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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-17753
REGENT BANCSHARES CORP.
(Exact name of registrant as specified in its charter)
New Jersey 23-2440805
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1430 Walnut Street, Philadelphia, PA 19102
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (215) 546-6500
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Series A Convertible Preferred Stock, $.10 par value
(Title of Class)
Common Stock, $.10 par value
(Title of Class)
Common Stock Purchase Warrants
(Title of Class)
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 [ ] No [ X ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Based upon the average of the highest bid and the lowest asked price for
the Registrant's Series A Convertible Preferred Stock and Common Stock recorded
on the National Association of Securities Dealers Automated Quotation System for
March 8, 1996, as of such date, the aggregate market value of the Registrant's
outstanding Series A Convertible Preferred Stock and Common Stock held by non-
affiliates of the Registrant was approximately $4,974,540 and $7,167,885
respectively.* As of March 8, 1996, the aggregate number of shares of the
Registrant's Series A Convertible Preferred Stock and Common Stock outstanding
was 481,982 and 1,017,015 shares, respectively.
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* Excluded from such computation are the 79,999 shares of Series A Convertible
Preferred Stock and the 437,792 shares of Common Stock beneficially owned by
directors and executive officers of the Registrant.
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REGENT BANCSHARES CORP.
FORM 10-K
INDEX
<TABLE>
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PAGE
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<S> <C> <C>
PART I
Item 1 Business....................................................................................... 1
Item 2 Properties..................................................................................... 2
Item 3 Legal Proceedings.............................................................................. 3
Item 4 Submission of Matters to a Vote of Security Holders............................................ 4
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters.......................... 5
Item 6 Selected Financial Data........................................................................ 6
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 7
Item 8 Financial Statements and Supplementary Data.................................................... 24
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 47
PART III
Item 10 Directors and Executive Officers of the Registrant............................................. 48
Item 11 Executive Compensation......................................................................... 50
Item 12 Securities Ownership of Certain Beneficial Owners and Management............................... 52
Item 13 Certain Relationships and Related Transactions................................................. 54
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 54
</TABLE>
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PART I
ITEM 1. BUSINESS OF REGENT BANCSHARES CORP. AND REGENT NATIONAL BANK
Regent Bancshares Corp. ('Regent') is a one bank holding company registered
under the Bank Holding Company Act. Regent was incorporated under the laws of
the Commonwealth of Pennsylvania on December 22, 1986 and on November 23, 1987
was merged into a New Jersey corporation with the same name (and which was
incorporated on November 2, 1987), with the New Jersey corporation being the
surviving entity. Regent became a bank holding company on June 2, 1989 when it
completed the acquisition of all of the authorized capital stock of Regent
National Bank (the 'Bank'), its only subsidiary. The Bank commenced operations
on June 5, 1989. Regent provides banking services through the Bank and does not
engage in any activities other than banking activities. The principal executive
offices of Regent are located at 1430 Walnut Street, Philadelphia, Pennsylvania
19102. Regent's telephone number is (215) 546-6500.
THE MERGER
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 an
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 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 Office of the
Comptroller of the Currency (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.
THE BANK
The Bank, a federally-chartered national bank, is regulated by the Office
of the Comptroller of the Currency and is a member of the Federal Reserve
System. The deposits held by the Bank are insured by the Bank Insurance Fund of
the Federal Deposit Insurance Corporation.
The Bank conducts all its banking activities through its office located at
1430 Walnut Street, Philadelphia, Pennsylvania 19102, offering a broad range of
commercial and private banking services. At December 31, 1995, the Bank had
total deposits of $196.1 million and had total loans and loans held for sale
outstanding of $120.0 million. Although the Bank's primary service area for
Community Reinvestment Act purposes is Center City Philadelphia, it also
services the Delaware Valley which consists of Philadelphia, Montgomery, Bucks,
Chester, Delaware, Berks, Lancaster, Northampton and Lehigh Counties in
Pennsylvania; New Castle and Kent Counties in Delaware; Cecil County in
Maryland; and Camden, Burlington, Salem, Atlantic, Ocean, Mercer, Cumberland and
Cape May Counties in New Jersey (the 'Delaware Valley').
The Bank engages in the commercial banking business, serving the banking
needs of its customers with a particular focus on small and medium-sized
businesses, professionals and other individuals, with an emphasis on the
origination of loans in the $100 thousand to $2.5 million range. The Bank's
strategy in providing its services is to attempt to respond to each customer's
needs and assure that a customer will deal regularly with the same officer of
the Bank. The small and midsized business and entrepreneurial market in the
Bank's service area is large and the Bank believes it can offer the flexibility,
speed and personal attention necessary to serve this large market. The banking
1
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and broad business experience of the officers and directors makes the Bank
particularly well-suited to serve the individualized needs of this market.
The Bank offers a wide range of deposit products, including checking
accounts, interest-bearing NOW accounts, insured money market accounts,
certificates of deposit, savings accounts and Individual Retirement Accounts.
A broad range of credit facilities are offered to the businesses and
residents of its service area, including commercial loans, home improvement
loans, mortgage loans, loans to finance automobile insurance premiums, and home
equity lines of credit. At December 31, 1995, the Bank's maximum legal lending
limit was approximately $2.8 million per borrower.
In addition, the Bank offers safe deposit boxes, travelers' checks, money
orders, direct deposit of payroll and Social Security checks, and access to one
or more regional or national automated teller networks as well as international
services through correspondent institutions. The Bank is also empowered to offer
trust services. The Bank has the power to act as executor of wills and as a
trustee for Individual Retirement Accounts, minors and other fiduciaries. Other
trust services are provided through correspondent institutions. The Bank has
established relationships with correspondent banks and other financial
institutions in order to provide other services requested by its customers,
including requesting correspondent banks to participate in loans where the loan
amount exceeds the Bank's policies or legal lending limit.
As of March 8, 1996, Regent and the Bank had a total of 43 employees.
COMPETITION
There is substantial competition among financial institutions in the Bank's
service area. The Bank competes with new and established local commercial banks,
as well as numerous regionally based commercial banks. There is also competition
from out of state financial institutions, thrifts and mutually owned savings
banks and savings and loan associations. As of the date hereof, the Bank had
attracted, and believes it will continue to attract its customers from the
deposit base of such existing banks and financial institutions and from growth
in the Delaware Valley. Many of such banks and financial institutions are
well-established and well-capitalized, allowing them to do more advertising and
promotion and to provide a greater range of services, including trust services.
The Bank's strategy has been and will continue to be emphasizing personalized
services, offering competitive rates to depositors and making use of commercial
and personal ties of the shareholders, directors, officers and staff to Delaware
Valley businesses and residents.
In recent years, intense market demands, economic pressures and significant
legislative and regulatory action have eroded traditional banking industry
classifications which were once clearly defined and have increased competition
among banks, as well as between banks and other financial institutions. As a
result, banks and other financial institutions have had to diversify their
services, generally increase interest paid on deposits and become more cost
effective. These events have resulted in increasing homogeneity in the financial
services offered by banks and other financial institutions. Some of the effects
on banks and other financial institutions of these market dynamics and
legislative and regulatory changes include increased customer awareness of
product and service differences among competitors and increased merger activity.
ITEM 2. PROPERTIES
The Bank leases approximately 20,600 square feet of the first and second
floors and basement of 1430 Walnut Street and the third floor of 1426 and 1428
Walnut Street, Philadelphia, Pennsylvania. The space is occupied by both Regent
and the Bank and serves as the Bank's sole banking location. The first floor
contains a banking lobby. The vault, together with additional lobby and storage
space is located in the basement. Executive, administrative, and loan offices
are located on the second floor. At December 31, 1995, approximately 90% of the
Bank's total leased square footage was occupied.
The property is leased with a rental expense of approximately $190,000 per
annum excluding taxes, insurance, utilities and janitorial services through 1996
and 1997, $210,000 for 1998, and $87,000 through May 1999. The lease provides
for two 5-year renewal options at the then current market rental rates, plus a
right of first refusal to purchase the premises.
2
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ITEM 3. LEGAL PROCEEDINGS
The Bank and Shareholders Funding, Inc. (the 'Debtor') were parties to a
Participation Agreement pursuant to which the Bank purchased 100% participations
in mortgage loans originated by the Debtor. The Debtor filed for bankruptcy
protection in November 1994, in the proceeding known as In Re: Shareholders
Funding, Inc., Debtor, pending in the United States Bankruptcy Court for the
Eastern District of Pennsylvania, Case No. 94-17215 SR. At approximately the
same time, James Beck (the president of the Debtor) filed an individual petition
for bankruptcy protection. Pursuant to a Motion for Relief from Stay filed on
February 24, 1995, the Bank requested, among other relief, that the court order
the Debtor to execute assignments of notes and mortgages to the Bank with
respect to approximately $7.6 million of mortgages that the Bank had purchased
and that the Debtor was obligated to resell but had failed to resell as a result
of its financial difficulties. The Debtor and the trustee objected to the Bank's
request, alleging that the mortgages may be the property of the Debtor and that
the funds advanced by the Bank of approximately $7.6 million might represent
unsecured loans to the Debtor.
The parties conducted discovery in connection with the pending Motion for
Relief from Stay, including document productions and interrogatories.
Ultimately, the trustee, the creditors' committee and the Bank agreed that a
potential claim existed against the Debtor's accounting firm and the pursuit of
that claim would be beneficial to all parties. Accordingly, the Bank, the
creditors' committee and the trustee agreed to a settlement. The Bankruptcy
Court issued an order approving the settlement on October 4, 1995. As part of
the settlement, the Bank's request to receive assignment of the $7.6 million in
notes and mortgages was granted, and the Bank has obtained legal title to those
mortgages. Also, as part of the settlement, the fixed portion of the Bank's
unsecured claim has been agreed to in the amount of approximately $1.73 million;
the contingent portion of the unsecured claim has been limited to approximately
$740 thousand. As part of the settlement, the Bank has agreed to pay to the
trustee $175 thousand, which is part of the Bank's fixed claim and may be used
to pay all or part of the costs and expenses of the administration of the
Debtor's estate and the Bank will lend the trustee up to $175 thousand to pay
counsel fees in litigation against the Debtor's accountant by the trustee. If
those counsel fees exceed $175 thousand, counsel has agreed to continue the
litigation on a contingency fee basis. The Bank will lend up to an additional
$50 thousand to pay the fees and expenses of professionals (other than
attorneys) retained by the trustee in connection with the claim against the
Debtor's accounting firm. Lastly, the Bank may make a third loan to the trustee
in an amount not to exceed $75 thousand for additional expenses of professionals
other than attorneys in connection with the litigation against the Debtor's
accountants. The loans will bear interest at the Bank's prime rate plus one
percent per annum. The Bank will make such loans available to the trustee only
after the expense has been approved by the Bank after receipt of a financial
plan which is in form and substance satisfactory to the Bank and only after the
expense is due and owing. The indebtedness will be evidenced by notes. The
disbursement of any proceeds of the claim against the Debtor's accountants will
be disbursed as follows: first, to the payment of any administrative claims of
the trustee, the committee and/or any professionals employed by the trustee or
the committee, provided that such claims arose directly out of the litigation
against the Debtor's accountants; and second, to the payment of the Bank's
post-petition loans. As security for the full and timely payment of such
indebtedness and all other obligations of the trustee to the Bank, the trustee
granted to the Bank a continuing first lien on and security interest in the
trustee's right, title and interest in the collateral of the Debtor, subject
only to those security interests that were duly perfected on the date of the
settlement. If the litigation against the Debtor's accountant is not successful,
repayment of such indebtedness will be paid from the assets of the Debtor's
estate, to the extent such assets are available prior to the distribution to the
general creditors, but after payment of administrative expenses. The Bank's
payment to the trustee of $175,000, as part of the settlement, has been charged
to earnings in the year ended December 31, 1995. Management believes the Bank's
loan commitments in connection with litigation against the Debtor's accountants,
which aggregate $225,000 plus an additional $75,000 which is subject to certain
conditions, are recoverable based upon its current assessment of the outcome of
this litigation. The Bank's recovery of unsecured claims against the Debtor are
primarily dependent on successful litigation against the Debtor's accountants.
In addition to the foregoing, there continue to be other possible claims
which could be asserted against the Bank by other creditors of the Debtor
associated with the Bank's transactions with the
3
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Debtor. Management believes that these possible claims are without merit, and
the Bank intends to vigorously defend any future actions brought related to
these matters. However, the ultimate outcome of these matters is not presently
determinable. Additionally, in November 1995, a title abstract company that
conducted a real estate settlement involving the refinancing of a mortgage
through the Debtor, filed a lawsuit against the Bank seeking damages in excess
of $100,000 plus any and all damages sustained which are unspecified. The
lawsuit alleges, among other things, breach of contract and reliance on the Bank
as the Debtor's warehouse lender. On February 2, 1996, the lawsuit was
dismissed.
Regent and the Bank are subject to various other legal actions and
proceedings, none of which is material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
4
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Regent's securities are traded on the NASDAQ Small-Cap Market under the
following symbols: Common Stock -- RBNK; Common Stock Units -- RBNKU; Common
Stock Warrants -- RBNKW; and Series A Convertible Preferred Stock -- RBNKP. As
of March 8, 1996, there were approximately 403 holders of Regent's Common Stock
and 308 holders of the Series A Convertible Preferred Stock. The following table
sets forth the low and high bid prices for Regent's various securities as
reported by NASDAQ for each quarter during 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
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LOW BID HIGH BID LOW BID HIGH BID
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<S> <C> <C> <C> <C>
First Quarter
Common..................................................... 5 3/4 7 6 3/4 8 1/2
Units...................................................... 5 1/2 6 15/16 6 1/2 7 1/2
Warrants................................................... 3/4 1 1/8 1/8
Preferred.................................................. 5 3/4 6 3/4 6 1/4 8 1/2
Second Quarter
Common..................................................... 5 1/2 6 3/4 6 3/4 8
Units...................................................... 5 1/2 5 3/4 6 1/2 6 7/8
Warrants................................................... 3/4 3/4 1/8 7/8
Preferred.................................................. 5 1/4 6 1/8 6 1/4 8 1/4
Third Quarter
Common..................................................... 6 11 7 8
Units...................................................... 5 3/4 10 3/4 6 7/8 7
Warrants................................................... 3/4 4 3/4 1 1/8
Preferred.................................................. 5 1/4 11 7 8 5/8
Fourth Quarter
Common..................................................... 10 1/2 11 6 8 1/2
Units...................................................... 10 3/4 1 1/2 6 1/2 7 5/32
Warrants................................................... 2 1/4 3 3/8 3/4 1 1/64
Preferred.................................................. 10 11 1/4 6 3/4 7 3/4
</TABLE>
These quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not represent actual transactions.
Regent has not paid any cash dividends on its common or preferred stock,
although Regent has paid stock dividends on its Common and Series A Convertible
Preferred Stock. Management of Regent intends to follow a policy of retaining
earnings for the foreseeable future for the purpose of strengthening its capital
and reserves. The payment of dividends to Regent by its wholly owned subsidiary,
Regent National Bank, is subject to certain restrictions. See note 2 and 18 to
the Consolidated Financial Statements.
EXTENSION OF EXPIRATION DATE OF ALL OPTIONS AND WARRANTS
The expiration date of the outstanding options and warrants of Regent that
would have expired before the effective time of the Merger has been extended by
the Board of Directors of Regent from their current expiration date to the
earlier of (a) the effective time of the Merger subject to the condition that,
during such period of extension from their original expiration date, such
options and warrants may not be exercised for the purchase of Regent Common
Stock but shall represent only the right to receive Carnegie Common Stock as
provided in the Merger Agreement or (b) the latter of (i) 30 days following the
termination of the Merger Agreement during which period such options and
warrants may be exercised for the purchase of Regent Common Stock in accordance
with their respective terms, or (ii) the stated expiration date of such options
or warrants. The exercise price of such options and warrants approximated the
fair value of the common stock on the date such extension was granted.
5
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ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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1995 1994 1993 1992 1991
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<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Interest income................................................ $ 21,160 $ 17,165 $ 15,112 $ 13,519 $ 11,163
Interest expense............................................... 12,553 11,373 9,921 8,810 7,882
--------- --------- --------- --------- ---------
Net interest income............................................ 8,607 5,792 5,191 4,709 3,281
Provision for loan losses...................................... 4,905 860 450 525 525
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses............ 3,702 4,932 4,741 4,184 2,756
Non-interest income............................................ 104 202 156 70 55
Realized gain on sale of securities............................ -- -- -- -- 642
Unrealized loss on securities held for sale.................... -- -- -- -- --
Non-interest expense........................................... 7,396 4,372 3,113 2,486 2,026
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(Loss) income before income taxes and extraordinary item....... (3,590) 762 1,784 1,768 1,427
Income tax (benefit) expense................................... (463) 259 607 601 485
Extraordinary item -- utilization of net operating loss
carry forward................................................ -- -- -- -- 213
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Net (loss) income.............................................. $ (3,127) $ 503 $ 1,177 $ 1,167 $ 1,155
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(LOSS) EARNINGS PER SHARE:
Primary...................................................... $ (3.41) $ 0.22 $ 0.71 $ 0.95 $ 0.57
Fully Diluted................................................ NA NA NA 0.82 NA
Cash Dividends................................................. -- -- -- -- --
Book Value Per Share........................................... 6.55 7.98 8.88 8.38 6.53
</TABLE>
SELECTED FINANCIAL RATIOS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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1995 1994 1993 1992 1991
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<S> <C> <C> <C> <C> <C>
Net interest margin........................................... 3.56% 2.37% 2.49% 2.87% 2.83%
Other expenses to average total assets........................ 3.00% 1.74% 1.44% 1.47% 1.70%
Return on average total assets................................ N/A .20% .55% .70% .97%
Return on average shareholders' equity........................ N/A 3.89% 9.29% 10.33% 11.24%
Average shareholders' equity to average total assets.......... 5.50% 5.14% 5.88% 6.67% 8.60%
Non-performing assets to total assets......................... 3.49%(1) 1.68% 1.04% 2.11% 2.09%
Allowance for loan losses as a percentage of period end loans
and loans held for sale..................................... 5.42% 2.10% 1.84% 1.94% 1.78%
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AT DECEMBER 31,
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1995 1994 1993 1992 1991
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<S> <C> <C> <C> <C> <C>
Total assets............................................. $ 262,512 $ 243,450 $ 243,945 $ 204,800 $ 132,416
Federal funds sold....................................... -- -- 6,000 -- 7,300
Loans, net............................................... 99,409 74,146 47,826 54,454 49,877
Investment securities.................................... 138,969 156,664 156,166 140,226 70,032
Deposits................................................. 196,132 161,061 192,393 160,715 119,723
Shareholders' equity..................................... 10,353 12,206 13,126 11,949 10,782
</TABLE>
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(1) Given the limitations of the Servicer's records associated with the Bank's
$16.8 million (net of unearned interest) automobile insurance premium finance
(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 IPF loans (see
note 2 to the consolidated financial statements), the Bank determined that
delinquent IPF loans approximated $11.7 million and the loss exposure was
estimated at $4.5 million. Accordingly, for purpose of the nonperforming assets
to total assets ratio, the Bank included the loss exposure amount of $4.5
million related to IPF loans.
6
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL OVERVIEW
Regent recorded a net loss of $3.1 million or $3.41 per share for the year
ended December 31, 1995 compared to net income of $503,000 or $.22 per share for
the year ended December 31, 1994. The loss in 1995 was primarily the result of
an increase in the provision for loan losses of $4.0 million that was
attributable to delinquent automobile insurance premium finance ('IPF') loans to
individuals. In addition, other expenses were $3.0 million higher in 1995 than
in 1994. An improvement in net interest income of $2.8 million partially offset
the increase in the provision for loan losses and in other expenses. The
increases in other expenses and net interest income were primarily attributable
to the IPF loan program.
At December 31, 1995 and 1994, a substantial portion of the Bank's consumer
loans, $16.8 million and $3.3 million (net of $930,000 and $214,700 of unearned
interest, respectively), consisted of IPF loans. The 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 an
independently owned and operated 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 canceled 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. For the years ended
December 31, 1995 and 1994, the Bank recorded interest and fee income from the
IPF loan portfolio of $3.6 million and $163,000, respectively, and paid the
servicer fees of $1.3 million and $62,000, respectively.
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 is material to the 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 the first quarter
of 1996. These delinquent IPF loans totaled approximately $11.7 million (net of
unearned interest) as of December 31, 1995.
The Bank has applied all cash receipts from IPF borrowers and related
insurers during the period January 1, 1996 to May 23, 1996, to the principal
balances of such delinquent loans, thereby reducing the Bank's possible loss
exposure on the December 31, 1995 IPF loan balance to approximately $4.5
million, which was recorded as part of the Bank's provision for loan losses for
the year ended December 31, 1995. The Bank believes that this loss exposure will
be substantially reduced by additional cash receipts to be collected from the
borrowers and insurance companies during 1996.
The Servicer has agreed that a portion of the losses incurred by the Bank
on the IPF loan balance at December 31, 1995 will be borne by the Servicer.
Accordingly in 1996, the Servicer has executed a promissory note payable to the
Bank in the amount of $1.8 million, secured by commercial real estate,
receivables, and personal assets and guarantees of the principals of the
Servicer.
In determining the $4.5 million charge to earnings and the resulting
specific allocation to the allowance for loan loss reserve, no credit has been
taken for any future collection of the $4.5 million of return premiums due from
insurance companies and other credit sources. This conservative approach has
been taken even though approximately $8 million has been collected from January
1, 1996 to May
7
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23, 1996 of the total gross receivables in the approximate amount of $17.8
million outstanding as of December 31, 1995 and notwithstanding the $1.8 million
note from the Servicer or the personal guarantees of its principals. Collections
and credits continue on a daily basis as a result of increased collections
efforts.
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
December 31, 1995 may differ from the estimated loss exposure of $4.5 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.
Total assets at December 31, 1995 were $262.5 million which were $19.0
million higher than total assets at December 31, 1994 of $243.5 million. The
increase was comprised primarily of growth in lending volume as total loans held
for the portfolio and loans held for sale at December 31, 1995 were above
December 31, 1994 total loans held for the portfolio and loans held for sale by
$38.5 million. The rise in loans was attributable to higher commercial activity
and IPF loans. A continuing emphasis has been placed on loan growth by
reinvesting the cash flow from the mortgage-backed securities portfolio into the
commercial and installment programs. The mortgage-backed securities portfolio
decreased by $18.7 million from December 31, 1994 to December 31, 1995.
The principal funding source for asset growth in 1995 was deposit activity,
partcularly certificates of deposit. Total deposits at December 31, 1995 were
$35.0 million higher than at December 31, 1994 and the increase was comprised of
higher certificates of deposit of $75.0 million which offset a decrease in
savings balances of $32.7 million. The higher certificates of deposit balances
also enabled Regent to reduce its advances from the Federal Home Loan Bank of
Pittsburgh ('FHLB') by $19.4 million from year end 1994 to year end 1995.
Regent recorded net income of $503,000, or $.22 per share, in 1994 compared
to the net income of $1.2 million, or $.71 per share, earned in 1993. In 1993,
the Bank introduced a new lending program directed to the mortgage banking
industry. As an alternative to a warehouse credit line, the Bank participates in
the funding of individual residential mortgage loans originated by mortgage
bankers. During late 1994, two of the mortgage banking companies involved in
this program experienced financial difficulties and subsequently filed for
bankruptcy protection. At or about the same time, the Bank learned that
irregularities occurred in the origination process at the mortgage banking
companies which negatively impacted the underlying real estate collateral of
certain loans that had been funded. As a result of these conditions, the Bank
recorded charges totaling $1.1 million on a pre-tax basis ($1.08 per common
share) in the fourth quarter, which included an additional provision for loan
losses of $825,000. Management of the Bank is aggressively pursuing the recovery
of a substantial portion of these charges through insurance claims and other
courses of action. Such recoveries, if realized, will be recorded in future
periods when received. Offsetting the effects of this non-recurring incident was
an increase in net interest income of $600,000, which resulted from a higher
level of average earning assets. The results of operations and per share
information is summarized in the following table:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- ------------- -------------
<S> <C> <C> <C>
Net interest income................................................ $ 8,606,622 $ 5,791,818 $ 5,191,442
Provision for loan losses.......................................... 4,905,000 860,000 450,000
Other income....................................................... 103,988 201,883 155,650
Other expenses..................................................... 7,395,707 4,371,776 3,113,483
-------------- ------------- -------------
Pre-tax (loss) income.............................................. (3,590,097) 761,925 1,783,609
(Benefit) provision for income taxes............................... (463,500) 259,100 606,500
-------------- ------------- -------------
Net (Loss) Income.................................................. $ (3,126,597) $ 502,825 $ 1,177,109
-------------- ------------- -------------
-------------- ------------- -------------
(Loss) earnings per share:
Primary.......................................................... $ (3.41) $ .22 $ .71
</TABLE>
8
<PAGE>
FINANCIAL CONDITION
CAPITAL ADEQUACY
Economic conditions and the regulatory environment have placed an
increasing emphasis on the capital strength of financial institutions. Capital
strength is a primary determinant in a financial institution's ability to grow,
make acquisitions and protect against any unforeseen loss or adverse economic
condition. An evaluation of capital strength assesses how an institution's
inherent risks impact its ongoing financial net worth and focuses particularly
on asset quality, interest rate sensitivity, earnings and liquidity.
Total shareholders' equity at December 31, 1995 was $10.4 million or $1.8
million lower than shareholders' equity of $12.2 million at December 31, 1994.
The decline was a result of the net loss of $3.1 million and a decrease in the
net unrealized loss on securities available for sale of $1.3 million. No cash
dividends were paid in 1995 or 1994 as it is management's intention to retain
its earnings for the foreseeable future in order to maintain its capital
strength and allow for growth.
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 risk-weighted assets and total
capital of at least 8% of risk-weighted assets. Tier I (Core) capital consists
of common shareholders' equity, non-cumulative preferred stock, and retained
earnings and excludes the effects of unrealized gains or losses on securities
available for sale. Tier II or total capital includes Tier I capital, cumulative
preferred stock, qualifying subordinated debt, and the allowance for possible
loan losses of up to a maximum of 1.25% of total risk-weighted assets. The
following table presents the components of Regent's assets and Tier I and II
capital ratios at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---------------- ----------------
<S> <C> <C>
Tier I: Capital................................................. $ 10,501,971 $ 13,628,567
Tier II: Allowance for possible loan losses................... 1,876,606 1,387,754
Qualifying subordinated debt.......................... 1,100,000 1,650,000
---------------- ----------------
Total Tier II capital...................................... $ 13,478,577 $ 16,666,321
---------------- ----------------
---------------- ----------------
Total Risk Adjusted Assets...................................... $ 150,128,495 $ 111,020,356
---------------- ----------------
---------------- ----------------
Tier I Ratio.................................................... 7.00% 12.28%
Tier II Ratio................................................... 8.98% 15.01%
</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 December 31, 1995 and 1994, Regent's leverage ratio was 4.0% and
5.6%, respectively. Additionally, the Bank's Tier I leverage capital ratio
approximated 4.94% at December 31, 1995 and 5.07% at April 30, 1996 which is
below the 6.5% discretionary ratio established by the OCC for the Bank. See Note
2 to the consolidated financial statements.
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.
9
<PAGE>
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 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 portfolio with an amortized cost of
$136.4 million at December 31, 1995, $22.4 million were adjustable rate and $114
million were fixed rate. The estimated weighted average life for the
mortgage-backed securities portfolio at December 31, 1995 approximated 4.6
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 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 net interest
income does not fluctuate by more than 5% assuming that interest rates increase
or decrease by 200 basis points.
10
<PAGE>
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.
<TABLE>
<CAPTION>
0 TO 3 4 TO 12 1 TO 3 3 TO 5 AFTER 5
MONTHS MONTHS YEARS YEARS YEARS TOTAL
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities..................... $ 14,715 $ 276 $ 10,510 $ 61,337 $ 49,529 $ 136,367
Other securities............................... 2,432 -- -- -- 396 2,828
Mortgage loans held for sale................... 2,942 9,932 -- -- -- 12,874
Loans.......................................... 50,950 23,343 6,270 9,811 16,729 107,103
--------- --------- --------- --------- --------- ---------
Total Earning Assets....................... $ 71,039 $ 33,551 $ 16,780 $ 71,148 $ 66,654 $ 259,172
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
NOW and money market........................... $ 7,624 $ -- $ -- $ -- $ -- $ 7,624
Savings........................................ 50,603 -- -- -- -- 50,603
Certificates of Deposit........................ 33,823 42,215 23,954 25,241 52 125,285
FHLB advances.................................. 33,444 -- -- 5,000 5,211 43,655
Subordinated debt.............................. -- -- 2,750 -- -- 2,750
Net non-interest bearing sources of funds...... -- -- -- -- 29,255 29,255
--------- --------- --------- --------- --------- ---------
Total Sources of Funds..................... $ 125,494 $ 42,215 $ 26,704 $ 30,241 $ 34,518 $ 259,172
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Period Gap..................................... $ (54,455) $ (8,664) $ (9,924) $ 40,907 $ 32,136
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Cumulative Gap................................. $ (54,455) $ (63,119) $ (73,043) $ (32,136) $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Cumulative Gap as % of total assets............ (20.5%) (23.7%) (27.5%) (12.1%) --%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</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. The remaining 14% consisted of collateralized mortgage obligations of
private issuers. The table below summarizes by major category the amortized cost
of the mortgage-backed securities available-for-sale and the carrying values of
mortgage-backed securities held-to-maturity at December 31, 1995, 1994 and 1993.
Prior to the adoption of SFAS 115 for 1994, the Bank was not required to
segregate its investment portfolio between securities available-for-sale and
securities held-to-maturity.
11
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------ -------------------------------- -----------------
AVAILABLE HELD AVAILABLE HELD
FOR SALE TO MATURITY FOR SALE TO MATURITY
-------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
GNMA........................ $ -- $ 12,746,299 $ -- $ 13,804,916 $ 130,375
FHLMC....................... 16,944,354 37,518,427 12,686,878 50,078,849 77,343,996
FNMA........................ 28,178,651 22,484,087 19,523,444 37,215,590 49,120,901
Collateralized mortgage
obligations............... -- 18,495,335 1,408,502 20,383,071 27,178,202
-------------- -------------- -------------- ---------------- ----------------
$ 45,123,005 $ 91,244,148 $ 33,618,824 $ 121,482,426 $ 153,773,474
-------------- -------------- -------------- ---------------- ----------------
-------------- -------------- -------------- ---------------- ----------------
</TABLE>
The following table details the range of maturities of mortgage-backed
securities held to maturity as of December 31, 1995 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 AFTER 1 BUT AFTER 5 BUT
YEAR WITHIN 5 YEARS WITHIN 10 YEARS TOTAL
----------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
U.S. agencies and corporations.................... $ 229,707 $ 37,634,736 $ 34,884,371 $ 72,748,814
Collateralized mortgage obligations............... 45,428 17,769,951 679,955 18,495,334
----------- -------------- -------------- --------------
$ 275,135 $ 55,404,687 $ 35,564,326 $ 91,244,148
----------- -------------- -------------- --------------
----------- -------------- -------------- --------------
Weighted average yield............................ 6.75% 6.68% 6.94%
</TABLE>
The following table details the range of maturities of mortgage-backed
securities available for sale as of December 31, 1995 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 AFTER 1 BUT AFTER 5 BUT
YEAR WITHIN 5 YEARS WITHIN 10 YEARS TOTAL
----------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
U.S. agencies and corporations.................... $ 317,793 $ 20,558,437 $ 24,246,775 $ 45,123,005
----------- -------------- --------------- --------------
----------- -------------- --------------- --------------
Weighted average yield............................ 6.75% 6.53% 6.82%
</TABLE>
The following table sets forth those collateralized mortgage obligations
which have a carrying value that exceeded 10% of Regent's shareholders' equity
at December 31, 1995. 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......................................................... $ 2,625,595 $ 2,491,850
Bear Stearns Mortgage Securities Inc.
Series 1993-2 Class 5......................................................... 2,146,879 2,025,053
Bear Stearns Mortgage Securities Inc.
Series 1993-2 Class 6......................................................... 1,720,637 1,646,035
Bear Stearns Mortgage Securities Inc.
Series 1993-12 Class 1B....................................................... 1,993,774 1,950,000
Bear Stearns Mortgage Securities Inc.
Series 1992-04................................................................ 2,238,853 2,213,211
Capstead Securities Corp.
Series 1992-C-3............................................................... 1,664,039 1,618,007
Resolution Trust Corporation
Series 1991-M6................................................................ 1,513,434 1,493,109
Saxon Mortgage Security Corp.
Series 1993-04 Class 1A....................................................... 2,531,607 2,468,105
</TABLE>
12
<PAGE>
Regent also makes investments in securities other than mortgage-backed
instruments and these are classified in the consolidated balance sheet as
investment securities. There are no investment securities at December 31, 1995.
The following table summarizes the carrying values of investment securities at
December 31, 1994 and 1993, which approximates the fair market values of such
instruments as of such respective dates:
<TABLE>
<CAPTION>
1994 1993
----------- -------------
<S> <C> <C>
U.S. Treasury bills $ 124,672 $ 99,860
Non-marketable equity securities:
Federal Reserve Bank............................................ -- 300,000
FHLB............................................................ -- 1,972,200
Other............................................................. -- 20,275
----------- -------------
$ 124,672 $ 2,392,335
----------- -------------
----------- -------------
</TABLE>
At December 31, 1995 and 1994, non-marketable equity securities of
$2,827,370 and $3,593,864, respectively, have been classified as
available-for-sale and carried at their fair market value, which approximates
their cost.
Gross unrealized gains and losses on mortgage-backed securities held to
maturity at December 31, 1995 were $270,103 and $1,618,747, respectively and
gross unrealized gains and losses on mortgage-backed securities available for
sale at December 31, 1995 were $279,724 and $504,838 respectively. There were no
sales of mortgage-backed securities during 1995 or 1994. Unrealized losses on
the securities generally are the result of lower than market interest rates on
the underlying mortgages contained in the securities.
At December 31, 1995, 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 GAAP, 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 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 $120.0 million at December 31, 1995 compared to $81.5
million at December 31, 1994 and $71.6 million at December 31, 1993. The
increases of 47% and 14% in outstanding year end 1995 and 1994
13
<PAGE>
loan balances, respectively, resulted primarily from higher commercial and
industrial and commercial real estate balances, and IPF loans.
The mix of the loans held for the portfolio has shifted and the portfolio
became more diversified in 1995. Commercial and industrial and real estate loans
comprised 46% and 37%, respectively, of the total loans held for the portfolio
at December 31, 1995 compared to commercial and industrial amounting to 36% and
real estate loans 58% of total loans held for the portfolio at year end 1994.
This shift reflects primarily the expansion of the commercial and industrial
segments, the growth of the insurance premium finance balances, and a reduction
in the residential mortgage portfolio. The residential mortgage portfolio
decreased as a result of transferring approximately $9.9 million to mortgage
loans held for sale. The mortgages transferred represented those mortgages which
had been originated through the mortgage participation program and had been
retained in the portfolio at the end of 1994 as a result of the bankruptcy of
the two mortgage banking companies. The underlying collateral for real estate
loans is primarily located in the Bank's market area and a significant portion
is secured by residential property. The following table details the types of
loans outstanding at December 31 for each of the past five years:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Commercial & industrial................... $ 49,006,081 $ 27,406,523 $ 23,293,946 $ 26,418,088 $ 26,227,429
Real estate:
Construction............................ 4,430,425 1,455,110 2,218,795 2,634,900 5,181,425
Mortgage-residential.................... 18,925,609 29,252,959 17,358,843 18,974,537 12,483,927
Mortgage-commercial..................... 16,168,009 13,550,216 5,700,298 7,001,507 6,651,876
Consumer.................................. 18,572,551 4,409,532 357,700 448,204 225,837
------------- ------------ ------------ ------------ ------------
$ 107,102,675 $ 76,074,340 $ 48,929,582 $ 55,477,236 $ 50,770,494
------------- ------------ ------------ ------------ ------------
------------- ------------ ------------ ------------ ------------
Mortgage loans held for sale.............. $ 12,873,725 $ 5,387,517 $ 22,700,892 $ -- $ --
------------- ------------ ------------ ------------ ------------
------------- ------------ ------------ ------------ ------------
</TABLE>
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 December 31, 1995:
<TABLE>
<CAPTION>
AFTER 1 BUT
WITHIN 1 YEAR WITHIN 5 YEARS AFTER 5 YEARS TOTAL
-------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Commercial & industrial....................... $ 25,667,859 $ 15,157,255 $ 8,180,967 $ 49,006,081
Real estate:
Construction................................ 3,866,962 212,383 351,080 4,430,425
Mortgages-residential....................... 2,788,788 9,467,964 6,668,857 18,925,609
Mortgages-commercial........................ 1,907,052 6,434,932 7,826,025 16,168,009
Consumer...................................... 18,501,176 71,375 -- 18,572,551
-------------- -------------- -------------- ----------------
$ 52,731,837 $ 31,343,909 $ 23,026,929 $ 107,102,675
-------------- -------------- -------------- ----------------
-------------- -------------- -------------- ----------------
</TABLE>
The table below provides a breakdown of loans as of December 31, 1995 that
have either predetermined interest rates or floating rates:
<TABLE>
<CAPTION>
AFTER 1 BUT
WITHIN 1 YEAR WITHIN 5 YEARS AFTER 5 YEARS TOTAL
-------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Predetermined interest rates.................. $ 25,322,054 $ 15,438,598 $ 15,752,662 $ 56,513,314
Floating rate................................. 27,409,783 15,905,311 7,274,267 50,589,361
-------------- -------------- -------------- ----------------
$ 52,731,837 $ 31,343,909 $ 23,026,929 $ 107,102,675
-------------- -------------- -------------- ----------------
-------------- -------------- -------------- ----------------
</TABLE>
14
<PAGE>
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 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.
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. IPF loans have
repayment terms of nine months and are secured by the insurance policy's
unearned premiums. 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 on delinquent accounts in a timely and
effective manner; collection efforts in obtaining the cancelled policy's
unearned premiums from the insurance company; and legal risk in properly
documenting and perfecting the collateral.
15
<PAGE>
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 $9.2 million or 3.49%, of total assets at December 31, 1995 compared to $4.1
million or 1.68% of total assets at December 31, 1994. The increase in
non-performing assets in 1995 was attributable to higher amounts of loans past
due 90 days or more as the level of non-accruing loans at year end 1995 of $3.6
million was comparable to non-accruing loan balances at December 31, 1994. The
rise in 90 day or more delinquent loans was primarily related 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 IPF loans (see note 2 to
the consolidated financial statements), the Bank determined that delinquent IPF
loans approximated $11.7 million and the loss exposure was estimated at $4.5
million. Accordingly, for purposes of determining the amount of non-performing
IPF loans, the Bank included the loss exposure amount of $4.5 million in
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 IPF 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 of the IPF
loans to protect the Bank from loss on the IPF loans will substantially reduce
the amount of actual loss associated with the IPF loans. The following table
details the non-performing assets at December 31, 1991 through 1995:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Non-accrual loans............................. $ 3,567,737 $ 3,685,804 $ 2,123,202 $ 3,055,220 $ 1,296,505
Accruing loans 90 days or more past due....... 5,594,005 393,681 420,237 314,759 489,291
Restructured loans............................ -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total non-performing loans.................... 9,161,742 4,079,485 2,543,439 3,369,979 1,785,796
Other real estate owned....................... -- -- -- 953,304 988,000
----------- ----------- ----------- ----------- -----------
Total non-performing assets................... $ 9,161,742 $ 4,079,485 $ 2,543,439 $ 4,323,283 $ 2,773,796
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Non-performing loans to period end loans and
loans held for sale......................... 7.64% 5.01% 3.55% 6.07% 3.52%
Non-performing assets to total assets......... 3.49% 1.68% 1.04% 2.11% 2.09%
Non-performing assets to loans, loans held for
sale and other real estate
owned....................................... 7.64% 5.01% 3.55% 7.66% 5.36%
</TABLE>
Accrual of interest is discontinued on loans when management believes,
after considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that collection of interest and
principal is doubtful. The non-accrual loans at December 31, 1995, 1994 and 1993
are primarily secured by various types of real estate. The table below shows the
effect on interest income of placing loans on non-accrual status for each of the
three years ended December 31, 1995.
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Interest income not recognized due
to non-accrual status.............................. $ 354,972 $ 211,032 $ 198,500
Interest income included in operating income
attributable to non-accrual loans.................. $ 79,200 $ 36,800 $ 79,900
</TABLE>
Other real estate owned consists of 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. Management continues
to evaluate the carrying value in relation to its fair value less the estimated
costs to sell.
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 new 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
16
<PAGE>
or the fair value of the collateral for certain collateral dependent loans.
Commercial, industrial, and mortgage loans are evaluated on an individual basis.
Consumer loans are comprised primarily of IPF loans. (See Note 2 to the
Consolidated Financial Statements.) 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
noted above, as of December 31, 1995, there are no restructured loans.
At December 31, 1995, the recorded investment in loans that are considered
to be impaired as defined by SFAS No. 114 and SFAS No. 118 was $19.4 million,
(of which $3.6 million were non-accrual loans and $11.7 million were delinquent
IPF loans). The related allowance for credit losses for these impaired loans is
$5.8 million. For approximately $12.2 million of impaired loans, the reserve
evaluation was based on the expected future cash flows and the remaining $7.2
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 from 1991 through 1995 in the allowance for loan losses:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year..................... $ 1,713,372 $ 1,321,225 $ 1,077,635 $ 905,139 $ 575,000
Charge-offs
Commercial & industrial...................... 1,040 138,158 54,377 352,727 60,535
Real estate -- construction.................. -- 22,492 -- -- 100,000
Real estate -- commercial.................... -- -- 190,000 -- 40,000
Real estate -- residential................... 127,679 355,493 -- -- --
Installment.................................. -- 36,000 -- -- --
----------- ----------- ----------- ----------- ---------
Total charge-offs.............................. 128,719 552,143 244,377 352,727 200,535
----------- ----------- ----------- ----------- ---------
Recoveries:
Commercial & Industrial...................... 1,209 84,290 3,641 223 --
Real estate -- commercial.................... -- -- 34,326 -- 5,674
Real estate -- residential................... 2,020 -- -- -- --
Installment.................................. 8,000 -- -- -- --
----------- ----------- ----------- ----------- ---------
Total recoveries........................... 11,229 84,290 37,967 223 5,674
----------- ----------- ----------- ----------- ---------
Net charge-offs................................ 117,490 467,853 206,410 352,504 194,861
----------- ----------- ----------- ----------- ---------
Provision charged to
operations................................... 4,905,000 860,000 450,000 525,000 525,000
----------- ----------- ----------- ----------- ---------
Balance, end of year........................... $ 6,500,882 $ 1,713,372 $ 1,321,225 $ 1,077,635 $ 905,139
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
Net charge-offs as a % of average loans and
loans held for sale.......................... .13% .60% .37% .62% .41%
Allowance for loan losses as a % of year-end
loans and loans held for sale................ 5.42% 2.10% 1.84% 1.94% 1.78%
</TABLE>
17
<PAGE>
The allowance for loan losses increased to $6.5 million at December 31,
1995 from $1.7 million at December 31, 1994. The increase in the allowance
resulted primarily from the additional provision associated with IPF loans.
Additions to the allowance for loan losses in the years ended December 31, 1991
through December 31, 1995 were based upon, among other things, the amount of net
charge-offs, loan growth, and the level of non-performing loans during each
period.
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 loans to secure the
Bank against loss on the IPF loans 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 underlying collateral. Prior to 1995, management generally
did not allocate the loan loss reserve across the various loan categories. In
1995, in connection with the adoption of SFAS 114 and 118, management began
formally allocating the reserve to specific loan categories. The following table
sets forth the allocation of the Bank's allowance for loan losses for each of
the five years ended December 31, 1995.
<TABLE>
<CAPTION>
1995 1994 1993 1992
------------------------ ------------------------ ------------------------ ------------------------
% OF % OF % OF % OF
LOANS TO LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
--------- ------------- --------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial &
Industrial........ $ 812,800 46% $ -- 36% $ -- 48% $ -- 48%
Real estate:
Construction...... 98,900 4% -- 2% -- 5% -- 5%
Mortgages --
residential..... 417,900 18% 750,000 38% -- 35% -- 34%
Mortgages --
commercial...... -- 15% -- 18% -- 12% -- 13%
Consumer........... 4,500,000 17% -- 6% -- --% -- --%
Unallocated........ 671,282 N/A 963,372 N/A 1,321,225 N/A 1,077,635 N/A
---------- --- ---------- --- ---------- --- ---------- ---
$6,500,882 100% $1,713,372 100% $1,321,225 100% $1,077,635 100%
---------- --- ---------- --- ---------- --- ---------- ---
---------- --- ---------- --- ---------- --- ---------- ---
<CAPTION>
1991
----------------------
% OF
LOANS TO
AMOUNT TOTAL LOANS
--------- -------------
Commercial &
Industrial........ $ -- 52%
Real estate:
Construction...... -- 10%
Mortgages --
residential..... 100,000 25%
Mortgages --
commercial...... -- 13%
Consumer........... -- --%
Unallocated........ 805,139 N/A
--------- ---
$ 905,139 100%
========= ===
</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 December 31, 1995 aggregated $196.1 million, which was
$35.0 million higher than the December 31, 1994 balance of $161.1 million. This
increase was attributable to higher certificate of deposit balances of $75.0
million which offset the decline in statement savings balances of $32.7 million.
As illustrated in the table below, the mix of deposits at December 31, 1995 has
shifted to a greater reliance on certificates of deposit as a funding source.
<TABLE>
<CAPTION>
% OF % OF % OF
1995 TOTAL 1994 TOTAL 1993 TOTAL
---------------- ----------- ---------------- ----------- ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Demand......................... $ 12,621,000 6% $ 13,641,796 8% $ 13,801,979 7%
NOW............................ 3,959,987 2% 4,201,594 3% 2,833,806 1%
Savings........................ 50,602,549 26% 83,335,372 52% 101,700,163 53%
Money Market................... 3,663,527 2% 9,594,864 6% 6,760,740 4%
Certificates of
Deposit...................... 125,284,579 64% 50,287,846 31% 67,296,178 35%
---------------- ----- ---------------- ----- ---------------- -----
$ 196,131,642 100% $ 161,061,472 100% $ 192,392,866 100%
---------------- ----- ---------------- ----- ---------------- -----
---------------- ----- ---------------- ----- ---------------- -----
</TABLE>
18
<PAGE>
Certificates of deposit of $100 thousand or more at December 31, 1995 of
$12.4 million had the following maturities:
Three months or less........................................... $4,630,000
Three months through six months................................ 2,108,000
Six months through twelve months............................... 1,669,000
Over twelve months............................................. 4,030,000
--------------
$12,437,000
--------------
--------------
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 1995, 1994 and 1993, the Bank
utilized its credit facilities with its correspondent banks and with the FHLB.
The borrowings under these facilities are secured by the Bank's mortgage-backed
securities. The following table summarizes the Bank's short-term borrowing
activity for 1995, 1994 and 1993:
<TABLE>
<CAPTION>
AVERAGE
AMOUNT MAXIMUM
OUTSTANDING OUTSTANDING INTEREST INTEREST
OUTSTANDING DURING AT ANY RATE AT RATE FOR
AT 12/31 THE YEAR MONTH-END 12/31 THE YEAR
-------------- -------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1995: FHLB borrowings.................. $ 33,443,822 $ 44,522,088 $ 66,155,178 6.02% 6.23%
Federal funds purchased......... -- 235,342 -- -- 5.69%
-------------- --------------
$ 33,443,822 $ 44,757,430 6.02% 6.23%
-------------- --------------
-------------- --------------
1994: FHLB borrowings.................. $ 63,037,382 $ 38,050,845 $ 63,037,382 6.32% 4.90%
Federal funds purchased......... -- 360,602 1,000,000 -- 4.52%
-------------- --------------
$ 63,037,382 $ 38,411,447 6.32% 4.90%
-------------- --------------
-------------- --------------
1993: FHLB borrowings.................. $ 23,704,821 $ 20,466,112 $ 27,500,000 3.46% 3.36%
Federal funds purchased......... -- 138,630 2,800,000 -- 3.17%
-------------- --------------
$ 23,704,821 $ 20,604,742 3.46% 3.35%
-------------- --------------
-------------- --------------
</TABLE>
RESULTS OF OPERATIONS
A net loss of $3.1 million or $3.41 per share was recorded in 1995 compared
to net income of $503 thousand or $.22 per share for 1994. The loss in 1995
resulted from a higher provision for loan losses of $4.0 million, due
principally to delinquent IPF loans, and an increase in other expenses of $3.0
million which more than offset an increase in net interest income of $2.8
million. The Bank anticipates that it will recover a substantial majority of the
IPF loans for which the specific loan loss provision of $4.5 million was made in
1995.
Net income for 1994 amounted to $503 thousand or $.22 per share compared to
$1.2 million or $.71 per share in 1993. The decrease in 1994 profitability
resulted from a higher provision for loan losses of $410 thousand and higher
other expenses of $1.3 million, but benefited from an increase in net interest
income of $600 thousand.
Net Interest Income
A key component of Regent's profitability is net interest income which
represents the difference between interest earned on loans, securities and other
interest earning assets and the interest paid on deposits, borrowings and debt
instruments. Net interest income is coordinated with the asset/liability
management process and emphasizes maintaining acceptable levels of liquidity,
interest rate risk, and capital.
19
<PAGE>
Net interest income for the year ended December 31, 1995 totaled $8.6
million which was $2.8 million higher than net interest income for the
comparable 1994 period of $5.8 million. The 49% increase was attributable to an
improved net interest margin which offset a decline in the amount of average
interest earnings assets from $244.9 million in 1994 to $241.5 million in 1995.
The net interest margin rose to 3.56% in 1995 from 2.37% in 1994 and benefited
from the yields on earning assets rising faster than the cost of interest
bearing liabilities. The yields on earnings assets of 8.76% in 1995 compared to
7.01% in 1994 were higher primarily as a result of the significant yield on the
Bank's IPF loan portfolio which exceeds the yield on the Bank's other lending
activity. The average IPF loan balance in 1995 was $10.5 million compared to
$500 thousand in 1994. However, management believes that the yields on IPF loans
are higher, due in part, to the reporting by the Servicer of interest and fees
on defaulted IPF loans. This income on defaulted loans is not readily
determinable but is included in the IPF loan balance and, therefore, has been
considered in the provision for loan losses. The yields on earning assets in
1995 also benefitted from lower amortization of securities portfolio premiums,
the higher prime lending rate that prevailed in 1995, and the reinvestment of
the cash flow from the mortgage-backed securities portfolio into higher yielding
lending activity. As a result of this reinvestment, a greater percentage of
interest income was derived from higher yielding lending activity in 1995 versus
1994. For the year ended December 31, 1995, interest and fees on loans
represented 53% of total interest income compared to 37% for the same 1994
period while investment income decreased from 63% in 1994 to 47% in 1995.
The cost of interest bearing liabilities increased to 5.80% in 1995 from
5.09% in 1994 and reflected a shift in funding sources from savings balances to
higher costing certificates of deposit. Average certificate of deposit balances
represented 47% of 1995's total average interest bearing liabilities with an
average rate paid of 6.32% versus a cost of 5.12% in 1994 on balances which
comprised 28% of total average interest bearing liabilities. The cost of
interest bearing liabilities was also impacted by the higher rates paid on short
term FHLB advances which rose to an average rate in 1995 of 6.23% from 4.90% in
1994.
Net interest income of $5.8 million in 1994 was $600 thousand, or 12%,
higher than net interest income in 1993 of $5.2 million. The increase was
attributable to higher average balances in the investment securities and lending
portfolios, which offset a drop in yield on earning assets. The total investment
securities portfolio balance at year end 1994 was comparable to year end 1993
totals but the average 1994 balance was higher. The average balance of $14.1
million was higher because a significant amount of securities were purchased
late in 1993 and early in 1994. For the remainder of 1994, the securities
decreased as the monthly cash flow from the mortgage-backed securities was
reinvested into loans. The lending portfolio increase benefited from the
expansion of the commercial loan area and the heavy volume generated by the
mortgage participation program. Of the $21.9 million increase in average loan
balances, approximately $17.5 million was attributable to the mortgage
participation program and $3.5 million to commercial activity. Reflecting the
emphasis on increased lending activity, income earned from loans represented 37%
of total interest income in 1994 versus 29% in 1993 while investment income
decreased from 71% in 1993 to 63% in 1994.
Although the funding sources changed significantly at year end 1994
reflecting the effects of the Treasury market on retail deposit outflows in the
fourth quarter, average balances showed less drastic changes throughout the
year. Average savings balances increased by $8.6 million while average balances
of FHLB advances were higher by $13.9 million. The increase in average FHLB
advances corresponded to the increase in mortgage participations which were
required to be funded by FHLB advances.
The overall cost of funds remained relatively unchanged in 1994 at 5.09%
versus 5.11% in 1993. The lower yield on earning assets in 1994, however,
reduced the net interest rate spread from 2.13% in 1993 to 1.92% in 1994. The
net interest margin, net interest income divided by total average earning
assets, displayed a corresponding decrease from 2.49% in 1993 to 2.37% in 1994.
20
<PAGE>
Provision for Loan Losses
The Bank recorded a provision for loan losses of $4.9 million in 1995, $860
thousand in 1994, and $450 thousand in 1993. The 1995 provision was increased
substantially from the amount provided in 1994 to reflect the high level of
delinquent IPF loans. The provision for loan losses in 1994 was higher than 1993
as a result of an increase in non-accrual loans that occurred due to
collectibility concerns for certain residential mortgage loans purchased from
two mortgage banking companies, as well as a commercial loan extended to one of
these companies.
Other Expenses
Other expenses for the year ended December 31, 1995 totaled $7.4 million
compared to $4.4 million for the twelve months ended December 31, 1994. The
increase in other expenses in 1995 of 3.0 million compared to 1994 was
attributable to higher salaries and employee benefits of $237 thousand resulting
from higher staffing levels and benefit costs and from salary increases,
professional fees and settlement costs of $443 thousand incurred in resolving
legal matters relating to the assignment of residential mortgages to the Bank,
expenses of $266 thousand incurred for professional services in connection with
the proposed merger, audit expenses of $329 thousand, a substantial portion of
which related to the delinquent IPF loans, and an increase of $2.0 million in
costs for the expansion and servicing of the insurance premium finance program.
The increase in other expenses was partially offset by lower premiums and a
refund of premiums previously paid to the FDIC totaling $205 thousand.
Total other expenses for 1994 were $4.4 million, or 40%, over 1993's total
of $3.1 million. The primary factors that increased other expenses were
personnel expenses, professional fees, FDIC premiums, state and local taxes,
depreciation, advertising, costs incurred in the start-up and processing of a
new installment lending program, the write-down of the carrying value of an
asset received in satisfaction of a borrower's debt and the write-off of an
accounts receivable balance from a mortgage banking company. Salaries and
related payroll taxes and employee benefits increased by $377 thousand and were
attributable to salary increases, additional employees and higher benefit costs.
Professional services were higher by $123 thousand due to a rise in legal costs
relating to the workout of problem loans and additional audit work performed by
independent accountants. FDIC premiums increased by $69 thousand based on the
higher level of deposit balances during the year. The carrying value of an asset
received in satisfaction of a borrowers debt was reduced by $132 thousand, and
the Bank wrote-off the balance of a receivable of $113 thousand from one of the
bankrupt mortgage companies. Expenses were incurred in the fourth quarter for
the start-up, processing and operational costs associated with a new installment
loan program amounting to $168 thousand. An advertising campaign initiated for
lending and deposit activity in 1994 increased advertising expenses by $48
thousand. The purchase of additional work stations and an upgrade in computer
capabilities increased depreciation expense by $39 thousand, and state and local
taxes were higher by $27 thousand.
Provision for Income Taxes
Regent recorded an income tax benefit of $463 thousand in 1995 versus
income tax expense of $259 thousand in 1994 and $607 thousand in 1993. The
effective tax rate for 1995 was 13% compared to 34% in 1994 and 1993. The lower
rate in 1995 reflects merger related expenses which were not deductible for
federal income tax purposes offset by an increase in the valuation allowance
against net deferred tax assets.
21
<PAGE>
CONSOLIDATED AVERAGE BALANCE SHEETS AND RATE/YIELD ANALYSIS
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------------- ----------------------------------- -------------------------
AVERAGE INCOME/ RATE/ AVERAGE INCOME/ RATE/ AVERAGE INCOME/
BALANCE EXPENSE YIELD BALANCE EXPENSE YIELD BALANCE EXPENSE
------------ ---------- --------- ------------ ---------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Federal funds sold....... $ -- $ -- --% $ 283,562 $ 9,562 3.37% $ 195,890 $ 6,898
Investment securities and
securities available
for sale............... 148,795,802 9,998,770 6.72% 166,476,790 10,841,050 6.51% 152,419,875 10,713,146
Loans and loans held for
sale (1)............... 92,743,726 11,160,803 12.03% 78,103,505 6,313,866 8.08% 56,161,328 4,392,116
------------ ---------- ------------ ---------- ------------ -----------
Total interest-earning
assets............... 241,539,528 21,159,573 8.76% 244,863,857 17,164,478 7.01% 208,777,093 15,112,160
------------ ---------- --------- ------------ ---------- --------- ------------ -----------
Cash and due from banks.... 4,476,867 4,141,245 3,971,327
Premises and equipment,
net....................... 643,403 687,614 611,634
Other assets............... 2,806,481 3,123,073 3,361,232
Allowance for loan
losses.................... (1,837,992) (1,382,633) (1,220,348)
------------ ------------ ------------
Total assets........... $247,628,287 $251,433,156 $215,500,938
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
NOW...................... $ 4,055,880 102,106 2.52% $ 3,323,519 $ 82,609 2.49% $ 2,762,220 $ 76,117
Savings.................. 53,283,064 2,588,766 4.86% 100,708,463 5,411,613 5.37% 92,098,667 5,038,442
Money market deposits.... 8,462,929 333,515 3.94% 8,657,771 254,607 2.94% 6,347,863 199,892
Time deposits............ 102,779,480 6,493,051 6.32% 63,612,009 3,257,678 5.12% 61,994,112 3,400,630
Short-term borrowings.... 44,757,430 2,788,852 6.23% 38,411,447 1,881,337 4.90% 20,604,742 691,121
Long-term advances....... 451,601 27,055 5.99% 6,069,041 267,204 4.40% 10,000,000 486,060
Subordinated debt........ 2,750,000 219,606 7.99% 2,712,466 217,612 8.02% 357,356 28,456
------------ ---------- ------------ ---------- ------------ -----------
Total interest-bearing
liabilities.......... 216,540,384 12,552,951 5.80% 223,494,716 11,372,660 5.09% 194,164,960 9,920,718
------------ ---------- --------- ------------ ---------- --------- ------------ -----------
Demand deposits............ 10,403,990 12,657,347 6,775,803
Other liabilities.......... 7,053,151 2,365,832 1,896,274
------------ ------------ ------------
Total liabilities...... 233,997,525 238,517,895 202,837,037
Shareholders' equity....... 13,630,762 12,915,261 12,663,901
------------ ------------ ------------
Total liabilities and
shareholders' equity... $247,628,287 $251,433,156 $215,500,938
------------ ------------ ------------
------------ ------------ ------------
Net interest income and net
interest spread........... $8,606,622 2.96% $5,791,818 1.92% $ 5,191,442
---------- --------- ---------- --------- -----------
---------- --------- ---------- --------- -----------
Net interest rate margin... 3.56% 2.37%
--------- ---------
--------- ---------
<CAPTION>
RATE/
YIELD
---------
ASSETS
Interest-earning assets:
Federal funds sold....... 3.52%
Investment securities and
securities available
for sale............... 7.03%
Loans and loans held for
sale (1)............... 7.82%
Total interest-earning
assets............... 7.24%
---------
Cash and due from banks....
Premises and equipment,
net.......................
Other assets...............
Allowance for loan
losses....................
Total assets...........
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
NOW...................... 2.76%
Savings.................. 5.47%
Money market deposits.... 3.15%
Time deposits............ 5.49%
Short-term borrowings.... 3.35%
Long-term advances....... 4.86%
Subordinated debt........ 7.96%
Total interest-bearing
liabilities.......... 5.11%
---------
Demand deposits............
Other liabilities..........
Total liabilities......
Shareholders' equity.......
Total liabilities and
shareholders' equity...
Net interest income and net
interest spread........... 2.13%
---------
---------
Net interest rate margin... 2.49%
---------
---------
</TABLE>
- ------------------
(1) For purpose of these computations, non-accruing loans are included in the
daily average loan amounts outstanding. Additionally, the yield on IPF loans
includes interest income on delinquent loans. See Note 2 to the consolidated
financial statements.
22
<PAGE>
VOLUME AND RATE VARIANCE ANALYSIS
Net interest income is affected by changes in the average interest rate
earned on earning assets and the average interest rate paid on interest-bearing
liabilities. In addition, net interest income is affected by changes in the
volume of earning assets and interest-bearing liabilities. The following table
sets forth for the years ended December 31, 1995 compared to December 31, 1994,
and December 31, 1994 to December 31, 1993, the dollar amount of increase
(decrease) in interest income and interest expense resulting from changes in the
volume of earning assets and interest-bearing liabilities and from changes in
yields and rates.
<TABLE>
<CAPTION>
1995 COMPARED TO 1994 1994 COMPARED TO 1993
--------------------------------------- ---------------------------------------
NET INCREASE NET INCREASE
(DECREASE) (DECREASE)
VOLUME RATE (1) VOLUME RATE (1)
----------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold........... $ (9,562) $ -- $ (9,562) $ 2,943 $ (279) $ 2,664
Investment securities and
securities available for
sale....................... (1,203,896) 361,616 (842,280) 630,188 (502,284) 127,904
Loans and loans held for
sale (2)................... 2,412,744 2,434,193 4,846,937 1,526,746 395,004 1,921,750
----------- ----------- ------------- ----------- ----------- -------------
Total Interest Income........ 1,199,286 2,795,809 3,995,095 2,159,877 (107,559) 2,052,318
----------- ----------- ------------- ----------- ----------- -------------
NOW accounts................. 18,424 1,073 19,497 12,540 (6,048) 6,492
Savings deposits............. (2,345,476) (477,371) (2,822,847) 460,689 (87,518) 373,171
Money market deposits........ (5,592) 84,500 78,908 66,862 (12,147) 54,715
Certificates of deposit...... 2,345,517 889,856 3,235,373 92,564 (235,516) (142,952)
Short-term borrowings........ 342,772 564,743 907,515 776,630 413,586 1,190,216
Long-term advances........... (134,654) (105,495) (240,149) (348,586) 129,730 (218,856)
Subordinated debt............ 2,991 (997) 1,994 188,941 215 189,156
----------- ----------- ------------- ----------- ----------- -------------
Total Interest Expense....... 223,982 956,309 1,180,291 1,249,640 202,302 1,451,942
----------- ----------- ------------- ----------- ----------- -------------
Net Interest Income.......... $ 975,304 $ 1,839,500 $ 2,814,804 $ 910,237 $ (309,861) $ 600,376
----------- ----------- ------------- ----------- ----------- -------------
----------- ----------- ------------- ----------- ----------- -------------
</TABLE>
- ------------------
(1) The change in interest due to both rate and volume has been reflected in
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
(2) Includes net loan fees of $1,007,637 in 1995 principally associated with IPF
loans and $101,888 in 1994 and interest on non-accrual loans to the extent
of interest paid of $79,200 and $36,860 in 1995 and 1994, respectively.
Non-accruing loans are included in the daily average loan amounts
outstanding used to determine the changes in interest income attributable to
volume. Also includes interest income on delinquent IPF loans. See Note 2 to
the consolidated financial statements.
23
<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants dated May 23, 1996. 25
Consolidated Balance Sheets, December 31, 1995 and 1994. 26
Consolidated Statements of Income for the years ended
December 31, 1995, 1994 and 1993. 27
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1995, 1994 and 1993. 28
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993. 29
Notes to Consolidated Financial Statements. 30
24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Shareholders and Board of Directors
of Regent Bancshares Corp.:
We have audited the accompanying consolidated balance sheets of Regent
Bancshares Corp. (a New Jersey corporation) and subsidiary as of December 31,
1995 and 1994, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2, the Bank recognized a loss from operations for the
year ended December 31, 1995 primarily as a result of a substantial increase in
the provision for loan losses associated with its insurance premium finance loan
portfolio. As a result, the Bank did not meet the Tier I leveraged capital
requirement established by the Office of the Comptroller of the Currency (OCC)
for the Bank under the OCC's discretionary authority. Additionally, on a
consolidated basis, the parent company's Tier I leveraged capital ratio amounts
to 4% which equals the minimum legal requirement. Failure to meet minimum
capital requirements can result in the regulators initiating certain actions
that, if undertaken, could have a direct material effect on the Bank's financial
statements. Such actions are presently uncertain and, accordingly, no
adjustments have been made in the accompanying financial statements.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Regent
Bancshares Corp. and subsidiary as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As described in Note 3 of the consolidated financial statements, the
Company changed its method of accounting for investments in debt and equity
securities.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
May 23, 1996
25
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1995 1994
------------- -------------
ASSETS
<S> <C> <C>
Cash and due from banks............................................................. $ 6,918,680 $ 2,802,177
Investment securities available for sale............................................ 47,725,261 35,056,688
Investment securities at cost, which approximates market value...................... -- 124,672
Mortgage-backed securities held to maturity (market value of $89,895,504 and
$113,189,677, respectively)....................................................... 91,244,148 121,482,427
Mortgage loans held for sale........................................................ 12,873,725 5,387,517
Loans, net of unearned interest and loan costs...................................... 105,910,034 75,859,639
Less: Allowance for loan losses (Note 2).......................................... (6,500,882) (1,713,372)
------------- -------------
Net loans......................................................................... 99,409,152 74,146,267
------------- -------------
Accrued interest receivable......................................................... 1,739,969 1,951,244
Premises and equipment, net......................................................... 704,487 656,501
Prepaid expenses and other assets (including net deferred taxes of $1,646,200 and
$1,358,100, respectively)......................................................... 1,896,639 1,842,984
------------- -------------
Total assets...................................................................... $ 262,512,061 $ 243,450,477
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing.............................................................. $ 12,621,000 $ 13,641,796
Interest bearing:
NOW and money market............................................................ 7,623,514 13,796,458
Savings......................................................................... 50,602,549 83,335,372
Certificates of deposit......................................................... 125,284,579 50,287,846
------------- -------------
Total deposits................................................................ 196,131,642 161,061,472
Advances from Federal Home Loan Bank of Pittsburgh.................................. 43,655,302 63,037,382
Subordinated debentures............................................................. 2,750,000 2,750,000
Accrued interest payable............................................................ 5,310,396 2,240,068
Other liabilities................................................................... 4,311,365 2,155,987
------------- -------------
Total liabilities................................................................... 252,158,705 231,244,909
------------- -------------
Commitments and Contingencies (Note 13)
Shareholders' equity:
Preferred stock, $.10 par value, 5,000,000 shares authorized,
Series A, 484,032 and 515,678 shares issued and outstanding; entitled to
$4,840,320 in involuntary liquidation.......................................... 48,403 51,568
Series B, 4,270 and 4,650 shares issued and outstanding; entitled to $42,700 in
involuntary liquidation........................................................ 427 465
Series C, 3,485 and 4,036 shares issued and outstanding; entitled to $34,850 in
involuntary liquidation........................................................ 349 404
Series D, 3,790 and 4,886 shares issued and outstanding; entitled to $37,900 in
involuntary liquidation........................................................ 379 488
Series E, 85,615 and 73,365 shares issued and outstanding; entitled to $856,150
in involuntary liquidation..................................................... 8,562 7,337
------------- -------------
58,120 60,262
Common stock, $.10 par value -- 10,000,000 shares authorized, 997,615 and 924,409
issued and outstanding.......................................................... 99,761 92,441
Capital surplus................................................................... 13,300,855 12,997,321
(Accumulated deficit) retained earnings........................................... (2,956,765) 478,544
Net unrealized loss on investment securities available for sale................... (148,615) (1,423,000)
------------- -------------
Total shareholders' equity...................................................... 10,353,356 12,205,568
------------- -------------
Total liabilities and shareholders' equity...................................... $ 262,512,061 $ 243,450,477
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Interest income:
Loans, including fees......................................... $ 11,160,803 $ 6,313,866 $ 4,392,116
Investment securities held for sale........................... -- -- 50,454
Investment securities and securities available for
sale....................................................... 9,998,770 10,841,050 10,662,692
Federal funds sold............................................ -- 9,562 6,898
-------------- -------------- --------------
Total interest income...................................... 21,159,573 17,164,478 15,112,160
-------------- -------------- --------------
Interest expense:
Deposits...................................................... 9,517,438 9,006,507 8,715,081
Short-term borrowings......................................... 2,788,852 1,857,622 691,121
Long-term debt................................................ 246,661 508,531 514,516
-------------- -------------- --------------
Total interest expense..................................... 12,552,951 11,372,660 9,920,718
-------------- -------------- --------------
Net interest income........................................ 8,606,622 5,791,818 5,191,442
Provision for loan losses (Note 2).............................. 4,905,000 860,000 450,000
-------------- -------------- --------------
Net interest income after provision for loan
losses.................................................. 3,701,622 4,931,818 4,741,442
-------------- -------------- --------------
Other income:
Service charges on deposit accounts........................... 82,565 102,452 85,581
Other......................................................... 21,423 99,431 70,069
-------------- -------------- --------------
Total other income......................................... 103,988 201,883 155,650
-------------- -------------- --------------
Other expenses:
Salaries and employee benefits................................ 1,686,979 1,449,481 1,072,102
Professional services......................................... 1,272,236 560,441 436,956
Rent.......................................................... 173,855 173,865 173,959
Other occupancy expense....................................... 161,730 118,460 105,334
Depreciation and amortization................................. 183,699 157,301 127,562
FDIC assessment and other insurance........................... 297,074 505,927 424,914
Litigation settlement......................................... 175,000 -- --
Auto insurance premium finance
servicing (Note 2)......................................... 2,132,104 168,235 --
Other......................................................... 1,313,030 1,238,066 772,656
-------------- -------------- --------------
Total other expenses....................................... 7,395,707 4,371,776 3,113,483
-------------- -------------- --------------
(Loss) income before (benefit) provision for income taxes....... (3,590,097) 761,925 1,783,609
(Benefit) provision for income taxes............................ (463,500) 259,100 606,500
-------------- -------------- --------------
NET (LOSS) INCOME............................................... (3,126,597) 502,825 1,177,109
Preferred stock dividends....................................... 487,408 287,222 516,457
-------------- -------------- --------------
(Loss) earnings for common stock................................ $ (3,614,005) $ 215,603 $ 660,652
-------------- -------------- --------------
-------------- -------------- --------------
(Loss) earnings per common share:
Primary....................................................... $(3.41) $.22 $.71
Fully diluted................................................. N/A N/A N/A
Weighted average number of shares outstanding................... 1,059,312 989,611 927,482
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
NET
UNREALIZED
LOSS ON
(ACCUMULATED INVESTMENT
PREFERRED STOCK COMMON STOCK DEFICIT) SECURITIES
-------------------- -------------------- CAPITAL RETAINED AVAILABLE
SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS FOR SALE TOTAL
--------- --------- --------- --------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1992.................. 584,005 $ 58,400 776,691 $ 77,669 $11,722,287 $ 90,278 -- $11,948,634
Issuance of preferred
stock as dividends.... 52,967 5,297 -- -- 425,084 (430,381) --
Issuance of common stock
as dividends.......... -- -- 57,287 5,729 459,729 (465,458) --
Conversion of preferred
stock to common
stock................. (49,639) (4,963) 53,616 5,361 (398) -- --
Net income.............. -- -- -- -- -- 1,177,109 1,177,109
--------- --------- --------- --------- ---------- ----------- ----------- ----------
Balance, December 31,
1993.................. 587,333 58,734 887,594 88,759 12,606,702 371,548 -- 13,125,743
Issuance of preferred
stock as dividends.... 51,912 5,191 -- -- 390,638 (395,829) --
Conversion of preferred
stock to common
stock................. (36,630) (3,663) 36,815 3,682 (19) -- --
Net unrealized loss on
investment securities
available for sale.... -- -- -- -- -- -- (1,423,000) (1,423,000)
Net income.............. -- -- -- -- -- 502,825 502,825
--------- --------- --------- --------- ---------- ----------- ----------- ----------
Balance, December 31,
1994.................. 602,615 60,262 924,409 92,441 12,997,321 478,544 (1,423,000) 12,205,568
Issuance of preferred
stock as dividends.... 51,452 5,145 -- -- 303,567 (308,712) --
Conversion of preferred
stock to common
stock................. (72,875) (7,287) 73,206 7,320 (33) -- --
Change in net unrealized
loss on investment
securities available
for sale.............. -- -- -- -- -- -- 1,274,385 1,274,385
Net loss................ -- -- -- -- -- (3,126,597) -- (3,126,597)
--------- --------- --------- --------- ---------- ----------- ----------- ----------
Balance, December 31,
1995.................. 581,192 $ 58,120 997,615 $ 99,761 $13,300,855 ($2,956,765) $(148,615) $10,353,356
--------- --------- --------- --------- ---------- ----------- ----------- ----------
--------- --------- --------- --------- ---------- ----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income..................................................... $(3,126,597) $ 502,825 $ 1,177,109
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Provision for loan losses........................................... 4,905,000 860,000 450,000
Depreciation and amortization....................................... 183,699 157,301 127,562
Net amortization of premiums and accretion of discounts on
investment securities and investment securities available for
sale.............................................................. 643,853 1,248,214 1,116,244
Loss on sale of other real estate................................... -- -- 10,800
Increase (decrease) in unearned interest/net deferred loan fees..... 977,940 432,246 (163,450)
Decrease (increase) in accrued interest receivable.................. 211,275 16,401 (37,282)
(Increase) decrease in prepaid expenses and other assets............ (53,655) 826,797 (1,443,393)
Increase in accrued interest payable................................ 3,070,328 654,283 143,416
Increase (decrease) in other liabilities............................ 2,155,378 1,970,534 (8,831)
Purchases of mortgage loans held for sale........................... (68,001,403) (301,014,991) (113,076,908)
Proceeds from sales of mortgage loans held for sale................. 60,515,195 318,328,366 90,376,016
----------- ----------- -----------
Total adjustments................................................... 4,607,610 23,479,151 (22,505,826)
----------- ----------- -----------
Net cash provided by (used in) operating activities................. 1,481,013 23,981,976 (21,328,717)
----------- ----------- -----------
Cash flows from investing activities:
Net (increase) decrease in loans...................................... (31,145,825) (27,612,611) 6,341,244
Purchase of investment securities..................................... -- (47,491,857) (77,808,413)
Principal collected on mortgage-backed and investment securities...... 13,002,652 34,639,562 60,727,658
Principal collected on investment securities available-for-sale....... 5,197,586 8,974,915 --
Net decrease (increase) in U.S. Treasury bills with maturities less
than three
months.............................................................. 124,672 (24,812) 24,903
Net decrease (increase) in Federal funds sold......................... -- 6,000,000 (6,000,000)
Purchases of premises and equipment................................... (231,685) (186,066) (106,691)
Proceeds from sale of other real estate owned......................... -- -- 942,504
----------- ----------- -----------
Net cash used in investing activities............................... (13,052,600) (25,700,869) (15,878,795)
----------- ----------- -----------
Cash flows from financing activities:
Net (decrease) increase in demand, NOW, savings and money market
deposits............................................................ (39,926,563) (14,323,062) 24,183,767
Net increase (decrease) in certificates of deposit.................... 74,996,733 (17,008,332) 7,494,069
Net (decrease) increase in advances from Federal Home Loan Bank of
Pittsburgh with original maturities less than three months.......... (9,193,560) 15,532,561 (1,395,179)
Advances from Federal Home Loan Bank of Pittsburgh with maturities
greater than three months........................................... 10,211,480 15,000,000 5,000,000
Maturities of advances from Federal Home Loan Bank of Pittsburgh with
maturities greater than three months................................ (20,400,000) (1,600,000) --
Proceeds from issuance of subordinated debentures..................... -- 200,000 2,550,000
----------- ----------- -----------
Net cash provided by (used in) financing activities................. 15,688,090 (2,198,833) 37,832,657
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.................... 4,116,503 (3,917,726) 625,145
Cash and cash equivalents, beginning of year............................ 2,802,177 6,719,903 6,094,758
----------- ----------- -----------
Cash and cash equivalents, end of year.................................. $ 6,918,680 $ 2,802,177 $ 6,719,903
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest............................................................ $ 9,482,623 $ 9,081,749 $ 7,729,084
Income taxes........................................................ 100,000 510,000 930,000
Supplemental schedule of non-cash investing and financing activity:
Issuance of preferred stock as dividends.............................. $ 308,712 $ 395,829 $ 430,381
Issuance of common stock as dividends................................. -- -- 465,458
Conversion of preferred stock to common stock......................... 7,287 3,663 4,963
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
REGENT BANCSHARES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Regent Bancshares Corp. ('Regent') is a bank holding company organized
under the laws of the State of New Jersey and engages in commercial banking
business through its wholly-owned subsidiary, Regent National Bank (the 'Bank'),
a nationally chartered bank insured by the Federal Deposit Insurance
Corporation. The Bank serves the needs of its banking customers with particular
focus on small and medium-sized businesses, professionals, and other
individuals. The Bank offers a wide variety of deposit products, including
checking accounts, interest bearing NOW accounts, insured money market accounts,
certificates of deposit, savings accounts and Individual Retirement Accounts.
2. INSURANCE PREMIUM FINANCE LOANS
At December 31, 1995, a substantial portion of the bank's consumer loans,
$16.8 million (net of $930,000 of unearned interest), consisted of loans to
individuals to finance automobile insurance premiums. These insurance premium
financed ('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 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 canceled
insurance policies which secure defaulted IPF loans. 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. For the year ended December 31, 1995,
the Bank recorded interest and fee income from the IPF loan portfolio of $3.6
million, and paid the Servicer fees of $1.3 million.
Subsequent to December 31, 1995 and 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 them to
believe that in all likelihood the Servicer may have reported interest and fee
income from IPF loans in default and may not have canceled 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
associated with the IPF portfolio, which amount is material to the consolidated
financial statements.
In estimating the ultimate expected loss amount, management experienced
significant difficulties and extreme delays given the limitations of the
Servicer's records. As a result, in order to assess the risk of loss on the IPF
loan balance at December 31, 1995 and estimate 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. These delinquent IPF loans
totaled approximately $11.7 million (net of unearned interest) as of December
31, 1995. Management applied all cash receipts from IPF borrowers and related
insurers during the period January 1, 1996 to May 23, 1996, to the net principal
balances of the delinquent IPF loans thereby reducing the Bank's possible
estimated loss exposure related to the IPF loan balance as of December 31, 1995
to approximately $4,500,000. Although management believes that the $4.5 million
loss exposure was the best estimate as of December 31, 1995, management also
believes that this loss exposure may be further reduced in the future by (i)
additional cash receipts subsequent to May 23, 1996 primarily from unearned
premiums due to the Bank from the related insurance companies, (ii) collection
of a $1.8 million note given to the Bank by the Servicer in 1996 to reimburse
losses from the IPF portfolio and (iii) other actions which may be taken by the
Bank against the Servicer to recover losses from the IPF portfolio. However, the
Bank has recorded, as part of its provision for loan losses for the year ended
December 31, 1995, an estimated loss provision in the amount of $4,500,000
associated with the IPF portfolio as of December 31, 1995, all of which was
recorded in the fourth quarter of 1995. No IPF loans have been charged-off as of
December 31, 1995.
Management of the Bank will monitor collection efforts and the losses
developing from the IPF portfolio as of December 31, 1995 and it is reasonably
possible that a change in estimated losses will
30
<PAGE>
REGENT BANCSHARES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. INSURANCE PREMIUM FINANCE LOANS -- (CONTINUED)
occur and that actual losses from the IPF portfolio as of December 31, 1995 may
be different from the estimated amounts.
As of December 31, 1995, the most recent notification from the OCC
categorized the Bank as 'well capitalized' under the regulatory framework for
prompt corrective action. However, following an examination of the Bank, in
1995, the OCC exercised its discretionary authority to increase the Tier I
leverage capital ratio (Tier I capital to total assets) for the Bank to 6.5%.
After considering the estimated loss provision associated with the IPF
portfolio, Regent has reported a net loss after related tax benefits of
approximately $3,126,000 and the Bank has 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. Management believes the reduced capital amounts
position the Bank as 'adequately capitalized' under the prompt corrective action
framework and that the Bank was in compliance with the stated legal minimum
capital requirements of the OCC. However, because of the net loss for the year
ended December 31, 1995, the Bank's Tier I leverage capital ratio approximated
4.94% (unaudited) as of December 31, 1995 and 5.07% (unaudited) as of April 30,
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 the OCC-approved capital plan. Additionally, on a consolidated
basis, Regent's Tier I leverage capital ratio amounts to 4% (unaudited) which
equals the minimum legal requirement. Failure to meet minimum capital
requirements can result in the regulators initiating certain actions that, if
undertaken, could have a direct material effect on the Bank's financial
statements. Such actions are presently uncertain and may expose the Bank to
regulatory sanctions that may include restrictions on operations and growth and
mandatory asset dispositions. Management expects that, at a minimum, the
regulators will require a revised capital plan demonstrating specific plans to
increase the Bank's Tier I leverage capital ratio to 6.5%. Management and the
Board have undertaken the development of a revised capital plan which provides
for the restoration of this ratio to 6.5% by December 31, 1996, which management
believes will be acceptable to the regulators. However, there are no assurances
that the regulators will accept or approve any such 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 regulators have permitted the Bank to pay dividends to Regent, the
parent company, thereby allowing Regent to meet its debt service requirements
under the subordinated debentures (see Note 11). Management believes that the
regulators will continue to permit the Bank to pay such dividends to Regent,
however, because of the minimum capital requirements established for the Bank,
there are no assurances that the Bank will be permitted to continue paying
dividends. Management believes that, as of December 31, 1995, the parent's
liquid assets are sufficient to permit the parent to meet its debt service
obligations under the subordinated debentures and other operating costs in 1996.
Should the Bank be unable to pay dividends to the parent in the future because
of legal or regulator-imposed limitations, it is reasonably possible that the
parent will be unable to meet its obligations under the subordinated debentures
beyond 1996.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Regent and its subsidiary conform to generally
accepted accounting principles. The more significant accounting policies are
summarized below.
31
<PAGE>
REGENT BANCSHARES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Regent and
the Bank. All material intercompany accounts and transactions have been
eliminated in consolidation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVESTMENT PORTFOLIO
The Financial Accounting Standards Board ('FASB') issued a pronouncement
that required Regent to change its method of accounting for certain investments
in debt securities beginning January 1, 1994. Held-to-maturity securities are to
be recorded at amortized cost; trading securities are to be recorded at fair
value, with unrealized gains and losses included in income; and
available-for-sale securities are to be recorded at fair value, with unrealized
gains and losses excluded from income and reported as a separate component of
shareholders' equity. At January 1, 1994, mortgage-backed and non-marketable
equity securities with a fair value of approximately $43,903,000 were classified
as available for sale and the related unrealized gains, net of applicable income
taxes, were $171,000. At December 31, 1995 and 1994, mortgage-backed and
non-marketable equity securities with a fair value of $47,725,261 and
$35,056,688, respectively, have been recorded as available for sale in the
accompanying consolidated balance sheet and related unrealized losses, net of
applicable income taxes, of $148,615 and $1,423,000, have been recorded as a
reduction to shareholders' equity at December 31, 1995 and 1994, respectively.
As permitted by a special report of the FASB entitled 'A Guide to
Implementation of Statement 115 on Accounting for Certain Invesments in Debt and
Equity Securities', the Bank transferred at the end of 1995 securities
previously classified as held to maturity to available for sale that had an
amortized cost of $16,552,778 and an unrealized gain of $45,016, net of tax.
There are no trading account securities and all other securities have been
classified as held to maturity.
Mortgage-backed securities and other investment securities classified as
held-to-maturity are acquired as investments with the intent and ability to
maintain the securities in the portfolio until maturity. These securities are
stated at cost adjusted for amortization of premiums and accretion of discounts,
using a method that approximates the effective yield method.
Investment securities at December 31, 1994 consist of U.S. Treasury bills
and are stated at cost which approximates fair market value.
Gains and losses on the sale of all securities are computed using the
specific identification basis and are recorded on a trade date basis.
During 1993, the actual prepayments of mortgage-backed securities differed
from the estimated prepayments previously assumed in the calculation of the
premium amortization as a result of declining interest rates. Regent adjusted
the amortization based on the actual prepayments and in consideration of
anticipated future prepayments. This additional amortization totalled $400,000
and is included in the consolidated statements of income as a reduction of
interest income from investment securities.
32
<PAGE>
REGENT BANCSHARES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of aggregate cost or
market value.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at the amount of the unpaid principal balance, net of
unearned interest and deferred loan fees/costs. Interest on loans is recognized
on the daily principal amount outstanding.
Accrual of interest is discontinued on loans when management believes,
after considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that collection of interest and
principal is doubtful. Non-accrual loans are restored to accrual status when
there has been a sustained period of repayment performance and all principal and
interest that is contractually due is reasonably assured of repayment. See Note
2 for interest income on IPF loans.
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 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 classifed as loans
and are stated at the lower of cost or fair value. Commercial, industrial, and
mortgage loans are comprised primarily of IPF loans (see Note 2). Consumer loans
are evaluated in the aggregate due to their homegeneous nature. 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 is defined by the Bank as a delay of less
than 90 days in making full contractual payment, 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 December
31, 1995, there are 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 Note 2 regarding the loss estimate
associated with automobile insurance premium finance ('IPF') loans.
At December 31, 1995, the recorded investment in loans that are considered
to be impaired as defined by SFAS No. 114 and SFAS No. 118 was $19.4 million, of
which $3.6 million were non-
33
<PAGE>
REGENT BANCSHARES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
accrual loans and $11.7 million were delinquent IPF loans. The related allowance
for credit losses for these impaired loans is $5.8 million. For approximately
$12.2 million of impaired loans, the reserve was based on the expected future
cash flows and the remaining $7.2 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 aggressively pursue 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 year ended December
31, 1995, the Bank did not recognize any interest income using the cash basis of
income recognition.
OTHER REAL ESTATE OWNED
Other real estate owned consisting of property acquired by foreclosure or
deed in lieu of foreclosure is initially recorded at the lower of the related
loan balance or the fair value of the property at the date acquired. These
assets are subsequently carried at the lower of this new basis or the fair value
less estimated costs to sell. Costs relating to the development and improvement
of the property are capitalized, whereas those related to holding the property
are charged to expense.
LOAN ORIGINATION FEES AND COSTS
Loan origination fees, net of certain direct loan origination costs of
closed loans, are deferred and amortized over the life of the related loans as
an adjustment to yield.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation of furniture and fixtures is computed using the
straight-line method over the estimated useful lives which range from 2 to 10
years. Leasehold improvements are amortized using the straight-line method over
the lesser of their estimated useful lives or the term of their respective
leases. Repairs and maintenance are expensed as incurred, and renewals and
betterments are capitalized.
FEDERAL INCOME TAXES
Effective January 1, 1993, Regent adopted Statement of Financial Accounting
Standards No. 109, 'Accounting for Income Taxes' (SFAS No. 109). The statement
requires the recording of deferred taxes based on the estimated future tax
effects of differences between the financial statement and income tax bases of
assets and liabilities using the enacted marginal tax rate. Deferred income tax
expense or credits are based on the changes in the asset or liability from
period to period. Prior to January 1, 1993, deferred income tax expenses or
credits were recorded to reflect the tax consequences of timing differences
between the recording of income and expenses for financial reporting purposes
and for purposes of filing federal income tax returns at income tax rates in
effect when the differences arose.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share for all periods presented is based on the
weighted average number of common shares outstanding after consideration of
preferred stock dividends. Common stock equivalents include the Series B, Series
C, Series D and Series E Convertible Preferred Stock. The weighted average
number of common shares attributable to common stock equivalents are 99,203,
89,339, and 60,238, shares for the years ended December 31, 1995, 1994 and 1993.
The primary earnings per common share does not assume the exercise of stock
options or warrants as common stock equivalents since the exercise price
exceeded the average market price of the common stock and, therefore, such
exercise would be antidilutive.
34
<PAGE>
REGENT BANCSHARES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Fully diluted earnings per common share 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 only 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
changed as necessary to reflect dividends declared and changes in market price.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and amounts due from banks. The statements of cash flows present
the net amounts of cash receipts and cash payments associated with certain loan
and deposit transactions.
RECENT ACCOUNTING PRONOUNCEMENTS: ACCOUNTING FOR MORTGAGE SERVICING RIGHTS
In May, 1995, the FASB issued Statement No. 122, 'Accounting for Mortgage
Servicing Rights,' ('SFAS No. 122'). This statement requires capitalization of
the cost of the rights to service mortgage loans when originated mortgages are
sold and servicing is retained. This statement also requires the capitalized
mortgage servicing rights to be amortized in proportion to and over the period
of estimated net servicing income. In addition, the mortgage servicing rights
must be periodically evaluated for impairment based on their fair value. SFAS
No. 122 was adopted prospectively on January 1, 1996. There was no material
financial statement impact upon adoption of this standard.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the FASB issued Statement No. 123, 'Accounting for
Stock-Based Compensation' ('SFAS No. 123'). SFAS No. 123 defines a fair value
based method of accounting for stock-based employee compensation. The statement
encourages, but does not require, the use of this method for financial statement
purposes. At a minimum, however, companies are required to provide pro-forma
footnote disclosures of the impact on earnings and earnings per share, as well
as certain additonal disclosures. SFAS No. 123 is effective for Regent in 1996
and will be applicable to all options granted after January 1, 1995. Adoption of
the statement is not expected to have a significant impact on the Regent's
financial statements.
4. RESTRICTED CASH BALANCES
The Bank is required to maintain reserves in the form of cash balances with
the Federal Reserve Bank against its deposit liabilities. Reserves of $204,000
and $250,000 were required to be held with the Federal Reserve Bank at December
31, 1995 and December 31, 1994.
5. INVESTMENT PORTFOLIO
Investment securities available for sale at December 31, 1995 and 1994 are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------------------------------------------
ESTIMATED
PRINCIPAL UNAMORTIZED UNEARNED AMORTIZED UNREALIZED UNREALIZED MARKET
BALANCE PREMIUMS DISCOUNTS COST GAINS LOSSES VALUE
------------ ------------ --------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
FHLMC............... $ 16,455,698 $ 488,656 $ -- $ 16,944,354 $ 76,032 $ 282,443 $ 16,737,943
FNMA................ 27,616,256 648,089 85,694 28,178,651 203,692 222,395 28,159,948
------------ ------------ --------- ------------ ----------- ----------- ------------
$ 44,071,954 $1,136,745 $ 85,694 45,123,005 279,724 504,838 44,897,891
------------ ------------ ---------
------------ ------------ ---------
Non-marketable
equity securities.
. 2,827,370 -- -- 2,827,370
------------ ----------- ----------- ------------
$ 47,950,375 $ 279,724 $ 504,838 $ 47,725,261
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
35
<PAGE>
REGENT BANCSHARES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INVESTMENT PORTFOLIO -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-------------------------------------------------------------------------------------------
ESTIMATED
PRINCIPAL UNAMORTIZED UNEARNED AMORTIZED UNREALIZED UNREALIZED MARKET
BALANCE PREMIUMS DISCOUNTS COST GAINS LOSSES VALUE
------------ ------------ --------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
FHLMC............... $ 12,359,696 $ 327,182 $ -- $ 12,686,878 $ -- $ 725,000 $ 11,961,878
FNMA................ 18,916,479 637,645 30,680 19,523,444 -- 1,367,000 18,156,444
Collateralized
mortgage
obligations....... 1,409,300 -- 798 1,408,502 -- 64,000 1,344,502
------------ ------------ --------- ------------ ----------- ----------- ------------
$ 32,685,475 $ 964,827 $ 31,478 33,618,824 -- 2,156,000 31,462,824
------------ ------------ ---------
------------ ------------ ---------
Non-marketable
equity securities.
. 3,593,864 -- -- 3,593,864
------------ ----------- ----------- ------------
$ 37,212,688 $ -- $ 2,156,000 $ 35,056,688
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
Mortgage-backed securities held to maturity at December 31, 1995 and 1994,
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------------------------------------------
ESTIMATED
PRINCIPAL UNAMORTIZED UNEARNED CARRYING UNREALIZED UNREALIZED MARKET
BALANCE PREMIUMS DISCOUNTS VALUE GAINS LOSSES VALUE
------------ ------------ --------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
GNMA................. $ 12,181,546 $ 564,753 $ -- $ 12,746,299 $ -- $ 201,824 $ 12,544,475
FHLMC................ 36,346,310 1,396,248 224,131 37,518,427 266,284 450,214 37,334,497
FNMA................. 21,534,711 949,376 -- 22,484,087 3,819 345,769 22,142,137
Collateralized
mortgage
obligations........ 17,947,058 555,146 6,869 18,495,335 -- 620,940 17,874,395
------------ ------------ --------- ------------ ----------- ----------- ------------
$ 88,009,625 $3,465,523 $ 231,000 $ 91,244,148 $ 270,103 $ 1,618,747 $ 89,895,504
------------ ------------ --------- ------------ ----------- ----------- ------------
------------ ------------ --------- ------------ ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------------------------------------------------------
ESTIMATED
PRINCIPAL UNAMORTIZED UNEARNED CARRYING UNREALIZED UNREALIZED MARKET
BALANCE PREMIUMS DISCOUNTS VALUE GAINS LOSSES VALUE
------------- ------------ --------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
GNMA............. $ 13,192,150 $ 612,766 $ -- $ 13,804,916 $ -- $ 1,423,375 $ 12,381,541
FHLMC............ 48,439,779 1,884,286 245,216 50,078,849 14,474 3,315,868 46,777,455
FNMA............. 36,072,650 1,203,708 60,768 37,215,590 -- 3,099,220 34,116,370
Collateralized
mortgage
obligations.... 19,781,772 614,957 13,657 20,383,072 -- 468,761 19,914,311
------------- ------------ --------- ------------- ----------- ----------- -------------
$ 117,486,351 $4,315,717 $ 319,641 $ 121,482,427 $ 14,474 $ 8,307,224 $ 113,189,677
------------- ------------ --------- ------------- ----------- ----------- -------------
------------- ------------ --------- ------------- ----------- ----------- -------------
</TABLE>
In accordance with Regent's policy to hold all mortgage-backed securities
to maturity, there were no sales of mortgage-backed securities during 1995 or
1994.
Expected maturities of mortgage-backed securities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without prepayment penalties. The contractual maturities of
these securities range from 10 to 40 years.
The Bank has established credit arrangements with financial institutions.
Mortgage-backed securities will serve as collateral for any transactions
executed under these arrangements. The maximum level of funds available is
approximately $11,000,000. Additionally, the Bank has the ability to borrow on a
short and long-term basis from the FHLB an amount not exceeding 85% to 90% of
the
36
<PAGE>
REGENT BANCSHARES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INVESTMENT PORTFOLIO -- (CONTINUED)
fair market value of these securities. Borrowings under this arrangement at
December 31, 1995 would require that investment securities of approximately
$49,000,000 be pledged as collateral. Securities with a carrying value of
$2,261,000 were pledged to secure public deposits.
The amortized cost and estimated market value of debt securities at
December 31, 1995, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
---------------- ----------------
<S> <C> <C>
Held to Maturity
Due in one year or less........................................ $ -- $ --
Due after one year through five years.......................... -- --
Due after five years through ten years......................... -- --
Due after ten years............................................ -- --
Mortgage-backed securities..................................... 91,244,148 89,895,504
---------------- ----------------
$ 91,244,148 $ 89,895,504
---------------- ----------------
---------------- ----------------
Available for Sale
Due in one year or less........................................ $ -- $ --
Due after one year through five years.......................... -- --
Due after five years through ten years......................... -- --
Due after ten years............................................ -- --
Mortgage-backed securities..................................... 45,123,005 44,897,891
---------------- ----------------
$ 45,123,005 $ 44,897,891
---------------- ----------------
---------------- ----------------
</TABLE>
Investment securities at December 31, 1994 of $124,672 consist of U.S.
Treasury bills and are stated at cost which approximate fair market value.
6. LOANS
A summary of the loan portfolio as of December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
---------------- --------------
<S> <C> <C>
Commercial & industrial loans.................................... $ 49,006,081 $ 27,406,523
Real estate:
Construction................................................... 4,430,425 1,455,110
Mortgages -- residential....................................... 18,925,609 29,252,959
Mortgages -- commercial........................................ 16,168,009 13,550,216
Consumer loans................................................... 18,572,551 4,409,532
---------------- --------------
107,102,675 76,074,340
Unearned interest/net deferred loan fees......................... (1,192,641) (214,701)
---------------- --------------
$ 105,910,034 $ 75,859,639
---------------- --------------
---------------- --------------
</TABLE>
Non-accrual loans were $3,567,737 and $3,685,804 at December 31, 1995 and
1994, respectively. Interest income of approximately $355,000, $211,000, and
$198,500 was not recognized as operating income due to the non-accrual status of
loans during 1995, 1994 and 1993, respectively. At December 31, 1995 and 1994,
loans totalling $1,094,005 and $393,681 respectively, were past due 90 days or
37
<PAGE>
REGENT BANCSHARES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LOANS -- (CONTINUED)
more and continue to accrue interest income. These loans exclude IPF loans of
$11.7 million which are delinquent. See Note 2.
In 1993, the Bank introduced a new lending program directed to the mortgage
banking industry. As an alternative to a warehouse credit line, the Bank
participates in the funding of individual residential mortgage loans originated
by the mortgage banker. During late 1994, two of the mortgage banking companies
involved in this program experienced financial difficulties and subsequently
filed for bankruptcy protection. At or about the same time, the Bank learned
that irregularities occurred in the origination process at the mortgage banking
companies which negatively impacted the underlying real estate collateral of
certain loans that had been funded. As a result of these conditions, the Bank
recorded charges totaling $1,067,000 on a pre-tax basis ($1.08 per common share)
in the fourth quarter of 1994, which includes an additional provision for loan
losses of $825,000.
At December 31, 1995 and 1994, there were $3,845,038 and $3,539,143
respectively, of loans outstanding to directors, principal shareholders and
executive officers and their affiliated interests. During 1995, new loans of
$2,721,042 were made and repayments totalled $2,415,147. Such loans are made in
the ordinary course of business at the Bank's normal credit terms and do not
present more than a normal risk of collection.
7. ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses for the years
ended December 31, 1995, 1994, and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Balance, beginning of year...................................... $ 1,713,372 $ 1,321,225 $ 1,077,635
Provision charged to operating income........................... 4,905,000 860,000 450,000
Loans charged-off............................................... (128,719) (552,143) (244,377)
Recoveries of loans previously charged-off...................... 11,229 84,290 37,967
------------- ------------- -------------
Balance, end of year............................................ $ 6,500,882 $ 1,713,372 $ 1,321,225
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
8. PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31, 1995 and 1994
follows:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Furniture and fixtures............................................... $ 855,188 $ 731,132
Leasehold improvements............................................... 597,146 490,160
------------- -------------
1,452,334 1,221,292
Less -- Accumulated depreciation..................................... 747,847 564,791
------------- -------------
Premises and equipment, net.......................................... $ 704,487 $ 656,501
------------- -------------
------------- -------------
</TABLE>
9. CERTIFICATES OF DEPOSIT
At December 31, 1995, 1994, and 1993, certificates of deposit outstanding
with a face value greater than or equal to $100,000 totalled approximately
$12,437,000, $7,646,000, $7,374,000, respectively. Interest expense for the
years then ended relating to those certificates was approximately $467,000,
$143,900, and $212,800, respectively.
38
<PAGE>
REGENT BANCSHARES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. ADVANCES FROM FEDERAL HOME LOAN BANK OF PITTSBURGH
A summary of the advances from the FHLB at December 31, 1995 and 1994
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------
INTEREST
AMOUNT MATURITY RATE
-------------- ---------- -----------
<S> <C> <C> <C>
Short-term:................................................ $ 20,500,000 11/1/96 6.05%
2,943,822 8/12/96 6.16%
5,000,000 1/8/96 5.93%
5,000,000 1/23/96 5.93%
--------------
Total short-term........................................... 33,443,822
--------------
Long-term:................................................. 5,000,000 12/20/00 6.02%
3,000,000 12/20/01 6.17%
2,000,000 12/20/02 6.22%
211,480 6/7/10 6.70%
--------------
Total long-term............................................ 10,211,480
--------------
Total Advances............................................. $ 43,655,302
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------------------
INTEREST
AMOUNT MATURITY RATE
-------------- ---------- -----------
<S> <C> <C> <C>
Short-term:................................................ $ 34,637,382 11/2/95 6.61%
4,000,000 2/17/95 6.13%
4,000,000 2/27/95 6.18%
2,000,000 4/3/95 6.17%
5,000,000 5/26/95 5.88%
3,400,000 11/20/95 5.38%
5,000,000 12/18/95 5.89%
5,000,000 12/19/95 5.89%
--------------
Total Advances............................................. $ 63,037,382
--------------
--------------
</TABLE>
Advances from the FHLB are collateralized by mortgage-backed securities at
an amount not exceeding 85% to 90% of the fair market value of these securities.
11. SUBORDINATED DEBENTURES
Subordinated debentures consist of 7 3/4% notes due September 30, 1998.
These notes are subordinated to rights of any senior debt consisting of certain
obligations to banks and other financial institutions which may be incurred.
12. INCOME TAXES
As of January 1, 1993, Regent adopted the provisions of SFAS No. 109. The
cumulative effect of adopting this change was not material, and accordingly, has
been reflected in the consolidated statements of income as part of the income
tax provision for the year ended December 31, 1993. Prior year financial
statements have not been restated to reflect the new accounting method.
39
<PAGE>
REGENT BANCSHARES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. INCOME TAXES -- (CONTINUED)
The (benefit) provision for income taxes for the years ended December 31,
1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Current.................................................. $ 481,100 $ 484,900 $ 643,500
Deferred................................................. (944,600) (225,800) (37,000)
------------ ----------- -----------
$ (463,500) $ 259,100 $ 606,500
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
The effective tax rates are reconciled to the statutory federal rates for
the years ended December 31, 1995, 1994 and 1993 as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate................................................................ (34.0)% 34.0% 34.0%
Merger expenses....................................................................... 3.0 -- --
Increase in valuation allowance for deferred tax assets............................... 18.1 -- --
--------- --------- ---------
Effective tax rate.................................................................... (12.9)% 34.0% 34.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of the enacted tax laws. The tax effect of
significant temporary differences are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------- -------------
<S> <C> <C>
Loan loss reserve.................................................... $ 2,180,300 $ 582,000
Depreciation......................................................... 36,700 11,900
Unrealized loss on investment securities available for
sale............................................................... 76,500 733,000
Other................................................................ 73,100 31,200
------------- -------------
Total gross assets................................................... 2,366,600 1,358,100
------------- -------------
Deferred loan costs.................................................. 70,400 --
------------- -------------
Total gross liabilities.............................................. 70,400 --
------------- -------------
Net deferred tax asset............................................... 2,296,200 1,358,100
------------- -------------
Valuation allowance.................................................. 650,000 --
------------- -------------
$ 1,646,200 $ 1,358,100
------------- -------------
------------- -------------
</TABLE>
The deferred tax asset is included in prepaid expense and other assets on
the consolidated balance sheets. Regent has established a valuation allowance of
$650,000 to reduce the net deferred tax asset to an amount which can be realized
through carryback to recover taxes previously paid.
At December 31, 1994, an income tax receivable of $255,444, is recorded and
included in prepaid expenses and other assets in the accompanying consolidated
balance sheets.
40
<PAGE>
REGENT BANCSHARES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. COMMITMENTS AND CONTINGENCIES
Future minimum lease payments under non-cancellable operating leases as of
December 31, 1995 are:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
- ------------------------- -----------
<S> <C>
1996.............................................................................. $ 189,660
1997.............................................................................. 189,660
1998.............................................................................. 209,660
1999.............................................................................. 87,358
2000.............................................................................. --
Thereafter........................................................................ --
-----------
Total minimum payments required................................................. $ 676,338
-----------
-----------
</TABLE>
Regent incurred rent expense of $173,855 and $173,865 in 1995, 1994 and
1993, respectively. The lease has an initial term of ten years and options to
renew for two terms of five years each. Rental payments for the option period
commencing June 1, 1999, will be based upon fair market value. The lease also
requires Regent to pay its pro rata share of all operating expenses such as
maintenance, insurance, taxes, etc.
Regent is subject to various legal actions and proceedings. In the
bankruptcy proceeding of a mortgage banking company for which the Bank funded
individual residential mortgages, the Bank has requested the court to order the
debtor to execute assignments of notes and mortgages to the Bank with respect to
approximately $7,600,000 of mortgages which the Bank had purchased and which the
debtor was obligated to resell but had failed to resell as a result of its
financial difficulties. Such mortgages were recorded by the Bank as of December
31, 1994. The debtor had objected to the Bank's request, alleging that the
mortgages may be the property of the debtor and that the funds advanced by the
Bank of approximately $7,600,000 might represent unsecured loans to the debtor.
In this event, it is management's belief that the Bank's claims in these
proceedings represent a substantial portion of all claims against the debtor.
In October 1995, the U.S. Bankruptcy Court issued an order approving the
settlement of the matter. 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 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 bankruptcy estate. The Bank's payment to the trustee of $175,000
has been 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.
There continues to be possible claims which may be made against the Bank by
other creditors associated with the Bank's transactions with the debtor. Such
claims have not been formally asserted to date. Management believes that these
possible claims are without merit, and the Bank intends to
41
<PAGE>
REGENT BANCSHARES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
vigorously defend any future actions brought related to these matters. However,
the ultimate outcome of these matters is not presently determinable and,
accordingly, no adjustments have been made in the accompanying consolidated
financial statements. Additionally, in November 1995, the agent that conducted a
real estate settlement involving the refinancing of a mortgage through the
debtor, filed a lawsuit against the Bank seeking damages in excess of $100,000
plus any and all damages sustained which are unspecified. The lawsuit alleges,
among other things, breach of contract and reliance on the Bank as the debtor's
warehouse lender. On February 2, 1996, this lawsuit was dismissed.
In the opinion of management, after discussions with legal counsel, the
resolution of each of these matters is not expected to have a material adverse
effect on Regent's consolidated financial condition or results of operations.
14. SIGNIFICANT GROUP CONCENTRATIONS OF RISK
Approximately 37% and 58% of the total loans outstanding at December 31,
1995 and 1994, respectively, are real estate loans and the collateral is
primarily located in the various counties surrounding Philadelphia. Regent is
able to decrease its credit exposure by an amount equal to the appraised value
of the collateral.
15. RELATED PARTIES
Regent incurred professional fees of $1,272,236, $560,441, and $436,956 in
1995, 1994 and 1993, respectively. Included in these amounts were approximately
$187,000, $270,000, and $167,000 in 1995, 1994 and 1993, respectively, of fees
paid to law firms that have representatives who are members of the Board of
Directors of Regent or the Bank.
Regent paid insurance premiums of approximately $89,700, $78,800, and
$79,700 during 1995, 1994 and 1993, respectively, to an insurance brokerage
agency whose president is also a member of the Board of Directors of Regent.
Regent paid consulting fees of approximately $86,600, $80,700, and $76,300
during 1995, 1994 and 1993, respectively, to an investment consulting firm whose
president is also a member of the Board of Directors of Regent.
In 1994, the Bank entered into an agreement with a company owned by an
advisory director to provide processing, servicing, marketing, and consulting
services to the Bank in connection with the Bank's automobile premium finance
lending program. The Bank incurred expenses of $1.3 million in 1995 and $62,000
in 1994 related to this agreement. See Note 2.
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Regent is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and letters of
credit, which involve, to varying degrees, elements of credit and interest rate
risk that are not recognized in the consolidated balance sheets.
Exposure to credit loss in the event of non-performance by the other party
to the financial instrument for commitments to extend credit is represented by
the contractual or notional amount of those instruments. The Bank uses the same
credit policies in making commitments as it does for on-balance-sheet
instruments.
42
<PAGE>
REGENT BANCSHARES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK -- (CONTINUED)
Regent had outstanding loan origination commitments to originate variable
and fixed rate loans aggregating approximately $3,950,000 and $350,000 at
December 31, 1995 and 1994, respectively. These commitments expire at various
dates within 120 days subsequent to December 31, 1995, and 75 days subsequent to
December 31, 1994 and the fixed rate commitments carry rates of interest of
9.00% to 9.75% of at December 31, 1995, and 10.5% at December 31, 1994.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment agreement.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since a portion of the commitments are
expected to expire without being drawn upon, the total commitments do not
necessarily represent future cash requirements. Regent evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral, obtained if
deemed necessary by Regent upon the extension of credit, is based on
management's credit evaluation of the counterparty. Collateral for most
commercial commitments varies but may include accounts receivable, inventory,
property, plant and equipment, and income-producing commercial properties.
Collateral for secured consumer commitments consists of liens on residential
real estate.
Commitments under outstanding standby letters of credit were $305,000 at
December 31, 1995 and $487,000 at December 31, 1994. Standby letters of credit
are instruments issued by the Bank which guarantee the beneficiary payment by
the Bank in the event of default by Regent's customer in the nonperformance of
an obligation of service. Most standby letters of credit are extended for one-
year periods. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Bank holds collateral supporting those commitments for which collateral is
deemed necessary primarily in the form of certificates of deposit and liens on
real estate.
Commitments under lines of credit exist as the borrower has not used the
full amount of the approved line of credit. Collateral for most commitments
under commercial lines of credit varies but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial
properties. Amounts available for use under existing lines of credit were
$18,009,000 and $6,807,000 at December 31, 1995 and 1994, respectively.
17. SHAREHOLDERS' EQUITY
Prior to the public offering of securities by Regent in 1989, the
organizers of Regent purchased 101,000 shares of common stock at $10 per share.
These shares contain warrants to purchase up to 50,022 and 59,438 shares of
common stock at $8.50 per share at December 31, 1995 and 1994, respectively. In
addition, Regent granted options to the organizers to purchase an aggregate of
274,241 and 264,825 shares of common stock at December 31, 1995 and 1994,
respectively. These options are exercisable at a price of $8.50 per share. The
options and warrants expire on the later of the consummation date of the
proposed merger with Carnegie Bancorp (subject to the condition that, during
such period of extension from their original expiration date, such options and
warrants may not be exercised for the purchase of Regent Common Stock but shall
only represent the right to receive Carnegie Common Stock as provided in the
Merger Agreement) or 30 days after termination of the Merger Agreement. See Note
21.
In connection with the public offering, 500,196 units were purchased which
consisted of one share of Regent's common stock and one-half warrant. Each whole
warrant entitles the holder to purchase 1.177 shares of common stock at a price
of $8.50 per share at December 31, 1995 and 1994, respectively and expires on
the latter of the consummation date of the proposed merger with Carnegie Bancorp
(subject to the condition that, during such period of extension from their
original expiration date, such warrants may not be exercised for the purchase of
Regent Common Stock but shall only represent the right to receive Carnegie
Common Stock as provided in the Merger Agreement) or 30 days after termination
of the Merger Agreement. See Note 21.
Also in connection with Regent's 1989 public offering, Regent issued
warrants to purchase units consisting of one share of Regent Common Stock and a
warrant to purchase one-half share of Regent
43
<PAGE>
REGENT BANCSHARES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. SHAREHOLDERS' EQUITY -- (CONTINUED)
common stock to Regent's managing underwriter, Hopper Soliday & Co., Inc.
and its designee (the 'Regent Underwriter Warrants'). The Regent Underwriter
Warrants were exercisable for the purchase of an aggregate of 147,124 shares of
Regent common stock at an exercise price of $10.20 per share at December 31,
1995 and 1994, respectively. The warrants expire on the latter of the
consummation date of the proposed merger with Carnegie Bancorp (subject to the
condition that, during such period of extension from their original expiration
date, such warrants may not be exercised for the purchase of Regent Common Stock
but shall only represent the right to receive Carnegie Common Stock as
provided in the Merger Agreement) or 30 days after termination of the Merger
Agreement. See Note 21.
In April 1989, Regent established a Stock Option Plan which provides for
the granting of incentive and nonqualified stock options to certain officers,
directors, founders and key employees. Currently, a maximum of 211,860 shares of
Regent's common stock may be issued, with no more than 153,010 shares granted to
directors, founders and director/officers of the Bank and no more than 58,850
shares granted to nondirector/officers of the Bank. Options are granted at a
price not less than 100% of the fair market value of the common stock at date of
grant and must be exercised within five years from date of grant, with certain
restrictions. At December 31, 1995 and 1994, options for 171,362 and 151,539
shares, respectively, were outstanding at $8.50 per share. No options were
exercised during 1995 or 1994. The options expire on the latter of the
consummation date of the proposed merger with Carnegie (subject to the condition
that, during such period of extension from their original expiration date, such
options may not be exercised for the purchase of Regent Common Stock but shall
only represent the right to receive Carnegie Common Stock as provided in the
Merger Agreement) or 30 days after termination of the merger agreement. See Note
21.
In June 1989, Regent sold 530,000 shares of Series A Convertible Preferred
Stock. The preferred stock is convertible, at the option of the holder, into
Regent's common stock on a share-for-share basis. The Series A Convertible
Preferred Stock is redeemable at Regent's option at $10.00 per share, plus
declared but unpaid dividends. Holders of the Regent Series A Preferred Stock
are entitled to receive a $10.00 per share liquidation preference before any
payment is made to common stockholders.
In June 1995 and in July 1994 and 1993, Regent issued 51,452, 51,912 and
52,967 shares, respectively, of Series E, and in May 1992, 1991, and 1990,
Regent issued 52,996 shares of Series D, 52,996 shares of Series C, and 52,998
shares of Series B Convertible Preferred Stock, representing a 10% stock
dividend to holders of Series A Convertible Preferred Stock. The fair market
value of the 51,452, 51,912 and 52,967 shares issued of Series E stock of
$308,712, $395,829 and $430,381, respectively, the 52,996 shares issued of
Series D stock of $357,750, the 52,996 shares issued of Series C stock of
$264,980 and the 52,998 shares of Series B stock of $490,250 has been charged to
retained earnings. Each share of Series B, C and D stock is convertible into
1.177 shares of common stock and each share of Series E stock is convertible
into one share of common stock.
The Series B through Series D Convertible Preferred Stock and the Series E
Convertible Preferrred Stock are redeemable in whole or in part at the option of
Regent, at a price of $8.50 and $10.00 per share, respectively, plus declared
but unpaid dividends.
In connection with the 10% stock dividend issued in the form of Series B
through Series D preferred stock, the organizers had the obligation to purchase
these shares from the recipients at $10 per share. Regent has issued to each
organizer who was required to purchase any share of the stock dividend a warrant
to purchase one-half of a share of common stock at $8.50 per share for each
share of preferred stock purchased. The warrants are exercisable for a period of
five years from the date of issue at a purchase price of $8.50 per share. In
connection with the issuance of the Series B, C and D Convertible Preferred
Stock, warrants for the purchase of 24,977, 25,319 and 25,852 shares,
respectively, have been issued to the organizers. These warrants expire on the
latter of the consummation date of the proposed merger with Carnegie Bancorp
(subject to the condition that, during such period of extension from their
original expiration date, such warrants may not be exercised for the purchase of
Regent Common Stock but shall only represent the right to receive Carnegie
Common Stock as provided in the Merger Agreement), 30 days after termination of
the Merger Agreement or the expiration date of the warrant. See Note 21.
44
<PAGE>
REGENT BANCSHARES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. SHAREHOLDERS' EQUITY -- (CONTINUED)
In July 1993 and May 1992, Regent paid 7% and 10% common stock dividends
resulting in the issuance of an additional 57,287 and 67,592 shares,
respectively, of common stock. In connection with preferred stock, options, and
warrants, approximately 1,600,000 shares have been reserved for issuance upon
exercise or conversion in accordance with the antidilution and adjustment
provisions of the various issues. Per share data and the weighted average number
of shares outstanding for all periods presented in the consolidated statements
of income have been adjusted to reflect the payment of the common stock
dividend.
18. DIVIDEND AND LOAN LIMITATIONS
The dividends that may be paid by a subsidiary bank to the parent company
are subject to certain legal limitations. Under such limitations, $235,000 is
currently available for the payment of dividends by the Bank to Regent at
December 31, 1995 and may be subject to regulatory approval. See Note 2.
Under current Federal Reserve regulations, the Bank is limited in the
amount it may loan to Regent, unless the loans are secured by specific
obligations. At December 31, 1995, the maximum amount available for transfer
from the Bank to Regent in the form of loans approximated 10% of consolidated
net assets.
19. REGENT BANCSHARES CORP. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
ASSETS
Cash.......................................................................... $ 100 $ 100
Other investment securities................................................... 247,381 134,147
Other assets.................................................................. 72,931 126,113
Investment in subsidiary...................................................... 12,836,662 14,748,926
-------------- --------------
Total assets................................................................ $ 13,157,074 $ 15,009,286
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities............................................................. $ 53,718 $ 53,718
Subordinated debentures....................................................... 2,750,000 2,750,000
Shareholders' equity.......................................................... 10,353,356 12,205,568
-------------- --------------
Total liabilities and shareholders' equity.................................. $ 13,157,074 $ 15,009,286
-------------- --------------
-------------- --------------
</TABLE>
45
<PAGE>
REGENT BANCSHARES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. REGENT BANCSHARES CORP. (PARENT COMPANY ONLY) FINANCIAL
INFORMATION -- (CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
1995 1994 1993
-------------- ------------- -------------
<S> <C> <C> <C>
Dividend from subsidiary........................................... $ 250,000 $ 250,000 $ --
Interest income.................................................... 7,360 4,312 3,896
-------------- ------------- -------------
Total income..................................................... 257,360 254,312 3,896
-------------- ------------- -------------
Expenses:
Interest......................................................... 219,606 217,612 28,456
Other............................................................ 75,501 43,363 43,177
-------------- ------------- -------------
Total expenses................................................ 295,107 260,975 71,633
-------------- ------------- -------------
(37,747) (6,663) (67,737)
Income tax benefit................................................. (97,800) (87,300) (23,000)
-------------- ------------- -------------
Income (loss) before equity in undistributed net (loss) income of
subsidiary....................................................... 60,053 80,637 (44,737)
Equity in undistributed net (loss) income of subsidiary............ (3,186,650) 422,188 1,221,846
-------------- ------------- -------------
Net (loss) income.................................................. $ (3,126,597) $ 502,825 $ 1,177,109
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
1995 1994 1993
-------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income................................................ $ (3,126,597) $ 502,825 $ 1,177,109
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities:
Decrease (increase) in other assets........................... 53,181 (80,819) (23,257)
Equity in undistributed net (loss) income of subsidiary....... 3,186,650 (422,188) (1,221,846)
Increase in other liabilities................................. -- 26,883 26,836
-------------- ------------- -------------
Total adjustments.......................................... 3,239,831 (476,124) (1,218,267)
-------------- ------------- -------------
Net cash provided by (used in) operating activities........ 113,234 26,701 (41,158)
-------------- ------------- -------------
Cash flows from investing activities:
(Increase) decrease in investment securities..................... (113,234) (26,701) 41,158
Increase in investment in subsidiary............................. -- (200,000) (2,550,000)
-------------- ------------- -------------
Net cash used in investing activities...................... (113,234) (226,701) (2,508,842)
-------------- ------------- -------------
Cash flows from financing activities:
Issuance of subordinated debentures.............................. -- 200,000 2,550,000
-------------- ------------- -------------
Net change in cash................................................. -- -- --
Cash, beginning of year............................................ 100 100 100
-------------- ------------- -------------
Cash, end of year.................................................. $100 $100 $100
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
46
<PAGE>
REGENT BANCSHARES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value. The estimated fair value amounts have been determined by the Bank
using available market information and appropriate valuation methodologies.
However, considerable judgment is required to interpret market data to develop
the estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Bank could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
CASH AND FEDERAL FUNDS SOLD: The carrying amounts for cash and federal
funds sold approximate the fair values of those assets.
MORTGAGE-BACKED SECURITIES AND INVESTMENT SECURITIES: Fair values are based
on quoted market prices, if available. If quoted market prices are not
available, then fair values are based on quoted market prices of comparable
instruments.
LOANS: For floating rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The
fair values of certain mortgage loans are based on quoted market prices of
similar loans sold in conjunction with securitization transactions. The fair
values for fixed rate commercial real estate and commercial and industrial loans
are estimated by discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar terms and credit
quality.
MORTGAGE LOANS HELD FOR SALE: Due to their short-term nature, the carrying
amount of mortgage loans held for sale approximates fair value.
DEPOSIT LIABILITIES: The fair value of demand deposits, NOW and savings
accounts, and money market deposits is the amount payable on demand at the
reporting date. Fair values for fixed rate certificates of deposit are estimated
using discounted cash flows based on rates currently offered for deposits of
similar remaining maturities.
ADVANCES FROM FHLB: The carrying amount of short-term advances approximates
their fair values. Rates currently available for advances with similar terms and
remaining maturities are used to estimate the fair value of long-term advances.
SUBORDINATED DEBENTURES: Rates currently available to Regent for debt with
similar terms and remaining maturities are used to estimate fair value.
OFF-BALANCE-SHEET INSTRUMENTS: The carrying amount of off-balance-sheet
instruments approximates their fair value as these commitments are short-term
and are primarily variable rate agreements.
47
<PAGE>
REGENT BANCSHARES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
The estimated fair value of Regent's financial instruments at December 31,
1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Assets:
Cash....................................................... $ 6,919 $ 6,919 $ 2,802 $ 2,802
Investment securities...................................... -- -- 125 125
Investment securities available for sale................... 47,725 47,725 35,057 35,057
Mortgage-backed securities held to maturity................ 91,244 89,895 121,482 113,190
Loans, net................................................. 99,409 98,450 74,146 73,618
Mortgage loans held for sale............................... 12,874 13,271 5,388 5,388
Financial Liabilities:
Deposits................................................... 196,132 198,196 161,061 160,678
Advances from FHLB......................................... 43,655 43,709 63,037 62,951
Subordinated debentures.................................... 2,750 2,895 2,750 2,438
Off-Balance Sheet Instruments:
(Notional amounts)
Commitments to extend credit............................... 3,950 3,950 350 350
Letters of credit.......................................... 305 305 487 487
Commitments under lines of credit.......................... 18,009 18,009 6,807 6,807
</TABLE>
21. BUSINESS COMBINATION
On August 30, 1995, with the approval of the Board of Directors, Regent and
the Bank entered into an Agreement and Plan of Merger (the Agreement) with
Carnegie Bancorp (Carnegie) and its wholly-owned subsidiary, Carnegie Bank, N.A.
(CBN) which provides that Regent will be merged with and into Carnegie (the
merger), and CBN will be merged with and into the Bank, which will conduct
business 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 an 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 of Carnegie and Regent as of a
future date to be determined. Management of Regent believes that Carnegie and
Regent will agree on the terms of this amendment to the Merger Agreement, but
there can be no assurance that Carnegie and Regent will do so or that the merger
will occur. To effect the merger, the approval of a majority of voting
shareholders of the Company and Carnegie and receipt of all governmental and
other required approvals, including the approval of the Office of the
Comptroller of the Currency and the Federal Reserve Bank, is necessary.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
48
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers of Regent, each of whom serves at the discretion of
the Board of Directors except as noted below, and the directors of Regent are as
follows:
<TABLE>
<CAPTION>
OFFICER/DIRECTOR
NAME AGE POSITION WITH REGENT SINCE
- ------------------------------------------ --- --------------------------------------------- -----------------
<S> <C> <C> <C>
Harvey Porter (1)......................... 64 President, Chief Executive Officer 1986
and a Director
David W. Ring............................. 80 Chairman of the Board and a Director 1986
Abraham L. Bettinger...................... 60 Chairman of the Board and a Director 1986
Barbara H. Teaford (2).................... 48 Executive Vice President, 1986
Secretary and a Director
Leonard S. Dwares......................... 61 Assistant Treasurer and a Director 1986
O. Francis Biondi......................... 63 Director 1986
Lance T. Funston.......................... 53 Director 1989
James J. Mooney........................... 51 Director 1989
Edward Parnes, Ph.D....................... 74 Director 1989
Robert J. Reichlin........................ 70 Director 1989
Stephen J. Carroll........................ 44 Treasurer, Chief Financial Officer 1990
and Accounting Officer
Harry D. Zutz............................. 78 Director 1989
</TABLE>
- ------------------
(1) Regent has a year-to-year employment agreement with Harvey Porter, under
which he received an annual salary of $175,672 during 1995.
(2) Regent has a year-to-year employment agreement with Barbara H. Teaford,
under which she received an annual salary of $118,939 during 1995.
The following is a brief listing of the principal occupation, and certain
other affiliations of each executive officer and director of Regent.
Mr. Porter is presently, and has been since December 1986, the President,
Chief Executive Officer and a director of Regent. Mr. Porter has also served as
the Bank's President and Chief Executive Officer since its inception in June
1989. From 1980 to 1985, he was at various times President, Chief Executive
Officer, Vice Chairman, a control shareholder and consultant with the First
National Bank of Wilmington and from 1977 to 1983, he was a director, officer
and a control shareholder of Integrity Holding Co., its one-bank holding
company. Mr. Porter had been a practicing attorney and has been involved in
various real estate and business ventures.
Mr. Ring is presently, and has been since December 1986, the Chairman of
the Board and a director of Regent. He has also been the Chairman of the Board
of the Bank since its inception. He was formerly a consultant to, and a director
of, Larami Corporation, a toy manufacturer, a director and a control shareholder
of the First National Bank of Wilmington and a director of Integrity Holding
Co., its one-bank holding company. Mr. Ring was a director of the Port
Corporation of Philadelphia and was formerly a director and Corporate Vice
President of Tasty Baking Co.
Mr. Bettinger is presently, and has been since 1986, the Vice Chairman of
the Board of Directors and a director of Regent. Mr. Bettinger has also served
as the Vice Chairman of the Bank since its inception in June 1989. Mr. Bettinger
is the President of Bettinger & Leech, Inc., a bank consulting
49
<PAGE>
firm, and Chairman of Bettinger & Leech Financial Corp. Bettinger & Leech, Inc.
has acted as a consultant to the Bank since the commencement of operations in
June 1989. Regent paid consulting fees of approximately $70,000 to Bettinger &
Leech, Inc. during 1995 and reimbursed expenses of approximately $16,600. From
1973 to 1981, he was a Senior Vice President of Keefe, Bruyette & Woods, Inc., a
bank consulting and investment banking firm, where he headed the firm's bank
consulting activities. Mr. Bettinger was formerly a Vice President with
Manufacturers Hanover Trust Company.
Mrs. Teaford is presently, and has been since 1987, the Executive Vice
President and a director of Regent. She has also been the Executive Vice
President of the Bank since its inception, and the Secretary of Regent since
1990. From 1985 through 1987, she was Vice President and manager of the Southern
Asset Based Lending District of The Philadelphia National Bank. From 1984 to
1985, she was a Vice President in the Regional Corporate Banking Division and
from 1981 to 1984, she was a Commercial Officer and Assistant Vice President in
the Large Corporate Banking Division, both with The Philadelphia National Bank.
From 1982 to 1986, she was a director and Secretary of the Board of Directors of
the Central National Bank of Greencastle, Indiana. Mrs. Teaford is a member of
the Board of Directors of a number of charitable and civic organizations,
including the Pennsylvania Horticultural Society and the Settlement Music
School.
Mr. Carroll is presently, and has been since 1990, the Treasurer and Chief
Financial Officer and Accounting Officer of Regent. He has also been Senior Vice
President and Chief Financial Officer of the Bank since 1990. From December 1987
to July 1990, he was Executive Vice President and Chief Operating Officer of
Metrobank of Philadelphia, N.A. From February 1986 to December 1987, he was Vice
President of Corporate Finance with the investment banking firm of Ryan, Beck &
Co.
Mr. Dwares is presently the Assistant Treasurer and Director of Regent. He
has been a Director since 1986 and the Assistant Treasurer since 1990. Prior to
becoming the Assistant Treasurer he acted as the Treasurer of Regent from 1986
to 1990. Mr. Dwares is currently President and principal shareholder of Leonard
S. Dwares & Co., P.A., Certified Public Accountants. Mr. Dwares was formerly a
director of The First National Bank of Wilmington and a member of the audit and
loan committees. He is a Chartered Financial Consultant.
Mr. Biondi is presently a director of Regent and had served as Vice
Chairman and Secretary of Regent from its inception to 1990. He has been a
senior partner with the law firm of Morris, Nichols, Arsht & Tunnell of
Wilmington, Delaware for more than five years, which firm was paid $100,500 by
Regent for professional services during 1995. From 1974 to 1983, he was a
director and a control shareholder of The First National Bank of Wilmington and
Integrity Holding Co., its one-bank holding company. Mr. Biondi is a former
member of the State of Delaware Council on Banking, former President of the
Delaware Bar Association and former City Solicitor of Wilmington, Delaware.
Mr. Funston is the President and Chief Executive Officer of TelAmerica
Media Inc., a firm specializing in the telemarketing of various consumer
products. Mr. Funston previously served as an Assistant to the Director of the
Federal Deposit Insurance Corporation and was formerly an assistant to a member
of the Board of Governors of the Federal Reserve System.
Mr. Mooney is the Chief Executive Officer of Searchtec Holding, Inc., a
title insurance, real property appraisal and public records research company. He
was formerly the Chairman of Industrial Valley Title Insurance Group,
Philadelphia, Pennsylvania.
Dr. Parnes is the Executive Director of Philadelphia Mental Health Clinic
and the President of Walnut Mortgage Co. and Boulevard Hotel Corporation. He is
also an Assistant Clinical Professor at Hahnemann Medical College and the
Hospital of the University of Pennsylvania.
Mr. Reichlin is the President of Zuckerman-Honickman, Inc., a distributor
of glass and plastic containers. He is also the Vice President of Vanguard of
Pennsylvania, a manufacturer of plastic bottles, the Chairman of the Board of
Vanguard Plastics of California, also a manufacturer of plastic bottles, and
Treasurer of Delta Industries, a distributor of bottles and sprayers. Mr.
Reichlin is a
50
<PAGE>
Trustee of Albert Einstein Medical Center and a member of its executive
committee. He is also a former President of The Locust Club.
Mr. Zutz is Chairman of the Board of both Harry David Zutz Insurance, Inc.
and Professional Liability Insurance, Inc., regional insurance agencies with
offices in Wilmington, Delaware and London, England. Harry David Zutz Insurance,
Inc., acting as insurance agent, has obtained various types of insurance for
Regent since its inception in June 1989. Regent paid insurance premiums of
approximately $89,700 to Harry David Zutz Insurance, Inc. during 1995. Mr. Zutz
is a member of Lloyds of London and a former director of the Bank of Delaware.
He is also involved with various real estate interests.
AUDIT AND COMPENSATION COMMITTEES
Leonard S. Dwares, a director of Regent and the Bank, and Nelson C. Mishkin
and Paul L. Jaffe, who are directors of the Bank, serve as the Audit Committee
and the Compensation Committee of the Board of Directors of the Bank. Regent is
solely a holding company and has no business activities other than those
conducted by the Bank. Officers of Regent are not, in such capacities,
separately compensated by Regent. The Audit Committee acts as a liaison between
the Bank's internal accounting staff and its internal auditors and its
independent public accountants and reports to the Board of Directors of the Bank
with respect to financial reporting, financial practices and the adequacy of
internal controls. The Compensation Committee considers and makes
recommendations to the Board of the Bank with respect to appropriate levels of
compensation for the officers and other executives of the Bank. Regent has no
nominating committee.
SECTION 16(A) REPORTING DELINQUENCIES
Section 16(a) of the Securities Exchange Act of 1934 (the 'Exchange Act')
requires that the officers and directors of a corporation, such as Regent, which
has a class of equity securities registered under Section 12 of the Exchange
Act, as well as persons who own more than 10% of a class of equity securities of
such a corporation, file reports of their ownership of such securities, as well
as monthly statements of changes in such ownership, with the corporation, the
Securities and Exchange Commission (the 'SEC') and Nasdaq. Based upon written
representations received by Regent from its officers and directors, and Regent's
review of the monthly statements of ownership changes filed with the Company by
its officers and directors during 1995, Regent believes that all such filings
required during 1995 were made on a timely basis, except for Barbara Teaford who
amended her initial Form 3 Report to correct her holdings with respect to
warrants and options and for Leonard Dwares who reported late on Form 4 two
transactions which involved the conversion of Regent's preferred stock to common
stock.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation for the years ended
December 31, 1995, 1994 and 1993 of the chief executive officer and of each
other executive officer of Regent and the Bank whose salary in 1995 exceeded
$100,000. No bonuses were paid to executive officers.
51
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($)
- ---------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Harvey Porter, President and Chief Executive Officer.................. 1995 175,672
1994 164,479
1993 155,122
Barbara H. Teaford, Executive Vice President.......................... 1995 118,939
1994 109,300
1993 105,000
</TABLE>
There is no other annual compensation or long-term compensation that is
required to be disclosed in the foregoing table.
Compensation for the above-named individuals is being paid pursuant to
employment agreements, the current terms of which expire in May 1996, and
thereafter automatically extend for successive one-year periods, subject to
prior written notice of termination by either individual or Regent, in each
case, no later than 90 days prior to expiration of the then current term. Such
agreements require continuation of compensation for one year to the executive's
spouse, issue or estate in the event of death. The agreements do not provide for
severance payments. These agreements will be terminated at the Effective Time of
the Merger when Mr. Porter and Mrs. Teaford will enter into employment
agreements with Carnegie.
As of December 31, 1995, the Bank had outstanding loans to various
officers, directors, and advisory directors of Regent and the Bank and their
families and various entities of which such persons are directors and officers.
Such loans were made in the ordinary course of the Bank's business, were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated third parties,
and did not involve more than the normal risk of collectibility or present other
unfavorable features.
OPTION GRANTS AND EXERCISES AND FISCAL YEAR-END OPTION VALUES
During the fiscal year ended December 31, 1995, Regent did not grant any
stock options to any executive officer named in the Summary Compensation Table.
Regent does not grant stock appreciation rights. The following table sets forth
information with regard to unexercised options at December 31, 1995 for the
named executives, adjusted for stock dividends paid in 1992 and 1993; no options
were exercised by them in 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT 12/31/95 (#) OPTIONS AT 12/31/95 ($)
-------------------------------- --------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------- ----------- ------------------- ----------- -------------------
<S> <C> <C> <C> <C>
Harvey Porter.............................................. 70,620 0 158,900 0
Barbara H. Teaford......................................... 41,783.5 0 94,000 0
</TABLE>
52
<PAGE>
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as to security
ownership, as of March 8, 1996, with respect to (a) each person who is known by
Regent's Board of Directors to own beneficially more than 5% of Regent's
outstanding Common Stock or Series A Convertible Preferred Stock, Regent's only
voting securities, (b) each of Regent's directors, (c) each person named in the
Summary Compensation Table and (d) all of Regent's executive officers and
directors as a group.
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE WARRANTS AND
COMMON STOCK PREFERRED STOCK OPTIONS
------------------------- ------------------------ ------------
AMOUNT AND AMOUNT AND AMOUNT AND
NATURE OF NATURE OF NATURE OF
BENEFICIAL PERCENT BENEFICIAL PERCENT BENEFICIAL
NAME AND ADDRESS OWNERSHIP(1) OF CLASS OWNERSHIP OF CLASS OWNERSHIP(2)
- -------------------------------------------- ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Abraham L. Bettinger........................ 127,334(3) 11.7% 4,500(4) * 59,899(5)
845 3rd Avenue
New York, NY 10022
O. Francis Biondi........................... 176,300(6) 15.9% 8,433 1.7% 82,055(7)
P.O. Box 1347
Wilmington, DE 19801-1347
Leonard S. Dwares........................... 11,088(8) 1.1% 200 * 9,412
300 Foulk Road
Suite One
Wilmington, DE 19803
Lance T. Funston (9)........................ 57,860 5.4% 26,400 5.4% 11,770
2044 Spruce Street
Philadelphia, PA 19103
John Hynansky............................... 67,677 6.5% -- -- 26,482
c/o The Winner Group
P.O. Box 954
905 Shipley Street
Wilmington, DE 19899
James J. Mooney............................. 10,298 1.0% -- -- 7,356
Edward Parnes............................... 26,800(10) 2.6% 2,000 * 12,005
Harvey Porter and Anna Porter (11).......... 209,120 18.2% 11,833(12) 2.4% 119,534(13)
c/o Regent National Bank
1430 Walnut Street
Philadelphia, PA 19102
Robert J. Reichlin.......................... 21,798(14) 2.1% 5,000 * 8,827(15)
191 South Gulph Road
King of Prussia, PA 19406
David W. Ring............................... 186,403 16.8% 12,433 2.6% 82,597
c/o Regent National Bank
1430 Walnut Street
Philadelphia, PA 19102
Barbara H. Teaford and
Stephen D. Teaford(12)...................... 159,811(16) 14.5% 7,600 1.6% 77,436
c/o Regent National Bank
1430 Walnut Street
Philadelphia, PA 19102
Harry D. Zutz............................... 18,826(17) 1.8% -- -- 9,415(18)
300 Delaware Avenue
Wilmington, DE 19899
All Directors and Executive Officers as a
Group (12 persons).......................... 1,015,481(19) 63.7% 79,999 16.6% 491,662
</TABLE>
- ------------------
* Less than 1%
(1) Includes shares of Regent Common Stock currently issued and outstanding and
shares of Regent Common Stock that may be issued upon conversion of Regent
Series A and Series E Convertible Preferred Stock and the exercise of
options and warrants exercisable within 60 days of December 31, 1995. For
the purposes of this table, each share of Regent Series A and Series E
Convertible Preferred Stock is treated as convertible into one share of
Regent Common Stock. The persons listed in the table do not own any shares
of Regent Series B, Series C and Series D Convertible Preferred Stock.
53
<PAGE>
(2) Represents shares of Regent Common Stock that may be acquired by the
exercise of options and warrants exercisable within 60 days of December 31,
1995.
(3) Includes 38,187 shares of Regent Common Stock owned by the Trustees of
Bettinger & Leech, Inc. Profit Sharing Plan of which Mr. Bettinger is a
Trustee; 10,695 shares of Regent Common Stock, owned by the Trustees of
Bettinger & Leech, Inc. Money Purchase Plan of which Mr. Bettinger is a
Trustee; 4,099 shares of Regent Common Stock owned by Bettinger & Leech
Financial Corp. of which Mr. Bettinger is a principal and 10,004 shares of
Regent Common Stock owned by Bettinger & Leech Inc., of which Mr. Bettinger
is a principal. Mr. Bettinger shares voting and investment power with
respect to these shares.
(4) Includes 1,500 shares owned by the Bettinger & Leech, Inc. Profit Sharing
Plan and 3,000 shares owned by Bettinger & Leech Financial Corp.
(5) Includes shares of Regent Common Stock that may be acquired by the exercise
of warrants as follows: 2,059 shares by Bettinger & Leech, Inc.; 4,708
shares by Mr. Bettinger's wife; 12,769 shares by the Bettinger & Leech,
Inc. Profit Sharing Plan; 2,405 shares by the Bettinger & Leech, Inc. Money
Purchase Plan; and 1,177 shares by Bettinger & Leech Financial Corp.
(6) Includes 11,166 shares of Regent Common Stock owned by Mr. Biondi's wife in
which Mr. Biondi disclaims beneficial ownership; 9,772 shares of Regent
Common Stock owned by O. Francis Biondi, Trustee for Mary Biondi, daughter;
9,771 shares of Regent Common Stock owned by O. Francis Biondi, Trustee for
O. Francis Biondi, Jr., son; and 2,529 shares of Regent Common Stock into
which shares of Regent Series E Convertible Preferred Stock owned by Mr.
Biondi are convertible.
(7) Includes shares of Regent Common Stock which may be acquired by the
exercise of options and warrants of which 5,580 shares are owned by Mr.
Biondi's wife in which Mr. Biondi disclaims beneficial ownership; 15,683
shares are owned by O. Francis Biondi, Trustee for Mary Biondi, daughter;
and 15,683 shares are owned by O. Francis Biondi, Trustee for O. Francis
Biondi, Jr., son.
(8) Includes 60 shares of Regent Common Stock into which shares of Regent
Series E Convertible Preferred Stock owned by Mr. Dwares are convertible.
(9) Mr. Funston and his wife own all of the shares, warrants and options set
forth on this table as joint tenants with right of survivorship, and share
voting and investment power with respect to all such securities. Includes
7,920 shares of Regent Common Stock into which shares of Regent Series E
Convertible Preferred Stock owned by Mr. Funston are convertible.
(10) Includes 600 shares of Regent Common Stock into which shares of Regent
Series E Convertible Preferred Stock owned by Mr. Parnes are convertible.
(11) Of these shares, 6,263 shares are owned jointly by Mr. Porter and his wife
and 66,599 shares are owned by Mr. Porter's wife as trustee of Trust Under
Deed dated 2/28/94 for the benefit of Mr. Porter's wife. Mr. Porter and his
wife share voting and investment power with respect to all shares owned
jointly.
(12) Of these shares, 2,900 shares are owned jointly by Mr. Porter and his wife
and 8,933 shares are owned by Mr. Porter's wife as trustee of Trust Under
Deed dated 2/28/94 for the benefit of Mr. Porter's wife. Mr. Porter and his
wife share voting and investment power with respect to all shares owned
jointly.
(13) Includes warrants to purchase 17,752 shares of Regent Common Stock owned by
Mr. Porter's wife as trustee of Trust Under Deed dated 2/28/94 for the
benefit of Mr. Porter's wife and options and warrants to purchase 84,030
owned jointly by Mr. Porter and his wife. Mr. Porter and his wife share
voting and investment power with respect to all shares owned jointly.
(14) Includes 2,942 shares of Regent Common Stock owned by Zuckerman-Honickman,
Inc., of which Mr. Reichlin is President.
(15) Includes 1,471 shares of Regent Common Stock that may be acquired by the
exercise of warrants which are owned by Zuckerman-Honickman, Inc., of which
Mr. Reichlin is President, and includes 117 shares of Regent Common Stock
owned by Mr. Reichlin's wife, as to which he disclaims beneficial
ownership.
(16) Mrs. Teaford and her husband, Stephen D. Teaford, own all of the shares,
warrants and options set forth on this table as tenants by the entireties
and share voting and investment power with respect to all such securities.
(17) Includes 2,942 shares of Regent Common Stock owned by H.D. Zutz Insurance,
Inc. Profit Sharing Plan of which Mr. Zutz is a Trustee and shares voting
and investment power.
(18) Includes warrants to purchase 1,471 shares of Regent Common Stock that may
be acquired owned by Harry David Zutz Insurance, Inc. Profit Sharing Plan
of which Mr. Zutz is a Trustee and shares voting and investment power.
(19) Includes 18,628 shares of Regent Common Stock into which shares of Regent
Series E Convertible Preferred Stock owned by such persons are convertible.
54
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to related party transactions involving Messrs.
Bettinger, Biondi, and Zutz reported in Item 10 of this Form 10-K Annual Report,
which information is incorporated by reference into this Item 13. Paul Jaffe, a
director of the Bank, is employed by a law firm to which the Bank paid legal
fees of $86,500 in 1995.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The Index to the Financial Statements filed under Item 8 is as follows:
<TABLE>
<CAPTION>
PAGE NO. IN
SEQUENTIAL
NUMBERING SYSTEM
-------------------------
<S> <C> <C>
(a) (1) FINANCIAL STATEMENTS:
Report of Independent Public Accountants dated 25
May 23, 1996.
Consolidated Balance Sheets, December 31, 1995 and 1994. 26
Consolidated Statements of Income for the years ended 27
December 31, 1995 and 1994, and 1993.
Consolidated Statements of Shareholders' Equity for the years ended December 28
31, 1995, 1994 and 1993.
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 29
1994 and 1993.
Notes to Consolidated Financial Statements. 30
(a) (2) FINANCIAL STATEMENT SCHEDULES:
</TABLE>
Schedules are omitted for the reason that they are not required or are not
applicable, or the required information is shown in the financial statements or
notes thereto.
<TABLE>
<S> <C> <C>
(a) (3) EXHIBITS:
The following Exhibits are filed as part of this report. (Exhibit numbers
correspond to the exhibits required by Item 601 of Regulation S-K for an
annual report on Form 10-K).
Exhibits identified with an asterisk below comprise executive compensation
plans and arrangements.
</TABLE>
<TABLE>
<CAPTION>
PAGE NO. IN
EXHIBIT SEQUENTIAL
NO. NUMBERING SYSTEM
- ---------- ---------------------
<S> <C> <C>
3(a) Articles and Certificate of Incorporation (Pennsylvania)(1) N/A
3(b) Certificate of Incorporation (New Jersey)(1) N/A
3(c) Articles and Certificate of Merger (Pennsylvania)(1) N/A
3(d) Certificate of Merger (New Jersey)(1) N/A
3(e) By-Laws(1) N/A
4(a) Form of Common Stock Certificate(1) N/A
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
PAGE NO. IN
EXHIBIT SEQUENTIAL
NO. NUMBERING SYSTEM
- ---------- ---------------------
<S> <C> <C>
4(b) Form of Preferred Stock Certificate(1) N/A
4(c) Series A Preferred Stock Designation(1) N/A
4(d) Series B Preferred Stock Designation(1) N/A
4(e) Series C Preferred Stock Designation(1) N/A
4(f) Series D Preferred Stock Designation(1) N/A
4(g) Series E Preferred Stock Designation(1) N/A
4(h) Form of Warrant, as amended June 30, 1994(1) N/A
4(i) Warrant Agreement dated May 24, 1989, as amended(2) N/A
4(j) Warrants with Hopper Soliday & Co., Inc. and its designee(2) N/A
4(k) Form of letter agreement in extensions of warrants and option dated September 1,
1995(3)
*10(a) Stock Option Plan(2) N/A
*10(b) Form of Incentive Stock Option(1) N/A
*10(c) Form of Non-Statutory Stock Option(1) N/A
10(d) Lease Agreement dated August 4, 1988 for the premises located at 1430 Walnut N/A
Street, Philadelphia, PA(1)
*10(e) Employment Agreement dated May 24, 1989 by and between Regent and Harvey Porter(2) N/A
*10(f) Employment Agreement dated May 24, 1989 by and between Regent and Barbara H. N/A
Teaford(2)
10(g) Amended and Restated Agreement and Plan of Merger as of August 30, 1995.(3)
21 Subsidiaries of Regent.(1) N/A
27 Financial Data Schedule.
</TABLE>
- ------------------
<TABLE>
<S> <C>
* Denotes management contract or compensatory plan.
1 Incorporated by reference from the Registration Statement on Form S-1 of Regent, as amended, Registration No.
33-27299.
2 Incorporated by reference from Regent's Form 10-K for the fiscal year ended December 31, 1989.
3 Incorporated by reference from Regent's Form 8-K Current Report dated September 20, 1995.
(b) Reports on Form 8-K. There were no reports on Form 8-K filed by Regent during the quarter ended December 31,
1995.
</TABLE>
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REGENT BANCSHARES CORP.
By: /s/HARVEY PORTER
--------------------------------------------
Harvey Porter, President and
Director (Principal Executive
Officer)
Date: May 28, 1996
By: /s/STEPHEN J. CARROLL
--------------------------------------------
Stephen J. Carroll, Treasurer
(Principal Financial Officer and
Accounting Officer)
Date: May 28, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ HARVEY PORTER President (Principal Executive May 28, 1996
- ----------------------------------------- Officer) and Director
Harvey Porter
/s/ DAVID W. RING Chairman of the Board and May 28, 1996
- ----------------------------------------- Director
David W. Ring
/s/ ABRAHAM L. BETTINGER Vice Chairman of the Board and Director May 28, 1996
- -----------------------------------------
Abraham L. Bettinger
/s/ O. FRANCIS BIONDI Director May 28, 1996
- -----------------------------------------
O. Francis Biondi
/s/ BARBARA H. TEAFORD Executive Vice President and Director May 28, 1996
- -----------------------------------------
Barbara H. Teaford
/s/ LEONARD S. DWARES Director May 28, 1996
- -----------------------------------------
Leonard S. Dwares
- ----------------------------------------- Director May __, 1996
Lance T. Funston
- ----------------------------------------- Director May __, 1996
James J. Mooney
- ----------------------------------------- Director May __, 1996
Edward Parnes
- ----------------------------------------- Director May __, 1996
Robert J. Reichlin
/s/ HARRY D. ZUTZ Director May 28, 1996
- -----------------------------------------
Harry D. Zutz
</TABLE>
56
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 6,918,680
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 47,725,261
<INVESTMENTS-CARRYING> 91,244,148
<INVESTMENTS-MARKET> 89,895,504
<LOANS> 105,910,034
<ALLOWANCE> 6,500,882
<TOTAL-ASSETS> 262,512,061
<DEPOSITS> 196,131,642
<SHORT-TERM> 33,443,822
<LIABILITIES-OTHER> 9,621,761
<LONG-TERM> 12,961,480
0
58,120
<COMMON> 99,761
<OTHER-SE> 10,195,475
<TOTAL-LIABILITIES-AND-EQUITY> 262,512,061
<INTEREST-LOAN> 11,160,803
<INTEREST-INVEST> 9,998,770
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 21,159,573
<INTEREST-DEPOSIT> 9,517,438
<INTEREST-EXPENSE> 12,552,951
<INTEREST-INCOME-NET> 8,606,622
<LOAN-LOSSES> 4,905,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,395,707
<INCOME-PRETAX> (3,590,097)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,126,597)
<EPS-PRIMARY> (3.41)
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.56
<LOANS-NON> 3,567,737
<LOANS-PAST> 5,594,005
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,713,372
<CHARGE-OFFS> 128,719
<RECOVERIES> 11,229
<ALLOWANCE-CLOSE> 6,500,882
<ALLOWANCE-DOMESTIC> 6,500,882
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 671,282
</TABLE>
