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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: March 31, 2003
-----------------
[ ] 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 March 31, 2003
-------------------- -----------------------------
$2.00 par value 9,887,447
Class B Common Stock Outstanding at March 31, 2003
-------------------- -----------------------------
$.10 par value 1,913,875
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS Mar 31, 2003 Dec 31, 2002
(Unaudited)
--------------- ----------------
Cash and due from banks $ 54,988 $ 27,081
Federal funds sold 27,800 13,490
---------- ----------
Total cash and cash equivalents 82,788 40,571
---------- ----------
Investment securities held to maturity (fair value of $32,402 at
March 31, 2003 and $32,745 at December 31, 2002) 30,541 30,614
Investment securities available for sale - at fair value 438,954 418,316
Total loans 558,544 576,734
Less allowance for loan losses 12,602 12,470
---------- ----------
Net loans 545,942 564,264
Premises and equipment, net 7,785 8,002
Accrued interest and other assets 27,892 26,717
---------- ----------
Total assets $1,133,902 $1,088,484
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 55,102 $ 55,575
Interest bearing (includes certificates of deposit in excess
of $100 of $128,543 at March 31, 2003 and
$180,978 at December 31, 2002) 777,882 765,265
---------- ----------
Total deposits 832,984 820,840
Accrued interest payable 10,489 11,406
Borrowings 157,500 127,500
Other liabilities 7,655 6,682
---------- ----------
Total liabilities 1,008,628 966,428
---------- ----------
MINORITY INTEREST 669 726
Stockholders' equity
Common stock
Class A, par value $2 per share; authorized, 18,000,000 shares; issued,
9,887,447 at March 31, 2003 and 9,595,191 at December 31, 2002 19,775 19,190
Class B, par value $.10 per share; authorized, 2,000,000 shares; issued,
1,913,875 at March 31, 2003 and 1,860,668 at December 31, 2002 191 186
Additional paid in capital 83,497 76,984
Retained earnings 19,374 24,819
Accumulated other comprehensive income (loss) 4,033 2,416
---------- ----------
126,870 123,595
Treasury stock - at cost, shares of Class A, 215,388 at March 31, 2003,
and December 31, 2002. (2,265) (2,265)
---------- ----------
Total stockholders' equity 124,605 121,330
---------- ----------
Total liabilities and stockholders' equity $1,133,902 $1,088,484
========== ==========
The accompanying notes are an integral part of these statements.
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months ended
March 31,
---------------------------
(in thousands, except per share data)
2003 2002
---------- ----------
Interest income
Loans, including fees $12,187 $14,214
Investment securities held to maturity 592 1,518
Investment securities available for sale 5,523 3,068
Deposits in banks 85 272
Federal funds sold 44 71
------- -------
TOTAL INTEREST INCOME 18,431 19,143
------- -------
Interest expense
Deposits 6,431 7,641
Borrowings 1,596 1,576
------- -------
TOTAL INTEREST EXPENSE 8,027 9,217
------- -------
NET INTEREST INCOME 10,404 9,926
Provision for loan losses 150 200
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,254 9,726
------- -------
Other income
Service charges and fees 253 286
Net gains on sales of investment securities 144 --
Gains on sales of other real estate 80 164
Gains on sales of loans 131 202
Other income 16 15
------- -------
624 667
------- -------
Other expenses
Salaries & wages 1,988 1,928
Employee benefits 384 438
Occupancy and equipment 337 237
Other operating expenses 1,835 1,814
------- -------
4,544 4,417
------- -------
INCOME BEFORE INCOME TAXES 6,334 5,976
Income taxes 1,934 1,761
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NET INCOME $ 4,400 $ 4,215
======= =======
Per share data
Net income - basic $.37 $.36
======= =======
Net income - diluted $.36 $.35
======= =======
The accompanying notes are an integral part of these statements.
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Three Months ended March 31, 2003
(UNAUDITED)
Class A Common Stock Class B Common Stock Additional
-------------------- -------------------- Paid in Retained Treasury
(in thousands) Shares Amount Shares Amount Capital Earnings Stock
------ ------ ------ ------ ---------- -------- --------
Balance, January 1, 2003 9,595 $19,190 1,861 $186 $76,984 $24,819 $(2,265)
Net income for the three months ended Mar. 31, - - - - - 4,400 -
Conversion of Class B common stock to
Class A Common stock 3 6 (3) (1) - (7) -
Purchase of treasury stock - - - - - - -
3% stock dividend declared 281 563 55 6 6,443 (7,011) -
Cash dividends on common stock - - - - - (2,819) -
Cash in lieu of fractional shares - - - - - (7) -
Stock options exercised 8 16 - - 90 - -
Other comprehensive income, net of
Reclassifications and taxes - - - - - - -
----- ------- ----- ---- ------- ------- -------
Comprehensive income
Balance, March 31, 2003 9,887 $19,775 1,913 $191 $83,497 $19,374 $(2,265)
===== ======= ===== ==== ======= ======= =======
[RESTUBBED TABLE]
Accumulated
Other
Comprehensive Comprehensive
(in thousands) Income (loss) Income
-------------- -------------
Balance, January 1, 2003 $2,415
Net income for the three months ended Mar. 31, - $4,400
Conversion of Class B common stock to
Class A Common stock - -
Purchase of treasury stock - -
3% 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 1,618 1,618
------ ------
Comprehensive income $6,018
======
Balance, March 31, 2003 $4,033
======
The accompanying notes are an integral part of the financial statement.
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended March 31,
(in thousands)
2003 2002
------- -------
Cash flows from operating activities
Net income $ 4,400 $ 4,215
Adjustments to reconcile net income to
net cash provided by (used in) operating activities
Depreciation 259 311
Provision for loan loss 150 200
Net accretion of discounts on loans,
mortgage-backed securities and investments (1,783) (2,413)
Benefit for deferred income taxes (39) (479)
Gains on other real estate (80) (164)
Gains on sales of loans (131) (202)
Net gains on sales of investment securities (144) --
Changes in assets and liabilities:
Increase in accrued interest receivable (1,745) (1,928)
(Increase) decrease in other assets 609 (810)
Increase (decrease) in accrued interest payable (917) 641
Increase in other liabilities 973 1,289
------- --------
Net cash provided by (used in) operating activities 1,552 660
Cash flows from investing activities
Proceeds from calls/maturities of HTM investment securities -- 31,051
Proceeds from calls/maturities of AFS investment securities 64,889 2,656
Proceeds from sales of AFS investment securities 19,078 --
Purchase of AFS investment securities (99,182) (77,345)
Purchase of FHLB Stock (1,504) (1,500)
Net decrease in loans 18,038 19,548
Purchase of premises and equipment (42) (479)
------- --------
Net cash provided by (used in) investing activities 1,277 26,069
Cash flows from financing activities:
Net increase in non-interest bearing and
interest bearing demand deposits and savings accounts 64,926 90,714
Net decrease in certificates of deposit (52,782) (6,498)
Mortgage payments (15) (10)
Net increase in borrowings 30,000 30,000
Cash dividends (2,819) (2,642)
Cash in lieu of fractional shares (8) (7)
Issuance of common stock under stock option plans 86 550
------- --------
Net cash provided by (used in) financing activities 39,388 112,107
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS 42,217 86,698
Cash and cash equivalents at beginning of year 40,571 40,018
------- --------
Cash and cash equivalents at end of year $82,788 $126,716
======= ========
The accompanying notes are an integral part of these statements.
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. 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. These
interim financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 2002. The
results of operations for the three-month period ended March 31, 2003,
are not necessarily indicative of the results, to be expected for the
full year.
2. Segment Information
The Company's community banking segment consists of commercial and retail
banking. The community banking business segment is managed as a single
strategic unit which generates revenue from a variety of products and
services provided by the Banks. For example, commercial lending is
dependent upon the ability of the Bank to fund itself with retail
deposits and other borrowings and to manage interest rate and credit
risk. This situation is also similar for consumer and residential
mortgage lending.
The Company's tax lien operation does not meet the quantitative
thresholds for requiring disclosure, but has different characteristics to
the community banking operation. The Company's tax lien operation
consists of purchasing delinquent tax certificates from local
municipalities at auction. The tax lien operation is managed as a single
strategic unit which generates revenue from a nominal interest rate
achieved at the individual auction along with periodic penalties imposed.
The accounting policies used in this disclosure of business segments are
the same as those described in the summary of significant accountings
policies. The consolidating adjustments reflect certain eliminations of
inter-segment revenues, cash and investments in subsidiaries.
Three months ended March 31 2003,
---------------------------------
(in thousands) Community Tax Lien
Banking Operation Consolidated
-------------- -------------- -----------------
Total assets $1,086,694 $47,208 $1,133,902
Total deposits 832,984 -- 832,984
Net interest income 9,585 819 10,404
Provision for loan losses 150 -- 150
Non-interest income 539 85 624
Non-interest expense 4,052 492 4,544
Income tax expense 1,831 103 1,934
---------- ------- ----------
Net income $4,091 $309 $4,400
========== ======= ==========
Three months ended March 31 2002,
---------------------------------
(in thousands) Community Tax Lien
Banking Operation Consolidated
-------------- -------------- -----------------
Total assets $1,005,408 $38,498 $1,043,906
Total deposits 786,076 -- 786,076
Net interest income 9,111 815 9,926
Provision for loan losses 200 -- 200
Non-interest income 569 98 667
Non-interest expense 4,006 411 4,417
Income tax expense 1,632 129 1,761
---------- ------- ----------
Net income $3,842 $373 $4,215
========== ======= ==========
Interest was paid to the Community Bank segment by the Tax Lien Operation
was approximately $509 thousand and $452 thousand for the period ending
March 31, 2003, and 2002, respectively.
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 2003 the Company declared a 3% 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 March 31, 2003
Income Average shares Per share
(numerator) (denominator) Amount
----------- -------------- ---------
Basic EPS
Income available to common shareholders $4,400 11,871 $0.37
Effect of dilutive securities
Stock options 240 (.01)
-----------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $4,400 12,111 $0.36
Three months ended March 31, 2002
Income Average shares Per share
(numerator) (denominator) Amount
----------- -------------- ---------
Basic EPS
Income available to common shareholders $4,215 11,790 $0.36
Effect of dilutive securities
Stock options 243 (.01)
-----------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $4,215 12,034 $0.35
4. Investment Securities:
The carrying value and approximate market value of investment securities
at March 31, 2003 are as follows:
Amortized Gross Gross Approximate
Purchased Unrealized Unrealized Fair Carrying
(in thousands) Cost Gains Losses Value Value
---------------- ------------ ------------ --------------- -------------
Held to maturity:
-----------------
Mortgage Backed $464 $-- $-- $464 $464
Other Securities 30,077 1,861 -- 31,938 30,077
------------ -------- -------- ------------ -----------
$30,541 $1,861 $-- $32,402 $30,541
============ ======== ========= ============ ===========
Available for sale:
-------------------
Federal Home Loan
Bank Stock - at cost $9,379 $-- $-- $9,379 $9,379
Mortgage Backed 91,442 618 -- 92,060 92,060
CMO's 81,597 152 (184) 81,565 81,565
US Agencies 25,000 38 -- 25,038 25,038
Other securities 225,417 8,514 (3,043) 230,888 230,888
------------ -------- -------- ------------ -----------
$432,835 $9,322 ($3,227) $438,930 $438,930
============ ======== ======== ============ ===========
5. Allowance for Credit Losses: Changes in the allowance for credit losses
were as follows:
Three months ended March 31,
----------------------------------
2003 2002
--------------- ---------------
(in thousands)
Balance at beginning of period, $12,470 $11,888
Loans charged-off (59) (127)
Recoveries 41 144
----------- -----------
Net charge-offs and recoveries (18) 17
Provision for loan losses 150 200
----------- -----------
Balance at end of period $12,602 $12,105
=========== ===========
6. Non-performing loans
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $14.0 million and $10.0 million at March 31,
2003 and 2002, respectively. Although the Company has non-performing
loans of approximately $14.0 million at March 31, 2003, management
believes it has adequate collateral to limit its' credit risks.
The balance of impaired loans which included the loans on which the
accrual of interest has been discontinued, was approximately $14.1
million and $10.1 million at March 31, 2003 and 2002, 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 $2.2 million at March 31,
2003. The income that was recognized on impaired loans during the
three-month period ended March 31, 2003 was $-0-. The cash collected on
impaired loans during the same period was $153 thousand of which $153
thousand 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.
7. Stock-based Compensation
At March 31, 2003, the Company had both a director and employee
stock-based compensation plan. The Company accounts for the plan under
the recognition and measurement principals of APB No. 25, "Accounting for
Stock Issued to Employee, and related interpretations. Stock-based
employee compensation cost are not reflected in net income, as all
options granted under the plan had an exercise price equal to the market
value under the underlying common stock of the date of the grant.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 148 "Accounting for Stock-Based
Compensation--Transition and Disclosure" ("SFAS No. 148") in December
2002. SFAS No. 148 amends the disclosure and certain transition
provisions of Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation". The new disclosure provisions
are effective for financial statements for fiscal years ending after
December 15, 2002 and financial reports containing condensed financial
statement for interim periods beginning after December 15, 2002.
The following table provides the disclosure required by SFAS No. 148 and
illustrates the effect on net income and earnings per share if the
Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based employee compensation.
(in thousands, except per share data) 2003 2002
---- ----
Net income(loss), as reported $4,400 $4,215
Less: Stock-based compensation costs under
Fair value based method for all awards. (109) (24)
------- -------
Pro forma net income (loss) $4,291 $4,191
Earnings per share - Basic As reported $0.37 $0.36
Pro forma $0.36 $0.36
Earnings per share - Diluted As reported $0.36 $0.35
Pro forma $0.35 $0.35
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 three-month period
ended March 31, 2003.
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.
CRITICAL ACCOUNTING POLICIES, JUDGEMENTS AND ESTIMATES
The accounting and reporting policies of the company conform with
accounting principals generally accepted in the United States of America and
general practices within the financial services industry. The preparation of the
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
Allowance for Credit Losses
The company considers that the determination of the allowance for loan
losses involves a higher degree of judgment and complexity than its other
significant accounting policies. The balance in the allowance for loan losses is
determined based on management's review and evaluation of the loan portfolio in
relation to past loss experience, the size and composition of the portfolio,
current economic events and conditions, and other pertinent factors, including
management's assumptions as to future delinquencies, recoveries and losses. All
of these factors may be susceptible to significant change. To the extent actual
outcomes differ from managements estimates, additional provisions for loan
losses may be required that would adversely impact earnings in future periods.
Income Taxes
Under the liability method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax basis
of assets and liabilities. Deferred tax assets are subject to managements'
judgment based upon available evidence that future realization is more likely
than not. If management determines that the company may be unable to realize all
or part of the net deferred tax assets in the future, a direct charge to income
tax expense may be required to reduce the recorded value of net deferred tax
assets to the expected realizable amount.
FINANCIAL CONDITION
Total consolidated assets as of March 31, 2003 were $1,134 million, an
increase of $46 million from the $1,088 million reported at year-end, December
31, 2002. 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 $18.2 million from the $576.7 million level at
December 31, 2002 to $558.5 million at March 31, 2003. 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 $573.2 million at March 31, 2003.
The allowance for loan loss increased $132 thousand to $12.6 million
at March 31, 2003 from $12.5 million at December 31, 2002. The level of
allowance for loan loss reserve represents approximately 2.3% of total loans at
March 31, 2003 versus 2.2% at December 31, 2002. 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 $20.6 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 $42.2 million from the $40.6
million level at December 31, 2002 to $82.8 million at March 31, 2003.
Total deposits, the primary source of funds, increased $12.1 million to
$833.0 million at March 31, 2003, from $820.8 million at December 31, 2002. This
increase in deposits is primarily due to the competitive rates of our Royal
Treasury money market. The balance of brokered deposits was $73.9 million,
representing approximately 9% of total deposits at March 31, 2003. 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 $3.3 million to $124.6
million at March 31, 2003 from $121.3 million at December 31, 2002. This
increase is primarily due to net income of $4.4 million, partially offset by a
quarterly cash dividend totaling $2.8 million. Additionally, stockholder's
equity increased by $1.6 million due to an adjustment in the market value of
available-for-sale investment securities during the first three months of 2003.
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, March 31, 2003 was
$4.4 million or $.37 basic earnings per share, as compared to net income of $4.2
million or $.36 basic earnings per share for the same three month period in
2002.
For the first quarter 2003, net interest income was $10.4 million as
compared to $9.9 million for the same quarter in 2002, an increase of $500
thousand, or 5%. This increase is primarily due to an increase in the average
balance of earning assets in the first quarter period of 2003 versus the same
period in 2002. Interest income on loans decreased $2.0 million for the first
quarter of 2003 versus 2002 primarily due to a decrease in the average balance
of loans during the same period. Interest income on investment securities
increased $1.5 million, a 33% increase over the same three-month period in 2002,
which is primarily due to the increase in the average balance in investment
securities. Total interest expense on deposits and borrowings decreased $1.2
million to $8.0 million as compared to $9.2 million for the same three-month
period in 2002. This decrease in interest expense is primarily due the reduction
of interest rates on deposits and borrowings.
Provision for loan losses was $150 thousand for the first quarter of
2003 and $200 for the same three-month period in 2002. Charge-offs and
recoveries were $59 thousand and $41 thousand respectively, for the three-month
period ended March 31, 2003 versus $127 thousand and $144 thousand,
respectively, for the same three-month period in 2002. Overall, management
considers the current level of allowance for loan loss to be adequate at March
31, 2003.
Total non-interest income for the three-month period ended March 31,
2003 was $624 thousand as compared to $667 thousand for the same three-month
period in 2002. The $43 thousand decrease in 2003 is primarily due to a decrease
in gains on the sale of loans.
Total non-interest expense for the three months ended March 31, 2003
was $4.5 million, an increase of $100 thousand, or 2%, as compared to $4.4
million for the same period in 2002. This increase in non-interest expense is
primarily due to an increase in operating expenses.
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 March 31, 2003, 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:
March 31, 2003 December 31, 2002
-------------- -----------------
Capital Levels
Tier 1 leverage ratio 10.8% 11.4%
Tier 1 risk-based ratio 14.1% 14.6%
Total risk-based ratio 15.4% 15.9%
Capital Performance
Return on average assets 1.6%(1) 1.7%(1)
Return on average equity 14.3%(1) 15.2%(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.
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 62%
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
March 31, 2003:
Interest Rate Sensitivity
(in millions) Days |
--------------------------| 1 to 5 Over 5 Non-rate
0 - 90 91 - 365| Years Years Sensitive Total
--------------------------|-------------------------------------------------------
Assets (1)
- ----------
Interest-bearing deposits in banks $55.0 $-- $-- $-- $-- $55.0
Federal funds sold 27.8 -- -- -- -- 27.8
Investment securities:
Available for sale 24.8 40.1 266.4 107.7 -- 439.0
Held to maturity 1.3 6.0 22.9 0.3 -- 30.5
----------------------------------------------------------------------------------
Total investment securities 26.1 46.1 289.3 108.0 -- 469.5
Loans: (2)
Fixed rate (3) 10.2 46.3 145.2 64.7 -- 266.4
Variable rate 226.8 18.3 34.1 0.3 -- 279.5
----------------------------------------------------------------------------------
Total loans 237.0 64.6 179.3 65.0 -- 545.9
Other assets (4) -- -- -- -- 35.7 35.7
----------------------------------------------------------------------------------
Total Assets $345.9 $110.7 $468.6 $173.0 $35.7 $1,133.9
==================================================================================
Liabilities & Capital
- ---------------------
Deposits:
Non interest bearing deposits $-- $-- $-- $-- $55.1 $55.1
Interest bearing deposits (5) 41.1 124.0 130.1 205.3 -- 500.5
Certificate of deposits 31.2 77.6 158.2 10.4 -- 277.4
----------------------------------------------------------------------------------
Total deposits 72.3 201.6 288.3 215.7 55.1 833.0
Borrowings 7.0 33.0 60.0 57.5 -- 157.5
Other liabilities -- -- .3 -- 18.5 18.8
Capital -- -- -- -- 124.6 124.6
----------------------------------------------------------------------------------
Total liabilities & capital $79.3 $234.6 $348.6 $273.2 $198.2 $1,133.9
==================================================================================
Net interest rate GAP $266.6 ($123.9) $120.0 ($100.2) ($163.0)
======================================================================
Cumulative interest rate GAP $266.6 $142.7 $262.7 $163.0 --
======================================================================
GAP to total assets 24% (11%)
==========================
GAP to total equity 214% (99%)
==========================
Cumulative GAP to total assets 24% 13%
==========================
Cumulative GAP to total equity 214% 115%
==========================
(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 March 31, 2003.
(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.
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 December 2002, the FASB issued SFAS 148, "Accounting for Stock-based
Compensation-Transition and Disclosure". SFAS 148 amends SFAS 123 "Accounting
for Stock-Based Compensation," to provide alternative methods of transition for
a voluntary charge to the fair value based method of accounting for stock-based
employees compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the methods of accounting for stock-based employee
compensation and the effect of method used on reports results. SFAS 148 is
effective for fiscal beginning after December 15, 2002. The expanded annual
disclosure provisions are effective for financial reports containing financial
statement for interim periods beginning after December 15, 2002. Management does
not expect the adoption of SFAS 148 to have a material effect on the company's
financial position, results of operations, or cash flows.
The Company adopted FIN 45 "Guarantor's Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Others" on January 1, 2003. FIN 45 requires a guarantor entity, at the inception
of a guarantee covered by the measurement provisions of the interpretation, to
record a liability for the fair value of the obligation undertaken in issuing
the guarantee. The Company has financial and performance letters of credit.
Financial letters of credit require the company to make a payment if the
customer's condition deteriorates, as defined in the agreements. Performance
letters of credit require the company to make payments if the customer fails to
perform certain non-financial contractual obligation. The Company previously did
not record a liability when guaranteeing obligations unless it became probable
that the company would have to perform under the guarantee. FIN 45 applies
prospectively to guarantees the company issues or modifies subsequent to
December 31, 2002. The maximum potential undiscounted amount of future payments
of the letters of credit as of March 31, 2003 are $5.3 million and they expire
through June 2004. Amounts due under these letters of credit would be reduced by
any proceeds that the company would be able to obtain in liquidating the
collateral for the loans, which varies depending on the customer.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 clarifies the application
of Accounting Research Bulletin 51, "Consolidated Financial Statements", for
certain entities that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties or in which equity investors do not have the characteristics of
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains and interest after
that date. It applies in the first fiscal year or interim period beginning after
June 15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. The company is in
the process of determining what impact, if any, the adoption of the provisions
of FIN 46 will have upon its financial condition or results of operations. The
company does not anticipate FIN 46 to have a material impact on the consolidated
financial position or results of operations.
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
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 March 13, 2003.
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
Jeffrey T. Hanuscin, Chief Financial Officer of Royal Bancshares of Pennsylvania
on March 13, 2003.
(b) The company filed the following report on Form 8-K during the
quarter ended March 31, 2003.
April 24, 2003, Royal Bancshares of Pennsylvania, Inc. filed a
Form 8-K reporting the release of earnings and declaration of stock
dividend on both classes of common stocks.
SIGNATURES
----------
Pursuant to 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: May 13th, 2003 Jeffrey T. Hanuscin
-------------------------
Jeffrey T. Hanuscin
Chief Financial Officer
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: May 13, 2003 By: Joseph P. Campbell
-------------------------------
Joseph P. Campbell
Chief Executive Officer
CERTIFICATION
I, Jeffrey T. Hanuscin, 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: May 13, 2003 By: Jeffrey T. Hanuscin
----------------------------
Jeffrey T. Hanuscin
Chief Financial Officer