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 September 30, 1996 .
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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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
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(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 November 14, 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 35 pages of which this is page one.
REGENCY BANCORP AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
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CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS) SEPTEMBER 30, 1996 DECEMBER 31, 1995
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ASSETS
Cash and due from banks $ 11,008 $ 8,925
Federal funds sold 7,000 -
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Total Cash and Equivalents 18,008 8,925
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Interest bearing deposits in other banks 3 3
Securities available-for-sale 28,334 31,750
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Loans 102,677 97,137
Allowance for credit losses (1,650) (1,784)
Deferred loan fees & discounts (1,053) (824)
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Net Loans 99,974 94,529
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Investments in real estate 13,750 17,954
Other real estate owned 569 341
Cash surrender value of life insurance 2,868 2,764
Premises and equipment, net 2,272 2,339
Accrued interest receivable and other assets 5,036 5,077
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Total Assets $ 170,814 $ 163,682
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing transaction accounts $ 34,012 $ 32,673
Interest bearing transaction accounts 47,438 40,656
Savings accounts 25,134 34,882
Time Deposits $100,000 or over 18,302 23,305
Other time deposits 27,182 12,229
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Total Deposits 152,068 143,745
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Short term borrowings - -
Notes Payable 2,730 4,109
Other liabilities 2,745 2,886
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Total Liabilities $ 157,543 $ 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 4,544 4,029
Net unrealized gain (loss) on available-for-sale securities,
net of taxes of ($102,000) in 1996 and $ 33,000 in 1995 (141) 45
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Total Shareholders' Equity 13,271 12,942
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Total Liabilities and Shareholders' Equity $ 170,814 $ 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 equivalent share data) For the three months For the nine months
ended September 30, ended September 30,
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1996 1995 1996 1995
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INTEREST INCOME
Loans (including fees) $ 2,884 $ 2,689 $ 8,380 $ 7,980
Investment securities:
Taxable 430 519 1,272 1,346
Tax exempt 21 21 66 66
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Total Investment Interest Income 451 540 1,338 1,412
Other 17 18 60 67
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Total Interest Income 3,352 3,247 9,778 9,459
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INTEREST EXPENSE
Interest on deposits 1,130 1,313 3,296 3,782
Other 41 30 141 49
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Total Interest Expense 1,171 1,343 3,437 3,831
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Net interest income 2,181 1,904 6,341 5,628
Provision for credit losses - 173 - 173
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Net interest income after
provision for credit losses 2,181 1,731 6,341 5,455
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NONINTEREST INCOME
Income from investments in real estate partnerships - - - -
Gain on sale of SBA loans 231 227 1,119 590
Depositor service charges 83 66 244 202
Income from investment management services 174 111 500 348
Gain/(loss) on sale of securities - - - (25)
Gain on sale of assets 5 2 14 2
Servicing fees on loans sold 92 82 231 238
Other 90 100 342 214
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Total Noninterest Income 675 588 2,450 1,569
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NONINTEREST EXPENSE
Loss (Gain) from investments in real estate partnerships (12) 518 170 135
Salaries and related benefits 1,154 1,129 3,340 3,308
Occupancy & Equipment 438 412 1,231 968
FDIC insurance and regulatory assessments 15 (3) 47 156
Marketing 117 116 328 280
Professional Services 178 126 601 398
Director's fees and expenses 90 66 258 200
Management fees for real estate projects 126 (118) 359 56
Other 265 265 1002 850
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Total Noninterest Expense 2,371 2,511 7,336 6,351
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Income (loss) before income taxes 485 (192) 1,455 673
Provision for income taxes 203 (81) 613 282
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Net Income (Loss) 282 (111) 842 391
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Net income per common and
common equivalent share .15 (.06) .45 .21
Shares used in computation 1,869 1,808 1,869 1,887
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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 NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Common Common Net
Stock Number of Stock Retained Unrealized
(In thousands) Shares Amount Earnings Gain (Loss) Total
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Balance, December 31, 1994 1,711 $ 7,950 $ 7,017 $ (640) $ 14,327
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Issuance of common stock
under stock option plan
Issuance of common stock dividend 11 19 - 19
including fractional shares 86 866 (868) (2)
Tax benefit of stock option transactions - 16 16
Cash dividends - - (262) (262)
Net change in unrealized gain (loss) on
available-for-sale securities (net of
taxes of $450,000) - - 621 621
Net Income - - 391 391
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Balance, September 30, 1995 1,808 $ 8,851 $ 6,278 $ (19) $ 15,110
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Common Common Net
Stock Number of Stock Retained Unrealized
(In thousands) 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 - - (327) (327)
Net change in unrealized gain (loss) on
available-for-sale securities (net of
taxes of $135,000) - - - (186) (186)
Net Income - - 842 842
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Balance, September 30, 1996 1,818 8,868 4,544 (141) 13,271
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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 NINE MONTHS ENDED SEPTEMBER 30, 1996 1995
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OPERATING ACTIVITIES:
Increase (decrease) in cash equivalents:
Net income $842 $ 391
Adjustments:
Provisions for credit losses - 173
Provision for losses on real estate - 235
Provision for OREO losses - 30
Depreciation and amortization 535 446
Deferred income taxes 490 (164)
(Increase) decrease in interest receivable and other assets (92) 324
Increase in surrender value of life insurance (104) (98)
Distributions of income from real estate partnerships 103 55
Equity in (income) loss of real estate partnerships (10) 135
(Increase) decrease in real estate held for sale 6,417 -
(Gain)/loss on acquisition of partnerships (63) (695)
Increase (decrease) in other liabilities (566) 25
(Gain)/loss on sale of securities - (590)
Gain on sale of loans held-for-sale (1,119) 7,466
Proceeds from sale of loans held-for-sale 11,619 (8,205)
Additions to loans held-for-sale (8,253) (267)
Loss (gain) on sale of premises and equipment and OREO (1) 3
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Net cash provided by (used in) operating activities 9,798 (739)
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INVESTING ACTIVITIES:
Purchase of available-for-sale securities (12,109) (16,001)
Proceeds from sales of available-for-sale securities 1,000 3,105
Purchases of held-to-maturity securities - (5,886)
Proceeds from maturities of available-for-sale securities 14,094 8,812
Proceeds from maturities of held-to-maturity securities - 4,000
Loan participations purchased - (750)
Loan participations sold - 810
Net (increase) decrease in loans (5,839) (665)
Net decrease (increase) in other short-term investments - (3,801)
Cash received through acquisition of partnerships 441 -
Proceeds from sale of OREO 123 76
Capital contributions to real estate partnerships (397) (1,114)
Capital distributions from real estate partnerships 1,012 687
Payments towards the acquisition and development
of investments in real estate - (531)
Purchases of premises and equipment (357) (183)
Proceeds from sale of premises and equipment - 3,832
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Net cash provided by (used in) investing activities (2,032) (7,609)
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FINANCING ACTIVITIES:
Net increase (decrease) in time deposits accounts 9,949 6,854
Net increase (decrease) in other deposits (1,626) 2,132
Net increase (decrease) on short term borrowings - -
Cash dividends paid (327) (262)
Payments for fractional shares related to stock dividends - (2)
Payments on notes payable (7,059) (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 1,317 8,590
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,083 242
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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 $ 18,008 $ 8,559
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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. Certain items
reflected on the consolidated statement of income and supporting schedules in
prior periods have been reclassified to be consistent with the current
presentation.
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
6
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.
NOTE 3. - INVESTMENT SECURITIES
During the period between December 31, 1995, and September 30, 1996, the
Company recorded a net decrease in the value of its available-for-sale portfolio
of $186,000 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 September 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 SEPTEMBER DECEMBER 31,
30, 1996 1995
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Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
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U.S. Treasuries $ 2,023 $ 2,018 $ 2,003 $ 2,005
U.S. Government Agencies 17,104 16,903 20,474 20,459
Mortgage-backed securities 7,686 7,606 7,655 7,685
State and Political Subdivision 1,414 1,458 1,540 1,601
Equity Securities 349 349 - -
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Total $ 28,576 $ 28,334 $ 31,672 $ 31,750
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At September 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) SEPTEMBER 30, 1996 DECEMBER 31, 1995
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Percent Percent
of of
Total Total
Amount Loans Amount Loans
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Commercial $ 58,400 56.9% $ 54,150 55.7%
Real estate mortgage 12,190 11.9% 10,389 10.7%
Real estate construction 23,594 23.0% 23,706 24.4%
Consumer and other 8,493 8.3% 8,892 9.2%
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Subtotal 102,677 100.0% 97,137 100.0%
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Less:
Unearned discount 632 468
Deferred loan fees 421 356
Allowances for credit losses 1,650 1,784
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Total loans, net $ 99,974 $ 94,529
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As of September 30, 1996, there were $505,000 in SBA loans held-for-sale.
7
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 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.
At September 30, 1996, the Bank's recorded investment in loans for
which impairment has been recognized totaled $164,000. Included in this amount
is $48,000 of impaired loans for which the related SFAS No. 114 allowance is
$48,000, as well as $116,000 of impaired loans that as a result of write-downs
or the fair value of the collateral, did not have a SFAS No. 114 allowance.
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 September 30, 1996, and September 30,
1995, the Company had 1,869,000 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 1996, 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 September 30, 1996, RSC's equity investment in the four partnerships
acquired was $5,387,760.
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 nine months ended September 30, 1996:
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(IN THOUSANDS) 1996 1995
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Cash paid during the period for:
Interest on deposits and other borrowings $ 3,387 $ 3,798
Income taxes 316 619
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Non cash transactions:
Transfer of loans to other real estate owned -
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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 nine months ended
September 30, 1996, was $842,000, an increase of $451,000 or 115.3% when
compared to earnings of $391,000 for the period ended September 30, 1995. Net
income for the third quarter of 1996 was $282,000 as compared to a loss of
($111,000) in the third quarter of 1995. Earnings per share were $0.15 in the
third quarter of 1996, $0.45 for the nine month period ended September 30, 1996,
compared to ($0.06) per share in the third quarter of 1995 and $0.21 for the
nine month period ended September 30, 1995. The Company paid a cash dividend of
$0.06 per share in the third quarter of 1996. During the third quarter of 1995,
the Company paid a cash dividend of $0.05.
The increase in net income of $451,000 for the period ended September
30, 1996 was primarily the result of an increase in net interest income of
$713,000, an increase in income generated from the sale of SBA loans of $529,000
and a decline in losses from investments in real estate of $348,000. Income for
the third quarter of 1996 increased by $393,000 compared to the third quarter of
1995, primarily as a result of lower losses from investments in real estate.
During the third quarter of 1996, the Company recorded pre-tax income from
investments in real estate of $12,000 compared to a loss of ($518,000) recorded
in the third quarter of 1995.
The Company's return on average assets was 0.69% for the first nine
months of 1996 compared to 0.33% for the first nine months of 1995. Return on
average common equity for the first nine months was 8.46 % compared to 3.51%
for the same period in 1995.
At September 30, 1996, the Company's total risk-based capital ratio
was 10.76% while the leverage ratio was 7.52%. All capital ratios were in
excess of minimum regulatory guidelines.
Nonperforming assets declined during the third quarter by $143,000 to
$4,093,000 at September 30, 1996 (2.40% of total assets), compared to $4,236,000
at June 30, 1996 (2.61% 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 reports on form 10-Q dated March 31, 1996 and June 30, 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 quarter ended September 30, 1996, 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
1.61% at September 30, 1996 (40.31% of nonperforming assets) compared to 1.84%
(193.50% of non-performing assets) at year end 1995.
10
During the quarter ended September 30, 1996, the Company opened its
fourth branch office at 126 N. "D" Street, Madera, California.
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 SEPTEMBER 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) $ 103,154 11.13% $ 2,885 $ 93,714 11.38% $ 2,689
Investment securities (2) 28,221 6.36% 451 33,224 6.45% 540
Federal funds sold & other 1,620 4.17% 17 1,420 5.03% 18
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Total Interest-earning assets $ 132,995 10.03% $ 3,353 $ 128,358 10.04% $ 3,247
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Noninterest-earning assets:
Allowance for credit losses (1,690) (1,385)
Cash and due from banks 8,668 7,842
Real estate investments 16,677 17,441
Premises and equivalent, net 2,313 4,288
Cash surrender value of life insurance 2,845 2,715
Accrued interest receivable and other assets 4,171 3,185
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Total Average Assets $ 165,980 $162,444
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LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities:
Transaction accounts $ 46,326 2.68% 312 $ 51,457 3.32% $ 430
Savings accounts 23,976 4.25% 256 23,530 4.72% 280
Time deposits 42,306 5.29% 563 42,401 5.64% 603
Federal funds purchased, notes payable
and other 7,219 2.26% 41 765 15.56% 30
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Total Interest-bearing $ 119,828 3.89% $ 1,172 $ 118,153 4.51% $ 1.343
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Noninterest-bearing liabilities:
Transaction accounts 30,622 26,294
Other liabilities 2,350 2,218
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Total liabilities 152,800 147,294
Shareholders' Equity:
Common stock 8,868 8,851
Retained earnings 4,452 6,437
Unrealized gain / (loss) on investment
securities (141) (138)
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Total Shareholders Equity 13,179 15,150
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Total average liabilities and
shareholders' equity $165,980 $ 162,444
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Net Interest Income $ 2,181 $ 1,904
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Interest income as a percentage of average
interest-earning assets 10.03% 10.04%
Interest expense as a percentage of average
interest-earning assets (3.51%) (4.15%)
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Net Interest Margin 6.52% 5.89%
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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
$319,000 and $347,000 for the three months ended September 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 NINE MONTHS ENDED SEPTEMBER 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) $ 98,964 11.31% $ 8,381 $ 91,591 11.65% $ 7,980
Investment securities (2) 28,702 6.23% 1,338 29,347 6.33% 1,412
Federal funds sold & other 1,640 4.89% 60 1,589 5.64% 67
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Total Interest-earning assets $ 129,306 10.10% $ 9,779 $ 123,027 10.28% $ 9,459
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Noninterest-earning assets:
Allowance for credit losses (1,743) (1,421)
Cash and due from banks 8,300 7,843
Real estate investments 18,723 17,104
Premises and equivalent, net 2,297 5,552
Cash surrender value of life insurance 2,811 2,682
Accrued interest receivable and other assets 4,428 3,268
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Total Average Assets $ 164,122 $ 158,055
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LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities:
Transaction accounts $ 45,604 2.69% $ 919 $ 52,068 3.43% $ 1,336
Savings accounts 25,383 4.19% 796 20,798 4.87% 758
Time deposits 39,740 5.32% 1,582 41,087 5.50% 1,689
Federal funds purchased, notes payable
and other (3) 7,888 2.39% 141 1,084 5.92% 48
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing $ 118,615 3.87% $ 3,438 $ 115,037 4.45% $ 3,831
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Transaction accounts 29,653 26,013
Other liabilities 2,554 2,100
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 150,822 143,150
Shareholders' Equity:
Common stock 8,868 8,382
Retained earnings 4,468 6,328
Unrealized gain / (loss) on investment
securities (36) (305)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Shareholders Equity $ 13,300 $ 14,305
- -----------------------------------------------------------------------------------------------------------------------------------
Total average liabilities and
shareholders' equity $164,122 $ 158,055
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 6,341 $ 5,628
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income as a percentage of average
interest-earning assets 10.10% 10.28%
Interest expense as a percentage of average
interest-earning assets (3.55%) (4.16%)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Margin 6.55% 6.12%
- -----------------------------------------------------------------------------------------------------------------------------------
(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
$933,000 and $925,000 for the nine months ended September 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 nine month periods ended
September 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
--------------------
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME VARIANCE ANALYSIS FOR THE THREE MONTHS AMOUNT RESULTING FROM TOTAL CHANGE
ENDED SEPTEMBER 30, 1996 CHANGES IN: 1995-1996
VOLUME RATE
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Earnings Variance Analysis
Increase (decrease) in interest income:
Loans 262 (66) 196
Investment securities (80) (9) (89)
Federal funds sold and other 4 (5) (1)
- -----------------------------------------------------------------------------------------------------------------------------------
Total 186 (80) 106
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Transaction accounts (40) (78) (118)
Savings accounts 5 (29) (24)
Certificates of deposit (1) (39) (40)
Federal funds purchased, notes payable and other 12 (1) 11
- -----------------------------------------------------------------------------------------------------------------------------------
Total (24) (147) (171)
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income 210 67 277
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME VARIANCE ANALYSIS FOR THE NINE MONTHS AMOUNT RESULTING FROM TOTAL CHANGE
ENDED SEPTEMBER 30, 1996 CHANGES IN: 1995-1996
VOLUME RATE
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Earnings Variance Analysis
Increase (decrease) in interest income:
Loans 615 (214) 401
Investment securities (54) (20) (74)
Federal funds sold and other 2 (9) (7)
- -----------------------------------------------------------------------------------------------------------------------------------
Total 563 (243) 320
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Transaction accounts (153) (264) (417)
Savings accounts 104 (66) 38
Certificates of deposit (54) (53) (107)
Federal funds purchased and other 103 (10) 93
- -----------------------------------------------------------------------------------------------------------------------------------
Total (1) (392) (393)
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income 564 149 713
- -----------------------------------------------------------------------------------------------------------------------------------
(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 $2,181,000 for
the third quarter of 1996 as compared to $1,904,000 for the comparable period of
1995, an increase of $277,000 or
14
14.5%. This increase was primarily attributable to higher loan balances and
lower rates paid on interest-bearing deposit accounts. The Company's net
interest margin in the third quarter of 1996 (based on average interest
earning assets) was 6.52% as compared to 5.89% for the same period in 1995.
Average interest earning assets grew 3.6% between the third quarter 1996 and
the third quarter of 1995 while interest-bearing liabilities grew 1.4% over
the same period.
Net interest income before the provision for loan losses for the first nine
months of 1996 was $6,341,000 as compared to $5,628,000 for the comparable
period of 1995, an increase of $713,000 or 12.7%. 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 nine month period ended September 30, 1996 (based on
average interest-earning assets) was 6.55% as compared to 6.12% for the same
period in 1995. Average interest-earning assets grew 5.1% for the nine month
period ended September 30, 1996 as compared to the nine month period ended
September 30, 1995 while interest-bearing liabilities grew 3.1% over the
comparable periods. The Company's earning asset mix changed slightly with
higher yielding loans increasing as a percentage of average earning assets while
lower yielding investments declined.
INTEREST EARNING ASSET MIX
- -------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 1995
- -------------------------------------------------------------------------------
Average Percent Average Percent
Balance of Total Balance of Total
- -------------------------------------------------------------------------------
Interest -Earning Asset Mix:
Loans $ 98,964 76.53% $ 91,591 74.45%
Investment securities 28,702 22.20% 29,347 24.26%
Federal funds sold and other 1,640 1.27% 1,589 1.29%
- -------------------------------------------------------------------------------
Total Interest-earning Assets $129,306 100.0% $123,027 100.0%
- -------------------------------------------------------------------------------
Average interest-earning assets for the nine months ended September 30,
1996 increased to $129,306,000 from $123,027,000 for the comparable period in
1995. Average loans increased by $7,373,000 to $98,964,000 representing 76.53%
of average interest-earning assets for the first nine months of 1996, compared
to $91,591,000 or 74.45% for the first nine months of 1995. The yield on
average loans declined to 11.31% at September 30, 1996, from 11.65% at September
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 6.23% for the period ended September 30,
1996, from 6.33% in the comparable period in 1995. As a percentage of average
interest earning assets investment securities declined to 22.20% for the nine
months ended September 30, 1996 compared to 24.26% for the comparable period in
1995.
Average interest-bearing liabilities for the nine months ended September
30, 1996 increased to $118,615,000 from $115,037,000 for the comparable period
in 1995 an increase of $3,578,000 or
15
3.11%. 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
nine months of 1996. As a result, federal funds purchased, notes payable and
other increased by $6,804,000 in 1996 compared to the same period in 1995.
For the first nine months ended September 30, 1996, the average interest rate
paid on interest-bearing liabilities declined to 3.87% from an average rate
of 4.45% paid during the first nine months of 1995.
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
------------
- -------------------------------------------------------------------------------
(IN THOUSANDS) FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
- -------------------------------------------------------------------------------
1996 1995 1996 1995
- -------------------------------------------------------------------------------
Other Income:
Income from investments in real
estate partnerships $ - $ - $ - $ -
Gain on sale of SBA loans 231 227 1,119 590
Depositor service charges 83 66 244 202
Income from investment management
services 174 111 500 348
Gain on sale of securities - - - (25)
Gain on sale of assets 5 2 14 2
Servicing fees on loans sold 92 82 231 238
Other 90 100 342 214
- -------------------------------------------------------------------------------
Total $ 675 $ 588 $ 2,450 $ 1,569
- -------------------------------------------------------------------------------
(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 third quarter of 1996, the Company recognized noninterest income
of $675,000 compared to $588,000 for the same period during 1995 an increase of
$87,000 or 14.8%. For the first nine months of 1996, noninterest income was
$2,450,000 compared to $1,569,000 for the first nine months of 1995, an increase
of $881,000 or 56.2%. These increases are attributable to increases in almost
all noninterest income categories. The greatest increase is attributable to
gains from the sale of SBA loans (see "SBA Loan Origination & Sales") as well
as income from investment management services (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.
16
During the quarter ended September 30, 1996, the Company recognized
gains on sale of SBA loans of $231,000, an increase of $4,000 from $227,000
in the comparable period of 1995. For the nine months ended September 30,
1996 gains on sale of SBA loans were $1,119,000 compared to $590,000 during
the first nine months of 1995, an increase of $529,000. These increases were
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 third quarter ended September 30, 1996, servicing
income totaled $92,000, an increase of $10,000 from income of $82,000 during
the quarter ended September 30, 1995. For the nine months ended September
30, 1996, servicing income totaled $231,000, a decline of $7,000 compared to
$238,000 of servicing income during the first nine months of 1995. The
servicing income decline for the first nine 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.
17
During 1996, RSC continued to aggressively pursue divestiture of its
remaining real estate projects through various transactions. As of September
30, 1996, RSC had dissolved or closed out all but three partnerships which
resulted in sole ownership of nine of the projects. These projects are accounted
for under the consolidation method.
For the third quarter ended September 30, 1996, the net gain from
investments in real estate projects amounted to $12,000, compared to a loss of
$518,000 in the third quarter ended September 30, 1995. The third quarter loss
in 1995 was primarily the result of the initial establishment of a loss reserve.
The net gain on the sale of real estate in the third quarter of 1996 was the
result of income generated from sales in two projects while losses experienced
in others were offset by the previously established loss reserve. For the first
nine months of 1996 the net loss from investments in real estate projects
amounted to $170,000, compared to a loss of $135,000 for the first nine months
of 1995, a decline of $35,000. Actual losses from investments in real estate
projects for the nine months ended September 30, 1996, amounted to $1,404,000.
These losses were offset by a $1,234,000 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 $1,053,000 in the first nine 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 $170,000 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.
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".
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 third quarter 1996 increased to $174,000 from
$111,000 in the same period of 1995, an increase of $63,000. For the first nine
months of 1996, income from RIA was $500,000, an increase of $152,000 or 43.7%
from income of $348,000 for the first nine months of 1995. RIA on a stand
alone basis in the nine month period ended September 30, 1996, posted net pre-
tax income of $21,000 compared to a net pre-tax loss of ($106,000) in the first
nine months of 1995.
18
As of September 30, 1996, RIA had $72.5 million in assets under management,
an increase of $21.6 million compared to $50.9 million as of September 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
SEPTEMBER 30, 1996 1995
- -------------------------------------------------------------------------------
Percent Percent
of of
Amount Average Amount Average
Assets Assets
- -------------------------------------------------------------------------------
Other Expense:
Loss (Gain) from investments in real
estate partnerships $ (12) (0.03%) $ 518 1.27%
Salaries and related benefits 1,154 2.76% 1,129 2.76%
Occupancy 438 1.05% 412 1.01%
FDIC insurance and regulatory
assessments 15 0.04% (3) (.01)%
Marketing 117 0.28% 116 0.28%
Professional services 178 0.43% 126 0.31%
Director's fees and expenses 90 0.22% 66 0.16%
Management fees for real estate
projects 126 0.30% (118) (.29)%
Other 265 0.64% 265 0.65%
- -------------------------------------------------------------------------------
TOTAL $2,371 5.68% $2,511 6.15%
- -------------------------------------------------------------------------------
For the third quarter ended September 30, 1996, other expenses decreased by
5.6% or $140,000 to $2,371,000, from $2,511,000 during the comparable period in
1995. The primary cause of the decline was due to lower losses from
investments in real estate. Professional services (legal and accounting),
directors fees and expenses, and management fees for real estate projects all
increased in the three month period ended September 30, 1996 compared to 1995
mainly due to increased activity related to RSC's divestiture of it's real
estate holdings. When compared to average assets for the respective periods,
other expenses declined to 5.68% versus 6.15% in 1995.
19
OTHER OPERATING EXPENSE TO AVERAGE ASSETS
- -------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 1995
- -------------------------------------------------------------------------------------------------------
Percent of Percent of
Average Average
Amount Assets Amount Assets
- -------------------------------------------------------------------------------------------------------
Other Expense:
Loss (Gain)from investments in real estate partnerships $ 170 0.14% $ 135 .11%
Salaries and related benefits 3,340 2.71% 3,308 2.80%
Occupancy 1,231 1.00% 968 0.82%
FDIC insurance and regulatory assessments 47 0.04% 156 0.13%
Marketing 328 0.27% 280 0.23%
Professional services 601 0.49% 398 0.34%
Director's fees and expenses 258 0.21% 200 0.17%
Management fees for real estate projects 359 0.29% 56 0.05%
Other 1,002 0.81% 850 0.72%
- -------------------------------------------------------------------------------------------------------
TOTAL $ 7,336 5.96% $ 6,351 5.37%
- -------------------------------------------------------------------------------------------------------
For the nine months ended September 30, 1996, other expenses increased
15.5% or $985,000 to $7,336,000, up from $6,351,000 during the comparable
period in 1995. The primary causes of the increase were due to higher
occupancy expense 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 5.96% versus 5.37% in 1995.
Salaries and benefits expense increased by only $32,000 or 0.97% in the
nine month period ended September 30, 1996 as compared to the first nine
months of 1995. Occupancy expense increased by $263,000 or 27.2% for the
first nine 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.
FDIC insurance and regulatory assessments declined by $109,000 or 69.9%
in the first nine months of 1996 compared to the same period in 1995 due to
lower insurance premiums charged by the FDIC.
BALANCE SHEET ANALYSIS
Total assets increased by $7,132,000 or 4.4% between December 31, 1995
and September 30, 1996. The Company's loan portfolio increased by $5,540,000
or 5.7% primarily as a result of $4,060,000 in loans made by RSC to
facilitate the sale of three of its partnerships. Deposits increased during
the nine months ended September 30, 1996 by $8,323,000 or 5.8%, primarily due
to concerted marketing efforts and additionally from new deposits generated
by the Banks new Madera branch.
20
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 56.9% of
the Company's loan portfolio at September 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 23.0% of the Company's loan
portfolio at September 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 $4.9 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 11.9% of the loan portfolio at
September 30, 1996, and are made up of (69%) non-residential properties and
(31%) single-family residential mortgages. The non-residential loans
generally are "mini-perm" (medium-term) commercial real estate mortgages with
maturities under seven years. The residential mortgages are secured by first
trust deeds and have varying maturities. Both types of loans may have either
fixed or floating rates. The majority are floating. Risks associated with
non-residential loans include the decline in value of commercial property
values; economic conditions surrounding commercial real estate properties;
and vacancy rates. The repayment of single-family residential mortgage loans
is generally dependent 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 September 30, 1996, comprising 8.2% of total loans. This
category includes traditional Consumer Installment Loans (47%), Home Equity
Lines of Credit (40%), Leases (1%), and Visa Card Loans (12%). Consumer
installment loans are generally secured by third trust deeds on single-family
residences, while Visa Cards are unsecured.
21
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.
In addition to the credit risk associated with the Bank's loan
portfolio, the Company continually reviews and monitors RSC's activities and
potential exposure to loss related to the sale of properties whether owned
directly or in partnership. In conjunction with this analysis, the Company
established a reserve for potential real estate losses during 1995. At
September 30, 1996 the Company's analysis indicated the reserve was
sufficient to absorb anticipated additional losses generated from the sale of
properties at expected price levels. Should market conditions change and
the expected demand for new homes or sales prices decline, or, should other
issues not presently known arise which effect disposition of RSC properties,
it is possible additional reserves could be required which could negatively
effect the Companies results of operations, including earnings and capital
ratios.
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 September 30, 1996, nonaccrual loans amounted to $3,524,000 or 3.43%
of total loans compared to $3,855,000 or 3.85% at June 30, 1996 and $581,000
or .60% at December 31, 1995. Other real estate owned was $569,000 at
September 30, 1996 compared to $381,000 at June 30, 1996 and $341,000 at
December 31, 1995. As previously discussed, the primary reason for the
increase in nonperforming loans during the first nine months of 1996 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 third quarter an
22
additional loan of $310,000 was made to facilitate the sale of a third
property. Management expects these loans will appear in the nonperforming
category until the properties underlying the loans are substantially sold out.
Following is a table presenting the Nonperforming Assets for the periods ending
September 30, 1996 and December 31, 1995.
NONPERFORMING ASSETS
- ----------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) SEPTEMBER 30, 1996 DECEMBER 31, 1995
- ----------------------------------------------------------------------------------------
Nonperforming Assets:
Nonaccrual RSC loans $ 3,452 $ 505
Nonaccrual bank loans 72 76
Restructured loans - -
- ----------------------------------------------------------------------------------------
Nonperforming loans 3,524 581
Other real estate owned 569 341
- ----------------------------------------------------------------------------------------
Total nonperforming assets 4,093 922
- ----------------------------------------------------------------------------------------
Accruing loans 90 days past due 75 725
- ----------------------------------------------------------------------------------------
Total loans before allowance for losses 102,677 97,137
Total assets 170,814 163,682
Allowance for possible credit losses (1,650) (1,784)
- ----------------------------------------------------------------------------------------
Ratios:
Nonperforming loans to total loans consolidated 3.43% .60%
Nonperforming loans to total loans bank
only (excluding RSC loans) .07% .08%
Nonperforming assets to:
Total loans 3.99% .95%
Total loans and OREO 3.96% .95%
Total assets 2.40% .56%
Allowance for possible credit losses to total
nonperforming assets 40.31% 193.50%
- ----------------------------------------------------------------------------------------
At September 30, 1996, the Bank's recorded investment in loans for which
impairment has been recognized totaled $164,000. Included in this amount is
$48,000 of impaired loans for which the related SFAS No. 114 allowance is
$48,000, as well as $116,000 of impaired loans that as a result of write-downs
or the fair value of the collateral, did not have a SFAS No. 114 allowance.
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 $1,650,000 or 1.61% of total loans
at September 30, 1996, compared to $1,784,000 or 1.84% at December 31, 1995.
The decrease is the result of net charge-offs totaling $134,000 during the first
nine 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
23
currently available to analyze credit loss potential, including economic
factors, overall credit quality, historical delinquency and a history
of actual charge-offs, management believes that the credit loss provision and
allowance is adequate. However, no prediction of the ultimate level of loans
charged-off in future years can be made with any certainty.
Following is a table presenting the activity within the Company's provision for
credit losses for the period between December 31, 1995 and September 30, 1996.
- ---------------------------------------------------------------------
(IN THOUSANDS)
- ---------------------------------------------------------------------
Balance, December 31, 1995 $ 1,784
- ---------------------------------------------------------------------
Provision charged to expense -
Loans charged off 209
Recoveries 75
- ---------------------------------------------------------------------
Balance, September 30, 1996 $ 1,650
- ---------------------------------------------------------------------
INVESTMENTS IN REAL ESTATE
The Company's investment in real estate consists of the Bank's
investment of capital and retained earnings in RSC. At September 30, 1996,
RSC was the sole owner of nine projects and is a limited partner in three
projects. As of September 30, 1996, the Company had an equity investment of
$13,750,000 invested in these partnerships and projects compared to
$17,954,000 at December 31, 1995. In addition, RSC has loans totaling
$4,959,000, 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. 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
September 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 September 30, 1996, and December 31, 1995, respectively.
- -------------------------------------------------------------------------------------------------------
(IN THOUSANDS) SEPTEMBER 30, 1996 DECEMBER 31, 1995
- -------------------------------------------------------------------------------------------------------
Percent of Percent of
Amount Total Deposits Amount Total Deposits
- -------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing transaction accounts $ 34,013 22.37% $ 32,672 22.73%
Interest bearing deposits: 72,572 47.72% 75,539 52.55%
Time deposits:
Under $100,000 18,302 12.04% 12,229 8.51%
$100,000 and over 27,181 17.87% 23,305 16.21%
- -------------------------------------------------------------------------------------------------------
Total Interest-bearing Deposits 118,055 77.63% 111,073 77.27%
- -------------------------------------------------------------------------------------------------------
Total Deposits $ 152,068 $ 100.0% $ 143,745 100.0%
- -------------------------------------------------------------------------------------------------------
During the first nine months of 1996, total deposits increased by
$8,323,000 or 5.8%, to $152,068,000 at September 30, 1996 compared to
$143,745,000 at December 31, 1995. The increase was primarily due to
concerted marketing efforts and additionally from new deposits generated by
the Banks new Madera branch.
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 MONTHS BUT WITHIN BUT WITHIN AFTER
AS OF SEPTEMBER 30, 1996 IMMEDIATELY 12 MONTHS FIVE YEARS FIVE YEARS TOTAL
- --------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity Gap:
Loans (1) $ 40,798 $ 33,702 $ 9,154 $ 9,183 $ 6,316 $ 99,153
Investment securities and other (2) 349 7,238 3,445 11,388 6,159 28,579
Fed funds sold 7,000 - - - - 7,000
- --------------------------------------------------------------------------------------------------------------------
Total Earning Assets 48,147 40,940 12,599 20,571 12,475 134,732
- --------------------------------------------------------------------------------------------------------------------
Interest-bearing transaction accounts 47,438 - - - - 47,438
Savings accounts 22,814 2,320 - - - 25,134
Time deposits - 12,945 24,704 7,676 159 45,484
Federal funds purchased - - - - - -
- --------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 70,252 15,265 24,704 7,676 159 118,056
- --------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap (22,105) 25,675 (12,105) 12,895 12,316
Cumulative gap (22,105) 3,570 (8,535) 4,360 16,676
Cumulative gap percentage to
interest earning assets (16.41%) 2.65% (6.33%) 3.24% 12.38%
- --------------------------------------------------------------------------------------------------------------------
(1) Amounts exclude nonaccrual loans of $3,524,000.
(2) Amounts exclude unrealized gain/l(loss) of $242,000
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 for the quarter ended September 30, 1996.
- --------------------------------------------------------------------------------
RISK-BASED CAPITAL RATIOS
(IN THOUSANDS) COMPANY BANK
- --------------------------------------------------------------------------------
Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------
Risk-Based Capital Ratio:
Total Capital $ 14,062 10.76% $ 13,554 10.38%
Tier 1 Capital 12,429 9.51% 11,921 9.13%
Total Risk-Adjusted Assets 130,703 130,614
- --------------------------------------------------------------------------------
Leverage Ratio:
Tier 1 Capital 12,429 7.52% 11,921 7.21%
Average Total Assets 165,222 165,301
- --------------------------------------------------------------------------------
As indicated in the table above, at September 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 NINE MONTHS
ENDED SEPTEMBER 30, 1996 ENDED SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Return on average assets 0.68% (.27)% 0.69% 0.33%
- -------------------------------------------------------------------------------------------------------------------
Return on average shareholders' equity 8.51% (2.91)% 8.46% 3.51%
- -------------------------------------------------------------------------------------------------------------------
Average shareholders' equity to average assets 7.94% 9.33% 8.10% 9.43%
- -------------------------------------------------------------------------------------------------------------------
Dividend payout ratio 38.68% (81.31)% 38.87% 66.93%
- -------------------------------------------------------------------------------------------------------------------
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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(3.1) Articles of Incorporation, as amended, dated September 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) Amendment to the Project Management Agreement, dated August 21,
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.
30
(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 July 26, 1996 in which it
reported the Company had declared a $.06 per share cash dividend
payable to shareholders of record on July 29, 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: November 8, 1996 By: /s/Steven F. Hertel
------------------------ ----------------------------
Steven F. Hertel
President and Chief
Executive Officer
(Principal Executive Officer)
Date: November 8, 1996 By: /s/Steven R. Canfield
------------------------ ----------------------------
Steven R. Canfield
Executive Vice President and
(Chief Financial Officer and
Accounting Officer)
32
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
*10.1 Amendment to the Project Management Agreement, dated 34
August 21, 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.
27.1 Financial Data Schedule 35
* Denotes management contracts, compensatory plans or arrangements.
33