Item 1. BUSINESS
Certain matters discussed or incorporated by reference in this Annual Report on Form 10-K including, but not limited to, matters described in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Changes to such risks and uncertainties, which could impact future financial performance, include, among others, (1) competitive pressures in the banking industry; (2) changes in the interest rate environment; (3) general economic conditions, either nationally or regionally; (4) changes in the regulatory environment; (5) changes in business conditions and inflation; (6) changes in securities markets; and (7) Year 2000 compliance problems. Therefore, the information set forth therein should be carefully considered when evaluating the business prospects of the Company and the Bank.
GENERAL DEVELOPMENT OF BUSINESS
Regency Bancorp (the "Company") is a California corporation organized to act as the holding company for Regency Bank (the "Bank"), and Regency Investment Advisors, Inc. ("RIA"), a SEC registered investment advisor. The Company and the Bank maintain their administrative headquarters and banking offices in Fresno, California. The Bank also maintains a full service banking office in Madera, California and a loan production office in Modesto, California. In 1995, upon its formation, the Company acquired all of the outstanding common stock of the Bank. Other than its investment in the Bank and RIA, the Company currently conducts no other significant business activities, although it is authorized to engage in a variety of activities which are deemed closely related to the business of banking upon prior approval of the Board of Governors of the Federal Reserve System (the "Board of Governors"), the Company's principal regulator.
The Bank is a California banking corporation which has served small and medium-sized businesses, professionals, merchants and individuals located in and adjacent to Fresno, California since 1980. The Company and Bank operate through the administrative headquarters office and Herndon Branch banking office located at 7060 N. Fresno St., Fresno, California, and offer a full range of commercial banking services, including the acceptance of demand, savings and time deposits, and the making of commercial, real estate (including real estate construction and residential mortgage), Small Business Administration, personal, home improvement, automobile and other installment and term loans. It also offers Visa credit cards, traveler's checks, safe deposit boxes, notary public, courier service and other customary bank services.
The Bank's Herndon branch office is open from 9:00 a.m. to 5:00 p.m., Monday through Friday. In addition to its Herndon Office, the Bank operates a full service banking office at 126 N. "D" Street in Madera, California. The Madera office hours are 9:00 a.m. to 5:00 p.m. Monday through Thursday, 9:00 a.m. to 6:00 p.m. on Friday and 9:00 a.m. to 1:00 p.m. on Saturday. The Bank also operates a full service facility and loan production office located at 5240 N. Palm Ave., Fresno, California. The facility is open from 9:00 a.m. to 6:00 p.m., Monday through Friday and 9:00 a.m. to 1:00 p.m. on Saturday. Additionally, the Bank has established a loan production office in Modesto, California. The Bank has automated teller machines located at its headquarters office and its Madera office. The Bank is insured under the Federal Deposit Insurance Act and each depositor's account is insured up to the legal limits thereon. The Bank is chartered (licensed) by
the California Commissioner of Financial Institutions ("Commissioner") and became a member of the Federal Reserve System in the third quarter of 1998. Additionally, in the fourth quarter of 1998, the Bank was accepted as a member of the Federal Home Loan Bank.
The Bank has one subsidiary, Regency Service Corporation ("RSC"), a California corporation which engaged in the business of real estate development primarily in the Fresno/Clovis area. For more information on RSC, see, "Real Estate Development Activities" under this section and additionally, under note 4 of the Company's audited consolidated financial statements included in item 8.
The Company's second subsidiary, Regency Investment Advisors ("RIA"), provides investment management and consulting services from offices located in the Company's headquarters office at 7060 N. Fresno St., Fresno, California. For more information on RIA, see, "Investment Management Activities" under this section.
The three areas in which the Bank has directed virtually all of its lending activities are: (i) commercial loans; (ii) real estate loans (including residential construction and mortgage loans); and (iii) consumer loans. As of December 31, 1998, these three categories accounted for approximately 66 percent, 28 percent and 6 percent, respectively, of the Bank's loan portfolio.
The Bank's deposits are attracted primarily from small and medium-sized businesses, professionals, merchants and individuals. The Bank's deposits are not received from a single depositor or group of affiliated depositors the loss of any one of which would have a material adverse effect on the business of the Bank, nor is a material portion of the Bank's loans concentrated within a single industry or group of related industries.
As of December 31, 1998, the Bank had total deposits of $206.6 million. Of this total, $54.2 million represented noninterest-bearing demand deposits, $101.3 million represented interest-bearing demand deposits and interest-bearing savings deposits, and $51.1 million represented time deposits.
REAL ESTATE DEVELOPMENT ACTIVITIES
The Bank, through RSC and pursuant to California Financial Code Section 751.3 has engaged in real estate development activities since 1986. Such activities typically involved the acquisition, development and sale of the properties (but sometimes involved the sale of properties prior to development) and historically were structured as limited partnerships in which RSC was the limited partner and a local developer the general partner. Partnerships are accounted for under the equity method. Sales of properties are recognized on the accrual method and are allocated between the partners based on the provisions of the various partnership agreements.
Under FDIC regulations, banks were required to divest their real estate development investments as quickly as prudently possible but in no event later than December 19, 1996, and submit a plan to the FDIC regarding divestiture of such investments. Such regulations also permitted banks to apply for the FDIC's consent to continue, on a limited basis, certain real estate development activities. In December 1995, the Bank and RSC submitted a request to extend the mandatory time period in which it must divest its real estate development interests. In December 1996, the FDIC, responding to the Bank's request, granted the Bank and RSC a two-year extension, until December 31, 1998, to continue its divestiture activities.
As of December 31, 1998, RSC had divested of all real estate investments and loans with the exception of one limited partnership interest with one completed home as its primary asset. At December 31, 1998, this one remaining partnership investment had been fully reserved for. For more information regarding RSC and its financial performance, see "Item 7 - Regency Service Corporation", below and additionally, note 4 of the Company's audited financial statements included in Item 8.
INVESTMENT MANAGEMENT ACTIVITIES
RIA was formed in August 1993 through the acquisition by the Bank of the assets, including client list, of a fee-only investment management and consulting firm. RIA provides investment management and consulting services, including comprehensive financial and retirement planning and investment advice to individuals and corporate clients for an annual fee that varies depending upon the size of a client's account. For more information regarding RIA and its financial performance, see "Item 7 - Regency Investment Advisors", below.
SUPERVISION AND REGULATION
The common stock of the Company is subject to the registration requirements of the Securities Act of 1933, as amended, and the qualification requirements of the California Corporate Securities Law of 1968, as amended. The Bank's common stock, however, which is owned 100 percent by the Company, is exempt from such requirements. The Company is also subject to the periodic reporting requirements of Section 13 of the Securities Exchange Act of 1934, as amended, which include, but are not limited to, filing annual, quarterly and other current reports with the Securities and Exchange Commission.
The Bank is licensed by the Commissioner, its deposits are insured by the FDIC, and became a member of the Federal Reserve System in the third quarter of 1998. Consequently, the Bank is subject to the supervision of, and is regularly examined by, the Commissioner and the Board of Governors. Such supervision and regulation include comprehensive reviews of all major aspects of the Bank's business and condition, including its capital ratios, subsidiary operations, allowance credit losses and other factors. However, no inference should be drawn that such authorities have approved any such factors. The Company and the Bank are required to file reports with the Commissioner and the Board of Governors and provide such additional information as the Commissioner and the Board of Governors may require.
The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and is registered as such with, and subject to the supervision of, the Board of Governors. The Company is required to obtain the approval of the Board of Governors before it may acquire all or substantially all of the assets of any bank, or ownership or control of the voting shares of any bank if, after giving effect to such acquisition of shares, the Company would own or control more than 5 percent of the voting shares of such bank. The Bank Holding Company Act prohibits the Company from acquiring any voting shares of, or interest in, all or substantially all of the assets of, a bank located outside the State of California unless such an acquisition is specifically authorized by the laws of the state in which such bank is located. Any such interstate acquisition is also subject to the
provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 discussed below.
The Company, and any subsidiaries which it may acquire or organize, are deemed to be "affiliates" of the Bank within the meaning of that term as defined in the Federal Reserve Act. This means, for example, that there are limitations (a) on loans by the Bank to affiliates, and (b) on investments by the Bank in affiliates' stock as collateral for loans to any borrower. The Company and its subsidiary are also subject to certain restrictions with respect to engaging in the underwriting, public sale and distribution of securities.
In addition, regulations of the Board of Governors promulgated under the Federal Reserve Act require that reserves be maintained by the Bank in conjunction with any liability of the Company under any obligation (promissory note, acknowledgment of advance, banker's acceptance or similar obligation) with a weighted average maturity of less than seven (7) years to the extent that the proceeds of such obligations are used for the purpose of supplying funds to the Bank for use in its banking business, or to maintain the availability of such funds.
In 1995, pursuant to Congressional mandate, the FDIC reduced bank deposit insurance assessment rates to a range from $0 to $0.27 per $100 of deposits, dependent upon a bank's risk. The FDIC has continued these reduced assessment rates through the first semiannual assessment period of 1999.
The Board of Governors and other federal banking agencies have adopted risk-based capital guidelines for evaluating the capital adequacy of bank holding companies and banks. The guidelines are designed to make capital requirements sensitive to differences in risk profiles among banking organizations, to take into account off-balance sheet exposures and to aid in making the definition of bank capital uniform internationally. Under the guidelines, the Company and the Bank are required to maintain capital equal to at least 8.0 percent of its assets and commitments to extend credit, weighted by risk, of which at least 4.0 percent must consist primarily of common equity (including retained earnings) and the remainder may consist of subordinated debt, cumulative preferred stock, or a limited amount of loan loss reserves.
Assets, commitments to extend credit, and off-balance sheet items are categorized according to risk and certain assets considered to present less risk than others permit maintenance of capital at less than the 8 percent ratio. For example, most home mortgage loans are placed in a 50 percent risk category and therefore require maintenance of capital equal to 4 percent of such loans, while commercial loans are placed in a 100 percent risk category and therefore require maintenance of capital equal to 8 percent of such loans.
The guidelines establish two categories of qualifying capital: Tier 1 capital comprising core capital elements and Tier 2 comprising supplementary capital requirements. At least one-half of the required capital must be maintained in the form of Tier 1 capital. Tier 1 capital includes common shareholder's equity and qualifying perpetual preferred stock less intangible assets and certain other adjustments. However, no more than 25 percent of the Company's total Tier 1 capital may consist of perpetual preferred stock. The definition of Tier 1 capital for the Bank is the same, except that perpetual preferred stock may be included only if it is noncumulative. Tier 2 capital includes, among other items, limited life (and in the case of banks, cumulative) preferred stock, mandatory convertible securities, subordinated debt and a limited amount of reserves for credit losses. Effective October 1, 1998 the Board of Governors and other federal
bank regulatory agencies approved including in Tier 2 capital up to 45 percent of the pretax net unrealized gains on certain available-for-sale equity securities having readily determinable fair values (i.e. the excess, if any, of fair market value over the book value or historical cost of the investment security). The federal regulatory agencies reserve the right to exclude all or a portion of the unrealized gains upon a determination that the equity securities are not prudently valued. Unrealized gains and losses on other types of assets, such as bank premises and available-for-sale debt securities, are not included in Tier 2 capital, but may be taken into account in the evaluation of overall capital adequacy and net unrealized losses on available-for-sale equity securities will continue to be deducted from Tier 1 capital as a cushion against risk.
The Board of Governors and other federal banking agencies have adopted a revised minimum leverage ratio for bank holding companies as a supplement to the risk-weighted capital guidelines. The old rule established a 3 percent minimum leverage standard for well-run banking organizations (bank holding companies and banks) with diversified risk profiles. Banking organizations which did not exhibit such characteristics or had greater risk due to significant growth, among other factors, were required to maintain a minimum leverage ratio 1 percent to 2 percent higher. The old rule did not take into account the implementation of the market risk capital measure set forth in the federal regulatory agency capital adequacy guidelines. The revised leverage ratio establishes a minimum Tier 1 ratio of 3 percent (Tier 1 capital to total assets) for the highest rated bank holding companies and banks. All other bank holding companies and banks must maintain a minimum Tier 1 leverage ratio of 4 percent with higher leverage capital ratios required for banking organizations that have significant financial and/or operational weaknesses, a high risk profile, or are undergoing or anticipating rapid growth.
On December 19, 1991, President Bush signed the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). The Board of Governors and other federal banking agencies adopted regulations effective December 19, 1992, implementing a system of prompt corrective action pursuant to Section 38 of the Federal Deposit Insurance Act and Section 131 of the FDICIA. The regulations establish five capital categories with the following characteristics: (1) "Well capitalized" - consisting of institutions with a total risk-based capital ratio of 10 percent or greater, a Tier 1 risk-based capital ratio of 6 percent or greater and a leverage ratio of 5 percent or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive; (2) "Adequately capitalized" - consisting of institutions with a total risk-based capital ratio of 8 percent or greater, a Tier 1 risk-based capital ratio of 4 percent or greater and a leverage ratio of 4 percent or greater, and the institution does not meet the definition of a "well capitalized" institution; (3) "Undercapitalized" - consisting of institutions with a total risk-based capital ratio less than 8 percent, a Tier 1 risk-based capital ratio of less than 4 percent, or a leverage ratio of less than 4 percent; (4) "Significantly undercapitalized" - consisting of institutions with a total risk-based capital ratio of less than 6 percent, a Tier 1 risk-based capital ratio of less than 3 percent, or a leverage ratio of less than 3 percent; (5) "Critically undercapitalized" - consisting of an institution with a ratio of tangible equity to total assets that is equal to or less than 2 percent.
The regulations established procedures for classification of financial institutions within the capital categories, filing and reviewing capital restoration plans required under the regulations and procedures for issuance of directives by the appropriate regulatory agency, among other matters. The regulations impose restrictions upon all institutions to refrain from certain actions which would cause an institution to be classified within any one of the three
"undercapitalized" categories, such as declaration of dividends or other capital distributions or payment of management fees, if following the distribution or payment the institution would be classified within one of the "undercapitalized" categories. In addition, institutions which are classified in one of the three "undercapitalized" categories are subject to certain mandatory and discretionary supervisory actions. Mandatory supervisory actions include (1) increased monitoring and review by the appropriate federal banking agency; (2) implementation of a capital restoration plan; (3) total asset growth restrictions; and (4) limitation upon acquisitions, branch expansion, and new business activities without prior approval of the appropriate federal banking agency. Discretionary supervisory actions may include (1) requirements to augment capital; (2) restrictions upon affiliate transactions; (3) restrictions upon deposit gathering activities and interest rates paid; (4) replacement of senior executive officers and directors; (5) restrictions upon activities of the institution and its affiliates; (6) requiring divestiture or sale of the institution; and (7) any other supervisory action that the appropriate federal banking agency determines is necessary to further the purposes of the regulations. Further, the federal banking agencies may not accept a capital restoration plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company under the guaranty is limited to the lesser of (i) an amount equal to 5 percent of the depository institution's total assets at the time it became undercapitalized, and (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it were "significantly undercapitalized." The FDICIA also restricts the solicitation and acceptance of and interest rates payable on brokered deposits by insured depository institutions that are not "well capitalized." An "undercapitalized" institution is not allowed to solicit deposits by offering rates of interest that are significantly higher than the prevailing rates of interest on insured deposits in the particular institution's normal market areas or in the market areas in which such deposits would otherwise be accepted.
Any financial institution which is classified as "critically undercapitalized" must be placed in conservatorship or receivership within 90 days of such determination unless it is also determined that some other course of action would better serve the purposes of the regulations. Critically undercapitalized institutions are also prohibited from making (but not accruing) any payment of principal or interest on subordinated debt without the prior approval of the FDIC and the FDIC must prohibit a critically undercapitalized institution from taking certain other actions without its prior approval, including (1) entering into any material transaction other than in the usual course of business, including investment expansion, acquisition, sale of assets or other similar actions; (2) extending credit for any highly leveraged transaction; (3) amending articles or bylaws unless required to do so to comply with any law, regulation or order; (4) making any material change in accounting methods; (5) engaging in certain affiliate transactions; (6) paying excessive compensation or bonuses; and (7) paying interest on new or renewed liabilities at rates which would increase the weighted average costs of funds beyond prevailing rates in the institution's normal market areas.
Under the FDICIA, the Board of Governors and other federal agencies have adopted regulations which require banks to establish and maintain comprehensive written real estate policies which address certain lending considerations, including loan-to-value limits, loan
administrative policies, portfolio diversification standards, and documentation, approval and reporting requirements. The FDICIA further generally prohibits an insured state bank from engaging as a principal in any activity that is impermissible for a national bank, absent FDIC determination that the activity would not pose a significant risk to the Bank Insurance Fund, and that the bank is, and will continue to be, within applicable capital standards. Similar restrictions apply to subsidiaries of insured state banks. The Company does not currently intend to engage in any activities which would be restricted or prohibited under the FDICIA.
The Board of Governors and other federal banking agencies have established safety and soundness standards for insured financial institutions covering (1) internal controls, information systems and internal audit systems; (2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset growth; (6) compensation, fees and benefits; and (7) excessive compensation for executive officers, directors or principal shareholders which could lead to material financial loss. If the agency determines that an institution fails to meet any standard, the agency may require the financial institution to submit to the agency an acceptable plan to achieve compliance with the standard. If the agency requires submission of a compliance plan and the institution fails to timely submit an acceptable plan or to implement an accepted plan, the agency must require the institution to correct the deficiency. Under the final rule, an institution must file a compliance plan within 30 days of a request to do so from the institution's primary federal regulatory agency. The agencies may elect to initiate enforcement action in certain cases rather than rely on an existing plan particularly where failure to meet one or more of the standards could threaten the safe and sound operation of the institution.
The Board of Governors issued final amendments to its risk-based capital guidelines to be effective December 31, 1994, requiring that net unrealized holding gains and losses on securities available for sale determined in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," are not to be included in the Tier 1 capital component consisting of common stockholders' equity. Net unrealized losses on marketable equity securities (equity securities with a readily determinable fair value), however, will continue to be deducted from Tier 1 capital. This rule has the general effect of valuing available for sale securities at amortized cost (based on historical cost) rather than at fair value (generally at market value) for purposes of calculating the risk-based and leverage capital ratios.
On December 13, 1994, the Board of Governors issued amendments to its risk-based capital guidelines regarding concentration of credit risk and risks of non-traditional activities, which were effective January 17, 1995. As amended, the risk-based capital guidelines identify concentrations of credit risk and evaluate a bank's ability to manage such risks and the risk posed by non-traditional activities as important factors in assessing a bank's overall capital adequacy.
The Board of Governors and other federal banking agencies issued a joint agency policy statement during 1996 regarding the management of interest-rate risk exposure (interest rate risk is the risk that changes in market interest rates might adversely affect a bank's financial condition) with the goal of ensuring that institutions with high levels of interest-rate risk have sufficient capital to cover their exposures. This policy statement reflected the agencies' decision at that time not to promulgate a standardized measure and explicit capital charge for interest rate risk in the expectation that industry techniques for measurement of such risk will evolve.
However, the Federal Financial Institution Examination Counsel ("FFIEC") on December 13, 1996, approved an updated Uniform Financial Institutions Rating System ("UFIRS"). In addition to the five components traditionally in the so-called "CAMEL" rating system which has been used by bank examiners for a number of years to classify and evaluate the soundness of financial institutions (including capital adequacy, asset quality, management, earnings and liquidity), UFIRS includes for all bank regulatory examinations conducted on or after January 1, 1997, a new rating for a sixth category identified as sensitivity to market risk. Ratings in this category are intended to reflect the degree to which changes in interest rates, foreign exchange rates, commodity prices or equity prices may adversely affect an institution's earnings and capital. The rating system henceforth will be identified as the "CAMELS" system.
COMPETITION
The banking business in California generally, and in the Bank's primary service area specifically is highly competitive with respect to both loans and deposits, and is dominated by a relatively small number of major banks with many offices operating over a wide geographic area. Among the advantages such major banks have over the Bank are their ability to finance wide-ranging advertising campaigns and to allocate their investment assets to geographic regions of higher yield and demand. Such banks offer certain services such as trust services and international banking services which are not offered directly by the Bank and, by virtue of their greater total capitalization upon which legal lending limits are based, such banks have substantially higher limits than the Bank. At December 31, 1998, the Bank's legal lending limits to a single borrower and such borrower's related interests were $3.0 million on an unsecured basis and $5.0 million on a fully secured basis based on regulatory capital of $20.0 million.
The Bank's primary service area encompasses Fresno County and Madera County. As cited in "The Market Share Report" published by the FDIC, as of June 30, 1998, there were 27 banks and savings and loans operating in Fresno County with total deposits of $5.4 billion. At that time, the Bank held a total of $164.5 million in deposits at its Fresno branches representing approximately 3.1 percent of total bank and savings and loan deposits in Fresno County. Additionally, there were 15 banks and savings and loans operating in Madera County with total deposits of $601.6 million. At June 30, 1998, the Bank held a total of $21.1 million in deposits, representing approximately 3.5 percent of total bank and savings and loan deposits in Madera County.
In order to compete with the major financial institutions in its primary service area, the Bank uses to the fullest extent possible the flexibility which is accorded by its independent status. This includes an emphasis on specialized services, local promotional activity, and personal contacts by the Bank's officers, directors and employees. The Bank also seeks to provide special services and programs for individuals in its primary service area who are employed in the professional and business fields, such as loans for equipment, furniture, tools of the trade or expansion of practices or businesses. In the event there are customers whose loan demands exceed the Bank's lending limits, the Bank seeks to arrange for such loans on a participation basis with other financial institutions. The Bank also assists those customers requiring services not offered by the Bank to obtain such services from correspondent banks.
Banking is a business which depends on interest rate differentials. In general, the difference between the interest rate paid by the Bank to obtain its deposits and its other
borrowings and the interest rate received by the Bank on loans extended to its customers and on securities held in the Bank's portfolio comprise the major portion of the Bank's earnings.
Commercial banks compete with savings and loan associations, credit unions, other financial institutions and other entities for funds. For instance, yields on corporate and government debt securities and other commercial paper affect the ability of commercial banks to attract and hold deposits. Commercial banks also compete for loans with savings and loan associations, credit unions, consumer finance companies, mortgage companies and other lending institutions.
The interest rate differentials of the Bank, and therefore its earnings, are affected not only by general economic conditions, both domestic and foreign, but also by the monetary and fiscal policies of the United States as set by statutes and as implemented by federal agencies, particularly the Federal Reserve Board. This agency can and does implement national monetary policy, such as seeking to curb inflation and combat recession, by its open market operations in United States government securities, adjustments in the amount of interest free reserves that banks and other financial institutions are required to maintain, and adjustments to the discount rates applicable to borrowing by banks from the Federal Reserve Board. These activities influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and timing of any future changes in monetary policies and their impact on the Bank can't be predicted.
Since 1986, California has permitted California banks and bank holding companies to be acquired by banking organizations based in other states on a "reciprocal" basis (i.e., provided the other state's laws permit California banking organizations to acquire banking organizations in that state on substantially the same terms and conditions applicable to local banking organizations). Some increase in merger and acquisition activity among California and out-of-state banking organizations has occurred as a result of this law, as well as increased competition for loans and deposits. Since October 2, 1995, California law implementing certain provisions of prior federal law has (1) permitted interstate merger transactions; (2) prohibited interstate branching through the acquisition of a branch business unit located in California without acquisition of the whole business unit of the California bank; and (3) prohibited interstate branching through de novo establishment of California branch offices. Initial entry into California by an out-of-state institution must be accomplished by acquisition of or merger with an existing whole bank which has been in existence for at least five years.
Community Reinvestment Act ("CRA") regulations effective as of July 1, 1995 evaluate banks' lending to low and moderate income individuals and businesses across a four-point scale from "outstanding" to "substantial noncompliance," and are a factor in regulatory review of applications to merge, establish new branches or form bank holding companies. In addition, any bank rated in "substantial noncompliance" with the CRA regulations may be subject to enforcement proceedings.
The Bank has a current rating of "satisfactory" CRA compliance, and is scheduled for further examination for CRA compliance during 1999.
The federal banking agencies, especially the OCC and the Board of Governors, have taken steps to increase the types of activities in which national banks and bank holding companies can engage, and to make it easier to engage in such activities. On November 20,
1996, the OCC issued final regulations permitting national banks to engage in a wider range of activities through subsidiaries. An "eligible institution" (those national banks that are well capitalized, have a high overall rating and a satisfactory CRA rating, and are not subject to an enforcement order) may engage in activities related to banking through operating subsidiaries after going through an expedited application process. In addition, the regulations include a provision whereby a national bank may apply to the OCC to engage in an activity through a subsidiary in which the bank itself may not engage. This OCC regulation could be advantageous to national banks depending on the extent to which the OCC permits national banks to engage in new lines of business.
Certain legislative and regulatory proposals that could affect the Bank and the banking business in general are pending or may be introduced before the United States Congress, the California State Legislature and federal and state government agencies. The United States Congress is considering numerous bills that could reform banking laws substantially. For example, proposed bank modernization legislation under consideration would, among other matters, include a repeal of the Glass-Steagall Act restrictions on banks that now prohibit the combination of commercial and investment banks.
It is not known to what extent, if any, the legislative proposals will be enacted and what effect such legislation would have on the structure, regulation and competitive relationships of financial institutions. It is likely, however, that many of these proposals would subject the Company and the Bank to increased regulation, disclosure and reporting requirements and would increase competition and the cost of doing business.
In addition to pending legislative changes, the various federal and state banking regulatory agencies frequently propose rules and regulations to implement and enforce already existing legislation. It cannot be predicted whether or in what form any such rules or regulations will be enacted or the effect that such rules and regulations may have on the business of the Company and the Bank.
Item 2.
Item 2. PROPERTIES
The Company leases land and a building at 5240 N. Palm Avenue, Fresno, California, under a lease agreement having an initial term of approximately 30 years with 2 five year options. The lease is accounted for as an operating lease for the land and a capital lease for the building. The facility is approximately 9,000 square feet with rental payments of $1.05 per square foot per month. The lease calls for rent payment increases of 25 percent every five years. The foregoing description of the lease is qualified by reference to the lease agreement dated December 22, 1988 attached as exhibit 10.10 to the Company's Registration Statement on Form S-4 filed with the Securities and Exchange Commission on July 27, 1994.
On February 20, 1995, the Bank entered into a lease agreement for its SBA loan production office located at 3501 Coffee Road, Suite 3, Modesto, California. The lease is for a period of 5 years on facilities of 1,072 square feet at a lease rate of $1.35 per square foot. The lease calls for annual rent adjustments based on changes in the consumer price index of not less than 3 percent and not more than 5 percent. The foregoing description of the lease is qualified by reference to the lease agreement dated February 20, 1995 and attached as exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995.
On August 17, 1995, the Company entered into a sale-leaseback of its corporate headquarters located at 7060 N. Fresno Street, Fresno, California. The leaseback is accounted for as an operating lease with a term of 15 years and contains provisions for periodic rent increases every three years based on changes in the consumer price index not to exceed 12 percent per adjustment. The facility is approximately 24,100 square feet with the initial rental rate set at $1.35 per square foot. The foregoing description of the lease is qualified by reference to the lease agreement dated August 17, 1995 and attached as exhibit 10.21 to the Company's Form 10-K for the year ended December 31, 1995.
On May 13, 1996, the Bank entered into a lease for its fourth branch office, commonly referred to as the Madera Branch, at 126 North "D" Street, Madera, California. The initial term of the lease is for three years at a fixed rate of $2,091 per month with an option for an additional three years at a rate of $2,510 per month. The facility is approximately 2,500 square feet in size and is located in the primary downtown business district in Madera. The foregoing description of the lease is qualified by reference to the lease agreement dated May 13, 1996 and attached as exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
Rent expense under all operating lease agreements was $636,000, $528,000 and $540,000, for the years ended December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998, the aggregate minimum future lease commitments under capital leases and noncancelable operating leases with terms of one year or more consist of the following (in thousands):
Item 3.
Item 3. LEGAL PROCEEDINGS
There are no material proceedings adverse to the Company or the Bank to which any director, officer, affiliate of the Company or 5 percent shareholder of the Company or the Bank, or any associate of any such director, officer, affiliate or 5 percent shareholder of the Company or Bank is a party, and none of the above persons has a material interest adverse to the Company or the Bank.
Neither the Company nor the Bank is a party to any pending legal or administrative proceedings (other than ordinary routine litigation incidental to the Company's or the Bank's business) and no such proceedings are known to be contemplated.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 1998.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
In May 1998, the Company's Stock began trading on the Nasdaq National Market System under the symbol REFN. Prior to that date there was limited trading in and no established public market for the Company's Common Stock. Hoefer & Arnett, Incorporated, Sutro & Co., Banc Stock Exchange and Van Kasper & Company act as market makers and facilitate trades in the Company's Common Stock. Based on information provided by Nasdaq and the aforementioned market makers, the range of high and low bids for the Company's Common Stock for the two most recent fiscal years are set forth below. Such bid prices represent inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
The bid price for the Company's Common Stock was $14.50 as of March 10, 1999.
(b) HOLDERS
As of March 10, 1999, there were approximately 650 holders of the Common Stock of the Company. There are no other classes of common equity outstanding.
(c) DIVIDENDS
The Company's shareholders are entitled to receive dividends when and as declared by its Board of Directors, out of funds legally available therefor, subject to the restrictions set forth in the California General Corporation Law (the "Corporation Law"). The Corporation Law provides that a corporation may make a distribution to its shareholders if the corporation's retained earnings equal at least the amount of the proposed distribution. The Corporation Law further provides that, in the event that sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its shareholders if it meets two conditions, which generally stated are as follows: (1) the corporation's assets equal at least 1-1/4 times its liabilities; and (2) the corporation's current assets equal at least its current liabilities or, if the average of the corporation's earnings before taxes on income and before interest expenses for the two preceding fiscal years was less than the average of the corporation's
interest expenses for such fiscal years, then the corporation's current assets must equal at least 1-1/4 times its current liabilities. Funds for payment of any cash dividends by the Company would be obtained from its investments as well as dividends and/or management fees from the Bank. The payment of cash dividends by the Bank is subject to restrictions set forth in the California Financial Code (the "Financial Code"). The Financial Code provides that banks may not make a cash distribution to its shareholders in excess of the lesser of (a) the bank's retained earnings; or (b) the bank's net income for its last three fiscal years, less the amount of any distributions made by the bank or by any majority-owned subsidiary of the bank to the shareholders of the bank during such period. However, a bank may, with the approval of the Commissioner, make a distribution to its shareholders in an amount not exceeding the greater of (a) its retained earnings; (b) its net income for its last fiscal year; or (c) its net income for its current fiscal year. In the event that the Commissioner determines that the shareholders' equity of a bank is inadequate or that the making of a distribution by the bank would be unsafe or unsound, the Commissioner may order the bank to refrain from making a proposed distribution.
The FDIC may also restrict the payment of dividends if such payment would be deemed unsafe or unsound or if after the payment of such dividends, the Bank would be included in one of the "undercapitalized" categories for capital adequacy purposes pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991. Additionally, while the Board of Governors has no general restriction with respect to the payment of cash dividends by an adequately capitalized bank to its parent holding company, the Board of Governors might, under certain circumstances, place restrictions on the ability of a particular bank to pay dividends based upon peer group averages and the performance and maturity of the particular bank, or object to management fees on the basis that such fees cannot be supported by the value of the services rendered or are not the result of an arm's length transaction.
During 1998 and 1997, the Company paid no cash dividends. During 1996, the Company paid four quarterly cash dividends of $.06 per common share. There can be no assurance that the Company will pay dividends in the future. The determination to pay dividends is subject to regulatory restrictions applicable to the Bank and the Company, the financial condition of the Bank and the Company and such other factors as the Board of Directors of the Company may consider.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The following table presents certain consolidated financial information concerning the business of the Company and the Bank. This information should be read in conjunction with the Consolidated Financial Statements and the notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere herein.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed or incorporated by reference in this Annual Report on Form 10-K including, but not limited to, matters described in Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Changes to such risks and uncertainties, which could impact future financial performance, include, among others, (1) competitive pressures in the banking industry; (2) changes in the interest rate environment; (3) general economic conditions, either nationally or regionally; (4) changes in the regulatory environment; (5) changes in business conditions and inflation; (6) changes in securities markets; and (7) Year 2000 compliance problems. Therefore, the information set forth therein should be carefully considered when evaluating the business prospects of the Company and the Bank.
OVERVIEW
The 1998 fiscal year was a year of growth and record profits for Regency Bancorp. Highlights included overall asset growth of 17.0 percent with total assets reaching $232.0 million at year end, completion of the divestiture of RSC's real estate investment assets, a return to profitability with net income after tax reaching $3.7 million for the year, and, in May the Company's common stock began trading on the Nasdaq national market system under the symbol REFN. In September 1998, the Bank received written acknowledgement from the Federal Deposit Insurance Corporation ("FDIC") and California Department of Financial Institutions ("CDFI") that the administrative orders issued in November 1997 had been rescinded. Additionally, the Bank was accepted as a member of both the Federal Reserve Bank and the Federal Home Loan Bank of San Francisco.
For the year ended December 31, 1998, the Company recorded net income of $3.7 million representing a $4.9 million improvement from a net loss of $1.3 million in 1997 and a $2.7 million increase from income of $1.0 million in 1996. Record income for 1998 was primarily the result of a decrease in expenses associated with RSC's divestiture, as well as a significantly larger earning asset base resulting in greater interest income. The net loss in 1997 was primarily the result of losses totaling $5.7 million related to the dissolution of RSC's real estate development activities.
Earnings per share for 1998 were $1.40 (basic) and $1.31 (diluted), compared to a net loss per share for 1997 of $.68 (basic and diluted) and net income per share of $.55 (basic) and $.54 (diluted) in 1996. For the year ended December 31, 1998, return on average assets and average equity were 1.77 and 18.17 percent, respectively. Shareholders' equity increased in 1998 by $3.7 million or 19.8 percent, primarily as a result of income generated by the Company's subsidiaries. Shareholders' equity increased by $5.3 million during 1997 primarily as a result of the Company's capital offering offset by the net loss for the year. The Company's ratio of common shareholders' equity to total assets was 9.7 percent at December 31, 1998, compared to 9.5 percent at December 31, 1997 and 7.4 percent at December 31, 1996. The Company's and Bank's levels of risk based capital to assets were considered "well capitalized" at year-end.
During 1998, the Company effectively completed divestiture of RSC's real estate holdings reducing the Company's investment in real estate from $4.1 million at December 31, 1997 to zero at year-end 1998. At December 31, 1996 the Company's investment in real estate was $16.3 million. The elimination of nonperforming real estate assets had a significant effect on the Company's overall increase in earning assets and an improved ratio of earning assets to total assets. For the year ended December 31, 1998, the Company's ratio of average earning assets to average total assets was 90.3 percent, compared to 83.9 percent in 1997 and 79.5 percent in 1996. The higher levels of earning assets achieved in 1998 were a significant reason for the increase in interest income, and subsequently the increase in overall net income achieved during 1998.
NET INTEREST INCOME
The Company's operating results depend primarily on net interest income (the difference between the interest earned on loans, investment securities and federal funds sold less interest expense on deposit accounts and borrowings). A primary factor affecting the level of net interest income is the Company's interest rate margin, the difference between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, as well as the difference between the relative amounts of average interest-earning assets and interest-bearing liabilities.
The following table presents, for the years ended December 31, 1998, 1997 and 1996, the Company's total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities and the resultant cost, expressed both in dollars and rates. The table also sets forth the net interest income and the net earning asset balances for the periods indicated.
CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND INTEREST RATES
(1) Loan amounts include nonaccrual loans, but the related interest income has been included only for the period prior to the loan being placed on a nonaccrual basis. Loan interest income includes loan fees of approximately $1,331,000, $1,252,000 and $1,232,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
(2) Applicable nontaxable securities yields have not been calculated on a taxable-equivalent basis
Changes in the net interest income can be attributed to changes in the yield on interest-earning assets, the rate paid on interest-bearing liabilities, as well as changes in the volume of interest-earning assets and interest-bearing liabilities. The following table presents the dollar amount of certain changes in interest income and expense for each major component of interest-earning assets and interest-bearing liabilities and the difference attributable to changes in average rates and volumes for the periods indicated.
VOLUME/RATE ANALYSIS
(1) A change due to both volume and rate has been allocated to the change in volume and rate in proportion to the relationship of the dollar amount of the change in each.
(2) Changes calculated on nontaxable securities have not considered tax equivalent effects.
Total interest income increased $3.4 million or 21.9 percent in 1998 to $18.6 million. During 1997, interest income increased $2.1 million or 15.6 percent to $15.3 million. Interest expense in 1998 increased $131,000 or 2.4 percent to $5.5 million from $5.3 million in 1997. In 1997, interest expense increased by $627,000 or 13.4 percent. One of the primary reasons for the Company's increased profitability in 1998 was the increase in net interest income. Net interest income for 1998 increased by $3.2 million or 32.3 percent. The Company's net interest margin increased to 7.04 percent in 1998 from 6.38 percent in 1997 and 6.45 percent in 1996. The higher margin for 1998 resulted from a higher percentage of loans to earning assets and a recovery of nonaccrued interest on loans RSC had carried on its books for several years. Management expects the net interest margin will return to more normalized levels in 1999.
Average interest-earning assets increased by $31.2 million in 1998 to $187.3 million compared to $156.2 million in 1997 and $132.3 million in 1996. For the year ended December 31, 1998, growth in average interest earning assets was paced by growth in average loans outstanding of 25.0 percent, growth in average investments of 9.1 percent, and a decline in average federal funds sold of 1.4 percent. Average interest bearing liabilities grew by 4.8 percent overall in 1998 with the majority of growth occurring in the Bank's preferred savings product, which experienced an increase of $8.1 million or 23.6 percent. The other subcategories of deposits had only minor growth or, as was the case of Federal Funds purchased, a decline on average for the year.
For the year ended December 31, 1997, average interest-earning assets increased $23.9 million to $156.2 million, compared to $132.3 million in 1996. In 1997, growth in average interest earning assets was spread over all earning asset categories with federal funds sold increasing 158.7
percent, investments increasing 23.7 percent and loans increasing 11.8 percent. Average interest bearing liabilities grew by $14.6 million in 1997 to $134.7 million from $120.2 million in 1996. All major interest bearing liability categories grew during 1997 with the exception of federal funds purchased. Of note in 1997 was a substantial reduction in Federal Funds purchased and other borrowings. During 1997, the Company was able to retire all debt incurred as a result of the acquisition of limited partnership properties involving RSC.
NONINTEREST INCOME
The Company receives a significant portion of its income from noninterest sources related both to activities conducted by the Bank (loan originations, servicing and depositor service charges), as well as from RIA (income from investment management services). The following table presents the dollar amount of the Company's noninterest income for the years ended December 31, 1998, 1997 and 1996 respectively.
NONINTEREST INCOME 1998 VS. 1997
Noninterest income increased $275,000 or 10.2 percent in 1998 to $2.96 million. The increase was primarily the result of an increase of $742,000 in other income resulting from recoveries of previously charged off investments in real estate and loans made by Regency Service Corporation of $739,000. Additional noninterest income categories reflecting an increase in 1998 included: depositor service charges, up $103,000 primarily as a result of growth in the Company's deposit base; income from RIA investment management services, up $106,000 as a result of increased assets under management; and gains on the sale of securities, up $34,000. Noninterest income categories with decreased income in 1998 were led by gain on sale of loans with a decline of $252,000. Gain on sale of loans declined primarily as a result of lower amounts of SBA loans sold throughout the year. The majority of the income in this category in 1998 was the result of newly originated mortgage loans generated by the Bank. Additional noninterest income categories declining in 1998 included: gain on sale of premises and equipment, down $248,000; and servicing fees on loans sold, down $210,000. During 1997, the Company recognized a gain on the sale of certain facilities resulting in greater than normal gain from the sale of premises & equipment. The Company generally does not sell non-financial assets, consequently, 1997's gain of $252,000 was a nonrecurring event and 1998's reduced income in this category should be more reflective of future income in this category. Income from servicing fees on loans sold is dependent on the volume of loans serviced and the speed at which serviced loans pre-pay their principal balances. The Company's overall servicing portfolio declined in 1998 as older loans in the servicing portfolio paid off while new loans originated were held on the Company's balance sheet rather than sold and serviced. The decline in portfolio size combined with the amortization of the future-servicing asset
associated with a number of loans that paid off at an accelerated rate combined to reduce income in this category.
NONINTEREST INCOME 1997 VS. 1996
For the year ended December 31, 1997, noninterest income decreased $422,000 or 13.6 percent to $2.7 million from $3.1 million in 1996. The overall decrease in noninterest income was primarily the result of decreased income from the sale of loans. For the year, gains on the sale of loans were down $707,000, primarily as a result of the Company's decision to retain the guaranteed portion of SBA loans originated to increase interest income, rather than sell the guaranteed portion to generate immediate noninterest income. Additional noninterest income categories reflecting declines in 1997 included: gain (loss) on sale of investments down $19,000 from 1996; and other income declining $124,000. The decline in other noninterest income was primarily a result of a decrease in broker fees of $84,000. Noninterest income categories reflecting an increase in 1997 included: gain on sale of premises & equipment, up $234,000 as a result of the Company's recognition of the gain associated with the sale of certain facilities; depositor service fee income, up $59,000 primarily as a result of growth in the Bank's deposit base; income from RIA investment management services, up $128,000 as a result of a larger asset base under management; and servicing fee income, up $7,000 as a result of a larger servicing portfolio of loans.
REGENCY INVESTMENT ADVISORS
As described above, Regency Investment Advisors is a wholly owned subsidiary of Regency Bancorp providing investment management and consulting services on a fee only basis. Revenue from RIA is primarily a result of fees generated from assets under management. At December 31, 1998, RIA's assets under management were $110.3 million, a 27.5 percent increase from assets under management of $86.5 million at December 31, 1997. During 1997, assets under management increased $9.3 million or 12.0 percent from $77.2 million at December 31, 1996. Assets in client accounts managed by RIA are not reflected in the consolidated assets of the Company.
Revenue from RIA's operations increased $106,000 or 13.1 percent in 1998 to $916,000 from $810,000 in 1997. In 1996, revenue from investment management services was $682,000. The increased revenue over the past two years was primarily the result of a larger asset base managed by RIA. On a stand alone basis, RIA provided the Company with pre-tax net income of $217,000, $181,000 and $55,000 in the years ended December 31, 1998, 1997 and 1996, respectively.
NONINTEREST EXPENSE
Noninterest expense reflects the costs of products, services, systems, facilities and personnel for the Company. The following table presents the Company's noninterest expense, stated both as dollars and as a percentage of average assets, for the years ended December 31, 1998, 1997 and 1996 respectively.
NONINTEREST EXPENSE 1998 VS. 1997
Noninterest expenses decreased by $3.95 million or 29.5 percent to $9.5 million in 1998 from $13.4 million in 1997. The 1998 decrease in noninterest expense resulted from a gain experienced by RSC on investments in real estate of $171,000, compared to a loss of $3.97 million during 1997. When compared to average assets for the respective periods, noninterest expense decreased to 4.56 percent from 7.20 percent.
Additional noninterest expense categories reflecting a decrease for the year included: occupancy expense, down $80,000 to $1.6 million primarily as a result of lower amounts of depreciation on fixed assets; director's fees and expense, down $51,000 to $219,000 as a result of reduced board fees and a streamlined meeting schedule; management fees for real estate projects, down $120,000 to zero as a result of the cancellation of RSC's third party management contract; and other noninterest expense, down $289,000. In 1997, other expense was abnormally high due to expenses related to the charge-off of accounts receivable at RSC. No similar expense occurred in 1998.
Noninterest expense categories reflecting an increase in 1998 included; salaries and related benefits, up $352,000 or 7.4 percent due primarily to an increase in bonuses paid under the Company's incentive compensation plan; FDIC insurance and regulatory assessments, up $150,000 or 125.0 percent as a result of the regulatory orders the Bank was under until September 1998; marketing, up 25,000 or 5.6 percent primarily as a result of increased radio advertising; and professional services, up $223,000 or 48.4 percent as a result of increased legal expense related to the Company's capital offering, Nasdaq listing, regulatory orders, as well as, increased audit expense related to the Bank's regulatory orders and increased consulting expense related to the Company's Year 2000 project. Management expects the expense categories of FDIC insurance and professional services will be reduced in 1999 with the termination of the Bank's regulatory orders and the nonrecurring professional fees related to the Company's capital offering and Nasdaq listing.
NONINTEREST EXPENSE 1997 VS. 1996
Noninterest expenses increased by $3.5 million to $13.4 million in 1997 from $9.9 million in 1996. This increase was a significant contributing factor to the Company's overall net loss for the year. The primary cause of the increase in noninterest expense came as a result of losses associated with RSC's divestiture of investments in real estate, which increased by $3.6 million in 1997. When compared to average assets for the respective periods, noninterest expense increased to 7.20 percent from 5.95 percent.
Additional noninterest expense categories increasing in 1997 included: salaries and related benefits, up $222,000 or 4.9 percent to $4.8 million, primarily as a result of higher commissions paid to staff on incentive based compensation; occupancy expense, up $72,000 to $1.6 million, primarily as a result of a full year's rental expense related to the Bank's Madera office (opened in late 1996), as well as higher maintenance and utility expense; FDIC insurance and regulatory assessments, up $57,000 to $120,000, primarily as a result of the administrative orders issued to the Bank and lower capital levels at the mid-year assessment period; and other expenses, up $299,000 to $1.3 million, primarily as a result of a one-time expense related to the write-off of an unsecured account receivable held by RSC.
Noninterest expense categories that decreased in 1997 compared to 1996 included: professional services, down $288,000 to $461,000, primarily as a result of lower legal and accounting expenses related to RSC; and management fees paid for real estate projects, down $368,000 to $120,000 as a result of a restructured management contract with RSC's project manager. Additionally, supplies, telephone and postage declined by $21,000 in 1997.
REGENCY SERVICE CORPORATION
As described above, Regency Service Corporation is a wholly owned subsidiary of Regency Bank and has engaged in real estate development activities primarily in the Fresno/Clovis area since 1986.
For the year ended December 31, 1998, RSC experienced a gain from sales of real estate in the amount of $171,000 compared to a loss of $4.0 million for the year ended December 31, 1997, and a loss of $351,000 for the year ended December 31, 1996. The gain in 1998 resulted from the sale of several properties which had previously been written down to reflect RSC's anticipated sales proceeds. For the year ended December 31, 1998, on a stand alone basis, RSC's activities (including gains from the sale of properties, recoveries of RSC's provision for real estate losses and credit losses, plus operating expenses), increased the Company's overall pre-tax income by $1.6 million compared to a decrease of $5.7 million in 1997 and a decrease of $1.5 million in 1996, respectively.
BALANCE SHEET ANALYSIS
For the year ended December 31, 1998, total assets increased by $33.7 million or 17.0 percent to $232.0 million from $198.2 million at December 31, 1997. During 1997, total assets increased by $17.2 million or 9.5 percent, from $181.0 million at December 31, 1996.
For 1998, total loans increased $21.5 million or 16.6 percent to $151.2 million from $129.6 million at December 31, 1997, primarily as a result of growth in the SBA and B&I loan portfolios.
During 1997, total loans increased $27.3 million or 26.7 percent as a result of the Company's decision to hold newly originated SBA loans rather than sell the guaranteed portion in the secondary market. Investment securities increased 30.2 percent to $48.2 million at December 31, 1998, from $37.0 million at year-end 1997.
During 1998, the Company effectively completed divestiture of RSC's real estate investments reducing the Company's investment in real estate from $4.3 million at December 31, 1997, to zero at year-end 1998. At December 31, 1996, the Company's investment in real estate was $16.5 million. The elimination of nonperforming real estate assets has been a significant cause of the Company's overall increase in earning assets and an improved ratio of earning assets to total assets. For the year ended December 31, 1998, the Company's ratio of average earning assets to average total assets was 90.3 percent, compared to 83.9 percent in 1997, and 79.5 percent in 1996. The higher levels of earning assets was a significant reason for the increase in net interest income in 1998 compared to 1997.
Deposits increased during 1998 by $30.4 million or 17.2 percent to end the year at $206.6 million. During 1997, deposits increased $16.5 million or 10.3 percent to $176.3 million from $159.8 million at December 31, 1996. Interest-bearing deposits grew 17.7 percent in 1998 while noninterest-bearing deposits grew 16.0 percent. Notes payable and capital lease obligations were little changed during 1998 and represent the capital lease obligation on the Company's Palm branch facility. During 1997, notes payable decreased 90.7 percent or $4.9 million as the Company paid off all debts related to the acquisition of real estate properties from RSC's former partners.
Shareholders' equity increased in 1998 by $3.7 million or 19.8 percent primarily as a result of income generated by the Company's subsidiaries. Shareholders equity increased by $5.3 million during 1997 primarily as a result of the Company's capital offering offset by a net loss for the year.
INVESTMENT SECURITIES
The Company maintains a securities portfolio consisting of U.S. Treasury, U.S. Government agencies and corporations, state and political subdivisions, asset-backed and other securities. An independent custodian holds investment securities in safekeeping. The provisions of SFAS No. 115 require, among other things, that certain investments in debt and equity securities be classified under three categories: securities held-to-maturity; trading securities; and securities available-for-sale. Securities classified as held-to-maturity are to be reported at amortized cost; securities classified as trading securities are to be reported at fair value with unrealized gains and losses included in operations; and securities classified as available-for-sale are to be reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of tax. If a security is sold, any gain or loss is recorded as a charge to earnings and the equity adjustment is reversed. At December 31, 1998, the Bank held $46.9 million in securities classified as available for sale. At December 31, 1998, an unrealized gain of $220,000, net of taxes of $159,000, related to these securities, was reflected in shareholders' equity. The Company had no securities classified as held-to-maturity or as trading securities at December 31, 1998 or 1997, respectively. For more information on investment securities, see Notes 1 and 2 to the consolidated financial statements.
The following table reflects the carrying amount (fair value) of the Company's investment securities available-for-sale as of December 31, 1998, 1997, and 1996 respectively.
The following table sets forth the relative maturities and yields of the Company's available-for-sale securities at December 31, 1998 based on amortized cost. Weighted average yields have been computed by dividing annual interest income, adjusted for amortization of premium and accretion of discount, by the amortized value of the related security. Yields on state and political subdivision securities have not been calculated on a fully taxable equivalent basis.
(1) Yields calculated on nontaxable securities have not considered tax equivalent effects.
LOAN PORTFOLIO
The following table shows the composition of the Company's loan portfolio, by type of loan, as of December 31, for the years indicated:
The following table represents the maturity distribution of the loan portfolio as of December 31, 1998.
During 1998, the Bank continued its success in SBA lending, leading the 15 county Fresno SBA district in the dollar volume of loans made for the seventh consecutive year. In addition, the Bank continued to actively participate in the U.S. Department of Agriculture Business and Industry Loan program. Business and Industry loans ("B&I") contain a government guarantee on a portion of the loan similar to that of an SBA loan guarantee. For the B&I fiscal year ended September 30, 1998, the Bank was the leading B&I lender in California in new loans made.
Commercial loans, including SBA and B&I loans, comprised approximately 65.7 percent of the Company's loan portfolio at December 31, 1998, compared to 58.3 percent at December 31, 1997, primarily as a result of the Bank holding newly originated SBA and B&I loans in its portfolio rather than selling these loans on the secondary market. Commercial loans are generally made to small and mid-size businesses and professionals. Commercial loans are diversified as to industries and types of business, with no material industry concentrations. Most of these loans have floating rates based upon underwriting analysis. The primary source of repayment on most commercial loans is cash flow from the primary business. Additional collateral in the form of real estate, cash, accounts receivable, inventory or other financial instruments is often obtained as a secondary source of repayment.
Real estate construction lending comprised 16.7 percent of the Company's loan portfolio at December 31, 1998, compared to 23.2 percent of the Company's loan portfolio at December 31, 1997. These loans are primarily made for the construction of single family residential housing. Loans in this category may be made to the homebuyer or to the developer. Construction loans are secured by deeds of trust on the primary property. The majority of construction loans have floating rates based upon underwriting analysis. A significant portion of the borrowers' ability to repay these loans is dependent upon the sale of the property, which is affected by, among other factors, the residential real estate market. In this regard, the Company's potential risks include a general decline in the value of the underlying property, as well as cost overruns or delays in the sale or completion of a property.
Real estate mortgage loans comprised 11.0 percent of the loan portfolio at December 31, 1998, compared to 11.5 percent at December 31, 1997. Real estate mortgage loans are made up of non-residential properties and single-family residential mortgages. The non-residential loans generally are "mini-perm" (medium-term) commercial real estate mortgages with maturities under seven years. The residential mortgages are secured by first trust deeds and have varying maturities. Both types of loans may have either fixed or floating rates. The majority are floating. Risks
associated with non-residential loans include the decline in value of commercial property values; economic conditions surrounding commercial real estate properties; and vacancy rates. The repayment of single-family residential mortgage loans is generally dependent upon the income of the borrower from other sources; however, declines in the underlying property value may create risk in these loans.
Consumer loans represented the remainder of the loan portfolio at December 31, 1998, comprising 6.6 percent of the loan portfolio compared to 7.0 percent of total loans at December 31, 1997. This category includes traditional Consumer loans, Home Equity Lines of Credit, and Visa Card loans. Consumer loans are generally secured by third trust deeds on single-family residences or personal property, while Visa Cards are unsecured.
RISK ELEMENTS AND CONCENTRATIONS
The Company assesses and manages credit risk on an ongoing basis through stringent credit review and approval policies, extensive internal monitoring and established formal lending policies. Additionally, the Bank contracts with an outside loan review consultant to periodically grade new loans and to review the existing loan portfolio. Management believes its ability to identify and assess risk and return characteristics of the Company's loan portfolio are critical for profitability and growth. Management strives to continue the historically low level of credit losses by continuing its emphasis on credit quality in the loan approval process, active credit administration and regular monitoring. With this in mind, management has designed and implemented a comprehensive loan review and grading system that functions to continually assess the credit risk inherent in the loan portfolio. Additionally, management believes its ability to manage portfolio credit risk is enhanced by the knowledge of the Bank's service area by the lending personnel and Board of Directors.
Generally, loans are secured by various forms of collateral. The loans are expected to be repaid from income of the borrower or with proceeds from the sale of assets securing the loans. The Company's loan policy requires sufficient collateral to meet the Company's relative risk criteria for each borrower. The Company's collateral mainly consists of real estate, cash, accounts receivable, inventory and other financial instruments. The Company either maintains possession of the collateral in safekeeping or perfects a security interest with the State of California. The Company's largest concentration of loans based on collateral is in real estate mortgages, including commercial real estate, and real estate construction lending. A significant portion of its customers' ability to repay these loans is dependent upon the economic sectors of residential real estate development and construction. If a significant decline in real estate property values were to occur in Fresno County, loans associated with these collateral types could become impaired as to their full collectability should default occur.
The Company does not believe there to be any concentration of loans in excess of 10 percent of total loans, other than those disclosed above, which would be significantly impacted by economic or other conditions. For further discussion of the impact of California economic conditions upon the loan portfolio, see "Allowance for Credit Losses" below.
NONPERFORMING LOANS
The Company's current policy is to cease accruing interest when a loan becomes 90-days past due as to principal or interest; when the full, timely collection of interest or principal becomes uncertain; or when a portion of the principal balance has been charged off, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual status, the accrued and uncollected interest receivable is reversed and the loan is accounted for on the cash or cost recovery method thereafter, until qualifying for return to accrual status. Generally, a loan may be returned to accrual status when all delinquent interest and principal become current in accordance with the terms of the loan agreement or when the loan is both well secured and in process of collection.
At December 31, 1998, nonaccrual loans totaled $1.2 million or .79 percent of total loans, compared to $1.7 million or 1.34 percent at December 31, 1997, and $3.3 million or 3.23 percent at December 31, 1996. The decrease in total nonaccrual loans was primarily the result of the Company's divestiture of RSC's real estate development assets including loans made by RSC to facilitate the divestiture of partnership properties. As of December 31, 1998, RSC had no loans outstanding. Of the total nonaccrual loans at December 31, 1997, $1.1 million represented loans RSC had made to facilitate the sale of former partnerships.
Of the nonaccrual loans at December 31, 1998, $831,000 represented the portion of SBA loans that are guaranteed by the SBA. Beginning in 1997, the SBA changed the requirements for banks originating SBA loans, which are subsequently sold in the secondary market. Under the current requirement, if a borrower defaults on a SBA guaranteed loan, the originating bank is required to buy the guaranteed portion back and hold it in its portfolio until collection efforts are exhausted. While this guaranteed portion is backed by the full faith and credit of the U.S. government and poses little risk of loss to the Bank, the Bank does incur loss of the use of the funds while awaiting payoff from the SBA or other loan collateral. Expense from the loss of use of the funds is expected to be minimal; however, due to this requirement it is expected that the Bank's SBA non-accrual loan levels will be slightly higher than in prior years.
The gross interest income that would have been recorded for loans placed on nonaccrual status was $103,000, $254,000 and $276,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The following table reflects the dollar value of various nonperforming assets, allowance for credit losses, assets and loans, as well as various nonperforming asset ratios as of December 31, 1998, 1997, 1996, 1995 and 1994, respectively.
Management is not aware of any potential problem loans which were accruing and current at December 31, 1998, where serious doubt exists as to the ability of the borrower to comply with present repayment terms.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses reflects management's judgment as to the level which is considered adequate to absorb potential losses inherent in the loan portfolio. This allowance is increased by provisions charged to expense and reduced by loan charge-offs net of recoveries. Management determines an appropriate provision based on information currently available to analyze credit loss potential, including: (1) the loan portfolio growth in the period; (2) a comprehensive grading and review of new and existing loans outstanding; (3) actual previous charge-offs; and (4) changes in economic conditions.
For the year ended December 31, 1998, the Company had net recoveries of $37,000 or (.03) percent of average loans. The net recoveries in 1998 were the result of net charge-offs of $105,000 on the Bank's loan portfolio, offset by recoveries of $142,000 on RSC's loan portfolio. During 1997, net charge-offs totaled $749,000 with $148,000 in net charge-offs attributable to the Bank and $601,000 attributable to RSC's real estate development divestiture activities. Net charge-offs during 1996 were $169,000.
The following table reflects loan charge-off and recovery activity for the Bank and RSC respectively, as well as on a consolidated basis, for the years indicated:
The Company's allowance for credit losses totaled $2.6 million or 1.74 percent of total loans at December 31, 1998, compared to $2.2 million or 1.71 percent of total loans at December 31, 1997, and $1.6 million or 1.58 percent at December 31, 1996. It is the policy of management to maintain the allowance for credit losses at a level deemed adequate for known and currently anticipated future risks inherent in the loan portfolio. Based on information currently available to analyze credit loss potential, including economic factors, overall credit quality, historical delinquency and a history of actual charge-offs, management believes that the credit loss provision and allowance is adequate. However, no prediction of the ultimate level of loans charged-off in future years can be made with any certainty.
Although management is of the opinion that the allowance for credit losses is maintained at an adequate level for known and currently anticipated future risks inherent in the loan portfolio, the Fresno economy and its real estate market remain important factors when assessing risk. The Bank's loan portfolio could be adversely affected if economic conditions and the real estate market in the Bank's market area deteriorate. The effect of such events, although uncertain at this time, could result in an increase in the level of nonperforming loans and OREO and the level of the allowance for credit losses, which could adversely affect the Company's and the Bank's future growth and profitability.
Following is a table presenting the activity within the Company's allowance for credit losses for the period between December 31, 1994 and December 31, 1998.
The following table represents the allocation of the allowance for loan losses for the period between December 31, 1994 and December 31, 1998.
DEPOSITS AND SHORT TERM BORROWINGS
Deposits represent the Bank's primary source of funds for investment. Deposits are primarily core deposits in that they are demand, savings, and time deposits generated from local businesses and individuals. These sources are considered to be relatively more stable, long-term deposit relationships thereby enhancing steady growth of the deposit base without major fluctuations in overall deposit balances. The Bank normally experiences a seasonal decline in deposits in the first quarter of each year. In order to assist in meeting its funding needs, the Bank maintains a Fed Funds line with a correspondent bank in the amount of $5.0 million. During 1998, the Bank applied for, and was accepted as a member of the Federal Home Loan Bank of San Francisco (the " FHLB"). At December 31, 1998, the Bank held stock in the FHLB which would allow the Bank to borrow up to $11.5 million using various loans or securities as collateral. In addition to these borrowing methods, the Bank from time to time uses its investment portfolio to raise funds through repurchase agreements. The Bank may, from time to time, obtain additional deposits through the use of brokered time deposits. As of December 31, 1998, the Bank held no institutional brokered time deposits. For more information on deposits and other short term borrowings, see Notes 6 and 7 to the consolidated financial statements.
The following table presents the composition of the deposit mix at December 31, 1994, through December 31, 1998, respectively.
The following table represents maturities of time deposits of $100,000 or more at December 31, 1998.
CAPITAL RESOURCES
The Company and Bank are subject to various minimum capital requirements as defined by regulation. For further discussion of the requirements see "Item 1 - Supervision and Regulation", of this report. The current and projected capital position of the Company and the impact of capital plans and long-term strategies are reviewed regularly by Management. The Company's capital position represents the level of capital available to support continued operations and expansion. The Company's primary capital resource is shareholders' equity, which increased $3.7 million or 19.8 percent from the previous year-end and increased $9.0 million or 66.7 percent from December 31, 1996. The ratio of total risk-based capital to risk-adjusted assets was 16.14 percent at December 31, 1998, compared to 13.87 percent at December 31, 1997. Tier 1 risk-based capital to risk-adjusted assets was 14.89 percent at December 31, 1998, compared to 12.62 percent at December 31, 1997.
The Board of Governors of the Federal Reserve System and other federal banking agencies have adopted risk-based capital guidelines for evaluating the capital adequacy of bank holding companies and banks. The guidelines are designed to make capital requirements sensitive to differences in risk profiles among banking organizations, to take into account off-balance sheet exposures and to aid in making the definition of bank capital uniform internationally. Under the guidelines, the Company and the Bank are required to maintain capital equal to at least 8.0 percent of its assets and commitments to extend credit, weighted by risk, of which at least 4.0 percent, must consist primarily of common equity (including retained earnings) and the remainder may consist of subordinated debt, cumulative preferred stock, or a limited amount of loan loss reserves. Assets, commitments to extend credit and off-balance sheet items are categorized according to risk and certain assets considered to present less risk than other permit maintenance of capital at less than the 8 percent ratio.
The guidelines establish two categories of qualifying capital: Tier 1 capital comprising core capital elements and Tier 2 comprising supplementary capital requirements. At least one-half of the required capital must be maintained in the form of Tier 1 capital. Tier 1 capital includes common shareholder's equity and qualifying perpetual preferred stock less intangible assets and certain other adjustments. However, no more than 25 percent of the Company's total Tier 1 capital may consist of perpetual preferred stock. The definition of Tier 1 capital for the Bank is the same, except that perpetual preferred stock may be included only if it is noncumulative. Tier 2 capital includes, among other items, limited life (and in the case of banks, cumulative) preferred stock, mandatory convertible securities, subordinated debt and a limited amount of reserves for credit losses. Effective October 1, 1998 the Board of Governors and other federal bank regulatory agencies approved including Tier 2 capital up to 45 percent of the pretax net unrealized gains on certain available-for-sale equity securities having readily determinable fair values (i.e. the excess, if any, of fair market value over the book value or historical cost of the investment security). The federal regulatory agencies reserve the right to exclude all or a portion of the unrealized gains upon a determination that the equity securities are not prudently valued. Unrealized gains and losses on other types of assets, such as bank premises and available-for-sale debt securities, are not included in Tier 2 capital, but may be taken into account in the evaluation of overall capital adequacy and net unrealized losses on available-for-sale equity securities will continue to be deducted from Tier 1 capital as a cushion against risk.
The Board of Governors and other federal banking agencies have adopted a revised minimum leverage ratio for bank holding companies as a supplement to the risk-weighted capital
guidelines. The old rule established a 3 percent minimum leverage standard for well-run banking organizations (bank holding companies and banks) with diversified risk profiles. Banking organizations which did not exhibit such characteristics or had greater risk due to significant growth, among other factors, were required to maintain a minimum leverage ratio 1 percent to 2 percent higher. The old rule did not take into account the implementation of the market risk capital measure set forth in the federal regulatory agency capital adequacy guidelines. The revised leverage ratio establishes a minimum Tier 1 ratio of 3 percent (Tier 1 capital to total assets) for the highest rated bank holding companies or those that have implemented the risk-based capital market risk measure. All other bank holding companies must maintain a minimum Tier 1 leverage ratio of 4 percent higher leverage capital ratios required for bank holding companies that have significant financial and/or operational weaknesses, a high risk profile, or are undergoing or anticipating rapid growth. The old rule remains in effect for banks, however, the federal regulatory agencies are currently continuing work on a revised leverage rule for banks.
On December 19, 1991, President Bush signed the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). The Board of Governors and other federal banking agencies adopted regulations effective December 19, 1992, implementing a system of prompt corrective action pursuant to Section 38 of the Federal Deposit Insurance Act and Section 131 of the FDICIA. The regulations establish five capital categories with the following characteristics: (1) "Well capitalized" - consisting of institutions with a total risk-based capital ratio of 10 percent or greater, a Tier 1 risk-based capital ratio of 6 percent or greater and a leverage ratio of 5 percent or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive; (2) "Adequately capitalized" - consisting of institutions with a total risk-based capital ratio of 8 percent or greater, a Tier 1 risk-based capital ratio of 4 percent or greater and a leverage ratio of 4 percent or greater, and the institution does not meet the definition of a "well capitalized" institution; (3) "Undercapitalized" - consisting of institutions with a total risk-based capital ratio less than 8 percent, a Tier 1 risk-based capital ratio of less than 4 percent, or a leverage ratio of less than 4 percent; (4) "Significantly undercapitalized" - consisting of institutions with a total risk-based capital ratio of less than 6 percent, a Tier 1 risk-based capital ratio of less than 3 percent, or a leverage ratio of less than 3 percent; (5) "Critically undercapitalized" - consisting of an institution with a ratio of tangible equity to total assets that is equal to or less than 2 percent.
Financial institutions classified as undercapitalized or below are subject to various limitations including, among other matters, certain supervisory actions by bank regulatory authorities and restrictions related to (a) growth of assets, (b) payment of interest on subordinated indebtedness, (c) payment of dividends or other capital distributions, and (d) payment of management fees to a parent holding company. The FDICIA requires the bank regulatory authorities to initiate corrective action regarding financial institutions which fail to meet minimum capital requirements. Such action may be taken in order to, among other matters, augment capital and reduce total assets. Critically undercapitalized financial institutions may also be subject to appointment of a receiver or conservator unless the financial institution submits an adequate capitalization plan.
The following tables reflect the Company's and Bank's capital amounts (in thousands) and ratios for the periods presented and applicable regulatory capital requirements for such periods:
The risk-based capital ratios increased in 1998 as the increase in equity outpaced the growth in total assets. Capital ratios are reviewed on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet the Company's future needs. All ratios are in excess of the regulatory definition of "well capitalized."
INFLATION
The impact of inflation on a financial institution differs significantly from that exerted on manufacturing or other commercial concerns, primarily because its assets and liabilities are largely monetary. In general, inflation primarily affects the Company indirectly through its effect on the ability of its customers to repay loans, or its impact on market rates of interest, and thus the ability of the Bank to attract loan customers. Inflation affects the growth of total assets by increasing the level of loan demand, and potentially adversely affects the Company's capital adequacy because loan growth in inflationary periods may increase more rapidly than capital. Interest rates in
particular are significantly affected by inflation, but neither the timing nor the magnitude of the changes coincides with changes in the Consumer Price Index, which is one of the indicators used to measure the rate of inflation. Adjustments in interest rates may be delayed because of the possible imposition of regulatory constraints. In addition to its effects on interest rates, inflation directly affects the Company by increasing the Company's operating expenses. The effect of inflation during the three-year period ended December 31, 1998 has not been significant to the Company's financial position or results of operations.
OTHER MATTERS
As discussed in the Company's annual report on Form 10-K for the year ended December 31, 1997, during the fourth quarter of 1997, the Bank's Board of Directors consented to administrative orders issued by the FDIC and CDFI. As reported in the Company's quarterly report on Form 10-Q for the period ended September 30, 1998, during the third quarter of 1998, the Bank received written notice from the FDIC and CDFI that both orders had been "terminated" and removed in their entirety.
YEAR 2000 READINESS DISCLOSURE
The inability of most computers, software and other equipment utilizing microprocessors to distinguish the year 1900 from the year 2000 poses substantial risks to all financial institutions including the Company. The year 2000 problem is pervasive and complex. Virtually every financial institution service provider and vendor will have their computing operations affected in some way by the rollover of the two-digit year value to 00 if action is not taken to fix the problem before the year 2000 arrives.
In 1997, the Company initiated a five-phase plan ("Plan") which includes awareness, assessment, renovation, validation, and implementation. The Company's Year 2000 Plan addresses the issues associated with the proper functioning of the Company's computer hardware and software systems before, at, and after the turn of the century and other date-related systems issues. The scope of the project covers all computer systems including PC and network hardware and software, and mainframe and mainframe software. It also covers all equipment and other systems utilized in the bank operations or in the premises from which the Company operates. The Company is using the Year 2000 milestones established to date by the Federal Financial Institutions Examination Council (FFIEC) to benchmark and gauge its progress.
Awareness and Assessment Phases - The Company completed the Awareness and Assessment Phases, as defined by the FFIEC, for its mission critical systems and facilities in 1997 and continues to update its assessment as needed. Non-mission critical systems have also been identified and assessed as to Y2K readiness and plans and timelines for renovation of both mission critical and non-mission critical systems have been prepared. Management of the Company reports regularly to the Board of Directors on its Year 2000 efforts.
Renovation Phase - The FFIEC guideline date for institutions to substantially complete program changes and system upgrades for mission critical systems was December 31, 1998. By that date, the Company had completed repairs, upgrades, or replacements of all hardware and software components with the exception of one software program supplied by a third party to RIA, the company's investment advisory subsidiary. The Company expects this one remaining system to be Year 2000 ready in June of 1999 upon receipt and installation of its scheduled
software release. In addition to mission critical systems and applications, the Company has completed redemption of all non-mission critical systems as of December 31, 1998.
Validation and Implementation Phases - To reduce the possibility of unexpected failure of the Company's systems during and after the century date change, which could have an impact on the Company and its customers, the Company continues to test its systems in accordance with a testing strategy and plan developed in 1998.
The FFIEC guideline date for institutions to begin testing their mission critical applications and systems was September 1, 1998. During March 1998, the Company began testing various mission critical and non-mission critical systems. By December 31, 1998, the Company had substantially completed this testing, including both remediated systems and systems presumed to be Year 2000 compliant. As a key part of the validation phase, the computer software that operates the Bank's main customer and accounting system, the "Fiserv CBS System," was thoroughly tested by Fiserv. Fiserv is one of the largest providers of bank computer software nationwide. In addition to Fiserv's efforts, the Bank has conducted additional testing of all components of the software through January 3, 2001, and has detected no Year 2000 problems. All of the systems referred to above have been implemented (i.e., placed into a production environment). All mission critical systems will continue to be monitored and tested throughout 1999 as releases of enhanced software become available.
Business Partner Relationships - As part of the Company's Plan, all third party suppliers and service providers have been contacted and assessed as to their Year 2000 preparedness. If their reliability cannot be reasonably assured, alternative vendors, suppliers and other contingency plans have been, or are, being prepared. In addition, the Bank has communicated with its large borrowers and major vendors upon which it relies to determine the extent to which the Company might be vulnerable if those third parties fail to resolve their Year 2000 issues. Borrowers or large deposit customers are being categorized based upon risk and are monitored on a regular basis. If a borrowing customer is determined to have significant Year 2000 exposure that may impair the quality or collectability of its loan, reserves for potential losses resulting from such Year 2000 exposures are established accordingly.
Because the Company recognizes that its business and operations could be adversely affected if key business partners fail to achieve timely Year 2000 compliance, the Company is evaluating strategies to manage and mitigate the risk to the Company of their Year 2000 failures. However, although the Company is establishing reasonable safeguards, there can be no assurance that all key business partners will adequately address their Year 2000 issues. Therefore, failures of third parties to adequately address their Year 2000 issues could adversely affect the business and operations of the Company.
Contingency Plans - FFIEC guidelines indicate that contingency plans covering mission critical systems in the event of Year 2000 problems are a prudent business practice. The Company has developed high level contingency plans for applications and systems used by the Bank and RIA that are deemed mission critical as well as plans to cover many non-mission critical applications and systems.
The contingency, or business resumption plan, is based on a review of various emergency scenarios ranging from the Year 2000 failure of a single software or hardware component to the total loss of systems and applications should large-scale power or communications failures occur.
The Company expects to have these plans substantially complete by June 30, 1999. Because business resumption planning is a dynamic process, the Company expects to further refine and test these plans throughout 1999. As part of the contingency planning process, the Company intends to take reasonable steps to mitigate foreseeable and significant risks that can be identified should key business partners fail to be Year 2000 compliant. The Bank's contingency planning includes risk management options to insure adequate liquidity availability for the Bank and its customers should the need arise.
Costs to Address Year 2000 Issues - The majority of costs associated with the Company's Year 2000 preparedness efforts have been associated with the use of existing staff to prepare, test and confirm the components of the plan. In some cases, third parties have been used to assist with planning and testing and certain new software and hardware products have been procured. The majority of these costs would have been incurred in the normal course of business as the company regularly upgrades its various systems in an effort to more efficiently and effectively serve its clientele and conduct its operations. The Company incurred costs of approximately $75,000 in 1998 related to the use of third party consultants and other extraordinary Year 2000 expenses and expects to expend a similar amount in 1999. The costs incurred in 1998 did not have a material effect on the Company's net income for 1998, and the Company does not expect the costs that will be incurred in 1999 to have a material impact on the Company's net income for 1999.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK
The financial services industry in general and the banking industry specifically encompass various forms and degrees of risk. As the primary source of business, the intermediation of funds presents various degrees and types of risk, which can be managed and controlled, however, can never be completely eliminated. Management of the Company and its' Board of Directors have established a framework of policies and procedures to manage risk by identifying, measuring, monitoring, and controlling the risks involved in the various products and lines of business of the Company.
Market risks comprise several of the risk factors encompassed in the Company's risk management policy/program. Market risk is described as the risk to a financial institution's condition resulting from adverse movements in market rates or prices, such as interest rates, foreign exchange rates, or equity prices. Further description of these components include:
Interest rate risk is the risk to earnings or capital arising from movements in interest rates. The economic perspective focuses on a bank's value given the current interest rate environment and sensitivity of that value to changes in interest rates. Interest rate risk arises from the following: repricing risk differences between the timing of rate changes and the timing of cash flows; basis risk - changing rate relationships among different yield curves affecting bank activities; yield curve risk - changing rate relationships across the spectrum of maturities; options risk - interest-related options embedded in bank products. The Company manages interest rate risk through a comprehensive asset/liability policy.
Price risk is the risk to earnings or capital arising from changes in the value of portfolios of financial instruments. This risk arises from market-making, dealing, and position-taking activities for interest rate, foreign exchange, equity, and commodity markets. Price risk focuses on the changes in market factors (e.g., interest rates, market liquidity, volatilities, etc.) that affect traded instruments. The primary accounts affected by price risk are the ones revalued for financial presentation. The Company does not engage in trading activities and as a result does not have exposure to price risk due to market-making, dealing, and position-taking activities for interest rate, foreign exchange, equity, and commodity markets. Some price risk is inherent in the Company's balance sheet based upon changes in interest rates, market liquidity and volatilities. These risks are managed under the Company's investment policy, and secondarily, by the asset/liability and liquidity policies.
Foreign exchange risk a.k.a. transfer risk is the risk to earnings or capital arising from movement of foreign exchange rates. It arises from accrual accounts denominated in foreign currency, including loans, deposits, and equity investments (i.e., cross-border investing). Under GAAP foreign-denominated accounts are periodically revalued into U.S. dollar terms. This periodic revaluation may reveal changes in the value of the investment related to the relative value of the local currency versus the U.S. dollar. The Company does not engage in foreign exchange trading or cross-border investing and has no foreign exchange exposure as of December 31, 1998.
Liquidity risk is the risk to earnings or capital resulting from the bank's inability to meet its obligations when they come due, without incurring unacceptable losses, and includes the inability to manage unplanned decreases or changes in funding sources. Liquidity risk also arises from a failure to recognize or address changes in market conditions that affect the bank's ability to liquidate assets quickly and with minimal loss in value. The Company manages liquidity risk through the Bank's asset/liability and liquidity policies.
ASSET AND LIABILITY MANAGEMENT
The Company's asset/liability management policy is designed to ensure that the Bank is managed to provide adequate liquidity, maintain adequate capital, and, provide a satisfactory and consistent level of profits, within suitable interest rate risk constraints. Generally, asset-liability ("A/L") management is a comprehensive integrated process for overall financial management. The major purpose of A/L management is to ensure that the Bank's primary financial objectives; profitability, capital adequacy, risk tolerance, and liquidity are achieved.
Through A/L management, the Bank develops a methodology, which can be used to optimize the critical risk/return tradeoff that the institution faces in pricing, maturity selection, funds allocation, and other decisions every day. Doing so will result in earnings which are adequate and consistent, thereby enabling the achievement of profitability and risk objectives.
The primary capital objective is capital preservation, which is achieved by controlling interest rate and credit-related risk exposure, and by the retention of ongoing earnings. The Bank will also strive to ensure that each dollar of capital is optimally leveraged. The Bank's A/L management program consists of four major disciplines; interest rate risk management, net interest margin/spread management, capital management, and liquidity management
The formal integration of these inter-related areas into an effective A/L management program that includes a process of planning, organizing, and controlling all of the Bank's financial resources will enable the Bank to achieve a planned net interest margin over time within acceptable risk levels.
INTEREST RATE RISK
As a financial institution, the Company's most significant market risk factor is interest rate risk. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Bank's assets and liabilities, and the market value of all interest earning assets, other than those which possess a short term to maturity. Since all of the Company's interest bearing liabilities and virtually all of the Company's interest earning assets are located at the Bank, virtually all of the Company's interest rate risk exposure lies at the Bank level. As a result, all significant interest rate risk management procedures are performed at the Bank level.
One approach to quantify interest rate risk is to use a simulation model to project changes in net interest income that result from forecast changes in interest rates. The primary analytical tool used by the Company to gauge interest rate sensitivity is a simulation model used by many banks and bank regulators. This industry standard model is used to simulate, based on the current and projected portfolio mix, the effects on net interest income of changes in market interest rates. This analysis calculates the difference between a net interest income forecast over a 12-month period using a flat interest rate scenario and a net interest income forecast using a rising (or falling) rate scenario, where the National Prime rate, serving as a "driver" is made to rise (or fall) by 200 basis points over the 12-month forecast interval triggering a response in the other rates. According to the Company's policy, the simulated changes in net interest income should always be less the 12.5 percent or steps must be taken to reduce interest rate risk. Various strategies the Bank will use to adjust its exposure to interest rate risk include: lengthen/shorten asset maturities; lengthen/shorten liability maturities; new product introductions; secondary marketing/sell newly originated assets; and growth/contraction (overall). As can be seen from the results of the following interest rate sensitivity analysis matrix, the simulated change in net interest income, based on the 12-month period ending December 31, 1999, fall well within the 12.5 percent risk limit. (In thousands)
The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk, even though such activities may be permitted with the approval of the Company's Board of Directors.
INTEREST RATE SENSITIVITY AND GAP ANALYSIS
It is management's objective to maintain stability in the net interest margin in times of fluctuating interest rates by maintaining an appropriate mix of interest sensitive assets and liabilities. Generally, if assets and liabilities do not reprice simultaneously and in equal volumes, the potential for interest rate risk exposure exists. To achieve this goal, the Bank prices the majority of its interest bearing liabilities at variable rates. At the same time, the majority of its interest-earning assets are also priced at variable rates. This pricing structure tends to stabilize the net interest margin percentage achieved by the Bank.
The following table sets forth the interest rate sensitivity and repricing schedule of the Company's interest-earning assets and interest-bearing liabilities, the interest rate sensitivity gap, the cumulative interest rate sensitivity gap, and the cumulative interest rate sensitivity gap ratio.
(1) Amounts exclude nonaccrual loans of $1,197,000.
The table indicates the time periods in which interest-earning assets and interest-bearing liabilities will mature or reprice in accordance with their contractual terms. The table does not necessarily indicate the impact of general interest rate movements on the net interest margin since the repricing of various categories of assets and liabilities is subject to competitive pressures. Additionally, this table does not take into consideration changing balances in forward periods as a result of normal amortization, principal paydowns, changes in deposit mix or other such movements of funds as a result of changing interest rate environments.
LIQUIDITY
Liquidity management refers to the Bank's ability to provide funds on an ongoing basis to meet fluctuations in deposit levels as well as the credit needs and requirements of its clients. Both assets and liabilities contribute to the Bank's liquidity position. Federal Funds lines, short-term investments and securities, and loan repayments contribute to liquidity, along with deposit increases, while loan funding and deposit withdrawals decrease liquidity. The Bank assesses the likelihood of projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual client funding needs. The Bank maintains lines of credit and other wholesale funding sources as described above. Additionally, the Bank maintains a portfolio of SBA loans either available-for-sale or in its portfolio that could be sold should additional liquidity be required.
The Company generated significant liquidity from its operating activities. In addition to net income in 1998 of $3.7 million, other operating activities provided $4.9 million in additional cash flows for a total of $8.6 million in net cash provided by operating activities. Financing activities, primarily the acceptance of customer deposits, provided additional cash flows. Total cash flows provided by financing activities were $30.4 million as a result of the increase in deposits for 1998. The Company uses cash flows to make investments in loans and investment securities. The increase in loans was $22.1 million in 1998 while investment securities increased by $11.2 million. The Company anticipates increasing its cash levels through the end of 1999 mainly due to increased profitability and retained earnings. For the same period, it is anticipated that the demand for loans will continue to moderately increase. The growth in deposit balances is expected to be sufficient to fund loan growth with excess funds available for investment in securities.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1997, AND FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED DECEMBER 31, 1998 AND INDEPENDENT AUDITORS' REPORT
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Regency Bancorp:
We have audited the accompanying consolidated balance sheet of Regency Bancorp and subsidiaries as of December 31, 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of Regency Bancorp and subsidiaries as of December 31, 1997 and for the years ended December 31, 1997 and 1997, were audited by other auditors whose report dated February 20, 1998, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Regency Bancorp and subsidiaries as of December 31, 1998, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.
/s/ KPMG LLP
February 5, 1999
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders Regency Bancorp Fresno, California
We have audited the accompanying consolidated balance sheet of Regency Bancorp and subsidiaries, as of December 31, 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Regency Bancorp and subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche - ------------------------------ Fresno, California February 4, 1998
REGENCY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
REGENCY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 - ------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include the accounts of Regency Bancorp and its wholly-owned subsidiaries, hereinafter referred to as the ("Company"). Regency Bancorp is a California corporation organized to act as the holding company for Regency Bank ("Bank"), with headquarters and branches in Fresno, a branch in Madera and a loan production office in Modesto, and Regency Investment Advisors Inc. ("RIA") a Securities Exchange Commision ("SEC") registered investment advisor. The Bank has one wholly-owned subsidiary, Regency Service Corporation, a California corporation ("RSC"), that engages in the business of real estate development primarily in the Fresno/Clovis area. Other than its investment in the Bank and RIA, the Company currently conducts no other significant business activities, although it is authorized to engage in a variety of activities which are deemed closely related to the business of banking upon prior approval of the Board of Governors of the Federal Reserve System ("Board of Governors"), the Company's principal regulator. All significant intercompany balances and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS - The Company operates three bank branches through its bank subsidiary in Fresno, California and one branch in Madera, California. The Bank is a California banking corporation which has served individuals, merchants, small and medium-sized businesses and professionals located in and adjacent to Fresno, California, since 1980. The Bank offers a full range of commercial banking services including the acceptance of demand, savings and time deposits, and the making of commercial, real estate (including real estate construction and residential mortgage), Small Business Administration ("SBA"), personal, home improvement, automobile and other installment and term loans. It also offers Visa credit cards, traveler's checks, safe deposit boxes, notary public, customer courier and other customary bank services. The Bank's primary source of revenue is interest generated by providing loans to customers. Additionally, the Bank generates revenue from the sale and servicing of loans made under government guaranteed programs.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
SIGNIFICANT ACCOUNTING POLICIES - The accounting and reporting policies of the Company conform to generally accepted accounting principles and to prevailing practices within the banking industry. The following is a summary of significant policies:
a. CASH AND CASH EQUIVALENTS - The Company considers cash and cash equivalents to include cash, federal funds sold, and other short-term investments consisting of deposits in other banks. Generally, federal funds are sold for one-day periods.
b. INVESTMENT SECURITIES - The Company's investment policy, as established by its investment committee, governs the type and quality of securities in which management may invest with the objective of achieving an optimum balance between credit quality, liquidity and income.
The Company has classified its investment securities as available-for-sale. These securities are recorded at their fair value. Unrealized gains or losses are included in shareholders' equity, net of tax. Gain or loss on the sale of available-for-sale securities is based on the specific identification method.
c. NON MARKETABLE EQUITY SECURITIES - The Bank became a member of both the Federal Reserve Bank and Federal Home Loan Bank System in 1998 and as such was required to own capital stock of these entities in amounts specified by regulations. At December 31, 1998, the Bank owned 5,749 and 5,912 shares of $100 par value capital stock of the Federal Reserve Bank and Federal Home Loan Bank of San Francisco, respectively.
d. LOANS - Loans are stated at the outstanding unpaid principal balance reduced by any partial charge-offs, valuation allowances and nonrefundable fees and related direct costs associated with the origination or purchase of loans. Interest on loans is accrued daily based on outstanding loan balances. The recognition of interest income on a loan is discontinued, and previously accrued interest is reversed, when the payment of interest or principal is ninety days past due, unless the outstanding loan is adequately secured and is in the process of collection. The loan is accounted for thereafter on the cash or cost recovery method until qualifying for return to accrual status.
Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or as a practical expedient at the loan's observable market rate or the fair value of the collateral if the loan is collateral dependent. Impaired loans are accounted for as loans until foreclosure.
Net deferred fees and costs are generally amortized into interest income over the loan term using a method which approximates the interest method. Other credit-related fees, such as standby letter of credit fees, loan placement fees and annual credit card fees are recognized as noninterest income over the commitment period or over the period the related service is performed.
The Company originates loans to customers under a SBA program that generally provides for guarantees of 75 percent to 90 percent of each loan. Loans held for sale are carried at the lower of cost or estimated market value in the aggregate. Historically, the Company has sold the guaranteed portion of each loan to a third-party and has retained the unguaranteed portion in its own portfolio. The Company allocates basis of the loans sold and the retained portions based upon their relative fair market value. The Company may be required to refund a portion of the sales premium received, if the borrower defaults or the loan prepays within 90 days of the settlement date. At December 31, 1998 and 1997, the Company had received premiums of $12,000 and $104,000, respectively, subject to such recourse.
The Company retains a servicing spread on the sale of SBA guaranteed loans that creates loan servicing income. Under Statement of Financial Accounting Standards ("SFAS") No. 125, which was implemented by the Company as of January 1, 1997, the servicing spread is recognized as a servicing asset to the extent the contractual servicing fee in the loan sale agreement exceeds adequate compensation for the servicing. Servicing spread in excess of the contractual fee, formerly known as excess servicing is recognized as an interest only ("IO") strip. The Company
measures the servicing assets and interest only strip by discounting the respective cash flow for the estimated expected life of the loan. The Company uses prepayment statistics and its own prepayment experience in estimating the expected life of the loans. Both the servicing asset and the interest only strip represent the discounted present values of cash flows that are recorded as loan servicing income. These assets are amortized as an offset to loan servicing income over the estimated expected life of the loans, as well as the capitalized excess servicing in prior years.
SFAS No. 125 requires periodic measurements of the fair value for servicing assets and interest only strips as well as loan prepayment experience. The statement further requires that these assets be stratified by one or more predominant risk characteristics of the underlying loans. The Company stratifies the servicing portfolio by date of origination. Fair value is measured by discounting the respective cash flows for the servicing assets and interest only strips over this remaining period.
At December 31, 1998 and 1997, there was no material difference between the Company's amortized carrying value for servicing assets and their fair value.
The Company measures the fair value of its IO strips following the same stratification and discounted cash flow methods used for servicing assets. The IO strip is treated as a financial asset in substance, similar to an available-for-sale security under SFAS No. 115. Differences between the fair value of the strip and its amortized carrying value are recorded as unrealized gains or losses, and recorded net of the related tax effect as a separate component of shareholders' equity. At December 31, 1998 and 1997, there was no material difference between the carrying value and the fair value of the IO strip.
e. ALLOWANCE FOR CREDIT LOSSES - The allowance for credit losses represents management's recognition of the risks assumed when extending credit and its evaluation of the quality of the loan portfolio. The allowance is maintained at a level considered to be adequate for potential credit losses based on management's assessment of various factors affecting the loan portfolio, which include a review of problem loans, business conditions and an overall evaluation of the quality of the portfolio. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for credit losses. Such agencies may require the Company to recognize additions to the allowance based on their judgement of information available to them at the time of their examination. The allowance is increased by provisions for credit losses charged to operations and reduced by charges to the allowance net of recoveries. Management considers the allowance for credit losses adequate to cover any losses that may be inherent in the loan portfolio.
In evaluating the probability of collection, management is required to make estimates and assumptions that affect the reported amounts of loans, allowance for credit losses and the provision for credit losses charged to operations. Actual results could differ significantly from those estimates.
f. PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows:
g. LONG LIVED ASSETS - The Company periodically evaluates the carrying value of long-lived assets to be held and used, including goodwill and other intangible assets. Based on such an evaluation, the Company determined that there is no impairment loss to be recognized in 1998 or 1997.
h. OTHER REAL ESTATE OWNED - Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less costs to sell. Revenue and expenses from operations and changes in the valuation allowance are included in noninterest expenses.
i. INVESTMENTS IN REAL ESTATE - Investments in real estate represent RSC's equity interests in real estate development partnerships and certain other real estate holdings held for sale or development. All investments in real estate are valued at net realizable value.
j. INCOME TAXES - The Company files a consolidated federal income tax return and a combined California tax return. Deferred income taxes are provided for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities in accordance with SFAS No. 109.
k. NET INCOME (LOSS) PER SHARE - Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average common shares outstanding during the period plus potential common shares outstanding. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. For the year ended December 31, 1997, diluted loss per common share is equal to basic loss per common share because the effect of potential common stock under the stock option plan was antidilutive.
l. STOCK-BASED COMPENSATION - The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board opinion No. 25, "Accounting for Stock Issued to Employees".
m. NEW ACCOUNTING PRONOUNCEMENTS - Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income" was issued in June 1997 and is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components, which included net income and changes in equity during the period except those resulting from investments by, or distributed to stockholders. As of January 1, 1998, the Company adopted the provisions of SFAS No. 130, which have been applied retroactively to all periods presented in these financial statements.
n. RECLASSIFICATIONS - Certain reclassifications have been made to prior year balances to conform to current year classifications.
2. INVESTMENT SECURITIES
Investment securities are comprised of the following (In thousands):
There were no investment securities classified as held-to-maturity or trading at December 31, 1998 or December 31, 1997.
Gross realized gains and losses on sales of available-for-sale securities for the years ended December 31, 1998, 1997 and 1996 are as follows (In thousands):
Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The amortized cost and fair value of debt securities available for sale at December 31, 1998, by contractual maturity, are shown below. (In thousands):
At December 31, 1998 and 1997, investment securities with cost basis of approximately $2,003,000 and $4,007,000 (market value of $2,015,000 and $4,011,000, respectively), were pledged as collateral to secure public funds and for other purposes as required by law or contract.
3. LOANS
Loans are comprised of the following (In thousands, except percentages):
Loans serviced for other institutions, principally SBA and Business & Industry loans totaled approximately $34,700,000 and $44,500,000 at December 31, 1998 and 1997, respectively.
The Company's business activity is with customers primarily located within Fresno and Madera counties. The Company grants real estate, commercial and installment loans to these customers. The Company's commercial portfolio is highly diversified among industry groups within the Company's service area. The Company's largest concentration of loans is in real estate mortgages and real estate construction lending. A significant portion of its customers' ability to repay these loans is dependent upon the economic sectors of residential real estate development and construction. Generally, loans are secured by various forms of collateral. The loans are expected to be repaid from income of the borrower or with proceeds from the sale of assets securing the loans. The Company's loan policy requires sufficient collateral to meet the Company's relative risk criteria for each borrower. The Company's collateral mainly consists of real estate, cash, accounts receivable, inventory and other financial instruments. The Company either maintains possession of the collateral in safekeeping or perfects a security interest with the State of California.
At December 31, 1998 and 1997, the following information related to nonperforming assets. (In thousands, except percentages)
The gross interest income that would have been recorded for loans placed on nonaccrual status was $103,000, $254,000 and $276,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company is not aware of any potential problem loans, which were accruing interest at December 31, 1998, or 1997, where serious doubt exists as to the ability of the borrower to comply with present repayment terms.
The Company does not believe there to be any concentration of loans in excess of 10 percent of total loans which are not disclosed above which would cause them to be significantly impacted by economic or other conditions.
At December 31, 1998 and 1997, the following information related to impaired loans under SFAS No. 114 was included in the total loan balance (In thousands):
Average impaired loans were $1,542,000, $689,000, and $188,000 for the years ended December 31, 1998, 1997, and 1996, respectively. The Company uses the cash basis method of income recognition for impaired loans. For the years ended December 31, 1998, 1997 and 1996, the Company did not recognize any income on such loans.
An analysis of the changes in the allowance for credit losses is as follows (In thousands):
Included in commercial loans are SBA loans with guaranteed balances of $25,368,000 and $13,045,000 at December 31, 1998 and 1997, respectively. The unguaranteed balance of these loans was $18,261,000 and $18,567,000 at December 31, 1998 and 1997, respectively.
The activity in the asset accounts related to the servicing spread retained on SBA guaranteed and Business & Industry loan sales for the three years ended December 31, 1998, 1997 and 1996 is summarized as follows:
In the ordinary course of business, the Company enters into various types of transactions which involve financial instruments with off-balance sheet risk. These instruments include commitments to extend credit and standby letters of credit which are not reflected in the accompanying consolidated balance sheets. These transactions may involve, to varying degrees, liquidity, credit and interest rate risk in excess of the amount, if any, recognized in the balance sheets. The Company's off-balance sheet credit risk exposure is the contractual amount of commitments to extend credit and standby letters of credit. The Company applies the same credit standards to these contracts as it uses in its lending process.
Commitments to extend credit are agreements to lend to customers. These commitments have specified interest rates and generally have fixed expiration dates but may be terminated by the Company if certain conditions of the contract are violated. Many of these commitments are expected to expire or terminate without funding. Therefore, the total commitment amounts do not necessarily represent future cash requirements. Collateral relating to these commitments varies, but may include cash, securities and real estate.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Credit risk arises in these transactions from the possibility that a customer may not be able to repay the Company upon default of performance. Collateral held for standby letters of credit is based on an individual evaluation of each customers' credit worthiness, but may include cash, securities or other guarantees.
4. REAL ESTATE ACTIVITIES
Regency Service Corporation was involved in residential real estate development in the Fresno/Clovis area through both limited partnership investments and direct investments in real estate projects. These real estate activities consisted of residential subdivisions being developed into lots and homes. Limited partnership investments were accounted for under the equity method. Gains on sales of limited partnership properties were recognized on the accrual method and were allocated between the partners based on the provisions of the partnership agreements.
Included in the investments in real estate balances are acquisition, development and construction loans held by the Bank totaling $0 and $271,000 at December 31, 1998 and 1997, respectively. The remaining investments in real estate balances of $0 and $4,067,000 represent RSC's investments in real estate at December 31, 1998 and 1997.
Condensed financial information relative to RSC included in the Company's consolidated financial statements at December 31, 1998 and 1997, respectively, is as follows (In thousands):
During 1997, the Company accelerated the disposition of RSC's real estate holdings. Based upon the Company's decision to pursue the bulk sale of several projects, as well as discounting other holdings to reflect RSC's current anticipated sales proceeds, several properties were written down to their estimated net realizable value. The amount of the writedown in 1997 was $2,342,000.
Condensed financial information relative to investments in real estate limited partnerships accounted for under the equity method, before eliminations, are as follows (In thousands):
5. PREMISES AND EQUIPMENT
Bank premises and equipment consists of the following (In thousands):
6. DEPOSITS
Deposits are comprised of the following (In thousands):
At December 31, 1998, time deposits of $100,000 or more include approximately $15,945,000 maturing in 3 months or less, $12,480,000 maturing in 3 to 12 months and $4,952,000 maturing after 12 months.
At December 31, 1998, the scheduled maturities of all certificates of deposits and other time deposits are as follows (In thousands):
7. SHORT-TERM BORROWINGS, LEASE COMMITMENTS, AND CONTINGENCIES
At December 31, 1998 and 1997, the Company had no federal funds purchased or securities sold under repurchase agreements outstanding.
At December 31, 1998, the Company had unsecured federal funds lines of credit available providing for short-term borrowings up to an aggregate of $5,000,000. Borrowings under federal funds lines are generally on an overnight basis with interest rates determined by market conditions. Interest rates ranged between 4.50 percent and 4.80 percent at December 31, 1998. The agreements are subject to annual renewal. Information concerning federal funds lines is summarized as follows (In thousands, except percentages):
In addition to its federal funds lines, the Company uses unpledged securities in its investment portfolio as a source of short-term liquidity by selling securities under repurchase agreements. Securities sold under repurchase agreements generally mature within one to seven days from the transaction date. Securities sold under repurchase agreements are delivered to broker dealers who arrange the transactions. The broker dealers may sell, loan or otherwise dispose of such securities to other parties in the normal course of their operations and agree to resell to the Company substantially identical securities at the maturities of the agreements. There were no such outstanding agreements at December 31, 1998 and 1997. During 1998, the Bank applied for, and was accepted as a member of the Federal Home Loan Bank of San Francisco (the " FHLB"). At December 31, 1998, the Bank held stock in the FHLB which would allow the Bank to borrow up to $11.5 million using various loans or securities as collateral. Information concerning securities sold under agreements to repurchase is summarized as follows (In thousands, except percentages):
The Company leases land and a building under a lease agreement having an initial term of approximately 30 years. The lease is accounted for as an operating lease for the land and a capital lease for the building.
During 1995, the Company entered into a sale-leaseback of its corporate headquarters. The leaseback is accounted for as an operating lease with a term of 15 years. Additionally, the Bank has lease commitments related to certain other properties which are accounted for as operating leases. Rent expense under all operating lease agreements was $636,000, $528,000 and $540,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998, the aggregate minimum future lease commitments under capital leases and noncancelable operating leases with terms of one year or more consist of the following (In thousands):
The Company is party to legal proceedings and claims which arise during the ordinary course of business. In the opinion of management, the ultimate outcome of such litigation and claims will not have a material adverse effect on the Company's financial position or results of its operations.
8. INCOME TAXES
Income tax expense (benefit) is summarized as follows (In thousands):
A reconciliation of the statutory federal income tax rate with the effective tax rate is as follows:
The Company's net deferred tax asset (included in other assets) is comprised of the following (In thousands):
Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. Accordingly, for the years ended December 31, 1998 and 1997, no valuation allowance related to the deferred tax asset was considered necessary.
9. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN - The Company has reserved 545,448 shares of its common stock for issuance under its amended 1990 stock option plan. Options granted under the plan may either be immediately exercisable for the full number of shares granted thereunder or may become exercisable in cumulative increments over a period of months or years as determined by the Compensation Committee of the Board of Directors but, in no event less than 20 percent of the shares subject to the option per year during the five years from the date of grant. All options are granted at prices not less than 100 percent of the fair value of the stock at the date of grant. The maximum term of shares granted is set by the Compensation Committee not to exceed ten years.
At December 31, 1998 and 1997, there were 124,495 and 190,994 additional shares available for grant under the Plan. The per share weighted-average fair value of stock options granted during 1998 was $2.96 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions. 1998 - expected dividend yield 2.67 percent, risk-free interest rate of 5.71 percent, expected life of 9.6 years and a volatility assumption of 15 percent. There were no options granted in 1997. In 1996 the calculated fair value of options granted was $2.17 using the following assumptions; expected life, 36 to 120 months; volitility 20 percent, risk free interest rates, 6.10 percent to 6.50 percent; and expected dividend yield of 2.5 percent.
The Company applies APB Opinion No. 25 in accounting for its Plan, and accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123 "Accounting for Stock-Based Compensation", the Company's net income would have been reduced to the pro forma amounts indicated below.
Pro forma net income reflects only options granted since December 31, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period of 5 years and compensation cost for options granted prior to January 1, 1996 is not considered.
Stock option activity during the periods indicated is as follows:
Additional information regarding options outstanding as of December 31, 1998 is as follows:
EMPLOYEE STOCK OWNERSHIP PLAN - The Company has an employee stock ownership plan covering substantially all full-time employees meeting certain requirements. Contributions to the plan are discretionary as determined by the Board of Directors. The employee stock ownership plan expense was $200,000, $200,000 and $173,500 for the years ended December 31, 1998, 1997 and 1996, respectively. The plan owned 172,319 and 161,239 shares of the Company's common stock at December 31, 1998 and 1997, respectively.
OTHER PLANS - The Company has also established the Regency Bancorp Cash or Deferred Retirement Plan which qualifies under the Internal Revenue Code Section 401(k). Employee contributions to the
Plan may be matched by the Company at the discretion of the Board of Directors. Employee contributions to the Plan are immediately vested while any matching contributions made by the Bank vest at different percentages based on years of service. For the years ended December 31, 1998, 1997 and 1996, the Company contributed approximately $45,000, $47,000 and $27,100 respectively, to the Plan.
The Company has a nonqualified Deferred Compensation Plan providing directors with the opportunity to participate in an unfunded, deferred compensation program. Under the plan, directors may elect to defer some or all of their current compensation. At December 31, 1998 and 1997, the total net deferrals included in other liabilities was approximately $557,000 and $515,000, respectively. In addition, in 1994, the Company established a salary continuation plan for three of the Bank's key executives which provides that upon retirement the Bank will continue to provide compensation to these executives for a period of 15 years. Future compensation under the Plan is earned by the executives for services rendered through retirement and vests at a rate of 10 percent per year. The Company accrues for the compensation based on anticipated years of service and the vesting schedule provided in the Plan. At December 31, 1998 and 1997, $323,000 and $242,000, respectively, has been accrued. In connection with the implementation of the Deferred Compensation and Salary Continuation Plans, single premium universal life insurance policies on the life of each participant were purchased by the Bank, which is beneficiary and owner of the policies. The cash surrender value of the policies was $3,186,000 and $3,038,000 at December 31, 1998 and 1997. The current annual tax-free interest rates on these policies range from 5.50 percent to 5.70 percent. The assets of the Plan, under Internal Revenue Service regulations, are the property of the Company and are available to satisfy the Company's general creditors.
10. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
The following table provides a reconciliation of the numerator and denominator of the basic EPS computation with the numerator and denominator of the diluted EPS computation (In thousands, except per share data):
On December 31, 1997, the Company completed a private placement offering of 750,000 new shares of its common stock. The net proceeds of $5,927,000 were used to contribute capital to the Bank. Warrants to purchase 26,211 shares of common stock at $9.90 and 150,000 shares of common stock at
$10.00 per share were outstanding at December 31, 1997 but were not included in the computation of diluted EPS because the warrants exercise price was greater than the average market price of the common shares. The warrants expire on January 1, 2003. Options to purchase 49,000, 60,000, and 167,000 shares of common stock at various prices per share were outstanding at December 31, 1998, 1997 and 1996, respectively but were not included in diluted EPS because the options exercise price was greater than the average market price of the common shares for the years then ended.
11. RELATED PARTY TRANSACTIONS
Certain officers and directors of the Company and affiliates are customers of and have had other transactions with the Bank in the ordinary course of business. In management's opinion, all loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than normal risk of collectibility or present other unfavorable features. Changes in loans outstanding to directors, officers and affiliates were as follows (In thousands):
Prior to 1998, the Company's Vice Chairman, David N. Price, provided administrative services for the Company's 401(k) and ESOP plans. In 1997 and 1996, the Company paid approximately $19,000 and $18,000, respectively, for these services.
12. FINANCIAL INSTRUMENTS FAIR VALUE DISCLOSURE
The following summary disclosures are made in accordance with the provisions of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", which requires the disclosure of fair value information about both on- and off- balance sheet financial instruments where it is practical to estimate that value. Fair value is defined in SFAS No. 107 as the amount at which an instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. It is not the Company's intent to enter into such exchanges.
In cases where quoted market prices were not available, fair values were estimated using present value of future cash flows or other valuation methods, as described below. The use of different assumptions (e.g., discount rates and cash flow estimates) and estimation methods could have a significant effect on fair value amounts. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. Because SFAS No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value of the Company.
The following methods and assumptions were used in estimating the fair values of financial instruments:
CASH AND CASH EQUIVALENTS - The carrying amounts reported in the balance sheets for cash and cash equivalents approximate their estimated fair values.
INVESTMENT SECURITIES - Fair values for investment securities, including mortgage-backed securities, are based on quoted market prices.
NON MARKETABLE EQUITY SECURITIES - Fair values of non marketable equity securities are based on the quoted par value of capital stock of the Federal Reserve Bank and Federal Home Loan Bank.
LOANS - The fair value for loans, values both the principal and interest cash flows to the present using discounting techniques. Principal cash flows are defined in the maturity schedules. Income is calculated for each month using the basis, the remaining balance, and the repricing rate for that time period. If any portion of the account is scheduled to reprice, the projected offering rate for that time period is used as the repricing rate. The income is then multiplied by a discount factor to determine the discounted fair value income amount.
SERVICING ASSET AND INTEREST ONLY STRIP - Fair values for servicing assets and interest only strips are estimated based on the results of valuation techniques which include the initial price paid, discounted cash flows, prepayment statistics, and estimated expected lives of the underlying loans.
DEPOSITS - Fair values for transactions and savings accounts are equal to the respective amounts payable on demand at December 31, 1998 and 1997 (i.e., carrying amounts). Fair values of fixed-maturity certificates of deposit were estimated using discounted cash flows over their remaining maturities as discussed above.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT - Fair values of commitments to extend credit are estimated using the fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present creditworthiness of counterparties. The fair value of standby letters of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date.
13. REGULATORY MATTERS
CAPITAL GUIDELINES - The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material direct effect on the Company's financial statements. Capital adequacy guidelines for the Company and the Bank and the regulatory framework for prompt corrective action for the Bank require that the Company and Bank meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital classification as well as the Company's and the Bank's capital adequacy are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). As of December 31, 1998 and 1997, the Company and Bank meet all capital adequacy requirements to which they are subject and management believes that, under the current regulations, both will continue to meet their minimum capital requirements in the foreseeable future.
As of December 31, 1998 and 1997 respectively, the Bank's capital ratios are considered "Well Capitalized" under the regulatory framework for prompt corrective action. The Company and Bank's actual capital amounts (in thousands) and ratios are also presented in the following table:
DIVIDENDS - Under California law, shareholders of the Company may receive dividends when and as declared by its Board of Directors out of funds legally available. With certain exceptions, a California corporation may not pay a dividend to its shareholders unless its retained earnings equal at least the amount of the proposed dividend. California law further provides that, in the event that sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its shareholders if it meets the following two generally stated conditions: (i) the corporation's assets equal at least 1 1/4 times its liabilities; and (ii) the corporation's current assets equal at least its current liabilities or, if the average of the corporation's earnings before taxes on income and before interest expense for the two preceding fiscal years was less than the average of the corporation's interest expense for such fiscal years, then the corporation's current assets must equal at least 1 1/4 times its current liabilities.
The Company expects to receive substantially all of its income initially from dividends from the Bank and/or RIA. Under California state banking law, the Bank may not pay cash dividends in an amount which exceeds the lesser of the retained earnings of the Bank or the Bank's net income for its last three fiscal years (less the amount of any distributions to shareholders made during that period). If the above test is not met, cash dividends may only be paid with the prior approval of the California State Department of Financial Institutions, in an amount not exceeding the Bank's net income for its last fiscal year or the amount of its net income for its current fiscal year. Accordingly, the future payment of cash dividends may depend on the Bank's earnings, its ability to meet capital requirements and/or the Company's ability to generate income from other sources.
CASH RESTRICTION - The FDIC requires banks to maintain average reserve balances on deposits, consisting of vault cash and actual balances held by the Federal Reserve Bank of San Francisco. The Bank's average FDIC reserve requirements were $2,601,000 and $1,683,000 in 1998 and 1997, respectively. The Bank maintained average balances of $2,801,000 and $1,815,000 in 1998 and 1997, respectively.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Following is a summary of amounts paid for interest and taxes and of non-cash transactions for the years ended December 31, 1998, 1997 and 1996 (In thousands):
15. PARENT COMPANY ONLY FINANCIAL STATEMENTS
Condensed balance sheets of Regency Bancorp at December 31, 1998, and 1997, and condensed statements of income and cash flows for the years ended December 31, 1998, 1997 and 1996, respectively. (In thousands):
CONDENSED BALANCE SHEETS
16. QUARTERLY FINANCIAL DATA
Following is selected quarterly financial information for the years ended December 31, 1998 and 1997. (In thousands):
QUARTERLY FINANCIAL DATA (UNAUDITED)
* * * * * *
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The registrant's Board of Director's approved the dismissal of Deloitte & Touche LLP as the registrant's independent accountant effective August 1, 1998. There were no disagreements with Deloitte & Touche LLP on any matter of accounting principals or practices, financial statement disclosure, or auditing scope or procedure. During the past two years the accountant's report contained no adverse opinion or disclaimer of opinion nor was it qualified as to uncertainty, audit scope or accounting principles. The decision to dismiss Deloitte & Touche LLP was a recommendation made by the registrant's Board Audit Committee to the registrant's Board of Directors. The registrant has engaged KPMG LLP as principal accountant to audit the registrant's financial statements effective August 1, 1998. Regency Bancorp received a letter from Deloitte and Touche LLP confirming their agreement with the above disclosure which was filed as Exhibit 99.1 on Form 8-K dated August 1, 1998 and filed on August 7, 1999.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 of Form 10-K is incorporated by reference to the information contained in the Company's definitive proxy statement for the 1999 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in the Company's definitive proxy statement for the 1999 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by reference to the information contained in the Company's definitive proxy statement for the 1999 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by reference to the information contained in the Company's definitive proxy statement for the 1999 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM-8-K
(a)(1) Financial Statements. Listed and included in Part II, Item 8.
(2) Financial Statement Schedules. Not Applicable.
(3) Exhibits.
* Denotes management contracts, compensatory plans or arrangements.
(b) Reports on Form 8-K
The Company filed a Form 8-K dated October 8, 1998, in which it reported its third quarter earnings, which states record net quarterly income of $1.08 million or $0.41 per share for the third quarter of 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
REGENCY BANCORP
Date: March 19, 1999 By: /s/ STEVEN F. HERTEL -------------- ------------------------- Steven F. Hertel President and Chief Executive Officer (Principal Executive Officer)
Date: March 19, 1999 By: /s/ STEVEN R. CANFIELD -------------- ------------------------- Steven R. Canfield Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX