.
This subsection (b) does not apply to contracts or transaction covered by
subsection (a).
(c) INTERESTED DIRECTORS. Interested or common directors may be
counted in determining the presence of a quorum at a meeting of the Board
or a committee thereof which authorizes, approves or ratifies a contract or
transaction.
(d) LOANS AND EXTENSIONS OF CREDIT. For purposes of this Section 3.17,
the term "transaction" does not include loans or extensions of credit in
the ordinary course of business.
ARTICLE IV
OFFICERS
4.1 OFFICERS. The officers of the Corporation shall be a Chairman of the
Board, a President, a Secretary and a Chief Financial Officer. The Corporation
may also have, at the discretion of the Board of Directors, one or more Vice
Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers
and such other officers as may be appointed in accordance with the provisions of
Section 4.3.
4.2 ELECTION. The officers of the Corporation, except such officers as may
be appointed in accordance with the provisions of Section 4.3 or Section 4.5,
shall be chosen annually by the Board of Directors, and each shall hold his
office until he shall
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resign or shall be removed or otherwise disqualified to serve, or his
successor shall be elected and qualified.
4.3 SUBORDINATE OFFICERS, ETC. The Board of Directors may appoint, and
may empower the President to appoint, such other officers as the business of
the Corporation may require, each of whom shall hold office, for such period,
have such authority and perform such duties as are provided in the bylaws or
as the Board of Directors may from time to time determine.
4.4 REMOVAL AND RESIGNATION. Any officer may be removed, either with or
without cause, by the Board of Directors, at any regular or special meeting
thereof, or, except in case of an officer chosen by the Board of Directors,
by any officer upon whom such power of removal may be conferred by the Board
of Directors (subject, in each case, to the rights, if any, of the officer
under any contract of employment).
Any officer may resign at any time by giving written notice to the Board
of Directors or to the President or to the Secretary of the Corporation,
without prejudice, however, to the rights, if any, of the Corporation under
any contract t which such officer is a party. Any such resignation shall take
effect at the date of the receipt of such notice or at any later time
specified therein; and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
4.5 VACANCIES. A vacancy in any office because of death, resignation,
removal, disqualification or any other cause shall be filled in the manner
prescribed in these bylaws for regular appointments to such office.
4.6 CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at
all meetings of the directors and the shareholders and shall exercise such
supervisory powers as may be given by the Board of Directors.
4.7 PRESIDENT. Subject to such supervisory powers, if any, as may be
given by the Board of Directors to the Chairman of the Board, the President
shall be the chief executive officer of the Corporation and shall, subject to
the control of the Board of Directors, have general supervision, direction
and control of the business and officers of the Corporation. He shall preside
at all meetings of the shareholders and all meetings of the Board of
Directors in the absence of the Chairman of the Board. He shall have the
general powers and duties of management usually vested in the office of
president of a corporation, and shall have such other powers and duties as
may be prescribed by the Board of Directors or the bylaws.
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4.8 VICE PRESIDENTS. In the event of the absence or disability of the
President, the Executive Vice Presidents, in order of their rank as fixed by
the Board of Directors or, if not ranked, the Executive Vice President
designated by the Board of Directors and in the event or the absence or
disability of all Executive Vice Presidents the other Vice Presidents, in
order of their rank as fixed by the Board of Directors or, if not ranked, the
Vice President designated by the Board of Directors, shall perform all the
duties of the President, and when so acting shall have all the powers of, and
be subject to all the restrictions upon, the President. The Vice Presidents
shall have such other powers and perform such other duties as from time to
time may be prescribed for them respectively by the Board of Directors or
these bylaws.
4.9 SECRETARY.
(a) BOOK OF MINUTES. The Secretary shall record or cause to be
recorded, and shall keep or cause to be kept, at the Head Office and such
other place as the Board of Directors may order, a book of minutes of
actions taken at all meetings of directors and shareholders, with the time
and place of holding, whether regular or special, and, if special, how
authorized, the notice thereof given, the name of those present at
directors' meetings, the number of shares present or represented at
shareholders' meetings, and the proceedings thereof.
(b) SHARE REGISTER. The Secretary shall keep, or cause to be kept, at
the Head Office or at the office of the Corporation's transfer agent, a
share register, or a duplicate share register, showing the names of the
shareholders and their addresses, the number and classes of shares held by
each, the number and date of certificates issued for the same, and the
number and date of cancellation of every certificate surrendered for
cancellation.
(c) OTHER DUTIES. The Secretary shall give, or cause to be given,
notice of all the meetings of the shareholders and of the Board of
Directors required by the bylaws or by law to be given, and the Secretary
shall keep the seal of the Corporation, if any, in safe custody, and shall
have such other powers and perform such other duties as may be prescribed
by the Board of Directors or by the bylaws.
4.10 CHIEF FINANCIAL OFFICER.
(a) BOOKS OF ACCOUNT. The Chief Financial Officer of the Corporation
shall keep and maintain, or cause to be kept and maintained, adequate and
correct accounts of the
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properties and business transactions of the Corporation, and shall send or
cause to be sent to the shareholders of the Corporation such financial
statements and reports as are by law or these bylaws required to be sent to
them. The books of account shall at all reasonable times be open to
inspection by any director.
(b) OTHER DUTIES. The Chief Financial Officer shall deposit or cause
to be deposited all moneys and other valuables in the name and to the
credit of the Corporation with such depositaries as may be designated by
the Board of Directors. The Chief Financial Officer shall disburse or cause
to be disbursed the funds of the Corporation as may be ordered by the Board
of Directors, shall render to the President and directors, whenever they
request it, an account of all of his transactions as Chief Financial
Officer and of the financial condition of the Corporation, and shall have
such other powers and perform such other duties as may be prescribed by the
Board of Directors or the bylaws.
ARTICLE V
GENERAL CORPORATE MATTERS
5.1 RECORD DATE. The Board of Directors may fix a time in the future as a
record date for the determination of the shareholders entitled to notice of and
to vote at any meeting of shareholders or entitled to give consent to corporate
action in writing without a meeting, to receive any report, to receive any
dividend or distribution, or any allotment of rights, or to exercise rights in
respect to any change, conversion, or exchange of shares. The record date so
fixed shall be not more than sixty (60) days nor less than ten (10) days prior
to the date of any meeting, nor more than sixty (60) days prior to any other
event for the purposes of which it is fixed. When a record date is so fixed,
only shareholders of record on that date are entitled to notice of and to vote
at any such meeting, to give consent without a meeting, to receive any report,
to receive a dividend, distribution, or allotment of rights, or to exercise the
rights, as the case may be, notwithstanding any transfer of any shares on the
books of the Corporation after the record date, except as otherwise provided in
the articles of incorporation or these bylaws.
5.2 INSPECTION OF CORPORATE RECORDS.
(a) BY SHAREHOLDERS. The accounting books and records, the record of
shareholders, and minutes of proceedings of the shareholders and the Board
and committees of the Board of this Corporation and any subsidiary of this
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Corporation shall be open to inspection upon the written demand on the
Corporation of any shareholder or holder of a voting trust certificate at
any reasonable time during usual business hours, for a purpose reasonably
related to such holder's interests as a shareholder or as the holder of
such voting trust certificate. Such inspection by a shareholder or holder
of a voting trust certificate may be made in person or by agent or
attorney, and the right of inspection includes the right to copy and make
extracts.
A shareholder or shareholders holding at least five percent (5
percent) in the aggregate of the outstanding voting shares of the
Corporation, or in the event the Corporation is subject to the reporting
requirements of the Securities Exchange Act of 1934, a shareholder or
shareholders who hold at least one percent (1 percent) of such voting
shares and have filed applicable forms with the Securities and Exchange
Commission relating to the election of directors of the Corporation,
shall have (in person or by agent or attorney) the absolute right: (1) to
inspect and copy the record of shareholders' names and addresses and
shareholdings during usual business hours upon five (5) business days'
prior written demand upon the Corporation and; (2) to obtain from the
transfer agent for the Corporation, upon written demand and upon the
tender of its usual charges, a list of the shareholders' names and
addresses, who are entitled to vote for the election of directors, and
their shareholdings, as of the most recent record date for which it has
been compiled or as of a date specified by the shareholder subsequent to
the date of demand. The list shall be made available on or before the
later of five (5) business days after the demand is received or the date
specified therein as the date as of which the list is to be compiled.
(b) BY DIRECTORS. Every director shall have the absolute right at any
reasonable time to inspect and copy all books, records and documents of
every kind and to inspect the physical properties of the Corporation. Such
inspection by a director may be made in person or by agent or attorney and
the right of inspection includes the right to copy and make extracts.
5.3 MAINTENANCE AND INSPECTION OF BYLAWS. The Corporation shall keep at its
Head Office the original or a copy of the bylaws as amended to date, which shall
be open to inspection by the shareholders at all reasonable times during office
hours.
5.4 ANNUAL AND OTHER REPORTS. The Board of Directors of the Corporation
shall cause an annual report to be sent to the shareholders at least fifteen
(15) days prior to the Annual Meeting of shareholders but not later than one
hundred twenty
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(120) days after the close of the fiscal year in accordance with the provisions
of Section 1501 of the General Corporation law.
5.5 CHECKS AND DRAFTS, HOW SIGNED. All checks, drafts or other orders for
payment of money, notes or other evidences of indebtedness, issued in the name
of or payable to the Corporation, shall be signed or endorsed by such person or
persons and in such manner as, from time to time, shall be determined by
resolution of the Board of Directors.
5.6 CONTRACTS, HOW EXECUTED. The Board of Directors, except as otherwise
provided in these bylaws, may authorize any officer or officers, agent or
agents, to enter into any contract or execute any instrument in the name of and
on behalf of the Corporation, and such authority may be general or confined to
specific instances; and, unless so authorized or ratified by the Board of
Directors or within the agency power of any officer, no officer, agent or
employee shall have any power or authority to bind the Corporation by any
contract or engagement or to pledge its credit or to render it liable for any
purpose or to any amount.
5.7 CERTIFICATES FOR SHARES. Every holder of shares in the Corporation
shall be entitled to have a certificate signed in the name of the Corporation by
the Chairman of the Board or the President or a Vice President and by the Chief
Financial Officer or an Assistant Treasurer or the Secretary or any Assistant
Secretary, certifying the number of shares and the class or series of shares
owned by the shareholder. Any of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if such
person were an officer, transfer agent or registrar at the date of issue.
5.8 STATEMENTS ON CERTIFICATE FOR SHARES. Any such certificate shall also
contain such legend or other statement as may he required by law, by these
bylaws or by an agreement between the Corporation and the issuee thereof.
5.9 LOST, STOLEN OR DESTROYED CERTIFICATES. No new certificates for
shares shall be issued to replace an old certificate unless the latter is
surrendered and canceled at the same time; provided, however, that a new
certificate will be issued by order of the Board of Directors without the
surrender and cancellation of the old certificate if (i) the old certificate
is lost, apparently destroyed or wrongfully taken; (ii) the request for the
issuance of the new certificate is made within a reasonable time after the
owner of the old certificate
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has notice of its loss, destruction, or theft; (iii) the request for the
issuance of a new certificate is made prior to the receipt of notice by the
Corporation that the old certificate has been acquired by a bona fide
purchaser; (iv) the owner of the old certificate files a sufficient indemnity
bond with or provides other adequate security to the Corporation; and (v) the
owner satisfies any other reasonable requirements imposed by the Corporation.
In the event of the issuance of a new certificate, the rights and liabilities
of the Corporation, and of the holders of the old and new certificates, shall
be governed by the provisions of Sections 8104 and 8405 of the California
Commercial Code.
5.10 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The Chairman of the
Board, President or any Vice President, or any other person authorized by
resolution of the Board of Directors or by any of the foregoing designated
officers, are authorized to vote, represent and exercise on behalf of this
Corporation all rights incident to any and all shares of any other
corporation or corporations standing in the name of the Corporation. The
authority herein granted to said officers to vote or represent on behalf of
this Corporation any and all shares held by this Corporation in any other
corporation or corporations may be exercised either by such officers in
person or by any other person authorized so to do by proxy or power or
attorney duly executed by these officers.
5.11 CONSTRUCTION AND DEFINITIONS. Unless the context otherwise
requires, the general provisions, rules of construction and definitions
contained in the General Corporation Law shall govern the construction of
these bylaws. Without limiting the generality of the foregoing, the masculine
gender includes the feminine and neuter, the singular number includes the
plural and the plural number includes the singular, and the term "person"
includes a corporation as well as a natural person.
5.12 CORPORATE SEAL. The Board of Directors shall adopt, use and at will
alter a corporate seal. Any corporate seal shall be circular in form and
shall have inscribed thereon the name of the Corporation, the date of its
incorporation and the word "California."
ARTICLE VI
AMENDMENTS
6.1 POWER OF SHAREHOLDERS. New bylaws may be adopted or these bylaws may
be amended or repealed by the affirmative vote of a majority of the
outstanding shares entitled to vote, or by the written assent of shareholders
entitled to vote such shares,
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except as otherwise provided by law or by the articles of incorporation.
6.2 POWER OF DIRECTORS. Subject to the right of shareholders as provided
in Section 6.1 to adopt, amend or repeal bylaws, bylaws may be adopted,
amended or repealed by the Board of Directors provided, however, that the
Board of Directors may adopt a bylaw or amendment thereof changing the
authorized number of directors only for the purpose of fixing the exact
number of directors within the limits specified in Section 3.2 of Article III
of these bylaws.
23
<PAGE>
CERTIFICATE OF SECRETARY
I, the undersigned, certify that:
1. I am the duly elected and acting Secretary of Regency Bancorp, a
California corporation; and
2. The foregoing By-Laws, consisting of twenty-two (22) pages, are
the By-Laws of this corporation as duly adopted by a Resolution of the Board
of Directors.
IN WITNESS WHEREOF, I have subscribed my name and affixed the seal
of this corporation on July 21, 1994.
/s/ [Illegible]
--------------------------
Secretary
[SEAL]
24
<PAGE>
RBC
RESOLUTION 95-13
(Regency Bancorp Bylaw Amendment)
WHEREAS, Article II, Section 2.3 of the Bylaws of Regency Bancorp (the
"Corporation"), which relates to the procedures for the nomination of
directors of the Corporation, currently provides as follows:
"2.3 NOMINATIONS FOR DIRECTOR.
Nominations for election of members of the Board of Directors may be
made by the Board of Directors or by any shareholder of any
outstanding class of voting stock of the Corporation entitled to vote
for the election of directors. Notice of intention to make any
nominations, other than by the Board of Directors, shall be made in
writing and shall be received by the President of the Corporation no
more than sixty (60) days prior to any meeting of shareholders called
for the election of directors, no more than ten (10) days after the
date the notice of such meeting is sent to shareholders pursuant to
Section 2.2 of these bylaws, and not later than the time fixed in the
notice of the meeting for the opening of the meeting. Such
notification shall contain the following information to the extend
known of the notifying shareholder: (a) the name and address of each
proposed nominee; (b) the principal occupation of each proposed
nominee; (c) the number of shares of voting stock of the Corporation
owned by each proposed nominee; (d) the name and residence address of
the notifying shareholder; and (e) the number of shares of voting
stock of the Corporation owned by the notifying shareholder.
Nominations not made in accordance herewith may be disregarded by the
then chairman of the meeting, and the inspectors of election shall
then disregard all votes cast for each nominee.
The first paragraph of this Section 2.3 shall be set forth in any
notice of a shareholders' meeting, whether pursuant to Section 2.2 or
Section 2.4 of these Bylaws, at which meeting the election of
directors is to be considered."
WHEREAS, it is deemed to be in the best interests of the Corporation and
its shareholders to amend the procedures described above by replacing Article
II, Section 2.3 of the Bylaws, with the nomination procedures described
below;
NOW, THEREFORE, BE IT RESOLVED, that Article II Section 2.3 of the
Bylaws of the Corporation be, and it hereby is, amended to read in its
entirety as follows:
"2.3 NOMINATION FOR DIRECTORS.
<PAGE>
Nominations for election of directors may be made by the Board of
Directors or by any holder of any outstanding class of capital stock
of the Corporation entitled to vote for the election of directors.
Notice of intention to make any nominations shall be made in writing
and shall be delivered or mailed to the President of the Corporation
not less than twenty-one (21) days nor more than sixty (60) days prior
to any meeting of shareholders called for the election of directors;
provided, however, that if less than twenty-one (21) days' notice of
the meting is given to shareholders, such notice of intention to
nominate shall be mailed or delivered to the President of the
Corporation not later than the close of business on the tenth (10th)
day following the day on which the notice of meeting was mailed;
provided further, that if notice of such meeting is sent by third
class mail (if permitted by law), no notice of intention to make
nominations shall be required. Such notification shall contain the
following information to the extend known to the notifying
shareholder:
(a) the name and address of each proposed nominee;
(b) the principal occupation of each proposed nominee;
(c) the number of shares of capital stock of the
Corporation owned by each proposed nominee;
(d) the name and residence address of the notifying
shareholder; and
(e) the number of shares of capital stock of the
Corporation owned by the notifying shareholder.
Nominations not made in accordance herewith may, in the discretion of
the Chairman of the meeting, be disregarded and upon the Chairman's
instructions, the inspectors of election can disregard all votes cast
for each such nominee. A copy of this paragraph shall be set forth in
a notice to shareholders of any meeting at which directors are to be
elected."
<PAGE>
RESOLVED FURTHER, that the officers of the Corporation be, and each of
them hereby is, authorized, empowered and directed to take any action and
execute, deliver and/or file any documents as may, by the officer or officers
so acting, be deemed necessary or advisable to implement the foregoing
resolutions in a manner which will carry out the intent of the Board.
ADOPTED THIS 20TH DAY OF APRIL, 1995.
<PAGE>
REGENCY BANCORP 99-01
RESOLUTION TO AMEND BYLAWS
RESOLVED, that Article II, Section 2.2 of the Bylaws of the Corporation be,
and it hereby is amended to include the following:
(e) SHAREHOLDER PROPOSALS. Notice of proposals which shareholders intend to
present at any annual meeting of shareholders and wish to be included in
the proxy statement of management of the corporation distributed in
connection with such annual meeting must be received at the principal
executive offices of the corporation not less than 120 days prior to the
date on which, during the previous year, management's proxy statement for
the previous year's annual meeting was first distributed to shareholders.
Any such proposal, and the proponent shareholder, must comply with the
eligibility requirements set forth in Rule 14a-8 of the Securities and
Exchange Commission.
BE IT FURTHER RESOLVED, that Article II, Section 2.10 of the Bylaws of the
Corporation be, and it hereby is amended to include the following:
The proxy solicited by management for any annual meeting of shareholders
shall confer discretionary authority upon management's proxy holders to
vote with respect to any shareholder proposal offered at such meeting, the
proponent of which has not notified the corporation, within the time period
specified by Section 2.2 (e) of these Bylaws, of his or her intention to
present such proposal at the annual meeting. Specific reference to such
voting authority shall be made in management's proxy statement for each
annual meeting.
ADOPTED THIS 28TH DAY OF JANUARY, 1999
<PAGE>
EXHIBIT 23.1
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 22, 1999
<PAGE>
EXHIBIT 23.2
The Board of Directors
Regency Bancorp:
We consent to incorporation by reference in the registration statement on
Form S-8 of Regency Bancorp of our report dated February 5, 1999, relating to
the consolidated balance sheet of Regency Bancorp and subsidiaries as of
December 31, 1998 and the related consolidated statements of operations,
shareholders' equity and cash flows for the year then ended, which report
appears in the December 31, 1998, annual report on Form 10-K of Regency
Bancorp.
KPMG LLP
Sacramento, California
March 25, 1999
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