UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997 .
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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
REGENCY BANCORP
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0378956
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organizations) Identification No.)
7060 N. FRESNO STREET, FRESNO, CALIFORNIA 93720
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (209) 438-2600.
None
(Former name, former address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for the shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
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As of May 8, 1997, the registrant had 1,853,738 shares of Common Stock
outstanding.
The Exhibit Index is located on page 30.
This report contains a total of 51 pages of which this is page one.
REGENCY BANCORP AND SUBSIDIARIES
PART I. ITEM 1. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS) MARCH 31, 1997 DECEMBER 31, 1996
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ASSETS
Cash and due from banks $ 8,990 $ 14,833
Federal funds sold 12,300 5,000
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Total Cash and Equivalents 21,290 19,833
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Interest bearing deposits in other banks 95 98
Securities available-for-sale 35,829 33,270
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Loans 101,192 102,458
Allowance for credit losses (1,699) (1,615)
Deferred loan fees & discounts (1,252) (1,073)
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Net Loans 98,241 99,770
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Investments in real estate 15,165 16,489
Other real estate owned 399 437
Cash surrender value of life insurance 2,938 2,903
Premises and equipment, net 2,182 2,262
Accrued interest receivable and other assets 5,413 5,996
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Total Assets $ 181,552 $ 181,058
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing transaction accounts 33,814 $ 36,613
Interest bearing transaction accounts 48,460 47,850
Savings accounts 30,703 25,540
Time Deposits $100,000 or over 29,186 30,766
Other time deposits 19,313 19,033
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Total Deposits 161,476 159,802
Short term borrowings - -
Notes Payable 4,012 4,976
Other liabilities 2,167 2,810
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Total Liabilities $ 167,655 $ 167,588
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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; 1,853,738 and 1,818,160 shares issued and
outstanding in 1997 and 1996, respectively 9,201 8,868
Retained earnings 4,836 4,601
Net unrealized gain (loss) on available-for-sale securities,
net of taxes of $(102,000) in 1997 and $1,026 in 1996 (140) 1
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Total Shareholders' Equity 13,897 13,470
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Total Liabilities and Shareholders' Equity $ 181,552 $ 181,058
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See notes to consolidated financial statements
2
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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(IN THOUSANDS, EXCEPT FOR PER COMMON AND EQUIVALENT SHARE DATA)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 1996
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INTEREST INCOME
Loans (including fees) $ 2,800 $ 2,869
Investment securities:
Taxable 514 443
Tax exempt 20 23
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Total Investment Interest Income 534 466
Other 114 19
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Total Interest Income $ 3,448 $ 3,354
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INTEREST EXPENSE
Interest on deposits 1,259 1,128
Other 20 38
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Total Interest Expense 1,279 1,166
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Net interest income 2,169 2,188
Provision for credit losses - -
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Net interest income after
provision for credit losses 2,169 2,188
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NONINTEREST INCOME
Income from investments in real estate partnerships - -
Gain on sale of SBA loans 270 315
Depositor service charges 98 76
Income from investment management services 214 164
Gain/(loss) on sale of securities 2 -
Gain on sale of assets 4 5
Servicing fees on loans sold 86 58
Other 107 95
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Total Noninterest Income $ 781 $ 713
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NONINTEREST EXPENSE
Loss from investments in real estate partnerships 240 97
Salaries and related benefits 1,164 1,111
Occupancy 403 392
FDIC insurance and regulatory assessments 22 16
Marketing 90 90
Professional Services 121 154
Director's fees and expenses 96 76
Management fees for real estate projects 108 79
Supplies, telephone and postage 79 85
Other 222 242
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Total Noninterest Expense $ 2,545 $ 2,342
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Income before income taxes 405 559
Provision for income taxes 170 237
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Net Income $ 235 $ 322
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Net income per common and
common equivalent share $ .12 $ .17
Shares used in computation 1,902,000 1,869,000
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See notes to consolidated financial statements
3
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
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Net
Common Stock Common Stock Retained Unrealized
(In thousands) Number 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 - - (109) - (109)
Net change in unrealized gain (loss) on
available-for-sale securities net of
taxes of $(16,000) - - - (23) (23)
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Net Income - - 322 - 322
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Balance, March 31, 1996 1,818 $8,868 $4,242 $ 22 $13,132
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Net
Common Stock Common Stock Retained Unrealized
(In thousands) Number of Shares Amount Earnings Gain (Loss) Total
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Balance, December 31, 1996 1,818 $8,868 $4,601 $ 1 $13,470
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Issuance of common stock
to employee stock ownership plan 36 333 - - 333
Cash dividends - - - - -
Net change in unrealized gain (loss) on
available-for-sale securities net of
taxes of $(102,000) - - - $(141) (141)
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Net Income - - 235 - 235
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Balance, March 31, 1997 1,854 $9,201 $4,836 $(140) $13,897
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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 THREE MONTHS ENDED MARCH 31, 1997 1996
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OPERATING ACTIVITIES:
Net income $ 235 $ 322
Adjustments:
Provisions for losses on real estate - 294
Provision for OREO losses 26 -
Depreciation and amortization 139 152
Deferred income taxes 94 222
(Increase) decrease in interest receivable and other assets 592 (531)
Increase in surrender value of life insurance (35) (35)
Distributions of income from real estate partnerships - 64
Equity in (income) loss of real estate partnerships - 97
Decrease in real estate held-for-sale 1,318 -
Increase (decrease) in other liabilities (643) (1,046)
(Gain)/loss on sale of securities 2 -
Gain on sale of loans held-for-sale (270) (315)
Proceeds from sale of loans held-for-sale 5,651 3,493
Additions to loans held-for-sale (4,936) (4,334)
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Net cash provided by (used in) operating activities 2,173 (1,617)
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INVESTING ACTIVITIES:
Purchase of available-for-sale securities (6,199) (6,737)
Proceeds from sales of available-for-sale securities - -
Purchases of held-to-maturity securities - -
Proceeds from maturities of available-for-sale securities 3,394 9,180
Loan participations purchased - -
Loan participations sold - -
Net (increase) decrease in loans 1,084 (521)
Net decrease (increase) in other short-term investments 3 -
Life insurance premiums paid - -
Cash received through acquisition of partnerships - 345
Proceeds from sale of OREO 18 -
Capital contributions to real estate partnerships - (397)
Capital distributions from real estate partnerships - 612
Payments towards the acquisition and development
of investments in real estate - (352)
Purchases of premises and equipment (59) (44)
Proceeds from sale of real estate held-for-sale -
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Net cash provided by (used in) investing activities 1,759 2,086
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FINANCING ACTIVITIES:
Net increase (decrease) in time deposits 2,973 2,425
Net increase (decrease) in other deposits (1,299) (4,834)
Net increase (decrease) on short term borrowings - 2,000
Cash dividends paid - (109)
Payments for fractional shares related to stock dividends - -
Payments on notes payable (964) (1,750)
Proceeds from notes payable - 378
Proceeds from the issuance of common stock to employee
stock ownership plan 333 -
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Net cash provided by (used in) financing activities 1,043 (1,890)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,457 (1,421)
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,833 8,925
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,290 $ 7,504
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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 Regency Investment Advisors, Inc., ("RIA"). RIA
provides investment management and consulting services. The Bank has one
wholly-owned subsidiary, Regency Service Corporation, a California corporation
("RSC"), that engages in the business of real estate development primarily in
the Fresno/Clovis area. All significant intercompany balances and transactions
have been eliminated in consolidation.
These unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles on a basis consistent
with the accounting policies reflected in the audited consolidated financial
statements of the Company included in the Annual Report on Form 10-K for the
year ended December 31, 1996. They do not, however, include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the unaudited
interim consolidated financial statements reflect all adjustments (all of which
are of a normal, recurring nature) necessary for a fair presentation of the
results for the interim periods presented. Operating results for the interim
periods presented are not necessarily indicative of the results that may be
expected for any other interim period or for the year as a whole.
NOTE 2. - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This Statement establishes standards for when transfers of financial assets,
including those with continuing involvement by the transferor, should be
considered a sale. SFAS No. 125 also establishes standards for when a liability
should be considered extinguished. This statement is effective for transfers of
assets and extinguishments of liabilities after December 31, 1996. In December
1996, the FASB reconsidered certain provisions of SFAS No. 125 and issued SFAS
No. 127 "Deferral of the Effective Date of Certain Provisions of SFAS No. 125"
to defer for one year the effective date of implementation for transactions
related to repurchase agreements, dollar-roll repurchase agreements, securities
lending and similar transactions. Management determined that the effect of
adoption of SFAS No. 125 on the Company's financial statements was not material
and believes that the effect of adoption of SFAS No. 127 will also not be
material.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share". This
Statement simplifies the standards for computing earnings per share ("EPS") and
makes them comparable to international EPS standards. SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS. In addition, all
entities with complex capital structures
6
are required to provide a dual disclosure of basic and diluted EPS on the
face of the income statement and a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. This Statement applies to entities with
publicly held common stock or potential common stock and is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods, and requires restatement of all prior period EPS
data presented. Management believes the adoption of this Standard will not
materially affect its earnings per share.
NOTE 3. - SECURITIES
During the period between December 31, 1996, and March 31, 1997, the
Company recorded a net decrease in the value of its available-for-sale portfolio
of $141,000 net of applicable taxes. This change is reflected as a change in
shareholders' equity in the Consolidated Statement of Shareholders' Equity.
This decrease in value is primarily the result of higher interest rates in the
bond market at March 31, 1997 as compared to rates at December 31, 1996.
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 MARCH 31, 1997 DECEMBER 31, 1996
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Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
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U.S. Treasuries $ 2,016 $ 2,017 $ 2,020 $ 2,029
U.S. Government Agencies 22,362 22,163 21,408 21,384
Mortgage-backed securities 1,317 1,352 7,972 7,948
State and Political Subdivision 10,023 9,944 1,518 1,559
Equity Securities 352 352 350 350
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Total $36,070 $35,828 $33,268 $33,270
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At March 31, 1997 and December 31, 1996 the Company held no securities
classified as held-to-maturity.
7
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) MARCH 31, 1997 DECEMBER 31, 1996
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Percent Percent
of of
Total Total
Amount Loans Amount Loans
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Commercial $ 56,589 55.9% $ 56,625 55.3%
Real estate mortgage 12,886 12.7% 13,260 12.9%
Real estate construction 23,047 22.8% 23,796 23.2%
Consumer and other 8,670 8.6% 8,778 8.6%
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Subtotal $101,192 100.0% $102,459 100.0%
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Less:
Unearned discount 838 681
Deferred loan fees 414 392
Allowances for credit losses 1,699 1,615
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Total loans, net $ 98,241 $ 99,771
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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. As of
March 31, 1997 and March 31, 1996, the Company had 1,902,000 and 1,869,000 total
shares of common and common stock equivalents outstanding.
NOTE 6 . - SUPPLEMENTAL CASH FLOW INFORMATION
Following is a summary of amounts paid for interest and taxes and of
non-cash transactions for the three months ended March 31, 1997 and 1996:
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(IN THOUSANDS) 1997 1996
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Cash paid during the period for:
Interest on deposits and other borrowings $ 1,308 $ 1,135
Income taxes - 310
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Non cash transactions:
Transfer of loans to other real estate owned 6 -
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8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed in this Report on Form 10-Q are forward-
looking statements that are subject to risks and uncertainties that could cause
actual results to differ materially from those projected. Such risks and
uncertainties include, but are not limited to, those described in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Therefore, the information set forth therein should be carefully considered when
evaluating the business prospects of the Company and the Bank.
FINANCIAL SUMMARY
The Company's consolidated net income for the three months ended March
31, 1997, was $235,000 a 27% decrease when compared to earnings of $322,000 for
the period ended March 31, 1996. Earnings per share decreased to $0.12 in the
first quarter of 1997 compared to $0.17 in the first quarter of 1996. The
Company paid no cash dividends in the first quarter of 1997 while a cash
dividend of $0.06 per share was paid in the first quarter of 1996. The
decline in net income of $87,000 was primarily due to losses related to the sale
of properties owned by RSC and secondarily by higher interest expense on deposit
accounts.
The Company's return on average assets was 0.54% for the first three
months of 1997 compared to 0.79% for the first three months of 1996. Return on
average common equity for the first quarter was 6.97% compared to 9.56% for the
same period in 1996.
During the first quarter of 1997, RSC continued to pursue divestiture
of its remaining real estate projects through various transactions. Over the
past 18 months RSC has obtained control and sole ownership of all but two of its
former limited partnerships. On a stand alone basis, RSC lost ($487,000 pre-
tax) during the first quarter of 1997, substantially reducing the Company's
overall net income. While RSC's divestiture continues to be a costly burden for
the Company, management has taken steps to reduce expenses in future periods
through streamlined operations related to project management.
Regency Investment Advisors continued to produce better than
expected earnings during the quarter ended March 31, 1997. For the period,
RIA on a stand alone basis produced pre-tax income of $46,000 compared to
earnings of $5,000 for the first quarter of 1996. At March 31, 1997, RIA's
assets under management had increased to $78.9 million.
9
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.
10
CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND
INTEREST RATES
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(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 1996
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Average Yield/ Average Yield/
Balance Rate Interest Balance Rate Interest
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ASSETS
Interest-earning assets:
Loans (1) $ 102,568 11.07% $ 2,800 $ 95,048 12.14% $ 2,868
Investment securities (2) 32,778 6.61% 534 30,019 6.24% 466
Federal funds sold & other 8,782 5.26% 114 1,564 5.19% 20
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Total Interest-earning assets $ 144,128 9.70% 3,448 126,631 10.66% 3,354
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Noninterest-earning assets:
Allowance for credit losses (1,673) (1,791)
Cash and due from banks 8,666 8,179
Real estate investments 16,455 20,421
Premises and equivalent, net 2,249 2,327
Cash surrender value of life insurance 2,915 2,775
Accrued interest receivable and other assets 3,947 4,776
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Total Average Assets $ 176,687 $ 163,318
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LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Transaction accounts 47,075 2.60% 302 46,253 2.77% 317
Savings accounts 29,180 4.11% 296 27,498 4.26% 291
Time deposits 48,791 5.49% 661 38,183 5.48% 520
Federal funds purchased and other 4,658 1.74% 20 6,138 2.49% 38
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Total Interest-bearing 129,704 4.00% 1,279 118,072 3.98% 1,166
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Noninterest-bearing liabilities:
Transaction accounts 30,978 28,762
Other liabilities 2,325 2,921
Total liabilities 163,007 149,755
Shareholders' Equity:
Common stock 8,983 8,924
Retained earnings 4,706 4,555
Unrealized gain/(loss) on investment
securities (9) 84
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Total Shareholders' Equity 13,680 13,563
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Total average liabilities and
shareholders' equity $ 176,687 $ 163,318
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Net Interest Income $ 2,169 $ 2,188
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Interest income as a percentage of average
interest-earning assets 9.70% 10.66%
Interest expense as a percentage of average
interest-earning assets (3.60)% (3.71)%
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Net Interest Margin 6.10% 6.95%
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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
$286,000 and $286,000 for the three months ended March 31, 1997, and 1996,
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.
11
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
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(IN THOUSANDS)
FOR THE THREE MONTHS ENDED MARCH 31, VOLUME(1) RATE(1) TOTAL
1997 AND 1996
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Net Interest Earnings Variance Analysis
Increase (decrease) in interest income:
Loans 333 (401) (68)
Investment securities (2) 44 24 68
Federal funds sold and other 94 - 94
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Total 471 (377) 94
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Increase (decrease) in interest expense:
Transaction accounts 5 (20) (15)
Savings accounts 16 (11) 5
Certificates of deposit 144 (3) 141
Federal funds purchased and other (8) (10) (18)
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Total 157 (44) 113
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Increase (decrease) in net interest 314 (333) (19)
income
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(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 credit losses was $2,169,000
for the first quarter of 1997 as compared to $2,188,000 for the comparable
period of 1996, a decrease of $19,000 or .87%. This decrease was primarily
attributable to lower overall yields on the loan portfolio as well as higher
interest expense related to a larger deposit base. The Company's net interest
margin in the first quarter of 1997 (based on average interest earning assets)
was 6.10% as compared to 6.95% for the same period in 1996. Interest earning
assets grew 13.8% between March 31, 1996 and March 31, 1997 primarily due to
higher amounts of federal funds sold. Interest bearing liabilities grew 9.9%
over the same period. The Company's earning asset mix changed slightly between
comparable periods with federal funds sold increasing from 1.2% of interest
earning assets during the first quarter of 1996 to 6.1% of interest earning
assets during the first quarter of 1997, while loans dropped from 75.1% to
71.2%. The shift of interest earning assets from higher yielding loans to lower
yielding federal funds sold is one of the components causing the decline in the
net interest margin between the quarters ending March 31, 1996 and 1997,
respectively.
12
INTEREST EARNING ASSET MIX
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(In thousands, except percentages)
For the three months ended March 31, 1997 1996
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Average Percent Average Percent
Balance of Total Balance of Total
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Interest Earning Asset Mix:
Loans $ 102,568 71.2% $ 95,048 75.1%
Investment securities 32,778 22.7% 30,019 23.7%
Federal funds sold and other 8,782 6.1% 1,564 1.2%
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Total Interest-earning Assets $ 144,128 100.0% $ 126,631 100.0%
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Average interest earning assets increased to $144,128,000 at March 31,
1997, from $126,631,000 at March 31, 1996, an increase of $17,497,000 or 13.8%.
Average loans increased by $7,520,000 or 7.9% to $102,568,000 representing 71.2%
of average interest earning assets in the first quarter of 1997, compared to
$95,048,000 or 75.1% in the first quarter of 1996. The yield on average loans
declined to 11.07% at March 31, 1997, from 12.14% at March 31, 1996, due to
lower margins on adjustable rate loans as well as lower fees.
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 increased to 6.61% for the period ended March 31, 1997,
from 6.24% in the comparable period in 1996. This change is primarily
attributed to lower yielding investment securities maturing and securities with
adjustable rate features repricing to higher interest rate levels.
Additionally, new securities purchased in the last year have generally had
higher yields than those in the portfolio in the first quarter of 1996.
Interest expense for the quarter ended March 31, 1997 was $1,279,000, an
increase of $113,000 or 9.7% from $1,166,000 in the quarter ended March 31,
1996. Interest bearing liabilities increased by $11,632,000 or 9.9%, in the
first quarter of 1997 as compared to the first quarter of 1996 as the increased
volume in interest bearing liabilities caused the overall interest expense to
increase.
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 and depositor service charges), as well as from the subsidiaries,
RSC and RIA.
13
NONINTEREST INCOME
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(IN THOUSANDS) FOR THE THREE MONTHS ENDED 1997 1996
MARCH 31,
- -------------------------------------------------------------------------------
Other Income:
Income from investments in real estate $ - $ -
partnerships 270 315
Gain on sale of SBA loans 98 76
Depositor service charges 214 164
Income from investment management services 2 -
Gain on sale of securities 4 5
Gain on sale of assets 86 58
Servicing fees on loans sold 107 95
Other
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Total $ 781 $ 713
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(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 first quarter of 1997, the Company recognized noninterest income
of $781,000 compared to $713,000 for the same period during 1996 an increase of
$68,000, or 9.5%. The increase is primarily attributable to an increase in
income from investment management services (see "Regency Investment Advisors")
as well as an increase in income from servicing fees on loans sold.
Depositor service charges increased in the first quarter of 1997 to $98,000, an
increase of $22,000, or 28.9% from income of $76,000 in the first quarter of
1996. The increase is primarily the result of growth in the Bank's deposit
account base over the past year.
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 March 31, 1997, the Company recognized gains
on sale of SBA loans of $270,000, a decrease of $45,000, or 14.3% from $315,000
in the comparable period of 1996. The decrease was primarily the result of the
volume of loans sold, as well as, an increase in the associated costs of
servicing and holding the loans on an ongoing basis.
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 quarter ended March 31, 1997, servicing income totaled
$86,000 an increase of $28,000 or 48.3% from income of $58,000 during the
quarter ended March 31, 1996. The increase was primarily the result of 1996's
first quarter income being reduced by payoffs of older loans in the Bank's
servicing portfolio which necessitated the amortization of previously recognized
capitalized servicing fees. Income from the
14
servicing of SBA loans in the first quarter of 1997 is more reflective of the
Company's normal servicing fee income.
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. Sales of
properties are recognized on the accrual method and are allocated between the
partners based on the provisions of the various partnership agreements.
Under FDIC regulations, banks were required to divest their real estate
development investments as quickly as prudently possible but in no event later
than December 19, 1996, and submit a plan to the FDIC regarding divestiture of
such investments. Such regulations also permitted banks to apply for the FDIC's
consent to continue, on a limited basis, certain real estate development
activities.
In 1994, the Bank and RSC submitted a divestiture plan (the
"Divestiture Plan") to the FDIC. The Divestiture Plan provided for RSC to
divest itself of all real estate development investments by year-end 1996;
however, since RSC was a limited partner in the majority of its real estate
development projects and, thus, did not control the operation of such
projects, there was no assurance that such divestiture would occur by
year-end 1996. In December 1995, the Bank and RSC submitted a request to
extend the mandatory time period in which it must divest of its real estate
development interests. In December 1996, the FDIC, responding to the Bank's
request, granted the Bank and RSC a two year extension, until December 31,
1998, to continue its divestiture activities.
As of March 31, 1997, the loss from investments in real estate
partnerships amounted to $240,000 compared to a loss of $97,000 in the first
quarter ended March 31, 1996, an increase of $143,000. The increase resulted
from the sale of additional properties at a loss. On a stand alone basis,
RSC's activities, (losses from the sale of properties plus operating
expenses), reduced the Company's overall pre-tax income by $487,000 in the
first quarter of 1997 compared to a loss of $294,000 in the first quarter of
1996. These operating expenses have been consolidated with similar operating
expenses in the Company's consolidated statement of income and noninterest
expense. Reflected on a stand alone basis, RSC's overall operating expense
as a percentage of average assets was 1.10% and .72% in the quarter ended
March 31, 1997 and 1996, respectively.
Effective April 1, 1997, RSC entered into a new construction and
sales agreement with Gary McDonald Real Estate and Development Company
("GMREDCO") replacing the previous project management agreement. Under the
new agreement, GMREDCO will construct pre-sold homes and a limited number of
spec homes on lots selected by RSC's management as well as provide brokerage
services on the aforementioned homes. Management anticipates the new
15
contract structure, as well as additional steps taken to reduce operating
expenses will reduce monthly RSC expenses by $25,000 to $40,000 per month
when fully implemented in June 1997.
In addition to the losses mentioned above, the reserve for
potential real estate losses was reduced by $383,000 during the first quarter
of 1997 to offset losses associated with the projects normal sales process.
At March 31, 1997, the Company had $927,000 reserved for potential future
losses from the sale of real estate.
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 first quarter 1997 increased to $214,000
from $164,000 in the same period of 1996, an increase of $50,000 or 30.5%.
On a stand alone basis, RIA's activities, (income from investment management
activities less operating expenses), provided the Company with pre-tax income
of $46,000 in the first quarter of 1997 compared to a pre-tax income of
$5,000 in the first quarter of 1996. These operating expenses have been
consolidated with similar operating expenses in the Company's consolidated
statement of income and noninterest expense.
RIA's ability to generate and increase income comes, in large part, from
the volume of assets under management. As of March 31, 1997, RIA had $78.9
million in assets under management, an increase of $14.9 million, or 23.3%
compared to $64.0 million as of March 31, 1996. Assets in client accounts
managed by RIA are not reflected in the consolidated assets of the Company.
Effective in the first quarter 1997, the Company and Bank received
regulatory permission for the transfer of RIA, as a subsidiary of the Bank,
to become a separate subsidiary of the Company. While consolidated financial
statements such as those included in this report on form 10-Q are not
affected by this transaction, certain regulatory reports such as the Bank's
quarterly Call Report will no longer include RIA's income or associated
expenses.
16
NONINTEREST EXPENSE
Non-interest 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:
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Percent of Percent of
Average Average
Amount Assets Amount Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Other Expense:
Loss from investments in real estate partnerships $ 240 .55% $ 97 .24%
Salaries and related benefits 1,164 2.67% 1,111 2.74%
Occupancy 403 .93% 392 .97%
FDIC insurance and regulatory assessments 22 .05% 16 .04%
Marketing 90 .21% 90 .22%
Professional services 121 .28% 154 .38%
Director's fees and expenses 96 .22% 76 .19%
Management fees for real estate projects 108 .25% 79 .19%
Supplies, telephone and postage 79 .18% 85 .21%
Other 222 .51% 242 .59%
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 2,545 5.85% $ 2,342 5.77%
- -----------------------------------------------------------------------------------------------------------------------------------
Other expenses increased by $203,000 or 8.67% to $2,545,000 for the three
months ended March 31, 1997, compared to $2,342,000 during the same period of
1996, primarily due to losses from RSC investments in real estate and
secondarily due to higher costs of management fees for RSC real estate
projects. When compared to average assets for the respective periods, other
expenses increased to 5.85% in 1997 versus 5.77% in 1996.
Losses related to RSC investments in real estate increased in the
first quarter of 1997 to $240,000 an increase of $143,000, or 147.4%, from
losses of $97,000 in the first quarter of 1996. The primary cause of the
increase in losses was due to the sale of several model homes.
Salaries and related benefits increased by $53,000 or 4.77% in the
quarter ended March 31, 1997 to $1,164,000 from $1,111,000 in the first quarter
of 1996. The primary cause of the increase can be attributed to additional
staff related to the opening of the Madera branch which was opened during the
third quarter of 1996. Salaries and related benefits decreased as a percentage
of average assets, to 2.67% for the first quarter of 1997 from 2.74% during the
first quarter of 1996.
Occupancy expense changed very little during the past year increasing
by $11,000, or 2.81%, to $403,000 during the quarter ended March 31, 1997 from
$392,000 for the quarter ended March 31, 1996. As a percentage of average
assets occupancy expense declined to .93% from .97% for the periods ending
March 31, 1997 and 1996, respectively.
17
FDIC insurance and regulatory assessments increased 37.5% to $22,000
during the first quarter of 1997, an increase of $6,000 from $16,000 for the
quarter ended March 31, 1996. The primary cause of the increase was the larger
deposit portfolio maintained by the Bank over the last year.
Professional services consist primarily of fees paid for legal,
accounting and consulting services to third party professionals. During the
quarter ended March 31, 1997, professional services decreased by $33,000, or
21.4% to $121,000 from $154,000 during the first quarter of 1996. As a
percentage of average assets, professional services were .28% and .38% in the
first quarter of 1997 and 1996, respectively. The primary reason for the
decrease in professional services between the periods related to lower legal and
accounting costs for RSC.
Management fees paid for real estate projects increased by $29,000 to
$108,000 in the period ended March 31, 1997 from $79,000 during the first
quarter of 1996. As a percentage of average assets, management fees for real
estate projects were .25% and .19% for the quarters ended March 31, 1997 and
1996, respectively.
Supplies, telephone, postage and other expenses changed very little in the
first quarter of 1997 compared to the first quarter of 1996, with both
decreasing slightly. Supplies, telephone and postage declined by $6,000 to
$79,000 for the period ended March 31, 1997 from $85,000 during the first
quarter of 1996. As a percentage of average assets, supplies, telephone and
postage were .18% and .21% in the quarter ended March 31, 1997 and 1996,
respectively. Other expenses decreased by $20,000 to $222,000 for the period
ended March 31, 1997 from $242,000 during the first quarter of 1996. As a
percentage of average assets, other expenses were .51% and .60% for the
quarters ended March 31, 1997 and 1996, respectively.
BALANCE SHEET ANALYSIS
Total assets increased by $494,000 or .3% between December 31, 1996 and
March 31, 1997, primarily as a result of additional deposits acquired resulting
in additional liquidity for the Bank. The Company's loan portfolio decreased by
$1,266,000 or 1.2%, primarily as a result of payoffs in the Company's real
estate loan portfolio. Liquid funds in cash and federal funds sold increased
$1,457,000, or 7.3% during the first quarter of 1997, primarily as a result of
additional deposits with low loan demand. Securities increased by $2,559,000,
or 7.7%, as a portion of the additional deposits were invested in additional
securities. Deposits increased during the first quarter of 1997 by $1,674,000
or 1.0%.
18
LOANS
The Company's loans are primarily made within its defined market area of
Fresno and Madera counties.
Commercial loans, including SBA loans, comprised approximately 55.9% of the
Company's loan portfolio at March 31, 1997. 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 22.8% of the Company's loan
portfolio at March 31, 1997, with these 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. As presented on these consolidated statements, this
category also contains $3.0 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 12.7% of the loan portfolio at March
31, 1997, and are made up of (68%) non-residential properties and (32%) 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 March 31, 1997, comprising 8.6% of total loans. This category includes
traditional Consumer Installment Loans (23%), Home Equity Lines of Credit (68%),
Leases (1%), and Visa Card Loans (8%). Consumer installment loans are generally
secured by second trust deeds on single-family residences, while Visa Cards are
unsecured.
19
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 March 31, 1997, nonaccrual loans amounted to $3,442,000 or 3.40% of
total loans compared to $3,301,000 or 3.22% at December 31, 1996 and $3,920,000
or 3.85% at March 31, 1996. Other real estate owned was $399,000 at March 31,
1997 compared to $437,000 at December 31, 1996. Of the total nonaccrual loans,
$2,957,000 represented loans RSC has made to facilitate the sale of former
partnerships that have loan to value ratios higher than would normally be made
by the Bank. While the Company has placed these loans on non-accrual, RSC
continues to receive principal and interest payments based on the terms of
individual notes. Without the non-accrual loans made by RSC, the Bank's loan
portfolio at March 31, 1997 had $485,000 in non-accrual loans or .48% of total
loans.
20
There were no troubled debt restructured loans as defined in SFAS 15 at March
31, 1997.
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) MARCH 31, 1997 DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Nonperforming Assets:
Nonaccrual RSC loans $ 2,957 $ 3,250
Nonaccrual bank loans 485 51
Restructured loans - -
- -----------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans 3,442 3,301
Other real estate owned 399 437
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets 3,841 3,738
- -----------------------------------------------------------------------------------------------------------------------------------
Accruing loans 90 days past due 9 19
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans before allowance for losses 101,192 102,458
Total assets 181,552 181,058
Allowance for possible credit losses (1,699) (1,615)
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios:
Nonperforming loans to total loans consolidated 3.40% 3.22%
Nonperforming loans to total loans bank only (excluding RSC loans) .48% .05%
Nonperforming assets to: 3.80% 3.65%
Total loans 3.78% 3.63%
Total loans and OREO 2.12% 2.06%
Total assets 226.07% 231.46%
Allowance for possible credit losses
- -----------------------------------------------------------------------------------------------------------------------------------
At March 31, 1997 and December 31, 1996, the Company's recorded
investment in loans for which an impairment has been recognized totaled
$282,000 and $242,000, respectively. These amounts were evaluated for
impairment using the fair value of collateral. At March 31, 1997, the
related SFAS No. 114 allowance for credit losses considered impaired was
$78,000. At December 31, 1996, included in total impaired loans were $113,000
of impaired loans for which the related SFAS No. 114 allowance was $89,000 as
well as $129,000 of impaired loans, that as a result of writedown or the fair
value of the collateral, did not have a SFAS No. 114 allowance. The Company
uses the cash basis method of income recognition for impaired loans. For the
three months ended March 31, 1997 and 1996, the Company did not recognize any
income on such loans.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses reflects management's judgment as to the
level which is considered adequate to absorb potential losses inherent in the
loan portfolio. This allowance is increased by provisions charged to expense
and reduced by loan charge-offs net of recoveries. Management determines an
appropriate provision based on information currently available to analyze credit
loss potential, including: (a) the loan portfolio growth in the period, (b) a
comprehensive grading and review of new and existing loans outstanding, (c)
actual previous charge-offs, and (d) changes in economic conditions.
The allowance for credit losses totaled $1,699,000 or 1.68% of total loans
at March 31, 1997, compared to $1,615,000 or 1.58% at December 31, 1996. The
increase is the result of recoveries totaling $90,000 during the first quarter
while charge-offs totaled only $6,000. No additional provision was deemed
necessary during the quarter ending March 31, 1997. It is the policy of
management to maintain the allowance for credit losses at a level adequate for
known and
21
future risks inherent in the loan portfolio. Based on information currently
available to analyze credit loss potential, including economic factors,
overall credit quality, historical delinquency and a history of actual
charge-offs, management believes that the credit loss provision and allowance
is adequate. However, no prediction of the ultimate level of loans
charged-off in future years can be made with any certainty.
Following is a table presenting the activity within the Company's
provision for credit losses for the period between December 31, 1996 and
March 31, 1997.
- -------------------------------------------------------------------------------
(IN THOUSANDS)
- -------------------------------------------------------------------------------
Balance, December 31, 1996 $ 1,615
- -------------------------------------------------------------------------------
Provision charged to expense -
Loans charged off 6
Recoveries 90
- -------------------------------------------------------------------------------
Balance, March 31, 1997 $ 1,699
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 a limited partner in two projects. Included in the investments in
real estate balance at March 31, 1997 are acquisition, development and
construction loans held by the Bank totaling $211,572. The remaining investments
in real estate balance of $14,953,693 represents RSC's investments in real
estate.
The following table represents the condensed financial information
relative to RSC as of March 31, 1997.
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) MARCH 31, 1997 DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Financial Position:
Investments in real estate
Real estate held-for-sale $ 13,890 $ 15,520
Equity in partnerships 1,991 2,070
- -----------------------------------------------------------------------------------------------------------------------------------
Investment in real estate before allowance 15,881 17,590
Allowance for real estate losses (927) (1,310)
- -----------------------------------------------------------------------------------------------------------------------------------
Investment in real estate $ 14,954 $ 16,280
- -----------------------------------------------------------------------------------------------------------------------------------
Loans to real estate partnerships and projects 3,486 3,988
Allowance for loan losses (110) (110)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Loans 3,376 3,878
- -----------------------------------------------------------------------------------------------------------------------------------
Other Assets 1,976 1,733
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities (4,222) (6,219)
- -----------------------------------------------------------------------------------------------------------------------------------
Bank's investment in RSC $ 16,084 $ 15,672
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
22
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 fed funds lines with correspondent banks in addition to using its
investment portfolio to raise funds through repurchase agreements. In addition,
the Bank may, from time to time, obtain additional deposits through the use of
brokered time deposits. As of March 31, 1997, the Bank held no brokered time
deposits and had no borrowings from correspondent banks against its fed funds
lines.
The following table presents the composition of the deposit mix for the
period ending March 31, 1997, and December 31, 1996, respectively.
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) MARCH 31, 1997 DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Percent of Percent of
Amount Total Deposits Amount Total Deposits
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing transaction accounts $ 33,814 20.9% $ 36,613 22.9%
Now and MMI 48,460 30.0% 47,850 29.9%
Savings 30,703 19.0% 25,540 16.0%
Time under $100,000 19,313 12.0% 19,033 11.9%
Time $100,000 and over 29,186 18.1% 30,766 19.3%
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing Deposits 127,662 79.1% 123,189 77.1%
- -----------------------------------------------------------------------------------------------------------------------------------
Total Deposits $ 161,476 100% $ 159,802 100%
- -----------------------------------------------------------------------------------------------------------------------------------
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.
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
23
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.
- -----------------------------------------------------------------------------------------------------------------------------------
AFTER THREE AFTER
NEXT DAY MONTHS ONE YEAR
(IN THOUSANDS, EXCEPT PERCENTAGES) BUT WITHIN BUT WITHIN BUT WITHIN AFTER
AS OF MARCH 31, 1997 IMMEDIATELY THREE MONTHS 12 MONTHS FIVE YEARS FIVE YEARS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity Gap:
Loans (1) $ 40,368 $ 37,097 $ 7,499 $ 6,549 $ 6,237 $ 97,750
Investment securities and other 352 17,305 6,830 10,065 1,613 36,165
- -----------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets $ 53,020 $ 54,402 $ 14,329 $ 16,614 $ 7,850 $ 146,215
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing transaction accounts 48,460 - - - - 48,460
Savings accounts 28,543 2,160 - - 30,703
Time deposits - 17,336 26,128 5,035 - 48,499
Federal funds purchased - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities $ 77,003 $ 19,496 $ 26,128 $ 5,035 - $ 127,662
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap (23,983) 34,906 (11,799) 11,579 7,850
Cumulative gap (23,983) 10,923 (876) 10,703 18,553
Cumulative gap percentage to
interest earning assets (16.40)% 7.47% (.60)% 7.32% 12.69%
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Amounts exclude nonaccrual loans of $3,442,000.
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.
CAPITAL RESOURCES
The Board of Governors of the Federal Reserve System and the FDIC have
adopted risk-based capital guidelines for evaluating the capital adequacy of
bank holding companies and banks. The guidelines are designed to make capital
requirements sensitive to differences in risk profiles among banking
organizations, to take into account off-balance sheet exposures and to aid in
making the definition of bank capital uniform internationally. Under the
guidelines, the Company and the Bank are required to maintain capital equal to
at least 8.0% of its assets and commitments to extend credit, weighted by risk,
of which at least 4.0%, must consist primarily of common equity (including
retained earnings) and the remainder may consist of subordinated debt,
cumulative preferred stock, or a limited amount of loan loss reserves. Assets,
commitments to extend credit and off-balance sheet items are categorized
according to risk and certain assets considered to present less risk than other
permit maintenance of capital at less than the 8% ratio.
24
The guidelines establish two categories of qualifying capital: Tier 1
capital comprising core capital elements and Tier 2 comprising supplementary
capital requirements. At least one-half of the required capital must be
maintained in the form of Tier 1 capital. Tier 1 capital includes common
shareholder's equity and qualifying perpetual preferred stock less intangible
assets and certain other adjustments. However, no more than 25% of the
Company's total Tier 1 capital may consist of perpetual preferred stock. The
definition of Tier 1 capital for the Bank is the same, except that perpetual
preferred stock may be included only if it is noncumulative. Tier 2 capital
includes, among other items, limited life (and in the case of banks, cumulative)
preferred stock, mandatory convertible securities, subordinated debt and a
limited amount of reserves for credit losses.
The Board of Governors also adopted a 3.0% minimum leverage ratio for
banking organizations as a supplement to the risk-weighted capital guidelines.
The leverage ratio is generally calculated using Tier 1 capital (as defined
under risk-based capital guidelines) divided by quarterly average net total
assets (excluding intangible assets and certain other adjustments).
The Board of Governors emphasized that the leverage ratio constitutes a
minimum requirement for well-run banking organizations having diversified risk.
Banking organizations experiencing or anticipating significant growth, as well
as those organizations which do not exhibit the characteristics of a strong,
well-run banking organization above, will be required to maintain minimum
capital ranging generally from 100 to 200 basis points in excess of the leverage
ratio. The FDIC adopted a substantially similar leverage ratio for state non-
member banks.
The table below presents the Company's and the Bank's risk-based and
leverage capital ratios as of March 31, 1997.
FOR CAPITAL TO BE WELL
ACTUAL ADEQUACY PURPOSES PROMPT CORRECTIVE
- -------------------------------------------------------------------------------------------------------------------------------
AS OF MARCH 31, 1997 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------------------------------------
Total Capital (to Risk Weighted Assets:)
Company $14,869 10.86% >=$10,950 >=8.00% N/A
Regency Bank $14,085 10.29% >=$10,952 >=8.00% >=$ 13,690 >=10.00%
Tier 1 Capital (to Risk Weighted Assets):
Company $13,170 9.62% >=$ 5,475 >=4.00% N/A
Regency Bank $12,386 9.05% >=$ 5,476 >=4.00% >=$ 8,214 >=6.00%
Tier 1 Capital (to Average Assets):
Company $13,170 7.49% >=$ 7,033 >=4.00% N/A
Regency Bank $12,386 7.05% >=$ 7,026 >=4.00% >=$ 8,782 >=5.00%
25
As indicated in the table above, at March 31, 1997, the Company's capital
ratios exceed the minimum capital levels required by current federal regulations
and the "Well Capitalized" standards of the prompt corrective action provision
of the FDICIA described below.
On December 19, 1991, the President signed the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). The FDICIA, among other
matters, substantially revised banking regulations and established a framework
for determination of capital adequacy of financial institutions. Under the
FDICIA, financial institutions are placed into one of five capital adequacy
categories as follows: (1) "Well capitalized" - consisting of institutions with
a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital
ratio of 6% or greater, and a leverage ratio of 5% or greater, and the
institution is not subject to an order, written agreement, capital directive or
prompt corrective action directive; (2) "Adequately capitalized" - consisting of
institutions with a total risk-based capital ratio of 8% or greater, a Tier 1
risk-based capital ratio of 4% or greater and a leverage ratio of 4% or greater,
and the institution does not meet the definition of a "well capitalized"
institution; (3) "Undercapitalized" - consisting of institutions with a total
risk-based capital ratio less than 8%, a Tier 1 risk-based capital ratio of less
than 4%, or a leverage ratio of less than 4%; (4) "Significantly
undercapitalized" - consisting of institutions with a total risk-based capital
ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a
leverage ratio of less than 3%; (5) "Critically undercapitalized" - consisting
of an institution with a ratio of tangible equity to total assets that is equal
to or less than 2%.
Financial institutions classified as undercapitalized or below are subject
to various limitations including, among other matters, certain supervisory
actions by bank regulatory authorities and restrictions related to (i) growth of
assets, (ii) payment of interest on subordinated indebtedness, (iii) payment of
dividends or other capital distributions, and (iv) payment of management fees to
a parent holding company. The FDICIA requires the bank regulatory authorities
to initiate corrective action regarding financial institutions which fail to
meet minimum capital requirements. Such action may be taken in order to, among
other matters, augment capital and reduce total assets. Critically
undercapitalized financial institutions may also be subject to appointment of a
receiver or conservator unless the financial institution submits an adequate
capitalization plan.
26
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).
- -------------------------------------------------------------------------------
QUARTER ENDED QUARTER ENDED
MARCH 31, 1997 MARCH 31, 1996
- -------------------------------------------------------------------------------
Return on average assets .54% .79%
- -------------------------------------------------------------------------------
Return on average shareholders' equity 6.97% 9.56%
- -------------------------------------------------------------------------------
Average shareholders' equity to average 7.74% 8.30%
assets
- -------------------------------------------------------------------------------
Dividend payout ratio - 33.89%
- -------------------------------------------------------------------------------
27
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
* (10.1) Construction and Sales Agreement, dated March 31, 1997, made
and entered into by and between Regency Service Corporation, a
California corporation and Gary L. McDonald Real Estate and
Development Co., a California corporation.
(27.1) Financial Data Schedule
* Denotes management contracts, compensatory plans or arrangement.
(b) Reports on Form 8-K
The Company filed a Form 8-K dated March 10, 1997, in which
it reported that on March 4, 1997, the Registrant issued a
press release which described a net 1996 annual income of
$1.01 million, a $2.78 million improvement over the
Company's financial performance the previous year.
The Company filed a Form 8-K dated April 17, 1997, in which
it reported that on April 14, 1997, the Company issued a
press release which stated that Gary McDonald, a founding
member of the board of Regency Bank and its parent holding
company, Regency Bancorp, announced his decision to not
stand for election at the upcoming annual meeting. The
Company also reported that on April 11, 1997, the Company
issued a letter to shareholders notifying them of Gary
McDonald's decision to not stand for election at the
Company's 18th annual meeting, May 13, 1997.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGENCY BANCORP
Date: May 8, 1997 By: /s/ Steven F. Hertel
______________________________ ______________________________
Steven F. Hertel
President and Chief Executive
Officer
(Principal Executive Officer)
Date: May 8, 1997 By: /s/ Steven R. Canfield
______________________________ ______________________________
Steven R. Canfield
Executive Vice President and
Chief Financial Officer
(Principal
Financial and Accounting Officer)
29
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
*10.1 Construction and Sales Agreement, dated March 31, 31-50
1997, made and entered into by and between Regency
Service Corporation, a California corporation, and
Gary L. McDonald Real Estate and Development Co., a
California corporation.
27.1 Financial Data Schedule 51
* Denotes management contracts, compensatory plans or arrangements.
30