SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-17753
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REGENT BANCSHARES CORP.
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(Exact name of registrant as specified in its charter)
New Jersey 23-2440805
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1430 Walnut Street, Philadelphia, PA 19102
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(Address of principal executive offices) (Zip Code)
(215) 546-6500
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(Registrant's telephone number, including area code)
N/A
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(Former name and address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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The number of shares of the Registrant's Common Stock and Series A
Convertible Preferred Stock outstanding at September 30, 1996 was 1,053,821 and
459,322, respectively.
<PAGE>
Part I. FINANCIAL INFORMATION
REGENT BANCSHARES CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,722,213 $ 6,918,680
Investment securities available-for-sale 35,441,598 47,725,261
Mortgage-backed securities held to maturity 78,855,814 91,244,148
Mortgage loans held for sale 2,914,743 12,873,725
Loans, net of unearned interest and loan fees 97,744,209 105,910,034
Less: Allowance for loan losses (4,480,139) (6,500,882)
------------ ------------
Net loans 93,264,070 99,409,152
Premises and equipment, net 733,091 704,487
Other real estate owned 189,627 --
Accrued interest receivable 1,514,995 1,739,969
Prepaid expenses and other assets 1,895,918 1,896,639
------------ ------------
Total Assets $220,532,069 $262,512,061
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 10,254,491 $ 12,621,000
Interest bearing:
NOW and money market 7,641,239 7,623,514
Savings 50,579,189 50,602,549
Certificates of deposit 119,513,204 125,284,579
------------ ------------
Total Deposits 187,988,123 196,131,642
Advances from Federal Home Loan Bank of Pittsburgh 16,119,634 43,655,302
Subordinated debentures 2,750,000 2,750,000
Accrued interest payable 4,496,441 5,310,396
Other liabilities 1,862,206 4,311,365
------------ ------------
Total Liabilities 213,216,404 252,158,705
------------ ------------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.10 par value, 5,000,000 shares
authorized Series A, 459,322
and 484,032 shares issued and outstanding;
entitled to $4,593,220 in involuntary liquidation 45,932 48,403
Series B, 3,820 and 4,220 shares issued and outstanding;
entitled to $38,200 in involuntary liquidation 382 427
Series C, 3,125 and 3,485 shares issued and
outstanding; entitled to $31,250 in involuntary
liquidation 313 349
Series D, 3,380 and 3,790 shares issued and outstanding;
entitled to $33,800 in involuntary liquidation 338 379
Series E, 103,684 and 85,615 shares issued and
declared; entitled to $1,036,840 in involuntary
liquidation 10,368 8,562
Common stock, $.10 par value, 10,000,000 shares
authorized, 1,053,821 and 997,615 shares issued and
outstanding 105,382 99,761
Capital surplus 14,693,192 13,300,855
Accumulated deficit (6,426,237) (2,956,765)
Net unrealized loss on securities available for sale (1,114,005) (148,615)
------------ ------------
Total Shareholders' Equity 7,315,665 10,353,356
------------ ------------
Total Liabilities & Shareholders' Equity $220,532,069 $262,512,061
============ ============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
REGENT BANCSHARES CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
Interest Income:
Loans, including fees $ 3,786,961 $ 3,116,643
Investment securities 2,018,363 2,288,464
----------- -----------
Total interest income 5,805,324 5,405,107
----------- -----------
Interest Expense:
Deposits 2,534,942 2,578,237
Short-term borrowings 506,891 530,626
Long-term debt 211,087 57,730
----------- -----------
Total interest expense 3,252,920 3,166,593
----------- -----------
Net interest income 2,552,404 2,238,514
Provision for loan losses 1,025,000 125,000
----------- -----------
Net interest income after
provision for loan losses 1,527,404 2,113,514
----------- -----------
Other Income:
Service charges on deposit accounts 24,421 18,550
Gain on sale of securities available-for-sale 6,871 --
Other 4,765 5,257
----------- -----------
Total other income 36,057 23,807
----------- -----------
Other Expenses:
Salaries and employee benefits 513,746 432,519
Professional services 202,330 425,901
Rent 43,464 43,464
Other occupancy expense 49,134 41,140
Depreciation and amortization 84,500 46,050
Insurance 43,005 16,612
Auto insurance premium finance servicing 632,871 297,498
Litigation settlement -- 175,000
Other 314,802 677,813
----------- -----------
Total other expenses 1,883,852 2,155,997
----------- -----------
Loss before income taxes (320,391) (18,676)
Benefit for income taxes -- (5,400)
----------- -----------
NET LOSS (320,391) (13,276)
Preferred stock dividends (25,118) (229,073)
----------- -----------
Loss for common stock $ (345,509) $ (242,349)
=========== ===========
Loss per common share:
Primary (.30) (.22)
Fully diluted -- --
Weighted average number of shares outstanding:
Primary 1,157,290 1,085,590
Fully diluted 1,616,612 1,573,122
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
REGENT BANCSHARES CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
Interest Income:
Loans, including fees $ 10,493,255 $ 7,482,226
Investment securities 6,434,591 7,581,244
------------ ------------
Total interest income 16,927,846 15,063,470
------------ ------------
Interest Expense:
Deposits 7,744,316 6,785,615
Short-term borrowings 1,464,820 2,179,974
Long-term debt 634,675 167,697
------------ ------------
Total interest expense 9,843,811 9,133,286
------------ ------------
Net interest income 7,084,035 5,930,184
Provision for loan losses 5,075,000 320,000
------------ ------------
Net interest income after
provision for loan losses 2,009,035 5,610,184
------------ ------------
Other Income:
Service charges on deposit accounts 70,368 56,160
Gain on sale of loans 82,797 --
Gain on sale of securities available-for-sale 6,871 --
Other 14,966 17,900
------------ ------------
Total other income 175,002 74,060
------------ ------------
Other Expenses:
Salaries and employee benefits 1,470,186 1,278,726
Professional services 633,759 833,988
Rent 130,391 130,391
Other occupancy expense 143,034 123,464
Depreciation and amortization 202,400 133,750
Insurance 90,837 238,921
Auto insurance premium finance servicing 1,724,007 975,840
Litigation settlement -- 175,000
Other 861,724 1,225,889
------------ ------------
Total other expenses 5,256,338 5,115,969
------------ ------------
(Loss) income before income taxes (3,072,301) 568,275
Provision for income taxes -- 191,800
------------ ------------
NET (LOSS) INCOME (3,072,301) 376,475
Preferred stock dividends (100,805) (360,147)
------------ ------------
(Loss) earnings for common stock $ (3,173,106) $ 16,328
============ ============
(Loss) earnings per common share:
Primary $ (2.83) $ .02
Fully diluted -- --
Weighted average number of shares outstanding:
Primary 1,122,027 1,048,059
Fully diluted 1,581,349 1,535,591
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
REGENT BANCSHARES CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
Cash Flows From Operating Activities:
Net(loss)income $ (3,072,301) $ 376,475
Adjustments to reconcile net income to net
cash provided by operating activities -
Provision for loan losses 5,075,000 320,000
Depreciation and amortization 202,400 133,750
Net amortization of premiums and accretion of
discounts on investment securities and
investment securities available for sale 658,322 468,635
Gain on sale of securities available for sale (6,871) --
Gain on sales of loans (82,797) --
Increase in unearned interest and fees 336,341 1,139,122
Decrease in accrued interest
receivable 224,974 256,774
(Increase) decrease in prepaid expenses,
other assets, and other real estate owned (188,906) 647,947
(Decrease) increase in accrued interest payable (813,955) 2,061,834
(Decrease)increase in other liabilities (2,449,159) 2,762,999
Purchases of mortgage loans held for sale (47,337,077) (38,677,832)
Proceeds from sales of mortgage loans held
for sale 57,378,856 39,994,316
----------- -----------
Total adjustments 12,997,128 9,107,545
----------- -----------
Net cash provided by operating
activities 9,924,827 9,484,020
----------- -----------
Cash Flows From Investing Activities:
Net increase in loans 733,742 (28,528,629)
Principal collected on investment and
mortgage-backed securities 11,894,989 10,088,975
Principal collected on investment securities
available-for-sale 5,394,500 4,116,335
Proceeds from sales of securities available-for-
sale 5,765,666 --
Net decrease in U.S. Treasury bills -- 124,672
Purchases of premises and equipment (231,004) (143,230)
----------- -----------
Net cash provided by (used in)
investing activities 23,557,893 (14,341,877)
----------- -----------
Cash Flows From Financing Activities:
Net (decrease) increase in total deposits (8,143,519) 31,881,802
Net decrease in advances
from Federal Home Loan Bank of Pittsburgh
with original maturities less than three
months (27,535,668) (30,111,797)
Advances from Federal Home Loan Bank with
maturities greater than three months -- 10,215,000
Maturities of advances from Federal Home Loan Bank with maturities
greater than three months -- (5,000,000)
Capital Contribution 1,000,000 --
----------- -----------
Net cash (used in) provided by financing
activities (34,679,187) 6,985,005
----------- -----------
Net (decrease) increase in cash & cash equivalents (1,196,467) 2,127,148
Cash & cash equivalents, beginning of year 6,918,680 2,802,177
----------- -----------
Cash & cash equivalents, end of period $ 5,722,213 $ 4,929,325
============ ===========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 10,657,766 $ 7,071,452
Income taxes 16,776 100,000
Supplemental Schedule of Non-Cash Investing and
Financing Activity:
Conversion of preferred stock to common stock $ 6,355 $ 5,486
Issuance of preferred stock as dividends 397,172 308,712
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
REGENT BANCSHARES CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. In the opinion of Regent Bancshares Corp. ("Regent"), the accompanying
unaudited consolidated financial statements contain all adjustments
(including normal recurring accruals) necessary to present fairly the
financial position of Regent and its wholly owned subsidiary, Regent
National Bank (the "Bank"), as of September 30, 1996 and December 31,
1995, and the results of their operations for the three and nine months
ended September 30, 1996 and 1995 and the cash flows for the nine
months ended September 30, 1996 and 1995.
2. Results of operations for the three and nine months ended September 30,
1996 are not necessarily indicative of the results to be expected for
the year ending December 31, 1996.
3. Earnings per common share for all periods presented is based on the
weighted average number of common shares outstanding and common stock
equivalents, after consideration of preferred stock dividends. Common
stock equivalents include the Series B, Series C, Series D and Series E
Convertible Preferred Stock. The earnings per common share does not
assume the exercise of stock options or warrants as common stock
equivalents since such exercise is antidilutive. For the nine months
ended September 30, 1996 and 1995, the weighted average number of
common shares includes 115,837 and 114,056 shares, respectively,
attributable to common stock equivalents.
Fully diluted earnings per share for the three and nine months ended
September 30, 1996 and 1995 is not presented since such presentation is
anti-dilutive.
Regent accrues on a quarterly basis the preferred stock dividend that
is payable annually each year. This accrual is considered for purposes
of the earnings per common share calculation and is computed using the
estimated market price of the preferred stock at the financial
reporting date. The accrual is adjusted as necessary to reflect
outstanding shares declared as a dividend and for changes in the market
price. The calculation of the earnings per common share for the nine
months ended September 30, 1996 reflected an adjustment for the amount
that had been accrued for the preferred stock dividend. As a result of
a decline in the market price, the accrual for preferred dividends
estimated in the earnings per common share calculation was higher than
the actual charge for the preferred stock dividend based on the market
price at the date of the preferred stock declaration. Consequently, the
6
<PAGE>
earnings per common share calculation for the nine months ended
September 30, 1996 included a benefit of $123,000 to adjust the
preferred stock dividend to the actual amount declared in June 1996.
4. In October 1995, the U.S. Bankruptcy Court issued an order approving
the settlement of a matter involving the bankruptcy of a mortgage
banking company for which the Bank had funded residential mortgages. As
part of the settlement, the Bank's request to receive assignment of
notes and mortgages of approximately $7,600,000 was granted and the
trustee and creditors' committee agreed not to object to the Bank's
unsecured claims against the debtor in the bankruptcy proceedings.
Additionally, the Bank agreed to pay the trustee $175,000 and will lend
the trustee up to an additional $175,000 to pay counsel fees in
connection with litigation by the trustee against a third party. The
Bank also agreed to make a second loan up to $50,000 and a third loan
of $75,000, subject to certain conditions, and to pay fees and expenses
of professionals (other than attorneys) in connection with the claim
against the third party. The loans will bear interest at the Bank's
prime rate plus one percent per annum, and will be secured by a
continuing first lien on, and security interest in (after
administrative expenses, as defined), the trustee's right, title and
interest in the assets of the debtor's bankrupt estate. The Bank's
payment to the trustee of $175,000 was charged to expense in the year
ended December 31, 1995. Management believes the Bank's loan
commitments under the settlement are recoverable based upon its current
assessment of the outcome of the litigation against the third party.
The Bank's unsecured claims against the debtor approximate $2.5
million, with recovery primarily dependent on successful litigation
against the third party.
One of the creditors of the mortgage banking company referenced above
has made a claim against the Bank seeking to recover the sum of
$233,868 with respect to two checks for mortgage loan closings drawn on
the account of the debtor which were returned by the Bank on account of
insufficient funds. The Bank believes that this claim is without merit
and intends to vigorously defend any future action related to this
matter.
The trustee in the bankruptcy proceedings of the principal shareholder
of the mortgage banking company debtor has asserted that certain
collateral (including an $85,000 payment received by the Bank)
transferred by the shareholder to the Bank as security for the
obligations of the debtor to the Bank was a preferential transfer
within 90 days of the shareholder's bankruptcy filing and is
recoverable by the trustee on behalf of the shareholder's creditors.
The Bank has negotiated a settlement of this claim for $65,000.
7
<PAGE>
In the opinion of management, after discussions with legal counsel, the
resolution of these matters is not expected to have a material adverse
effect on Regent's consolidated financial condition or results of
operations.
5. The Bank adopted Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No.
114") as amended by Statement of Financial Accounting Standards No.
118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures" ("SFAS No. 118") effective January 1,
1995. Under the new standard, the 1995 and 1996 allowance for credit
losses related to loans that are impaired as defined by SFAS No. 114
and SFAS No. 118 is evaluated based on the present value of expected
future cash flows discounted at the loan's effective interest rate, at
the loan's observable market price or the fair value of the collateral
for certain collateral dependent loans. Furthermore, in-substance
foreclosures are classified as loans and are stated at the lower of
cost or fair value. Commercial, industrial and mortgage loans are
evaluated for impairment on an individual basis. Consumer loans are
comprised primarily of automobile insurance premium finance loans
("IPF"). Prior to 1995, the allowance for credit losses related to
these loans was evaluated based on undiscounted cash flows or the fair
value of the collateral for collateral dependent loans. The adoption of
SFAS No. 114 and SFAS No. 118 did not have a material effect on
Regent's consolidated financial condition, cash flows or results of
operations.
Factors influencing management's recognition of impairment include
decline in collateral value; lack of performance under contract loan
agreement terms, including evaluation of late payments or non-payment;
lack of performance under other creditor's agreements or obligations
(i.e. non-payment of taxes, non-payment of loans to other creditors);
financial decline significantly different from status at loan
inception; litigation or bankruptcy of borrower; and significant change
in ownership or loss of guarantors to the detriment of credit quality.
A minimal delay or shortfall is defined by the Bank as a delay of less
than 90 days in making full contractual payment, or in the absence of
significant credit weaknesses which will further delay or stop the
borrower from repaying principal and interest in full under original
contract terms.
Loans evaluated under SFAS No. 114 and SFAS No. 118 are those loans
risk-rated by the Bank as Special Mention, Substandard and Doubtful, as
well as any Troubled Debt Restructuring which may not be so risk-rated.
As of September 30, 1996, there were no restructured loans.
The allowance for loan losses is maintained at a level believed
adequate by management to absorb potential losses in the loan
8
<PAGE>
portfolio. Management's determination of the adequacy of the allowance
is based on the risk characteristics of the portfolio, past loan loss
experience, local economic conditions, and other relevant factors. The
allowance is increased by provisions for loan losses charged against
income and is reduced by net charge-offs. The allowance is based on
management's estimates, and actual losses may vary from the current
estimates. These estimates are reviewed periodically, and, as
adjustments become necessary, they are reported in earnings in the
periods in which they become known. See Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financial
Overview - regarding the loss estimate associated with IPF loans.
At September 30, 1996, the recorded investment in loans that are
considered to be impaired as defined by SFAS No. 114 and SFAS No. 118
was $10.3 million, of which $2.9 million were non-accrual loans and
$2.7 million were IPF loans. The related allowance for credit losses
for these impaired loans was $3.7 million. For approximately $3.4
million of impaired loans, the reserve was based on the expected future
cash flows and the remaining $6.9 million was based on the fair value
of the collateral.
An asset which no longer retains any value to the Bank will be
charged-off immediately. Assets whose value has depreciated will be
charged-off in part. Potential recovery against these assets is
considered marginal, and recovery is expected to be long term. Bank
policy is to pursue aggressively any likely recovery against
charged-off assets.
The Bank applies all payments received on non-accrual loans to
principal until such time as the principal is paid off, after which
time any additional payments received are recognized as interest
income. For the nine months ended September 30, 1996, the Bank did not
recognize any interest income using the cash basis of income
recognition.
6. For the year ended December 31, 1995, the Bank recorded a provision for
loan losses of $4.5 million in connection with a loss exposure
identified in the Bank's IPF loan portfolio. For the nine months ended
September 30, 1996, the Bank recorded net charge-offs of $6.2 million
on delinquent IPF loans and increased its provision for loan losses by
$3.9 million, primarily as a result of delinquent IPF loans. The Bank
has discontinued its IPF loan business effective September 3, 1996. See
Management's Discussion and Analysis of Financial Condition and Results
of Operations for additional information.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF PERATIONS
FINANCIAL OVERVIEW
Regent Bancshares Corp. ("Regent"), the holding company for Regent National Bank
(the "Bank") recorded a net loss of $3,072,301 or $2.83 per share for the nine
months ended September 30, 1996 compared to net income of $376,475 or $.02 per
share for the comparable 1995 period. The loss for the first nine months of 1996
was due principally to a higher provision for loan losses of $4,755,000 and an
increase in other expenses of $140,369, which offset higher net interest income
of $1,153,851 and gains on the sale of residential mortgage loans and
available-for-sale securities aggregating $89,668.
For the third quarter ended September 30, 1996, the net loss was $320,391 or
$.30 per share compared to a net loss for the 1995 third quarter of $13,276 or
$.22 per share. The higher loss incurred in the 1996 third quarter versus the
1995 third quarter was primarily the result of an increase in the provision for
loan losses of $900,000. Net interest income for the three months ended
September 30, 1996 was higher than the comparable 1995 period by $313,890 and
other expenses in the third quarter of 1996 were lower than the 1995 third
quarter by $272,145.
Total assets of $220,532,069 at September 30, 1996 were substantially lower than
total assets at December 31, 1995 of $262,512,061. The reduction in Regent's
asset size was the result of a curtailment of the Bank residential mortgage
warehouse lending program, the sale of $27.8 in loan participations, and a
decrease in the Bank's mortgage-backed securities portfolio. The reduction of
$24.7 million in mortgage-backed securities classified as held-to-maturity and
available-for-sale resulted from the normal monthly principal prepayments and
the sale in September 1996 of $5.8 million in available-for-sale securities.
Proceeds from the loan participations and securities sales were used to reduce
borrowings from the Federal Home Loan Bank of Pittsburgh ("FHLB"). See "Recent
Developments" for further discussion of asset sales and capital and liquidity
matters.
At September 30, 1996 and December 31, 1995, a substantial portion of the
Bank's consumer loans, $13.2 million and $16.8 million (net of $1.3 million and
$930,000 of unearned interest, respectively), consisted of IPF loans. The IPF
loans have repayment terms of nine months and are secured by the unearned
premium balance on the individual automobile insurance policies. The IPF loans
were serviced for the Bank by a servicing company (the "Servicer") under a
Processing, Servicing, Marketing and Consulting Agreement (the "Agreement")
through September 1, 1996.
10
<PAGE>
The Agreement provided, among other things, that the Servicer was to solicit IPF
loans, maintain compliance with applicable laws and regulations and process and
service the IPF loans including the collection of repayments from borrowers and
of unearned premium balances from insurers on cancelled insurance policies.
Under the Agreement, the Bank received all collections and paid the Servicer a
fee equal to a specified initial per loan charge plus one-half of pre-tax
profits, as defined in the Agreement, from the IPF loan portfolio.
During the preparation of Regent's consolidated financial statements for the
year ended December 31, 1995, management of the Bank became aware of several
matters which caused management of the Bank to believe that the Servicer may
have reported interest and fee income from IPF loans in default and may not have
cancelled insurance policies securing defaulted loans or collected insurance
premium balances on such policies on a timely basis. As a result, management
began the process of estimating the ultimate expected loss that existed as of
December 31, 1995, which amount was material to Regent's consolidated financial
statements.
In order to assess the risk of loss on the IPF loan balance at December 31, 1995
and the amount thereof, the Bank identified delinquent IPF loans based upon the
payment history of the IPF loan portfolio during 1995 and through May 15, 1996.
During the period January 1, 1996 to May 15, 1996, the Bank applied all cash
receipts from delinquent IPF borrowers to the principal balances of such
delinquent loans as of December 31, 1995, and the Bank applied the proceeds of
the unearned premiums received from insurance companies except for those
applicable to accrued fees to the principal balances of delinquent IPF loans as
of December 31, 1995, thereby reducing the Bank's possible loss exposure on the
December 31, 1995 IPF loan balance to approximately $4.5 million. The $4.5
million loss exposure was recorded as part of the Bank's allowance for loan
losses at December 31, 1995.
In determining the loss exposure at December 31, 1995, no credit was taken for
the anticipated future collection of return premiums due from insurance
companies and other credit sources on delinquent IPF loans, or for a $1.8
million note from the Servicer and its principals in recognition by the Servicer
that a portion of the losses incurred by the Bank on the IPF loan balances
should be borne by the Servicer. The promissory note payable to the Bank in the
amount of $1.8 million is secured by commercial real estate, receivables and
personal assets, although realization is uncertain.
The Bank determined its loss exposure on IPF loans at September 30, 1996 based
on an aged delinquency report and estimated future cash payments from borrowers
and insurance companies. In the second and third quarters of 1996, net IPF loan
balances of $6.2 million that were past due 120 days or more have been
charged-off. As of September 30, 1996, IPF loans that were past due 90 to 120
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days totaled $578,000. The Bank has allocated $2.7 million of the allowance for
loan losses to the IPF loan portfolio and management believes that such amount
is adequate because of concerted collection efforts and the Bank's assumption
in September 1996 of the management and operational control of the servicing
operations. The Bank discontinued its IPF loan business effective September 3,
1996.
Interest and fees accrued on all IPF loans during the first nine months of
1996 approximated $4.3 million. Due to the Servicer's inability to place IPF
loans on non-accrual status this total includes accrued interest and fees on
delinquencies. The Bank has reduced the amount of interest and fee income on IPF
loans by approximately $1.3 million, which is management's estimate of the
income inappropriately accrued per the Servicer's records. In 1995, interest and
fee income included accrued income on delinquent IPF loans. However, any
uncollectible accrued income receivables were considered in the determination of
the provision for possible loan losses. For the nine months ended September 30,
1996, the Bank increased its provision loan losses by $4.8 million compared to
the nine months ended September 30, 1995 primarily as a result of 1996
delinquent IPF loans.
Regent has entered into an Amended and Restated Agreement and Plan of Merger
dated as of August 30, 1995 (the "Merger Agreement") among Carnegie Bancorp
("Carnegie"), Carnegie Bank, N.A. ("CBN"), Carnegie's wholly owned national bank
subsidiary, Regent and the Bank, providing for the merger of Regent with and
into Carnegie (the "Merger") and for the merger of CBN with and into the Bank
(the "Bank Merger"). The Merger Agreement was further amended (the "Amended
Merger Agreement") on October 2, 1996, whereby Regent will be acquired by
Carnegie through an exchange of Regent's common and preferred shares for
Carnegie common stock. The exchange rate is to be based on the ratio of Regent's
book value, as defined, to Carnegie's book value, as defined, determined on the
last day of the month immediately preceding the closing date. The amendment does
not provide for the purchase or exchange of Regent's outstanding warrants and
options for common stock of Carnegie.
In addition, each Regent common and preferred stockholder will receive a
beneficial interest in the Regent Liquidation Trust. The Regent Liquidation
Trust will consist principally of Regent IPF loans which are not being purchased
by Carnegie in the merger. The Regent Liquidation Trust will be established at
the closing date of the merger for the principal purpose of seeking to collect
Regent's remaining and previously charged-off IPF loans. The term of the Regent
Liquidation Trust is expected to be three years, at which time Trust
Beneficiaries will receive a pro rata cash distribution of any proceeds
collected by the Regent Liquidation Trust and remaining after satisfaction of
the indemnification obligations of the Regent Liquidation Trust to Carnegie.
12
<PAGE>
The merger is subject to the maintenance by Regent of a specified net worth and
to other conditions as defined in the Amended Merger Agreement, and to the
approval and adoption of the Amended Merger Agreement by the affirmative vote of
a majority of the votes cast by the holders of Regent Common Stock and Regent
Series A Convertible Preferred Stock, each voting as a separate class, at a
meeting of the holders thereof, approval and adoption of the Amended Merger
Agreement by the affirmative vote of a majority of the votes cast by the holders
of Carnegie Common Stock voting at a meeting of Carnegie shareholders and
various approvals of the OCC and the Board of Governors of the Federal Reserve
System (the "FRB"). Approval of the OCC and the FRB have been obtained; however,
extensions of such approvals will be required.
RECENT DEVELOPMENTS
For the year ended December 31, 1995, Regent had a net loss of $2.1 million and
for the nine months ended September 30, 1996, Regent had a net loss of $3.1
million. These losses resulted primarily from charge-offs of IPF loans 120 or
more days past due and increases in the reserve for potential loan losses on the
IPF Loans that remain outstanding. In September 1996, the Bank discontinued
making IPF loans. As a result of the Bank's losses and the effect thereof on the
Bank's capital, on October 10, 1996, the Bank entered into a written agreement
(the "Regulatory Agreement") with the OCC pursuant to 12 U.S.C.
(section)1818(b).
Under the Regulatory Agreement the Bank is required, subject to OCC review or
approval, to (i) adopt and implement an action plan to improve the Bank by
November 9, 1996, (ii) achieve capital levels specified in the Regulatory
Agreement at October 31, 1996 and December 31, 1996, (iii) develop a three-year
capital program by November 9, 1996 aimed at identifying means for the Bank to
maintain adequate capital levels and establishing restrictions on the payment of
dividends, (iv) continue the liquidation of the Bank's IPF loans in accordance
with procedures specified in the Regulatory Agreement, (v) review the adequacy
of the Bank's allowance for loan and lease losses and establish a program for
the maintenance of adequate allowances by the Bank for loan and lease losses in
compliance with OCC requirements, (vi) review the Bank's liquidity on a weekly
basis and take appropriate action to ensure adequate sources of liquidity in
relation to the Bank's needs and (vii) appoint a committee of directors
responsible for monitoring the Bank's compliance with the terms of the
Regulatory Agreement and reporting thereon to the OCC. The Bank believes that it
is currently in compliance with all of the provisions of the Regulatory
Agreement in all material respects and anticipates that, absent unforeseen
circumstances, it should be able to remain in compliance with the Regulatory
Agreement in all material respects.
Based upon the Bank's unsatisfactory condition and the questionable ability of
Regent to continue to service its outstanding debt beyond September 30, 1996,
13
<PAGE>
the Federal Reserve Bank of Philadelphia (the "FRBP") formally notified Regent,
in a letter dated September 6, 1996, of its determination that Regent is in
"troubled condition". As a consequence of such condition, Regent must provide
the FRBP with 30 days' notice prior to adding any members to its board of
directors or engaging any new senior executive officers. In addition to the
notice requirement, the FRBP has prohibited Regent, without prior written FRBP
approval, from declaring or paying any dividends, repurchasing or redeeming any
of its stock and incurring any additional debt, and has required Regent to
submit to the FRBP by October 6, 1996 a written plan to service Regent's
outstanding debt and to immediately notify the FRBP of any material event that
significantly impacts the financial condition of Regent and the Bank. Regent has
submitted to the FRB certain written undertakings from the Bank's organizers to
service the interest on Regent's outstanding subordinated debentures in the
event Regent does not otherwise have sufficient funds to pay such interest when
next due.
Failure to make significant improvements in the condition of the Bank and future
regulatory determinations could result in additional formal or informal
enforcement actions against the Bank which would include restrictions on the
operations, growth and capital distributions, monitoring and periodic review by
the OCC, civil money penalties, mandatory asset dispositions, conservatorships
and other actions, many of which, by law, must be publicly disclosed. If Regent
or the Bank does not comply with any of the terms of any order or agreement, the
OCC may petition the appropriate court for an order to enforce the terms
thereof. If willful noncompliance were to continue, the OCC could seek to take
possession of the business and property of the Bank, subject to providing notice
and the holding of a hearing with the concurrence of the Pennsylvania Attorney
General, or could seek to terminate the deposit insurance of the Bank.
In connection with the requirements of the Regulatory Agreement, the Bank has
taken steps to reduce its asset size and improve its capital position. As
previously indicated, the Bank has curtailed its residential mortgage warehouse
lending program, sold loan participations of $27.8 million and sold $5.8 million
available-for-sale securities in September 1996. In addition, Regent's and the
Bank's equity capital was increased by $1 million through capital contributions
by certain directors. Further asset reductions occurred in October 1996 through
the additional sale of loan participations totaling $6.4 million and of
available-for-sale securities of $3.6 million. Proceeds from the asset sales
were used to reduce FHLB borrowings. These actions have enabled the Bank to
achieve the capital ratios by October 31, 1996 as required by the Regulatory
Agreement. The Bank is currently executing and implementing the various plans as
required by the Regulatory Agreement.
14
<PAGE>
In September 1996, Harvey Porter, for reasons of ill health, retired as Chief
Executive Officer of Regent and as President and Chief Executive Officer of the
Bank. David W. Ring, Chairman of the Board, was appointed by the Registrant's
Board of Directors to serve as the Chief Executive Officer of Regent. John J.
Lyons, the former President, Chief Executive Officer and director of Jupiter
Tequesta National Bank and the former President, Chief Executive Officer and
Chairman of Monarch Savings Bank, was appointed President, Chief Executive
Officer and a director of the Bank by the Bank's Board of Directors in September
1996.
FINANCIAL CONDITION
Capital Adequacy
The following table sets forth the capital ratios of Regent and the Bank as of
September 30, 1996 and December 31, 1995 as well as the required minimum
regulatory capital ratios for Regent and the Bank. Since September 30, 1996, the
Bank, as previously discussed, has taken further steps to decrease the size of
the Bank and thereby improve the Bank's capital ratios.
<PAGE>
<TABLE>
<CAPTION>
Required
Regent September 30, 1996 December 31, 1995 Regulatory
- ------ ------------------ ----------------- Minimum
----------
<S> <C> <C> <C>
Risk-based capital:
Tier I capital... 6.12% 7.00% 4.00%
Total capital.... 8.17% 8.98% 8.00%
Leverage ratio............ 3.31% 4.00% 3.00-5.00%(1)
Required
September 30, 1996 December 31, 1995 Regulatory
The Bank ------------------ ----------------- Minimum
----------
Risk-based capital:
Tier I capital... 8.08% 8.67% 4.00%
Total capital.... 9.33% 9.92% 8.00%
Leverage ratio............ 4.35% 4.94% 3.00-5.00%(1)
</TABLE>
<PAGE>
(1) the 3% level only applies to those banking companies that are given the
highest composite rating under the uniform bank rating (CAMEL) system of the
federal banking regulatory agencies. (As of October 31, 1996, the Bank's
leverage ratio was 5.31% and Regent's was 4.02%).
Both Regent and the Bank are subject to minimum capital requirements promulgated
by the FRB and the OCC, their respective primary regulators. As an institution
whose deposits are insured by the Federal Deposit Insurance Corporation (the
"FDIC"), the Bank is also subject to insurance assessments imposed by the FDIC.
The actual assessment to be paid by any FDIC-insured institution is based on the
15
<PAGE>
institution's assessment risk classification which is determined on whether the
institution is considered "well capitalized," "adequately capitalized" or
"undercapitalized" as those terms are defined in corrective action provisions of
the Federal Deposit Insurance Corporation Improvement Act of 1991, and whether
such institution is considered by its bank supervisory agency to be financially
sound or to have supervisory concerns.
Asset and Liability Management
Asset and liability management is the process of maximizing net interest income
within the constraints of maintaining acceptable levels of liquidity, interest
rate risk and capital. To achieve this objective, policies and procedures have
been implemented that utilize a combination of selected investments and funding
sources with various maturity structures.
Liquidity: Liquidity represents the ability to generate funds at reasonable
rates to meet potential cash outflows from deposit customers who need to
withdraw funds or borrowers who need available credit. The primary source of the
Bank's liquidity has been the Bank's ability to generate deposits.
Supplementing the deposit base, liquidity is available from the investment
portfolio, which consists primarily of mortgage-backed securities issued by U.S.
Government agencies and corporations. These securities enhance liquidity not
only by their marketability, but they also provide monthly principal and
interest payments.
The liquidity position is also strengthened by the establishment of credit
facilities with other banks, the FRBP and the FHLB. Investment securities are
required to be pledged as collateral for transactions executed under these
facilities and provide for an availability of funds on an overnight basis. The
FHLB also provides for borrowings on a fixed or floating rate basis with
specified maturities up to 20 years at costs that would be less expensive than
through the Bank's deposit generation process.
Investment Portfolio: The investment portfolio, consisting principally of
mortgage-backed securities, is coordinated with the liquidity and interest rate
sensitivity position of the Bank. With an emphasis on minimizing credit, capital
and market risk, the investment portfolio is considered an extension of loans
with the objectives of enhancing liquidity and earning a fair return. The
investments in mortgage-backed securities consist of a combination of adjustable
and fixed rate securities with an emphasis on investments with relatively short
weighted average lives. Of the total mortgage-backed securities portfolio with
16
<PAGE>
an amortized cost of $112.4 million at September 30, 1996, $17.9 million were
adjustable rate and $94.5 million were fixed rate. The estimated weighted
average life for the mortgage-backed securities portfolio at September 30, 1996
approximated 6.1 years.
Interest Rate Sensitivity: Interest rate sensitivity is closely related to
liquidity since each is directly affected by the maturity of assets and
liabilities. Interest rate sensitivity also deals with exposure to fluctuations
in interest rates and its effect on net interest income. It is management's
objective to maintain stability in the growth of net interest income by
appropriately mixing interest sensitive assets and liabilities. One tool used by
management to gauge interest rate sensitivity is a gap analysis which
categorizes assets and liabilities on the basis of maturity date, the date of
next repricing and the applicable amortization schedule. This analysis
summarizes the matching or mismatching of rate sensitive assets versus rate
sensitive liabilities according to specified time periods, and provides
management with an indication of how interest income will be impacted by
changing rate scenarios. For example, an institution with more interest
sensitive assets than liabilities is said to have a positive gap. In this
example, as interest rates rise, the greater volume of assets should reprice
more rapidly than the liabilities. The net result should be an increase in the
net interest margin. Conversely, in a declining rate environment the net
interest margin should decline. If the institution has a greater volume of
interest sensitive liabilities than assets, it is said to have a negative gap.
In this event, increased interest rates would cause the greater volume of
liabilities to reprice more rapidly than assets. The net result should be a
decline in the net interest margin. Conversely, in a declining rate environment
the net interest margin should increase. In addition to the GAP analysis,
computer simulations are used to evaluate the impact of a change in interest
rates on liquidity, interest rate spreads/margins and operating results. The
simulation model is a more effective tool than an analysis since the simulation
analysis can more accurately reflect the impact of rising and declining rates on
each type of interest earning asset and interest bearing liability. The
simulation is particularly more beneficial as it can better evaluate the effects
of prepayment speeds on the Bank's portfolio of mortgage-backed securities and
what impact that would have on the Bank's liquidity and profitability. Using the
result of the simulation analysis, the Bank strives to control its interest rate
risk exposure so that the net interest income does not fluctuate by more than 5%
assuming that interest rates increase or decrease by 200 basis points.
The blending of fixed and floating rate loans and investments to match the
repricing and maturity characteristics of the various funding sources is a
continuous process in an attempt to minimize fluctuations in net interest
income. An effective tool used by the Bank in this process has been the
availability and flexibility of the various FHLB advance programs, which enable
the Bank to lock in spreads when appropriate and provide an effective method of
matching fixed rate assets with a fixed rate funding source.
The Bank's objective is to structure its balance sheet, as outlined in the
following Interest Sensitivity table, to minimize any significant fluctuation in
net interest income. The distribution in the table is based on a combination of
maturities, repricing frequencies and prepayment patterns. Floating rate assets
and liabilities are distributed based on the repricing frequency of the
17
<PAGE>
instrument while fixed rate instruments are based on maturities. Mortgage-backed
securities are distributed in accordance with their repricing frequency and
estimated prepayment speeds. Deposit liabilities are distributed according to
repricing opportunities for NOW and money market accounts, maturities for
certificates of deposit and savings deposits reflect the earliest period in
which balances can be withdrawn. As the table shows, the Bank has a cumulative
negative gap for all time periods. This indicates that future liquidity,
interest rate margins and operating results should be positively impacted in a
falling rate environment and negatively impacted in a rising rate environment.
<TABLE>
<CAPTION>
0 to 3 4 to 12 1 to 3 3 to 5 After
(Dollars in thousands) Months Months Years Years 5 Years Total
-------- -------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities $ 12,876 $ 356 $ 20,314 $ 47,300 $ 31,506 $112,352
Other securities 2,664 -- -- -- 396 3,060
Mortgage loans held for sale 2,915 -- -- -- -- 2,915
Loans 47,062 18,190 8,282 13,221 12,525 99,280
-------- -------- -------- -------- -------- --------
Total Earning Assets $ 65,517 $ 18,546 $ 28,596 $ 60,521 $ 44,427 $217,607
======== ======== ======== ======== ======== ========
NOW and money market $ 7,641 $ -- $ -- $ -- $ --
$ 7,641
Savings 50,579 -- -- -- --
50,579
Certificates of Deposit 16,233 74,293 4,108 24,829 50 119,513
FHLB advances 5,915 -- -- 5,000 5,205
16,120
Subordinated debt -- -- 2,750 -- -- 2,750
Net non-interest bearing
source of funds -- -- -- -- 21,004 21,004
-------- -------- -------- -------- -------- --------
Total Sources of Funds $ 80,368 $ 74,293 $ 6,858 $ 29,829 $ 26,259 $217,607
======== ======== ======== ======== ======== ========
Period Gap $(14,851) $(55,747) $ 21,738 $ 30,692 $ 18,168
======== ======== ======== ======== ========
Cumulative Gap $(14,851) $(70,598) $(48,860) $(18,168) --
======== ======== ======== ======== ========
Cumulative Gap as % of
total assets (6.7)% (32.0)% (22.2)% (8.2)%
</TABLE>
INVESTMENT PORTFOLIO
The investment portfolio of Regent includes investments classified as
held-to-maturity and available-for-sale and consists of mortgage-backed
securities and non-marketable equity securities. The mortgage-backed securities
portfolio is comprised principally of securities issued by U.S. Government
18
<PAGE>
agencies and corporations, which represented 86% of the total mortgage-backed
portfolio at September 30, 1996. The remaining 14% consisted of collateralized
mortgage obligations of private issuers. The table below summarizes by major
category the amortized cost and market values of the investment securities
classified as available-for-sale and held-to-maturity at September 30, 1996:
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
----------------------- -----------------------------
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
GNMA $11,432,725 $10,906,224 $ - $ -
FHLMC 32,405,551 31,492,279 8,114,605 7,719,319
FNMA 19,252,128 18,572,228 25,381,342 24,662,623
Collateralized mortgage
obligations 15,765,410 14,806,986
Non-marketable equity
securities - - 3,059,657 3,059,657
---------- ---------- ----------- ----------
$78,855,814 $75,777,717 $36,555,604 $35,441,599
========== ========== ========== ==========
</TABLE>
The following table details the range of maturities of mortgage-backed
securities held to maturity as of September 30, 1996 based on the weighted
average life of the securities for each classification and the weighted average
yield for each maturity period:
<TABLE>
<CAPTION>
Within 1 Ater 1 But After 5 But
Year Within 5 Years Within 10 Years Total
----------- -------------- --------------- -----------
<S> <C> <C> <C> <C>
U.S. agencies and corporations $ 617,475 $43,055,623 $ 19,417,304 $63,090,402
Collateralized mortgage obligations 1,541,669 14,223,743 -- 15,765,412
----------- ----------- -------------- -----------
$ 2,159,144 $57,279,366 $ 19,417,304 $78,855,814
=========== =========== ============== ===========
Weighted Average Yield 5.25% 6.31% 6.21%
</TABLE>
The following table details the range of maturities of mortgage-backed
securities available for sale as of September 30, 1996 based on the amortized
cost, the weighted average life of the securities for each classification, and
the weighted average yield for each maturity period:
<TABLE>
<CAPTION>
Within 1 After 1 But After 5 But
Year Within 5 Years Within 10 Years Total
-------- -------------- --------------- ------
<S> <C> <C> <C> <C>
U.S. agencies and corporations $ -- $14,591,303 $18,904,644 $33,495,947
========== =========== =========== ===========
Weighted Average Yield --% 6.38% 7.23%
</TABLE>
The following table sets forth those collateralized mortgage obligations which
have a carrying value that exceeded 10% of Regent's shareholders' equity at
September 30, 1996. These securities have an investment rating of AA or better.
19
<PAGE>
<TABLE>
<CAPTION>
Carrying Value Market Value
-------------- ------------
<S> <C> <C>
Bear Stearns Mortgage Securities Inc.
Series 1993-2 Class 7..................... $2,265,505 $2,089,577
Bear Stearns Mortgage Securities Inc.
Series 1993-2 Class 5..................... 1,764,729 1,588,258
Bear Stearns Mortgage Securities Inc.
Series 1993-2 Class 6..................... 1,575,707 1,472,384
Bear Stearns Mortgage Securities Inc.
Series 1993-12 Class 1B................... 1,595,702 1,544,921
Bear Stearns Mortgage Securities Inc.
Series 1992-04............................ 2,166,116 2,119,949
Capstead Securities Corp.
Series 1992-C-3........................... 1,513,954 1,442,669
Resolution Trust Corporation
Series 1991-M6............................ 1,247,686 1,194,871
Saxon Mortgage Security Corp.
Series 1993-04 Class 1A................... 2,357,659 2,272,695
</TABLE>
Gross unrealized gains and losses on mortgage-backed securities held to maturity
at September 30, 1996 were $81,086 and $3,159,183, respectively, and gross
unrealized gains and losses on mortgage-backed securities available for sale at
September 30, 1996 were $17,113 and $1,131,118 , respectively. Through the nine
months ended September 30, 1996, available-for-sale securities totaling $5.8
million were sold at a gain of $6,871. There were no sales of mortgage-backed
securities in 1995. Unrealized losses on the securities generally are the result
of lower than market interest rates on the underlying mortgages contained in the
securities.
At September 30, 1996, the contractual maturity of substantially all of the
Bank's mortgage-backed securities was in excess of ten years. The actual
maturity of a mortgage-backed security is less than its stated maturity due to
prepayments of the underlying mortgages. Prepayments that are different than
anticipated will affect the yield to maturity. The yield is based upon the
interest income and the amortization of any premium or discount related to the
mortgage-backed security. In accordance with generally accepted accounting
principles, premiums and discounts are amortized over the estimated lives of the
loans, which decrease and increase interest income, respectively. The prepayment
assumptions used to determine the amortization period for premiums and discounts
can significantly affect the yield of the mortgage-backed security, and these
assumptions are reviewed periodically to reflect actual prepayments.
Although prepayments of underlying mortgages depend on many factors, including
the type of mortgages, the coupon rate, the age of the mortgages, the
geographical location of the underlying real estate collateralizing the
mortgages and general levels of market interest rates, the difference between
the interest rates on the underlying mortgages and the prevailing mortgage
interest rates generally is the most significant determinant of the rate of
prepayments. During periods of falling mortgage interest rates, if the coupon
rate of the underlying mortgages exceeds the prevailing market interest rates
offered for mortgage loans, refinancing generally increases and accelerates the
prepayment of the underlying mortgages and the related security. Under such
20
<PAGE>
circumstances, the Bank may be subject to reinvestment risk because to the
extent that the Bank's mortgage-backed securities amortize or prepay faster than
anticipated, the Bank may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate.
Mortgage-backed securities generally increase the quality of the Bank's assets
by virtue of the insurance or guarantees that back them, are more liquid than
individual mortgage loans and may be used to collateralize borrowings or other
obligations of the Bank.
LENDING
Total loans, consisting of loans held for the portfolio and mortgage loans held
for sale, amounted to $102.2 million at September 30, 1996 compared to $120.0
million at December 31, 1995. The decrease from year end 1995 outstanding loan
balances to September 30, 1996 resulted primarily from the sale of $27.8 million
in loan participations in September 1996.
The following table details the types of loans outstanding by category
as of September 30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
Amount % Amount %
------ -- ------ ---
<S> <C> <C> <C> <C>
Commercial & industrial $47,114,776 47% $ 49,006,081 46%
Real estate:
Construction 7,389,369 7% 4,430,425 4%
Mortgages-residential 17,402,700 18% 18,925,609 18%
Mortgages-commercial 11,634,504 12% 16,168,009 15%
Consumer 15,739,088 16% 18,572,551 17%
---------- ---- ----------- ----
Total loans 99,280,437 100% 107,102,675 100%
==== ====
Less:
Unearned interest and fees (1,536,228) (1,192,641)
----------- ------------
$97,744,209 $105,910,034
=========== ============
Mortgage loans held for sale $ 2,914,743 $ 12,873,725
=========== ============
</TABLE>
21
<PAGE>
Real estate loans are secured primarily by first mortgages on commercial
property in which the loan-to-value ratio is 75% or less and residential
properties with a loan-to-value ratio of 80% or less. Consumer loans are
collateralized primarily by unearned automobile insurance premiums.
To meet its asset/liability objectives and to control its interest rate
sensitivity exposure, the Bank's strategy is to originate loans with floating
rates and with maturities less than five years. The following table presents the
scheduled maturities of loans that are outstanding as of September 30, 1996:
<PAGE>
<TABLE>
<CAPTION>
After 1
Within But Within After
1 Year 5 Years 5 Years Total
------- ---------- ------- -----
<S> <C> <C> <C> <C>
Predetermined interest
rates $21,950,889 $20,768,935 $12,525,628 $55,245,452
Floating rate 37,185,192 3,062,525 3,787,268 44,034,985
----------- ----------- ----------- ----------
$59,136,081 $23,831,460 $16,312,896 $99,280,437
=========== =========== =========== ===========
</TABLE>
RISK ELEMENTS
Risk elements unique to each particular loan category are as follows:
Commercial and Industrial
Risk factors inherent in commercial and industrial loans include economic risk
which may affect a borrower's ability to sustain and grow a business; collateral
risk in that an economic downturn may result in collateral depreciation;
interest rate risk in that rate changes may outpace business cash flow; and
legal risk in properly documenting and perfecting collateralization. The Bank
monitors such loans annually with updated financial analyses.
Construction loans
Risk factors inherent in construction loans include economic risk which may
affect end purchase or use of the collateral; engineering risk which may prevent
completion of construction or result in added expense in build-out;
environmental risk in earth and water table movement; management risk in
correctly and completely monitoring construction and loan advances; and legal
risk in properly documenting each advance and ensuring collateralization. The
Bank monitors such loans to review all advances and monitors all projects.
Residential mortgages
Risk factors inherent in residential mortgage lending include economic risk
which may affect a borrower's ability to maintain a job and financial stability;
collateral risk in that an economic downturn may result in collateral
depreciation; interest rate risk in that rate changes may outpace personal cash
flow; indeterminate risk in that personal factors - divorce, illness - may
affect credit stability; environmental risk in that collateral may be damaged or
destroyed by natural causes; and legal risk in properly documenting and
perfecting collateralization. The Bank evaluates, among other things,
collateral, financial stability, credit stability, cash flow and interest rate
risk, and monitors such loans for indications of financial decline or collateral
devaluation.
22
<PAGE>
Commercial mortgages
Risk factors inherent in commercial mortgage lending include economic risk which
may affect lessees' ability to pay rent or a borrower's ability to cash flow
vacancies; collateral risk in that an economic downturn may result in collateral
depreciation; environmental risk in that collateral may be damaged or destroyed
by natural causes; interest rate risk in that rate changes may outpace property
cash flow; and legal risk in properly documenting and perfecting
collateralization. Loans are underwritten to match lease terms, and large
tenants are subject to credit review. The Bank monitors such loans quarterly or
annually with updated inspections, lease analyses and financial analyses.
Consumer loans
Consumer loans consist primarily of loans to individuals to finance automobile
insurance premiums on their insurance policies. These loans have repayment terms
of nine months and are secured by the insurance policy's unearned premium. Risk
factors include economic risk which may affect the borrower's ability to
maintain a job and financial stability; the financial strength and stability of
the insurance company underwriting the insurance and insurance agents that
originate the loans; the effectiveness of the internal control structure to
cancel the insurance policies on delinquent accounts in a timely and effective
manner; collection efforts in obtaining the cancelled policy's unearned premium
from the insurance company; and legal risk in properly documenting and
perfecting the collateral.
The level of non-performing assets consisting of non-accrual loans, accruing
loans past due 90 days or more, and other real estate owned, amounted to $4.3
million or 1.97% of total assets at September 30, 1996 compared to $9.2 million
or 3.49% of total assets at December 31, 1995. The decrease in non-performing
assets in the first nine months of 1996 was attributable to a lower amount of
IPF loans 90 days or more past due and a decline in non-accruing loans primarily
as a result of charging-off $801,000 in non-accruing loan balances. Included in
the accruing loans 90 days or more past due were IPF loans totaling $682,200 and
$4.5 million at September 30, 1996 and December 31, 1995, respectively. Given
the limitation of the Servicer's records associated with the IPF loans, the Bank
was unable to obtain an accurate aging of such loans at December 31, 1995.
Accordingly, for purposes of determining the amount of the non-performing IPF
loans, the Bank included the loss exposure amount of $4.5 million in accruing
loans 90 days or more past due as of December 31, 1995. IPF loans of $682,200
were considered to be accruing loans 90 days or more past due at September 30,
1996 based on an aged delinquency report. The following table details the
non-performing assets at September 30, 1996 and December 31, 1995:
23
<PAGE>
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
Non-accrual loans $2,877,622 $3,567,737
Accruing loans 90 days or more past due 1,276,417 5,594,005
Restructured loans -- --
---------- ----------
Total non-performing loans 4,154,039 9,161,742
Other real estate owned 189,627 -
--------- ---------
Total non-performing assets $4,343,666 $9,161,742
========= =========
Non-performing loans to period end loans
and loans held for sale 4.06% 7.64%
Non-performing assets to total assets 1.97% 3.49%
Non-performing assets to loans, loans held
for sale and other real estate owned 4.24% 7.64%
</TABLE>
Accrual of interest is discontinued on loans when management believes, after
considering economic and business conditions and collection efforts, that the
borrowers' financial condition is such that collection of interest and principal
is doubtful. The non-accrual loans are primarily secured by various types of
real estate. Interest income not recognized due to non-accrual status was
$221,200 for the nine months ended September 30, 1996. No interest income was
included in operating income attributable to non-accrual loans in the nine month
period ended September 30, 1996.
Other real estate owned represents property acquired by foreclosure or deed in
lieu of foreclosure. These assets are initially reported at the lower of the
related loan balance or the fair value of the property.
Other problem loans not considered above include loans considered impaired by
Statement of Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" ("SFAS No. 114"), as amended by Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures" ("SFAS No. 118").
Under the standard, the allowance for credit losses related to loans that are
impaired, as defined by SFAS No. 114 and SFAS No. 118, is evaluated based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price or at the fair value of the
collateral for certain collateral dependent loans. Commercial, industrial and
mortgage loans are evaluated for impairment on an individual basis. Consumer
loans are comprised primarily of IPF loans. Prior to 1995, the allowance for
credit losses related to these loans was evaluated based on undiscounted cash
flows or the fair value of the collateral for collateral dependent loans.
24
<PAGE>
Factors influencing management's recognition of impairment include decline in
collateral value; lack of performance under contract loan agreement terms,
including evaluation of late payments or non-payment; lack of performance under
other creditors' agreements or obligations (i.e. non-payment of taxes or
non-payment of loans to other creditors); financial decline significantly
different from status at loan inception; litigation or bankruptcy of the
borrower; significant change in ownership or loss of guarantors to the detriment
of credit quality.
Loans aggregated for evaluation under SFAS No. 114 and SFAS No. 118 are those
loans risk-rated by the Bank as Special Mention, Substandard and Doubtful, as
well as any Troubled Debt Restructuring which may not be so risk-rated. As of
September 30, 1996, there were no restructured loans.
At September 30, 1996, the recorded investment in loans that are considered to
be impaired as defined by SFAS No. 114 and SFAS No. 118 was $10.3 million (of
which $2.9 million were non-accrual loans and $2.7 million were IPF loans). The
related allowance for credit losses for these impaired loans was $3.7 million.
For approximately $3.4 million of impaired loans, the reserve evaluation was
based on the expected future cash flows and the remaining $6.9 million was based
on the fair value of the collateral.
As part of the quarterly review of the risk elements of the portfolio, an
evaluation is also made of the adequacy of the allowance for loan losses. In
making an assessment of the quality of the loan portfolio and the adequacy of
the allowance for loan losses, management takes into consideration such elements
as general economic conditions, industry trends, the volume of delinquencies,
specific credit review, the value of underlying collateral, and other pertinent
information. Based on this evaluation, the allowance for loan losses is adjusted
by the provision which is charged against income. The following table summarizes
the activity for the nine months ended September 30, 1996 and 1995:
25
<PAGE>
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Balance, beginning of period $ 6,500,882 $ 1,713,372
Charge-offs:
Commercial & industrial 414,193 340
Real estate - construction -- --
Real estate - residential 447,192 127,679
Consumer 7,474,692 --
----------- -----------
8,336,077 128,019
----------- -----------
Recoveries:
Commercial & industrial -- 567
Consumer 1,240,335 8,000
----------- -----------
Total recoveries 1,240,335 8,567
----------- -----------
Net (charge-offs) recoveries (7,095,742) (119,452)
----------- -----------
Provision charged to operations 5,075,000 320,000
----------- -----------
Balance, end of period $ 4,480,140 $ 1,913,920
=========== ===========
Allowance for loan losses as a % of period end
loans and loans held for sale 4.38% 1.76%
Net charge-offs as a % of average loans
and loans held for sale 7.55% .18%
</TABLE>
Management believes that those loans identified as non-performing are adequately
secured and the allowance for loan losses is sufficient in relation to the
potential risk of loss that has been identified in the loan portfolio.
Management has allocated the allowance based on an assessment of risks within
the loan portfolio and the estimated value of the underlying collateral. The
following table sets forth the allocation of the Bank's allowance for loan
losses at September 30, 1996:
September 30, 1996
------------------------------
% of Loans
Amount to Total Loans
------ --------------
Commercial & Industrial $ 543,900 47%
Real Estate:
Construction 171,300 7%
Mortgages - residential 281,700 18%
Mortgages - commercial 3,300 12%
Consumer 2,737,200 16%
Unallocated 742,740 N/A
---------- ---
$4,480,140 100%
========== ===
It is not expected that the level of net-charge-offs for real estate and
commercial and industrial loans during the next full year will vary
significantly from historical levels. The amount of net charge-offs associated
with consumer loans will be dependent upon the success of collection efforts in
reducing the delinquent IPF loans.
26
<PAGE>
DEPOSITS
Total deposits at September 30, 1996 aggregated $188.0 million which was lower
than total deposits at December 31, 1995 of $196.1 million due primarily to
declines in demand and certificate of deposit balances. As illustrated in the
table below, the composition of deposits at September 30, 1996 has remained
relatively consistent compared to the composition at December 31, 1995.
September 30, 1996 December 31, 1995
------------------- ---------------------
Balance % Balance %
------------ ---- ------------- ----
Demand $ 10,254,491 5% $ 12,621,000 6%
NOW 3,545,110 2% 3,959,987 2%
Savings 50,579,189 27% 50,602,549 26%
Money Market 4,096,129 2% 3,663,527 2%
Certificates of deposit 119,513,204 64% 125,284,579 64%
------------ ---- ------------ ----
$187,988,123 100% $196,131,642 100%
============ ==== ============ ====
SHORT-TERM BORROWINGS
Short-term borrowings are used to supplement the deposit base of the Bank, to
support asset growth, to fund specific loan programs, and as a tool in the
Bank's asset/liability management process. During 1996 and 1995, the Bank has
utilized its credit facilities with its correspondent banks and with the FHLB.
The borrowings from the FHLB are secured by the Bank's investments in
mortgage-backed securities.
The following table summarizes the Bank's short-term borrowing activity for the
nine months ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
Average Weighted
Amount Maximum Average
Balance Outstanding Outstanding Interest Average
Outstanding During at any Rate at Rate
9/30 the Period Month-End 9/30 Paid
----------- ----------- ----------- ----- -----
<S> <C> <C> <C> <C> <C>
1996: FHLB borrowings $5,914,743 $35,132,791 $47,269,068 5.89% 5.53%
Federal funds purchased - 145,073 1,000,000 - 5.21%
---------- -----------
$5,914,743 $35,277,864 5.53%
========== ===========
1995: FHLB borrowings $37,926,981 $46,341,779 $66,155,178 6.62% 6.25%
Federal funds purchased -- 280,952 -- -- 5.92%
----------- -----------
$37,926,981 $46,622,731 6.25%
=========== ===========
</TABLE>
RESULTS OF OPERATIONS
A net loss for the nine months ended September 30, 1996 was recorded of
$3,072,301 or $2.83 per share compared to net income of $376,475 or $.02 per
share earned in the first nine months of 1995. For the quarter ended September
27
<PAGE>
30, 1996, the net loss was $320,391 or $.30 per share versus a net loss of
$13,276 or $.22 per share earned in the comparable 1995 period. The lower 1996
quarterly and year-to-date results were attributable primarily to increases in
the provision for loan losses related to IPF loans. Regent also recorded higher
net interest income and gains on the sale of residential mortgages and
mortgage-backed securities available-for-sale.
NET INTEREST INCOME
Net interest income for the nine months ended September 30, 1996 totaled
$7,084,035 or 19% higher than net interest income in the comparable 1995 period
of $5,930,184. For the three months ended September 30, 1996, net interest
income was $2,552,404 which was an increase of $313,890 from the 1995 third
quarter total of $2,238,514. The quarterly and year-to-date increases were
attributable to an improved net interest margin which reflected the yields on
earning assets rising faster than the cost of interest bearing liabilities. The
net interest margin rose from 3.31% for the first nine months of 1995 to 3.70%
for the same nine month period in 1996. The higher margin reflected primarily a
greater percentage of interest income being derived from higher yielding loan
activity, and, in particular, IPF lending activity. Before charge-offs, the
yield on IPF loans approximated 23% and represented 17% of total interest income
in the first nine months of 1996 versus 14% of total interest income in the
comparable 1995 period. In 1996, interest and fees on all loans represented 62%
of total interest income versus 50% in 1995. Net interest income also benefited
from an increase in average earning assets of $16,216,000. The following table
is a rate/yield analysis for the nine months ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
--------------------------- ---------------------------
Average Income/ Rate/ Average Income/ Rate/
Balance Expense Yield Balance Expense Yield
------- ------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Securities $129,494 $6,435 6.63% $151,650 $7,581 6.66%
Loans 125,253 10,493 11.16% 86,881 7,482 11.36%
------- ------ -------- ------
Total $254,747 16,928 8.85% $238,531 15,063 8.42%
======= ------ ======== ------
Interest Bearing Liabilities:
NOW accounts $ 3,807 68 2.38% $ 4,185 78 2.49%
Statement savings 50,647 1,852 4.87% 55,014 2,000 4.86%
Money market 3,798 121 4.24% 9,008 258 3.83%
Time deposits 123,385 5,703 6.16% 96,228 4,450 6.18%
Short-term borrowings 35,278 1,465 5.53% 46,622 2,180 6.25%
Long-term advances 10,207 470 6.13% 93 3 6.51%
Subordinated debt 2,750 165 7.98% 2,750 164 7.98%
------- ------ -------- ------
Total 229,872 9,844 5.70% 213,900 9,133 5.71%
------- ------ -------- ------
Non-Interest bearing
sources of funds 24,875 24,631
------- -------
Net Interest Income/Spread $254,747 $7,084 3.15% $238,531 $5,930 2.71%
======== ====== ===== ======== ====== =====
Net Interest Margin 3.70% 3.31%
===== =====
</TABLE>
28
<PAGE>
PROVISION FOR LOAN LOSSES
A provision for loan losses of $5,075,000 was recorded for the nine months ended
September 30, 1996 compared to $320,000 in the same period of 1995. For the
third quarter of 1996, the provision was $1,025,000 versus $125,000 in the 1995
third quarter. The increases in the quarterly and year-to-date provisions were
due to the charge-offs incurred in connection with IPF loans.
OTHER EXPENSES
Total other expenses for the nine months ended September 30, 1996 were
$5,256,338 or 3% over the comparable 1995 period total of $5,115,969. For the
third quarter, other expenses were lower in 1996 than in 1995 by $272,145 or
13%. The primary factors that increased other expenses for the nine month period
ended September 30, 1996 were higher salaries and employee benefits, and
processing and operational costs associated with IPF loans. Salaries and
employee benefit expenses increased by $191,460 in the first three quarters of
1996 due to higher staffing levels and benefit costs and to salary increases.
Processing and operational costs for IPF loans increased by $748,167 for the
nine month period relating to higher loan activity and the Bank absorbing all
costs of servicing the IPF loan portfolio beginning in April 1996, which
previously had been borne by the servicing company. The nine month period in
1996 benefited from lower professional fees of $200,229 which were lower as a
result of legal expenses incurred in 1995 in connection with the settlement of
the assignment of certain residential mortgage loans to Regent. In addition to
the legal costs, an expense of $175,000 was incurred as part of this settlement.
Insurance expense was also lower by $148,084 reflecting the reduction in FDIC
insurance premiums.
Other expenses were lower for the 1996 third quarter versus the third quarter of
1995 by $272,145 due to the litigation settlement costs of $175,000 incurred in
September 1995 and a reduction in professional fees of $223,571. The decrease in
professional fees reflected the legal expenses incurred in 1995 for the mortgage
assignment settlement. Offsetting these decreases were higher salaries and
employee benefit expenses and IPF loan processing and servicing costs.
PROVISION FOR INCOME TAXES
Regent did not record an income tax benefit for the three and nine months ended
September 30, 1996 since prior year losses had been benefited to the maximum
extent of carryback availability. Tax losses exceeding tax carryback
availability will be benefited when utilized. At September 30, 1996, Regent had
29
<PAGE>
a tax loss carryforward of $200,000. Additionally, Regent has approximately $4.9
million of potential future tax deductions associated with income and expense
amounts treated differently for tax and financial reporting purposes. Regent has
established a valuation allowance for the entire tax benefit associated with
future deductions, approximating $1.7 million. These deferred tax benefits will
be recognized for financial reporting purposes as Regent generates future
taxable income. For the three and nine months ended September 30, 1995, the
income tax provision was based on an effective tax rate of 34%.
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to Item 3 of the Registrant's Form 10-K Report for the year
ended December 31, 1995 for a description of certain legal proceedings.
Item 2. CHANGES IN SECURITIES
In May 1994, the Registrant extended the expiration date of its publicly traded
warrants (the "Warrants") from May 23, 1994 until December 31, 1995. In
September 1995, the Registrant further extended the expiration date of the
Warrants to the earlier of (a) the effective time of the Registrant's merger
with Carnegie Bancorp ("Carnegie"), during which period the Warrants could not
be exercised for the purchase of the Registrant's Common Stock but represented
only the right to receive Carnegie Common Stock as provided in the August 30,
1995 Merger Agreement (the "Merger Agreement") with Carnegie or (b) 30 days
after the termination of the Merger Agreement, during which period the Warrants
could be exercised in accordance with their terms.
On October 2, 1996, the Registrant entered into an amendment (the "Amendment")
to the Merger Agreement. The Amendment does not provide for the issuance of
Carnegie Common Stock in exchange for the Warrants. In addition, the Amendment
constituted a termination of the Merger Agreement. As a result, under the terms
of the Registrant's September 1995 extension of the expiration date of the
Warrants, the Warrants would have expired on November 1, 1996. The Registrant
has extended this expiration date to November 30, 1996 in order to provide
notice of the November 30, 1996 expiration date to the holders of the Warrants.
Item 5. OTHER INFORMATION
In September 1996, Harvey Porter, for reasons of ill health, retired as Chief
Executive Officer of the Registrant and as President and Chief Executive Officer
of Regent National Bank (the "Bank"). David W. Ring, Chairman of the Board of
the Registrant, was appointed by the Registrant's Board of Directors to serve as
the Chief Executive Officer of the Registrant. John J. Lyons, the former
President, Chief Executive Officer and director of Jupiter Tequesta National
Bank and the former President, Chief Executive Officer and Chairman of Monarch
Savings Bank, was appointed President, Chief Executive Officer and a director of
the Bank by the Bank's Board of Directors in September 1996.
30
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
Not applicable.
(b) Reports on Form 8-K.
On October 18, 1996, the Registrant filed a Current Report on Form 8-K
dated October 2, 1996. Under Item 5 thereof, the Registrant reported (i) the
Amendment, dated as of October 2, 1996, to the Amended and Restated Agreement
and Plan of Merger dated as of August 30, 1995 among Carnegie Bancorp, Carnegie
Bank, N.A., Regent Bancshares Corp. and Regent National Bank and (ii) an
Agreement Dated October 10, 1996 By And Between Regent National Bank,
Philadelphia, Pennsylvania and The Office of the Comptroller of the Currency and
an Addendum thereto. No financial statements were filed with the Registrant's
October 3, 1996 Current Report on Form 8-K.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Issuer
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
REGENT BANCSHARES CORP.
/S/ David W. Ring
----------------------------------
DAVID W. RING
Chairman & CEO
/S/ Stephen J. Carroll
----------------------------------
STEPHEN J. CARROLL
Treasurer
Dated: November 14, 1996
32
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,722,213
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 35,441,598
<INVESTMENTS-CARRYING> 78,855,814
<INVESTMENTS-MARKET> 75,777,717
<LOANS> 97,744,209
<ALLOWANCE> 4,480,139
<TOTAL-ASSETS> 220,532,069
<DEPOSITS> 187,988,123
<SHORT-TERM> 5,914,743
<LIABILITIES-OTHER> 6,358,647
<LONG-TERM> 12,954,891
0
57,333
<COMMON> 105,382
<OTHER-SE> 7,152,950
<TOTAL-LIABILITIES-AND-EQUITY> 220,532,069
<INTEREST-LOAN> 10,493,255
<INTEREST-INVEST> 6,434,591
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 16,927,846
<INTEREST-DEPOSIT> 7,744,316
<INTEREST-EXPENSE> 9,843,811
<INTEREST-INCOME-NET> 7,084,035
<LOAN-LOSSES> 5,075,000
<SECURITIES-GAINS> 6,871
<EXPENSE-OTHER> 5,256,338
<INCOME-PRETAX> (3,072,301)
<INCOME-PRE-EXTRAORDINARY> (3,072,301)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,072,301)
<EPS-PRIMARY> (2.83)
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.70
<LOANS-NON> 2,877,622
<LOANS-PAST> 1,276,417
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,500,882
<CHARGE-OFFS> 8,336,077
<RECOVERIES> 1,240,335
<ALLOWANCE-CLOSE> 4,480,140
<ALLOWANCE-DOMESTIC> 4,480,140
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 742,740
</TABLE>
