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 March 31, 1996
---------------------------
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
----------------------------
REGENT BANCSHARES CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 23-2440805
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1430 Walnut Street, Philadelphia, PA 19102
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(215) 546-6500
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
------------------------------------------------------------------------------
(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
-------------- --------------
The number of shares of the Registrant's Common Stock and Series A
Convertible Preferred Stock outstanding at March 31, 1996 was 1,017,687 and
481,982, respectively.
<PAGE>
Part I. FINANCIAL INFORMATION
REGENT BANCSHARES CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
ASSETS March 31, 1996 Decmber 31, 1995
-------------- ----------------
<S> <C> <C>
Cash and due from banks $ 4,172,646 $ 6,918,680
Investment securities available for sale 45,059,628 47,725,261
Mortgage-backed securities held to maturity 87,601,012 91,244,148
Mortgage loans held for sale 13,741,689 12,873,725
Loans, net of unearned interest and loan costs 113,806,064 105,910,034
Less: Allowance for loan losses (5,926,921) (6,500,882)
------------ ------------
Net loans 107,879,143 99,409,152
------------ ------------
Premises and equipment, net 786,764 704,487
Other real estate owned 179,627 --
Accrued interest receivable 1,720,048 1,739,969
Prepaid expenses and other assets 2,147,293 1,896,639
------------ ------------
Total Assets $ 263,287,850 $ 262,512,061
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 12,332,265 $ 12,621,000
Interest bearing:
NOW and money market 8,327,550 7,623,514
Savings 50,412,080 50,602,549
Certificates of deposit 125,750,860 125,284,579
------------ ------------
Total Deposits 196,822,755 196,131,642
Advances from Federal Home Loan Bank of Pittsburgh 44,637,186 43,655,302
Subordinated debentures 2,750,000 2,750,000
Accrued interest payable 4,318,908 5,310,396
Other liabilities 4,471,433 4,311,365
------------ ------------
Total Liabilities 253,000,282 252,158,705
------------ ------------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.10 par value, 5,000,000 shares authorized
Series A, 481,982 and 484,032 shares issued and
outstanding; entitled to $4,819,820 in involuntary
liquidation 48,198 48,403
Series B, 3,920 and 4,270 shares issued and outstanding;
entitled to $39,200 in involuntary liquidation 392 427
Series C, 3,135 and 3,485 shares issued and
outstanding; entitled to $31,350 in involuntary
liquidation 313 349
Series D, 3,425 and 3,790 shares issued and outstanding;
entitled to $34,250 in involuntary liquidation 342 379
Series E, 68,836 and 85,615 shares issued and
outstanding; entitled to $688,360 in involuntary
liquidation 6,884 8,562
Common stock, $.10 par value, 10,000,000 shares
authorized, 1,017,687 and 997,615 shares issued and
outstanding 101,769 99,761
Capital surplus 13,300,837 13,300,855
Accumulated deficit (2,738,973) (2,956,765)
Net unrealized loss on securities available for sale (432,194) (148,615)
------------ ------------
Total Shareholders' Equity 10,287,568 10,353,356
============ ============
Total Liabilities & Shareholders' Equity $ 263,287,850 $ 262,512,061
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
REGENT BANCSHARES CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Interest Income:
Loans, including fees $3,063,283 $1,933,491
Investment securities 2,279,504 2,666,702
--------- ---------
Total interest income 5,342,787 4,600,193
--------- ---------
Interest Expense:
Deposits 2,579,037 1,818,154
Short-term borrowings 547,060 978,216
Long-term debt 160,524 54,172
--------- ---------
Total interest expense 3,286,621 2,850,542
--------- ---------
Net interest income 2,056,166 1,749,651
Provision for loan losses 175,000 70,000
--------- ---------
Net interest income after
provision for loan losses 1,881,166 1,679,651
--------- ---------
Other Income:
Service charges on deposit accounts 22,980 22,755
Other 4,746 6,000
--------- ---------
Total other income 27,726 28,755
--------- ---------
Other Expenses:
Salaries and employee benefits 498,721 423,827
Professional services 209,885 169,845
Rent 43,464 43,464
Other occupancy expense 43,616 36,839
Depreciation and amortization 55,900 43,100
Insurance 15,592 104,858
Auto insurance premium finance servicing 412,794 228,549
Other 266,028 266,569
--------- ---------
Total other expenses 1,546,000 1,317,051
--------- ---------
Income before income taxes 362,892 391,355
Provision for income taxes 145,100 133,000
--------- ---------
NET INCOME 217,792 258,355
Preferred stock dividends 144,600 78,855
--------- ---------
Earnings for common stock $ 73,192 $ 179,500
========= =========
Earnings per common share:
Primary $ .05 $ .18
Fully diluted -- $ .17
Weighted average number of shares outstanding:
Primary 1,357,980 1,014,272
Fully diluted -- 1,529,250
</TABLE>
See notes to consolidated financial statements.
<PAGE>
REGENT BANCSHARES CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 217,792 $ 258,355
Adjustments to reconcile net income to net
cash (used in) provided by operating activities -
Provision for loan losses 175,000 70,000
Depreciation and amortization 55,900 43,100
Net amortization of premiums and accretion of
discounts on investment securities and
investment securities available for sale 212,411 155,082
Increase in unearned interest and fees 140,580 19,890
Decrease in accrued interest receivable 19,921 108,468
Decrease in prepaid expenses, other assets,
and other real estate owned (430,281) 175,459
(Decrease) increase in accrued interest payable (991,488) 222,900
Increase in other liabilities 160,068 77,467
Purchases of mortgage loans held for sale (12,614,352) (4,816,164)
Proceeds from sales of mortgage loans held
for sale 11,746,388 7,690,494
----------- ----------
Total adjustments (1,525,853) 3,746,696
----------- -----------
Net cash (used in) provided by operating
activities (1,308,061) 4,005,051
----------- -----------
Cash Flows From Investing Activities:
Net increase in loans (8,785,571) (2,976,806)
Principal collected on investment and
mortgage-backed securities 4,076,936 3,088,336
Principal collected on investment securities
available for sale 1,735,844 999,385
Net decrease in U.S. Treasury bills -- 124,672
Purchases of premises and equipment (138,179) (14,697)
----------- -----------
Net cash (used in) provided by
investing activities (3,110,970) 1,220,890
----------- -----------
Cash Flows From Financing Activities:
Net increase in total deposits 691,113 5,537,132
Net increase (decrease) in advances
from Federal Home Loan Bank of Pittsburgh
with original maturities less than three
months 981,884 (10,169,572)
----------- -----------
Net cash provided by (used in) financing
activities 1,672,997 ( 4,632,440)
----------- -----------
Net (decrease) increase in cash & cash equivalents (2,746,034) 593,501
Cash & cash equivalents, beginning of year 6,918,680 2,802,177
----------- -----------
Cash & cash equivalents, end of period $ 4,172,646 $ 3,395,678
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 4,278,109 $ 2,627,462
Income taxes -- --
Supplemental Schedule of Non-Cash Investing and
Financing Activity:
Conversion of preferred stock to common stock $ 1,991 $ 273
</TABLE>
See notes to consolidated financial statements.
<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 March 31, 1996 and December 31, 1995,
and the results of their operations and cash flows for the three months
ended March 31, 1996 and 1995.
2. Results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the results to be expected for the full year.
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 and, for the three months ended March 31,
1996, outstanding stock options and warrants. For the three months
ended March 31, 1996 and 1995, the weighted average number of common
shares includes 340,802 and 87,265 shares, respectively, attributable
to common stock equivalents.
Fully diluted earnings per share for the three months ended March 31,
1995 assumes the conversion of preferred stock and 1,529,250 shares
were used in the calculation. Fully diluted earnings per share for the
three months ended March 31, 1996 is not presented since such
presentation is anti-dilutive.
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 creditor's 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 an additional loan up to $50,000 and a third
loan of $75,000, (subject to certain conditions), to pay fees and
expenses of professionals (other than attorneys) in connection with the
claim against
<PAGE>
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.
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 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; significant change in
ownership or loss of guarantors to the detriment of credit quality. A
minimal delay or shortfall
<PAGE>
is defined by the Bank as a delay of less than 90 days in making full
contractual payment, or when there are no 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 March 31, 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
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 such 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 March 31, 1996, the recorded investment in loans that are considered
to be impaired as defined by SFAS No. 114 and SFAS No. 118 was $15.9
million, of which $2.6 million were non-accrual loans and $9.4 million
were delinquent IPF loans. The related allowance for credit losses for
these impaired loans is $5.4 million. For approximately $10.0 million
of impaired loans, the reserve was based on the expected future cash
flows and the remaining $5.6 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 three months ended March 31, 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. See Management's
Discussion and Analysis of Financial Condition and Results of
Operations for additional information.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL OVERVIEW
Regent Bancshares Corp. ("Regent"), the holding company for Regent National Bank
(the "Bank"), recorded net income of $217,792 or $.05 per share for the quarter
ended March 31, 1996 compared to $258,355 or $.18 per share for the first
quarter of 1995. The principal factors that decreased the quarterly earnings
were increases in the provision for loan losses of $105,000 and in other
expenses of $228,949, which were offset by an increase in net interest income of
$306,515.
Total assets of $263,287,850 at March 31, 1996 were comparable to total assets
at December 31, 1995 of $262,512,061. The mix of assets, however, shifted
slightly as total loans at March 31, 1996 of $113,806,064 exceeded total loans
at December 31, 1995 of $105,910,034 by $7,896,030 while investment securities
available for sale and held to maturity decreased by $6,308,769 from December
31, 1995 to March 31, 1996. This change in asset mix reflects the continuing
emphasis on loan growth by reinvesting the cash flow from the mortgage-backed
securities portfolio into commercial and consumer loans.
At March 31, 1996 and December 31, 1995, a substantial portion of the
Bank's consumer loans, $19.4 million and $16.8 million (net of $990,200 and
$930,000 of unearned interest, respectively), consisted of automobile insurance
premium finance loans ("IPF"). These loans have repayment terms of nine months
and are secured by the unearned premium balance on the individual automobile
insurance policies. The IPF loans are serviced for the Bank by a servicing
company (the "Servicer") under a Processing, Servicing, Marketing and Consulting
Agreement (the "Agreement"). The Agreement provides, among other things, that
the Servicer is 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 receives all
collections and pays 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
<PAGE>
the ultimate expected loss that existed as of December 31, 1995, which amount
was material to the consolidated financial statements.
In order to assess the risk of loss on the IPF loan balance at March 31, 1996
and 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
the first quarter of 1996.
During the period January 1, 1996 to May 15, 1996, the Bank has applied all cash
receipts from delinquent IPF borrowers to the principal balances of such
delinquent loans and the proceeds of the unearned premiums from insurance
companies applicable to principal and interest to the principal balances of
delinquent IPF loans, 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.
The Servicer has recognized that a portion of the losses incurred by the
Bank on the IPF loan balance should be borne by the Servicer. Accordingly, the
Servicer and its principals have executed a promissory note payable to the Bank
in the amount of $1.8 million, secured by commercial real estate, receivables,
and personal assets.
In determining the loss exposure at March 31, 1996 and December 31, 1995
and the resulting specific allocation to the allowance for loan loss reserve, no
credit has been taken for the anticipated future collection of return premiums
due from insurance companies and other credit sources, or for the $1.8 million
note from the Servicer and its principals. Collections and credits continue on a
daily basis as a result of increased collections efforts.
Due to (1) the inability of the Servicer to provide accurate information
resulting in the possibility of the overaccrual of interest and fees on IPF
loans in default, and (2) the growth of the IPF loan portfolio in the first
quarter of 1996, management deemed it appropriate to increase the allocation of
the allowance for loan losses applicable to IPF loans to $4.8 million at March
31, 1996 from $4.5 million at December 31, 1995 and to reduce the amount of
interest and fee income recognized on IPF loans in the first quarter of 1996.
These steps have significantly impacted the earning performance of Regent
in the 1996 first quarter.
By applying all cash receipts from delinquent borrowers and the proceeds of
the unearned premiums received from insurance companies during the first quarter
of 1996 to the principal balance of delinquent IPF loans at December 31, 1995,
as indicated above, interest on IPF loans in the three months ended March 31,
1996 was recognized on only those IPF loans considered non-delinquent as of
December 31, 1995 and on IPF loans originated in 1996. Fees on IPF loans were
recognized only to the extent of actual cash received from return premiums from
the insurance companies that had not been applied to the principal balance of
the loan. Under these methods, interest and fees in the consolidated statement
of income includes $752,000 on IPF loans. If interest and fees had been accrued
on all IPF loans during the first three months of 1996, the Bank estimates that
interest and fee income would approximate $900,000. In addition to lower
interest and fee income, Regent increased its provision for loan losses by
$105,000 in the three months
<PAGE>
ended March 31, 1996 compared to the quarter ended March 31, 1995 due primarily
to delinquent IPF loans.
Although it is possible that a change in estimated losses on the IPF portfolio
will occur and that the Bank's actual losses on the IPF portfolio at March 31,
1996 may differ from the estimated loss exposure of $4.8 million, management
believes that the likelihood of a loss by the Bank on the IPF loan portfolio in
excess of the estimated loss is remote and that collection efforts and the $1.8
million note will reduce the amount of actual loss associated with IPF loans.
As a result of the estimated loss provision associated with the IPF portfolio,
Regent reported a net loss after related tax benefits for the year ended
December 31, 1995 of approximately $3,126,000 and the Bank reported a net loss
after related tax benefits of approximately $2,937,000, thereby reducing their
capital amounts and ratios as of December 31, 1995 and March 31, 1996.
Management believes the reduced capital amounts position the Bank as "adequately
capitalized" under the applicable regulations of the Office of the Comptroller
of the Currency (the "OCC") and that the Bank was in compliance with the stated
legal minimum capital requirements of federal law. However, because of the net
loss for the year ended December 31, 1995, the Bank's Tier I leverage capital
ratio approximated 5.02% as of March 31, 1996 which is below the 6.5%
discretionary ratio established by the OCC for the Bank and which the Board of
Directors of the Bank committed to maintaining pursuant to an OCC-approved
capital plan. Failure to meet minimum capital requirements can result in the
initiation of regulatory actions that, if undertaken, could have a material
effect on the Bank's financial statements. Such regulatory actions are presently
uncertain but could include restrictions on operations and growth and mandatory
asset dispositions. In anticipation of possible OCC action, management and the
Board have submitted a revised capital plan to the OCC which provides for the
restoration of the Bank's leverage capital ratio to 6.5% by December 31, 1996.
Management believes this revised capital plan will be acceptable to the OCC.
However, there are no assurances that the OCC will approve the Bank's revised
plan. The revised capital plan includes an undertaking to maintain the Bank's
asset size at no more than $265 million through December 31, 1996, retention of
1996 earnings, possible recovery of a portion of the estimated losses from the
IPF loans and an equity investment of up to $500,000 by the Organizers of the
Bank, if necessary, to meet the 6.5% Tier I leverage capital ratio by December
31, 1996.
The OCC has in the past permitted the Bank to pay dividends to Regent, the
parent company, thereby allowing Regent to meet its debt service requirements
under the subordinated debentures. Management believes that the OCC will
continue to permit the Bank
<PAGE>
to pay such dividends to Regent, although there are no assurances that the OCC
will continue to permit the Bank to continue paying dividends for such purposes.
Management believes that, as of March 31, 1996, Regent's liquid assets are
sufficient to permit it to meet its debt service obligations under the
subordinated debentures and other operating costs in 1996. It is possible that
Regent will be unable to meet its obligations under the subordinated debentures
after 1996 if the Bank has not restored its Tier I leverage capital ratio to at
least 6.5% by December 31, 1996.
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"), which will then operate under the name Carnegie Regent
Bank, N.A. Because of the losses incurred by Regent for the year ended December
31, 1995, Carnegie and Regent are currently negotiating another amendment to the
Merger Agreement, which Regent anticipates will provide for an exchange ratio of
Carnegie securities for Regent securities based upon the relative book values
per share of Carnegie and Regent as of a future date to be determined.
Consummation of the Merger is subject to various conditions, including the
approval and adoption of the 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 at a meeting of the holders thereof,
approval and adoption of the 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. Approval of the OCC and the Federal
Reserve System have been obtained; however, extensions of such approvals may be
required if the merger is not consummated prior to the expiration of such
approvals.
FINANCIAL CONDITION
Capital Adequacy
Capital adequacy standards adopted by federal banking regulators make capital
more sensitive to differences in risk profiles among banking organizations and
consider off-balance-sheet exposures in determining capital adequacy. Various
levels of risk are assigned to different categories of assets and
off-balance-sheet activities.
These standards define capital as Tier I and Tier II capital. All banks are
required to have Tier I capital of at least 4% of
<PAGE>
risk-weighted assets and total capital of 8% of risk-weighted assets. Tier I
(Core) capital consists of common shareholders' equity, non-cumulative preferred
stock and retained earnings. Tier II or total capital includes Tier I capital,
cumulative preferred stock, qualifying subordinated debt and the allowance for
loan losses up to a maximum of 1.25% of total risk-weighted assets. The
following table presents the components of the Regent's assets and Tier I and II
capital ratios at March 31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Tier I Capital $ 10,719,762 $ 10,501,971
Allowance for possible loan losses 1,932,941 1,876,606
Qualifying subordinated debt 1,100,000 1,100,000
------------ ------------
Total Tier II Capital $ 13,752,703 $ 13,478,577
============ ============
Total Risk Adjusted Assets $154,635,255 $150,128,495
============ ============
Tier I Ratio 6.93% 7.00%
==== ====
Tier II Ratio 8.89% 8.98%
==== ====
</TABLE>
In addition to the risk-based requirements, regulations have been adopted that
establish a minimum leverage capital ratio of 3% of Tier I capital to total
assets. The 3% level applies to only those banks that are given the highest
composite rating under the regulators' rating system while all other banks are
expected to have 3% plus an additional cushion of at least 100 to 200 basis
points. At March 31, 1996 and December 31, 1995, Regent's leverage ratio was
4.07% and 4.00%, respectively. Additionally, the Bank's Tier I leverage ratio at
March 31, 1996 approximated 5.02% which is below the 6.5% discretionary ratio
established by the OCC for the Bank.
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.
<PAGE>
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 and the Federal Home Loan Bank of Pittsburgh
("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
an amortized cost of $130.6 million at March 31, 1996, $21.6 million were
adjustable rate and $109 million were fixed rate. The estimated weighted average
life for the mortgage-backed securities portfolio at March 31, 1996 approximated
5.7 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
<PAGE>
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 a GAP 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
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.
<PAGE>
<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 $ 15,809 $ 285 $ 14,334 $ 55,766 $ 44,360 $ 130,554
Other securities 2,367 -- -- -- 396 2,763
Mortgage loans held for sale 13,742 -- -- -- -- 13,742
Loans 52,870 26,363 7,372 16,104 12,430 115,139
-------- -------- -------- -------- -------- --------
Total Earning Assets $ 84,788 $ 26,648 $ 21,706 $ 71,870 $ 57,186 $ 262,198
======== ======== ======== ======== ======== ========
NOW and money market $ 8,328 $ -- $ -- $ -- $ -- $ 8,328
Savings 50,412 -- -- -- -- 50,412
Certificates of Deposit 20,814 57,438 21,772 25,675 52 125,751
FHLB advances 34,428 -- -- 5,000 5,209 44,637
Subordinated debt -- -- 2,750 -- -- 2,750
Net non-interest bearing
source of funds -- -- -- -- 30,320 30,320
-------- -------- -------- -------- -------- --------
Total Sources of Funds $ 113,982 $ 57,438 $ 24,522 $ 30,675 $ 35,581 $ 262,198
======== ======== ======== ======== ======== ========
Period Gap (29,194) (30,790) (2,816) 41,195 21,605
======== ======== ======== ======== ========
Cumulative Gap (29,194) (59,984) (62,800) (21,605) --
======== ======== ======== ======== ========
Cumulative Gap as % of
total assets (11.1%) (22.8%) (23.9%) (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 agencies and corporations, which represented 86% of the
total mortgage-backed portfolio at March 31, 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 March 31, 1996:
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
----------------------------- ----------------------------
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
GNMA $12,298,030 $11,811,780 $ -- $ --
FHLMC 36,072,341 35,427,606 15,792,937 15,593,808
FNMA 21,275,485 20,671,561 27,159,682 26,703,973
Collateralized mortgage
obligations 17,955,156 16,991,901 -- --
Non-marketable equity
securities -- -- 2,761,847 2,761,847
---------- ---------- ---------- ----------
$87,601,012 $84,902,848 $45,714,466 $45,059,628
========== ========== ========== ==========
</TABLE>
The following table details the range of maturities of mortgage-backed
securities held to maturity as of March 31, 1996 based on the weighted average
life of the securities for each
<PAGE>
classification and the weighted average yield for each maturity period:
<PAGE>
<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 $782,186 $39,398,888 $29,464,782 $69,645,856
Collateralized mortgage obligations -- 17,494,501 460,655 17,955,156
-------- ---------- ---------- ----------
$782,186 $56,893,389 $29,925,437 $87,601,012
======= ========== ========== ==========
Weighted Average Yield 6.00% 6.41% 6.90%
</TABLE>
<PAGE>
The following table details the range of maturities of mortgage-backed
securities available for sale as of March 31, 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 $ -- $19,456,339 $23,496,280 $42,952,619
======== ========== ========== ==========
Weighted Average Yield --% 6.86% 6.90%
</TABLE>
The following table sets forth those collateralized mortgage obligations which
have a carrying value that exceeded 10% of Regent's shareholders' equity at
March 31, 1996. These securities have an investment rating of AA or better.
<TABLE>
<CAPTION>
Carrying Value Market Value
-------------- ------------
<S> <C> <C>
Bear Stearns Mortgage Securities Inc.
Series 1993-2 Class 7.....................$2,580,197 $2,397,012
Bear Stearns Mortgage Securities Inc.
Series 1993-2 Class 5..................... 1,999,957 1,821,065
Bear Stearns Mortgage Securities Inc.
Series 1993-2 Class 6..................... 1,693,772 1,567,277
Bear Stearns Mortgage Securities Inc.
Series 1993-12 Class 1B................... 1,993,774 1,900,000
Bear Stearns Mortgage Securities Inc.
Series 1992-04............................ 2,239,904 2,161,165
Capstead Securities Corp.
Series 1992-C-3........................... 1,610,663 1,532,869
Resolution Trust Corporation
Series 1991-M6............................ 1,423,965 1,405,864
Saxon Mortgage Security Corp.
Series 1993-04 Class 1A................... 2,483,612 2,356,335
</TABLE>
Gross unrealized gains and losses on mortgage-backed securities held to maturity
at March 31, 1996 were $100,331 and $2,798,495, respectively, and gross
unrealized gains and losses on mortgage-backed securities available for sale at
March 31, 1996 were $163,512 and $818,350 respectively. There were no sales of
mortgage-backed securities during 1996 or 1995. Unrealized losses on the
securities generally are the result of lower than market interest rates on the
underlying mortgages contained in the securities.
<PAGE>
At March 31, 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
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 $128.9 million at March 31, 1996 compared to $120.0
million at December 31, 1995. The increase of 7% from year end 1995 outstanding
loan balances to March 31, 1996 resulted primarily from higher commercial real
estate balances, and the IPF loan portfolio.
The following table details the types of loans outstanding by category as of
March 31, 1996 and December 31, 1995:
<PAGE>
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
--------------------------- ---------------------------
Amount % Amount %
------ -- ------ --
<S> <C> <C> <C> <C>
Commercial & industrial $ 48,110,902 42% $ 49,006,081 46%
Real estate:
Construction 7,121,572 6% 4,430,425 4%
Mortgages-residential 21,018,440 18% 18,925,609 18%
Mortgages-commercial 17,559,080 15% 16,168,009 15%
Consumer 21,329,291 19% 18,572,551 17%
----------- --- ----------- ---
Total Loans 115,139,285 100% 107,102,675 100%
=== ===
Less:
Unearned interest and fees ( 1,333,221) ( 1,192,641)
----------- -----------
$113,806,064 $105,910,034
=========== ===========
Mortgage loans held for sale $ 13,741,689 $ 12,873,725
=========== ===========
</TABLE>
<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 March 31, 1996:
<TABLE>
<CAPTION>
After 1
Within But Within After
1 Year 5 Years 5 Years Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Predetermined interest
rates $28,436,828 $21,686,014 $12,429,949 $62,552,791
Floating rate 25,764,895 18,875,839 7,945,760 52,586,494
---------- ---------- ---------- ----------
$54,201,723 $40,561,853 $20,375,709 $115,139,285
========== ========== ========== ===========
</TABLE>
<PAGE>
RISK ELEMENTS
Risk elements unique to each particular loan category are as follows:
Commerical and Industrial
Risk factors inherent in commercial and industrial loans include economic risk
which may affect 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 analysis.
<PAGE>
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 monitor 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.
Commercial mortgages
Risk factors inherent in commercial mortgage lending include economic risk which
may affect lessees' ability to pay rent, or 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 analysis and financial analysis.
Consumer loans
Consumer loans consist primarily of loans to individuals to finance automobile
insurance premiums on the 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
<PAGE>
and insurance agents that originate the loans; the effectiveness of the internal
control structure to cancel the insurance 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 $7.9
million or 2.98% of total assets at March 31, 1996 compared to $9.2 million or
3.49% of total assets at December 31, 1995. The decrease in non-performing
assets in the 1996 first quarter was attributable to a lower amount of loans
past due 90 days or more and a decline in non-accruing loans primarily as a
result of charging-off $745,000 in non-accruing loan balances. The high level of
90 days or more delinquent loans was attributable to past due IPF loans. Given
the limitation of the Servicer's records associated with IPF loans, the Bank was
unable to obtain an accurate aging of such loans. In connection with the Bank's
determination of the loss exposure on the IPF loans, the Bank estimated the loss
exposure at $4.5 million. Accordingly, for purposes of determining the amount of
non-performing IPF loans, the Bank included the loss exposure of $4.5 million of
accruing loans 90 days or more past due. Although the allowance for loan losses
includes a specific reserve of $4.5 million for these delinquent loans,
management believes that concerted efforts recently initiated to collect
unearned premiums on the cancelled policies from the insurance companies and the
secured promissory note of $1.8 million obtained from the Servicer will
substantially reduce the amount of actual loss associated with the IPF loans.
The following table details the non-performing assets at March 31, 1996 and
December 31, 1995:
<PAGE>
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Non-accrual loans $2,622,956 $3,567,737
Accruing loans 90 days or more past due 5,053,019 5,594,005
Restructured loans - -
--------- ---------
Total non-performing loans 7,675,975 9,161,742
Other real estate owned 179,627 -
--------- ---------
Total non-performing assets $7,855,602 $9,161,742
========= =========
Non-performing loans to period end loans
and loans held for sale 5.96% 7.64%
Non-performing assets to total assets 2.98% 3.49%
Non-performing assets to loans, loans held
for sale and other real estate owned 6.09% 7.64%
</TABLE>
Accrual of interest is discontinued on loans when management believes, after
considering economic and business conditions and
<PAGE>
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 $90,300 for the three months ended
March 31, 1996. No interest income was included in operating income attributable
to non-accrual loans in the same three-month period.
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 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.
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;
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
March 31, 1996, there were no restructured loans.
At March 31, 1996, the recorded investment in loans that are considered to be
impaired as defined by SFAS No. 114 and SFAS No. 118 was $15.6 million (of which
$2.6 million were on non-accrual loans and $9.4 million were delinquent IPF
loans). The related allowance for credit losses for these impaired loans is $5.4
million. For approximately $10.0 million of impaired loans, the
<PAGE>
reserve evaluation was based on the expected future cash flows and the remaining
$5.6 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 three months ended March 31, 1996 and 1995:
<PAGE>
March 31, 1996 March 31, 1995
-------------- --------------
Balance, beginning of period $ 6,500,882 $ 1,713,372
Charge-offs:
Commercial & industrial 413,961 128
Real estate - construction -- --
Real estate - residential 335,000 --
---------- ----------
748,961 $ 128
---------- ----------
Recoveries:
Commercial & industrial -- 90
Consumer -- 8,000
---------- ----------
Total recoveries -- 8,090
---------- ----------
Net (charge-offs) recoveries (748,961) 7,962
---------- ----------
Provision charged to operations 175,000 70,000
---------- ----------
Balance, end of period $ 5,926,921 $ 1,791,334
========== ==========
Allowance for loan losses as a % of period
loans and loans held for sale 4.60% 2.20%
Net charge-offs as a % of average loans
and loans held for sale 2.49% --
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 believes the Bank's concerted efforts to collect unearned premiums on
the delinquent IPF loans from insurance companies and the secured promissory
note of $1.8 million obtained from the Servicer of the IPF will substantially
reduce the amount of actual loss that the Bank will ultimately recognize.
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 for March 31, 1996:
<PAGE>
<TABLE>
<CAPTION>
March 31, 1996
--------------
% of Loans
Amount to Total Loans
------ --------------
<S> <C> <C>
Commercial & Industrial $ 276,500 42%
Real Estate:
Construction 119,900 6%
Mortgages - residential 221,700 18%
Morgages - commercial 3,400 15%
Consumer 4,787,100 19%
Unallocated 518,321 N/A
--------- ---
$5,926,921 100%
========= ===
</TABLE>
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.
DEPOSITS
Total deposits at March 31, 1996 aggregated $196.8 million which was comparable
to total deposits at December 31, 1995 of $196.1 million. As illustrated in the
table below, the composition of deposits at March 31, 1996 has remained
relatively consistent compared to the composition at December 31, 1995.
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
Balance % Balance %
------- - ------- -
<S> <C> <C> <C> <C>
Demand $ 12,332,265 6% $ 12,621,000 6%
NOW 3,959,346 2% 3,959,987 2%
Savings 50,412,080 26% 50,602,549 26%
Money Market 4,368,204 2% 3,663,527 2%
Certificates of deposit 125,750,860 64% 125,284,579 64%
----------- -- ----------- --
$196,822,755 100% $196,131,642 100%
=========== === =========== ===
</TABLE>
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
three months ended March 31, 1996 and 1995:
<PAGE>
<TABLE>
<CAPTION>
Average
Amount Maximum Weighted
Balance Outstanding Outstanding Average
Outstanding During at any Interest Average Rate
3/31 the Period Month-End Rate at 3/31 Paid
----------- ---------- --------- ------------ ----
<C> <C> <C> <C> <C> <C>
1996: FHLB borrowings $34,427,866 $35,178,650 $37,277,083 5.81% 6.22%
Federal funds purchased -- 87,912 -- 6.17%
---------- ----------
$34,427,866 $35,266,562 6.22%
========== ==========
1995: FHLB borrowings $52,867,810 $63,168,996 $66,155,178 7.00% 6.20%
Federal funds purchased -- 741,111 -- 6.49%
---------- ----------
$52,867,810 $63,910,107 6.21%
========== ==========
</TABLE>
RESULTS OF OPERATIONS
Regent recorded net income of $217,792 or $.05 per share for the quarter ended
March 31, 1996 compared to $258,355 or $.18 per share for the first quarter of
1995. The principal factors that decreased the quarterly earnings were increases
in the provision loan losses of $105,000 and in other expenses of $228,949,
which were offset by an increase in net interest income of $306,515.
The IPF lending program has significantly impacted the earnings performance of
Regent in the 1996 first quarter. Interest on IPF loans in the three months
ended March 31, 1996 was recognized on only those IPF loans considered
non-delinquent as of December 31, 1995 and on IPF loans originated in 1996. Fees
on IPF loans were recognized only to the extent of actual cash received from the
proceeds of return premiums from insurance companies that had not been applied
to the principal balance of the loan. Under these methods, interest and fees in
the consolidated statement of income for the first quarter of 1996 includes
$752,000 on IPF loans. If interest and fees had been accrued on all IPF loans
during the first three months of 1996, the Bank estimates that interest and fee
income would approximate $900,000. In addition to the lower interest and fee
income on IPF loans, Regent increased its provision for loan losses during the
first quarter of 1996 by $105,000 due primarily to delinquent IPF loans.
NET INTEREST INCOME
Net interest income for the three months ended March 31, 1996 totaled $2,056,166
which was $306,515 or 18% higher than net interest income of $1,749,651 in the
comparable 1995 period. The increase was attributable to an improved net
interest margin which rose from 2.99% for the first three months of 1995 to
3.21% for the same three 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. The yield on
IPF loans approximated 17% and represented 14% of total interest income in the
first three months of 1996 versus 7% of total interest income in the comparable
1995 period. In 1996, interest and fees on all loans
<PAGE>
represented 59% of total interest income versus 42% in 1995. Net interest income
also benefitted from an increase in average earning assets of $23,120,000. The
following table is a rate/yield analysis for the three months ended March 31,
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 $136,875 $2,280 6.66% $155,221 $2,667 6.87%
Loans 120,545 3,063 10.22% 79,079 1,933 9.78%
------- ----- ------- -----
Total $257,420 5,343 8.30% $234,300 4,600 7.85%
======= ----- ======= -----
Interest Bearing Liabilities:
NOW accounts 3,965 23 2.33% 3,954 24 2.48%
Statement savings 49,671 603 4.87% 65,425 785 4.87%
Money market 3,712 36 3.89% 9,377 67 2.91%
Time deposits 124,112 1,917 6.20% 68,150 942 5.60%
Short-term borrowings 35,266 547 6.22% 63,910 978 6.21%
Long-term advances 10,209 107 4.12% -- -- -
Subordinated debt 2,750 54 7.99% 2,750 54 7.99%
------- ----- ------ ---
Total 229,685 3,287 5.74% 213,566 2,850 5.41%
------- ----- ------- -----
Non-Interest bearing
sources of funds 27,735 20,734
------- -------
Net Interest Income/Spread $257,420 2.56% $234,300 2.44%
======= ==== ======= ====
Net Interest Margin $2,056 3.21% $1,750 2.99%
===== ==== ===== ====
</TABLE>
PROVISION FOR LOAN LOSSES
A provision for loan losses of $175,000 was recorded for the three months ended
March 31, 1996 compared to $70,000 for the three months ended March 31, 1995.
The increase in the provision was due primarily to the growth of the loan
portfolio and the high level of delinquencies attributable to IPF loans.
OTHER EXPENSES
Other expenses for the three months ended March 31, 1996 totaled $1,546,000, an
increase of $228,949 or 17% over the comparable 1995 total of $1,317,051. The
primary factors that increased other expenses were higher salaries and employee
benefits, merger related expenses, and processing and operational costs
associated with IPF loans. Salaries and employee benefit costs in 1996 were
above 1995 amounts by $74,894 resulting from higher staffing levels and benefit
costs and normal salary increases. Expenses totaling $64,000 were incurred in
1996 for professional services in connection with the proposed Carnegie merger.
Processing and operational costs for IPF loans increased by $184,245 which
related to higher IPF loan activity.
<PAGE>
PROVISION FOR INCOME TAXES
The provision for income taxes for the 1996 first quarter was $145,100 compared
to the 1995 first quarter provision of $133,000. The effective tax rate for 1996
was 40% versus 34% in 1995. The higher effective rate in 1996 reflected merger
related expenses which are not deductible for federal income tax purposes.
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.
<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.
------------------------------
HARVEY PORTER
President & CEO
------------------------------
STEPHEN J. CARROLL
Treasurer
Dated: June 13, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 4,172,646
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45,059,628
<INVESTMENTS-CARRYING> 87,601,012
<INVESTMENTS-MARKET> 84,902,848
<LOANS> 113,806,064
<ALLOWANCE> 5,926,921
<TOTAL-ASSETS> 263,287,850
<DEPOSITS> 196,822,755
<SHORT-TERM> 34,427,866
<LIABILITIES-OTHER> 8,790,341
<LONG-TERM> 12,959,320
0
56,129
<COMMON> 101,769
<OTHER-SE> 10,129,670
<TOTAL-LIABILITIES-AND-EQUITY> 263,287,850
<INTEREST-LOAN> 3,063,283
<INTEREST-INVEST> 2,279,504
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,342,787
<INTEREST-DEPOSIT> 2,579,037
<INTEREST-EXPENSE> 3,286,621
<INTEREST-INCOME-NET> 2,056,166
<LOAN-LOSSES> 175,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,546,000
<INCOME-PRETAX> 362,892
<INCOME-PRE-EXTRAORDINARY> 362,892
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 217,792
<EPS-PRIMARY> .05
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.21
<LOANS-NON> 2,622,956
<LOANS-PAST> 5,053,019
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,500,882
<CHARGE-OFFS> 748,961
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 5,926,921
<ALLOWANCE-DOMESTIC> 5,926,921
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 518,321
</TABLE>
