UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996.
[ ] 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 33-82150
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REGENCY BANCORP
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(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0378956
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organizations) Identification No.)
7060 N. FRESNO STREET, FRESNO, CALIFORNIA 93720
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(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (209) 438-2600.
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NONE
(Former name, former address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for the shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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As of June 30, 1996, the registrant had 1,818,160 shares of Common Stock
outstanding.
The Exhibit Index is located on page 33.
This report contains a total of 116 pages of which this is page one.
1
REGENCY BANCORP AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
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CONSOLIDATED BALANCE SHEET (Unaudited)
(In thousands) June 30, 1996 December 31, 1995
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ASSETS
Cash and due from banks $ 9,158 $ 8,925
Federal funds sold 1,000 -
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Total Cash and Equivalents 10158 8,925
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Interest bearing deposits in other banks 3 3
Securities available-for-sale 27,702 31,750
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Loans 100,110 97,137
Allowance for credit losses (1,690) (1,784)
Deferred loan fees & discounts (902) (824)
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Net Loans 97,518 94,529
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Investments in real estate 16,343 17,954
Other real estate owned 381 341
Cash surrender value of life insurance 2,834 2,764
Premises and equipment, net 2,270 2,339
Accrued interest receivable and other assets 5,060 5,077
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Total Assets $ 162,269 $ 163,682
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing transaction accounts $ 31,677 $ 32,673
Interest bearing transaction accounts 44,097 40,656
Savings accounts 22,996 34,882
Time Deposits $100,000 or over 25,460 23,305
Other time deposits 16,492 12,229
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Total Deposits 140,722 143,745
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Short term borrowings - -
Notes Payable 6,016 4,109
Other liabilities 2,500 2,886
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Total Liabilities 149,238 150,740
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Shareholders' Equity:
Preferred stock, no par value;
1,000,000 shares authorized;
no shares issued or outstanding
Common stock, no par value; 5,000,000
shares authorized, 1,818,160
shares issued and outstanding 8,868 8,868
Retained earnings 4,371 4,029
Net unrealized gain (loss) on available-for-sale securities,
net of taxes of $150,000 in 1996 and $ 33,000 in 1995 (208) 45
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Total Shareholders' Equity 13,031 12,942
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Total Liabilities and Shareholders' Equity $ 162,269 $ 163,682
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See notes to consolidated financial statements
2
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
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(In thousands, except for per common and For the three months For the six months
equivalent share data) ended June 30, ended June 30,
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1996 1995 1996 1995
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INTEREST INCOME
Loans (including fees) $ 2,627 $ 2,664 $ 5,496 $ 5,291
Investment securities:
Taxable 399 436 842 827
Tax exempt 22 26 45 45
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Total Investment Interest Income 421 462 887 872
Other 24 46 43 49
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Total Interest Income 3,072 3,172 6,426 6,212
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INTEREST EXPENSE
Interest on deposits 1,038 1,304 2,166 2,469
Other 62 19 100 19
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Total Interest Expense 1,100 1,323 2,266 2,488
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Net interest income 1,972 1,849 4,160 3,724
Provision for credit losses - - - -
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Net interest income after
provision for credit losses 1,972 1,849 4,160 3,724
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NONINTEREST INCOME
Income from investments in real estate partnerships - 217 - 383
Gain on sale of SBA loans 573 235 888 363
Depositor service charges 85 65 161 136
Income from investment management services 162 124 326 237
Gain/(loss) on sale of securities - - - (25)
Gain on sale of assets 4 - 9 -
Servicing fees on loans sold 81 76 139 156
Other 157 62 252 114
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Total Noninterest Income 1062 779 1,775 1,364
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NONINTEREST EXPENSE
Loss from investments in real estate partnerships 85 - 182 -
Salaries and related benefits 1,075 1,075 2,186 2,179
Occupancy 401 298 793 556
FDIC insurance and regulatory assessments 16 79 32 159
Marketing 121 89 211 164
Professional Services 269 151 423 272
Director's fees and expenses 92 67 168 134
Management fees for real estate projects 154 94 233 174
Other 410 298 737 585
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Total Noninterest Expense 2623 2,151 4,965 4,223
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Income before income taxes 411 477 970 865
Provision for income taxes 173 198 410 363
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Net Income $ 238 $ 279 $ 560 $ 502
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Net income per common and
common equivalent share .13 .15 .30 .27
Shares used in computation 1,874,000 1,887,000 1,872,000 1,887,000
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See notes to consolidated financial statements
3
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
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FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
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Common Common Net
Stock Number Stock Retained Unrealized
(In thousands) of Shares Amount Earnings Gain(Loss) Total
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Balance, December 31, 1,711 $ 7,950 $ 7,017 $ (640) $ 14,327
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Issuance of common stock
under stock option plan 11 19 - - 19
Issuance of common stock dividend
including fractional shares 86 866 (868) - (2)
Tax benefit of stock option transactions - 16 - - 16
Cash dividends - - (171) - (171)
Net change in unrealized gain (loss)on
available-for-sale securities (net of
taxes of $ 393,000) - - - 542 542
Net Income - - 502 - 502
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Balance, June 30, 1995 1,808 $ 8,851 $ 6,480 $(98) $ 15,233
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Common Common Net
Stock Number Stock Retained Unrealized
(In thousands) of Shares Amount Earnings Gain(Loss) Total
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Balance, December 31, 1995 1,818 $ 8,868 $ 4,029 $ 45 $12,942
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Issuance of common
stock under stock option plan - - - - -
Cash dividends - - (218) - (218)
Net change in unrealized gain (loss) on
available-for-sale securities (net of
taxes of $183,000) (253) (253)
Net Income - - 560 - 560
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Balance, June 30, 1996 1,818 8,868 4,371 (208) 13,031
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See notes to consolidated financial statements
4
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
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(IN THOUSANDS) FOR THE SIX MONTHS ENDED JUNE 30, 1996 1995
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OPERATING ACTIVITIES:
Increase (decrease) in cash equivalents:
Net income $ 560 $ 502
Adjustments:
Provisions for credit losses - -
Provision for losses on real estate - -
Provision for OREO losses - 30
Depreciation and amortization 325 320
Deferred income taxes 490 150
(Increase) decrease in interest receivable and other assets (67) 835
Increase in surrender value of life insurance (70) (65)
Distributions of income from real estate partnerships 103 35
Equity in (income) loss of real estate partnerships 5 (383)
(Increase) decrease in real estate held for sale 3,987 -
(Gain) loss on acquisition of partnerships (63) -
Increase (decrease) in other liabilities (811) (1,358)
(Gain)/loss on sale of securities - 25
Gain on sale of loans held-for-sale (888) (363)
Proceeds from sale of loans held-for-sale 8,742 4,695
Additions to loans held-for-sale (5,901) (4,676)
Loss (gain) on sale of premises and equipment and OREO (1) -
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Net cash provided by (used in) operating activities 6,411 (253)
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INVESTING ACTIVITIES:
Purchase of available-for-sale securities (11,223) (10,305)
Proceeds from sales of available-for-sale securities - 3,105
Purchases of held -to-maturity securities - (3,876)
Proceeds from maturities of available-for-sale securities 14,778 6,934
Proceeds from maturities of held-to-maturity securities - 2,000
Loan participations purchased - (750)
Loan participations sold - -
Net (increase) decrease in loans (3,079) 1,044
Net decrease (increase) in other short-term investments - (4,801)
Cash received through acquisition of partnerships 441 -
Proceeds from sale of OREO 123 -
Capital contributions to real estate partnerships (397) (954)
Capital distributions from real estate partnerships 1,012 587
Payments towards the acquisition and development
of investments in real estate - (220)
Purchases of premises and equipment (199) (132)
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Net cash provided by (used in) investing activities 1,456 7,368
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FINANCING ACTIVITIES:
Net increase (decrease) in timed deposits accounts 6,418 8,162
Net increase (decrease) in other deposits (9,441) 3,103
Net increase (decrease) on short term borrowings - -
Cash dividends paid (218) (171)
Payments for fractional shares related to stock dividends - (2)
Payments on notes payable (3,773) (151)
Proceeds from notes payable 380 -
Proceeds from the issuance of common stock under
employee stock option plan - 19
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Net cash provided by (used in) financing activities (6,634) 10,960
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,233 3,339
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,925 8,317
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,158 $ 11,656
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See notes to consolidated financial statements
5
REGENCY BANCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Regency Bancorp and its wholly-owned subsidiaries(the "Company"). Regency
Bancorp is a California corporation organized to act as the holding company for
Regency Bank (the "Bank") and its subsidiaries. The Bank has two wholly-owned
subsidiaries, Regency Investment Advisors, Inc., a California corporation
("RIA"), which provides investment management and consulting services, and
Regency Service Corporation, a California corporation ("RSC"), that engages in
the business of real estate development primarily in the Fresno/Clovis area. All
significant intercompany balances and transactions have been eliminated in
consolidation.
These unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles on a basis consistent
with the accounting policies reflected in the audited consolidated financial
statements of the Company included in the Annual Report on Form 10-K for the
year ended December 31, 1995. They do not, however, include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the unaudited
interim consolidated financial statements reflect all adjustments (all of which
are of a normal, recurring nature) necessary for a fair presentation of the
results for the interim periods presented. Operating results for the interim
periods presented are not necessarily indicative of the results that may be
expected for any other interim period or for the year as a whole.
NOTE 2. - ACCOUNTING CHANGE
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which requires adoption of the disclosure provisions no later
than fiscal years beginning after December 15, 1995 and adoption of the
recognition and measurement provisions for nonemployee transactions no later
than after December 15, 1995. The new standard defines a fair value method of
accounting for stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period. Pursuant to the new standard, companies are encouraged, but not
required, to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," but would be required to disclose in a note to the
financial statements pro forma net income, and, if presented, earnings per share
as if the company has applied the new method of accounting. The accounting
requirements of the new method are effective for all employee awards granted
beginning in 1995. The Company has determined it will not elect to change to
the fair value method, but will adopt the disclosure provisions in fiscal 1996.
6
NOTE 3. - INVESTMENT SECURITIES
During the period between December 31, 1995, and June 30, 1996, the Company
recorded a net decrease in the value of its available-for-sale portfolio of
$253,000 net of applicable taxes. This change is reflected as a change in
shareholders' equity in the Consolidated Statement of Shareholders' Equity.
This change in value is primarily the result of higher interest rates in the
bond market at June 30, 1996 as compared to rates at December 31, 1995.
Following is a comparison of the amortized cost and approximate fair value of
securities available-for-sale:
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AVAILABLE-FOR-SALE SECURITIES JUNE 30, 1996 DECEMBER 31, 1995
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Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
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U.S. Treasuries $ 2,026 $ 2,015 $ 2,003 $ 2,005
U.S. Government Agencies 15,612 15,293 20,474 20,459
Mortgage-backed securities 9,003 8,935 7,655 7,685
State and Political Subdivision 1,414 1,454 1,540 1,601
Equity Securities 5 5 - -
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Total $ 28,060 $ 27,702 $ 31,672 $ 31,750
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At June 30, 1996 and December 31, 1995 the Company held no investment securities
classified as held-to-maturity.
NOTE 4. - LOANS
The following table presents a breakdown of the Company's loan portfolio in both
dollars outstanding as well as a percentage of total loans. Further discussion
of the Company's loan portfolio can be found in Item No. 7 - Management's
Discussion and Analysis, Balance Sheet Analysis.
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(IN THOUSANDS, EXCEPT PERCENTAGES) JUNE 30, 1996 DECEMBER 31, 1995
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Percent of Percent of
Amount Total Loans Amount Total Loans
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Commercial $52,797 52.7% $54,150 55.7%
Real estate mortgage 11,683 11.7% 10,389 10.7%
Real estate construction 27,100 27.1% 23,706 24.4%
Consumer and other 8,530 8.5% 8,892 9.2%
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Subtotal 100,110 100.0% 97,137 100.0%
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Less:
Unearned discount 531 468
Deferred loan fees 371 356
Allowances for credit losses 1,690 1,784
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Total loans, net $97,518 $94,529
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As of June 30, 1996, there were $799,000 in SBA loans held-for-sale.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." This standard was further modified by SFAS No. 118,
"Accounting by Creditors for
7
Impairment of a Loan-Income Recognition and Disclosures." SFAS Nos. 114 and 118
were effective for the Company as of January 1, 1995. They require the Company
to measure impaired loans based upon the present value of expected future cash
flows discounted at the loan's effective interest rate, except that as a
practical expedient, a creditor may measure impairment based on a loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. A loan is impaired when, based upon current information
and events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement.
Under the provisions of SFAS No. 114 and SFAS No. 118, the Company has
analyzed its loan portfolio. As of June 30, 1996, the amount of impaired loans
was not significant.
NOTE 5. - EARNINGS PER SHARE
Primary earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding and common stock
equivalents (stock options) assumed to be outstanding during the year. All
share and per share amounts have been adjusted retroactively to reflect the 5%
stock dividend issued in 1995. As of June 30, 1996, and June 30, 1995, the
Company had 1,872,000 and 1,887,000 total shares of common and common stock
equivalents outstanding.
NOTE 6. - REAL ESTATE ACTIVITIES
Regency Service Corporation ("RSC") is involved in residential real estate
development in the Fresno/Clovis area through both limited partnership
investments in joint ventures and direct investments in real estate projects.
These real estate activities consist primarily of residential subdivisions being
developed into lots and homes. Limited partnership investments are accounted
for under the equity method.
During the first quarter, RSC continued to aggressively pursue divestiture
of its remaining real estate projects through various transactions. During the
quarter ended March 31, 1996, RSC dissolved a total of six partnerships and sold
its investment in one property. As a result of these transactions, RSC obtained
sole ownership of four projects, closed one project out completely and financed
the sale of two properties. Additionally, the assets of RSC now reflect not
only RSC's equity investment, but the total assets and liabilities of the
acquired projects. The above transactions resulted in a net loss of $235,000.
As of December 31, 1995, RSC's equity investment in the four partnerships
acquired was $4,430,000.
8
The schedule below presents the condensed financial information of the four
entities acquired as of the dates of acquisition:
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ASSETS:
Cash $ 442
Notes receivable 2,025
Land and real estate under construction 10,031
Other assets 223
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Total assets 12,721
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LIABILITIES:
Notes payable 5,300
Accrued interest and other liabilities 425
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Total Liabilities 5,725
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Equity $ 6,996
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NOTE 7. - SUPPLEMENTAL CASH FLOW INFORMATION
Following is a summary of amounts paid for interest and taxes and of non-cash
transactions for the six months ended June 30, 1996 and 1995:
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(IN THOUSANDS) 1996 1995
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Cash paid during the period for:
Interest on deposits and other borrowings $ 2,266 $ 1,121
Income taxes 316 600
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Non cash transactions:
Transfer of loans to other real estate owned 162 15
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9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL SUMMARY
The Company's consolidated net income for the six months ended June 30,
1996, was $560,000, an increase of $58,000 or 11.6% when compared to earnings of
$502,000 for the period ended June 30, 1995. Net income for the second quarter
of 1996 was $238,000 as compared to $279,000 in the second quarter of 1995.
Earnings per share were $0.13 in the second quarter of 1996, $0.30 for the six
month period ended June 30, 1996, compared to $0.15 per share in the second
quarter of 1995 and $0.27 for the six month period ended June 30, 1995. The
Company paid a cash dividend of $0.06 per share in the second quarter of 1996.
During the second quarter of 1995, the Company paid a cash dividend of $0.05.
Subsequent to the close of the quarter, the Company's board of directors
declared an additional cash dividend of $0.06 per share payable to shareholders
of record on July 29, 1996.
The increase in net income of $58,000 for the period ended June 30, 1996
was primarily the result of an increase in net interest income of $436,000 as
well as from an increase in income generated from the sale of SBA loans of
$525,000. Income for the second quarter of 1996 declined by $41,000 compared to
the second quarter of 1995, primarily as a result of losses from investments in
real estate. During the second quarter of 1995, the Company recorded net income
from investments in real estate of $217,000 compared to a loss of $85,000
recorded in the second quarter of 1996.
The Company's return on average assets was 0.69% for the first six months
of 1996 compared to 0.65% for the first six months of 1995. Return on average
common equity for the first six months was 8.43% compared to 6.85% for the same
period in 1995.
At June 30, 1996, the Company's total risk-based capital ratio was 10.83%
while the leverage ratio was 7.51%. All capital ratios were in excess of
minimum regulatory guidelines.
Nonperforming assets declined during the second quarter by $25,000 to
$4,236,000 at June 30, 1996 (2.61% of total assets), compared to $4,261,000
at March 31, 1996 (2.56% to total assets) and $922,000 at December 31, 1995
(0.56% of total assets) as a result of continued paydowns on nonaccrual loans
made to facilitate the sale of RSC partnerships. As reported in the
Company's quarterly report on form 10-Q dated March 31, 1996, RSC made loans
amounting to approximately $3.75 million to facilitate the sale of two RSC
partnerships. The two loans were immediately placed on nonaccrual status in
accordance with applicable accounting guidelines regarding the sale of real
estate. As homes and/or lots are sold on these projects, principal
reductions, as well as interest payments received are used to reduce the
principal balance outstanding on these loans. During the second quarter, a
third loan of $310,000 was made to facilitate the sale of another RSC
project. It was also placed on nonaccrual status. The allowance for credit
losses as a percentage of total loans was 1.69% at June 30, 1996 (39.90% of
nonperforming assets) compared to 1.84% (193.50% of non-performing assets) at
year end 1995.
10
During the quarter ended June 30, 1996, the Company entered into a lease
agreement for a branch office to be located at 126 N. "D" Street, Madera,
California. The term of the lease is for a period of 3 years at a fixed rate of
$2,091 per month and contains provisions for an additional term of three years
at a monthly rate of $2,521 per month. The facility covered under the lease
agreement is a free standing building of approximately 2,500 square feet. The
foregoing description of the lease is qualified by reference to the lease
agreement dated May 13, 1996 attached as exhibit 10.4 to this Form 10-Q. The
Company has received approval from the FDIC and State Banking Department and
expects to open the Madera branch office on or about August 15, 1996.
NET INTEREST INCOME
The Company's operating results depend primarily on net interest income
(the difference between the interest earned on loans and investments less
interest expense on deposit accounts and borrowings). A primary factor
affecting the level of net interest income is the Company's interest rate
margin, the difference between the yield earned on interest earning assets and
the rate paid on interest bearing liabilities, as well as the difference between
the relative amounts of average interest earning assets and interest bearing
liabilities.
The following table presents, for the periods indicated, the Company's total
dollar amount of interest income from average interest earning assets and the
resultant yields, as well as the interest expense on average interest bearing
liabilities and the resultant cost, expressed both in dollars and rates. The
table also sets forth the net interest income and the net earning balance for
the periods indicated.
11
CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND
INTEREST RATES
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(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
FOR THE THREE MONTHS ENDED JUNE 30, 1996 1995
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Average Yield/ Average Yield/
Balance Rate Interest Balance Rate Interest
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ASSETS
Interest-earning assets:
Loans (1) $ 98,643 10.71% $ 2,627 $ 90,400 11.82% $ 2,664
Investment securities (2) 27,871 6.08% 421 28,753 6.45% 462
Federal funds sold & other 1,736 5.56% 24 3,041 5.92% 46
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Total Interest-earning assets 128,250 9.63% 3,072 122,194 10.41% 3,172
- - -------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets:
Allowance for credit losses (1,750) (1,388)
Cash and due from banks 8,035 8,051
Real estate investments 19,143 17,306
Premises and equivalent, net 2,252 6,149
Cash surrender value of life insurance 2,812 2,682
Accrued interest receivable and other assets 4,477 3,008
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Total Average Assets $163,219 $158,002
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LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities:
Transaction accounts $ 44,235 2.63% $ 289 $ 51,393 3.47% $ 445
Savings accounts 24,472 4.11% 250 21,510 4.93% 264
Time deposits 38,910 5.16% 499 42,039 5.67% 595
Federal funds purchased, notes payable
and other 10,558 2.36% 62 343 22.60% 19
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Total Interest-bearing 118,175 3.74% 1,100 115,285 4.60% 1,323
- - -------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Transaction accounts 29,551 26,199
Other liabilities 2,282 1,534
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Total liabilities 150,008 143,018
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Shareholders' Equity:
Common stock 8,868 8,328
Retained earnings 4,393 6,905
Unrealized gain / (loss) on investment
securities (50) (249)
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Total Shareholders Equity 13,211 14,984
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Total average liabilities and
shareholders' equity $163,219 $158,002
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Net Interest Income $ 1,972 $ 1,849
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Interest income as a percentage of average
interest-earning assets 9.63% 10.41%
Interest expense as a percentage of average
interest-earning assets (3.45%) (4.34%)
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Net Interest Margin 6.18% 6.07%
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(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
$328,000 and $283,000 for the three months ended June 30, 1996, and 1995,
respectively.
(2) Applicable nontaxable securities yields have not been calculated on a
taxable-equivalent basis because they are not material to the Company's results
of operations.
12
CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND
INTEREST RATES
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- - -------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 1995
- - -------------------------------------------------------------------------------------------------------------------------
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Average Yield/ Average Yield/
Balance Rate Interest Balance Rate Interest
- - -------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans (1) $ 96,846 11.41% $5,496 $90,508 11.79% $ 5,291
Investment securities (2) 28,945 6.16% 887 28,158 6.25% 872
Federal funds sold & other 1,650 5.24% 43 1,674 5.83% 49
- - -------------------------------------------------------------------------------------------------------------------------
Total Interest-earning assets 127,441 10.14% 6,426 120,340 10.41% 6,212
- - -------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets:
Allowance for credit losses (1,770) (1,439)
Cash and due from banks 8,114 7,850
Real estate investments 19,757 16,935
Premises and equivalent, net 2,289 6,185
Cash surrender value of life insurance 2,794 2,666
Accrued interest receivable and other assets 4,558 3,308
- - -------------------------------------------------------------------------------------------------------------------------
Total Average Assets $163,183 $155,845
- - -------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities:
Transaction accounts $ 45,239 2.70% $ 607 $ 52,373 3.49% $ 906
Savings accounts 26,094 4.16% 540 19,432 4.96% 477
Time deposits 38,443 5.33% 1,019 40,431 5.41% 1,086
Federal funds purchased, notes payable
and other (3) 8,226 2.44% 100 1,489 2.66% 19
- - -------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing 118,002 3.86% 2,266 113,725 4.41% 2,488
- - -------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Transaction accounts 29,163 25,565
Other liabilities 2,657 1,773
- - -------------------------------------------------------------------------------------------------------------------------
Total liabilities 149,822 141,063
Shareholders' Equity:
Common stock 8,868 8,148
Retained earnings 4,476 7,023
Unrealized gain / (loss) on investment
securities 17 (389)
- - -------------------------------------------------------------------------------------------------------------------------
Total Shareholders Equity 13,361 14,782
- - -------------------------------------------------------------------------------------------------------------------------
Total average liabilities and
shareholders' equity $ 163,183 $ 155,845
- - -------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 4,160 $ 3,724
- - -------------------------------------------------------------------------------------------------------------------------
Interest income as a percentage of average
interest-earning assets 10.14% 10.41%
Interest expense as a percentage of average
interest-earning assets (3.58%) (4.17%)
- - -------------------------------------------------------------------------------------------------------------------------
Net Interest Margin 6.56% 6.24%
- - -------------------------------------------------------------------------------------------------------------------------
(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
$614,000 and $577,000 for the six months ended June 30, 1996, and 1995,
respectively.
(2) Applicable nontaxable securities yields have not been calculated on a
taxable-equivalent basis because they are not material to the Company's results
of operations.
(3) Interest expense has been reduced by capitalized interest on real estate
projects of approximately $0 and $55,000 for the six month periods ended June
30, 1996 and 1995, respectively.
13
Changes in the interest margin can be attributed to changes in the yield on
interest earning assets, the rate paid on interest bearing liabilities, as well
as changes in the volume of interest earning assets and interest bearing
liabilities. The following table presents the dollar amount of certain changes
in interest income and expense for each major component of interest earning
assets and interest bearing liabilities and the difference attributable to
changes in average rates and volumes for the periods indicated.
VOLUME/RATE ANALYSIS
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED JUNE 30, 1996 COMPARED
TO 1995 VOLUME RATE TOTAL
- - -------------------------------------------------------------------------------
Net Interest Earnings Variance Analysis
Increase (decrease) in interest income:
Loans 660 (697) (37)
Investment securities (14) (27) (41)
Federal funds sold and other (18) (4) (22)
- - -------------------------------------------------------------------------------
Total 628 (728) (100)
- - -------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Transaction accounts (56) (100) (156)
Savings accounts 64 (78) (14)
Certificates of deposit (42) (54) (96)
Federal funds purchased, notes payable and other 44 (1) 43
- - -------------------------------------------------------------------------------
Total 10 (233) (223)
- - -------------------------------------------------------------------------------
Increase (decrease) in net interest income 618 (495) 123
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 COMPARED
TO 1995 VOLUME RATE TOTAL
- - -------------------------------------------------------------------------------
Net Interest Earnings Variance Analysis
Increase (decrease) in interest income:
Loans 352 (147) 205
Investment securities 24 (9) 15
Federal funds sold and other (1) (5) (6)
- - -------------------------------------------------------------------------------
Total 375 (161) 214
- - -------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Transaction accounts (113) (186) (299)
Savings accounts 116 (53) 63
Certificates of deposit (53) (14) (67)
Federal funds purchased and other 82 (1) 81
- - -------------------------------------------------------------------------------
Total 32 (254) (222)
- - -------------------------------------------------------------------------------
Increase (decrease) in net interest income 343 93 436
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
(1) A change due to both volume and rate has been allocated to the change in
volume and rate in proportion to the relationship of the dollar amount of the
change in each.
(2) Changes calculated on nontaxable securities have not considered tax
equivalent effects.
Net interest income before the provision for loan losses was $1,972,000 for
the second quarter of 1996 as compared to $1,849,000 for the comparable period
of 1995, an increase of $123,000 or 6.7%. This increase was primarily
attributable to lower rates paid on interest-bearing deposit accounts. The
Company's net interest margin in the second quarter of 1996 (based on average
interest earning assets) was 6.18% as compared to 6.07% for the same period in
1995.
14
Average interest earning assets grew 4.9% between the second quarter 1996 and
the second quarter of 1995 while interest-bearing liabilities grew 2.5% over the
same period.
Net interest income before the provision for loan losses for the first six
months of 1996 was $4,160,000 as compared to $3,724,000 for the comparable
period of 1995, an increase of $436,000 or 11.7%. This increase was primarily
attributable to lower rates paid on interest-bearing deposit accounts as well as
an increase in the number of loans on the Company's books. The Company's net
interest margin for the six month period ended June 30, 1996 (based on average
interest-earning assets) was 6.56% as compared to 6.24% for the same period in
1995. Average interest-earning assets grew 5.9% for the six month period ended
June 30, 1996 as compared to the six month period ended June 30, 1995 while
interest-bearing liabilities grew 3.8% over the comparable periods. The
Company's earning asset mix changed very little between comparable periods.
INTEREST EARNING ASSET MIX
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 1995
- - -------------------------------------------------------------------------------
Average Percent Average Percent
Balance of Total Balance of Total
- - -------------------------------------------------------------------------------
Interest-Earning Asset Mix:
Loans $ 96,846 75.99% $ 90,508 75.21%
Investment securities 28,945 22.71% 28,158 23.40%
Federal funds sold and other 1,650 1.30% 1,674 1.39%
- - -------------------------------------------------------------------------------
Total Interest-earning Assets 127,441 100.0% $ 120,340 100.0%
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
Average interest-earning assets for the six months ended June 30, 1996
increased to $127,441,000 from $120,340,000 for the comparable period in 1995.
Average loans increased by $6,338,000 to $96,846,000 representing 75.99% of
average interest-earning assets for the first six months of 1996, compared to
$90,508,000 or 75.21% for the first six months of 1995. The yield on average
loans declined to 11.41% at June 30, 1996, from 11.79% at June 30, 1995, due
primarily to a lower Prime lending rate, the rate to which most of the Company's
floating rate loans are tied.
Other interest-earning assets consist of investment securities, overnight
federal funds sold and other short term investments. These investments are
maintained to meet the liquidity requirements of the Company as well as pledging
requirements on certain deposits, and typically have a lower yield than loans.
The yield on investments decreased to 6.16% for the period ended June 30, 1996,
from 6.25% in the comparable period in 1995.
Average interest-bearing liabilities for the six months ended June 30, 1996
increased to $118,002,000 from $113,725,000 for the comparable period in 1995 an
increase of $4,277,000 or 3.76%. The primary reason for the increase was the
result of RSC assuming the debt on several real estate projects that were
dissolved during the first six months of 1996. As a result, federal funds
purchased, notes payable and other increased by $6,737,000 in 1996 compared to
the same period in 1995. For the first six months ended June 30, 1996, the
average interest rate paid on interest-bearing liabilities declined to 3.86%
from an average rate of 4.41% paid during the first six months of 1995.
15
NONINTEREST INCOME
The Company receives a significant portion of its income from noninterest
sources related both to activities conducted by the Bank (SBA loan originations
and servicing, depositor service charges), as well as from the Bank's two
subsidiaries RSC and RIA.
OTHER INCOME
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE SIX MONTHS
(IN THOUSANDS) ENDED JUNE 30, ENDED JUNE 30,
- - -------------------------------------------------------------------------------
1996 1995 1996 1995
- - -------------------------------------------------------------------------------
Other Income:
Income from investments in real
estate partnerships $ - $217 $ - $383
Gain on sale of SBA loans 573 235 888 363
Depositor service charges 85 65 161 136
Income from investment management
services 162 124 326 237
Gain on sale of securities - - - (25)
Gain on sale of assets 4 - 9 -
Servicing fees on loans sold 81 76 139 156
Other 157 62 252 114
- - -------------------------------------------------------------------------------
Total $1,062 $779 $1,775 $1,364
- - -------------------------------------------------------------------------------
(Income from RSC and RIA in these consolidated financial statements is included
in noninterest income. A further discussion of RSC and RIA is set forth below.)
During the second quarter of 1996, the Company recognized noninterest
income of $1,062,000 compared to $779,000 for the same period during 1995 an
increase of $283,000 or 36.3%. For the first six months of 1996, noninterest
income was $1,775,000 compared to $1,364,000 for the first six months of 1995,
an increase of $411,000 or 30.1%. These increases are attributable to
increases in almost all noninterest income categories with the exception of
income from investments in real estate, with the greatest increases coming from
income from the sale of SBA loans (see "SBA Loan Origination & Sales") as well
as income from investment management services loans (see "Regency Investment
Advisors").
SBA LOAN ORIGINATION & SALES
The Bank originates loans to customers under a Small Business
Administration ("SBA") program that generally provides for SBA guarantees of 70%
to 90% of each loan. The Bank then sells the guaranteed portion of the loan in
the secondary market while retaining the unguaranteed portion of the loan as
well as the ongoing servicing. Income from the sale of the guaranteed portion is
affected by the timing and volume of sales (when loans are funded and available
for sale), as well as the premium paid in the secondary market. The premium paid
in the secondary market is further affected by the rate and terms of the loan as
well as the yield curve.
During the quarter ended June 30, 1996, the Company recognized gains on
sale of SBA loans of $573,000, an increase of $338,000 from $235,000 in the
comparable period of 1995. For the six months ended June 30, 1996 gains on sale
of SBA loans were $888,000 compared to $363,000 during the first six months of
1995, an increase of $525,000. These increases were
16
primarily the result of timing related to the number and volume of loans
available for sale in the respective periods as well as higher premiums
recognized in 1996.
An additional source of income related to the Bank's SBA loan
origination activities is reflected in income from the ongoing servicing of
loans sold. During the second quarter ended June 30, 1996, servicing income
totaled $81,000, an increase of $5,000 from income of $76,000 during the
quarter ended June 30, 1995. For the the six months ended June 30, 1996,
servicing income totaled $139,000, a decline of $17,000 compared to $156,000
of servicing income during the first six months of 1995. The servicing
income decline for the first six months was the result of payoffs of older
SBA loans resulting in a slight decrease in the overall size of the servicing
portfolio.
REGENCY SERVICE CORPORATION (RSC)
The Bank's wholly owned subsidiary, Regency Service Corporation ("RSC"),
has engaged in real estate development activities since 1986. Such activities,
which typically involve the acquisition, development and sale of residential
real properties (but which sometimes involve the sale of properties prior to
development), historically have been structured as limited partnerships in
which RSC is the limited partner and a local developer is the general partner.
Partnerships are accounted for under the equity method.
The FDIC has adopted final regulations under the Federal Deposit Insurance
Corporation Improvement Act of 1991 regarding real estate investment and
development activities of insured state banks and their majority-owned
subsidiaries. Under the new FDIC regulations, banks must divest of their real
estate development investments as quickly and as prudently as possible, but in
no event later than December 19, 1996, and must submit a plan to the FDIC
regarding the divestiture of such investments. Such regulations also permit
banks to apply for the FDIC's consent to continue certain real estate
development activities and/or to file for an extension to continue divestiture
beyond December 19, 1996. RSC has filed a request with the FDIC to continue its
divestiture beyond December 19, 1996, however, as of the date of this report the
Company has not received written approval for such continuation.
To comply with these regulations RSC has undertaken business strategies
designed to reduce the Company's involvement in real estate development through
its subsidiary as quickly and as prudently as possible. RSC's first challenge
in meeting its divestiture obligations has involved the modification of the
original structure of its partnerships. As stated in the first paragraph, most
of the properties RSC has invested in have been through limited partnerships.
Under the limited partnership structure, the general partner conducts the
activities of and manages the partnership. Due to this structure, RSC has not
had direct day to day control or decision making capability in regard to
substantially all of the properties in which it has been a limited partner
investor.
During the second quarter of 1996, RSC continued to aggressively pursue
divestiture of its remaining real estate projects through various transactions.
As of June 30, 1996, RSC had dissolved or closed out all but three partnerships
which resulted in sole ownership of six of the projects. These projects are
accounted for under the consolidation method. During June 1996, RSC completed
the sale of phases II and III of its Blackhorse III subdivision. As a result of
this
17
transaction, RSC was able to retire debt of $714,000, while reducing assets by
$2,150,000. To facilitate this transaction, RSC recorded a loan of $310,000 to
the purchaser. This transaction resulted in a loss of $295,000. Due to the
nature of the transaction the loan has been placed on nonaccrual and will be
accounted for by the cost recovery method.
For the second quarter ended June 30, 1996, the net loss from investments
in real estate projects amounted to $85,000, compared to income of $217,000 in
the second quarter ended June 30, 1995, a decline of $302,000. The decline
resulted from the sale of properties at a loss. Actual losses from investments
in real estate projects amounted to $729,000. These losses were offset by a
$644,000 reduction in RSC's allowance for real estate losses. For the first six
months of 1996 the net loss from investments in real estate projects amounted to
$182,000, compared to income of $383,000 for the first six months of 1995, a
decline of $565,000. Actual losses from investments in real estate projects
amounted to $1,125,000. These losses were offset by a $943,000 reduction in
RSC's allowance for real estate losses.
On a stand alone basis, RSC's activities reduced the Company's overall pre-
tax income by $770,000 in the first six months of 1996. This amount includes
all of the costs of operating RSC during this period, including operating costs
such as legal, accounting, project management expense, salaries and the $182,000
in losses from the sale of real estate mentioned above. These operating
expenses have been consolidated with similar operating expenses in the Company's
income statement and noninterest expense table above.
During the second quarter of 1996, the Company completed its analysis of
amounts owing under RSC's project management service agreement with Peachwood
Park, a California Limited Partnership, wherein McDonald Construction Inc.,
a corporation owned by the Company's Chairman, Gary L. McDonald, serves as
general partner. As a result of this analysis, the Company determined that
the contract with Peachwood should be cancelled through a termination
agreement and a new contract should be entered into that delineates the
current divestiture of RSC projects and other obligations of the parties
which were not covered by the prior agreement. On April 1, 1996, RSC entered
into a new contract for management services with Gary L. McDonald Real Estate
and Development Company, a California corporation owned by the Company's
Chairman Gary L. McDonald. Copies of the agreements are attached as exhibits
10.1 and 10.2 to this Form 10-Q and the foregoing description of the
agreements is qualified by reference thereto. The Company also determined
that it owed Peachwood Park approximately $434,300 which was paid by a
one-time payment of $56,700 related to termination of the prior agreement and
reversal of a $377,600 receivable, which had been reserved for as described
in detail in the Company's annual financial statements for the year ended
December 31, 1995.
Additional discussion of loans made by RSC to its partnerships and, in
general, of the Company's investment in RSC is contained in this report under
the headings, "Nonperforming Loans" and "Investments in Real Estate".
18
REGENCY INVESTMENT ADVISORS (RIA)
The Bank's wholly-owned subsidiary, Regency Investment Advisors ("RIA"),
was formed in August 1993 through the acquisition by the Bank of the assets,
including the client list, of a fee-only investment management and consulting
firm. RIA provides investment management and consulting services, including
comprehensive financial and retirement planning and investment advice, to
individuals and corporate clients for an annual fee that varies depending upon
the size of a client account.
Income from RIA for the second quarter 1996 increased to $162,000 from
$124,000 in the same period of 1995, an increase of $38,000. For the first six
months of 1996, income from RIA was $326,000, an increase of $89,000 or 37.6%
from income of $237,000 for the first six months of 1995. Due to acquisition
costs as well as overhead expense incurred after acquisition, RIA has posted a
net loss on a stand alone basis since inception, however, in the six month
period ended June 30, 1996, RIA posted net pre-tax income of $6,000 compared to
a net pre-tax loss of ($57,000) in the first six months of 1995.
As of June 30, 1996, RIA had $69.0 million in assets under management, an
increase of $23.6 million compared to $45.4 million as of June 30, 1995. Assets
in client accounts managed by RIA are not reflected in the consolidated assets
of the Company.
OTHER EXPENSE
Noninterest expense reflects the costs of products and services, systems,
facilities and personnel for the Company. The major components of other
operating expenses stated both as dollars and as a percentage of average assets
are as follows:
OTHER OPERATING EXPENSE TO AVERAGE ASSETS
- - ------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
FOR THE THREE MONTHS ENDED JUNE 30, 1996 1995
- - ------------------------------------------------------------------------------------------
Percent of Percent of
Average Average
Amount Assets Amount Assets
- - ------------------------------------------------------------------------------------------
Other Expense:
Loss from investments in real
estate partnerships $ 85 0.21% $ - -
Salaries and related benefits 1,075 2.65% 1,075 2.73%
Occupancy 401 0.99% 298 0.76%
FDIC insurance and regulatory
assessments 16 0.04% 79 0.20%
Marketing 121 0.30% 89 0.23%
Professional services 269 0.66% 151 0.38%
Director's fees and expenses 92 0.23% 67 0.17%
Management fees for real estate
projects 154 0.38% 94 0.24%
Other 410 1.01% 298 0.75%
- - ------------------------------------------------------------------------------------------
TOTAL $2,623 6.46% $2,151 5.46%
- - ------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------
19
For the second quarter ended June 30, 1996, other expenses increased 22.0%
or $472,000 to $2,623,000, up from $2,151,000 during the comparable period in
1995. The primary cause of the increase was due to losses from investments in
real estate, higher fees for professional services (legal and accounting),
directors fees and expenses, and marketing expense. Management fees for real
estate projects increased to $154,000 in the second quarter of 1996 from $94,000
in the second quarter of 1995 primarily as a result of a one-time charge of
$56,700 related to the termination of RSC's previous management contract with
Peachwood Park. Additionally, the Company recognized a one-time charge of
$140,000 (reflected above in the Other category) related to the cancellation of
an option to purchase the property immediately contiguous to the Company's
headquarters facility owned by the Company's Chairman, Gary L. McDonald and
his wife. When compared to average assets for the respective periods, other
expenses increased to 6.46% versus 5.46% in 1995.
OTHER OPERATING EXPENSE TO AVERAGE ASSETS
- - ------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 1995
- - ------------------------------------------------------------------------------------------
Percent of Percent of
Average Average
Amount Assets Amount Assets
- - ------------------------------------------------------------------------------------------
Other Expense:
Loss from investments in real
estate partnerships $ 182 0.22% $ - -
Salaries and related benefits 2,186 2.69% 2,179 2.82%
Occupancy 793 0.98% 556 0.72%
FDIC insurance and regulatory
assessments 32 0.04% 159 0.21%
Marketing 211 0.26% 164 0.21%
Professional services 423 0.52% 272 0.35%
Director's fees and expenses 168 0.21% 134 0.17%
Management fees for real estate
projects 233 0.29% 174 0.23%
Other 737 0.91% 585 0.75%
- - ------------------------------------------------------------------------------------------
TOTAL $4,965 6.12% $4,223 5.46%
- - ------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------
For the six months ended June 30, 1996, other expenses increased 17.6% or
$742,000 to $4,965,000, up from $4,223,000 during the comparable period in 1995.
The primary cause of the increase was due to losses from investments in real
estate as well as higher fees for professional services (legal and accounting),
directors fees and expense, and management fees for real estate projects. When
compared to average assets for the respective periods, other expenses increased
to 6.12% versus 5.46% in 1995.
Salaries and benefits expense increased by only $7,000 or 0.32% in the six
month period ended June 30, 1996 as compared to the first six months of 1995.
Occupancy expense increased by $237,000 or 42.6% for the first six months of
1996 compared to the same period in 1995, primarily due to the sale and
leaseback transaction involving the Company's headquarters facility completed in
the third quarter of 1995. As a result of the transaction, the Company now
leases its facility at 7060 N. Fresno Street, Fresno, CA. As part of the
transaction, the Company recorded a loan to the buyer of the property. The
resulting increase in interest income from the loan offsets the higher rental
expense reflected as part of the occupancy expense number shown above.
20
FDIC insurance and regulatory assessments declined by $127,000 or 79.9% in
the first six months of 1996 compared to the same period in 1995 due to lower
insurance premiums charged by the FDIC.
BALANCE SHEET ANALYSIS
Total assets decreased by $1,413,000 or 0.86% between December 31, 1995 and
June 30, 1996. The Company's loan portfolio increased by $2,973,000 or 3.06%
primarily as a result of $4,060,000 in loans made by RSC to facilitate the sale
of three of its partnerships. Deposits declined during the second quarter of
1996 by $3,023,000 or 2.1%, primarily due to seasonal fluctuations in the Bank's
deposit base.
LOANS
The Company's loans are primarily made within its defined market area of
Fresno and Madera counties. During the first quarter of 1995, the Company
opened an SBA loan production office in Modesto and additionally employs
business development officers targeting businesses in the northern and southern
San Joaquin Valley for SBA loans as well.
Commercial loans, including SBA loans, comprised approximately 52.7% of the
Company's loan portfolio at June 30, 1996. These loans are generally 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 with the majority tied to the national
Prime Rate. The primary source of repayment on most commercial loans is cash
flow from the primary business. Additional collateral in the form of real
estate, cash, accounts receivable, inventory or other financial instruments is
often obtained as a secondary source of repayment.
Real Estate Construction lending comprised 27.1% of the Company's loan
portfolio at June 30, 1996, consisting of loans primarily for the construction
of single family residential housing. Loans in this category may be to the home
buyer or to the developer. Construction loans are secured by deeds of trust on
the primary property. Such loans also contain $5.0 million in loans RSC has
made to its partnerships or to facilitate the sale of a project. The majority
of construction loans have floating rates tied to either the national Prime Rate
or Regency Bank's Reference Rate. A significant portion of the borrowers'
ability to repay these loans is dependent on the residential real estate market,
principally from the sale of the property. 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 11.7% of the loan portfolio at June
30, 1996, and are made up of (62%) non-residential properties and (38%) 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
21
are floating. Risks associated with non-residential loans include the decline
in value of commercial property values; economic conditions surrounding
commercial real estate properties; and vacancy rates. The repayment of single-
family residential mortgage loans is generally dependent on the income of the
borrower from other sources, however, declines in the underlying property value
may create risk in these loans.
Consumer installment loans represented the remainder of the loan portfolio
at June 30, 1996, comprising 8.5% of total loans. This category includes
traditional Consumer Installment Loans (51%), Home Equity Lines of Credit (41%),
Leases (1%), and Visa Card Loans (7%). Consumer installment loans are generally
secured by second trust deeds on single-family residences, while Visa Cards are
unsecured.
RISK ELEMENTS
The Company assesses and manages credit risk on an ongoing basis through
stringent credit review and approval policies, extensive internal monitoring and
established formal lending policies. Additionally, the Bank contracts with an
outside loan review consultant to periodically grade new loans and to review the
existing loan portfolio. Management believes its ability to identify and assess
risk and return characteristics of the Company's loan portfolio is critical for
profitability and growth. Management strives to continue the historically low
level of credit losses by continuing its emphasis on credit quality in the loan
approval process, active credit administration and regular monitoring. With
this in mind, management has designed and implemented a comprehensive loan
review and grading system that functions to continually assess the credit risk
inherent in the loan portfolio. Additionally, management believes its ability
to manage portfolio credit risk is enhanced by the knowledge of the Bank's
service area by the lending personnel and Board of Directors.
NONPERFORMING LOANS
The Company's current policy is to cease accruing interest when a loan
becomes 90-days past due as to principal or interest; when the full, timely
collection of interest or principal becomes uncertain; or when a portion of the
principal balance has been charged off, unless the loan is well secured and in
the process of collection. When a loan is placed on nonaccrual status, the
accrued and uncollected interest receivable is reversed and the loan is
accounted for on the cash or cost recovery method thereafter, until qualifying
for return to accrual status. Generally, a loan may be returned to accrual
status when all delinquent interest and principal become current in accordance
with the terms of the loan agreement or when the loan is both well secured and
in process of collection.
At June 30, 1996, nonaccrual loans amounted to $3,885,000 or 3.85% of total
loans compared to $3,920,000, also 3.85%, at March 31, 1996 and $581,000 or .60%
at December 31, 1995. Other real estate owned was $381,000 at June 30, 1996
compared to $341,000 at March 31, 1996 and December 31, 1995. As previously
discussed, the primary reason for the increase in nonperforming loans during the
first six months of 1995 is related to three loans made to facilitate the sale
of RSC properties. During the first quarter of 1996, two loans totaling
$3,750,000 were made to facilitate the sale of RSC properties, while during the
second quarter an additional loan of
22
$310,000 was made to facilitate the sale of a third property. During the second
quarter of 1996, these loans were paid down by $332,000 as interest paid, as
well as principal reductions, were credited entirely toward the principal
balance. Management expects these loans will appear in the nonperforming
category until the properties underlying the loans are substantially sold out,
currently estimated to be between 18 and 30 months.
Following is a table presenting the Nonperforming loans for the period between
December 31, 1995 and June 30, 1996.
NONPERFORMING ASSETS
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PERCENTAGES) 1996 1995
- - -------------------------------------------------------------------------------
Nonperforming Assets:
Nonaccrual RSC loans $ 3,728 $ 505
Nonaccrual bank loans 127 76
Restructured loans - -
- - -------------------------------------------------------------------------------
Nonperforming loans 3,855 581
Other real estate owned 381 341
- - -------------------------------------------------------------------------------
Total nonperforming assets 4,236 922
- - -------------------------------------------------------------------------------
Accruing loans 90 days past due 179 725
- - -------------------------------------------------------------------------------
Total loans before allowance for losses 100,110 97,137
Total assets 162,269 163,682
Allowance for possible credit losses (1,690) (1,784)
- - -------------------------------------------------------------------------------
Ratios:
Nonperforming loans to total loans consolidated 3.85% .60%
Nonperforming loans to total loans bank only
(excluding RSC loans) .13% .08%
Nonperforming assets to:
Total loans 4.23% .95%
Total loans and OREO 4.22% .95%
Total assets 2.61% .56%
Allowance for possible credit losses to total
nonperforming assets 39.90% 193.50%
- - -------------------------------------------------------------------------------
Under the provisions of SFAS No. 114 and SFAS No. 118, the Company has
analyzed its loan portfolio. As of June 30, 1996, the amount of impaired loans
was not significant.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses reflects management's judgment as to the
level which is considered adequate to absorb potential losses inherent in the
loan portfolio. This allowance is increased by provisions charged to expense
and reduced by loan charge-offs net of recoveries. Management determines an
appropriate provision based on information currently available to analyze credit
loss potential, including: (a) the loan portfolio growth in the period, (b) a
comprehensive grading and review of new and existing loans outstanding, (c)
actual previous charge-offs, and (d) changes in economic conditions.
The allowance for credit losses totaled $1,690,000 or 1.69% of total loans
at June 30, 1996, compared to $1,784,000 or 1.84% at December 31, 1995. The
decrease is the result of net charge-offs totaling $94,000 during the first six
months of 1996 with no additional provision deemed necessary. It is the policy
of management to maintain the allowance for credit losses at a level adequate
for known and future risks inherent in the loan portfolio. Based on information
currently
23
available to analyze credit loss potential, including economic factors, overall
credit quality, historical delinquency and a history of actual charge-offs,
management believes that the credit loss provision and allowance is adequate.
However, no prediction of the ultimate level of loans charged-off in future
years can be made with any certainty.
Following is a table presenting the activity within the Company's provision for
credit losses for the period between December 31, 1995 and June 30, 1996.
- - ------------------------------------------------------------
IN THOUSANDS
- - ------------------------------------------------------------
Balance, December 31, 1995 $1,784
- - ------------------------------------------------------------
Provision charged to expense -
Loans charged off (165)
Recoveries 71
- - ------------------------------------------------------------
Balance, June 30, 1996 $1,690
- - ------------------------------------------------------------
- - ------------------------------------------------------------
INVESTMENTS IN REAL ESTATE
The Company's investment in real estate consists of the Bank's investment
of capital and retained earnings in RSC. RSC is currently the sole owner of six
projects and is a limited partner in three projects. As of June 30, 1996, the
Company had an equity investment of $16,343,000 invested in these partnerships
and projects compared to $17,954,000 at December 31, 1995. In addition, RSC has
loans totaling $5,009,000, including one loan to a partnership and three loans
to facilitate the sale of projects which have been classified as construction
loans on the consolidated balance sheet. Approximately, $3,728,000 of these
loans have been placed on nonaccrual status. As a result of the dissolution of
several RSC partnerships, RSC has become the 100% owner of several projects. As
a result of these transactions, the assets and liabilities of RSC now reflect
not only RSC's equity investment, but the total assets and liabilities of the
acquired projects as well. See "Regency Service Corporation" for further
discussion of these issues.
24
FUNDING SOURCES
Deposits represent the Bank's principal source of funds for investment.
Deposits are primarily core deposits in that they are demand, savings, and time
deposits generated from local businesses and individuals. These sources are
considered to be relatively more stable, long-term deposit relationships thereby
enhancing steady growth of the deposit base without major fluctuations in
overall deposit balances. In order to assist in meeting its funding needs, the
Bank maintains federal funds lines with correspondent banks in addition to using
its investment portfolio to raise funds through repurchase agreements. In
addition, the Bank may, from time to time, obtain additional deposits through
the use of brokered time deposits. As of June 30, 1996, the Bank held no
brokered time deposits and had no outstanding borrowings from correspondent
banks.
The following table presents the composition of the deposit mix for the period
ending June 30, 1996, and December 31, 1995, respectively:
- - -------------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------------
IN THOUSANDS JUNE 30, 1996 DECEMBER 31, 1995
- - -------------------------------------------------------------------------------------------------------
Percent of Percent of
Amount Total Deposits Amount Total Deposits
- - -------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing transaction accounts $31,677 22.51% $32,672 22.73%
Interest bearing deposits: 67,093 47.68% 75,539 52.55%
Time deposits:
Under $100,000 16,492 11.72% 12,229 8.51%
$100,000 and over 25,460 18.09% 23,305 16.21%
- - -------------------------------------------------------------------------------------------------------
Total Interest-bearing Deposits 109,045 77.49% 111,073 77.27%
- - -------------------------------------------------------------------------------------------------------
Total Deposits $140,722 100.0% $143,745 100.0%
- - -------------------------------------------------------------------------------------------------------
During the first six months of 1996 total deposits declined by $3,023,000
or 2.1% to $140,722,000 at June 30, 1996 compared to $143,745,000 at December
31, 1995. The decline was the result of a shift in lower rate savings and money
market deposits into higher yielding time deposits and competitive pressures
from non-bank competition (money market mutual funds and brokerage accounts), as
well as seasonal fluctuations in the banks deposit portfolio.
LIQUIDITY
Liquidity management refers to the Bank's ability to provide funds on an
ongoing basis to meet fluctuations in deposit levels as well as the credit needs
and requirements of its clients. Both assets and liabilities contribute to the
Bank's liquidity position. Federal funds lines, short-term investments and
securities, and loan repayments contribute to liquidity, along with deposit
increases, while loan funding and deposit withdrawals decrease liquidity. The
Bank assesses the likelihood of projected funding requirements by reviewing
historical funding patterns, current and forecasted economic conditions and
individual client funding needs. The Bank maintains lines of credit with two
correspondent banks for up to $9,000,000 available on a short-term basis.
Additionally, the Bank generally maintains a portfolio of SBA loans either
available for sale or in its portfolio that could be sold should additional
liquidity be required.
25
INTEREST RATE SENSITIVITY
Interest rate sensitivity is a measure of the exposure to fluctuations in
the Bank's future earnings caused by fluctuations in interest rates. Generally,
if assets and liabilities do not reprice simultaneously and in equal volumes,
the potential for such exposure exists. It is management's objective to
maintain stability in the net interest margin in times of fluctuating interest
rates by maintaining an appropriate mix of interest sensitive assets and
liabilities. To achieve this goal, the Bank prices the majority of its
interest-bearing liabilities at variable rates. At the same time, the majority
of its interest-earning assets are also priced at variable rates, the majority
of which float with the Prime Rate. This pricing structure tends to stabilize
the net interest margin percentage earned by the Bank.
The following table sets forth the interest rate sensitivity and repricing
schedule of the Company's interest-earning assets and interest-bearing
liabilities, the interest rate sensitivity gap, the cumulative interest rate
sensitivity gap, and the cumulative interest rate sensitivity gap ratio.
- - ----------------------------------------------------------------------------------------------------------------------------------
Next Day After Three After
But Within Months One Year
(IN THOUSANDS, EXCEPT PERCENTAGES) Three But Within But Within After
AS OF JUNE 30, 1996 Immediately Months 12 Months Five Years Five Years Total
- - ----------------------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity Gap:
Loans (1) 42,150 33,744 9,008 6,861 4,492 96,255
Investment securities and other - 5,899 5,298 8,982 7,526 27,705
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 42,150 39,643 14,306 15,843 12,018 123,960
- - ----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing transaction accounts 44,097 - - - - 44,097
Savings accounts 20,481 2,515 - - - 22,996
Time deposits - 15,278 21,978 4,609 87 41,952
Federal funds purchased - - - - - -
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 64,578 17,793 21,978 4,609 87 109,045
- - ----------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap (22,428) 21,850 (7,672) 11,234 11,931
Cumulative gap (22,428) (578) (8,250) 2,984 14,915
Cumulative gap percentage to interest
earning assets (18.09%) (.47%) (6.66%) 2.41% 12.03%
- - ----------------------------------------------------------------------------------------------------------------------------------
(1) Amounts exclude unearned discounts and loan fees of approximately $902,000
as well as nonaccrual loans of $3,855,000.
The above table indicates the time periods in which interest-earning assets
and interest-bearing liabilities will mature or reprice in accordance with their
contractual terms. The table does not necessarily indicate the impact of
general interest rate movements on the net interest margin since the repricing
of various categories of assets and liabilities is subject to competitive
pressures. Additionally, this table does not take into consideration changing
balances in forward periods as a result of normal amortization, principle
paydowns, changes in deposit mix or other such movements of funds as a result of
changing interest rate environments.
26
CAPITAL RESOURCES
The Board of Governors and the FDIC have adopted risk-based capital
guidelines for evaluating the capital adequacy of bank holding companies and
banks. The guidelines are designed to make capital requirements sensitive to
differences in risk profiles among banking organizations, to take into account
off-balance sheet exposures and to aid in making the definition of bank capital
uniform internationally. Under the guidelines, the Company and the Bank are
required to maintain capital equal to at least 8.0% of its assets and
commitments to extend credit, weighted by risk, of which at least 4.0%, must
consist primarily of common equity (including retained earnings) and the
remainder may consist of subordinated debt, cumulative preferred stock, or a
limited amount of loan loss reserves. Assets, commitments to extend credit and
off-balance sheet items are categorized according to risk and certain assets
considered to present less risk than other permit maintenance of capital at less
than the 8.0% ratio.
The guidelines establish two categories of qualifying capital: Tier 1
capital comprising core capital elements and Tier 2 comprising supplementary
capital requirements. At least one-half of the required capital must be
maintained in the form of Tier 1 capital. Tier 1 capital includes common
shareholder's equity and qualifying perpetual preferred stock less intangible
assets and certain other adjustments. However, no more than 25% of the
Company's total Tier 1 capital may consist of perpetual preferred stock. The
definition of Tier 1 capital for the Bank is the same, except that perpetual
preferred stock may be included only if it is noncumulative. Tier 2 capital
includes, among other items, limited life (and in the case of banks, cumulative)
preferred stock, mandatory convertible securities, subordinated debt and a
limited amount of reserve for credit losses.
The Board of Governors also adopted a 3.0% minimum leverage ratio for
banking organizations as a supplement to the risk-weighted capital guidelines.
The leverage ratio is generally calculated using Tier 1 capital (as defined
under risk-based capital guidelines) divided by quarterly average net total
assets (excluding intangible assets and certain other adjustments).
The Board of Governors emphasized that the leverage ratio constitutes a
minimum requirement for well-run banking organizations having diversified risk.
Banking organizations experiencing or anticipating significant growth, as well
as those organizations which do not exhibit the characteristics of a strong,
well-run banking organization above, will be required to maintain minimum
capital ranging generally from 100 to 200 basis points in excess of the leverage
ratio. The FDIC adopted a substantially similar leverage ratio for state non-
member banks.
27
The table below presents the Company's and the Bank's risk-based and leverage
capital ratios as of June 30, 1996.
- - -------------------------------------------------------------------------------
RISK-BASED CAPITAL RATIOS
(IN THOUSANDS) COMPANY BANK
- - -------------------------------------------------------------------------------
Amount Ratio Amount Ratio
- - -------------------------------------------------------------------------------
Risk-Based Capital Ratio:
Total Capital $ 13,778 10.83% $ 12,959 10.19%
Tier 1 Capital 12,186 9.57% 11,357 8.94%
Total Risk-Adjusted Assets 127,277 127,057
- - -------------------------------------------------------------------------------
Leverage Ratio:
Tier 1 Capital 12,186 7.51% 11,357 7.01%
Average Total Assets 162,253 162,087
- - -------------------------------------------------------------------------------
As indicated in the table above, at June 30, 1996, the Company's capital
ratios exceed the minimum capital levels required by current federal
regulations. Management believes based upon currently available information
that the Company and the Bank will continue to meet their respective minimum
capital requirements in the foreseeable future.
On December 19, 1991, the President signed the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). The FDICIA, among other
matters, substantially revises banking regulations and establishes a framework
for determination of capital adequacy of financial institutions. Under the
FDICIA, financial institutions are placed into one of five capital adequacy
categories as follows: (1) "Well capitalized" - consisting of institutions with
a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital
ratio of 6% or greater, and a leverage ratio of 5% or greater, and the
institution is not subject to an order, written agreement, capital directive or
prompt corrective action directive; (2) "Adequately capitalized" - consisting of
institutions with a total risk-based capital ratio of 8% or greater, a Tier 1
risk-based capital ratio of 4% or greater and a leverage ratio of 4% or greater,
and the institution does not meet the definition of a "well capitalized"
institution; (3) "Undercapitalized" - consisting of institutions with a total
risk-based capital ratio less than 8%, a Tier 1 risk-based capital ratio of less
than 4%, or a leverage ratio of less than 4%; (4) "Significantly
undercapitalized" - consisting of institutions with a total risk-based capital
ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a
leverage ratio of less than 3%; (5) "Critically undercapitalized" - consisting
of an institution with a ratio of tangible equity to total assets that is equal
to or less than 2%.
Financial institutions classified as undercapitalized or below are subject
to various limitations including, among other matters, certain supervisory
actions by bank regulatory authorities and restrictions related to (i) growth of
assets, (ii) payment of interest on subordinated indebtedness, (iii) payment of
dividends or other capital distributions, and (iv) payment of management fees to
a parent holding company. The FDICIA requires the bank regulatory authorities
to initiate corrective action regarding financial institutions which fail to
meet minimum capital requirements. Such action may be taken in order to, among
other matters, augment capital and reduce total assets. Critically
undercapitalized financial institutions may also be subject to appointment of a
receiver or conservator unless the financial institution submits an adequate
capitalization plan.
28
RETURN ON EQUITY AND ASSETS
The following table sets forth the ratios of net income to average assets and
average shareholders' equity, and average shareholders' equity to average
assets. Also indicated is the Company's dividend payout ratio. (For purposes
of calculating average shareholders' equity as used in these ratios, unrealized
losses on the Company's available-for-sale securities portfolio have been
included and the percentages shown have been annualized).
- - -------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, 1996 ENDED JUNE 30, 1996
- - -------------------------------------------------------------------------------
1996 1995 1996 1995
- - -------------------------------------------------------------------------------
Return on average assets .59% .71% .69% .65%
- - -------------------------------------------------------------------------------
Return on average shareholders'
equity 7.25% 7.47% 8.43% 6.85%
- - -------------------------------------------------------------------------------
Average shareholders' equity to
average assets 8.09% 9.48% 8.19% 9.48%
- - -------------------------------------------------------------------------------
Dividend payout ratio 45.84% 30.72% 38.96% 34.13%
- - -------------------------------------------------------------------------------
29
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO VOTE OF SECURITY HOLDERS
(a) The 1996 Annual Meeting of Shareholders (the "Annual Meeting")
was held on May 21, 1996.
(b) Proposal No. 1. To elect directors. The following eight
directors, all of whom are incumbent directors, and Mrs. Joann
Price as the employee director nominee were elected at the annual
meeting by the following vote:
Votes Against
Votes For or Withheld
----------------------------------------------------------
Joseph L, Castanos 1,205,735 4,525
Steven F. Hertel 1,205,735 4,525
Roy Jura 1,205,735 4,525
Gary McDonald 1,205,735 4,525
Barbara Palmquist 1,205,735 4,525
David N. Price 1,205,735 4,525
Joann Price 1,205,735 4,525
Daniel R. Suchy 1,205,735 4,525
Waymon E. Watts 1,205,735 4,525
(c) Proposal No. 2. To ratify the appointment of Deloitte &
Touche LLP as the Company's independent public accountants
for the 1996 fiscal year.
Votes for - 1,184,075 Votes against or withheld - 2,536
(d) Proposal No. 3. To approve the Amendments to the 1990
Regency Bancorp Stock Option Plan.
Votes for - 645,814 Votes against or withheld - 35,122
(e) Proposal No.4. To approve the Regency Bancorp
Indemnification Agreements.
Votes for - 784,442 Votes against or withheld - 31,274
30
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(3.1) Articles of Incorporation, as amended, dated June 9, 1994,
incorporated by reference from exhibit 3.1 of registrant's Annual
Report on Form 10-K for the year ended December 31, 1994, filed
with the Commission on February 27, 1995.
(3.2) Bylaws, as amended, incorporated by reference from exhibit 3.2 of
registrant's Annual Report on Form 10-K for the year ended
December 31, 1994, filed with the Commission on February 27,
1995.
*(10.1) Contract Termination Agreement, dated April 1, 1996, by and
between Regency Service Corporation, a California corporation,
and Peachwood Park, a California limited partnership, (Gary L.
McDonald Construction Inc. general partner).
*(10.2) Project Management Agreement, dated April 1, 1996, by and between
Regency Service Corporation, a California corporation, and Gary
L. McDonald Real Estate and Development Co., a California
Corporation, for project managerial services related to real
estate development activities conducted by RSC.
*(10.3) Form of Indemnification Agreement
(10.4) Lease agreement dated May 13, 1996 for premises located at 126
'D' Street, Madera, California.
*(10.5) Regency Bancorp 1990 Stock Option Plan, as amended.
(27.1) Financial Data Schedule
* Denotes management contracts, compensatory plans or arrangements.
(b) Reports on Form 8-K
The Company filed a Form 8-K dated April 26, 1996 in which it
reported the Company had declared a $.06 per share cash dividend
payable to shareholders of record on April 26, 1996.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGENCY BANCORP
Date: ______________________________ By:___________________________________
Steven F. Hertel
President and Chief Executive Officer
(Principal Executive Officer)
Date: ______________________________ By: __________________________________
Steven R. Canfield
Executive Vice President and
(Chief Financial Officer and
Accounting Officer)
32
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
*10.1 Contract Termination Agreement, dated April 1, 1996, 34 - 39
by and between Regency Service Corporation, a
California corporation, and Peachwood Park, a
California limited partnership, (Gary L. McDonald
Construction Inc., general partner.
*10.2 Project Management Agreement, dated April 1, 1996, by 40 - 64
and between Regency Service Corporation, a California
corporation, and Gary L. McDonald Real Estate and
Development Co., a California Corporation, for project
managerial services related to real estate development
activities conducted by RSC.
*10.3 Form of Indemnification Agreement 65 - 77
10.4 Lease agreement dated May 13, 1996 for premises located 78 - 96
at 126 "D" street.
*10.5 Regency Bancorp 1990 Stock Option Plan, as amended 97 - 116
* Denotes management contracts, compensatory plans or arrangements.
33