UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997. -------------- / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . --------------- ------------ COMMISSION FILE NUMBER 33-82150 ----------- REGENCY BANCORP --------------- (Exact name of registrant as specified in its charter) CALIFORNIA 77-0378956 ---------- ---------- (State or other jurisdiction of (I.R.S. Employer Incorporation or organizations) Identification No.) 7060 N. FRESNO STREET, FRESNO, CALIFORNIA 93720 ----------------------------------------- ----- (Address of principal executive offices) (Zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (209) 438-2600. --------------- NONE ---- (Former name, former address and fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for the shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- As of August 8, 1997, the registrant had 1,871,125 shares of Common Stock outstanding. The Exhibit Index is located on page 33. This report contains a total of 34 pages of which this is page one. REGENCY BANCORP AND SUBSIDIARIES PART I ITEM 1. FINANCIAL INFORMATION CONSOLIDATED BALANCE SHEETS - ---------------------------------------------------------------------------------------------------- (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) JUNE 30, 1997 DECEMBER 31, 1996 - ---------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 12,070 $ 14,833 Federal funds sold 6,400 5,000 - ---------------------------------------------------------------------------------------------------- Total Cash and Equivalents 18,470 19,833 - ---------------------------------------------------------------------------------------------------- Interest bearing deposits in other banks - 98 Securities available-for-sale 37,199 33,270 - ---------------------------------------------------------------------------------------------------- Loans 112,434 102,458 Allowance for credit losses (1,891) (1,615) Deferred loan fees & discounts (1,158) (1,073) - ---------------------------------------------------------------------------------------------------- Net Loans 109,385 99,770 - ---------------------------------------------------------------------------------------------------- Investments in real estate 11,260 16,489 Other real estate owned 444 437 Cash surrendered value of life insurance 2,968 2,903 Premises and equipment, net 2,011 2,262 Accrued interest receivable and other assets 5,133 5,996 - ---------------------------------------------------------------------------------------------------- Total Assets $ 186,870 $ 181,058 - ---------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest bearing transaction accounts $ 39,161 $ 36,613 Interest bearing transaction accounts 49,591 47,850 Savings accounts 35,126 25,540 Time Deposits $100,000 or over 28,584 30,766 Other time deposits 18,400 19,033 - ---------------------------------------------------------------------------------------------------- Total Deposits 170,862 159,802 Short term borrowings - - Notes Payable 2,545 4,976 Other Liabilities 1,418 2,810 - ---------------------------------------------------------------------------------------------------- Total Liabilities 174,825 167,588 - ---------------------------------------------------------------------------------------------------- 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, 1,871,125 and 1,818,160 shares issued and outstanding in 1997 and 1996, respectively 9,276 8,868 Retained earnings 2,694 4,601 Net unrealized gain (loss) on available-for-sale securities, net of taxes of $54,000 in 1997 and $1,000 in 1996 75 1 - ---------------------------------------------------------------------------------------------------- Total Shareholders' Equity 12,045 13,470 - ---------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 186,870 $ 181,058 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- See Notes to consolidated financial statements 2 REGENCY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - -------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, - -------------------------------------------------------------------------------------------------------------- 1997 1996 1997 1996 - -------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans (including fees) $2,904 $2,627 $5,704 $5,496 Investment securities: Taxable 580 399 1,094 842 Tax exempt 34 22 54 45 - -------------------------------------------------------------------------------------------------------------- Total Investment Interest Income 614 421 1,148 887 Other 141 24 255 43 - -------------------------------------------------------------------------------------------------------------- Total Interest Income 3,659 3,072 7,107 6,426 - -------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits 1,310 1,038 2,569 2,166 Other 20 62 40 100 - -------------------------------------------------------------------------------------------------------------- Total Interest Expense 1,330 1,100 2,609 2,266 - -------------------------------------------------------------------------------------------------------------- Net interest income 2,329 1,972 4,498 4,160 Provision for credit losses 835 - 835 - - -------------------------------------------------------------------------------------------------------------- Net interest income after provision for credit losses 1,494 1,972 3,663 4,160 - -------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Income from investments in real estate partnerships - - - - Gain/(loss) on sale of loans 216 573 486 888 Depositor service charges 96 85 194 161 Income from investment management services 188 162 402 326 Gain/(loss) on sale of securities (36) - (34) - Gain on sale of assets 0 4 4 9 Servicing fees on loans sold 81 81 167 139 Other 74 157 181 252 - -------------------------------------------------------------------------------------------------------------- Total Noninterest Income 619 1,062 1,400 1,775 - -------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Loss from investments in real estate partnerships 3,350 85 3,590 182 Salaries and related benefits 1,233 1,075 2,397 2,186 Occupancy 411 401 814 793 FDIC insurance and regulatory assessments 22 16 44 32 Marketing 142 121 232 211 Professional Services 157 269 278 423 Director's fees and expenses 80 92 176 168 Management fees for real estate projects 4 154 112 233 Supplies, Telephone & Postage 84 93 163 178 Other 323 317 545 559 - -------------------------------------------------------------------------------------------------------------- Total Noninterest Expense 5,806 2,623 8,351 4,965 - -------------------------------------------------------------------------------------------------------------- Income before income taxes (benefit) (3,693) 411 (3,288) 970 Provision (benefit) for income taxes (1,551) 173 (1,381) 410 - -------------------------------------------------------------------------------------------------------------- Net Income/(loss) $(2,142) $238 $(1,907) $560 - -------------------------------------------------------------------------------------------------------------- Net income/(loss) per common and common equivalent share (1.15) .13 (1.03) .30 Weighted average common shares outstanding (in thousands) 1,859 1,874 1,845 1,872 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- See notes to consolidated financial statements 3 REGENCY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) - -------------------------------------------------------------------------------------------------------------- FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 - -------------------------------------------------------------------------------------------------------------- Common Common Net Stock Stock Retained Unrealized (In thousands) Number of Shares Amount Earnings Gain (Loss) Total - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 1,818 $ 8,868 $4,029 $45 $ 12,942 - -------------------------------------------------------------------------------------------------------------- Issuance of common stock under stock option plan - - - - - Cash dividends - - (218) - (218) Net change in unrealized gain (loss) on available-for-sale securities (net of taxes of $183,000) - - - (253) (253) Net Income - - 560 - 560 - -------------------------------------------------------------------------------------------------------------- Balance, June 30, 1996 1,818 $ 8,868 $4,371 $(208) $ 13,031 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Common Common Net Stock Stock Retained Unrealized (In thousands) Number of Shares Amount Earnings Gain (Loss) Total - -------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 1,818 $ 8,868 $ 4,601 $ 1 $ 13,470 - -------------------------------------------------------------------------------------------------------------- Issuance of common stock to employee stock ownership plan 36 333 - - 333 Issuance of common stock under stock option plan 17 75 - - 75 Cash dividends - - - - - Net change in unrealized gain (loss) on available-for-sale securities (net of taxes of $53,000) - - - 74 74 Net Loss - - (1,907) - (1,907) - --------------------------------------------------------------------------------------------------------------- Balance, June 30, 1997 1,871 $9,276 $2,694 $75 $12,045 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- See notes to consolidated financial statements 4 REGENCY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - ------------------------------------------------------------------------------------------------ (IN THOUSANDS) FOR THE SIX MONTHS ENDED JUNE 30, 1997 1996 - ------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES: Increase (decrease) in cash equivalents: Net income/(loss) $ (1,907) $ 560 Adjustments: Provision for credit losses 835 - Provision for losses on real estate 635 - Provision for OREO losses 29 - Depreciation and amortization 315 325 Deferred income taxes (286) 490 (Increase) decrease in interest receivable and other assets 1,096 (67) Increase in surrender value of life insurance (65) (70) Distributions of income from real estate partnerships 7 103 Equity in (income) loss of real estate partnerships 218 5 (Increase) decrease in real estate held for sale 4,169 3,987 (Gain)/loss on acquisition of partnerships - (63) Increase (decrease) in other liabilities (1,392) (811) Gain on sale of loans held-for-sale (227) (888) Proceeds from sale of loans held-for-sale 5,587 8,742 Additions to loans held-for-sale (3,884) (5,901) Loss (gain) on sale of premises and equipment and OREO (6) (1) Loss (gain) on sale of furniture and equipment 16 - (Gain)/loss on sale of investment securities 36 - - -------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 5,176 6,411 - -------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Purchase of available-for-sale securities (12,820) (11,223) Proceeds from sales of available-for-sale securities 2,102 - Proceeds from maturities of available-for-sale securities 6,848 14,778 Loan participations purchased - - Loan participations sold - - Net (increase) decrease in loans (12,159) (3,079) Net decrease (increase) in other short-term investments 98 - Cash received through acquisition of partnerships - 441 Proceeds from sale of OREO 203 123 Capital contributions to real estate partnerships - (397) Capital distributions from real estate partnerships 200 1,012 Purchases of premises and equipment (82) (199) Proceeds from sale of premises and equipment 34 - - -------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (15,576) 1,456 - -------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net increase (decrease) in time deposits accounts 13,875 6,418 Net increase (decrease) in other deposits (2,815) (9,441) Net increase (decrease) on short term borrowings - - Cash dividends paid - (218) Payments for fractional shares related to stock dividends - - Payments on notes payable (4,610) (3,773) Proceeds from notes payable 2,179 380 Proceeds from the issuance of common stock under employee stock option plan 75 - Proceeds from the issuance of common stock to employee stock ownership plan 333 - - -------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 9,037 (6,634) - -------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,363) 1,233 - -------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,833 8,925 - -------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD 18,470 $10,158 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- 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, applied prospectively. 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 are 6 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. The following table provides pro forma disclosure of basic and diluted EPS in accordance with SFAS No. 128: THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, --------------------------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Proforma basic EPS (1.15) .13 (1.03) .31 Proforma diluted EPS (1.12) .13 (1.00) .30 In June 1997, the Financial Accounting Standards Board adopted Statements of Financial Accounting Standards No. 130 ("Reporting of Comprehensive Income"), which requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from nonowner sources; and No. 131, ("Disclosures about Segments of an Enterprise and Related Information") which establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas, and major customers. Adoption of these statements will not impact the Company's consolidated financial position, results of operations or cash flows. Both statements are effective for fiscal years beginning after December 15, 1997, with earlier application permitted. NOTE 3. - INVESTMENT SECURITIES During the period between December 31, 1996, and June 30, 1997, the Company recorded a net increase in the value of its available-for-sale portfolio of $74,000 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 slightly lower interest rates in the bond market at June 30, 1997 as compared to rates at December 31, 1996 and higher yielding investments in the Company's investment securities portfolio. Following is a comparison of the amortized cost and approximate fair value of securities available-for-sale: - ------------------------------------------------------------------------------- AVAILABLE-FOR-SALE SECURITIES JUNE 30, 1997 DECEMBER 31, 1996 - ------------------------------------------------------------------------------- Amortized Fair Amortized Fair (In thousands) Cost Value Cost Value - ------------------------------------------------------------------------------- U.S. Treasuries $ 2,013 $ 2,019 $ 2,020 $ 2,029 U.S. Government Agencies 22,456 22,456 21,408 21,384 Mortgage-backed securities 2,550 2,650 7,972 7,948 State and Political Subdivisions 9,836 9,860 1,518 1,559 Equity Securities 214 214 350 350 - ------------------------------------------------------------------------------- Total $37,069 $37,199 $33,268 $33,270 - ------------------------------------------------------------------------------- 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 2 - Management's Discussion and Analysis, Balance Sheet Analysis. - ------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PERCENTAGES) JUNE 30, 1997 DECEMBER 31, 1996 - ------------------------------------------------------------------------------- Percent of Percent of Amount Total Loans Amount Total Loans - ------------------------------------------------------------------------------- Commercial $ 65,397 58.3% $ 56,624 55.3% Real estate mortgage 13,917 12.3% 13,260 12.9% Real estate construction 24,093 21.4% 23,796 23.2% Consumer and other 9,027 8.0% 8,778 8.6% - ------------------------------------------------------------------------------- Subtotal $112,434 100.0% $102,458 100.0% - ------------------------------------------------------------------------------- Less: Unearned discount 706 681 Deferred loan fees 452 392 Allowances for credit losses 1,891 1,615 - ------------------------------------------------------------------------------- Total loans, net $109,385 $99,770 - ------------------------------------------------------------------------------- NOTE 5. - SUPPLEMENTAL CASH FLOW INFORMATION Following is a summary of amounts paid for interest and taxes and of non-cash transactions for the six months ended June 30, 1997 and 1996: - ------------------------------------------------------------------------------- (IN THOUSANDS) 1997 1996 - ------------------------------------------------------------------------------- Cash paid during the period for: Interest on deposits and other borrowings $1,762 $2,266 Income taxes - 316 - ------------------------------------------------------------------------------- Non cash transactions: Transfer of loans to other real estate owned 233 162 - ------------------------------------------------------------------------------- 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 loss for the six months ended June 30, 1997, was $1,907,000, compared to net income of $560,000 for the period ended June 30, 1996. The net loss for the second quarter of 1997 was $2,142,000 as compared to income of $238,000 in the second quarter of 1996. The net loss for the second quarter and the first six months of 1997 was the direct result of the Company's decision to further accelerate the disposition of RSC's real estate holdings. Based upon the Company's new direction to pursue the bulk sale of several projects, as well as discounting other holdings to reflect RSC's currently anticipated sales proceeds, several properties were written down in value and additional reserves were added to allow for potential future losses on the sale of real estate. Additionally reserves were added to allow for potential future credit losses. Further discussion regarding RSC and the amounts of the aforementioned writedowns and reserves can be found on pages 16-18. Earnings/(loss) per weighted average common share was $(1.15) in the second quarter of 1997, and $(1.03) for the six month period ended June 30, 1997, compared to $0.13 per share in the second quarter of 1996 and $0.31 for the six month period ended June 30, 1996. The Company paid no cash dividends in the second quarter of 1997, while a cash dividend of $0.06 per share was paid in the second quarter of 1996. The Company's net income, without the loss from RSC, would have been $934,000 or $.51 per share for the six months ended June 30, 1997. The Company's return on average assets was (2.06)% for the first six months of 1997 compared to 0.69% for the first six months of 1996. Return on average common equity for the first six months of 1997 was (27.44)% compared to 8.43% for the same period in 1996. At June 30, 1997, the Company's total risk-based capital ratio was 9.21%, while the leverage ratio was 5.76%. Capital ratios at these levels are considered adequate under FDICIA regulatory guidelines, discussed in greater detail on pages 27-29. In a press release dated July 22, 1997, the Company reported its second quarter and year to date results of operations and indicated that during the next six months it would pursue raising additional capital to allow for the continued growth of its banking and investment advisory activities. During the second quarter of 1997, RSC continued to pursue divestiture of its remaining real estate projects through various transactions. During the quarter, RSC sold 51 homes and lots 9 and entered into escrow or sales agreements for the sale of 97 additional homes and lots which are expected to close during the third and fourth quarters of 1997. Based upon management's accelerated divestiture program, as well as discounted sales prices in the Fresno/Clovis marketplace, a writedown of $2,342,000 was made on June 30, 1997, to levels that more accurately reflect RSC's currently anticipated sales proceeds. In addition to the writedown, $634,000 was added to the reserve for potential future losses, bringing the reserve balance to $1,300,000 as of June 30, 1997, and an additional $835,000 was added to RSC's reserve for credit losses with $600,000 in loans being charged off. The total of the aforementioned reserves and writedowns incurred during the second quarter was $3,811,000. During the second quarter, the Bank implemented a new Visa Debit Card product as well as a program to obtain fee income from the usage of the Bank's ATM's by non-Regency clients. Both of these programs have begun to produce modest fee income and are expected to augment the Bank's non interest income in the future. 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 - ----------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT FOR PERCENTAGES) FOR THE THREE MONTHS ENDED JUNE 30, 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Average Yield/ Average Yield/ Balance Rate Interest Balance Rate Interest - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-earning assets: Loans (1) $105,732 11.02% $2,904 $98,643 10.71% $2,627 Investment securities (2) 37,381 6.59% 614 27,871 6.08% 421 Federal funds sold & other 10,274 5.50% 141 1,736 5.56% 24 - ----------------------------------------------------------------------------------------------------------------------------------- Total Interest-earning assets $153,387 9.57% $3,659 $128,250 9.63% $3,072 - ----------------------------------------------------------------------------------------------------------------------------------- Noninterest-earning assets: Allowance for credit losses (1,677) (1,750) Cash and due from banks 9,000 8,035 Real estate investments 15,862 19,143 Premises and equivalent, net 2,143 2,252 Cash surrender value of life insurance 2,949 2,812 Accrued interest receivable and other assets 4,570 4,477 - ----------------------------------------------------------------------------------------------------------------------------------- Total Average Assets $186,234 $163,219 - ----------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS'EQUITY Interest-bearing liabilities: Transaction accounts $48,913 2.50% $305 $44,235 2.63% $289 Savings accounts 33,552 4.04% 338 24,472 4.11% 250 Time deposits 48,590 5.51% 667 38,910 5.16% 499 Federal funds purchased, notes payable and other 3,864 2.08% 20 10,558 2.36% 62 - ----------------------------------------------------------------------------------------------------------------------------------- Total Interest-bearing liabilities $134,919 3.95% $1,330 $118,175 3.74% $1,100 - ----------------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing liabilities: Transaction accounts 35,042 29,551 Other liabilities 2,257 2,282 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 172,218 150,008 Shareholders' Equity: Common stock 9,208 8,868 Retained earnings 4,922 4,393 Unrealized gain / (loss) on investment securities (114) (50) - ----------------------------------------------------------------------------------------------------------------------------------- Total Shareholders Equity $14,016 $13,211 - ----------------------------------------------------------------------------------------------------------------------------------- Total average liabilities and shareholders' equity $186,234 $163,219 - ----------------------------------------------------------------------------------------------------------------------------------- Net Interest Income $2,329 $1,972 - ----------------------------------------------------------------------------------------------------------------------------------- Interest income as a percentage of average interest-earning assets 9.57% 9.63% Interest expense as a percentage of average interest-earning assets (3.48%) (3.45%) - ----------------------------------------------------------------------------------------------------------------------------------- Net Interest Margin 6.09% 6.18% - ----------------------------------------------------------------------------------------------------------------------------------- (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 $320,000 and $328,000 for the three months ended June 30, 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 CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND INTEREST RATES - ------------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT FOR PERCENTAGES) FOR THE SIX MONTHS ENDED JUNE 30, 1997 1996 - ------------------------------------------------------------------------------------------------------------- AVERAGE YIELD/ AVERAGE YIELD/ BALANCE RATE INTEREST BALANCE RATE INTEREST - ------------------------------------------------------------------------------------------------------------- ASSETS Interest-earning assets: Loans (1) $104,159 11.04% $5,704 $ 96,846 11.41% $5,496 Investment securities (2) 35,092 6.60% 1,148 28,945 6.16% 887 Federal funds sold & other 9,532 5.39% 255 1,650 5.24% 43 - ------------------------------------------------------------------------------------------------------------- Total Interest-earning assets $148,783 9.63% $7,107 $127,441 10.14% $6,426 - ------------------------------------------------------------------------------------------------------------- Noninterest-earning assets: Allowance for credit losses (1,675) (1,770) Cash and due from banks 8,834 8,114 Real estate investments 16,157 19,757 Premises and equivalent, net 2,196 2,289 Cash surrender value of life insurance 2,932 2,794 Accrued interest receivable and other assets 4,260 4,558 - ------------------------------------------------------------------------------------------------------------- Total Average Assets $181,487 $163,183 - ------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Transaction accounts $ 47,999 2.55% $ 607 $ 45,239 2.70% $ 607 Savings accounts 31,378 4.07% 634 26,094 4.16% 540 Time deposits 48,690 5.50% 1,328 38,443 5.33% 1,019 Federal funds purchased, notes payable and other (3) 4,259 1.89% 40 8,226 2.44% 100 - ------------------------------------------------------------------------------------------------------------- Total Interest-bearing liabilities $132,326 3.98% $2,609 $118,002 3.86% $2,266 - ------------------------------------------------------------------------------------------------------------- Noninterest-bearing liabilities: Transaction accounts 33,021 29,163 Other liabilities 2,291 2,657 - ------------------------------------------------------------------------------------------------------------- Total liabilities 167,638 149,822 Shareholders' Equity: Common stock 9,096 8,868 Retained earnings 4,815 4,476 Unrealized gain / (loss) on investment securities (62) 17 - ------------------------------------------------------------------------------------------------------------- Total Shareholders Equity $ 13,849 $ 13,361 - ------------------------------------------------------------------------------------------------------------- Total average liabilities and shareholders' equity $181,487 $163,183 - ------------------------------------------------------------------------------------------------------------- Net Interest Income $4,498 $4,160 - ------------------------------------------------------------------------------------------------------------- Interest income as a percentage of average interest-earning assets 9.63% 10.14% Interest expense as a percentage of average interest-earning assets (3.54%) (3.58%) - ------------------------------------------------------------------------------------------------------------- Net Interest Margin 6.09% 6.56% - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- (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 $606,000 and $614,000 for the six months ended June 30, 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. 12 Changes in the interest margin can be attributed to changes in the yield on interest earning assets, the rate paid on interest bearing liabilities, as well as changes in the volume of interest earning assets and interest bearing liabilities. The following table presents the dollar amount of certain changes in interest income and expense for each major component of interest earning assets and interest bearing liabilities and the difference attributable to changes in average rates and volumes for the periods indicated. VOLUME/RATE ANALYSIS - ----------------------------------------------------------------------------------------------------- (IN THOUSANDS) FOR THE THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO 1996 VOLUME (1) RATE (1) TOTAL - ----------------------------------------------------------------------------------------------------- Net Interest Earnings Variance Analysis Increase (decrease) in interest income: Loans 244 33 277 Investment securities (2) 134 59 193 Federal funds sold and other 118 (1) 117 - ----------------------------------------------------------------------------------------------------- Total 496 91 587 - ----------------------------------------------------------------------------------------------------- Increase (decrease) in interest expense: Transaction accounts 23 (7) 16 Savings accounts 75 13 88 Time deposits 138 30 168 Federal funds purchased, notes payable and other (26) (16) (42) - ----------------------------------------------------------------------------------------------------- Total 210 20 230 - ----------------------------------------------------------------------------------------------------- Increase (decrease) in net interest income 286 71 357 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- (IN THOUSANDS) FOR THE SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO 1996 VOLUME (1) RATE (1) TOTAL - ----------------------------------------------------------------------------------------------------- Net Interest Earnings Variance Analysis Increase (decrease) in interest income: Loans 388 (180) 208 Investment securities (2) 198 63 261 Federal funds sold and other 211 1 212 - ----------------------------------------------------------------------------------------------------- Total 797 (116) 681 - ----------------------------------------------------------------------------------------------------- Increase (decrease) in interest expense: Transaction accounts - - - Savings accounts 106 (12) 94 Time deposits 279 30 309 Federal funds purchased and other (41) (19) (60) - ----------------------------------------------------------------------------------------------------- Total 344 (1) 343 - ----------------------------------------------------------------------------------------------------- Increase (decrease) in net interest income 453 (115) 338 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- (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 $2,329,000 for the second quarter of 1997 as compared to $1,972,000 for the comparable period of 1996, an increase of $357,000 or 18.1%. This increase was primarily attributable to a larger earning assets base with only a modest decrease in the overall interest margin. The Company's net interest margin in the second quarter of 1997 (based on average interest earning assets) was 6.09% as compared to 6.18% 13 for the same period in 1996. Interest earning assets grew 19.6% between June 30, 1996 and June 30, 1997. Interest bearing liabilities grew 14.1% over the same period. The Company's earning asset mix shifted between comparable periods with federal funds sold increasing from 1.4% of interest earning assets during the second quarter of 1996 to 6.7% of interest earning assets during the second quarter of 1997. As a percentage of average assets, loans dropped from 76.9% to 68.9% between the second quarter of 1996 and the second quarter of 1997 respectively, while investments increased from 21.7% to 24.4% of average earning assets. The shift of interest earning assets from higher yielding loans to lower yielding federal funds sold and investments is one of the components causing the decline in the net interest margin between the quarters ending June 30, 1996 and 1997, respectively. Net interest income before the provision for credit losses for the first six months of 1997 was $4,498,000 as compared to $4,160,000 for the comparable period of 1996, an increase of $338,000 or 8.1%. This increase was primarily attributable to a larger earning asset portfolio. The Company's net interest margin for the six month period ended June 30, 1997 (based on average interest-earning assets) was 6.09% as compared to 6.56% for the same period in 1996. Average interest-earning assets grew 16.7% for the six month period ended June 30, 1997 as compared to the six month period ended June 30, 1996 while interest-bearing liabilities grew 12.1% over the comparable periods. The Company's earning asset mix showed an increased level of Fed Funds sold and investment securities and a lower level of loans, based on the percentage of earning assets, between comparable periods. INTEREST EARNING ASSET MIX - ----------------------------------------------------------------------------- (In thousands, except percentages) For the six months ended June 30, 1997 1996 - ----------------------------------------------------------------------------- Average Percent Average Percent Balance of Total Balance of Total - ----------------------------------------------------------------------------- Interest-Earning Asset Mix: Loans $104,159 70.0% $ 96,846 76.0% Investment securities 35,092 23.6% 28,945 22.7% Federal funds sold and other 9,532 6.4% 1,650 1.3% - ----------------------------------------------------------------------------- Total Interest-earning Assets $148,783 100.0% $127,441 100.0% - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Average interest-earning assets for the six months ended June 30, 1997 increased to $148,783,000 from $127,441,000 for the comparable period in 1996. Average loans increased by $7,313,000 to $104,159,000 representing 70.0% of average interest-earning assets for the first six months of 1997, compared to $96,846,000 or 76.0% for the first six months of 1996. The yield on average loans declined to 11.04% at June 30, 1997, from 11.41% at June 30, 1996, primarily due to lower interest rates as a result of competitive pressure from other banks. 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 14 have a lower yield than loans. The yield on investments increased to 6.60% for the six month period ended June 30, 1997, from 6.16% in the comparable period in 1996. Average interest-bearing liabilities for the six months ended June 30, 1997 increased to $132,326,000 from $118,002,000 for the comparable period in 1996 an increase of $14,324,000 or 12.1%. The primary reason for the increase was a result of exceptionally strong growth in deposits over the past 12 months with a large portion attributable to the opening of the Bank's Madera branch in August 1996. For the first six months ended June 30, 1997, the average interest rate paid on interest-bearing liabilities increased to 3.98% from an average rate of 3.86% paid during the first six months of 1996. 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 Company's investment advisory firm, RIA. OTHER INCOME - --------------------------------------------------------------------------------------------- (IN THOUSANDS) FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, - --------------------------------------------------------------------------------------------- 1997 1996 1997 1996 - --------------------------------------------------------------------------------------------- Other Income: Income from investments in real estate partnerships $ - $ - $ - $ - Gain/(loss) on sale of loans 216 573 486 888 Depositor service charges 96 85 194 161 Income from investment management services 188 162 402 326 Gain on sale of securities (36) - (34) - Gain on sale of assets 0 4 4 9 Servicing fees on loans sold 81 81 167 139 Other 74 157 181 252 - --------------------------------------------------------------------------------------------- Total $619 $1,062 $1,400 $1,775 - --------------------------------------------------------------------------------------------- (Income from RSC and RIA in these consolidated financial statements is included in noninterest income. A further discussion of RSC and RIA is set forth below.) During the second quarter of 1997, the Company recognized noninterest income of $619,000, compared to $1,062,000 for the same period during 1996, a decrease of $443,000 or 41.7%. For the first six months of 1997, noninterest income was $1,400,000, compared to $1,775,000 for the first six months of 1996, a decrease of $375,000 or 21.1%. These declines were primarily attributable to lower gains on sale of SBA loans related to the decision to hold a larger portfolio of these loans in the Bank's loan portfolio rather than sell them for immediate gain. LOAN ORIGINATION & SALES The Bank originates various types of loans that may be sold on active secondary markets. The majority of loans available for sale are originated 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 15 unguaranteed portion of the loan as well as the ongoing servicing. Income from the sale of the guaranteed portion is affected by the timing and volume of sales (when loans are funded and available for sale), as well as the premium paid in the secondary market. The premium paid in the secondary market is further affected by the rate and terms of the loan as well as the yield curve. During the quarter ended June 30, 1997, the Company had no sales of SBA loans, choosing instead to hold a larger portfolio of the guaranteed portion of these loans in an effort to increase interest income, however, several loans made under another program, Business and Industry "B&I", were sold and a gain recognized. Net income from loans sold in the second quarter of 1997 was $216,000 compared to $573,000 in the second quarter of 1996. The primary cause of the decline in income between the second quarter of 1996 and 1997 was the decision to hold a larger portfolio of SBA guaranteed loans in the Bank's portfolio. For the six months ended June 30, 1997, gains on the sale of loans was $486,000 compared to $888,000 during the first six months of 1996, a decrease of $402,000. An additional source of income related to the Bank's SBA loan origination activities is reflected in income from the ongoing servicing of loans sold. During the second quarter ended June 30, 1997, servicing income totaled $81,000, which was identical to the servicing income during the quarter ended June 30, 1996. For the six months ended June 30, 1997, servicing income totaled $167,000, an increase of $28,000 compared to $139,000 during the first six months of 1996. The servicing income increase for the first six months of 1997 was the result of a larger portfolio of loans. 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 local developers are the general partners. Partnerships are accounted for under the equity method. 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 16 request, granted the Bank and RSC a two year extension, until December 31, 1998, to continue its divestiture activities. 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. For the second quarter ended June 30, 1997, the loss from investments in real estate amounted to $3,350,000 compared to a loss of $85,000 for the same period in 1996, an increase of $3,265,000. The increased loss resulted from the accelerated divestiture of properties at discounted prices as well as a writedown of several properties to reflect RSC's currently anticipated sales proceeds. The amount of the writedown of these properties was $2,342,000. During the quarter RSC sold 51 homes and lots and had entered into escrow or sales agreements for the sale of 97 additional homes and lots which are expected to close during the third and fourth quarters of 1997. On a stand alone basis, RSC's activities, (losses from the sale of properties, additions to RSC's provision for real estate losses and provision for credit losses, plus operating expenses), reduced the Company's overall pre-tax income by $4,027,000 in the second quarter of 1997 compared to a loss of $472,000 in the second quarter of 1996. These operating expenses have been consolidated with similar operating expenses in the Company's consolidated statement of income. For the six months ended June 30, 1997, the loss from investments in real estate partnerships amounted to $3,590,000 compared to a loss of $182,000 for the same period in 1996, an increase of $3,408,000. As stated above, the increased loss resulted from the sale of properties at discounted prices as well as the writedown of several properties to reflect RSC's currently anticipated sales proceeds. For the six months ended June 30, 1997, on a stand alone basis, RSC's activities, (including losses from the sale of properties, additions to RSC's provision for real estate losses and provision for credit losses, plus operating expenses), reduced the Company's overall pre-tax income by $4,915,000 compared to $771,000 in 1996. REGENCY INVESTMENT ADVISORS (RIA) The Company's other 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. Revenue from RIA for the second quarter of 1997 increased to $188,000 from $162,000 in the same period of 1996, an increase of $16,000 or 9.9%. On a stand alone basis, RIA's activities, (income from investment management activities less operating expenses), provided the Company with after-tax income of $21,000 in the second quarter of 1997 compared to after-tax income of 17 $3,000 in the second quarter of 1996. RIA's operating expenses have been consolidated with similar operating expenses in the Company's consolidated statement of income. For the six months ended June 30, 1997, revenue from RIA increased to $402,000 from $326,000 for the same period in 1996, an increase of $76,000 or 23.3%. On a stand alone basis, RIA's activities, (income from investment management activities less operating expenses), provided the Company with after-tax income of $48,000 for the six months ended June 30, 1997, compared to $3,600 for the same period in 1996. These operating expenses have been consolidated with similar operating expenses in the Company's consolidated statement of income. RIA's ability to generate and increase income comes, in large part, from the volume of assets under management. As of June 30, 1997, RIA had $80.3 million in assets under management, an increase of $11.3 million, or 16.4% compared to $69.0 million as of June 30, 1996. Assets in client accounts managed by RIA are not reflected in the consolidated assets of the Company. OTHER EXPENSE Noninterest expense reflects the costs of products and services, systems, facilities and personnel for the Company. The major components of other operating expenses stated both as dollars and as a percentage of average assets are as follows: OTHER OPERATING EXPENSE TO AVERAGE ASSETS - ------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PERCENTAGES) FOR THE THREE MONTHS ENDED JUNE 30, 1997 1996 - ------------------------------------------------------------------------------------------------- Percent of Percent of Average Average Amount Assets Amount Assets - ------------------------------------------------------------------------------------------------- Other Expense: Loss from investments in real estate partnerships $3,350 7.21% $ 85 0.21% Salaries and related benefits 1,233 2.65% 1,075 2.65% Occupancy 411 0.88% 401 0.99% FDIC insurance and regulatory assessments 22 0.05% 16 0.04% Marketing 142 0.31% 121 0.30% Professional services 157 0.34% 269 0.66% Director's fees and expenses 80 0.17% 92 0.23% Management fees for real estate projects 4 0.01% 154 0.38% Supplies, telephone & postage 84 0.18% 93 0.23% Other 323 0.70% 317 0.78% - ------------------------------------------------------------------------------------------------- TOTAL $5,806 12.50% $2,623 6.46% - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- For the second quarter ended June 30, 1997, other expenses increased 121.3% or $3,183,000 to $5,806,000, up from $2,623,000 during the comparable period in 1996. The primary cause of the increase was due to losses from investments in real estate. When compared to average assets for the respective periods, other operating expenses increased to 12.50% versus 6.46% in 1996. 18 Losses related to RSC investments in real estate increased in the second quarter of 1997 to $3,350,000 an increase of $3,265,000, from losses of $85,000 in the second quarter of 1996. The increased loss resulted from the sale of properties at discounted prices, as well as the writedown of several properties to reflect RSC's currently anticipated sales proceeds under its accelerated divestiture plan. Salaries and related benefits increased by $158,000 or 14.7% in the second quarter ended June 30, 1997 to $1,233,000 from $1,075,000 in the second quarter of 1996. The primary cause of the increase can be attributed to additional staff related to the Bank's Madera branch which was opened during the third quarter of 1996. Salaries and related benefits, as a percentage of average assets, were 2.65% during both the second quarter of 1997 and the comparable period in 1996. Occupancy expense during the second quarter ended June 30, 1997 increased by $10,000, or 2.5%, to $411,000, from $401,000 for the comparable period in 1996. As a percentage of average assets, occupancy expense declined to .88% from .99% for the quarters ending June 30, 1997 and 1996, respectively. FDIC insurance and regulatory assessments increased 37.5% to $22,000 during the second quarter of 1997, an increase of $6,000 from $16,000 for the quarter ended June 30, 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 June 30, 1997, professional services decreased by $112,000, or 41.6% to $157,000 from $269,000 during the second quarter of 1996. As a percentage of average assets, professional services were .34% and .66% in the second 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 as well as higher than normal consulting expenses incurred in 1996. Management fees paid for real estate projects decreased by $150,000 to $4,000 in the period ended June 30, 1997 from $154,000 during the second quarter of 1996. As a percentage of average assets, management fees for real estate projects were .01% and .38% for the quarters ended June 30, 1997 and 1996, respectively. The primary cause of the decrease is related to a new performance based construction and sales agreement entered into between RSC and GMREDCO. Supplies, telephone, postage and other expenses decreased slightly in the second quarter of 1997 compared to the second quarter of 1996. Supplies, telephone and postage declined by $9,000 to $84,000 for the period ended June 30, 1997 from $93,000 during the comparable period in 1996. As a percentage of average assets, supplies, telephone and postage were .18% and .23% in the second quarter of 1997 and 1996, respectively. Other expenses increased by $6,000 to $323,000 for the second quarter ended June 30, 1997 from $317,000 during the comparable period in 1996. As a percentage of average assets, other expenses were .70% and .78% for the quarters ended, June 30, 1997 and 1996, respectively. 19 OTHER OPERATING EXPENSE TO AVERAGE ASSETS - ------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PERCENTAGES) FOR THE SIX MONTHS ENDED JUNE 30, 1997 1996 - ------------------------------------------------------------------------------------------------- Percent of Percent of Average Average Amount Assets Amount Assets - ------------------------------------------------------------------------------------------------- Other Expense: Loss from investments in real estate partnerships $3,590 3.99% $ 182 0.22% Salaries and related benefits 2,397 2.66% 2,186 2.69% Occupancy 814 0.90% 793 0.98% FDIC insurance and regulatory assessments 44 0.05% 32 0.04% Marketing 232 0.26% 211 0.26% Professional services 278 0.31% 423 0.52% Director's fees and expenses 176 0.20% 168 0.21% Management fees for real estate projects 112 0.12% 233 0.29% Supplies, telephone & postage 163 0.18% 178 0.22% Other 545 0.61% 559 0.69% - ------------------------------------------------------------------------------------------------- TOTAL $8,351 9.28% $4,965 6.12% - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- For the six months ended June 30, 1997, non-interest expenses increased 68.2% or $3,386,000 to $8,351,000, up from $4,965,000 during the comparable period in 1996. The primary cause of the increase was due to losses from RSC investments in real estate. When compared to average assets for the respective periods, other expenses increased to 9.28% versus 6.12% in 1996. Losses related to RSC investments in real estate increased in the six months ended June 30, 1997 to $3,590,000 an increase of $3,408,000, from losses of $182,000 in the comparable period of 1996. The increase resulted from the sale of properties at discounted prices as well as the writedown of several properties to reflect RSC's currently anticipated sales proceeds under its accelerated divestiture plan. As a percentage of average assets, losses related to real estate investments increased to 3.99% for the first six months of 1997 from .22% during the comparable period in 1996. Salaries and related benefits increased by $211,000 or 9.65% in the six months ended June 30, 1997 to $2,397,000 from $2,186,000 in the comparable period of 1996. The primary cause of the increase can be attributed to additional staff related to the Bank's Madera branch which was opened during the third quarter of 1996. Salaries and related benefits decreased as a percentage of average assets, to 2.66% for the first six months of 1997 from 2.69% during the comparable period in 1996. Occupancy expense during the six months ended June 30, 1997 increased by $21,000, or 2.65%, to $814,000, from $793,000 for the comparable period in 1996. As a percentage of average assets occupancy expense declined to .90% from .98% for the six months ending June 30, 1997 and 1996, respectively. FDIC insurance and regulatory assessments increased 37.5% to $44,000 during the six months ending June 30, 1997, an increase of $12,000 from $32,000 for the comparable period in 20 1996. The primary cause of the increase was the larger deposit portfolio maintained by the Bank over the last year. Professional services decreased in the six months ended June 30, 1997, by $145,000, or 34.3% to $278,000 from $423,000 during the comparable period of 1996. As a percentage of average assets, professional services were .31% and .52% in the second 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 decreased by $121,000 to $112,000 in the six month period ended June 30, 1997 from $233,000 during the comparable period of 1996. As a percentage of average assets, management fees for real estate projects were .12% and .29% for the six months ended June 30, 1997 and 1996, respectively. Supplies, telephone, postage and other expenses decreased slightly in the six months ended June 30, 1997 compared to the same period of 1996. Supplies, telephone and postage declined by $15,000 to $163,000 for the period ended June 30, 1997 from $178,000 during the comparable period in 1996. As a percentage of average assets, supplies, telephone and postage were .18% and .22% in the first six months of 1997 and 1996, respectively. Other expenses decreased by $14,000 to $545,000 for the six months ended June 30, 1997 from $559,000 during the comparable period in 1996. As a percentage of average assets, other expenses were .61% and .69% for the six months ended, June 30, 1997 and 1996, respectively. 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. Commercial loans, including SBA loans, comprised approximately 58.2% of the Company's loan portfolio at June 30, 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 21.4% of the Company's loan portfolio at June 30, 1997, consisting of loans primarily for the construction of single family residential housing. Loans in this category may be to the home buyer or to the developer. Construction loans are secured by deeds of trust on the primary property. Such loans also contain $5.0 million in loans RSC has made to its partnerships or to facilitate the sale of a project. The majority of construction loans have floating rates tied to either the national Prime Rate or Regency Bank's Reference Rate. A significant portion of the borrowers' ability to repay these loans is dependent on the residential 21 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 12.4% of the loan portfolio at June 30, 1997, and are made up of (62%) non-residential properties and (38%) single-family residential mortgages. The non-residential loans generally are "mini-perm" (medium-term) commercial real estate mortgages with maturities under seven years. The residential mortgages are secured by first trust deeds and have varying maturities. Both types of loans may have either fixed or floating rates. The majority are floating. Risks associated with non-residential loans include the decline in value of commercial property values, economic conditions surrounding commercial real estate properties, and vacancy rates. The repayment of single-family residential mortgage loans is generally dependent on the income of the borrower from other sources; however, declines in the underlying property value may create risk in these loans. Consumer installment loans represented the remainder of the loan portfolio at June 30, 1997, comprising 8.0% of total loans. This category includes traditional Consumer Installment Loans (54%), Home Equity Lines of Credit (39%), and Visa Card Loans (7%). Consumer installment loans are generally secured by second trust deeds on single-family residences, while Visa Cards are unsecured. RISK ELEMENTS The Company assesses and manages credit risk on an ongoing basis through stringent credit review and approval policies, extensive internal monitoring and established formal lending policies. Additionally, the Bank contracts with an outside loan review consultant to periodically grade new loans and to review the existing loan portfolio. Management believes its ability to identify and assess risk and return characteristics of the Company's loan portfolio is critical for profitability and growth. Management strives to continue the historically low level of credit losses by continuing its emphasis on credit quality in the loan approval process, active credit administration and regular monitoring. With this in mind, management has designed and implemented a comprehensive loan review and grading system that functions to continually assess the credit risk inherent in the loan portfolio. Additionally, management believes its ability to manage portfolio credit risk is enhanced by the knowledge of the Bank's service area by the lending personnel and Board of Directors. NONPERFORMING LOANS The Company's current policy is to cease accruing interest when a loan becomes 90-days past due as to principal or interest; when the full, timely collection of interest or principal becomes uncertain; or when a portion of the principal balance has been charged off, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual status, the accrued and uncollected interest receivable is reversed and the loan is accounted for on the cash or cost recovery method thereafter, until qualifying for return to accrual status. Generally, a loan may be returned to accrual status when all delinquent interest and principal become current in accordance 22 with the terms of the loan agreement or when the loan is both well secured and in process of collection. At June 30, 1997, nonperforming loans amounted to $2,496,000 or 2.22% of total loans compared to $3,301,000 or 3.22% at December 31, 1996 and $3,855,000 or 3.85% at June 30, 1996. Other real estate owned was $444,000 at June 30, 1997 compared to $437,000 at December 31, 1996. Of the total nonaccrual loans, $1,636,000 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 June 30, 1997 had $829,000 in non-accrual loans or .74%, compared to $51,000 in non-accrual loans or .05% at December 31, 1996. Of the Bank's non-accrual loans at June 30, 1997, $503,000 represent the portion of SBA loans that are guaranteed by the SBA. Beginning in 1997, the SBA changed the requirements for Bank's originating SBA loans which are subsequently sold on the secondary market. Under the new requirement, if a borrower defaults on an SBA guaranteed loan, the originating bank is required to buy the guaranteed portion back and hold it in its portfolio until collection efforts are exhausted. While this guaranteed portion is backed by the full faith and credit of the U.S. government and poses little risk of loss to the Bank, the Bank does incur loss of the use of the funds while awaiting payoff from the SBA or other loan collateral. Expense from the loss of use of the funds is expected to be minimal; however, due to this new requirement, it is expected that non-accrual levels will be slightly higher. Following is a table presenting the nonperforming loans for the periods ending June 30, 1997 and December 31, 1996, respectively. NONPERFORMING ASSETS - --------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PERCENTAGES) JUNE 30, 1997 DECEMBER 31, 1996 - --------------------------------------------------------------------------------------------------- Nonperforming Assets: Nonaccrual RSC loans $ 1,636 $ 3,250 Nonaccrual bank loans 829 51 Restructured loans 31 - - --------------------------------------------------------------------------------------------------- Nonperforming loans 2,496 3,301 Other real estate owned 444 437 - --------------------------------------------------------------------------------------------------- Total nonperforming assets 2,940 3,738 - --------------------------------------------------------------------------------------------------- Accruing loans 90 days past due 222 19 - --------------------------------------------------------------------------------------------------- Total loans before allowance for losses 112,434 102,458 Total assets 186,870 181,058 Allowance for possible credit losses (1,891) (1,615) - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- Ratios: Nonperforming loans to total loans consolidated 2.22% 3.22% Nonperforming loans to total loans bank only (excluding RSC loans) 0.74% 0.05% Nonperforming assets to: Total loans 2.61% 3.65% Total loans and OREO 2.60% 3.63% Total assets 1.57% 2.06% Allowance for possible credit losses to total nonperforming assets 64.32% 43.23% - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- At June 30, 1997 and December 31, 1996, the Company's recorded investment in loans for which an impairment has been recognized totaled $261,000 and $242,000, respectively. 23 These amounts were evaluated for impairment using the fair value of collateral. At June 30, 1997, the related SFAS No. 114 allowance for credit losses considered impaired was $119,000. The Company uses the cash basis method of income recognition for impaired loans. For the six months ended June 30, 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 $1,891,000 or 1.68% of total loans at June 30, 1997, compared to $1,615,000 or 1.58% at December 31, 1996. The increase is the result of charge offs net of recoveries of $559,000 during the first six months of 1997 with additional provision for credit losses of $835,000. It is the policy of management to maintain the allowance for credit losses at a level adequate for known and future risks inherent in the loan portfolio. Based on information currently available to analyze credit loss potential, including economic factors, overall credit quality, historical delinquency and a history of actual charge-offs, management believes that the credit loss provision and allowance is adequate. However, no prediction of the ultimate level of loans charged-off in future years can be made with any certainty. Following is a table presenting the activity within the Company's provision for credit losses for the period between December 31, 1996 and June 30, 1997. - ------------------------------------------------------------------------------- (IN THOUSANDS) - ------------------------------------------------------------------------------- Balance, December 31, 1996 $ 1,615 - ------------------------------------------------------------------------------- Provision charged to expense 835 Loans charged off (674) Recoveries 115 - ------------------------------------------------------------------------------- Balance, June 30, 1997 $1,891 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 24 INVESTMENTS IN REAL ESTATE The Company's investment in real estate consists of the Bank's investment of capital and retained earnings in RSC. RSC is currently the sole owner of six projects and is a limited partner in two projects. Included in the investments in real estate balance at June 30, 1997 are acquisition, development and construction loans held by the Bank totaling $271,000. The remaining investments in real estate balance of $10,989,000 represents RSC's investments in real estate. The following table represents the condensed financial information relative to RSC for the period ending June 30, 1997 and December 31, 1996, respectively. - --------------------------------------------------------------------------------------- (IN THOUSANDS) JUNE 30, 1997 DECEMBER 31, 1996 - --------------------------------------------------------------------------------------- Financial Position: Investments in real estate Real estate held-for-sale $10,645 $15,520 Equity in partnerships 1,644 2,070 - --------------------------------------------------------------------------------------- Investment in real estate before allowance 12,289 17,590 Allowance for real estate losses (1,300) (1,310) - --------------------------------------------------------------------------------------- Investment in real estate $10,989 $16,280 - --------------------------------------------------------------------------------------- Loans to real estate partnerships and projects 2,109 3,988 Allowance for loan losses (344) (110) - --------------------------------------------------------------------------------------- Net Loans 1,765 3,878 - --------------------------------------------------------------------------------------- Other Assets 1,827 1,733 - --------------------------------------------------------------------------------------- Liabilities (2,924) (6,219) - --------------------------------------------------------------------------------------- Bank's investment in RSC $11,657 $15,672 - --------------------------------------------------------------------------------------- 25 FUNDING SOURCES Deposits represent the Bank's principal source of funds for investment. Deposits are primarily core deposits in that they are demand, savings, and time deposits generated from local businesses and individuals. These sources are considered to be relatively more stable, long-term deposit relationships thereby enhancing steady growth of the deposit base without major fluctuations in overall deposit balances. In order to assist in meeting its funding needs, the Bank maintains federal funds lines with correspondent banks in addition to using its investment portfolio to raise funds through repurchase agreements. In addition, the Bank may, from time to time, obtain additional deposits through the use of brokered time deposits. As of June 30, 1997, the Bank held no brokered time deposits and had no borrowings from correspondent banks against its federal funds lines. The following table presents the composition of the deposit mix for the period ending June 30, 1997 and December 31, 1996, respectively. - -------------------------------------------------------------------------------------------------- (IN THOUSANDS) JUNE 30, 1997 DECEMBER 31, 1996 - -------------------------------------------------------------------------------------------------- Percent of Percent of Amount Total Deposits Amount Total Deposits - -------------------------------------------------------------------------------------------------- Noninterest-bearing transaction accounts $ 39,161 22.9% $ 36,613 22.9% Now and MMI 49,591 29.0% 47,850 29.9% Savings 35,126 20.6% 25,540 16.0% Time under $100,000 18,400 10.8% 19,033 11.9% Time $100,000 and over 28,584 16.7% 30,766 19.3% - -------------------------------------------------------------------------------------------------- Total interest-bearing deposits 131,701 77.1% 123,189 77.1% - -------------------------------------------------------------------------------------------------- Total Deposits $170,862 100.0% $159,802 100.0% - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- 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 26 maintaining an appropriate mix of interest sensitive assets and liabilities. To achieve this goal, the Bank prices the majority of its interest-bearing liabilities at variable rates. At the same time, the majority of its interest-earning assets are also priced at variable rates, the majority of which float with the Prime Rate. This pricing structure tends to stabilize the net interest margin percentage earned by the Bank. The following table sets forth the interest rate sensitivity and repricing schedule of the Company's interest-earning assets and interest-bearing liabilities, the interest rate sensitivity gap, the cumulative interest rate sensitivity gap, and the cumulative interest rate sensitivity gap ratio. - ------------------------------------------------------------------------------------------------------------------------- NEXT DAY AFTER THREE AFTER BUT WITHIN MONTHS ONE YEAR (IN THOUSANDS, EXCEPT PERCENTAGES) THREE BUT WITHIN BUT WITHIN AFTER AS OF JUNE 30, 1997 IMMEDIATELY MONTHS 12 MONTHS FIVE YEARS FIVE YEARS TOTAL - ------------------------------------------------------------------------------------------------------------------------- Interest Rate Sensitivity Gap: Loans (1) 41,172 37,384 10,963 10,677 9,233 109,969 Investment securities and other 214 14,442 9,700 9,772 2,941 37,069 - ------------------------------------------------------------------------------------------------------------------------- Total Earning Assets $ 48,326 $51,826 $20,663 $20,449 $12,174 $153,438 - ------------------------------------------------------------------------------------------------------------------------- Interest-bearing transaction accounts 49,591 - - - - 49,591 Savings accounts 32,284 2,842 - - - 35,126 Time deposits - 14,274 28,220 3,529 961 46,984 Federal funds purchased - - - - - - - ------------------------------------------------------------------------------------------------------------------------- Total Interest-Bearing Liabilities $ 81,875 $17,116 $28,220 $ 3,529 $ 961 $131,701 - ------------------------------------------------------------------------------------------------------------------------- Interest rate sensitivity gap (33,549) 34,710 (7,557) 16,920 11,213 Cumulative gap (33,549) 1,161 (6,396) 10,524 21,737 Cumulative gap percentage to interest earning assets (21.86%) 0.76% (4.17%) 6.86% 14.17% - ------------------------------------------------------------------------------------------------------------------------- (1) Amounts exclude nonaccrual loans of $2,465,000. 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, principal paydowns, changes in deposit mix or other such movements of funds as a result of changing interest rate environments. CAPITAL RESOURCES The Board of Governors of the Federal Reserve System and the FDIC have adopted risk-based capital guidelines for evaluating the capital adequacy of bank holding companies and banks. The guidelines are designed to make capital requirements sensitive to differences in risk profiles among banking organizations, to take into account off-balance sheet exposures and to aid in making the definition of bank capital uniform internationally. Under the guidelines, the Company and the Bank are required to maintain capital equal to at least 8.0% of its assets and commitments to extend credit, weighted by risk, of which at least 4.0%, must consist primarily of common equity (including retained earnings) and the remainder may consist of subordinated debt, cumulative preferred stock, or a limited amount of loan loss reserves. Assets, commitments to extend credit 27 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. 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 June 30, 1997. TO BE ADEQUATELY CAPITALIZED UNDER FOR CAPITAL ADEQUACY PROMPT CORRECTIVE ACTUAL PURPOSES ACTION PROVISIONS - ----------------------------------------------------------------------------------------------------------------- AS OF JUNE 30, 1997 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ----------------------------------------------------------------------------------------------------------------- Total Capital (to Risk Weighted Assets:) Company $12,352 9.21% > = $10,732 > = 8.00% N/A Regency Bank $12,015 8.97% > = $10,721 > = 8.00% > = $10,721 > = 8.00% Tier 1 Capital (to Risk Weighted Assets): Company $10,674 7.96% > = $5,366 > = 4.00% N/A Regency Bank $10,330 7.71% > = $5,361 > = 4.00% > = $5,361 > = 4.00% Tier 1 Capital (to Average Assets): Company $10,674 5.76% > = $7,408 > = 4.00% N/A Regency Bank $10,330 5.58% > = $7,408 > = 4.00% > = $7,408 > = 4.00% 28 As indicated in the table above, at June 30, 1997, the Company's and Bank's capital ratios are considered "Adequately Capitalized" by current 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. 29 RETURN ON EQUITY AND ASSETS The following table sets forth the ratios of net income to average assets and average shareholders' equity, and average shareholders' equity to average assets. Also indicated is the Company's dividend payout ratio. (For purposes of calculating average shareholders' equity as used in these ratios, unrealized losses on the Company's available-for-sale securities portfolio have been included and the percentages shown have been annualized). - -------------------------------------------------------------------------------------------- FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, - -------------------------------------------------------------------------------------------- 1997 1996 1997 1996 - -------------------------------------------------------------------------------------------- Return on average assets (4.61)% .59% (2.12)% .69% - -------------------------------------------------------------------------------------------- Return on average shareholders' equity (61.30)% 7.25% (27.77)% 8.43% - -------------------------------------------------------------------------------------------- Average shareholders' equity to average assets 7.53% 8.09% 7.63% 8.19% - -------------------------------------------------------------------------------------------- Dividend payout ratio 0.00% 45.84% 0.00% 38.96% - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTER TO VOTE OF SECURITY HOLDERS (a) The 1997 Annual Meeting of Shareholders (the "Annual Meeting") was held on May 13, 1997. The following seven directors, all of whom are incumbent directors, and Mr. Dan Ray (the employee director nominee) were elected at the Annual Meeting by the following vote: VOTES AGAINST VOTES FOR OR WITHHELD --------- ------------- Joseph L, Castanos 1,520,000 2,838 Steven F. Hertel 1,520,000 2,838 Roy Jura 1,520,000 2,838 Barbara Palmquist 1,520,000 2,838 David N. Price 1,520,000 2,838 Daniel Ray 1,520,000 2,838 Daniel R. Suchy 1,520,000 2,838 Waymon E. Watts 1,520,000 2,838 30 (c) The appointment of Deloitte & Touche LLP as the Company's independent public accountants for the 1997 fiscal year was ratified by the following vote: Votes for - 1,517,636 Votes against or withheld - 5,202 ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (27.1) Financial Data Schedule (b) Reports on Form 8-K 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 The Company filed a Form 8-K dated May 14, 1997, in which it reported that on May 9, 1997, the Registrant issued a press release which described earnings of $235,000 from its consolidated operations during the first quarter of 1997. It also announced that total assets reached a record level, $181.6 million, a growth of 8.9% from $166.7 million a year earlier. The Company filed a Form 8-K dated July 22, 1997, in which it reported that on July 22, 1997, the Registrant issued a press release and letter to shareholders announcing its results of operations for the first six months of 1997 as well as a capital augmentation program. The registrant stated that it took action at June 30, 1997 resulting from an analysis of strategic alternatives to make a special adjustment to the balance sheet of registrant's subsidiary, RSC and engaged Carruthers & Company to assist registrant in raising additional capital. 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: August 11, 1997 By: /s/ Steven F. Hertel ----------------------- ---------------------------------------- Steven F. Hertel President and Chief Executive Officer (Principal Executive Officer) Date: August 11, 1997 By: /s/ Steven R. Canfield ----------------------- ---------------------------------------- Steven R. Canfield Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 32 EXHIBIT INDEX EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NUMBER 27.1 Financial Data Schedule 34 33