================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
----------------------
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
-----------------------------------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-17753
-------------------------------------------
REGENT BANCSHARES CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 23-2440805
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1430 Walnut Street, Philadelphia, PA 19102
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(215) 546-6500
---------------------------------------------------
(Registrants telephone number, including area code)
N/A
- ------------------------------------------------------------------------------
(Former name and address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No
-------------------------- -------------------
The number of shares of the Registrants Common Stock and Series A
Convertible Preferred Stock outstanding at June 30, 1996 was 1,020,370 and
481,482, respectively.
================================================================================
<PAGE>
Part I. FINANCIAL INFORMATION
REGENT BANCSHARES CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
ASSETS June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
Cash and due from banks $ 2,882,935 $ 6,918,680
Investment securities available for sale 42,312,693 47,725,261
Mortgage-backed securities held to maturity 83,114,410 91,244,148
Mortgage loans held for sale 8,487,231 12,873,725
Loans, net of unearned interest and loan fees 121,358,138 105,910,034
Less: Allowance for loan losses ( 3,965,009) ( 6,500,882)
------------ ------------
Net loans 117,393,129 99,409,152
------------ ------------
Premises and equipment, net 795,551 704,487
Other real estate owned 179,627 -
Accrued interest receivable 1,757,382 1,739,969
Prepaid expenses and other assets 1,811,650 1,896,639
------------ ------------
Total Assets $258,734,608 $262,512,061
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $13,169,595 $12,621,000
Interest bearing:
NOW and money market 7,794,728 7,623,514
Savings 51,003,478 50,602,549
Certificates of deposit 123,178,212 125,284,579
------------ ------------
Total Deposits 195,146,013 196,131,642
Advances from Federal Home Loan Bank of Pittsburgh 47,436,405 43,655,302
Subordinated debentures 2,750,000 2,750,000
Accrued interest payable 4,278,207 5,310,396
Other liabilities 2,730,371 4,311,365
------------ ------------
Total Liabilities 252,340,996 252,158,705
------------ ------------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.10 par value, 5,000,000 shares authorized
Series A, 481,482 and 484,032 shares issued and
outstanding; entitled to $4,814,820 in involuntary
liquidation 48,148 48,403
Series B, 3,870 and 4,270 shares issued and outstanding;
entitled to $38,700 in involuntary liquidation 387 427
Series C, 3,125 and 3,485 shares issued and
outstanding; entitled to $31,250 in involuntary
liquidation 313 349
Series D, 3,435 and 3,790 shares issued and outstanding;
entitled to $34,350 in involuntary liquidation 343 379
Series E, 114,859 and 85,615 shares issued and
declared; entitled to $1,148,590 in involuntary
liquidation 11,486 8,562
Common stock, $.10 par value, 10,000,000 shares
authorized, 1,020,370 and 997,615 shares issued and
outstanding 102,037 99,761
Capital surplus 13,693,243 13,300,855
Accumulated deficit (6,105,895) (2,956,765)
Net unrealized loss on securities available for sale (1,356,450) ( 148,615)
------------ ------------
Total Shareholders' Equity 6,393,612 10,353,356
------------ ------------
Total Liabilities & Shareholders' Equity $258,734,608 $262,512,061
============ ============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
REGENT BANCSHARES CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Interest Income:
Loans, including fees $3,643,011 $2,432,092
Investment securities 2,136,724 2,626,078
----------- ----------
Total interest income 5,779,735 5,058,170
----------- ----------
Interest Expense:
Deposits 2,630,337 2,389,224
Short-term borrowings 410,869 671,132
Long-term debt 263,064 55,795
----------- ----------
Total interest expense 3,304,270 3,116,151
----------- ----------
Net interest income 2,475,465 1,942,019
Provision for loan losses 3,875,000 125,000
----------- ----------
Net interest income(loss) after
provision for loan losses (1,399,535) 1,817,019
----------- ----------
Other Income:
Service charges on deposit accounts 22,967 14,855
Gain on sale of loans 82,797 --
Other 5,455 6,643
----------- ----------
Total other income 111,219 21,498
----------- ----------
Other Expenses:
Salaries and employee benefits 457,719 422,380
Professional services 221,544 238,242
Rent 43,463 43,463
Other occupancy expense 50,284 45,485
Depreciation and amortization 62,000 44,600
Insurance 32,240 117,451
Auto insurance premium finance servicing 678,342 427,772
Other 280,893 303,528
----------- ----------
Total other expenses 1,826,485 1,642,921
----------- ----------
(Loss)income before income taxes (3,114,801) 195,596
(Benefit)provision for income taxes (145,100) 64,200
----------- ----------
NET(LOSS) INCOME (2,969,701) 131,396
Preferred stock dividends 68,913 (52,222)
----------- ----------
(Loss)earnings for common stock $(2,900,788) $ 79,174
=========== ==========
(Loss)earnings per common share:
Primary $ (2.61) $ .08
Fully diluted N/A .08
Weighted average number of shares outstanding:
Primary 1,111,020 1,040,476
Fully diluted 1,592,502 1,555,054
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
REGENT BANCSHARES CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Interest Income:
Loans, including fees $6,706,294 $4,365,583
Investment securities 4,416,228 5,292,780
----------- ----------
Total interest income 11,122,522 9,658,363
----------- ----------
Interest Expense:
Deposits 5,209,374 4,207,378
Short-term borrowings 957,929 1,649,348
Long-term debt 423,588 109,967
----------- ----------
Total interest expense 6,590,891 5,966,693
----------- ----------
Net interest income 4,531,631 3,691,670
Provision for loan losses 4,050,000 195,000
----------- ----------
Net interest income after
provision for loan losses 481,631 3,496,670
----------- ----------
Other Income:
Service charges on deposit accounts 45,947 37,610
Gain on sale of loans 82,797 --
Other 10,201 12,643
----------- ----------
Total other income 138,945 50,253
----------- ----------
Other Expenses:
Salaries and employee benefits 956,440 846,207
Professional services 431,429 408,087
Rent 86,927 86,927
Other occupancy expense 93,900 82,324
Depreciation and amortization 117,900 87,700
Insurance 47,832 222,309
Auto insurance premium finance servicing 1,091,136 656,321
Other 546,921 570,097
----------- ----------
Total other expenses 3,372,485 2,959,972
----------- ----------
(Loss)income before income taxes (2,751,909) 586,951
Provision for income taxes -- 197,200
----------- ----------
NET(LOSS) INCOME (2,751,909) 389,751
Preferred stock dividends (75,687) (131,074)
----------- ----------
(Loss)earnings for common stock $(2,827,596) $ 258,677
=========== ==========
(Loss)earnings per common share:
Primary $ (2.56) $ .25
Fully diluted N/A .25
Weighted average number of shares outstanding:
Primary 1,105,517 1,029,221
Fully diluted 1,586,999 1,543,799
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
REGENT BANCSHARES CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net(loss)income $(2,751,909) $ 389,751
Adjustments to reconcile net income to net
cash provided by operating activities --
Provision for loan losses 4,050,000 195,000
Depreciation and amortization 117,900 87,700
Net amortization of premiums and accretion of
discounts on investment securities and
investment securities available for sale 451,917 294,774
Gain on sales of loans ( 82,797) --
Increase in unearned interest and fees 1,336,946 815,649
(Increase)decrease in accrued interest
receivable ( 17,413) 56,432
(Increase)decrease in prepaid expenses,
other assets, and other real estate owned ( 94,638) 469,193
(Decrease) increase in accrued interest payable ( 1,032,189) 1,297,061
(Decrease)increase in other liabilities ( 1,580,994) 3,012,227
Purchases of mortgage loans held for sale (32,478,981) (25,874,924)
Proceeds from sales of mortgage loans held
for sale 36,948,272 28,894,597
----------- -----------
Total adjustments 7,618,023 9,247,709
----------- -----------
Net cash provided by operating
activities 4,866,114 9,637,460
----------- -----------
Cash Flows From Investing Activities:
Net increase in loans (23,370,923) (16,133,206)
Principal collected on investment and
mortgage-backed securities 8,136,873 8,148,410
Principal collected on investment securities
available for sale 3,745,680 1,622,855
Net decrease in U.S. Treasury bills -- 124,672
Purchases of premises and equipment ( 208,963) ( 66,113)
----------- -----------
Net cash (used in) provided by
investing activities (11,697,333) ( 6,303,382)
----------- -----------
Cash Flows From Financing Activities:
Net(decrease)increase in total deposits ( 985,629) 26,165,915
Net increase (decrease) in advances
from Federal Home Loan Bank of Pittsburgh
with original maturities less than three
months 3,781,103 (26,541,749)
----------- -----------
Net cash provided by (used in) financing
activities 2,795,474 ( 375,834)
----------- -----------
Net (decrease) increase in cash & cash equivalents ( 4,035,745) 2,958,244
Cash & cash equivalents, beginning of year 6,918,680 2,802,177
----------- -----------
Cash & cash equivalents, end of period $ 2,882,935 $ 5,760,421
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 7,618,080 $ 4,669,632
Income taxes -- 100,000
Supplemental Schedule of Non-Cash Investing and
Financing Activity:
Conversion of preferred stock to common stock $ 2,259 $ 413
Declaration of preferred stock as dividends 397,221 308,712
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
REGENT BANCSHARES CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. In the opinion of Regent Bancshares Corp. ("Regent"), the accompanying
unaudited consolidated financial statements contain all adjustments
(including normal recurring accruals) necessary to present fairly the
financial position of Regent and its wholly owned subsidiary, Regent
National Bank (the "Bank"), as of June 30, 1996 and December 31, 1995,
and the results of their operations for the three and six months ended
June 30, 1996 and 1995 and the cash flows for the six months ended June
30, 1996 and 1995.
2. Results of operations for the three and six months ended June 30, 1996
are not necessarily indicative of the results to be expected for the
year ending December 31, 1996.
3. Earnings per common share for all periods presented is based on the
weighted average number of common shares outstanding and common stock
equivalents, after consideration of preferred stock dividends. Common
stock equivalents include the Series B, Series C, Series D and Series E
Convertible Preferred Stock. The earnings per common share does not
assume the exercise of stock options or warrants as common stock
equivalents since such exercise is antidilutive. For the six months
ended June 30, 1996 and 1995, the weighted average number of common
shares includes 127,135 and 137,723 shares, respectively, attributable
to common stock equivalents.
Fully diluted earnings per share for the three and six months ended
June 30, 1995 assumes the conversion of preferred stock. Fully diluted
earnings per share for the three and six months ended June 30, 1996 is
not presented since such presentation is anti-dilituve.
Regent accrues on a quarterly basis the preferred stock dividend that
is payable annually each year. This accrual is considered for purposes
of the earnings per common share calculation and is computed using the
estimated market price of the preferred stock at the financial
reporting date. The accrual is adjusted as necessary to reflect
outstanding shares declared as a dividend and for changes in the market
price. The calculation of the earnings per common share for the three
and six months ended June 30, 1996 reflected an adjustment for the
amount that had been accrued for the preferred stock dividend. As a
result of a decline in the market price, the accrual for preferred
dividends estimated in the earnings per common share calculation was
higher than the actual charge for the preferred stock dividend based on
the market price at the date of the preferred stock declaration.
Consequently, the earnings per common share calculation for the three
and six months ended June 30, 1996 included a benefit of $123,000 to
adjust to the actual amount of the preferred stock dividend declared in
June 1996.
5
<PAGE>
4. In October 1995, the U.S. Bankruptcy Court issued an order approving
the settlement of a matter involving the bankruptcy of a mortgage
banking company for which the Bank had funded residential mortgages. As
part of the settlement, the Bank's request to receive assignment of
notes and mortgages of approximately $7,600,000 was granted and the
trustee and creditors' committee agreed not to object to the Bank's
unsecured claims against the debtor in the bankruptcy proceedings.
Additionally, the Bank agreed to pay the trustee $175,000 and will lend
the trustee up to an additional $175,000 to pay counsel fees in
connection with litigation by the trustee against a third party. The
Bank also agreed to make a second loan up to $50,000 and a third loan
of $75,000, (subject to certain conditions), and to pay fees and
expenses of professionals (other than attorneys) in connection with the
claim against the third party. The loans will bear interest at the
Bank's prime rate plus one percent per annum, and will be secured by a
continuing first lien on, and security interest in (after
administrative expenses, as defined), the trustee's right, title and
interest in the assets of the debtor's bankrupt estate. The Bank's
payment to the trustee of $175,000 was charged to expense in the year
ended December 31, 1995. Management believes the Bank's loan
commitments under the settlement are recoverable based upon its current
assessment of the outcome of the litigation against the third party.
The Bank's unsecured claims against the debtor approximate $2.5
million, with recovery primarily dependent on successful litigation
against the third party.
One of the creditors of the mortgage banking company referenced above
has made a claim against the Bank seeking to recover the sum of
$233,868 with respect to two checks for mortgage loan closings drawn on
the account of the debtor which were returned by the Bank on account of
insufficient funds. The Bank believes that this claim is without merit
and intends to vigorously defend any future action related to this
matter.
The trustee in the bankruptcy proceedings of the principal shareholder
of the mortgage banking company debtor has asserted that certain
collateral (including an $85,000 payment received by the Bank)
transferred by the shareholder to the Bank as security for the
obligations of the debtor to the Bank was a preferential transfer
within 90 days of the shareholder's bankruptcy filing and is
recoverable by the trustee on behalf of the shareholder's creditors.
The Bank is attempting to negotiate a settlement of this claim with the
trustee.
6
<PAGE>
In the opinion of management, after discussions with legal counsel, the
resolution of these matters is not expected to have a material adverse
effect on Regent's consolidated financial condition or results of
operations.
5. The Bank adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114") as
amended by Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures" ("SFAS No. 118") effective January 1, 1995. Under the
new standard, the 1995 and 1996 allowance for credit losses related to
loans that are impaired as defined by SFAS No. 114 and SFAS No. 118 is
evaluated based on the present value of expected future cash flows
discounted at the loan's effective interest rate, at the loan's
observable market price or the fair value of the collateral for certain
collateral dependent loans. Furthermore, in-substance foreclosures are
classified as loans and are stated at the lower of cost or fair value.
Commercial, industrial and mortgage loans are evaluated for impairment
on an individual basis. Consumer loans are comprised primarily of
automobile insurance premium finance loans ("IPF"). Prior to 1995, the
allowance for credit losses related to these loans was evaluated based
on undiscounted cash flows or the fair value of the collateral for
collateral dependent loans. The adoption of SFAS No. 114 and SFAS No.
118 did not have a material effect on Regent's consolidated financial
condition, cash flows or results of operations.
Factors influencing management's recognition of impairment include
decline in collateral value; lack of performance under contract loan
agreement terms, including evaluation of late payments or non-payment;
lack of performance under other creditor's agreements or obligations
(i.e. non-payment of taxes, non-payment of loans to other creditors);
financial decline significantly different from status at loan
inception; litigation or bankruptcy of borrower; significant change in
ownership or loss of guarantors to the detriment of credit quality. A
minimal delay or shortfall is defined by the Bank as a delay of less
than 90 days in making full contractual payment, or in the absence of
significant credit weaknesses which will further delay or stop the
borrower from repaying principal and interest in full under original
contract terms.
Loans evaluated under SFAS No. 114 and SFAS No. 118 are those loans
risk-rated by the Bank as Special Mention, Substandard and Doubtful, as
well as any Troubled Debt Restructuring which may not be so risk-rated.
As of June 30, 1996, there were no restructured loans.
7
<PAGE>
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 other relevant factors. The
allowance is increased by provisions for loan losses charged against
income and is reduced by net charge-offs. The allowance is based on
management's estimates, and actual losses may vary from the current
estimates. These estimates are reviewed periodically, and, as
adjustments become necessary, they are reported in earnings in the
periods in which they become known. See Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financial
Overview - regarding the loss estimate associated with automobile
insurance premium finance loans ("IPF loans").
At June 30, 1996, the recorded investment in loans that are considered
to be impaired as defined by SFAS No. 114 and SFAS No. 118 was $8.9
million, of which $2.7 million were non-accrual loans and $2.5 million
were IPF loans. The related allowance for credit losses for these
impaired loans was $3.1 million. For approximately $3.1 million of
impaired loans, the reserve was based on the expected future cash flows
and the remaining $5.8 million was based on the fair value of the
collateral.
An asset which no longer retains any value to the Bank will be
charged-off immediately. Assets whose value has depreciated will be
charged-off in part. Potential recovery against these assets is
considered marginal, and recovery is expected to be long term. Bank
policy is to pursue aggressively any likely recovery against
charged-off assets.
The Bank applies all payments received on non-accrual loans to
principal until such time as the principal is paid off, after which
time any additional payments received are recognized as interest
income. For the six months ended June 30, 1996, the Bank did not
recognize any interest income using the cash basis of income
recognition.
6. For the year ended December 31, 1995, the Bank recorded a provision for
loan losses of $4.5 million in connection with a loss exposure
identified in the Bank's IPF loan portfolio. In the second quarter of
1996 the Bank recorded a charge-off of $5.8 million on delinquent IPF
loans and increased its provision for loan losses by $3.9 million, of
which $3.7 million related to delinquent IPF loans. The Bank has
discontinued its IPF loan business effective September 3, 1996. See
Management's Discussion and Analysis of Financial Condition and Results
of Operations for additional information.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL OVERVIEW
Regent Bancshares Corp. ("Regent"), the holding company for Regent National Bank
(the "Bank") recorded a net loss of $2,751,909 or $2.56 per share for the six
months ended June 30, 1996 compared to net income of $389,751 or $.25 per share
for the comparable 1995 period. The loss for the first six months of 1996
compared to net income in 1995 was due principally to a higher provision for
loan losses of $3,855,000 and an increase in other expenses of $412,513 which
offset higher net interest income of $839,961 and a gain on the sale of
residential mortgage loans of $82,797.
For the second quarter ended June 30, 1996, the net loss was $2,969,701 or $2.61
per share versus net income for the 1995 second quarter of $131,396 or $.08 per
share. The loss in 1996 quarterly earnings compared to the net income in 1995
was also the result of a higher provision for loan losses of $3,750,000 and an
increase in other expenses of $183,564. Net interest income for the three months
ended June 30, 1996 was higher than the comparable 1995 period by $533,446 and a
gain on the sale of residential mortgage loans of $82,797 was also recorded in
the 1996 second quarter.
Total assets of $258,734,608 at June 30, 1996 were $3,777,453 lower than total
assets at December 31, 1995 of $262,512,061. The mix of assets shifted as total
loans at June 30, 1996 of $121,358,138 exceeded total loans at December 31, 1995
of $105,910,034 by $15,448,104 while investment securities available for sale
and held to maturity decreased by $13,542,306 from December 31, 1995 to June 30,
1996. This change in asset mix reflects the continuing emphasis on loan growth
by reinvesting the cash flow from the mortgage-backed securities portfolio into
commercial and consumer loans.
At June 30, 1996 and December 31, 1995, a substantial portion of the Bank's
consumer loans, $15.9 million and $16.8 million (net of $1,261,000 and $930,000
of unearned interest, respectively), consisted of automobile insurance premium
finance loans ("IPF"). The IPF loans have repayment terms of nine months and are
secured by the unearned premium balance on the individual automobile insurance
policies. The IPF loans were serviced for the Bank by a servicing company (the
"Servicer") under a Processing, Servicing, Marketing and Consulting Agreement
(the "Agreement") through September 1, 1996. The Agreement provided, among other
things, that the Servicer was to solicit IPF loans, maintain compliance with
applicable laws and regulations and process and service the IPF loans including
the collection of repayments from borrowers and of unearned premium balances
from insurers on cancelled insurance policies. Under the Agreement, the Bank
received all collections and paid the Servicer a fee equal to a specified
initial per loan charge plus one-half of pre-tax profits, as defined in the
Agreement, from the IPF loan portfolio.
9
<PAGE>
During the preparation of Regent's consolidated financial statements for the
year ended December 31, 1995, management of the Bank became aware of several
matters which caused management of the Bank to believe that the Servicer may
have reported interest and fee income from IPF loans in default and may not have
cancelled insurance policies securing defaulted loans or collected insurance
premium balances on such policies on a timely basis. As a result, management
began the process of estimating the ultimate expected loss that existed as of
December 31, 1995, which amount was material to Regent's consolidated financial
statements.
In order to assess the risk of loss on the IPF loan balance at December 31, 1995
and the amount thereof, the Bank identified delinquent IPF loans based upon the
payment history of the IPF loan portfolio during 1995 and through May 15, 1996.
During the period January 1, 1996 to May 15, 1996, the Bank applied all cash
receipts from delinquent IPF borrowers to the principal balances of such
delinquent loans as of December 31, 1995, and the Bank applied the proceeds of
the unearned premiums received from insurance companies except for those
applicable to accrued fees to the principal balances of delinquent IPF loans as
of December 31, 1995, thereby reducing the Bank's possible loss exposure on the
December 31, 1995 IPF loan balance to approximately $4.5 million. The $4.5
million loss exposure was recorded as part of the Bank's allowance for loan
losses at December 31, 1995.
In determining the loss exposure at December 31, 1995, no credit was taken for
the anticipated future collection of return premiums due from insurance
companies and other credit sources on delinquent IPF loans, or for a $1.8
million note from the Servicer and its principals in recognition by the Servicer
that a portion of the losses incurred by the Bank on the IPF loan balances
should be borne by the Servicer. The promissory note payable to the Bank in the
amount of $1.8 million is secured by commercial real estate, receivables and
personal assets.
The Bank determined its loss exposure on IPF loans at June 30, 1996 based on an
aged delinquency report provided by the Servicer. IPF loan balances of $5.8
million that were past due 120 days or more as of June 30, 1996 were
charged-off. As of June 30, 1996, IPF loans that were past due 90 to 120 days
totaled $578,000. The Bank has allocated $2,500,000 of the allowance for loan
losses to the IPF loan portfolio and management believes that such amount is
adequate because of concerted collection efforts and the $1.8 million promissory
note obtained from the Servicer. In addition to the charge-offs, the Bank
reduced the amount of interest and fee income recognized on IPF loans for the
first six months of 1996 due to the inability of the Servicer to provide
accurate information resulting in the possibility of the overaccrual of interest
and fees on IPF loans in default. The Bank discontinued its IPF loan business
effective September 3, 1996.
10
<PAGE>
By applying all cash receipts from delinquent borrowers and the proceeds of the
unearned premiums received from insurance companies to the principal balance of
delinquent IPF loans at December 31, 1995, as indicated above, interest on IPF
loans in the six months ended June 30, 1996 was recognized on only those IPF
loans considered non-delinquent as of December 31, 1995 and on IPF loans
originated in 1996. Fees on IPF loans were recognized only to the extent of
actual cash received from the proceeds of return premiums from the insurance
companies that had not been applied to the principal balance of the loan. Under
these methods, interest and fees in the consolidated statement of income
includes $1.9 million on IPF loans. If interest and fees had been accrued on all
IPF loans during the first six months of 1996, the Bank estimates that interest
and fee income would approximate $2.8 million. In addition to lower interest and
fee income, Regent increased its provision for loan losses by $3,855,000 in the
six months ended June 30, 1996 compared to the six months ended June 30, 1995
due primarily to delinquent IPF loans.
As a result of the estimated loss provision associated with the IPF loan
portfolio, for the year ended December 31, 1995, Regent and the Bank reported a
net loss after related tax benefits of approximately $3,120,000 and $2,937,000,
respectively. These losses have adversely affected the capital amounts and
ratios of Regent and the Bank. See "Capital Adequacy."
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 and the six months ended June 30, 1996, Carnegie and Regent are
currently negotiating another amendment to the Merger Agreement. Regent
anticipates the new agreement will provide for an exchange ratio of Carnegie
common stock for Regent securities based upon the relative book values per share
of Carnegie and Regent as of the month end prior to the consummation of the
merger. Regent expects that the Merger will be consummated by April 30, 1997.
Consummation of the Merger is subject to various conditions, including the
negotiation and execution of an amendment to the Merger Agreement, 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
11
<PAGE>
Preferred Stock at a meeting of the holders thereof, approval and adoption of
the Merger Agreement by the affirmative vote of a majority of the votes cast by
the holders of Carnegie Common Stock voting at a meeting of Carnegie
shareholders and various approvals of the OCC and the Board of Governors of the
Federal Reserve System. Approval of the OCC and the Federal Reserve System have
been obtained; however, extensions of such approvals will be required.
FINANCIAL CONDITION
Capital Adequacy
The following table sets forth the capital ratios of Regent and the Bank as of
June 30, 1996 and December 31, 1995 as well as the required minimum regulatory
capital ratios for Regent and the Bank. The data shown do not reflect the
agreement of certain directors of Regent to invest $1,000,000 in the common
stock of Regent which will contribute the $1,000,000 to the capital of the Bank.
Since June 30, 1996, the Bank has also taken steps to decrease the size of the
Bank by approximately 20% and thereby improve the Bank's capital ratios.
Required
June 30, December 31, Regulatory
Regent 1996 1995 Minimum
- ------ ------- ------------ ----------
Risk-based capital:
Tier I capital... 4.79% 7.00% 4.00%
Total capital... 6.73% 8.98% 8.00%
Leverage ratio.... 3.00% 4.00% 3.00-5.00(1)
Required
June 30, December 31, Regulatory
The Bank 1996 1995 Minimum
- -------- ------- ------------ ----------
Risk-based capital:
Tier I capital... 6.37% 8.67% 4.00%
Total capital 7.61% 9.92% 8.00%
Leverage ratio 3.94% 4.94% 3.00-5.00(1)
(1) the 3% level only applies to those banks that are given the highest
composite rating under the uniform bank rating (CAMEL) system of the federal
banking regulatory agencies.
Both Regent and the Bank are subject to minimum capital requirements promulgated
by the Board of Governors of the Federal Reserve System (the "FRB") and the OCC,
12
<PAGE>
their respective primary regulators. As an institution whose deposits are
insured by the Federal Deposit Insurance Corporation (the "FDIC"), the Bank is
also subject to insurance assessments imposed by the FDIC. The actual assessment
to be paid by any FDIC-insured institution is based on the institution's
assessment risk classification which is determined on whether the institution is
considered "well capitalized," "adequately capitalized" or "undercapitalized" as
those terms are defined in corrective action provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1991, and whether such institution is
considered by its bank supervisory agency to be financially sound or to have
supervisory concerns.
In 1995, the Bank agreed with the OCC as part of a capital plan submitted to the
OCC to maintain a Tier I leverage capital ratio of not less than 6.5%. Because
of the Bank's net loss for the year ended December 31, 1995 and the six months
ended June 30, 1996, the Bank's Tier I leverage capital ratio as of June 30,
1996 was approximately 3.94% and its total capital ratio was approximately 7.61%
compared to the required minimum of 8.00%. The failure to meet minimum capital
requirements can result in the initiation of regulatory actions that, if
undertaken, could have a material effect on the Bank's financial statements and
condition. Any such regulatory actions are currently uncertain but could include
restrictions on operations and growth and mandatory asset dispositions. In June
1996, in anticipation of possible OCC action, the Bank submitted a revised
capital plan to the OCC which provided that the Bank would restore the Bank's
Tier I leverage capital ratio to 6.5% by December 31, 1996.
In August and early September 1996, representatives of the OCC indicated to
management of the Bank the OCC's continuing concern about the impact of the
delinquent IPF loan balances on the Bank and the volatility of the Bank's
investment portfolio. As a result, the Bank intends to submit a new capital plan
to the OCC by September 30, 1996. Part of this capital plan will include the
investment of $1,000,000 by certain directors of Regent in Regent's common
stock. Regent will thereupon contribute the additional $1,000,000 to the Bank's
capital. As also noted earlier, the Bank is in the process of reducing its
assets by approximately 20% for the purpose of increasing the Bank's capital
ratios. The Bank can give no assurances that this capital plan will be
acceptable to the OCC.
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.
13
<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, the Federal Reserve Bank of Philadelphia and the
Federal Home Loan Bank of Pittsburgh ("FHLB"). Investment securities are
required to be pledged as collateral for transactions executed under these
facilities and provide for an availability of funds on an overnight basis. The
FHLB also provides for borrowings on a fixed or floating rate basis with
specified maturities up to 20 years at costs that would be less expensive than
through the Bank's deposit generation process.
Investment Portfolio: The investment portfolio, consisting principally of
mortgage-backed securities, is coordinated with the liquidity and interest rate
sensitivity position of the Bank. With an emphasis on minimizing credit, capital
and market risk, the investment portfolio is considered an extension of loans
with the objectives of enhancing liquidity and earning a fair return. The
investments in mortgage-backed securities consist of a combination of adjustable
and fixed rate securities with an emphasis on investments with relatively short
weighted average lives. Of the total mortgage-backed securities portfolio with
an amortized cost of $123.8 million at June 30, 1996, $20.7 million were
adjustable rate and $103.1 million were fixed rate. The estimated weighted
average life for the mortgage-backed securities portfolio at June 30, 1996
approximated 6.1 years.
Interest Rate Sensitivity: Interest rate sensitivity is closely related to
liquidity since each is directly affected by the maturity of assets and
liabilities. Interest rate sensitivity also deals with exposure to fluctuations
in interest rates and its effect on net interest income. It is management's
objective to maintain stability in the growth of net interest income by
appropriately mixing interest sensitive assets and liabilities. One tool used by
management to gauge interest rate sensitivity is a gap analysis which
categorizes assets and liabilities on the basis of maturity date, the date of
next repricing and the applicable amortization schedule. This analysis
summarizes the matching or mismatching of rate sensitive assets versus rate
sensitive liabilities according to specified time periods, and provides
management with an indication of how interest income will be impacted by
14
<PAGE>
changing rate scenarios. For example, an institution with more interest
sensitive assets than liabilities is said to have a positive gap. In this
example, as interest rates rise, the greater volume of assets should reprice
more rapidly than the liabilities. The net result should be an increase in the
net interest margin. Conversely, in a declining rate environment the net
interest margin should decline. If the institution has a greater volume of
interest sensitive liabilities than assets, it is said to have a negative gap.
In this event, increased interest rates would cause the greater volume of
liabilities to reprice more rapidly than assets. The net result should be a
decline in the net interest margin. Conversely, in a declining rate environment
the net interest margin should increase. In addition to the GAP analysis,
computer simulations are used to evaluate the impact of a change in interest
rates on liquidity, interest rate spreads/margins and operating results. The
simulation model is a more effective tool than an analysis since the simulation
analysis can more accurately reflect the impact of rising and declining rates on
each type of interest earning asset and interest bearing liability. The
simulation is particularly more beneficial as it can better evaluate the effects
of prepayment speeds on the Bank's portfolio of mortgage-backed securities and
what impact that would have on the Bank's liquidity and profitability. Using the
result of the simulation analysis, the Bank strives to control its interest rate
risk exposure so that the net interest income does not fluctuate by more than 5%
assuming that interest rates increase or decrease by 200 basis points.
The blending of fixed and floating rate loans and investments to match the
repricing and maturity characteristics of the various funding sources is a
continuous process in an attempt to minimize fluctuations in net interest
income. An effective tool used by the Bank in this process has been the
availability and flexibility of the various FHLB advance programs, which enable
the Bank to lock in spreads when appropriate and provide an effective method of
matching fixed rate assets with a fixed rate funding source.
The Bank's objective is to structure its balance sheet, as outlined in the
following Interest Sensitivity table, to minimize any significant fluctuation in
net interest income. The distribution in the table is based on a combination of
maturities, repricing frequencies and prepayment patterns. Floating rate assets
and liabilities are distributed based on the repricing frequency of the
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.
15
<PAGE>
<TABLE>
<CAPTION>
0 to 3 4 to 12 1 to 3 3 to 5 After
(Dollars in thousands) Months Months Years Years 5 Years Total
- ---------------------- -------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities $14,218 $ 448 $19,598 $49,689 $39,894 $123,847
Other securities 2,541 -- -- -- 396 2,937
Mortgage loans held for sale 8,487 -- -- -- -- 8,487
Loans 57,851 22,368 9,672 20,571 13,426 123,888
-------- ------- ------- ------- ------- --------
Total Earning Assets $83,097 $22,816 $29,270 $70,260 $53,716 $259,159
======== ======= ======= ======= ======= ========
NOW and money market $ 7,795 $ -- $ -- $ -- $ -- $ 7,795
Savings 51,003 -- -- -- -- 51,003
Certificates of Deposit 20,188 58,696 18,641 25,601 52 123,178
FHLB advances 37,229 -- -- 5,000 5,207 47,436
Subordinated debt -- -- 2,750 -- -- 2,750
Net non-interest bearing
source of funds -- -- -- -- 26,997 26,997
-------- ------- ------- ------- ------- --------
Total Sources of Funds $116,215 $58,696 $21,391 $30,601 $32,256 $259,159
======== ======= ======= ======= ======= ========
Period Gap ( 33,118) (35,880) 7,879 39,659 21,460
======== ======= ======= ======= =======
Cumulative Gap ( 33,118) (68,998) (61,119) (21,460) --
======== ======= ======= ======= =======
Cumulative Gap as % of
total assets ( 12.8)% (26.7)% (23.6)% (8.3)%
====== ===== ===== ====
</TABLE>
INVESTMENT PORTFOLIO
The investment portfolio of Regent includes investments classified as
held-to-maturity and available-for-sale and consists of mortgage-backed
securities and non-marketable equity securities. The mortgage-backed securities
portfolio is comprised principally of securities issued by U.S. Government
agencies and corporations, which represented 86% of the total mortgage-backed
portfolio at June 30, 1996. The remaining 14% consisted of collateralized
mortgage obligations of private issuers. The table below summarizes by major
category the amortized cost and market values of the investment securities
classified as available-for-sale and held-to-maturity at June 30, 1996:
16
<PAGE>
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
--------------------------- ---------------------------
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
GNMA $11,719,508 $11,031,441 $ -- $ --
FHLMC 34,582,758 33,385,860 14,728,564 14,295,349
FNMA 19,918,201 19,111,138 26,003,948 25,080,713
Collateralized mortgage
obligations 16,893,943 15,791,365 -- --
Non-marketable equity
securities -- -- 2,936,631 2,936,631
----------- ----------- ----------- -----------
$83,114,410 $79,319,804 $43,669,143 $42,312,693
=========== =========== =========== ===========
</TABLE>
The following table details the range of maturities of mortgage-backed
securities held to maturity as of June 30, 1996 based on the weighted average
life of the securities for each classification and the weighted average yield
for each maturity period:
<TABLE>
<CAPTION>
Within 1 After 1 But After 5 But
Year Within 5 Years Within 10 Years Total
---------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
U.S. agencies and corporations $1,061,478 $37,508,686 $27,650,303 $66,220,467
Collateralized mortgage obligations 163,838 16,579,227 150,878 16,893,943
---------- ----------- ----------- -----------
$1,225,316 $54,087,913 $27,801,181 $83,114,410
========== =========== =========== ===========
Weighted Average Yield 7.00% 6.30% 6.46%
==== ==== ====
</TABLE>
The following table details the range of maturities of mortgage-backed
securities available for sale as of June 30, 1996 based on the amortized cost,
the weighted average life of the securities for each classification, and the
weighted average yield for each maturity period:
<TABLE>
<CAPTION>
Within 1 After 1 But After 5 But
Year Within 5 Years Within 10 Years Total
-------- -------------- --------------- -----------
<S> <C> <C> <C> <C>
U.S. agencies and corporations $ -- $19,737,723 $20,994,789 $40,732,512
======== =========== =========== ===========
Weighted Average Yield --% 6.78% 7.37%
</TABLE>
The following table sets forth those collateralized mortgage obligations which
have a carrying value that exceeded 10% of Regent's shareholders' equity at June
30, 1996. These securities have an investment rating of AA or better.
Carrying Value Market Value
-------------- ------------
Bear Stearns Mortgage Securities Inc.
Series 1993-2 Class 7................. $2,378,444 $2,153,963
Bear Stearns Mortgage Securities Inc.
Series 1993-2 Class 5................. 2,026,326 1,858,235
Bear Stearns Mortgage Securities Inc.
Series 1993-2 Class 6................. 1,666,669 1,526,133
Bear Stearns Mortgage Securities Inc.
Series 1993-12 Class 1B............... 1,993,774 1,880,000
Bear Stearns Mortgage Securities Inc.
Series 1992-04........................ 2,182,856 2,093,219
Capstead Securities Corp.
Series 1992-C-3....................... 1,554,114 1,463,959
Resolution Trust Corporation
Series 1991-M6........................ 1,315,377 1,259,697
Saxon Mortgage Security Corp.
Series 1993-04 Class 1A............... 2,434,838 2,281,895
17
<PAGE>
Gross unrealized gains and losses on mortgage-backed securities held to maturity
at June 30, 1996 were $55,832 and $3,850,438, respectively, and gross unrealized
gains and losses on mortgage-backed securities available for sale at June 30,
1996 were $59,948 and $1,416,398, respectively. There were no sales of
mortgage-backed securities during 1996 or 1995. Unrealized losses on the
securities generally are the result of lower than market interest rates on the
underlying mortgages contained in the securities.
At June 30, 1996, the contractual maturity of substantially all of the Bank's
mortgage-backed securities was in excess of ten years. The actual maturity of a
mortgage-backed security is less than its stated maturity due to prepayments of
the underlying mortgages. Prepayments that are different than anticipated will
affect the yield to maturity. The yield is based upon the interest income and
the amortization of any premium or discount related to the mortgage-backed
security. In accordance with generally accepted accounting principles, premiums
and discounts are amortized over the estimated lives of the loans, which
decrease and increase interest income, respectively. The prepayment assumptions
used to determine the amortization period for premiums and discounts can
significantly affect the yield of the mortgage-backed security, and these
assumptions are reviewed periodically to reflect actual prepayments.
Although prepayments of underlying mortgages depend on many factors, including
the type of mortgages, the coupon rate, the age of the mortgages, the
geographical location of the underlying real estate collateralizing the
mortgages and general levels of market interest rates, the difference between
the interest rates on the underlying mortgages and the prevailing mortgage
interest rates generally is the most significant determinant of the rate of
prepayments. During periods of falling mortgage interest rates, if the coupon
rate of the underlying mortgages exceeds the prevailing market interest rates
offered for mortgage loans, refinancing generally increases and accelerates the
prepayment of the underlying mortgages and the related security. Under such
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.
18
<PAGE>
LENDING
Total loans, consisting of loans held for the portfolio and mortgage loans held
for sale, amounted to $132.3 million at June 30, 1996 compared to $120.0 million
at December 31, 1995. The increase of 10% from year end 1995 outstanding loan
balances to June 30, 1996 resulted primarily from higher construction loan
balances, commercial and industrial loans and the IPF loan portfolio.
The following table details the types of loans outstanding by
category as of June 30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
Amount % Amount %
------------- -- ------------------ --
<S> <C> <C> <C> <C>
Commercial & industrial $54,057,025 44% $ 49,006,081 46%
Real estate:
Construction 11,613,301 9% 4,430,425 4%
Mortgages--residential 21,878,723 18% 18,925,609 18%
Mortgages--commercial 18,179,277 15% 16,168,009 15%
Consumer 18,159,399 14% 18,572,551 17%
------------ -- ------------ --
Total loans 123,887,725 100% 107,102,675 100%
=== ===
Less:
Unearned interest and fees (2,529,587) ( 1,192,641)
------------ ------------
$121,358,138 $105,910,034
============ ============
Mortgage loans held for sale $ 8,487,231 $ 12,873,725
============ ============
</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 June 30, 1996:
<TABLE>
<CAPTION>
After 1
Within But Within After
1 Year 5 Years 5 Years Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Predetermined interest
rates $24,583,374 $28,285,479 $13,426,382 $66,295,235
Floating rate 49,339,677 6,017,138 2,235,675 57,592,490
----------- ----------- ----------- ------------
$73,923,051 $34,302,617 $15,662,057 $123,887,725
=========== =========== =========== ============
</TABLE>
<PAGE>
19
RISK ELEMENTS
Risk elements unique to each particular loan category are as
follows:
Commerical and Industrial
Risk factors inherent in commercial and industrial loans include economic risk
which may affect a borrower's ability to sustain and grow a business; collateral
risk in that an economic downturn may result in collateral depreciation;
interest rate risk in that rate changes may outpace business cash flow; and
legal risk in properly documenting and perfecting collateralization. The Bank
monitors such loans annually with updated financial analyses.
Construction loans
Risk factors inherent in construction loans include economic risk which may
affect end purchase or use of the collateral; engineering risk which may prevent
completion of construction or result in added expense in build-out;
environmental risk in earth and water table movement; management risk in
correctly and completely monitoring construction and loan advances; and legal
risk in properly documenting each advance and ensuring collateralization. The
Bank monitors such loans to review all advances and 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 a borrower's ability to cash flow
vacancies; collateral risk in that an economic downturn may result in collateral
depreciation; environmental risk in that collateral may be damaged or destroyed
by natural causes; interest rate risk in that rate changes may outpace property
cash flow; and legal risk in properly documenting and perfecting
collateralization. Loans are underwritten to match lease terms, and large
tenants are subject to credit review. The Bank monitors such loans quarterly or
annually with updated inspections, lease analyses and financial analyses.
20
<PAGE>
Consumer loans
Consumer loans consist primarily of loans to individuals to finance automobile
insurance premiums on their insurance policies. These loans have repayment terms
of nine months and are secured by the insurance policy's unearned premium. Risk
factors include economic risk which may affect the borrower's ability to
maintain a job and financial stability; the financial strength and stability of
the insurance company underwriting the insurance and insurance agents that
originate the loans; the effectiveness of the internal control structure to
cancel the insurance on delinquent accounts in a timely and effective manner;
collection efforts in obtaining the cancelled policy's unearned premium from the
insurance company; and legal risk in properly documenting and perfecting the
collateral.
The level of non-performing assets consisting of non-accrual loans, accruing
loans past due 90 days or more, and other real estate owned, amounted to $5.1
million or 1.97% of total assets at June 30, 1996 compared to $9.2 million or
3.49% of total assets at December 31, 1995. The decrease in non-performing
assets in the first six months of 1996 was attributable to a lower amount of IPF
loans past due 90 days or more and a decline in non-accruing loans primarily as
a result of charging-off $745,000 in non-accruing loan balances. Included in the
accruing loans 90 days or more past due were IPF loans totalling $578,000 and
$4.5 million at June 30, 1996 and December 31, 1995, respectively. Given the
limitation of the Servicer's records associated with the IPF loans, the Bank was
unable to obtain an accurate aging of such loans at December 31, 1995.
Accordingly, for purposes of determining the amount of the non-performing IPF
loans, the Bank included the loss exposure amount of $4.5 million in accruing
loans 90 days or more past due as of December 31, 1995. IPF loans of $578,000
were considered to be accruing loans 90 days or more past due at June 30, 1996
based on an aged delinquency report provided by the Servicer. The following
table details the non-performing assets at June 30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
Non-accrual loans $2,718,067 $3,567,737
Accruing loans 90 days or more past due 2,210,073 5,594,005
---------- ----------
Restructured loans -- --
---------- ----------
Total non-performing loans 4,928,140 9,161,742
Other real estate owned 179,627 --
---------- ----------
Total non-performing assets $5,107,767 $9,161,742
========== ==========
Non-performing loans to period end loans
and loans held for sale 3.72% 7.64%
Non-performing assets to total assets 1.97% 3.49%
Non-performing assets to loans, loans held
for sale and other real estate owned 3.85% 7.64%
</TABLE>
21
<PAGE>
Accrual of interest is discontinued on loans when management believes, after
considering economic and business conditions and collection efforts, that the
borrowers' financial condition is such that collection of interest and principal
is doubtful. The non-accrual loans are primarily secured by various types of
real estate. Interest income not recognized due to non-accrual status was
$200,300 for the six months ended June 30, 1996. No interest income was included
in operating income attributable to non-accrual loans in the same three-month
period.
Other real estate owned represents property acquired by foreclosure or deed in
lieu of foreclosure. These assets are initially reported at the lower of the
related loan balance or the fair value of the property.
Other problem loans not considered above include loans considered impaired by
Statement of Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" ("SFAS No. 114"), as amended by Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures" ("SFAS No. 118").
Under the standard, the allowance for credit losses related to loans that are
impaired, as defined by SFAS No. 114 and SFAS No. 118, is evaluated based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price or at the fair value of the
collateral for certain collateral dependent loans. Commercial, industrial and
mortgage loans are evaluated for impairment on an individual basis. Consumer
loans are comprised primarily of IPF loans. Prior to 1995, the allowance for
credit losses related to these loans was evaluated based on undiscounted cash
flows or the fair value of the collateral for collateral dependent loans.
Factors influencing management's recognition of impairment include decline in
collateral value; lack of performance under contract loan agreement terms,
including evaluation of late payments or non-payment; lack of performance under
other creditors' agreements or obligations (i.e. non-payment of taxes or
non-payment of loans to other creditors); financial decline significantly
different from status at loan inception; litigation or bankruptcy of the
borrower; significant change in ownership or loss of guarantors to the detriment
of credit quality.
Loans aggregated for evaluation under SFAS No. 114 and SFAS No. 118 are those
loans risk-rated by the Bank as Special Mention, Substandard and Doubtful, as
well as any Troubled Debt Restructuring which may not be so risk-rated. As of
June 30, 1996, there were no restructured loans.
22
<PAGE>
At June 30, 1996, the recorded investment in loans that are considered to be
impaired as defined by SFAS No. 114 and SFAS No. 118 was $8.9 million (of which
$2.7 million were non-accrual loans and $2.5 million were IPF loans). The
related allowance for credit losses for these impaired loans was $3.1 million.
For approximately $3.1 million of impaired loans, the reserve evaluation was
based on the expected future cash flows and the remaining $5.8 million was based
on the fair value of the collateral.
As part of the quarterly review of the risk elements of the portfolio, an
evaluation is also made of the adequacy of the allowance for loan losses. In
making an assessment of the quality of the loan portfolio and the adequacy of
the allowance for loan losses, management takes into consideration such elements
as general economic conditions, industry trends, the volume of delinquencies,
specific credit review, the value of underlying collateral, and other pertinent
information. Based on this evaluation, the allowance for loan losses is adjusted
by the provision which is charged against income. The following table summarizes
the activity for the six months ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Balance, beginning of period $6,500,882 $1,713,372
Charge-offs:
Commercial & industrial 414,008 164
Real estate--construction -- --
Real estate--residential 335,000 127,679
Consumer 5,836,865 --
---------- ----------
6,585,873 127,843
---------- ----------
Recoveries:
Commercial & industrial -- 191
Consumer -- 8,000
---------- ----------
Total recoveries -- 8,191
---------- ----------
Net (charge-offs) recoveries (6,585,873) (119,652)
---------- ----------
Provision charged to operations 4,050,000 195,000
---------- ----------
Balance, end of period $3,965,009 $1,788,720
========== ==========
Allowance for loan losses as a % of period
loans and loans held for sale 3.00% 1.91%
Net charge-offs as a % of average loans
and loans held for sale 10.60% .29%
</TABLE>
Management believes that those loans identified as non-performing are adequately
secured and the allowance for loan losses is sufficient in relation to the
potential risk of loss that has
23
<PAGE>
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 will substantially reduce the amount of loss the Bank
will ultimately recognize. Management has allocated the allowance based on an
assessment of risks within the loan portfolio and the estimated value of the
underlying collateral. The following table sets forth the allocation of the
Bank's allowance for loan losses at June 30, 1996:
June 30, 1996
------------------------------
% of Loans
Amount to Total Loans
---------- --------------
Commercial & Industrial $ 277,700 44%
Real Estate:
Construction 64,000 9%
Mortgages--residential 291,900 18%
Mortgages--commercial 3,400 15%
Consumer 2,500,000 14%
Unallocated 828,009 N/A
---------- ---
$3,965,009 100%
========== ===
It is not expected that the level of net-charge-offs for real estate and
commercial and industrial loans during the next full year will vary
significantly from historical levels. The amount of net charge-offs associated
with consumer loans will be dependent upon the success of collection efforts in
reducing the delinquent IPF loans.
DEPOSITS
Total deposits at June 30, 1996 aggregated $195.1 million which was comparable
to total deposits at December 31, 1995 of $196.1 million. As illustrated in the
table below, the composition of deposits at June 30, 1996 has remained
relatively consistent compared to the composition at December 31, 1995.
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
Balance % Balance %
------------ -- ------------ --
<S> <C> <C> <C> <C>
Demand $ 13,169,595 7% $ 12,621,000 6%
NOW 4,095,597 2% 3,959,987 2%
Savings 51,003,478 26% 50,602,549 26%
Money Market 3,699,131 2% 3,663,527 2%
Certificates of deposit 123,178,212 63% 125,284,579 64%
------------ -- ------------ --
$195,146,013 100% $196,131,642 100%
============ === ============ ===
</TABLE>
SHORT-TERM BORROWINGS
Short-term borrowings are used to supplement the deposit base of the Bank, to
support asset growth, to fund specific loan programs, and as a tool in the
Bank's asset/liability management process. During 1996 and 1995, the Bank has
utilized its credit facilities with its correspondent banks and with the FHLB.
The borrowings from the FHLB are secured by the Bank's investments in
mortgage-backed securities.
24
<PAGE>
The following table summarizes the Bank's short-term borrowing activity for the
six months ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
Average Weighted
Amount Maximum Average
Balance Outstanding Outstanding Interest Average
Outstanding During at any Rate at Rate
6/30 the Period Month-End 6/30 Paid
----------- ---------- --------- -------- -------
<C> <C> <C> <C> <C> <C>
1996: FHLB borrowings $37,229,280 $34,403,202 $37,277,083 5.48% 5.56%
Federal funds purchased -- 123,626 1,000,000 -- 5.78%
----------- -----------
$37,229,280 $34,526,828 5.56%
=========== ===========
1995: FHLB borrowings $36,280,633 $52,686,616 $66,155,178 6.39% 6.27%
Federal funds purchased -- 368,508 -- -- 6.49%
----------- -----------
$36,280,633 $53,055,124 6.27%
=========== ===========
</TABLE>
RESULTS OF OPERATIONS
A net loss for the six months ended June 30, 1996 was recorded of $2,751,909 of
$2.56 per share compared to net income of $389,751 or $.25 per share earned in
the first six months of 1995. For the quarter ended June 30, 1996, the net loss
was $2,969,701 or $2.61 per share versus net income of $131,396 or $.08 per
share earned in the comparable 1995 period. The lower 1996 quarterly and
year-to-date results were attributable to increases in the provision for loan
losses and in other expenses. Regent also recorded higher net interest income
and a gain on the sale of residential mortgages.
NET INTEREST INCOME
Net interest income for the six months ended June 30, 1996 totaled $4,531,631 or
23% higher than net interest income in the comparable 1995 period of $3,691,670.
For the three months ended June 30, 1996, net interest income was $2,475,465
which was an increase of $533,446 from the 1995 second quarter total of
$1,942,019. The quarterly and year-to-date increases were attributable to an
improved net interest margin which reflected the yields on earning assets rising
faster than the cost of interest bearing liabilities. The net interest margin
rose from 3.17% for the first six months of 1995 to 3.52% for the same six month
period in 1996. The higher margin reflected primarily a greater percentage of
interest income being derived from higher yielding loan activity, and, in
particular, IPF lending activity. Before charge-offs, the yield on IPF loans
approximated 20% and represented 17% of total interest income in the first six
months of 1996 versus 10% of total interest income in the comparable 1995
period. In 1996, interest and fees on all loans represented 60% of total
interest income versus 45% in
25
<PAGE>
1995. Net interest income also benefited from an increase in average earning
assets of $22,853,000. The following table is a rate/yield analysis for the six
months ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
-------------------------- --------------------------
Average Income/ Rate/ Average Income/ Rate/
Balance Expense Yield Balance Expense Yield
------- ------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Securities $133,216 $4,417 6.63% $153,018 $5,293 6.92%
Loans 124,311 6,706 10.82% 81,656 4,365 10.78%
-------- ------ -------- ------
Total $257,527 11,123 8.64% $234,674 9,658 8.23%
======== ------ ======== ------
Interest Bearing Liabilities:
NOW accounts $ 3,854 45 2.34% $ 4,014 49 2.46%
Statement savings 50,458 1,227 4.88% 58,175 1,403 4.86%
Money market 3,881 80 4.13% 9,047 161 3.59%
Time deposits 124,769 3,858 6.20% 85,977 2,594 6.08%
Short-term borrowings 34,527 958 5.56% 53,055 1,649 6.27%
Long-term advances 10,208 314 6.17% 31 1 6.51%
Subordinated debt 2,750 109 7.99% 2,750 109 7.99%
-------- ------ -------- -----
Total 230,447 6,591 5.74% 213,049 5,966 5.65%
------ -----
Non-Interest bearing
sources of funds 27,080 21,625
-------- --------
Net Interest Income/Spread $257,527 $4,532 2.90% $234,674 $3,692 2.58%
======== ====== ==== ======== ====== ====
Net Interest Margin 3.52% 3.17%
==== ====
</TABLE>
PROVISION FOR LOAN LOSSES
A provision for loan losses of $4,050,000 was recorded for the six months ended
June 30, 1996 compared to $195,000 in the same period of 1995. For the second
quarter of 1996, the provision was $3,875,000 versus $125,000 in the 1995 second
quarter. The increases in the quarterly and year-to-date provisions were due to
the charge-offs incurred in connection with IPF loans.
OTHER EXPENSES
Total other expenses for the six months ended June 30, 1996 were $3,372,485 or
14% over the comparable 1995 period total of $2,959,972. For the second quarter,
other expenses were higher in 1996 over 1995 by $183,564 or 11%. The primary
factors that increased other expenses for the three and six month periods were
higher salaries and employee benefit costs, merger related expenses, and
processing and operational costs associated with IPF loans. Salaries and
employee benefit costs increased by $35,339 for the quarter and $110,233 for six
months and were attributable to higher staffing levels and benefit costs and to
salary increases. Expenses totaling $64,000 were incurred in the first six
months of 1996 for professional services in connection with the proposed
Carnegie merger. Processing and operational costs for IPF loans increased by
$250,570 and $434,815 for the three and six month periods, respectively,
relating to higher loan activity. Offsetting these higher expense items was a
26
<PAGE>
reduction in insurance costs which declined by $85,211 in the 1996 second
quarter and by $174,477 for the six months ended June 30, 1996. The lower
insurance expense reflected the substantial drop in rates assessed by the FDIC
for insuring bank deposits.
PROVISION FOR INCOME TAXES
Regent did not record an income tax provision or benefit for the six months
ended June 30, 1996 due to the pre-tax losses that were incurred and the
inability to carryback any tax losses to prior years. For the three months ended
June 30, 1996, the income tax benefit of $145,100 represented the reversal of
the income tax provision recorded in the 1996 first quarter. For the three and
six months ended June 30, 1995, the income tax provision was based on an
effective tax rate of 34%.
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to Item 3 of the Registrant's Form 10-K Report for the year
ended December 31, 1995 for a description of certain legal proceedings.
Item 5. OTHER INFORMATION
On August 28, 1996, effective immediately, Harvey Porter resigned as Chief
Executive Officer of Regent and David W. Ring, Chairman of the Board of Regent,
was appointed Chief Executive Officer of Regent. On August 28, 1996, effective
September 5, 1996, Mr. Porter resigned, for reasons of health, as President and
Chief Executive Officer of the Bank and John J. Lyons was appointed Acting
President and Chief Executive Officer of the Bank. Mr. Lyons most recently
served as President and Chief Executive Officer of Monarch Savings Bank in
Clark, New Jersey and prior thereto served as President and Chief Executive
Officer of Jupiter Tequesta National Bank in Tequesta, Florida.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Issuer
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
REGENT BANCSHARES CORP.
/S/ David Ring
-----------------------
DAVID RING
Chairman & CEO
/S/ Stephen J. Carroll
-----------------------
STEPHEN J. CARROLL
Treasurer
Dated: September 12, 1996
28
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,882,935
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,312,693
<INVESTMENTS-CARRYING> 83,114,410
<INVESTMENTS-MARKET> 79,319,804
<LOANS> 121,358,138
<ALLOWANCE> 3,965,009
<TOTAL-ASSETS> 258,734,608
<DEPOSITS> 195,146,013
<SHORT-TERM> 37,229,280
<LIABILITIES-OTHER> 7,008,578
<LONG-TERM> 12,957,125
0
60,677
<COMMON> 102,037
<OTHER-SE> 6,230,898
<TOTAL-LIABILITIES-AND-EQUITY> 258,734,608
<INTEREST-LOAN> 6,706,294
<INTEREST-INVEST> 4,416,228
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11,122,522
<INTEREST-DEPOSIT> 5,209,374
<INTEREST-EXPENSE> 6,590,891
<INTEREST-INCOME-NET> 4,531,631
<LOAN-LOSSES> 4,050,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,372,485
<INCOME-PRETAX> (2,751,909)
<INCOME-PRE-EXTRAORDINARY> (2,751,909)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,751,909)
<EPS-PRIMARY> (2.56)
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.52
<LOANS-NON> 2,718,067
<LOANS-PAST> 2,210,073
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,500,882
<CHARGE-OFFS> 6,585,873
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 3,965,009
<ALLOWANCE-DOMESTIC> 3,965,009
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 828,009
</TABLE>
