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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: September 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 September 30, 2002
- -------------------- ---------------------------------
$2.00 par value 9,594,647
Class B Common Stock Outstanding at September 30, 2002
- -------------------- ---------------------------------
$.10 par value 1,860,968
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS Sep 30, 2002 Dec 31, 2001
(Unaudited)
---------- --------
Cash and due from banks $ 25,012 $ 32,918
Federal funds sold 19,280 7,100
---------- --------
Total cash and cash equivalents 44,292 40,018
---------- --------
Investment securities held to maturity (fair value of $35,627 at
September 30, 2002 and $94,625 at December 31, 2001) 33,176 92,903
Investment securities available for sale - at fair value 409,422 129,755
Total loans 588,068 646,235
Less allowance for loan losses 12,209 11,888
---------- --------
Net loans 575,859 634,347
Premises and equipment, net 8,286 8,512
Accrued interest and other assets 26,577 25,445
---------- --------
Total assets $1,097,612 $930,980
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $52,881 $51,991
Interest bearing (includes certificates of deposit in excess
of $100 of $200,235 at September 30, 2002 and
$303,793 at December 31, 2001) 749,433 649,869
---------- --------
Total deposits 802,314 701,860
Accrued interest payable 10,722 11,634
Borrowings 157,500 100,225
Other liabilities 8,291 8,175
---------- --------
Total liabilities 978,827 821,894
---------- --------
MINORITY INTEREST 607 637
Stockholders' equity
Common stock
Class A, par value $2 per share; authorized, 18,000,000 shares; issued,
9,594,647 at September 30, 2002 and 8,848,867 at December 31, 2001 19,189 17,698
Class B, par value $.10 per share; authorized, 2,000,000 shares; issued,
1,860,968 at September 30, 2002 and 1,804,693 at December 31, 2001 186 180
Additional paid in capital 76,982 65,011
Retained earnings 22,638 30,457
Accumulated other comprehensive income (loss) 1,448 (2,632)
---------- --------
120,443 110,714
Treasury stock - at cost, shares of Class A, 215,388 at September 30, 2002,
and December 31, 2001. (2,265) (2,265)
---------- --------
Total stockholders' equity 118,178 108,449
---------- --------
Total liabilities and stockholders' equity $1,097,612 $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
September 30,
-----------------------
(in thousands, except per share data) 2002 2001
------- -------
Interest income
Loans, including fees $13,255 $15,181
Investment securities held to maturity 852 2,409
Investment securities available for sale 5,461 2,006
Deposits in banks 146 148
Federal funds sold 83 157
------- -------
TOTAL INTEREST INCOME 19,797 19,901
------- -------
Interest expense
Deposits 7,151 8,297
Borrowings 2,103 1,573
------- -------
TOTAL INTEREST EXPENSE 9,254 9,870
------- -------
NET INTEREST INCOME 10,543 10,031
Provision for loan losses -- --
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,543 10,031
------- -------
Other income
Service charges and fees 302 243
Gains on sales of investment securities available for sale 543 60
Gains on sales of other real estate 142 32
Gains on sales of loans 230 165
Other income 13 72
------- -------
1,230 572
------- -------
Other expenses
Salaries & wages 1,873 2,300
Employee benefits 438 916
Occupancy and equipment 319 480
Other operating expenses 2,213 1,484
------- -------
4,843 5,180
------- -------
INCOME BEFORE INCOME TAXES 6,930 5,423
Income taxes 2,468 1,851
------- -------
NET INCOME $ 4,462 $ 3,572
======= =======
Per share data
Net income - basic $ .39 $ .32
======= =======
Net income - diluted $ .38 $ .31
======= =======
The accompanying notes are an integral part of these statements.
3
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine months ended
September 30,
-----------------------
(in thousands, except per share data) 2002 2001
------- -------
Interest income
Loans, including fees $40,387 $38,033
Investment securities held to maturity 3,392 5,489
Investment securities available for sale 13,181 5,121
Deposits in banks 597 253
Federal funds sold 215 683
------- -------
TOTAL INTEREST INCOME 57,772 49,579
------- -------
Interest expense
Deposits 22,178 19,781
Borrowings 5,520 2,581
------- -------
TOTAL INTEREST EXPENSE 27,698 22,362
------- -------
NET INTEREST INCOME 30,074 27,217
Provision for loan losses 250 --
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 29,824 27,217
------- -------
Other income
Service charges and fees 847 738
Gains on sales of investment securities available for sale 529 60
Gains on sales of other real estate 400 136
Gains on sales of loans 608 189
Other income 47 101
------- -------
2,431 1,224
------- -------
Other expenses
Salaries & wages 5,681 5,794
Employee benefits 1,335 2,361
Occupancy and equipment 875 857
Other operating expenses 6,030 4,327
------- -------
13,921 13,339
------- -------
INCOME BEFORE INCOME TAXES 18,334 15,102
Income taxes 5,761 3,804
------- -------
NET INCOME $12,573 $11,298
======= =======
Per share data
Net income - basic $ 1.09 $ 1.00
======= =======
Net income - diluted $ 1.08 $ .97
======= =======
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
Nine Months ended September 30, 2002
(UNAUDITED)
Class A Common Stock Class B Common Stock Additional
---------------------- ---------------------- Paid in Retained
(in thousands) Shares Amount Shares Amount Capital Earnings
-------- -------- -------- -------- ---------- --------
Balance, January 1, 2002 8,849 $17,698 1,805 $180 $65,011 $30,457
Net income for the nine months ended Sept. 30, - - - - - 12,573
Conversion of Class B common stock to Class A
Common stock 60 120 (52) (5) - (115)
Purchase of treasury stock - - - - - -
6% stock dividend declared 518 1,035 108 11 11,285 (12,331)
Cash dividends on common stock - - - - - (7,939)
Cash in lieu of fractional shares - - - - - (7)
Stock options exercised 168 336 - - 686 -
Other comprehensive income, net of
Reclassifications and taxes - - - - - -
----- ------- ----- ---- ------- -------
Comprehensive income
Balance, September 30, 2002 9,595 $19,189 1,861 $186 $76,982 $22,638
===== ======= ===== ==== ======= =======
Accumulated
Other
Treasury Comprehensive Comprehensive
(in thousands) Stock Income (loss) Income
------------ ----------------------------------
Balance, January 1, 2002 $(2,265) $(2,632)
Net income for the nine months ended Sept. 30, - - $12,573
Conversion of Class B common stock to Class A
Common stock - - -
Purchase of treasury stock - - -
6% stock dividend declared - -
Cash dividends on common stock - - -
Cash in lieu of fractional shares - - -
Stock options exercised - - -
Other comprehensive income, net of
Reclassifications and taxes - 4,080 4,080
------- ------ -------
Comprehensive income $16,653
=======
Balance, September 30, 2002 $(2,265) $1,448
======= ======
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)
Nine months ended September 30,
(in thousands)
Cash flows from operating activities 2002 2001
-------- -------
Net income $12,573 $11,298
Adjustments to reconcile net income to
net cash provided by (used in) operating activities
Depreciation 946 555
Provision for loan loss 250 --
Amortization of premiums and discounts on loans,
mortgage-backed securities and investments (469) (2,249)
Benefit for deferred income taxes 3,563 (264)
(Gains) on other real estate (400) (136)
(Gains) on sales of loans (608) (189)
(Gains) on sales of investment securities (529) (60)
Changes in assets and liabilities:
Increase (decrease) in accrued interest receivable (2,688) (1,004)
Increase (decrease) in other assets (1,320) (1,522)
Increase (decrease) in accrued interest payable (912) 1,008
Increase (decrease) in unearned income on loans (836) (269)
Increase (decrease) in other liabilities (569) (2,100)
-------- -------
Net cash provided by (used in) operating activities 9,001 5,068
Cash flows from investing activities
Proceeds from calls/maturities of HTM investment securities 58,063 57,753
Proceeds from calls/maturities of AFS investment securities 182,691 7,350
Proceeds from sales of AFS investment securities 115,250 --
Purchase of HTM investment securities -- (65,000)
Purchase of AFS investment securities (566,444) --
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 59,003 14,400
Purchase of premises and equipment (720) (1,870)
-------- -------
Net cash provided by (used in) investing activities (155,157) 23,942
Cash flows from financing activities:
Net increase in non-interest bearing and
interest bearing demand deposits and savings accounts 227,001 21,315
Net decrease in certificates of deposit (126,547) (21,587)
Mortgage payments (39) (35)
Net increase in borrowings 57,275 4,000
Cash dividends (7,939) (6,730)
Cash in lieu of fractional shares (7) (6)
Issuance of common stock under stock option plans 686 169
Purchase of treasury stock -- --
-------- -------
Net cash provided by (used in) financing activities 150,430 (2,874)
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS 4,274 26,136
Cash and cash equivalents at beginning of year 40,018 43,222
-------- -------
Cash and cash equivalents at end of year $ 44,292 $69,358
======== =======
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.
Nine months ended Sept 30,
--------------------------
(in thousands) 2002 2001
------ -------
Interest income $57,772 $64,560
Interest expense 27,698 30,887
------- -------
Net interest income 30,074 33,673
Provision for loan losses 250 250
Non-interest income 2,431 1,964
Non-interest expense 13,921 16,662
Income tax expense 5,761 6,374
------- -------
Net income $12,573 $12,351
======= =======
(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 originates mezzanine loans 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 September 30, 2002
Income Average shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $4,462 11,519 $0.39
Effect of dilutive securities
Stock options 171 (.01)
------------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $4,462 11,690 $0.38
Three months ended September 30, 2001
Income Average shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $3,572 11,337 $0.32
Effect of dilutive securities
Stock options 273 (.01)
------------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $3,572 11,611 $0.31
Nine months ended September 30, 2002
Income Average shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $12,573 11,492 $1.09
Effect of dilutive securities
Stock options 174 (.01)
------------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $12,573 11,668 $1.08
Nine months ended September 30, 2001
Income Average shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $11,298 11,326 $1.00
Effect of dilutive securities
Stock options 263 (.03)
------------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $11,298 11,588 $0.97
8
4. Investment Securities:
The carrying value and approximate market value of investment
securities at September 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 $608 $ -- $ -- $ 608 $ 608
Other Securities 32,568 2,451 -- 35,019 32,568
-------- ------ -------- -------- --------
$ 33,176 $2,451 $ -- $ 35,627 $ 33,176
======== ====== ======== ======== ========
Available for sale:
- -------------------
Federal Home Loan
Bank Stock - at cost $ 7,875 $ -- $ -- $ 7,875 $ 7,875
Mortgage Backed 92,206 194 -- 92,400 92,400
CMO's 87,226 862 (92) 87,996 87,996
US Agencies 70,000 149 -- 70,149 70,149
Other securities 149,907 3,653 (2,558) 151,002 151,002
-------- ------ -------- -------- --------
$407,214 $4,858 ($2,650) $409,422 $409,422
======== ====== ======== ======== ========
9
5. Allowance for Credit Losses: Changes in the allowance for credit losses
were as follows:
Three months ended Sept 30,
---------------------------
2002 2001
------- -------
(in thousands)
Balance at beginning of period, $12,158 $12,248
Loans charged-off -- (497)
Recoveries 51 70
------- -------
Net charge-offs and recoveries 51 (427)
Provision for loan losses -- --
------- -------
Balance at end of period $12,209 $11,821
======= =======
Nine months ended Sept 30,
---------------------------
2002 2001
-------- -------
(in thousands)
Balance at beginning of period, $11,888 $11,973
Loans charged-off (294) (519)
Recoveries 365 367
------- -------
Net charge-offs and recoveries 71 (152)
Provision for loan losses 250 --
------- -------
Balance at end of period $12,209 $11,821
======= =======
6. Non-performing loans
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $13.3 million and $7.4 million at September
30, 2002 and 2001, respectively. Although the Company has
non-performing loans of approximately $13.3 million at September 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 $13.4
million and $7.5 million at September 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 associated with impaired loans was
$ 3 million at September 30, 2002. The income that was recognized on
impaired loans during the nine-month period ended September 30, 2002
was $-0-. The cash collected on impaired loans during the same period
was $1 million of which $1 million was credited to the principal
balance outstanding on such loans. 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 nine-month period ended
September 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 September 30, 2002 were $1,098 million,
an increase of $167 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 $58.1 million from the $646.2 million level at
December 31, 2001 to $588.1 million at September 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 $609.0 million at September 30, 2002.
The allowance for loan loss increased $321,000 to $12.2 million at
September 30, 2002 from $11.9 million at December 31, 2001. The level of
allowance for loan loss reserve represents approximately 2.1% of total loans at
September 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 $219.9 million increase in total investment securities is primarily
attributable to the redeployment of excess cash on hand to achieve a higher rate
of return.
Total cash and cash equivalents increased $4.3 million from $40.0
million level at December 31, 2001 to $44.3 million at September 30, 2002.
11
Total deposits, the primary source of funds, increased $100.4 million
to $802.3 million at September 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 $142.9 million, representing approximately 18%
of total deposits at September 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 $9.1 million to $117.5
million at September 30, 2002 from $108.4 million at December 31, 2001. This
increase is primarily due to net income of $12.6 million, partially offset by
three quarterly cash dividends totaling $7.9 million. Additionally,
stockholder's equity increased by $3.4 million due to an adjustment in the
market value of available-for-sale investment securities during the first nine
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, September 30, 2002
was $4.5 million or $.39 basic earnings per share, as compared to net income of
$3.6 million or $.32 basic earnings per share for the same three month period in
2001. During the third quarter ended September 30, 2002 the Company had
approximately $550 thousand in gains from sale of $110 million of investment
securities classified as available for sale investments. Consolidated net income
for the nine months ended, September 30, 2002 was $12.6 million or $1.09 basic
earnings per share, as compared to net income of $11.3 million or $1.00 basic
earnings per share for the same nine month period in 2001. This increase is
primarily due to a higher return from the increase in the balance of earning
assets.
For the third quarter 2002, net interest income was $10.5 million as
compared to $10.0 million for the same quarter in 2001, an increase of $500
thousand or 5%. This increase is primarily due to an increase in the average
balance in earning assets in the third quarter period of 2002 versus the same
period in 2001. Interest income on loans decreased $1.9 million for the third
quarter of 2002 versus 2001 primarily due to a decrease in the average balance
of loans during the same period. Interest income on investment securities
increased $1.9 million, a 43% 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 decreased $0.6
million to $9.3 million as compared to $9.9 million for the same three-month
period in 2001. This decrease in interest expense is primarily due the reduction
of interest rates on deposits and borrowings
Provision for loan losses was $0 for the third quarter of 2002 and $0
for the same three-month period in 2001. Charge-offs and recoveries were $0 and
$51,000 respectively, for the three-month period ended September 30, 2002 versus
$497,000 and $70,000, respectively, for the same three-month period in 2001.
Overall, management considers the current level of allowance for loan loss to be
adequate at September 30, 2002.
12
Total non-interest income for the three-month period ended September
30, 2002 was $1.2 million as compared to $572 thousand for the same three-month
period in 2001. The $658 thousand increase in 2002 is primarily due to gains
realized through the sale of investment securities completed during the quarter.
Total non-interest expense for the three months ended September 30,
2002 was $4.8 million, a decrease of $337 thousand, as compared to $5.2 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 September 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:
September 30, 2002 December 31, 2001
------------------ -----------------
Capital Levels
Tier 1 leverage ratio 10.3% 14.1%
Tier 1 risk-based ratio 15.1% 14.4%
Total risk-based ratio 16.4% 15.9%
Capital Performance
Return on average assets 1.6%(1) 2.0%(1)
Return on average equity 15.3%(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 37%
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
September 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 $25.0 $-- $-- $-- $-- $25.0
Federal funds sold 19.3 -- -- -- -- 19.3
Investment securities:
Available for sale 0.4 4.1 38.7 366.2 -- 409.4
Held to maturity -- 3.3 29.5 0.4 -- 33.2
------------------------------------------------------------------------------
Total investment securities 0.4 7.4 68.2 366.6 -- 442.6
Loans: (2)
Fixed rate (3) 21.1 20.4 149.9 82.3 -- 273.7
Variable rate 145.9 46.4 92.9 17.0 -- 302.2
------------------------------------------------------------------------------
Total loans 167.0 66.8 242.8 99.3 -- 575.9
Other assets (4) -- -- -- -- 34.8 34.8
------------------------------------------------------------------------------
Total Assets $211.7 $74.2 $311.0 $465.9 $34.8 $1,097.6
==============================================================================
Liabilities & Capital
Deposits:
Non interest bearing deposits $-- $-- $-- $-- $52.9 $52.9
Interest bearing deposits (5) 102.8 -- 308.4 -- -- 411.2
Certificate of deposits 38.7 112.3 157.5 29.7 -- 338.2
------------------------------------------------------------------------------
Total deposits 141.5 112.3 465.9 29.7 52.9 802.3
Borrowings 40.0 -- 80.0 37.5 -- 157.5
Other liabilities -- -- -- .4 19.2 19.6
Capital -- -- -- -- 118.2 118.2
------------------------------------------------------------------------------
Total liabilities & capital $181.5 $112.3 $545.9 $67.6 $190.3 $1,097.6
==============================================================================
Net interest rate GAP $30.2 ($38.1) ($234.9) $398.3 ($156.0)
================================================================
Cumulative interest rate GAP $30.2 ($7.9) ($242.8) $156.0 --
================================================================
GAP to total assets 3% (3%)
======================
GAP to total equity 26% (32%)
======================
Cumulative GAP to total assets 3% (1%)
======================
Cumulative GAP to total equity 26% (7%)
======================
(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 September 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
ITEM 4 - CONTROLS AND PROCEDURES
We maintain a system of controls and procedures designed to provide
reasonable assurance to the reliability of the financial statements and other
disclosures included in this report, as well as to safeguard assets from
unauthorized use or disposition. We evaluated the effectiveness of the design
and operation of our disclosure controls and procedures under the supervision
and with the participation of management, including our Chief Executive Officer
and Chief Financial Officer, within 90 days prior to the filing date of this
report. Based upon that evaluation, our disclosure controls and procedures are
effective in timely alerting them to material information required to be
included in our periodic Securities and Exchange Commission filings. No
significant changes were made to our internal controls or other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
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
None
Item 5. Other Information
None
16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by
Joseph P. Campbell, Chief Executive Officer of Royal Bancshares of Pennsylvania
on November 13, 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by
James J. McSwiggan, Chief Financial Officer of Royal Bancshares of Pennsylvania
on November 13, 2002.
(b) The company did not file any reports on Form 8-K during the quarter
ended September 30, 2002.
17
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: November 13th, 2002 /s/ James J. McSwiggan
---------------------------------------
James J. McSwiggan, CFO & Treasurer
Dated: November 13th, 2002 /s/ Jeffrey T. Hanuscin
--------------------------------------
Jeffrey T. Hanuscin, VP of Finance
18
CERTIFICATION
I, Joseph P. Campbell, Chief Executive Officer, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of Royal
Bancshares of Pennsylvania.
2. Based on my knowledge, the quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
the quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation date.
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditor and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
the internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditor any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls.
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 By: /s/ Joseph P. Campbell
-----------------------
Joseph P. Campbell
Chief Executive Officer
19
CERTIFICATION
I, James J. McSwiggan, Chief Financial Officer, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of Royal
Bancshares of Pennsylvania.
2. Based on my knowledge, the quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
the quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation date.
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditor and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
the internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditor any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls.
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 By: /s/ James J McSwiggan
-----------------------
James J. McSwiggan
Chief Financial Officer
20