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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(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, 2002
--------------
[ ] 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: 0-26366
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ROYAL BANCSHARES OF PENNSYLVANIA, INC.
----------------------------------------------------------
(Exact name of the registrant as specified in its charter)
PENNSYLVANIA 23-2812193
- -------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporated or organization) identification No.)
732 Montgomery Avenue, Narberth, PA 19072
-----------------------------------------
(Address of principal Executive Offices)
(610) 668-4700
--------------
(Registrant's telephone number, including area code)
N/A
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the bank (1) has filed all reports required to be
filed by Section 13 of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the bank was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Common Stock Outstanding at June 30, 2002
-------------------- ----------------------------
$2.00 par value 9,534,578
Class B Common Stock Outstanding at June 30, 2002
-------------------- ----------------------------
$.10 par value 1,907,668
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS June 30, 2002 Dec 31, 2001
(Unaudited)
----------- -----------
Cash and due from banks $ 65,898 $ 32,918
Federal funds sold 10,300 7,100
----------- -----------
Total cash and cash equivalents 76,198 40,018
----------- -----------
Investment securities held to maturity (fair value of $54,572 at
June 30, 2002 and $94,625 at December 31, 2001) 53,345 92,903
Investment securities available for sale - at fair value 256,417 129,755
Total loans 610,141 646,235
Less allowance for loan losses 12,158 11,888
----------- -----------
Net loans 597,983 634,347
Premises and equipment, net 8,484 8,512
Accrued interest and other assets 28,527 25,445
----------- -----------
Total assets $ 1,020,954 $ 930,980
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 50,193 $ 51,991
Interest bearing (includes certificates of deposit in excess
of $100 of $204,819 at June 30, 2002 and
$303,793 at December 31, 2001) 682,324 649,869
----------- -----------
Total deposits 732,517 701,860
Accrued interest payable 11,072 11,634
Borrowings 157,500 100,225
Other liabilities 5,366 8,175
----------- -----------
Total liabilities 906,455 821,894
----------- -----------
MINORITY INTEREST 542 637
Stockholders' equity
Common stock
Class A, par value $2 per share; authorized, 18,000,000 shares; issued,
9,534,578 at June 30, 2002 and 8,848,867 at December 31, 2001 19,069 17,698
Class B, par value $.10 per share; authorized, 2,000,000 shares; issued,
1,907,668 at June 30, 2002 and 1,804,693 at December 31, 2001 191 180
Additional paid in capital 76,907 65,011
Retained earnings 20,929 30,457
Accumulated other comprehensive (loss) (874) (2,632)
----------- -----------
116,222 110,714
Treasury stock - at cost, shares of Class A, 215,388 at June 30, 2002,
and December 31, 2001 (2,265) (2,265)
----------- -----------
Total stockholders' equity 113,957 108,449
----------- -----------
Total liabilities and stockholders' equity $ 1,020,954 $ 930,980
=========== ===========
The accompanying notes are an integral part of these statements
2
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months ended
June 30,
---------------------------
(in thousands, except per share data)
2002 2001
-------- --------
Interest income
Loans, including fees $ 12,919 $ 11,689
Investment securities held to maturity 1,022 1,538
Investment securities available for sale 4,651 1,555
Deposits in banks 179 37
Federal funds sold 62 152
-------- --------
TOTAL INTEREST INCOME 18,833 14,971
-------- --------
Interest expense
Deposits 7,385 5,833
Borrowings 1,842 541
-------- --------
TOTAL INTEREST EXPENSE 9,227 6,374
-------- --------
NET INTEREST INCOME 9,604 8,597
Provision for loan losses 50 --
-------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 9,554 8,597
-------- --------
Other income
Service charges and fees 259 276
Loss on sales of investment securities available for sale (14) --
Gains on sales of other real estate 94 --
Gains on sales of loans 175 25
Other income 20 (52)
-------- --------
534 249
-------- --------
Other expenses
Salaries & wages 1,881 1,797
Employee benefits 459 1,049
Occupancy and equipment 319 166
Other operating expenses 2,001 1,726
-------- --------
4,660 4,738
-------- --------
INCOME BEFORE INCOME TAXES 5,428 4,108
Income taxes 1,531 297
-------- --------
NET INCOME $ 3,897 $ 3,811
======== ========
Per share data
Net income - basic $ .34 $ .34
======== ========
Net income - diluted $ .33 $ .33
======== ========
The accompanying notes are an integral part of these statements
3
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Six months ended
June 30,
---------------------------
(in thousands, except per share data)
2002 2001
-------- --------
Interest income
Loans, including fees $ 27,133 $ 22,852
Investment securities held to maturity 2,540 3,080
Investment securities available for sale 7,720 3,115
Deposits in banks 451 105
Federal funds sold 132 526
-------- --------
TOTAL INTEREST INCOME 37,976 29,678
-------- --------
Interest expense
Deposits 15,028 11,485
Borrowings 3,417 1,008
-------- --------
TOTAL INTEREST EXPENSE 18,445 12,493
-------- --------
NET INTEREST INCOME 19,531 17,186
Provision for loan losses 250 --
-------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 19,281 17,186
-------- --------
Other income
Service charges and fees 545 494
Loss on sales of investment securities available for sale (14) --
Gains on sales of other real estate 259 104
Gains on sales of loans 377 25
Other income 34 29
-------- --------
1,201 652
-------- --------
Other expenses
Salaries & wages 3,809 3,494
Employee benefits 897 1,446
Occupancy and equipment 555 378
Other operating expenses 3,817 2,840
-------- --------
9,078 8,158
-------- --------
INCOME BEFORE INCOME TAXES 11,404 9,680
Income taxes 3,292 1,954
-------- --------
NET INCOME $ 8,112 $ 7,726
======== ========
Per share data
Net income - basic $ .71 $ .68
======== ========
Net income - diluted $ .69 $ .66
======== ========
The accompanying notes are an integral part of these statements
4
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Six Months ended June 30, 2002
(UNAUDITED)
Class A Common Stock Class B Common Stock Additional
----------------------- ---------------------- Paid in
(in thousands) Shares Amount Shares Amount Capital
-------- -------- ------ -------- --------
Balance, January 1, 2002 8,849 $ 17,698 1,805 $ 180 $ 65,011
Net income for the six months ended June 30, - - - -
Conversion of Class B common stock to Class A
Common stock 6 12 (5) -
Purchase of treasury stock - - - - -
6% stock dividend declared 518 1,035 108 11 11,285
Cash dividends on common stock - - - - -
Cash in lieu of fractional shares - - - - -
Stock options exercised 162 324 - - 611
Other comprehensive income, net of
Reclassifications and taxes - - - - -
-------- -------- ----- -------- --------
Comprehensive income
Balance, June 30, 2002 9,535 $ 19,069 1,908 $ 191 $ 76,907
======== ======== ===== ======== ========
[RESTUBBED TABLE]
Accumulated
Other
Retained Treasury Comprehensive Comprehensive
(in thousands) Earnings Stock Income (loss) Income
-------- -------- ------------- ----------
Balance, January 1, 2002 $ 30,457 $ (2,265) $ (2,632)
Net income for the six months ended June 30, 8,112 - - $ 8,112
Conversion of Class B common stock to Class A
Common stock (12) - - -
Purchase of treasury stock - - -
6% stock dividend declared (12,331)
Cash dividends on common stock (5,290) - - -
Cash in lieu of fractional shares (7) - - -
Stock options exercised - - - -
Other comprehensive income, net of
Reclassifications and taxes - - 1,758 1,758
-------- -------- -------- --------
Comprehensive income $ 9,870
========
Balance, June 30, 2002 $ 20,929 $ (2,265) $ (874)
======== ======== ========
The accompanying notes are an integral part of the financial statement.
5
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30,
(in thousands)
Cash flows from operating activities 2002 2001
--------- ---------
Net income $ 8,112 $ 7,726
Adjustments to reconcile net income to
net cash provided by (used in) operating activities
Depreciation 626 256
Provision for loan loss 250 --
Amortization of premiums and discounts on loans,
mortgage-backed securities and investments 679 (2,830)
Benefit for deferred income taxes 1,248 (3,343)
Gains on other real estate (259) --
Gains on sales of loans (377) --
Loss on sales of investment securities 14 --
Changes in assets and liabilities:
Increase (decrease) in accrued interest receivable (1,513) 1,448
Increase (decrease) in other assets (2,815) (3,107)
Increase (decrease) in accrued interest payable (562) (638)
Increase (decrease) in unearned income on loans (322) --
Increase (decrease) in other liabilities (2,952) (4,158)
--------- ---------
Net cash provided by (used in) operating activities 2,129 (4,646)
Cash flows from investing activities
Proceeds from calls/maturities of HTM investment securities 38,063 27,700
Proceeds from calls/maturities of AFS investment securities 89,433 10,403
Purchase of HTM investment securities -- (1,140)
Purchase of AFS investment securities (210,412) (64,688)
Purchase of FHLB Stock (3,000) --
Purchase of loans -- --
Cash paid for asset acquisition -- (15,239)
Cash from entity acquired -- 26,548
Net decrease in loans 36,416 25,334
Purchase of premises and equipment (598) (764)
--------- ---------
Net cash provided by (used in) investing activities (50,098) 8,154
Cash flows from financing activities:
Net increase in non-interest bearing and
interest bearing demand deposits and savings accounts 143,758 (7,210)
Net decrease in certificates of deposit (113,101) (23,498)
Mortgage payments (20) (13)
Net increase in borrowings 57,275 7,000
Cash dividends (5,290) (4,447)
Cash in lieu of fractional shares (7) --
Issuance of common stock under stock option plans 611 36
Purchase of treasury stock -- --
--------- ---------
Net cash provided by (used in) financing activities 83,226 (28,132)
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS 35,257 (24,624)
Cash and cash equivalents at beginning of year 40,018 43,222
--------- ---------
Cash and cash equivalents at end of year $ 75,275 $ 18,598
========= =========
The accompanying notes are an integral part of these statements
6
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying unaudited consolidated financial statements include the
accounts of Royal Bancshares of Pennsylvania, Inc. (the Company) and its
wholly-owned subsidiaries: Royal Equity Partners, Inc. (1) and Royal Bank of
Pennsylvania (the Bank), Royal Real Estate of Pennsylvania, Inc. and Crusader
Servicing Corporation. On June 22, 2001, the Bank purchased a 60% ownership in
Crusader Servicing Corporation from Crusader Holding Corporation. These
financial statements reflect the historical information of the Company. All
significant inter-company transactions and balances have been eliminated.
1. The accompanying unaudited condensed financial statements have been
prepared in accordance with accounting principles generally accepted in
the United States of America (US GAAP) for interim financial
information. The financial information included herein is unaudited;
however, such information reflects all adjustments (consisting solely
of normal recurring adjustments) that are, in opinion of management,
necessary to present a fair statement of the results for the interim
periods. Further information is included in the Annual Report on Form
10-K for the year ended December 31, 2001.
2. Acquisitions
As of June 22, 2001, Royal Bancshares of Pennsylvania completed its
acquisition of the assets of Crusader Holding Corporation (Crusader).
Under the terms the acquisition, certain assets and liabilities were
purchased for approximately $41.5 million which represented the
approximate fair value of net assets acquired. Included in this
purchase was approximately $331.3 million of assets, of which $236.5
million was related to the loan portfolio. The purchase also included
the assumption of deposits in the approximate amount of $251 million.
The purchase price was paid in cash. This transaction was accounted for
under the purchase method of accounting. There was no goodwill recorded
in connection with this transaction.
The following represents the unaudited results of operations of the
Company as if the acquisition had occurred the first date of the period
indicated. This pro forma information should be read in conjunction
with the related historical information and is not necessarily
indicative of the results that would have been attained had the
acquisition actually been consummated on the dates indicated, nor are
they necessarily indicative of our future operating results.
Six months ended June 30,
-------------------------
(in thousands) 2002 2001
------- -------
Interest income $37,976 $44,659
Interest expense 18,445 21,017
------- -------
Net interest income 19,531 23,642
Provision for loan losses 250 250
Non-interest income 1,201 1,392
Non-interest expense 9,078 11,481
Income tax expense 3,292 4,523
------- -------
Net income $ 8,112 $ 8,780
======= =======
(1) During the second quarter of 2002, the wholly-owned subsidiary of the
Company, Royal Investments of Delaware, changed it's name to Royal Equity
Partners, Inc. ("REP"). REP now invests equity as a limited partner or
limited liability member in commercial real estate transactions.
7
3. Per Share Information
The Company follows the disclosure provisions of SFAS No. 128,
"Earnings Per Share. Basic EPS excludes dilution and is computed by
dividing income available to common shareholders by the weighted
average common shares outstanding during the period. Diluted EPS takes
into account the potential dilution that could occur if securities or
other contracts to issue common stock were exercised and converted into
common stock. In January 2002 the company declared a 6% stock dividend.
All share and per share information has been restated to reflect this
dividend. Basic and diluted EPS are calculated as follows (In
thousands, except per share data):
Three months ended June 30, 2002
Income Average shares Per share
(numerator) (denominator) Amount
Basic EPS
Income available to common shareholders $3,897 11,511 $0.34
Effect of dilutive securities
Stock options 176 (.01)
------------------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $3,897 11,687 $0.33
Three months ended June 30, 2001
Income Average shares Per share
(numerator) (denominator) Amount
Basic EPS
Income available to common shareholders $3,811 11,364 $0.34
Effect of dilutive securities
Stock options 315 (.01)
------------------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $3,811 11,679 $0.33
Six months ended June 30, 2002
Income Average shares Per share
(numerator) (denominator) Amount
Basic EPS
Income available to common shareholders $8,112 11,479 $0.71
Effect of dilutive securities
Stock options 209 (.02)
------------------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $8,112 11,688 $0.69
Six months ended June 30, 2001
Income Average shares Per share
(numerator) (denominator) Amount
Basic EPS
Income available to common shareholders $7,726 11,341 $0.68
Effect of dilutive securities
Stock options 299 (.02)
------------------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $7,726 11,640 $0.66
8
4. Investment Securities:
---------------------
The carrying value and approximate market value of investment
securities at June 30, 2002 are as follows:
Amortized Gross Gross Approximate
Purchased Unrealized Unrealized Fair Carrying
(in thousands) Cost Gains Losses Value Value
-------- ------ ------- -------- --------
Held to maturity:
- -----------------
Mortgage Backed $ 780 $ -- $ -- $ 780 $ 780
US Agencies 20,000 -- (294) 19,706 20,000
Other Securities 32,565 1,592 (71) 34,086 32,565
-------- ------ ------- -------- --------
$ 53,345 $1,592 ($365) $ 54,572 $ 53,345
======== ====== ======= ======== ========
Available for sale:
- -------------------
Federal Home Loan
Bank Stock - at cost $ 7,875 $ -- $ -- $ 7,875 $ 7,875
Mortgage Backed 9,108 190 (49) 9,249 9,249
US Agencies 144,991 864 (23) 145,832 145,832
Other securities 95,827 1,825 (4,191) 93,460 93,460
-------- ------ ------- -------- --------
$258,801 $2,879 ($4,263) $256,417 $256,417
======== ====== ======= ======== ========
9
5. Allowance for Credit Losses: Changes in the allowance for credit
losses were as follows:
Three months ended June 30,
--------------------------
2002 2001
-------- --------
(in thousands)
Balance at beginning of period, $ 12,105 $ 12,186
Loans charged-off (167) (21)
Recoveries 170 83
-------- --------
Net charge-offs and recoveries 3 62
Provision for loan losses 50 --
-------- --------
Balance at end of period $ 12,158 $ 12,248
======== ========
Six months ended June 30,
--------------------------
2002 2001
-------- --------
(in thousands)
Balance at beginning of period, $ 11,888 $ 11,973
Loans charged-off (294) (21)
Recoveries 314 296
-------- --------
Net charge-offs and recoveries 20 275
Provision for loan losses 250 --
-------- --------
Balance at end of period $ 12,158 $ 12,248
======== ========
6. Non-performing loans
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $10,408,000 and $6,654,000 at June 30, 2002
and 2001, respectively. Although the Company has non-performing loans
of approximately $10,408,000 at June 30, 2002, management believes it
has adequate collateral to limit it's credit risks.
The balance of impaired loans which included the loans on which the
accrual of interest has been discontinued, was approximately
$10,467,000 and $6,807,000 at June 30, 2002 and 2001, respectively. The
Company identifies a loan as impaired when it is probable that interest
and principal will not be collected according to the contractual terms
of the loan agreements. Although the company recognizes the balances of
impaired loans when analyzing its' loan loss reserve, the allowance for
loan loss specifically associated with impaired loans was $ -0- at June
30, 2002. The income that was recognized on impaired loans during the
six-month period ended June 30, 2002 was $-0-. The cash collected on
impaired loans during the same period was $-0- of which $-0- was
credited to the principal balance outstanding on such loans. Interest
that would have been accrued on impaired loans during the six-month
period ending June 30, 2002 was $3,000. The Company's policy for
interest income recognition on impaired loans is to recognize income on
currently performing restructured loans under the accrual method. The
Company recognizes income on non-accrual loans under the cash basis
when the principal payments on the loans become current and the
collateral on the loan is sufficient to cover the outstanding
obligation to the Company. If these factors do not exist, the Company
does not recognize income.
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULT OF OPERATIONS
The following discussion and analysis is intended to assist in
understanding and evaluating the changes in the financial condition and earnings
performance of the Company and its' subsidiaries for the six-month period ended
June 30, 2002.
From time to time, the Company may include forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters in this and other filings with the Securities
Exchange Commission. The Private Securities Litigation Reform Act of 1995
provides safe harbor for forward-looking statements. In order to comply with the
terms of the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance development and results of the Company's business
include the following: general economic conditions, including their impact on
capital expenditures, business conditions in the banking industry; the
regulatory environment; rapidly changing technology and evolving banking
industry standards; competitive factors, including increased competition with
community, regional and national financial institutions; new service and product
offerings by competitors and price pressures and similar items.
FINANCIAL CONDITION
- -------------------
Total consolidated assets as of June 30, 2002 were $1,021 million, an
increase of $90 million from the $931 million reported at year-end, December 31,
2001. This increase is primarily due to new deposits generated during the year,
along with the utilization of low interest rates offered on advances at the
F.H.L.B. of Pittsburgh.
Total loans decreased $36.1 million from the $646.2 million level at
December 31, 2001 to $610.1 million at June 30, 2002. This decrease is
attributed to the slow pace of the economic recovery and stiff loan competition
that is occurring throughout the industry. The year-to-date average balance of
loans was $616.0 million at June 30, 2002.
The allowance for loan loss increased $270,000 to $12.2 million at
June 30, 2002 from $11.9 million at December 31, 2001. The level of allowance
for loan loss reserve represents approximately 2.0% of total loans at June 30,
2002 versus 1.8% at December 31, 2001. While management believes that, based on
information currently available, the allowance for loan loss is sufficient to
cover losses inherent in the Company's loan portfolio at this time, no
assurances can be given that the level of allowance will be sufficient to cover
future loan losses or that future adjustments to the allowance will be
sufficient to cover future loan losses or that future adjustments to the
allowance will not be necessary if economic and/or other conditions differ
substantially from the economic and other conditions considered by management in
evaluating the adequacy of the current level of the allowance.
The $87.1 million increase in total investment securities is primarily
attributable to the redeployment of excess cash on hand to achieve a higher rate
of return.
11
Total cash and cash equivalents increased $36.2 million from $40.0
million level at December 31, 2001 to $76.2 million at June 30, 2002. This
increase was primarily due to anticipated investments settlements and
certificate of deposit redemptions for upcoming month.
Total deposits, the primary source of funds, increased $30.6 million to
$732.5 million at June 30, 2002, from $701.9 million at December 31, 2001. This
increase in deposits is primarily due to the competitive rates of our Royal
Treasury money market and the opening of our new Grant Avenue Branch. The
balance of brokered deposits was $160.4 million, representing approximately 22%
of total deposits at June 30, 2002. Generally, these brokered deposits cannot be
redeemed prior to the stated maturity, except in the event of the death or
adjudication of incompetence of the deposit holder
Consolidated stockholder's equity increased $5.6 million to $114.0
million at June 30, 2002 from $108.4 million at December 31, 2001. This increase
is primarily due to net income of $8.1 million, partially offset by two
quarterly cash dividends totaling $5.3 million. Additionally, stockholder's
equity increased by $1.8 million due to an adjustment in the market value of
available-for-sale investment securities during the first six months of 2002.
RESULTS OF OPERATIONS
- ---------------------
Results of operations depend primarily on net interest income, which is
the difference between interest income on interest earning assets and interest
expense on interest bearing liabilities. Interest earning assets consist
principally of loans and investment securities, while interest bearing
liabilities consist primarily of deposits. Net income is also effected by the
provision for loan losses and the level of non-interest income as well as by
non-interest expenses, including salary and employee benefits, occupancy
expenses and other operating expenses.
Consolidated net income for the three months ended, June 30, 2002 was
$3.9 million or $.34 basic earnings per share, as compared to net income of $3.8
million or $.34 basic earnings per share for the same three month period in
2001. During the second quarter ended June 30, 2001 the Company had
approximately $900 thousand in extraordinary tax benefits from loss carryovers
attributed to its purchase of Knoblauch State Bank and historical tax credits
from Crusader Holding Corporation. Consolidated net income for the six months
ended, June 30, 2002 was $8.1 million or $.71 basic earnings per share, as
compared to net income of $7.7 million or $.68 basic earnings per share for the
same six month period in 2001. This increase is primarily due to a higher return
from the increase in the balance of earning assets.
For the second quarter 2002, net interest income was $9.6 million as
compared to $8.6 million for the same quarter in 2001, an increase of $1 million
or 12%. This increase is primarily due to an increase in the average balance in
earning assets in the second quarter period of 2002 versus the same period in
2001. Interest income on loans increased $1.2 million for the second quarter of
2002 versus 2001 primarily due to higher average balance of loans during the
same period. Interest income on investment securities increased $2.6 million, an
83% increase over the same three-month period in 2001, which is primarily due to
the increase in the average balance in investment securities. Total interest
expense on deposits and borrowings increased $2.8 million to $9.2 million as
compared to $6.4 million for the same three-month period in 2001. This increase
in interest expense is primarily due to an increase in the average interest
bearing liabilities balance in the second quarter of 2002.
12
Provision for loan losses was $50,000 for the second quarter of 2002
and $0 for the same three-month period in 2001. Charge-offs and recoveries were
$167,000 and $170,000 respectively, for the three-month period ended June 30,
2002 versus $21,000 and $83,000, respectively, for the same three-month period
in 2001. Overall, management considers the current level of allowance for loan
loss to be adequate at June 30, 2002.
Total non-interest income for the three-month period ended June 30,
2002 was $534,000 as compared to $249 thousand for the same three-month period
in 2001. The $285 thousand increase in 2002 is primarily due to an increase in
gains on sale of loans, which is primarily attributed to the Crusader Mortgage
Division.
Total non-interest expense for the three months ended June 30, 2002 was
$4.7 million, a decrease of $77,000, as compared to $4.7 million for the same
period in 2001. This decrease in non-interest expense is primarily due to a
smaller contribution to the Company's Stock Appreciation Rights Program during
this quarter as compared to the same three-month period in 2001.
CAPITAL ADEQUACY
- ----------------
The company is required to maintain minimum amounts of capital to total
"risk weighted" assets and a minimum Tier 1 leverage ratio, as defined by the
banking regulators. At June 30, 2002, the Company was required to have a minimum
Tier 1 and total capital ratios of 4% and 8%, respectively, and a minimum Tier 1
leverage ratio of 3% plus an additional 100 to 200 basis points.
The table below provides a comparison of Royal Bancshares of
Pennsylvania's risk-based capital ratios and leverage ratios:
June 30, 2002 December 31, 2001
------------- -----------------
Capital Levels
Tier 1 leverage ratio 12.4% 14.1%
Tier 1 risk-based ratio 15.1% 14.4%
Total risk-based ratio 16.3% 15.9%
Capital Performance
Return on average assets 1.6% (1) 2.0% (1)
Return on average equity 14.7% (1) 15.0% (1)
(1) annualized
The Company's ratios compare favorably to the minimum required amounts
of Tier 1 and total capital to "risk weighted" assets and the minimum Tier 1
leverage ratio, as defined by banking regulators. The Company currently meets
the criteria for a well-capitalized institution, and management believes that
the Company will continue to meet its' minimum capital requirements. At present,
the Company has no commitments for significant capital expenditures.
The Company is not under any agreement with regulatory authorities nor
is the Company aware of any current recommendations by the regulatory
authorities that, if such recommendations were implemented, would have a
material effect on liquidity, capital resources or operations of the Company.
13
LIQUIDITY & INTEREST RATE SENSITIVITY
- -------------------------------------
Liquidity is the ability to ensure that adequate funds will be
available to meet its' financial commitments as they become due. In managing
its' liquidity position, all sources of funds are evaluated, the largest of
which is deposits. Also taken into consideration is the repayment of loans.
These sources provide alternatives to meet its' short-term liquidity needs.
Longer liquidity needs may be met by issuing longer-term deposits and by raising
additional capital. The liquidity ratio is generally maintained equal to or
greater than 25% of deposits and short-term liabilities.
The liquidity ratio of the Company remains strong at approximately 44%
and exceeds the Company's peer group levels and target ratio set forth in the
Asset/Liability Policy. The Company's level of liquidity is provided by funds
invested primarily in corporate bonds, capital trust securities, US Treasuries
and agencies, and to a lesser extent, federal funds sold. The overall liquidity
position is monitored on a monthly basis.
Interest rate sensitivity is a function of the repricing
characteristics of the Company's assets and liabilities. These include the
volume of assets and liabilities repricing, the timing of the repricing, and the
interest rate sensitivity gaps is a continual challenge in a changing rate
environment. The following table shows separately the interest sensitivity of
each category of interest earning assets and interest bearing liabilities as of
June 30, 2002:
14
Interest Rate Sensitivity
- -------------------------
(in millions) Days
--------------------- 1 to 5 Over 5 Non-rate
Assets (1) 0 - 90 91 - 365 Years Years Sensitive Total
- ---------- ------ -------- ----- ----- --------- -----
Interest-bearing deposits in banks $ 65.0 $ -- $ -- $ -- $ -- $ 65.0
Federal funds sold 10.3 -- -- -- -- 10.3
Investment securities:
Available for sale 10.3 4.1 25.5 217.4 -- 257.3
Held to maturity .1 1.3 31.4 20.6 -- 53.4
------ ------ ------ ------ ------ --------
Total investment securities 10.4 5.4 56.9 238.0 -- 310.7
Loans: (2)
Fixed rate (3) 16.4 30.2 115.9 94.9 -- 257.4
Variable rate 203.8 17.2 117.3 2.3 -- 340.6
------ ------ ------ ------ ------ --------
Total loans 220.2 47.4 233.2 97.2 -- 598.0
Other assets (4) -- -- -- -- 37.0 37.0
------ ------ ------ ------ ------ --------
Total Assets $305.9 $ 52.8 $290.1 $335.2 $ 37.0 $1,021.0
====== ====== ====== ===== ====== ========
Liabilities & Capital
- ---------------------
Deposits:
Non interest bearing deposits $ -- $ -- $ -- $ -- $50.2 $ 50.2
Interest bearing deposits (5) 82.7 -- 248.0 -- -- 330.7
Certificate of deposits 50.6 137.1 133.0 31.0 -- 351.7
------ ------ ------ ------ ------ --------
Total deposits 133.3 137.1 381.0 31.0 50.2 732.6
Borrowings 77.5 -- 80.0 -- -- 157.5
Other liabilities -- -- -- 16.5 16.9
.4
Capital -- -- -- -- 114.0 114.0
------ ------ ------ ------ ------ --------
Total liabilities & capital $210.8 $137.1 $461.0 $ 31.4 $180.7 $1,021.0
====== ====== ====== ===== ====== ========
Net interest rate GAP $ 95.1 ($84.3) ($170.9) $303.8 ($143.7)
====== ====== ====== ===== ======
Cumulative interest rate GAP $ 95.1 $ 10.8 ($160.1) $143.7 --
====== ====== ====== ===== ======
GAP to total assets 9% (8%)
====== ======
GAP to total equity 83% (74%)
====== ======
Cumulative GAP to total assets 9% 1%
====== ======
Cumulative GAP to total equity 83% 10%
====== ======
(1) Interest earning assets are included in the period in which the balances
are expected to be repaid and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments, and contractual maturities.
(2) Reflects principal maturing within the specified periods for fixed and
variable rate loans and includes nonperforming loans.
(3) Fixed rate loans include a portion of variable rate loans whose floors are
in effect at June 30, 2002.
(4) For purposes of gap analysis, other assets include the allowance for
possible loan loss, unamortized discount on purchased loans and deferred
fees on loans.
(5) Based on historical analysis, Money market and Savings deposits are assumed
to have rate sensitivity of 1 month; NOW account deposits are assumed to
have a rate sensitivity of 4 months.
The Company's exposure to interest rate risk is mitigated somewhat by a
portion of the Company's loan portfolio consisting of floating rate loans, which
are tied to the prime lending rate but which have interest rate floors and no
interest rate ceilings. Although the Company is originating fixed rate loans, a
portion of the loan portfolio continues to be comprised of floating rate loans
with interest rate floors.
15
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In August 2001, the FASB issued SFAS No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 retains the existing
requirements to recognize and measure the impairment of long-lived assets to be
held and used or to be disposed of by sale. However, SFAS No. 144 makes changes
to the scope and certain measurement requirements of existing accounting
guidance. SFAS No. 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001. The adoption of this statement is not
expected to have a significant impact on the financial condition or results of
operations of the Company.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and use of Proceeds
None
Item 3. Default and Upon Senior Securities
None
Item 4. Submission of Matters to Vote Security Holders
On Wednesday May 15, 2002, the Annual Meeting of Shareholders of Royal
Bancshares of Pennsylvania was convened in Philadelphia, PA at 6:30 P.M. The
following nominees were elected as Class III Directors of the Registrant to
serve for a three-year term:
For Withhold Authority
--------------------------------------
Carl M. Cousins 23,959,008 32,803
John M. Decker 23,957,390 34,421
Evelyn R. Tabas 23,929,256 62,555
Lee E. Tabas 23,930,191 61,620
Edward B. Tepper 23,959,008 32,803
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
16
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
----------------------------------------
PURSUANT TO 18 U.S.C. SECTION 1350
----------------------------------
In connection with the Quarterly Report of Royal Bancshares ("Royal")
on Form 10-Q for the period ending June 30, 2002, as filed with the Securities
and Exchange Commission (the "Report"), I, Joseph P. Campbell, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of Royal as of the dates and for the period expressed in the Report.
/s/ Joseph P. Campbell
------------------------
Chief Executive Officer
Date: August 13, 2002.
17
CERTIFICATION OF CHIEF FINANCIAL OFFICER
----------------------------------------
PURSUANT TO 18 U.S.C. SECTION 1350
----------------------------------
In connection with the Quarterly Report of Royal Bancshares ("Royal")
on Form 10-Q for the period ending June 30, 2002, as filed with the Securities
and Exchange Commission (the "Report"), I, James J McSwiggan, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of Royal as of the dates and for the period expressed in the Report.
/s/ James J. McSwiggan
-------------------------
Chief Financial Officer
Date: August 13, 2002.
18
SIGNATURES
----------
Pursuant to the requirements of the requirements 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.
ROYAL BANCSHARES OF PENNSYLVANIA, INC.
(Registrant)
Dated: August 13th, 2002 /s/ James J. McSwiggan
-------------------------------------------
James J. McSwiggan, CFO & Treasurer
Dated: August 13th, 2002 /s/ Jeffrey T. Hanuscin
-------------------------------------------
Jeffrey T. Hanuscin, VP of Finance
19