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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, 2004
-----------------
[ ] 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 by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act 12b-2). 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, 2004
-------------------- -----------------------------
$2.00 PAR VALUE 10,229,133
Class B Common Stock Outstanding at March 31, 2004
-------------------- -----------------------------
$.10 PAR VALUE 1,945,422
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
MAR 31,2004 DEC 31, 2003
(UNAUDITED)
----------- -----------
ASSETS
Cash and due from banks $72,755 $17,470
Federal funds sold 20,980 7,600
---------- ----------
Total cash and cash equivalents 93,735 25,070
---------- ----------
Investment securities held to maturity (fair value of $22,736 at
March 31, 2004 and $114,275 at December 31, 2003) 21,434 113,091
Investment securities available for sale - at fair value 498,938 452,246
Loans held for sale 2,847 3,157
Total loans 487,418 512,557
Less allowance for loan losses 12,467 12,426
---------- ----------
Net loans 477,798 503,288
Premises and equipment, net 69,735 7,480
Accrued interest and other assets 54,165 53,235
---------- ----------
Total assets $1,215,805 $1,154,410
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $55,364 $58,942
Interest bearing (includes certificates of deposit in excess
of $100 of $102,693 at March 31, 2004 and
$104,123 at December 31, 2003) 734,153 732,117
---------- ----------
Total deposits 789,517 791,059
Accrued interest payable 7,746 7,733
Borrowings 265,846 212,000
Other liabilities 9,680 7,920
---------- ----------
Total liabilities 1,072,789 1,018,712
---------- ----------
MINORITY INTEREST 4,201 865
Stockholders' equity
Common stock
Class A, par value $2 per share; authorized, 18,000,000 shares; issued,
10,229,133 at March 31, 2004 and 10,027,284 at December 31, 2003 20,458 20,055
Class B, par value $.10 per share; authorized, 2,000,000 shares; issued,
1,945,422 at March 31, 2004 and 1,909,742 at December 31, 2003 195 191
Additional paid in capital 91,335 85,448
Retained earnings 20,899 24,989
Accumulated other comprehensive income 8,193 6,415
---------- ----------
141,080 137,098
Treasury stock - at cost, shares of Class A, 215,388 at March 31, 2004,
and December 31, 2003 (2,265) (2,265)
---------- ----------
Total stockholders' equity 138,815 134,833
---------- ----------
Total liabilities and stockholders' equity $1,215,805 $1,154,410
========== ==========
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) 2004 2003
------- -------
Interest income
Loans, including fees $10,634 $12,187
Investment securities held to maturity 1,174 592
Investment securities available for sale 5,556 5,523
Deposits in banks 141 85
Federal funds sold 23 44
------- -------
TOTAL INTEREST INCOME 17,528 18,431
------- -------
Interest expense
Deposits 4,367 6,431
Borrowings 2,363 1,596
------- -------
TOTAL INTEREST EXPENSE 6,730 8,027
------- -------
NET INTEREST INCOME 10,798 10,404
Provision for loan losses 1 150
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,797 10,254
------- -------
Other income
Service charges and fees 352 253
Net gains on sales of investment securities 193 144
Gains on sales of other real estate 332 80
Gains on sales of loans 176 131
Other income 2,130 16
------- -------
3,183 624
------- -------
Other expenses
Salaries & wages 2,090 1,988
Employee benefits 512 384
Occupancy and equipment 421 337
Other operating expenses 3,553 1,835
------- -------
6,576 4,544
------- -------
INCOME BEFORE INCOME TAXES 7,404 6,334
Income taxes 2,240 1,934
------- -------
NET INCOME $5,164 $4,400
======= =======
Per share data
Net income - basic $.42 $.36
======= =======
Net income - diluted $.42 $.36
======= =======
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, 2004
(UNAUDITED)
CLASS A COMMON STOCK CLASS B COMMON STOCK ADDITIONAL
-------------------- -------------------- PAID IN RETAINED
(in thousands) SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------ ------ ------ ------ ------- --------
Balance, January 1, 2004 10,027 $20,054 1,909 $191 $85,448 $24,989
Net income for the three months ended Mar. 31, - - - - - 5,164
Conversion of Class B common stock to Class A
Common stock 3 6 (3) (1) - (5)
Purchase of treasury stock - - - - - -
2% stock dividend declared 196 392 39 5 5,842 (6,237)
Cash dividends on common stock - - - - - (3,001)
Cash in lieu of fractional shares - - - - - (11)
Stock options exercised 3 6 - - 45 -
Other comprehensive income, net of
Reclassifications and taxes - - - - - -
------ ------- ----- ---- ------- -------
Comprehensive income
Balance, March 31, 2004 10,229 $20,458 1,945 $195 $91,335 $20,899
====== ======= ===== ==== ======= =======
ACCUMULATED
OTHER
TREASURY COMPREHENSIVE COMPREHENSIVE
(in thousands) STOCK INCOME (LOSS) INCOME
-------- ------------- -------------
Balance, January 1, 2004 $(2,265) $6,415
Net income for the three months ended Mar. 31, - - $5,164
Conversion of Class B common stock to Class A
Common stock - - -
Purchase of treasury stock - - -
2% 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 - 1,778 1,778
------- ------ ------
Comprehensive income $6,942
======
Balance, March 31, 2004 $(2,265) $8,193
======= ======
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)
Cash flows from operating activities 2004 2003
-------- --------
Net income $5,164 $4,400
Adjustments to reconcile net income to
net cash provided by (used in) operating activities
Depreciation 203 259
Provision for loan loss 1 150
Net accretion of discounts on loans,
mortgage-backed securities and investments 3,200 (1,783)
Provision for deferred income taxes 916 (39)
Gains on other real estate (332) (80)
Gains on sales of loans (176) (131)
Net (gain) loss on sales of investment securities (193) (144)
Changes in assets and liabilities:
Increase (decrease) in accrued interest receivable 1,421 (1,745)
(Increase) decrease in other assets (3,269) 609
(Decrease) increase in accrued interest payable 13 (917)
Increase in other liabilities 4,464 973
------- -------
Net cash provided by (used in) operating activities 11,412 1,552
Cash flows from investing activities
Proceeds from calls/maturities of HTM investment securities 89,285 --
Proceeds from calls/maturities of AFS investment securities 37,917 64,889
Proceeds from sales of AFS investment securities 890 19,078
Purchase of AFS investment securities (83,932) (99,182)
Purchase of HTM investment securities -- --
(Purchase) redemption of FHLB Stock 704 (1,504)
Net decrease in loans 25,529 18,038
Purchase of premises and equipment (62,458) (42)
------- -------
Net cash provided by investing activities 7,935 1,277
Cash flows from financing activities:
Net increase in non-interest bearing and
interest bearing demand deposits and savings accounts 1,925 64,926
Net decrease in certificates of deposit (3,469) (52,782)
Mortgage payments (16) (15)
Net increase in borrowings 53,846 30,000
Cash dividends (3,002) (2,819)
Cash in lieu of fractional shares (11) (8)
Issuance of common stock under stock option plans 45 86
------- -------
Net cash provided by financing activities 49,318 39,388
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS 68,665 42,217
Cash and cash equivalents at beginning of year 25,070 40,571
------- -------
Cash and cash equivalents at end of year $93,735 $82,788
======= =======
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., Royal
Investment 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, 2003. The results of operations for the three-month period
ended March 31, 2004, 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.
THREE MONTHS ENDED MARCH 31 2004,
------------------------------------------
(in thousands) COMMUNITY TAX LIEN
BANKING OPERATION CONSOLIDATED
---------- ---------- ------------
Total assets $1,170,108 $45,697 $1,215,805
Total deposits 789,517 -- 789,517
Net interest income 9,917 881 10,798
Provision for loan losses -- 1 1
Other income 2,858 325 3,183
Other expense 5,629 947 6,576
Income tax expense 2,118 122 2,240
---------- ---------- ----------
Net income $5,028 $136 $5,164
========== ========== ==========
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
Other income 539 85 624
Other expense 3,858 686 4,544
Income tax expense 1,832 102 1,934
---------- ---------- ----------
Net income $4,284 $116 $4,400
========== ========== ==========
Interest paid to the Community Bank segment by the Tax Lien Operation
was approximately $455 thousand and $509 thousand for the three months
period ending March 31, 2004, and 2003, 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 2004 the Company declared a 2% 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, 2004
----------------------------------------
Income Average shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $5,164 12,249 $0.42
Effect of dilutive securities
Stock options 60 --
----------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $5,164 12,309 $0.42
THREE MONTHS ENDED MARCH 31, 2003
----------------------------------------
Income Average shares Per share
(numerator) (denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $4,400 12,108 $0.36
Effect of dilutive securities
Stock options 235 --
----------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $4,400 12,343 $0.36
4. Investment Securities:
The carrying value and approximate market value of investment
securities at March 31, 2004 are as follows:
AMORTIZED GROSS GROSS APPROXIMATE
PURCHASED UNREALIZED UNREALIZED FAIR CARRYING
(in thousands) COST GAINS LOSSES VALUE VALUE
--------- ------- --------- --------- ---------
HELD TO MATURITY:
-----------------
Mortgage Backed $ 312 $ -- $ -- $312 $312
Other Securities 21,122 1,302 -- 22,424 21,122
-------- ------- ------- -------- --------
$ 21,434 $1,302 $ -- $22,736 $21,434
======== ======= ======= ======== ========
AVAILABLE FOR SALE:
-------------------
Federal Home Loan
Bank Stock - at cost $ 10,703 $ -- $ -- $10,703 $10,703
Mortgage Backed 63,512 626 (122) 64,016 64,016
CMO's 41,049 978 -- 42,027 42,027
US Agencies 94,976 50 (1,516) 93,510 93,510
Other securities 276,284 14,140 (1,742) 288,682 288,682
-------- ------- ------- -------- --------
$486,524 $15,794 ($3,380) $498,938 $498,938
======== ======= ======= ======== ========
5. Allowance for Credit Losses: Changes in the allowance for credit losses
were as follows:
THREE MONTHS ENDED MAR 31,
--------------------------
2004 2003
-------- --------
(in thousands)
BALANCE AT BEGINNING OF PERIOD, $12,426 $12,470
Loans charged-off (57) (59)
Recoveries 97 41
------- -------
Net charge-offs and recoveries 40 (18)
Provision for loan losses 1 150
------- -------
BALANCE AT END OF PERIOD $12,467 $12,602
======= =======
6. Non-performing loans
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $10.0 million and $14.0 million at March 31,
2004 and 2003, respectively. Although the Company has non-performing
loans of approximately $10.0 million at March 31, 2004, management
believes it has adequate collateral to limit its credit risk with these
loans.
The balance of impaired loans which included the loans on which the
accrual of interest has been discontinued, was approximately $10.1
million and $14.1 million at March 31, 2004 and 2003, 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 $1.8 million at March 31,
2004. The income that was recognized on impaired loans during the
three-month period ended March 31, 2004 was $-0-. The cash collected on
impaired loans during the same period was $188 thousand of which $188
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. Pension Plan
The Company has a noncontributory nonqualified defined benefit pension
plan covering certain eligible employees. The Company-sponsored pension
plan provides retirement benefits under pension trust agreements and
under contracts with insurance companies. The benefits are based on
years of service and the employee's compensation during the highest
consecutive years during the last 10 years of employment. The Company's
policy is to fund pension costs allowable for income tax purposes.
Net periodic defined benefit pension expense for the three months ended
March 31, 2004 and 2003 included the following components:
2004 2003
---- ----
Service cost 108 103
Interest cost 63 54
--- ---
Net periodic benefit cost 171 157
8. Stock-based Compensation
At March 31, 2004, 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) 2004 2003
------ ------
Net income (loss), as reported $5,164 $4,400
Less: Stock-based compensation costs under
Fair value based method for all awards. (106) (109)
------ ------
Pro forma net income $5,058 $4,291
Earnings per share - Basic As reported $0.42 $0.36
Pro forma $0.41 $0.35
Earnings per share - Diluted As reported $0.42 $0.36
Pro forma $0.41 $0.35
9. Variable Interest Entities ("VIE")
The Company, together with a real estate development company, formed
Brook View Investors, L.L.C. ("Brook View") in May 2001. Brook View was
formed to construct 13 apartment buildings with a total of 116 units in
a gated apartment community. The development company is the general
partner of the project. The Company invested 60% of initial capital
contributions with the development company holding the remaining equity
interest. Upon the repayment of the initial capital contributions and a
preferred return, distributions will convert to 50% for the Company and
50% for the development company. At March 31, 2004, Brook View had
total assets of $13.2 million and total borrowings of $13.0 million of
which $0 is guaranteed by the Company. The Company has determined that
Brook View is a VIE and it is the primary beneficiary. The Company's
exposure to loss due to its investment in and receivables due from
Brook View is $4.9 million.
The Company, together with a real estate development company, formed
Burrough's Mill Apartment, L.L.C. ("Burrough's Mill") in December 2001.
Burrough's Mill was formed to construct 32 apartment buildings with a
total of 308 units in a gated apartment community. The development
company is the general partner of the project. The Company invested 72%
of initial capital contributions with the development company holding
the remaining equity interest. Upon the repayment of the initial
capital contributions and a preferred return, distributions will
convert to 50% for the Company and 50% for the development company. At
March 31, 2004, Burrough's Mill had total assets of $28.9 million and
total borrowings of $26.2 million of which $0 is guaranteed by the
Company. The Company has determined that Burrough's Mill is a VIE and
it is the primary beneficiary. The Company's exposure to loss due to
its investment in and receivables due from Brook View is $1.0 million.
The Company, together with a real development company, formed Main
Street West Associates, L.P. ("Main Street") in February 2002. Main
Street was formed to acquire, maintain, improve, and operate office
space located in Norristown, Pennsylvania. The development company is
the general partner of the project. The Company invested 90% of initial
capital contributions with the development company holding the
remaining equity interest. Upon the repayment of the initial capital
contributions and a preferred return, distributions will convert to 50%
for the Company and 50% for the development company. At March 31, 2004,
Main Street had total assets of $3.6 million and total borrowings of
$2.5 million of which $0 is guaranteed by the Company. The Company has
determined that Main Street is a VIE and it is the primary beneficiary.
The Company's exposure to loss due to its investment in and receivables
due from Main Street is $1.2 million.
The Company, together with a real estate investment company, formed 212
C Associates, L.P. ("212 C") in May 2002. 212 C was formed to acquire,
hold, improve, and operate office space located in Lansdale,
Pennsylvania. The investment company is the general partner of the
project. The Company invested 90% of initial capital contributions with
the investment company holding the remaining equity interest. Upon the
repayment of the initial capital contributions and a preferred return,
distributions will convert to 50% for the Company and 50% for the
investment company. At March 31, 2004, 212 C had total assets of $12.6
million and total borrowings of $12.2 million of which $0 is guaranteed
by the Company. The Company has determined that 212 C is a VIE and it
is the primary beneficiary. The Company's exposure to loss due to its
investment in and receivables due from 212 C is $2.3 million.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULT OF OPERATIONS
The following discussion and analysis is intended to assist in
understanding and evaluating the changes in the financial condition and earnings
performance of the Company and its' subsidiaries for the nine-month period ended
March 31, 2004.
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, 2004 were $1,216 million, an
increase of $62 million from the $1,154 million reported at year-end, December
31, 2003. This increase is primarily due to $58 million of assets relating to
investments in real estate partnerships that are now being consolidated as a
result of FIN 46(R). Previously these investments were accounted for under the
equity method of accounting.
Total loans decreased $25.4 million from the $515.7 million level at
December 31, 2003 to $490.3 million at March 31, 2004. 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 $489.0 million at March 31, 2004.
The allowance for loan loss increased $41 thousand to $12.5 million at
March 31, 2004 from $12.4 million at December 31, 2003. The level of allowance
for loan loss reserve represents approximately 2.5% of total loans at March 31,
2004 versus 2.4% at December 31, 2003. 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 $45.0 million decrease in total investment securities is primarily
attributable to agency callable bonds that exercised the call feature at the end
of the quarter.
Total cash and cash equivalents increased $68.7 million from the $25.1
million level at December 31, 2003 to $93.8 million at March 31, 2004.
Total deposits, the primary source of funds, decreased $1.6 million to
$789.5 million at March 31, 2004, from $791.1 million at December 31, 2003. The
balance of brokered deposits was $78.1 million, representing approximately 10%
of total deposits at March 31, 2004. 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.
Total borrowings increased $53.8 million to $265.8 million at March 31,
2004, from $212.0 million at December 31, 2003. This increase is primarily
attributed to the consolidation of investments in real estate partnerships as a
result of FIN 46(R). In the balance at March 31, 2004, includes $53.8 million of
borrowings that are not an obligation nor guaranteed by the company.
Consolidated stockholder's equity increased $4.0 million to $138.8
million at March 31, 2004 from $134.8 million at December 31, 2003. This
increase is primarily due to net income of $5.2 million, partially offset by
quarterly cash dividends totaling $3.0 million. Additionally, stockholders'
equity increased by $1.8 million due to an adjustment in the market value of
available-for-sale investment securities during the first three months of 2004.
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, 2004 was
$5.2 million or $.42 basic earnings per share, as compared to net income of $4.4
million or $.36 basic earnings per share for the same three month period in
2003.
For the first quarter 2004, net interest income was $10.8 million as
compared to $10.4 million for the same quarter in 2003, an increase of $394
thousand, or 4%. This increase is primarily due to a reduction in costs related
to deposits and borrowings for the first quarter 2004 as compared to the same
period in 2003. Interest income on loans decreased $1.6 million for the first
quarter of 2004 versus 2003 primarily due to a decrease in the average balance
of loans during the same period. Interest income on investment securities
increased $615 thousand, a 10% increase over the same three-month period in
2003, which is primarily due to the larger average balance in investment
securities held during the quarter. Total interest expense on deposits and
borrowings decreased $1.3 million to $6.7 million as compared to $8.0 million
for the same three-month period in 2003. This decrease in interest expense is
primarily due the reduction of interest rates on deposits and borrowings.
Provision for loan losses was $1 thousand for the first quarter of 2004
and $150 for the same three-month period in 2003. Charge-offs and recoveries
were $57 thousand and $96 thousand respectively. Overall, management considers
the current level of allowance for loan loss to be adequate at March 31, 2004.
Total non-interest income for the three-month period ended March 31,
2004 was $3.2 million as compared to $624 thousand for the same three-month
period in 2003. The $2.6 million increase in 2003 is primarily due a $1.9
million addition from the consolidation as a result of FIN 46(R) and the
purchase of Bank Owned Life Insurance during the fourth quarter of 2003.
Total non-interest expense for the three months ended March 31, 2004
was $6.6 million, an increase of $2.1 million, as compared to $4.5 million for
the same period in 2003. The increase is primarily attributed to the $1.6
million addition from the consolidation as a result of FIN 46(R).
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, 2004, 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, 2004 DECEMBER 31, 2003
-------------- -----------------
CAPITAL LEVELS
Tier 1 leverage ratio 11.7% 11.1%
Tier 1 risk-based ratio 16.2% 15.3%
Total risk-based ratio 17.5% 16.5%
CAPITAL PERFORMANCE
Return on average assets 1.8% (1) 1.6% (1)
Return on average equity 15.0% (1) 14.5% (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 70%
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, 2004:
INTEREST RATE SENSITIVITY
- -------------------------
(IN MILLIONS) DAYS |
----------------------+ 1 TO 5 OVER 5 NON-RATE
ASSETS 0 - 90 91 - 365 | YEARS YEARS SENSITIVE TOTAL
- ------ ----------------------+----------------------------------------------
Interest-bearing deposits in banks $66.2 $ -- $ -- $ -- $6.6 $72.8
Federal funds sold 21.0 -- -- -- -- 21.0
Investment securities:
Available for sale 102.2 29.8 293.0 61.8 12.1 498.9
Held to maturity .1 7.0 13.5 .8 -- 21.4
---------------------------------------------------------------------
Total investment securities 102.3 36.8 306.5 62.6 12.1 520.3
Loans:
Fixed rate 24.4 66.5 145.4 5.2 -- 241.5
Variable rate 178.1 70.7 -- -- (12.5) 236.3
---------------------------------------------------------------------
Total loans 202.5 137.2 145.4 5.2 (12.5) 477.8
Other assets -- -- -- -- 123.9 123.9
---------------------------------------------------------------------
Total Assets $392.0 $174.0 $451.9 $67.8 $130.1 $1,215.8
=====================================================================
LIABILITIES & CAPITAL
- ---------------------
Deposits:
Non interest bearing deposits $ -- $ -- $ -- $ -- $55.4 $55.4
Interest bearing deposits 58.6 175.8 267.3 -- -- 501.7
Certificate of deposits 33.0 103.0 85.9 10.5 -- 232.4
---------------------------------------------------------------------
Total deposits 91.6 278.8 353.2 10.5 55.4 789.5
Borrowings (1) -- -- 117.5 94.5 53.8 265.8
Other liabilities -- -- .3 -- 21.4 21.7
Capital -- -- -- -- 138.8 138.8
---------------------------------------------------------------------
Total liabilities & capital $ 91.6 $278.8 $ 471.0 $105.0 $ 269.4 $1,215.8
=====================================================================
Net interest rate GAP $300.4 ($104.8) ($19.1) ($37.2) ($139.3)
========================================================
Cumulative interest rate GAP $300.4 $195.6 $ 176.5 $139.3 --
========================================================
GAP to total assets 25% (9%)
====================
GAP to total equity 216% (76%)
====================
Cumulative GAP to total assets 25% 16%
====================
Cumulative GAP to total equity 216% 141%
====================
(1) The $53.8 in borrowings classified as non-rate sensitive are related to
variable interest entities and are not obligations of the Company.
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 January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities (FIN 46). In general, a variable interest entity
is a corporation, partnership, trust or any other legal structures used for
business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary if the
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. The
consolidation requirements of FIN 46 apply immediately to interest entities
created after January 31, 2003. In December 2003, the FASB issued FIN 46(R) with
respect to variable interest entities created before January 31, 2003, which
among other things revised the implementation date to the first fiscal year or
interim period ended after March 15, 2004, with the exception of Special Purpose
Entities (SPE). The Company currently has no SPEs. The Company adopted the
provisions of FIN 46(R) effective for the period ending March 31, 2004, which
required the Company to consolidate its investment in real estate partnerships
for the first quarter of 2004. Prior to FIN 46 and 46(R), the Company accounted
for its investment in the real estate partnerships under the equity method of
accounting. The Company's investment in real estate partnerships is discussed
further in Note 9. The SEC recently released Staff Accounting Bulletin No. 105,
Application of Accounting Principles to Loan Commitments. SAB 105 provides
guidance about the measurements of loan commitments recognized at fair value
under FASB Statement No. 133, Accountings for Derivative Instruments and Hedging
Activities. SAB 105 also requires companies to disclose their accounting policy
for those loan commitments including methods and assumptions used to estimate
fair value and associated hedging strategies. SAB 105 is effective for all loan
commitments accounted for as derivatives that are entered into after March 31,
2004. The adoption of SAB 105 is not expected to have a material effect on our
consolidated financial statements.
On March 31, 2004, the Financial Accounting Standards Board (FASB)
issued a proposed Statement, Share-Based Payment an Amendment of FASB Statements
No. 123 and APB No. 95, that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. Under the FASB's proposal, all forms of
share-based payments to employees, including employee stock options, would be
treated the same as other forms of compensation by recognizing the related cost
in the income statement. The expense of the award would generally be measured at
fair value at the grant date. Current accounting guidance requires that the
expense relating to so called fixed plan employee stock options only be
disclosed in the footnotes to the financial statements. The proposed Statement
would eliminate the ability to account for share-based compensation transactions
using APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company
is currently evaluating this proposed statement and its effects on its 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
31.1 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 May 10, 2004.
31.2 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 Financial Officer of Royal Bancshares of Pennsylvania on May 10, 2004.
32.1 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 May 10, 2004.
32.2 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 May 10, 2004.
(b) The Company filed the following report on Form 8-K on February
26, 2004 announcing the opening of Royal Asian Bank a Division
of Royal Bank of Pennsylvania.
The Company filed the following report on Form 8-K on March
31, 2004 announcing the name change of it's subsidiary Royal
Bank of Pennsylvania to Royal Bank America.
The Company filed the following report on Form 8-K on April
23, 2004 announcing it's 36th quarterly cash dividend and also
release earnings for the 1st quarter ending March 31, 2004.
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 10th, 2004 /s/ Jeffrey T. Hanuscin
--------------------------
Jeffrey T. Hanuscin
Chief Financial Officer