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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the quarterly period ended: June 30, 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 (IRS Employer
of incorporated or organization) identification No.)
732 Montgomery Avenue, Narberth, PA 19072
-----------------------------------------
(Address of principal Executive Offices)
(610) 668-4700
--------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the bank (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that
the bank was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class A Common Stock Outstanding at June 30, 2003
-------------------- ----------------------------
$2.00 par value 9,898,794
Class B Common Stock Outstanding at June 30, 2003
-------------------- ----------------------------
$.10 par value 1,911,087
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
June 30, 2003
(Unaudited) Dec 31, 2002
------------- ---------------
ASSETS
Cash and due from banks $ 118,937 $ 27,081
Federal funds sold 15,050 13,490
---------- ----------
Total cash and cash equivalents 133,987 40,571
---------- ----------
Investment securities held to maturity (fair value of $31,389 at
June 30, 2003 and $32,745 at December 31, 2002) 29,427 30,614
Investment securities available for sale - at fair value 464,576 418,316
Loans held for sale 8,358 8,119
Total loans 539,252 568,615
Less allowance for loan losses 12,654 12,470
---------- ----------
Net loans 534,956 564,264
Premises and equipment, net 7,844 8,002
Accrued interest and other assets 25,039 26,717
---------- ----------
Total assets $1,195,829 $1,088,484
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 60,819 $ 55,575
Interest bearing (includes certificates of deposit in excess
of $100 of $124,336 at June 30, 2003 and
$180,978 at December 31, 2002) 778,378 765,265
---------- ----------
Total deposits 839,197 820,840
Accrued interest payable 10,755 11,406
Borrowings 207,500 127,500
Other liabilities 6,673 6,682
---------- ----------
Total liabilities 1,064,125 966,428
---------- ----------
MINORITY INTEREST 730 726
Stockholders' equity
Common stock
Class A, par value $2 per share; authorized, 18,000,000 shares; issued,
9,898,794 at June 30, 2003 and 9,595,191 at December 31, 2002 19,798 19,190
Class B, par value $.10 per share; authorized, 2,000,000 shares; issued,
1,911,087 at June 30, 2003 and 1,860,668 at December 31, 2002 191 186
Additional paid in capital 83,587 76,984
Retained earnings 20,528 24,819
Accumulated other comprehensive income 9,135 2,416
---------- ----------
133,239 123,595
Treasury stock - at cost, shares of Class A, 215,388 at June 30, 2003,
and December 31, 2002. (2,265) (2,265)
---------- ----------
Total stockholders' equity 130,974 121,330
---------- ----------
Total liabilities and stockholders' equity $1,195,829 $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
June 30,
-----------------------------
(in thousands, except per share data)
2003 2002
------------ ------------
Interest income
Loans, including fees $11,503 $12,919
Investment securities held to maturity 578 1,022
Investment securities available for sale 5,427 4,651
Deposits in banks 199 179
Federal funds sold 46 62
------- -------
TOTAL INTEREST INCOME 17,753 18,833
------- -------
Interest expense
Deposits 5,731 7,385
Borrowings 1,899 1,843
------- -------
TOTAL INTEREST EXPENSE 7,630 9,228
------- -------
NET INTEREST INCOME 10,123 9,605
Provision for loan losses 167 50
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 9,956 9,555
------- -------
Other income
Service charges and fees 301 259
Net gains on sales of investment securities -- (14)
Gains on sales of other real estate 109 94
Gains on sales of loans 153 175
Other income 42 20
------- -------
605 534
------- -------
Other expenses
Salaries & wages 1,995 1,881
Employee benefits 508 459
Occupancy and equipment 329 319
Other operating expenses 1,850 2,002
------- -------
4,682 4,661
------- -------
INCOME BEFORE INCOME TAXES 5,879 5,428
Income taxes 1,899 1,531
------- -------
NET INCOME $ 3,980 $ 3,897
======= =======
Per share data
Net income - basic $ .34 $ .33
======= =======
Net income - diluted $ .33 $ .32
======= =======
The accompanying notes are an integral part of these statements.
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Six months ended
June 30,
-----------------------------
(in thousands, except per share data)
2003 2002
------------ ------------
Interest income
Loans, including fees $23,690 $27,133
Investment securities held to maturity 1,171 2,540
Investment securities available for sale 10,950 7,720
Deposits in banks 284 451
Federal funds sold 90 132
------- -------
TOTAL INTEREST INCOME 36,185 37,976
------- -------
Interest expense
Deposits 12,163 15,028
Borrowings 3,495 3,417
------- -------
TOTAL INTEREST EXPENSE 15,658 18,445
------- -------
NET INTEREST INCOME 20,527 19,531
Provision for loan losses 317 250
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 20,210 19,281
------- -------
Other income
Service charges and fees 555 545
Net gains(losses) on sales of investment securities 144 (14)
Gains on sales of other real estate 189 259
Gains on sales of loans 284 377
Other income 57 34
------- -------
1,229 1,201
------- -------
Other expenses
Salaries & wages 3,983 3,809
Employee benefits 892 897
Occupancy and equipment 665 555
Other operating expenses 3,686 3,817
------- -------
9,226 9,078
------- -------
INCOME BEFORE INCOME TAXES 12,213 11,404
Income taxes 3,833 3,292
------- -------
NET INCOME $ 8,380 $ 8,112
======= =======
Per share data
Net income - basic $ .71 $ .69
======= =======
Net income - diluted $ .70 $ .67
======= =======
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
Six Months ended June 30, 2003
(UNAUDITED)
Class A Common Stock Class B Common Stock Additional
--------------------- --------------------- Paid in Retained
(in thousands) Shares Amount Shares Amount Capital Earnings
--------- ---------- --------- ---------- --------- ----------
Balance, January 1, 2003 9,595 $19,190 1,861 $186 $76,984 $24,819
Net income for the three months ended - - - - - 8,380
Jun. 30,
Conversion of Class B common stock to Class A
Common stock 6 12 (5) (1) - (12)
Purchase of treasury stock - - - - - -
3% stock dividend declared 281 563 55 6 6,443 (7,011)
Cash dividends on common stock - - - - - (5,640)
Cash in lieu of fractional shares - - - - - (8)
Stock options exercised 17 33 - - 160 -
Other comprehensive income, net of
Reclassifications and taxes - - - - - -
----- ------- ----- ---- ------- -------
Comprehensive income
Balance, June 30, 2003 9,899 $19,798 1,911 $191 $83,587 $20,528
===== ======= ===== ==== ======= =======
Accumulated
Other
Treasury Comprehensive Comprehensive
(in thousands) Stock Income (loss) Income
------------ ---------------- --------------
Balance, January 1, 2003 $ (2,265) $2,415
Net income for the three months ended - - $ 8,380
Jun. 30,
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 - 6,720 6,720
-------- ------ -------
Comprehensive income $15,100
=======
Balance, June 30, 2003 $ (2,265) $9,135
======== ======
The accompanying notes are an integral part of the financial statement.
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30,
(in thousands)
2003 2002
------------ ------------
Cash flows from operating activities
Net income $ 8,380 $ 8,112
Adjustments to reconcile net income to
net cash provided by (used in) operating activities
Depreciation 517 626
Provision for loan loss 317 250
Net accretion of discounts on loans,
mortgage-backed securities and investments 101 357
Provision for deferred income taxes 269 1,248
Gains on other real estate (189) (259)
Gains on sales of loans (284) (377)
Net (gain) loss on sales of investment securities (144) 14
Changes in assets and liabilities:
Increase in accrued interest receivable (1,255) (1,513)
(Increase) in other assets (1,651) (2,815)
(Decrease) in accrued interest payable (651) (562)
(Decrease) in other liabilities (9) (2,952)
-------- -------
Net cash provided by (used in) operating activities 5,401 2,129
Cash flows from investing activities
Proceeds from calls/maturities of HTM investment securities 2,000 38,063
Proceeds from calls/maturities of AFS investment securities 131,522 87,433
Proceeds from sales of AFS investment securities 19,078 2,000
Purchase of AFS investment securities (182,766) (210,412)
Purchase of FHLB Stock (3,654) (3,000)
Net decrease in loans 29,323 36,416
Purchase of premises and equipment (359) (598)
-------- -------
Net cash provided by (used in) investing activities (4,856) (50,098)
Cash flows from financing activities:
Net increase in non-interest bearing and
interest bearing demand deposits and savings accounts 83,078 143,758
Net decrease in certificates of deposit (64,722) (113,101)
Mortgage payments (30) (20)
Net increase in borrowings 80,000 57,275
Cash dividends (5,640) (5,290)
Cash in lieu of fractional shares (8) (7)
Issuance of common stock under stock option plans 193 611
-------- -------
Net cash provided by (used in) financing activities 92,871 83,226
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS 93,416 35,257
Cash and cash equivalents at beginning of year 40,571 40,018
-------- -------
Cash and cash equivalents at end of year $133,987 $75,275
======== =======
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 its 60%
ownership interest in Crusader Servicing 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 June 30, 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 Bank. 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. The same is also true 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.
Six months ended June 30 2003,
-------------------------------
(in thousands) Community Tax Lien
Banking Operation Consolidated
------------- ----------------- --------------
Total assets $1,147,104 $48,725 $1,195,829
Total deposits 839,197 -- 839,197
Net interest income 18,803 1,724 20,527
Provision for loan losses 300 17 317
Other income 1,051 178 1,229
Other expense 8,217 1,009 9,226
Income tax expense 3,614 219 3,833
---------- ------- ----------
Net income $ 7,723 $ 657 $ 8,380
========== ======= ==========
Six months ended June 30 2003,
-------------------------------
(in thousands) Community Tax Lien
Banking Operation Consolidated
------------- ----------------- --------------
Total assets $968,032 $52,922 $1,020,954
Total deposits 732,517 -- 732,517
Net interest income 18,112 1,419 19,531
Provision for loan losses 250 -- 250
Other income 1,001 200 1,201
Other expense 8,233 845 9,078
Income tax expense 3,106 186 3,292
-------- ------- ----------
Net income $ 7,524 $ 588 $ 8,112
======== ======= ==========
Interest paid to the Community Bank segment by the Tax Lien Operation
was approximately $974 thousand and $910 thousand for the six months
period ending June 30, 2003, and 2002, respectively.
3. Per Share Information
---------------------
The Company follows the 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 June 30, 2003
Income Average shares Per share
------ -------------- ---------
(numerator) (denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $3,980 11,875 $0.34
Effect of dilutive securities
Stock options 58 (.01)
------------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $3,980 11,933 $0.33
Three months ended June 30, 2002
Income Average shares Per share
------ -------------- ---------
(numerator) (denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $3,897 11,856 $0.33
Effect of dilutive securities
Stock options 325 (.01)
------------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $3,897 12,181 $0.32
Six months ended June 30, 2003
Income Average shares Per share
------ -------------- ---------
(numerator) (denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $8,380 11,876 $0.71
Effect of dilutive securities
Stock options 56 (.01)
------------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $8,379 11,932 $0.70
Six months ended June 30, 2002
Income Average shares Per share
------ -------------- ---------
(numerator) (denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $8,112 11,824 $0.69
Effect of dilutive securities
Stock options 308 (.01)
------------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $8,112 12,132 $0.32
4. Investment Securities:
----------------------
The carrying value and approximate market value of investment securities
at June 30, 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 $ 411 $ -- $ -- $ 411 $ 411
Other Securities 29,016 1,987 -- 30,978 29,016
-------- ------- -------- -------- --------
$ 29,427 $ 1,987 $ -- $ 31,389 $ 29,427
======== ======= ======== ======== ========
Available for sale:
-------------------
Federal Home Loan
Bank Stock - at cost $ 11,529 $ -- $ -- $ 11,529 $ 11,529
Mortgage Backed 96,224 169 (7) 96,386 96,386
CMO's 104,120 558 -- 104,678 104,678
US Agencies 17,807 50 -- 17,857 17,857
Other securities 221,055 15,051 (1,980) 234,126 234,126
-------- ------- -------- -------- --------
$450,735 $15,828 ($1,987) $464,576 $464,576
======== ======= ======== ======== ========
5. Allowance for Credit Losses: Changes in the allowance for credit losses
--------------------------- were as follows:
Three months ended June 30,
---------------------------
2003 2002
---------- ----------
(in thousands)
Balance at beginning of period, $12,602 $12,105
Loans charged-off (142) (167)
Recoveries 27 170
------- -------
Net charge-offs and recoveries (115) 3
Provision for loan losses 167 50
------- -------
Balance at end of period $12,654 $12,158
======= =======
Six months ended June 30,
---------------------------
2003 2002
---------- ----------
(in thousands)
Balance at beginning of period, $12,470 $11,888
Loans charged-off (201) (294)
Recoveries 68 314
------- -------
Net charge-offs and recoveries (133) 20
Provision for loan losses 317 250
------- -------
Balance at end of period $12,654 $12,158
======= =======
6. Non-performing loans
--------------------
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $13.9 million and $10.4 million at June 30,
2003 and 2002, respectively. Although the Company has non-performing
loans of approximately $13.9 million at June 30, 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 $13.9
million and $10.5 million at June 30, 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 $2.8 million at June 30,
2003. The income that was recognized on impaired loans during the
three-month period ended June 30, 2003 was $-0-. The cash collected on
impaired loans during the same period was $287 thousand of which $287
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 June 30, 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 $8,380 $8,112
Less: Stock-based compensation costs under
Fair value based method for all awards. (218) (48)
------ -------
Pro forma net income (loss) $8,162 $8,064
Earnings per share - Basic As reported $0.71 $0.69
Pro forma $0.69 $0.68
Earnings per share - Diluted As reported $0.70 $0.67
Pro forma $0.68 $0.66
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULT OF OPERATIONS
The following discussion and analysis is intended to assist in understanding
and evaluating the changes in the financial condition and earnings performance
of the Company and its' subsidiaries for the six-month period ended June 30,
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 June 30, 2003 were $1,196 million, an
increase of $107.3 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 $29.1 million from the $576.7 million level at
December 31, 2002 to $547.6 million at June 30, 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 $570.9 million at June 30, 2003.
The allowance for loan loss increased $184 thousand to $12.7 million at June
30, 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 June 30, 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 $45.1 million increase in total investment securities is primarily
attributable to the redeployment of excess cash on hand to achieve a higher rate
of return.
Total cash and cash equivalents increased $93.4 million from the $40.6
million level at December 31, 2002 to $134.0 million at June 30, 2003. This
increase is primarily due to investments purchased and loan commitments that
have not settled as of June 30, 2003.
Total deposits, the primary source of funds, increased $18.4 million to
$839.2 million at June 30, 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 June 30, 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 $9.7 million to $131.0 million
at June 30, 2003 from $121.3 million at December 31, 2002. This increase is
primarily due to net income of $8.4 million, partially offset by quarterly cash
dividends totaling $5.6 million. Additionally, stockholder's equity increased by
$6.7 million due to an adjustment in the market value of available-for-sale
investment securities during the first six 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, June 30, 2003 was $4.0
million or $.34 basic earnings per share, as compared to net income of $3.9
million or $.33 basic earnings per share for the same three month period in
2002. Consolidated net income for the six months ended, June 30, 2003 was $8.4
million or $0.71 basic earnings per share, as compared to net income of $8.1
million or $0.69 basic earnings per share for the same six month period in 2002.
For the second quarter 2003, net interest income was $10.1 million as
compared to $9.6 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 second quarter period of 2003 versus the same
period in 2002. Interest income on loans decreased $1.4 million for the second
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 $332 thousand, a 6% 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 $1.6
million to $7.6 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 $167 thousand for the second quarter of 2003
and $50 for the same three-month period in 2002. Charge-offs and recoveries were
$184 thousand and $69 thousand respectively, for the three-month period ended
June 30, 2003 versus $167 thousand and $170 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 June 30, 2003.
Total non-interest income for the three-month period ended June 30, 2003 was
$605 thousand as compared to $534 thousand for the same three-month period in
2002. The $71 thousand increase in 2003 is primarily due to service charge and
fee income collect on our deposit and loan customers.
Total non-interest expense for the three months ended June 30, 2003 was $4.7
million, an increase of $21 thousand, or 0.5%, as compared to $4.7 million for
the same period in 2002.
CAPITAL ADEQUACY
- ----------------
The company is required to maintain minimum amounts of capital to total
"risk weighted" assets and a minimum Tier 1 leverage ratio, as defined by the
banking regulators. At June 30, 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:
June 30, 2003 December 31, 2002
------------- -----------------
Capital Levels
Tier 1 leverage ratio 10.9% 11.4%
Tier 1 risk-based ratio 14.5% 14.6%
Total risk-based ratio 15.8% 15.9%
Capital Performance
Return on average assets 1.4% (1) 1.7% (1)
Return on average equity 12.3% (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 71% and
exceeds the Company's peer group levels and target ratio set forth in the
Asset/Liability Policy. The Company's level of liquidity is provided by funds
invested primarily in corporate bonds, capital trust securities, US Treasuries
and agencies, and to a lesser extent, federal funds sold. The overall liquidity
position is monitored on a monthly basis.
Interest rate sensitivity is a function of the repricing characteristics of
the Company's assets and liabilities. These include the volume of assets and
liabilities repricing, the timing of the repricing, and the interest rate
sensitivity gaps is a continual challenge in a changing rate environment. The
following table shows separately the interest sensitivity of each category of
interest earning assets and interest bearing liabilities as of June 30, 2003:
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 $108.3 $ -- $ -- $ -- $ 10.6 $ 118.9
Federal funds sold 15.1 -- -- -- -- 15.1
Investment securities:
Available for sale 15.0 5.6 175.1 268.9 -- 464.6
Held to maturity 2.0 6.0 21.1 0.3 -- 29.4
----------------------------------------------------------------------------
Total investment securities 17.0 11.6 196.2 269.2 -- 494.0
Loans: (2)
Fixed rate 18.3 44.9 165.1 69.7 -- 298.0
Variable rate 203.2 21.0 26.6 0.7 -- 251.5
----------------------------------------------------------------------------
Total loans 221.5 65.9 191.7 70.4 -- 549.5
Other assets (3) -- -- -- -- 18.3 18.3
----------------------------------------------------------------------------
Total Assets $361.9 $ 77.5 $387.9 $339.6 $ 28.9 $1,195.8
============================================================================
Liabilities & Capital
- ---------------------
Deposits:
Non interest bearing deposits $ -- $ -- $ -- $ -- $ 60.8 $ 60.8
Interest bearing deposits (4) 456.8 56.1 -- -- -- 512.9
Certificate of deposits 23.8 87.7 145.6 8.4 -- 265.5
----------------------------------------------------------------------------
Total deposits 480.6 143.8 145.6 8.4 60.8 839.2
Borrowings 3.0 30.0 60.0 114.5 -- 207.5
Other liabilities -- -- .3 -- 17.8 18.1
Capital -- -- -- -- 131.0 131.0
----------------------------------------------------------------------------
Total liabilities & capital $483.6 $173.8 $205.9 $122.9 $ 209.6 $1,195.8
============================================================================
Net interest rate GAP ($121.7) ($ 96.3) $182.0 $216.7 ($ 180.7)
==============================================================
Cumulative interest rate GAP ($121.7) ($218.0) ($ 36.0) $180.7 --
==============================================================
AP to total assets (10%) (8%)
====================
GAP to total equity (93%) (74%)
====================
Cumulative GAP to total assets (10%) (18%)
====================
Cumulative GAP to total equity (93%) (166%)
====================
(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) For purposes of gap analysis, other assets
include the allowance for possible loan loss, unamortized discount on purchased
loans and deferred fees on loans.
(4) Based on historical analysis, Money market are assumed to have rate
sensitivity of 1 month; NOW account and savings 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 PROCEDURE
- -------------------------------
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 June 30, 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
he 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.
The Company adopted Statement of Financial Accounting Standard 149 (SFAS No.
149), Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, on July 1, 2003. SFAS No. 149 clarifies and amends SFAS No. 133 for
implementation issues raised by constituents or includes the conclusions reached
by the FASB on certain FASB Staff Implementation Issues. Statement 149 also
amends SFAS No. 133 to require a lender to account for loan commitments related
to mortgage loans that will be held for sale as derivatives. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003. The
Company periodically enters into commitments with its customers, which it
intends to sell in the future. Management does not anticipate the adoption of
SFAS No. 149 to have a material impact on the Company's financial position or
results of operations.
The FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, on May 15, 2003. SFAS No. 150
changes the classification in the statement of financial position of certain
common financial instruments from either equity or mezzanine presentation to
liabilities and requires an issuer of those financial statements to recognize
changes in fair value or redemption amount, as applicable, in earnings. SFAS No.
150 is effective for public companies for financial instruments entered into or
modified after May 31, 2003 and is effective at the beginning of the first
interim period beginning after June 15, 2003. Management has not entered into
any financial instruments that would qualify under SFAS No. 150. As a result,
management does not anticipate the adoption of SFAS No. 150 to have a material
impact on the Company's 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
- ------------------------------------------------------
On Wednesday, May 21, 2003, the Annual Meeting of Shareholders of Royal
Bancshares of Pennsylvania was convened in Philadelphia, PA at 6:30 P.M. The
following nominees were elected as Class I Directors of the Registrant to serve
for a three year term:
For Withhold
--- --------
Joseph P. Campbell 24,838,632 108,843
Daniel M. Tabas 24,838,858 108,617
James J. McSwiggan 24,838,961 108,514
Murray Stempel, III 24,837,483 109,992
Howard Wurzak 24,837,483 109,992
Item 5. Other Information
- -------------------------
None
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
31 Section 302 Certification Pursuant to Section 13(a) or 15(d) of
the Securities and Exchange Act of 1934 signed by Joseph P. Campbell, Chief
Executive Officer of Royal Bancshares of Pennsylvania on August 13, 2003
31 Section 302 Certification Pursuant to Section 13(a) or 15(d) of
the Securities and Exchange Act of 1934 signed by Jeffrey T. Hanuscin, Chief
Executive Officer of Royal Bancshares of Pennsylvania on August 13, 2003
32 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 August 13, 2003.
32 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 August 13, 2003.
(b) The company filed the following report on Form 8-K during the quarter
ended June 30, 2003.
July 17, 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: August 13th, 2003 /s/ Jeffrey T. Hanuscin
-----------------------
Jeffrey T. Hanuscin
Chief Financial Officer