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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the quarterly period ended: SEPTEMBER 30, 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
---------
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 October 31, 2004
-------------------- -------------------------------
$2.00 PAR VALUE 10,257,741
Class B Common Stock Outstanding at October 31, 2004
-------------------- -------------------------------
$.10 PAR VALUE 1,941,340
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
ASSETS SEPT 30, 2004 DEC 31, 2003
(UNAUDITED)
----------------- ------------------
Cash and due from banks $15,174 $17,470
Federal funds sold 7,000 7,600
----------------- ------------------
Total cash and cash equivalents 22,174 25,070
----------------- ------------------
Investment securities held to maturity (HTM) (fair value of $186,974 at
September 30, 2004 and $114,275 at December 31, 2003) 186,379 113,091
Investment securities available for sale (AFS) - at fair value 390,074 452,246
Loans held for sale 1,544 3,157
Loans 462,119 512,557
Less allowance for loan losses 12,601 12,426
----------------- ------------------
Net loans 449,518 500,131
Premises and equipment, net 71,610 7,480
Accrued interest and other assets 59,584 53,235
----------------- ------------------
Total assets $1,180,883 $1,154,410
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $60,555 $58,942
Interest bearing (includes certificates of deposit in excess
of $100 of $97,483 at September 30, 2004 and
$104,123 at December 31, 2003) 675,829 732,117
----------------- ------------------
Total deposits 736,384 791,059
Accrued interest payable 7,252 7,733
Borrowings 283,358 212,000
Other liabilities 9,892 7,920
----------------- ------------------
Total liabilities 1,036,886 1,018,712
----------------- ------------------
MINORITY INTEREST 3,582 865
Stockholders' equity
Common stock
Class A, par value $2 per share; authorized, 18,000,000 shares; issued,
10,247,444 at September 30, 2004 and 10,027,284 at December 31, 2003 20,495 20,055
Class B, par value $.10 per share; authorized, 2,000,000 shares; issued,
1,942,213 at September 30, 2004 and 1,909,742 at December 31, 2003 194 191
Additional paid in capital 91,501 85,448
Retained earnings 24,270 24,989
Accumulated other comprehensive income 6,220 6,415
----------------- ------------------
142,680 137,098
Treasury stock - at cost, shares of Class A, 215,388 at September 30, 2004,
and December 31, 2003. (2,265) (2,265)
----------------- ------------------
Total stockholders' equity 140,415 134,833
-----------------
------------------
Total liabilities and stockholders' equity $1,180,883 $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
SEPTEMBER 30,
----------------------------------
(in thousands, except per share data)
2004 2003
----------------- ----------------
Interest income
Loans, including fees $9,774 $11,872
Investment securities held to maturity 2,070 630
Investment securities available for sale 5,011 5,552
Deposits in banks 9 117
Federal funds sold 16 26
----------------- ----------------
TOTAL INTEREST INCOME 16,880 18,197
----------------- ----------------
Interest expense
Deposits 4,151 5,089
Borrowings 2,642 2,141
----------------- ----------------
TOTAL INTEREST EXPENSE 6,793 7,230
----------------- ----------------
NET INTEREST INCOME 10,087 10,967
Provision for loan losses 1 197
----------------- ----------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,086 10,770
----------------- ----------------
Other income
Service charges and fees 343 380
Net gains on sales of investment securities 282 203
Gains on sales of other real estate 915 107
Gains on sales of loans 91 181
Income related to variable interest entities "VIE" 1,954 --
Other income 237 55
----------------- ----------------
3,822 926
----------------- ----------------
Other expenses
Salaries and wages 2,249 1,942
Employee benefits 635 503
Occupancy and equipment 379 328
Expenses related to variable interest entities "VIE" 1,324 --
Other operating expenses 2,003 1,939
----------------- ----------------
6,590 4,712
----------------- ----------------
INCOME BEFORE INCOME TAXES 7,318 6,984
Income taxes 2,206 2,222
----------------- ----------------
NET INCOME $5,112 $4,762
================= ================
Per share data
Net income - basic $.42 $ .39
================= ================
Net income - diluted $.41 $ .39
================= ================
The accompanying notes are an integral part of these statements.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
(in thousands, except per share data)
2004 2003
----------------- ----------------
Interest income
Loans, including fees $30,061 $35,562
Investment securities held to maturity 4,463 1,801
Investment securities available for sale 15,662 16,502
Deposits in banks 296 401
Federal funds sold 69 116
----------------- ----------------
TOTAL INTEREST INCOME 50,551 54,382
----------------- ----------------
Interest expense
Deposits 12,806 17,252
Borrowings 7,686 5,636
----------------- ----------------
TOTAL INTEREST EXPENSE 20,492 22,888
----------------- ----------------
NET INTEREST INCOME 30,059 31,494
Provision for loan losses 6 514
----------------- ----------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 30,053 30,980
----------------- ----------------
Other income
Service charges and fees 1,014 935
Net gains on sales of investment securities 508 347
Gains on sales of other real estate 1,789 296
Gains on sales of loans 523 465
Income related to variable interest entities "VIE" 5,714 --
Other income 921 112
----------------- ----------------
10,469 2,155
----------------- ----------------
Other expenses
Salaries and wages 6,540 5,925
Employee benefits 1,705 1,395
Occupancy and equipment 1,120 993
Expenses related to variable interest entities "VIE" 3,858 --
Other operating expenses 6,360 5,625
----------------- ----------------
19,583 13,938
----------------- ----------------
INCOME BEFORE INCOME TAXES 20,939 19,197
Income taxes 6,269 6,055
----------------- ----------------
NET INCOME $14,670 $13,142
================= ================
Per share data
Net income - basic $1.20 $1.08
================= ================
Net income - diluted $1.19 $1.08
================= ================
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
NINE MONTHS ENDED SEPTEMBER 30, 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 $20,055 1,909 $191 $85,448 $24,989
Net income for the nine months ended Sept 30, - - - - - 14,670
Conversion of Class B common stock to
Class A Common stock 7 14 (6) (1) - (13)
Purchase of treasury stock - - - - - -
2% stock dividend declared 196 392 39 4 5,842 (6,237)
Cash dividends on common stock - - - - -
(per share: Class A $0.75 and Class B $0.86) - - - - - (9,128)
Cash in lieu of fractional shares - - - - - (11)
Stock options exercised 17 34 - - 211 -
Other comprehensive income, net of
Reclassifications and taxes - - - - - -
------------ ------------- ------------- ------------- ------------- -------------
Comprehensive income
Balance, September 30, 2004 10,247 $20,495 1,942 $194 $91,501 $24,270
============ ============= ============= ============= ============= =============
[RESTUBBED TABLE]
ACCUMULATED
OTHER
TREASURY COMPREHENSIVE COMPREHENSIVE
(in thousands) STOCK INCOME (LOSS) INCOME
------------ ----------------------------------
Balance, January 1, 2004 $(2,265) $6,415
Net income for the nine months ended Sept 30, - - $14,670
Conversion of Class B common stock to
Class A Common stock - - -
Purchase of treasury stock - - -
2% stock dividend declared - -
Cash dividends on common stock
(per share: Class A $0.75 and Class B $0.86) - - -
Cash in lieu of fractional shares - - -
Stock options exercised - - -
Other comprehensive income, net of
Reclassifications and taxes - (195) (195)
------------------------------------------------
Comprehensive income $14,475
==================
Balance, September 30, 2004 $(2,265) $6,220
============== ===============
The accompanying notes are an integral part of the financial statement.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 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 nine months ended Sept 30, - - - - - 13,142
Conversion of Class B common stock to
Class A Common stock 8 16 (7) (1) - (15)
Purchase of treasury stock - - - - - -
3% stock dividend declared 281 563 55 6 6,443 (7,011)
Cash dividends on common stock
(per share: Class A $0.71 and Class B $0.82) - - - - - (8,469)
Cash in lieu of fractional shares - - - - - (8)
Stock options exercised 64 126 - - 517 -
Other comprehensive income, net of
Reclassifications and taxes - - - - - -
------------ ------------- ------------- ------------- ------------- -------------
Comprehensive income
Balance, September 30, 2003 9,948 $19,895 1,909 $191 $83,944 $22,458
============ ============= ============= ============= ============= =============
[RESTUBBED TABLE]
ACCUMULATED
OTHER
TREASURY COMPREHENSIVE COMPREHENSIVE
(in thousands) STOCK INCOME (LOSS) INCOME
------------ ----------------------------------
Balance, January 1, 2003 $(2,265) $2,416
Net income for the nine months ended Sept 30, - - $13,142
Conversion of Class B common stock to
Class A Common stock - - -
Purchase of treasury stock - - -
3% stock dividend declared - -
Cash dividends on common stock
(per share: Class A $0.71 and Class B $0.82) - - -
Cash in lieu of fractional shares - - -
Stock options exercised - - -
Other comprehensive income, net of
Reclassifications and taxes - 3,475 3,475
------------------------------------------------
Comprehensive income $16,617
==================
Balance, September 30, 2003 $(2,265) $5,891
============== ===============
The accompanying notes are an integral part of the financial statement.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
(in thousands)
Cash flows from operating activities 2004 2003
---------------- -----------------
Net income $14,670 $13,142
Adjustments to reconcile net income to
net cash provided by (used in) operating activities
Depreciation 2,172 777
Provision for loan loss 6 514
Net accretion (amortization) of discounts and premiums
on loans, mortgage-backed securities and investments (499) 1,606
Provision for deferred income taxes 2,384 2,239
Gains on other real estate (1,789) (296)
Gains on sales of loans (523) (465)
Net (gains) on sales of investment securities (508) (347)
Changes in assets and liabilities:
Increase(decrease) in accrued interest receivable 101 (2,063)
(Increase) in other assets (8,835) (15,787)
Increase(decrease) in accrued interest payable 6,308 (822)
Increase in other liabilities 4,016 1,956
---------------- -----------------
Net cash provided by operating activities 17,503 454
Cash flows from investing activities
Proceeds from calls/maturities of HTM investment securities 109,410 4,000
Proceeds from calls/maturities of AFS investment securities 141,770 187,288
Proceeds from sales of AFS investment securities 5,890 86,339
Purchase of AFS investment securities (86,311) (321,451)
Purchase of HTM investment securities (185,125) (40,000)
Redemption(purchase) of FHLB Stock (1,018) (3,685)
Net decrease in loans 53,544 29,604
Purchase of premises and equipment (66,302) (452)
---------------- -----------------
Net cash (used in) investing activities (28,142) (58,357)
Cash flows from financing activities:
Net (decrease) increase in non-interest bearing and
interest bearing demand deposits and savings accounts (31,070) 75,564
Net decrease in certificates of deposit (23,605) (92,736)
Mortgage payments (47) (45)
Net increase in borrowings 71,358 84,500
Cash dividends (9,128) (8,469)
Cash in lieu of fractional shares (11) (8)
Issuance of common stock under stock option plans 246 643
---------------- -----------------
Net cash provided by financing activities 7,743 59,449
NET (DECREASED) INCREASE IN
CASH AND CASH EQUIVALENTS (2,896) 1,546
Cash and cash equivalents at beginning of year 25,070 40,571
---------------- -----------------
Cash and cash equivalents at end of year $22,174 $42,117
================ =================
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 Investments of Delaware, Inc. and Royal Bank
America (the Bank), Royal Real Estate of Pennsylvania, Inc., Royal Investments
of Pennsylvania, LLC. 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 and
nine-month periods ended September 30, 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 SEPTEMBER 30, 2004
-----------------------------------------
(in thousands) COMMUNITY TAX LIEN
BANKING OPERATION CONSOLIDATED
-------------- ------------------- -----------------
Total assets $1,136,654 $44,229 $1,180,883
Total deposits 736,384 -- 736,384
Net interest income $9,002 $720 $9,722
Provision for loan losses -- 1 1
Other income 3,779 43 3,822
Other expense 5,780 445 6,225
Income tax expense 2,145 61 2,206
-------------- ------------------- -----------------
Net income $4,856 $256 $5,112
============== =================== =================
THREE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------------------
(in thousands) COMMUNITY TAX LIEN
BANKING OPERATION CONSOLIDATED
-------------- ------------------- -----------------
Total assets $1,121,091 $44,996 $1,166,087
Total deposits 803,668 -- 803,668
Net interest income $10,005 $962 $10,967
Provision for loan losses 150 47 197
Other income 808 118 926
Other expense 4,197 515 4,712
Income tax expense 2,093 129 2,222
-------------- ------------------- -----------------
Net income $4,373 $389 $4,762
============== =================== =================
Interest paid to the Community Banking segment by the Tax Lien Operation was
approximately $478 thousand and $451 thousand for the three months period ending
September 30, 2004, and 2003, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2004
----------------------------------------------------------
(in thousands) COMMUNITY TAX LIEN
BANKING OPERATION CONSOLIDATED
-------------- ------------------- -----------------
Total assets $1,136,654 $44,229 $1,180,883
Total deposits 736,384 -- 736,384
Net interest income 27,702 2,357 30,059
Provision for loan losses -- 6 6
Other income 9,460 1,009 10,469
Other expense 17,866 1,717 19,583
Income tax expense 5,953 316 6,269
-------------- ------------------- -----------------
Net income $13,343 $1,327 $14,670
============== =================== =================
NINE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------------------
(in thousands) COMMUNITY TAX LIEN
BANKING OPERATION CONSOLIDATED
-------------- ------------------- -----------------
Total assets $1,121,091 $44,996 $1,166,087
Total deposits 803,668 -- 803,668
Net interest income 28,807 2,687 31,494
Provision for loan losses 450 64 514
Other income 1,859 296 2,155
Other expense 12,413 1,525 13,938
Income tax expense 5,707 348 6,055
-------------- ------------------- -----------------
Net income $12,096 $1,046 $13,142
============== =================== =================
Interest paid to the Community Bank segment by the Tax Lien Operation was
approximately $1,335 thousand and $1,426 thousand for the nine months period
ending September 30, 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 SEPTEMBER 30, 2004
--------------------------------------------
Income Average shares Per share
(numerator) (denominator) Amount
------------ ---------------- -----------
Basic EPS
Income available to common shareholders $5,112 12,260 $0.42
Effect of dilutive securities
Stock options 60 ($0.01)
------------------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $5,112 12,320 $0.41
THREE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------
Income Average shares Per share
(numerator) (denominator) Amount
------------ ---------------- -----------
Basic EPS
Income available to common shareholders $4,762 12,146 $0.39
Effect of dilutive securities
Stock options 60 --
------------------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $4,762 12,206 $0.39
NINE MONTHS ENDED SEPTEMBER 30, 2004
------------------------------------------------
Income Average shares Per share
(numerator) (denominator) Amount
------------- ---------------- ------------
Basic EPS
Income available to common shareholders $14,670 12,254 $1.20
Effect of dilutive securities
Stock options 63 (.01)
------------------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $14,670 12,317 $1.19
NINE MONTHS ENDED SEPTEMBER 30, 2003
------------------------------------------------
Income Average shares Per share
(numerator) (denominator) Amount
------------- ---------------- ------------
Basic EPS
Income available to common shareholders $13,142 12,122 $1.08
Effect of dilutive securities
Stock options 58 --
------------------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $13,142 12,180 $1.08
4. Investment Securities:
The carrying value and approximate market value of investment
securities at September 30, 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 $256 $-- $-- $256 $256
US Agencies 165,000 102 (151) 164,951 165,000
Other Securities 21,123 644 -- 21,767 21,123
----------------
------------ ------------ ---------------- ---------------
$186,379 $746 ($151) $186,974 $186,379
================ ============ ============ ================ ===============
AVAILABLE FOR SALE:
-------------------
Federal Home Loan
Bank Stock - at cost $12,425 $-- $-- $12,425 $12,425
Mortgage Backed 54,817 505 (56) 55,266 55,266
CMO's 30,962 471 -- 31,433 31,433
US Agencies 94,976 62 (835) 94,203 94,203
Other securities 187,470 9,350 (73) 196,747 196,747
---------------- ------------ ------------ ---------------- ---------------
$380,650 $10,388 ($964) $390,074 $390,074
================ ============ ============ ================ ===============
5. Allowance for Loan Losses: Changes in the allowance for loan losses were as
follows:
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2004 2003
--------------- ---------------
(in thousands)
BALANCE AT BEGINNING OF PERIOD, $12,539 $12,654
Loans charged-off (7) (483)
Recoveries 68 14
--------------- ---------------
Net charge-offs and recoveries 61 (469)
Provision for loan losses 1 197
--------------- ---------------
BALANCE AT END OF PERIOD $12,601 $12,382
=============== ===============
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2004 2003
--------------- ---------------
(in thousands)
BALANCE AT BEGINNING OF PERIOD, $12,426 $12,470
Loans charged-off (98) (685)
Recoveries 267 83
--------------- ---------------
Net charge-offs and recoveries 169 (602)
Provision for loan losses 6 514
--------------- ---------------
BALANCE AT END OF PERIOD $12,601 $12,382
=============== ===============
6. Non-performing loans
--------------------
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $4.5 million and $12.3 million at September
30, 2004 and 2003, respectively. Although the Company has
non-performing loans of approximately $4.5 million at September 30,
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 $4.5
million and $12.3 million at September 30, 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
$612 thousand at September 30, 2004. The income that was recognized on
impaired loans during the three-month period ended September 30, 2004
was $-0-. The cash collected on impaired loans during the same period
was $430 thousand of which $430 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
September 30, 2004 and 2003 included the following components:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------------
(in thousands) 2004 2003 2004 2003
--------- ------- ---------- -----------
Service cost 191 103 573 309
Interest cost 53 54 159 161
--------- ------- ---------- -----------
Net periodic benefit cost 244 157 732 470
8. Stock-based Compensation
------------------------
At September 30, 2004, the Company had both a director and employee
stock-based compensation plan. The Company accounts for the plan under
the recognition and measurement provisions of APB No. 25, "Accounting
for Stock Issued to Employee," and related interpretations. Stock-based
employee compensation costs 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.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- --------------------------
(in thousands, except per share data) 2004 2003 2004 2003
-------- ------ ----------- ---------
Net income, as reported $5,112 $4,762 $14,670 $13,142
Less: Stock-based compensation costs
under fair value based method for (106) (115) (318) (327)
all awards, net of related tax effect
------ ------ ------------ -----------
Pro forma net income $5,006 $4,647 $14,352 $12,815
Earnings per share - Basic As reported $0.42 $0.39 $1.20 $1.08
Pro forma $0.41 $0.38 $1.17 $1.06
Earnings per share - Diluted As reported $0.41 $0.39 $1.19 $1.08
Pro forma $0.41 $0.38 $1.17 $1.05
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 September
30, 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 $212 thousand.
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 September 30, 2004, Burrough's Mill had total assets
of $35.9 million and total borrowings of $28.4 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 Burrough's Mill is $4.2 million.
The Company, together with a real estate 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 September
30, 2004, Main Street had total assets of $4.1 million and total borrowings of
$2.9 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 $737 thousand.
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 September 30, 2004, 212 C had
total assets of $13.9 million and total borrowings of $12.0 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 $1.6 million.
The Company's interest in the above mentioned variable interest
entities are held by Royal Investments of Pennsylvania, LLC, a wholly owned
subsidiary of Royal Bank America, and consolidated into the financial statements
of the Company.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULT OF OPERATIONS
The following discussion and analysis is intended to assist in
understanding and evaluating the changes in the financial condition and earnings
performance of the Company and its subsidiaries for the nine-month period ended
September 30, 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, JUDGMENTS 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 Loan 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 managements' 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 September 30, 2004 were $1,180 million,
an increase of $26 million from the $1,154 million reported at year-end,
December 31, 2003. This increase is primarily due to $67 million of assets, of
which the majority relates to premises and equipment, 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 $50.61 million from the $512.6 million level at
December 31, 2003 to $462.2 million at September 30, 2004. This decrease is
attributed to the speed of loans payoffs resulting from project completions and
rate restructuring. The year-to-date average balance of loans was $459.7 million
at September 30, 2004.
The allowance for loan loss increased $175 thousand to $12.6 million
at September 30, 2004 from $12.4 million at December 31, 2003. The level of
allowance for loan loss reserve represents approximately 2.7% of total loans at
September 30, 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 $11.1 million increase in total investment securities is primarily
attributable to the redeployment of excess cash held during the year.
Total cash and cash equivalents decreased $2.9 million from the $25.1
million level at December 31, 2003 to $22.2 million at September 30, 2004. This
decrease is primarily due to a decline in the money market accounts as a result
increase in short term interest rates.
Total deposits, the primary source of funds, decreased $54.7 million to
$736.4 million at September 30, 2004, from $791.1 million at December 31, 2003.
The balance of brokered deposits was $73.1 million, representing approximately
10% of total deposits at September 30, 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 $71.4 million to $283.4 million at September
30, 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 September 30, 2004, $63.4 million of
borrowings are not an obligation nor guaranteed by the company.
Consolidated stockholders' equity increased $5.6 million to $140.4
million at September 30, 2004 from $134.8 million at December 31, 2003. This
increase is primarily due to net income of $14.7 million, partially offset by
quarterly cash dividends totaling $9.1 million.
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 and borrowings. Net income is also
effected by the provision for loan losses and the level of non-interest income
as well as by non-interest expenses, including salary and employee benefits,
occupancy expenses and other operating expenses.
Consolidated net income for the three months ended, September 30, 2004
was $5.1 million or $0.42 basic earnings per share, as compared to net income of
$4.8 million or $0.39 basic earnings per share for the same three month period
in 2003. Consolidated net income for the nine months ended, September 30, 2004
was $14.7 million or $1.20 basic earnings per share, as compared to net income
of $13.1 million or $1.08 basic earnings per share for the same nine month
period in 2003.
For the third quarter 2004, net interest income was $10.1 million as
compared to $11.0 million for the same quarter in 2003, a decrease of $0.9
million. This decrease is primarily due to $1.3 million of interest paid
relating to investments in real estate partnerships that are now being
consolidated as a result of FIN 46(R). Interest income including fees on loans
decreased $2.1 million for the third 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 during the third quarter increased $899
thousand, a 15% 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 $437
thousand to $6.8 million as compared to $7.2 million for the same three-month
period in 2003. This decrease in interest expense is primarily due the reduction
in average deposits balance along with a reduction of interest rates on deposits
and borrowings offset by an increase of interest reported as a result
investments in real estate partnerships that are now being consolidated as a
result of FIN 46(R).
Provision for loan losses was $1 thousand for the third quarter of 2004
and $197 for the same three-month period in 2003. Charge-offs and recoveries for
the third quarter of 2004 were $7 thousand and $68 thousand respectively.
Overall, management considers the current level of allowance for loan loss to be
adequate at September 30, 2004.
Total non-interest income for the three-month period ended September
30, 2004 was $3.8 million as compared to $926 thousand for the same three-month
period in 2003. The $2.9 million increase in 2004 is primarily due to a $2.0
million addition from the consolidation as a result of FIN 46(R) and gains
realized from the sale of other real estate owned.
Total non-interest expense for the three months ended September 30,
2004 was $6.6 million, an increase of $1.9 million, as compared to $4.7 million
for the same period in 2003. The increase is primarily attributed to the $1.3
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 September 30, 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:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
CAPITAL LEVELS
Tier 1 leverage ratio 11.6% 11.1%
Tier 1 risk-based ratio 16.3% 15.3%
Total risk-based ratio 16.4% 16.5%
CAPITAL PERFORMANCE
Return on average assets 1.7% (1) 1.6% (1)
Return on average equity 14.8% (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 calculated by adding total cash and investments
less reserve requirements divided by deposits and short-term liabilities which
is generally maintained equal to or greater than 25%.
The liquidity ratio of the Company remains strong at approximately 53%
and exceeds the Company's peer group levels and target ratio set forth in the
Asset/Liability Policy. The Company's level of liquidity is provided by funds
invested primarily in corporate bonds, capital trust securities, US Treasuries
and agencies, and to a lesser extent, federal funds sold. The overall liquidity
position is monitored on a monthly basis.
Interest rate sensitivity is a function of the repricing
characteristics of the Company's assets and liabilities. These include the
volume of assets and liabilities repricing, the timing of the repricing, and the
interest rate sensitivity gaps is a continual challenge in a changing rate
environment. The following table shows separately the interest sensitivity of
each category of interest earning assets and interest bearing liabilities as of
September 30, 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 $3.3 $0.0 $0.0 $0.0 $11.9 $15.2
Federal funds sold 7.0 0.0 0.0 0.0 0.0 7.0
Investment securities:
Available for sale 23.7 33.4 258.5 65.1 9.4 390.1
Held to maturity 4.2 21.8 160.4 0.0 0.0 186.4
------------ ------------ ------------ ------------ ------------ ------------
Total investment securities 27.9 55.2 418.9 65.1 9.4 576.5
Loans:
Fixed rate 46.9 49.8 107.7 17.9 0.0 222.3
Variable rate 154.8 67.5 19.1 0.0 (12.6) 228.8
------------ ------------ ------------ ------------ ------------ ------------
Total loans 201.7 117.3 126.8 17.9 (12.6) 451.1
Other assets 0.0 0.0 0.0 0.0 131.1 131.1
------------ ------------ ------------ ------------ ------------ ------------
Total Assets $239.9 $172.5 $545.7 $83.0 $139.8 $1,180.9
============ ============ ============ ============ ============ ============
LIABILITIES & CAPITAL
- ---------------------
Deposits:
Non interest bearing deposits $0.0 $0.0 $0.0 $0.0 $58.4 $58.4
Interest bearing deposits 48.8 166.5 247.9 0.0 0.0 463.2
Certificate of deposits 33.8 55.4 120.7 4.9 0.0 214.8
------------ ------------ ------------ ------------ ------------ ------------
Total deposits 82.6 221.9 368.6 4.9 58.4 736.4
Borrowings (1) 15.0 7.5 30.0 174.5 56.4 283.4
Other liabilities 0.0 0.0 0.3 0.0 20.4 20.7
Capital 0.0 0.0 0.0 0.0 140.4 140.4
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities & capital $97.6 $229.4 $398.9 $179.4 $275.6 $1,180.9
============ ============ ============ ============ ============ ============
Net interest rate GAP $142.3 $(56.9) $146.8 $(96.4) $(135.8)
============ ============ ============ ============ ============
Cumulative interest rate GAP $142.3 $85.4 $232.2 $135.8
============ ============ ============ ============ ============
GAP to total assets 12% -5%
============ ============
GAP to total equity 101% -41%
============ ============
Cumulative GAP to total assets 12% 7%
============ ============
Cumulative GAP to total equity 101% 61%
============ ============
(1) The $56.4 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. As of September 30, 2004, 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. Based upon
the evaluation of disclosures and financial reporting, the controls are
determined to be effective. Such controls revealed a weakness within our
residential mortgage originations department with regards to procedures and
policy manuals. These weaknesses are in the process of being corrected with
enhanced policy manuals, changes to operating procedures, and the outsourcing of
the quality control function. Management expects this to be corrected by year
end. The Company has determined that these weaknesses will not have a material
financial impact to operations. No significant changes in the Company's internal
controls over financial reporting were necessitated by the evaluation.
RECENT DEVELOPMENTS
-------------------
On October 27, 2004, the Company completed a private placement of an
aggregate of $25.0 million of trust preferred securities through two
newly-formed Delaware trust affiliates, Royal Bancshares Capital Trust I ("Trust
I") and Royal Bancshares Capital Trust II ("Trust II") (collectively, the
"Trusts"). As part of this transaction, the Company issued an aggregate
principal amount of $12,887,000 of floating rate junior subordinate debt
securities to Trust I, which debt securities bear an initial interest rate of
4.26% until December 2004, and after that which will be rest quarterly at
3-month LIBOR plus 2.15%, and an aggregate principal amount of $12,887,000 of
fixed/floating rate junior subordinated deferrable interest to Trust II, which
debt securities bear an initial interest rate of 5.80% until December 2009 and
then which will reset quarterly at 3-month LIBOR plus 2.15%.
Each of Trust I and Trust II issued an aggregate principal amount of
$12,500,000 of capital securities bearing fixed and or fixed/floating interest
rates corresponding to the debt securities held by each trust to an unaffiliated
investment vehicle and an aggregate principal amount of $387,000 of common
securities bearing fixed and or fixed/floating interest rates corresponding to
the debt securities held by each trust to the Company. The Company has fully and
unconditionally guaranteed all of the obligations of the Trusts, including any
distributions and payments on liquidation or redemption of the capital
securities.
The Company's adoption of FIN 46(R), "Consolidation of Variable
Interest Entities" during period ending December 31, 2004 will require the
Company to record on its balance sheet the two new trust preferred placements
issued on October 27, 2004 as "Note Payable to Royal Bancshares Capital Trust I"
and "Note Payable to Royal Bancshares Capital Trust II".
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 effective for the period ending March 31, 2004, which
required the Company to consolidate its investment in real estate partnerships.
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 further discussed 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.
On September 30, 2004, the Financial Accounting Standards Board
("FASB") issued Staff Position No. EITF Issue 03-1-1, "Effective Date of
Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments," which delays the
effective date for the measurement and recognition guidance contained in
Emerging Issues Task Force ("EITF") Issue No. 03-1. EITF Issue No. 03-1 provides
guidance for evaluating whether an investment is other-than-temporarily impaired
and was originally to be effective for other-than-temporary impairment
evaluations made in reporting periods beginning after June 15, 2004 (July 1,
2004 for the Company). The delay in the effective date for the measurement and
recognition guidance contained in EITF Issue No. 03-1 does not suspend the
requirement to recognize other-than-temporary impairments as required by
existing authoritative literature. The disclosure guidance in paragraphs 21 and
22 of EITF Issue 03-1 remains effective. The delay will be superseded concurrent
with the final issuance of Staff Position No. EITF Issue 03-1-a, which is
expected to provide implementation guidance on matters such as impairment
evaluations for declines in value caused by increases in interest rates and/or
sector spreads. As previously noted, the Company's unrealized losses on
securities are attributable to these rate-related factors. The impact of the
final issuance of Staff Position No. EITF 03-1-a on the Company's financial
condition and results of operations cannot be determined at the present time.
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 19, 2004, 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 II Directors of the Registrant to serve
for a three year term:
FOR WITHHOLD
--- --------
Jack Loew 25,285,186 9,945
Anthony Micale 25,286,693 8,438
Mitchell Morgan 25,287,443 7,688
Albert Ominsky 25,285,186 9,945
Gregory Reardon 25,286,693 8,438
Robert Tabas 25,151,534 143,597
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
10.1 Employment agreement between Royal Bancshares of Pennsylvania,
Inc. and Joseph P. Campbell, President and Chief Executive
Officer, entered into on April 23, 2004.
10.2 Employment agreement between Royal Bancshares of Pennsylvania,
Inc. and John Decker, Senior Vice President, entered into on
April 23, 2004.
10.3 Employment agreement between Royal Bancshares of Pennsylvania,
Inc. and James J. McSwiggan, Executive Vice President, entered
into on April 23, 2004.
10.4 Employment agreement between Royal Bancshares of Pennsylvania,
Inc. and Murray Stempel, Senior Vice President, entered into
on April 23, 2004.
10.5 Employment agreement between Royal Bank America and Edward
Shin, entered into on April 23, 2004.
10.6 Employment agreement between Royal Bank America and Robert R.
Tabas, entered into on April 23, 2004.
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 November 9, 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 November 9, 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 November 9, 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 November 9, 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: November 9, 2004 /s/ Jeffrey T. Hanuscin
-------------------------
Jeffrey T. Hanuscin
Chief Financial Officer