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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2004
or
[ ] 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.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2812193
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
732 MONTGOMERY AVENUE, NARBERTH, PENNSYLVANIA 19072
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(Address of principal executive offices) (Zip Code)
(610) 668-4700
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(Issuer's telephone number, including area code)
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(Former name, former address and former year, if changed since last report)
Securities registered pursuant to Section NONE
12(b) of the Act:
Securities registered pursuant to Section CLASS A COMMON STOCK
12(g) of the Act: ($2.00 PAR VALUE)
CLASS B COMMON STOCK
($.10 PAR VALUE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contended, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of Registrant's Common Stock held by non-affiliates
is $98,464,214, based on the June 30, 2004 closing price of the Registrant's
Common Stock of $00.00 per share (restated for stock dividend).
As of February 28, 2005, the Registrant had 10,482,060 and 1,978,347 shares
outstanding of Class A and Class B common stock, respectively.
Portions of the following documents are incorporated by reference: the
definitive Proxy Statement of the Registrant relating to Registrant's Annual
meeting of Shareholders to be held on May 18, 2005--Part III.
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PART I
ITEM 1. BUSINESS
ROYAL BANCSHARES
Royal Bancshares of Pennsylvania, Inc. ("Royal Bancshares"), is a
Pennsylvania business corporation and a bank holding company registered under
the Federal Bank Holding Company Act of 1956, as amended (the "Holding Company
Act"). Royal Bancshares is supervised by the Board of Governors of the Federal
Reserve System (Federal Reserve Board). Its legal headquarters is located at 732
Montgomery Avenue, Narberth, PA. On June 29, 1995, pursuant to the plan of
reorganization approved by the shareholders of Royal Bank America, formerly
Royal Bank of Pennsylvania ("Royal Bank"), all of the outstanding shares of
common stock of Royal Bank were acquired by Royal Bancshares and were exchanged
on a one-for-one basis for common stock of Royal Bancshares. The principal
activities of Royal Bancshares is owning and supervising Royal Bank, which
engages in a general banking business in principally Montgomery, Philadelphia
and Berks counties in Pennsylvania and Southern New Jersey. Royal Bancshares
also has a wholly owned non-bank subsidiary, Royal Investments of Delaware,
Inc., which is engaged in investment activities. At December 31, 2004, Royal
Bancshares had consolidated total assets of approximately $1.21 billion, total
deposits of approximately $742 million and shareholders' equity of approximately
$141 million.
From time to time, Royal Bancshares 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 and Exchange Commission. The Private Securities Litigation Reform Act
of 1995 provides safe harbor for forward-looking statements. When we use words
such as "believes", or "expects," "anticipates" or similar expressions, we are
making forward-looking statements. In order to comply with the terms of the safe
harbor, Royal Bancshares notes that a variety of factors could cause Royal
Bancshares actual results and experience to differ materially from the
anticipated results or other expectations expressed in Royal Bancshares
forward-looking statements. The risks and uncertainties that may affect the
operations, performance development and results of Royal Bancshares business
include the following: general economic conditions, including their impact on
capital expenditures; interest rate fluctuations: business conditions in Royal
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.
Royal Bancshares has three reportable operating segments, Community
Banking, Tax Liens, and Equity Investments which resulted from the adoption of
FIN46(R) as described in Note B of the Notes to Consolidated Financial
Statements included in this Report. The segment reporting information in Note B
is incorporated by reference into this Item 1.
ROYAL BANK AMERICA
Royal Bank was incorporated in the Commonwealth of Pennsylvania on
July 30, 1963, was chartered by the Commonwealth of Pennsylvania Department of
Banking and commenced operation as a Pennsylvania state-chartered bank on
October 22, 1963. Royal Bank is the successor of the Bank of King of Prussia,
the principal ownership of which was acquired by The Tabas Family in 1980. Royal
Bank is an insured bank by the Federal Deposit Insurance Corporation (the
"FDIC").
During 2004, Royal Bank started a banking division called Royal Asian
Bank ("Royal Asian") which operates three branches in Pennsylvania and
anticipates opening two branches in Northern New Jersey in early 2005.
Royal Bank derives its income principally from interest charged on loans
and interest on investment securities and fees received in connection with the
origination of loans and other services. Royal Bank's principal expenses are
interest expense on deposits and operating expenses. Principally operating
revenues, deposit growth and the repayment of outstanding loans provide funds
for activities.
Service Area. Royal Bank's primary service area includes Montgomery,
Chester, Bucks, Delaware, Berks and Philadelphia counties, New Jersey and the
State of Delaware. This area includes residential areas and industrial and
commercial businesses of the type usually found within a major metropolitan
area. Royal Bank serves this area from twenty
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branches located throughout Montgomery, Philadelphia and Berks counties and New
Jersey. Royal Bank also considers the states of Pennsylvania, New Jersey, New
York and Delaware as a part of its service area for certain products and
services. Frequently, Royal Bank will do business with clients located outside
of its service area. Royal Bank has loans in twenty-nine states via
participations with other lenders who have broad experience in those respective
markets. Royal Bank's legal headquarters are located at 732 Montgomery Avenue,
Narberth, PA.
Royal Bank conducts business operations as a commercial bank offering
checking accounts, savings and time deposits, and loans, including residential
mortgages, home equity and SBA loans. Royal Bank also offers safe deposit boxes,
collections, internet banking and bill payment along with other customary bank
services (excluding trust) to its customers. Drive-up, ATM, and night depository
facilities are available. Services may be added or deleted from time to time.
The services offered and the business of Royal Bank is not subject to
significant seasonal fluctuations. Royal Bank is a member of the Federal Reserve
Fedline Wire Transfer System.
Competition. The financial services industry in our service area is
extremely competitive. Competitors within our service area include banks and
bank holding companies with greater resources. Many competitors have
substantially higher legal lending limits.
In addition, savings banks, savings and loan associations, credit
unions, money market and other mutual funds, mortgage companies, leasing
companies, finance companies and other financial services companies offer
products and services similar to those offered by Royal Bank, on competitive
terms.
Many bank holding companies have elected to become financial holding
companies under the Gramm-Leach-Bliley Act of 1999, which give a broader range
of products with which Royal Bank must compete. Although the long-range effects
of this development cannot be predicted, it will likely further narrow the
differences and intensify competition among commercial banks, investment banks,
insurance firms and other financial services companies.
Employees. Royal Bancshares employed approximately 183 persons on a
full-time equivalent basis as of December 31, 2004.
Deposits. At December 31, 2004, total deposits of Royal Bank were
distributed among demand deposits (9%), money market deposit accounts, savings
and Super Now (64%) and time deposits (27%). At year-end 2004, deposits
decreased $49 million from year-end 2003, or 6%, primarily due to maturing
brokered deposits and reduction in the Money Market accounts due to a reduction
of interest rates paid.
Lending. At December 31, 2004, Royal Bank had a total loan portfolio of
$469 million, representing 39% of total assets. The loan portfolio is
categorized into commercial demand, commercial mortgages, residential mortgages
(including home equity lines of credit), construction, real estate tax liens and
installment loans. At year-end 2004, loans decreased $46 million from year end
2003, or 9.0% primarily due to an increased number of loans being paid in full
as compared to new origination.
Current market and regulatory trends in banking are changing the basic
nature of the banking industry. Royal Bank intends to keep pace with the banking
industry by being competitive with respect to interest rates and new types or
classes of deposits insofar as it is practical to do so consistent with Royal
Bank's size, objective of profit maintenance and stable capital structure.
NON-BANK SUBSIDIARIES
On June 30, 1995, Royal Bancshares established a special purpose
Delaware investment company, Royal Investment of Delaware, ("RID") as a wholly
owned subsidiary. Its legal headquarters is at 103 Springer Building, 3411
Silverside Road, Wilmington, DE. RID buys, holds and sells investment
securities. At December 31, 2004, total assets of RID were $21.4 million, of
which $16.1 million was held in cash and cash equivalents and $5.3 million was
held in investment securities.
Royal Bancshares through its wholly owned subsidiary Royal Bank hold a
60% ownership in Crusader Servicing Corporation ("CSC"). Its legal headquarters
is at 732 Montgomery Avenue, Narberth, PA. CSC acquires, through auction,
delinquent property tax liens in various jurisdictions, assuming a lien position
that is generally superior to any mortgage liens
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on the property, and obtaining certain foreclosure rights as defined by local
statute. At December 31, 2004, total assets of CSC were $50.2 million.
On June 23, 2003, Royal Bancshares through its wholly owned subsidiary
Royal Bank of Pennsylvania established Royal Investments of Pennsylvania, LLC
("RIP") as a wholly owned subsidiary. Its legal headquarters is at 732
Montgomery Avenue, Narberth, Pennsylvania. RIP was formed to invest in equity
real estate ventures subject to limitations imposed by regulation. At December
31, 2004, total assets of RIP prior to consolidation under FIN46(R) were
$10.4 million. During the early part of 2005, RIP changed its name to Royal
Investments America.
On October 27, 2004, Royal Bancshares formed two Delaware trust
affiliates, Royal Bancshares Capital Trust I and Royal Bancshares Capital Trust
II from the completion of an aggregate of $25.0 million private placement of
trust preferred securities.
WEBSITE ACCESS TO COMPANY REPORTS
We post publicly available reports required to be filed with the SEC on
our website, www.royalbankamerica.com, as soon as reasonably practicable after
filing such reports with the SEC. The required reports are available free of
charge through our website.
PRODUCTS AND SERVICES WITH REPUTATION RISK
Royal Bancshares offers a diverse range of financial and banking
products and services. In the event one or more customers and/or governmental
agencies become dissatisfied or object to any product or service offered by
Royal Bancshares or any of its subsidiaries, whether legally justified or not,
negative publicity with respect to any such product or service could have a
negative impact on Royal Bancshares's reputation. The discontinuance of any
product or service, whether or not any customer or governmental agency has
challenged any such product or service, could have a negative impact on Royal
Bancshares' reputation.
FUTURE ACQUISITIONS
Royal Bancshares' acquisition strategy consists of identifying financial
institutions, insurance agencies and other financial companies with business
philosophies that are similar to our business philosophies, which operate in
strong markets that are geographically compatible with our operations, and which
can be acquired at an acceptable cost. In evaluating acquisition opportunities,
we generally consider potential revenue enhancements and operating efficiencies,
asset quality, interest rate risk, and management capabilities. Royal Bancshares
currently has no formal commitments with respect to future acquisitions although
discussions with acquisition candidates take place occasionally.
CONCENTRATIONS, SEASONALITY
Royal Bancshares does not have any portion of its business dependent on
a single or limited number of customers, the loss of which would have a material
adverse effect on its business. No substantial portion of loans or investments
is concentrated within a single industry or group of related industries, except
a significant majority of loans are secured by real estate much of which is
located in southeastern Pennsylvania. The business of Royal Bancshares and its
subsidiaries is not seasonal in nature.
ENVIRONMENT COMPLIANCE
Royal Bancshares and its subsidiaries' compliance with federal, state
and local environment protection laws had no material effect on capital
expenditures, earnings or their competitive position in 2004, and is not
expected to have a material effect on such expenditures, earnings or competitive
position in 2005.
SUPERVISION AND REGULATION
Bank holding companies and banks operate in a highly regulated
environment and are regularly examined by federal and state regulatory
authorities.
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The following discussion concerns various federal and state laws and
regulations and the potential impact of such laws and regulation on Royal
Bancshares and its subsidiaries.
To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to the
particular statutory or regulatory provisions themselves. Proposals to change
laws and regulations are frequently introduced in Congress, the state
legislatures, and before the various bank regulatory agencies. Royal Bancshares
cannot determine the likelihood or timing of any such proposals or legislations
or the impact they may have on Royal Bancshares and its subsidiaries. A change
in law, regulations or regulatory policy may have a material effect on Royal
Bancshares's business.
Holding Company. Royal Bancshares, as a Pennsylvania business
corporation, is subject to the jurisdiction of the Securities and Exchange
Commission (the "SEC") and of state securities commissions for matters relating
to the offering and sale of its securities. Accordingly, if Royal Bancshares
wishes to issue additional shares of its Common Stock, in order, for example, to
raise capital or to grant stock options, Royal Bancshares will have to comply
with the registration requirements of the Securities Act of 1933 as amended, or
find an applicable exemption from registration.
Royal Bancshares is subject to the provisions of the Holding Company
Act, and to supervision, regulation and examination by the Federal Reserve
Board. The Holding Company Act requires Royal Bancshares to secure the prior
approval of the Federal Reserve Board before it owns or controls, directly or
indirectly, more than 5% of the voting shares of any corporation, including
another bank. In addition, the Holding Company Act prohibits Royal Bancshares
from acquiring more than 5% of the voting shares of, or interest in, or all or
substantially all of the assets of, any bank located outside Pennsylvania,
unless such an acquisition is specifically authorized by laws of the state in
which such bank is located.
A bank holding company also is prohibited from engaging in or acquiring
direct or indirect control of more than 5% of the voting shares of any such
company engaged in non-banking activities unless the Federal Reserve Board, by
order or regulation, has found such activities to be closely related to banking
or managing or controlling banks as to be a proper incident thereto. In making
this determination, the Federal Reserve Board considers whether the performance
of these activities by a bank holding company would offer benefits to the public
that outweigh possible adverse effects.
As a bank holding company, Royal Bancshares is required to file an
annual report with the Federal Reserve Board and any additional information that
the Federal Reserve Board may require pursuant to the Holding Company Act. The
Federal Reserve Board may also make examinations of the holding company and any
or all of subsidiaries. Further, under the Holding Company Act and the Federal
Reserve Board's regulation, a bank holding company and its subsidiaries are
prohibited from engaging in certain tying arrangements in connection, with any
extension of credit or provision of credit of any property or services. The so
called "anti-tying" provisions state generally that a bank may not extend
credit, lease, sell property or furnish any service to a customer on the
condition that the customer obtain additional credit or service from Royal Bank,
its bank holding company or any other subsidiary of its bank holding company, or
on the condition that the customer not obtain other credit or services from a
competitor of Royal Bank, its bank holding company or any subsidiary of its bank
holding company.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act and by state banking laws on any
extensions of credit to Royal Bank holding company or any of its subsidiaries,
on investments in the stock or other securities of Royal Bank holding company
and on taking of such stock or securities as collateral for loans to any
borrower.
Under the Pennsylvania Banking Code of 1965, as amended, the ("Code"),
Royal Bancshares is permitted to control an unlimited number of banks. However,
Royal Bancshares would be required under the Holding Company Act to obtain the
prior approval of the Federal Reserve Board before it could acquire all or
substantially all of the assets of any bank, or acquiring ownership or control
of any voting shares of any bank other than Royal Bank, if, after such
acquisition, the registrant would own or control more than 5% of the voting
shares of such bank. The Holding Company Act has been amended by the Riegle-Neal
Interstate Banking and Branching Act of 1994, which authorizes bank holding
companies subject to certain limitations and restrictions to acquire banks
located in any state.
In 1995, the Code was amended to harmonize Pennsylvania law with the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 to enable
Pennsylvania institutions to participate fully in interstate banking and to
remove obstacles to the choice by banks from other states engaged in interstate
banking to select Pennsylvania as a head office location.
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A bank holding company located in Pennsylvania, another state, the
District of Columbia or a territory or possession of the United States may
control one or more banks, bank and trust companies, national banks, interstate
banks and, with the prior written approval of the Pennsylvania Department of
Banking, may acquire control of a bank and trust company or a national bank
located in Pennsylvania. A Pennsylvania-chartered institution may maintain
branches in any other state, the District of Columbia, or a territory or
possession of the United States upon the written approval of the Pennsylvania
Department of Banking.
Federal law also prohibits the acquisition of control of a bank holding
company without prior notice to certain federal bank regulators. Control is
defined for this purpose as the power, directly or indirectly, to direct the
management or policies of Royal Bank or bank holding company or to vote 25% or
more of any class of voting securities of Royal Bank holding company.
Royal Bank. The deposits of Royal Bank are insured by the FDIC. Royal
Bank is subject to supervision, regulation and examination by the Pennsylvania
Department of Banking and by the FDIC. In addition, Royal Bank is subject to a
variety of local, state and federal laws that affect its operation.
The Pennsylvania Department of Banking and the FDIC routinely examine
Pennsylvania state-chartered, non-member banks such as Royal Bank in areas such
as reserves, loans, investments, management practices and other aspects of
operations. These examinations are designed for the protection of depositors
rather that Royal Bancshares' shareholders.
Federal and state banking laws and regulations govern, among other
things, the scope of a bank's business, the investments a bank may make, the
reserves against deposits a bank must maintain, the types and terms of loans a
bank may make and the collateral it may take, the activities of banks with
respect to mergers and consolidations, and the establishment of branches.
Pennsylvania law permits statewide branching.
Under the Federal Deposit Insurance Act ("FDIC Act"), the FDIC possesses
the power to prohibit institutions regulated by it (such as Royal Bank) from
engaging in any activity that would be an unsafe and unsound banking practice or
in violation of applicable law. Moreover, the FDIC Act: (i) empowers the FDIC to
issue cease-and-desist or civil money penalty orders against Royal Bank or its
executive officers, directors and/or principal shareholders based on violations
of law or unsafe and unsound banking practices; (ii) authorizes the FDIC to
remove executive officers who have participated in such violations or unsound
practices; (iii) restricts lending by Royal Bank to its executive officers,
directors, principal shareholders or related interests thereof; (iv) restricts
management personnel of a bank from serving as directors or in other management
positions with certain depository institutions whose assets exceed a specified
amount or which have an office within a specified geographic area. Additionally,
the FDIC Act provides that no person may acquire control of Royal Bank unless
the FDIC has been given 60-days prior written notice and within that time has
not disapproved the acquisition or extended the period for disapproval.
Under the Community Reinvestment Act ("CRA"), the FDIC uses a five-point
rating scale to assign a numerical score for a bank's performance in each of
three areas: lending, service and investment. Under the CRA, the FDIC is
required to: (i) assess the records of all financial institutions regulated by
it to determine if these institutions are meeting the credit needs of the
community (including low-and moderate-income neighborhoods) which they serve,
and (ii) take this record into account in its evaluation of any application made
by any such institutions for, among other things, approval of a branch or other
deposit facility, office relocation, a merger or an acquisition of bank shares.
The CRA also requires the federal banking agencies to make public disclosures of
their evaluation of each bank's record of meeting the credit needs of its entire
community, including low-and moderate-income neighborhoods. This evaluation will
include a descriptive rate ("outstanding," "satisfactory," "needs to improve" or
"substantial noncompliance") and a statement describing the basis for the
rating. After its most recent examination of Royal Bank under CRA, the FDIC gave
Royal Bank a CRA rating of satisfactory.
A subsidiary bank of a holding company is subject to certain
restrictions imposed by the Federal Reserve Act, as amended, on any extensions
of credit to Royal Bank holding company or its subsidiaries, on investments in
the stock or other securities of Royal Bank holding company or its subsidiaries,
and on taking such stock or securities as collateral for loans. The Federal
Reserve Act, as amended, and Federal Reserve Board regulations also place
certain limitations and reporting requirements on extensions of credit by a bank
to principal shareholders of its parent holding company, among others, and to
related interests of such principal shareholders. In addition, such legislation
and regulations may affect the
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terms upon which any person who becomes a principal shareholder of a holding
company may obtain credit from banks with which the subsidiary bank maintains a
correspondent relationship.
From time to time, various types of federal and state legislation have
been proposed that could result in additional regulation of, and restrictions
on, the business of Royal Bank. It cannot be predicted whether any such
legislation will be adopted or how such legislation would affect the business of
Royal Bank. As a consequence of the extensive regulation of commercial banking
activities in the United States, Royal Bank's business is particularly
susceptible to being affected by federal legislation and regulations that may
increase the costs of doing business.
Under Bank Secrecy Act ("BSA"), banks and other financial institutions
are required to report to the Internal Revenue Service currency transactions of
more than $10,000 or multiple transactions in any one day of which Royal Bank is
aware that exceed $10,000 in the aggregate. Civil and criminal penalties are
provided under the BSA for failure to file a required report, for failure to
supply information required by the BSA or for filing a false or fraudulent
report.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
GENERAL. The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDIC Improvement Act") includes several provisions that have a direct
impact on Royal Bank. The most significant of these provisions are discussed
below.
The FDIC is required to conduct periodic full-scope, on-site
examinations of Royal Bank. In order to minimize losses to the deposit insurance
funds, the FDIC Improvement Act establishes a format to monitor FDIC-insured
institutions and to enable "prompt corrective action" by the appropriate federal
supervisory agency if an institution begins to experience any difficulty. The
FDIC Improvement Act establishes five "capital" categories. They are: (1) well
capitalized, (2) adequately capitalized, (3) undercapitalized, (4) significantly
undercapitalized, and (5) critically undercapitalized. The overall goal of these
capital measures is to impose scrutiny and operational restrictions on banks as
they descend the capital categories from well capitalized to critically
undercapitalized.
Under current regulations, a "well-capitalized" institution is one that
has at least a 10% total risk-based capital ratio, a 6% Tier 1 risk-based
capital ratio, a 5% Tier 1 Leverage Ratio, and is not subject to any written
order or final directive by the FDIC to meet and maintain a specific capital
level. Royal Bank is presently categorized as a "well-capitalized" institution.
An "adequately capitalized" institution is one that meets the required
minimum capital levels, but does not meet the definition of a "well-capitalized"
institution. The existing capital rules generally require banks to maintain a
Tier 1 Leverage Ratio of at least 4% and an 8% total risk-based capital ratio.
Since the risk-based capital requirement is measured in the form of Tier 1
capital, this also will mean that a bank would need to maintain at least 4% Tier
1 risk-based capital ratio. An institution must meet each of the required
minimum capital levels in order to be deemed "adequately capitalized."
An "undercapitalized" institution is one that fails to meet one or more
of the required minimum capital levels for an "adequately capitalized"
institution. Under the FDIC Improvement Act, an "undercapitalized" institution
must file a capital restoration plan and is automatically subject to
restrictions on dividends, management fees and asset growth. In addition, the
institution is prohibited from making acquisitions, opening new branches or
engaging in new lines of business without the prior approval of its primary
federal regulator. A number of other restrictions may be imposed.
A "critically undercapitalized" institution is one that has a tangible
equity (Tier 1 capital) ratio of 2% or less. In addition to the same
restrictions and prohibitions that apply to "undercapitalized" and
"significantly undercapitalized" institutions, any institution that becomes
"critically undercapitalized" is prohibited from taking the following actions
without the prior written approval of its primary federal supervisory agency:
engaging in any material transactions other than in the usual course of
business; extending credit for highly leveraged transactions; amending its
charter or bylaws; making any material changes in accounting methods; engaging
in certain transactions with affiliates; paying excessive compensation or
bonuses; and paying interest on liabilities exceeding the prevailing rates in
the institution's market area. In addition, a "critically undercapitalized"
institution is prohibited from paying interest or principal on its subordinated
debt and is subject to being placed in conservatorship or receivership if its
tangible equity capital level is not increased within certain mandated time
frames.
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REAL ESTATE LENDING GUIDELINES. Pursuant to the FDIC Improvement Act,
the FDIC has issued real estate lending guidelines that establish loan-to-value
("LTV") ratios for different types of real estate loans. A LTV ratio is
generally defined as the total loan amount divided by the appraised value of the
property at the time the loan is originated. If a bank does not hold a first
lien position, the total loan amount would be combined with the amount of all
senior liens when calculating the ratio. In addition to establishing the LTV
ratios, the FDIC's real estate guidelines require all real estate loans to be
based upon proper loan documentation and a recent independent appraisal of the
property.
The FDIC's guidelines establish the following limits for LTV ratios:
Loan Category LTV Limit
----------------------------------------- ---------
Raw Land 65%
Land Development
Construction:
Commercial, Multifamily (includes
condos and co-ops), and other
Nonresidential 80%
Improved Property 85%
Owner occupied 1-4 Family and Home Equity
(without credit enhancements) 90%
The guidelines provide exceptions to the LTV ratios for
government-backed loans; loans facilitating the sale of real estate acquired by
the lending institution in the normal course of business; loans where Royal
Bank's decision to lend is not based on the offer of real estate as collateral
and such collateral is taken only out of an abundance of caution; and loans
renewed, refinanced, or restructured by the original lender to the same
borrower, without the advancement of new money. The regulation also allows
institutions to make a limited amount of real estate loans that do not conform
to the proposed LTV ratios. Under this exception, Royal Bank would be allowed to
make real estate loans that do not conform to the LTV ratio limits, up to an
amount not to exceed 100% of Royal Bank's total capital.
TRUTH IN SAVINGS ACT. The FDIC Improvement Act also contains the Truth
in Savings Act. The purpose of this Act is to require the clear and uniform
disclosure of the rates of interest that are payable on deposit accounts by
Royal Bank and the fees that are assessable against deposit accounts, so that
consumers can make a meaningful comparison between the competing claims of banks
with regard to deposit accounts and products. This Act requires Royal Bank to
include, in a clear and conspicuous manner, the following information with each
periodic statement of a deposit account: (1) the annual percentage yield earned,
(2) the amount of interest earned, (3) the amount of any fees and charges
imposed and (4) the number of days in the reporting period. This Act allows for
civil lawsuits to be initiated by customers if Royal Bank violates any provision
or regulation under this Act.
GRAMM-LEACH-BLILEY ACT OF 1999. On November 12, 1999, President Clinton signed
the Gramm-Leach-Bliley Act of 1999, also known as the Financial Services
Modernization Act. The Financial Services Modernization Act repeals the two
affiliation provisions of the Glass-Steagall Act:
o Section 20, which restricted the affiliation of Federal Reserve
Member Banks with firms "engaged principally" in specified
securities activities; and
o Section 32, which restricts officer, director, or employee
interlocks between a member bank and any company or person
"primarily engaged" in specified securities activities.
In addition, the Financial Services Modernization Act contains
provisions that expressly preempt any state insurance law. The law establishes a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms, and other financial service providers. It revises
and expands the framework of the Holding Company Act to permit a holding company
to engage in a full range of financial activities through a new entity known as
a Financial Holding Company. "Financial activities" is broadly defined to
include not only banking, insurance and securities activities, but also merchant
banking and additional activities that the Federal Reserve Board, in
consultation with the Secretary of the Treasury, determines to be financial in
nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally.
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In general, the Financial Services Modernization Act:
o Repeals historical restrictions on, and eliminates many federal and
state law barriers to, affiliations among banks, securities firms,
insurance companies, and other financial service providers;
o Provides a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding
companies;
o Broadens the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies, and their financial
subsidiaries;
o Provides an enhanced framework for protecting the privacy of
consumer information;
o Adopts a number of provisions related to the capitalization,
membership, corporate governance, and other measures designed to
modernize the Federal Home Loan Bank system;
o Modifies the laws governing the implementation of the CRA; and
o Addresses a variety of other legal and regulatory issues affecting
both day-to-day operations and long-term activities of financial
institutions.
In order for Royal Bancshares to take advantage of the ability to
affiliate with other financial service providers, Royal Bancshares must become a
"Financial Holding Company." To become a Financial Holding Company, a company
must file a declaration with the Federal Reserve, electing to engage in
activities permissible for Financial Holding Companies and certifying that it is
eligible to do so because all of its insured depository institution subsidiaries
are well-capitalized and well-managed. In addition, the Federal Reserve Board
must determine that each insured depository institution subsidiary of Royal
Bancshares has at least a "satisfactory" CRA rating. Royal Bancshares currently
meets the requirements to make an election to become a Financial Holding
Company. Royal Bancshares' management has not determined at this time whether it
will seek an election to become a Financial Holding Company. Royal Bancshares
continues to examine its strategic business plan to determine whether, based,
among other factors, on market conditions, the relative financial conditions of
Royal Bancshares and its subsidiaries, regulatory capital requirements and
general economic conditions, Royal Bancshares desires to utilize any of the
expanded powers provided in the Financial Service Modernization Act.
The Financial Services Modernization Act also includes a new section of
the FDIC Act governing subsidiaries of state banks that engage in "activities as
principal that would only be permissible" for a national bank to conduct in a
financial subsidiary. It expressly preserves the ability of a state bank to
retain all existing subsidiaries. Because Pennsylvania permits commercial banks
chartered by the state to engage in any activity permissible for national banks,
Royal Bank will be permitted to form subsidiaries to engage in the activities
authorized by the Financial Services Modernization Act, to the same extent as a
national bank. In order to form a financial subsidiary, Royal Bank must be
well-capitalized, and Royal Bank would be subject to the same capital deduction,
risk management and affiliate transaction rules as applicable to national banks.
Although the long-range effect of the Financial Services Modernization
Act cannot be predicted, Royal Bancshares and Royal Bank do not believe that the
Financial Services Modernization Act will have a material adverse effect on its
operations in the near-term. However, to the extent that it permits banks,
securities firms, and insurance companies to affiliate, the financial services
industry may experience further consolidation. The Financial Services
Modernization Act is intended to grant to community banks certain powers as a
matter of right that larger institutions have accumulated on an ad hoc basis.
Nevertheless, this act may have the result of increasing the amount of
competition that Royal Bancshares and Royal Bank face from larger institutions
and other types of companies offering financial products, many of which may have
substantially more financial resources than Royal Bancshares and Royal Bank.
9
USA PATRIOT ACT OF 2001. In October 2001, the USA Patriot Act of 2001
was enacted in response to the terrorist attacks in New York, Pennsylvania and
Washington D.C., which occurred on September 11, 2001. The Patriot Act is
intended to strengthen U.S. law enforcements' and the intelligence communities'
abilities to work cohesively to combat terrorism on a variety of fronts. The
potential impact of the Patriot Act on financial institutions of all kinds is
significant and wide ranging. The Patriot Act contains sweeping anti-money
laundering and financial transparency laws and imposes various regulations,
including standards for verifying client identification at account opening, and
rules to promote cooperation among financial institutions, regulators and law
enforcement entities in identifying parties that may be involved in terrorism or
money laundering.
SARBANES-OXLEY ACT OF 2002. On July 30, 2002, the Sarbanes-Oxley Act of
2002 was enacted "SOX". The stated goals of the SOX are to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by improving
the accuracy and reliability of corporate disclosures pursuant to the securities
laws.
SOX is the most far-reaching U.S. securities legislation enacted in some
time. SOX generally applies to all companies, both U.S. and non-U.S., that file
or are required to file periodic reports with the SEC under the Securities
Exchange Act of 1934, or the Exchange Act. Given the extensive SEC role in
implementing rules relating too many of SOX's new requirements, the final scope
of the requirements remains to be determined.
The SOX addresses, among other matters:
o New requirements for audit committees of reporting companies,
including independence, expertise, and responsibilities;
o Certification of financial statements by the chief executive
officer and chief financial officer;
o The forfeiture of bonuses or other incentive-based compensation
and profits from the sale of an issuer's securities by directors
and senior officers in the twelve month period following initial
publication of any financial statements that later require
restatement;
o Increased disclosure and reporting obligations for the reporting
company and their directors and executive officers with other
banks regulatory requirements;
o Disclosure of off-balance sheet transactions;
o A prohibition on personal loans to directors and officers,
except certain loans made by insured financial institutions on
non-preferential terms and in compliance with other bank
regulatory requirements;
o Disclosure of a code of ethics and filing a Form 8-K for a
change or waiver of such code;
o "Real time" filing of periodic reports;
o The formation of an independent public accounting oversight
board;
o New standards for auditors and regulation of audits, including
independence provisions that restrict non-audit services that
accountants may provide to their audit clients; and
o Various increased civil and criminal penalties for fraud and
other violations of securities laws.
Section 404 of SOX requires Royal Bancshares to include in its Annual
Report on Form 10-K for fiscal years ending after November 15, 2004, a report by
its management and an attestation report by its independent registered public
accounting firm on the adequacy of Royal Bancshares' internal control over
financial reporting. Management's internal control report must, among other
things, set forth management's assessment of the effectiveness of Royal
Bancshares' internal control over financial reporting as of the end of its most
recent fiscal year, including a statement as to whether or not internal control
over financial reporting is effective. See Item 9A of this Report.
10
REGULATION W. Transactions between a bank and its "affiliates" are
quantitatively and qualitatively restricted under the Sections 23A and 23B of
Federal Reserve Act. The FDIC Act applies Sections 23A and 23B to insured
nonmember banks in the same manner and to the same extent as if they were
members of the Federal Reserve System. The Federal Reserve Board has also
recently issued Regulation W, which codifies prior regulations under Sections
23A and 23B of the Federal Reserve Act and interpretative guidance with respect
to affiliate transactions. Regulation W incorporates the exemption from the
affiliate transaction rules but expands the exemption to cover the purchase of
any type of loan or extension of credit from an affiliate. Affiliates of a bank
include, among other entities, Royal Bank's holding company and companies that
are under common control with Royal Bank. Royal Bancshares is considered to be
an affiliate of Royal Bank. In general, subject to certain specified exemptions,
a bank or its subsidiaries are limited in their ability to engage in "covered
transactions" with affiliates:
o To an amount equal to 10% of Royal Bank's capital and surplus,
in the case of covered transactions with any one affiliate; and
o To an amount equal to 20% of Royal Bank's capital and surplus,
in the case of covered transactions with all affiliates.
In addition, a bank and its subsidiaries may engage in covered
transactions and other specified transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to Royal
Bank or its subsidiary, as those prevailing at the time for comparable
transactions with nonaffiliated companies. A "covered transaction" includes:
o A loan or extension of credit to an affiliate;
o A purchase of, or an investment in, securities issued by an
affiliate;
o A purchase of assets from an affiliate, with some exceptions;
o The acceptance of securities issued by an affiliate as
collateral for a loan or extension of credit to any party; and
o This issuance of a guarantee, acceptance or letter of credit on
behalf of an affiliate.
In addition, under Regulation W:
o A bank and its subsidiaries may not purchase a low-quality asset
from an affiliate;
o Covered transactions and other specified transactions between a
bank or its subsidiaries and an affiliate must be on terms and
conditions that are consistent with safe and sound banking
practices; and
o With some exceptions, each loan or extension of credit by a bank
to an affiliate must be secured by collateral with a market
value ranging from 100% to 130%, depending on the type of
collateral, of the amount of the loan or extension of credit.
Regulation W generally excludes all non-bank and non-savings association
subsidiaries of banks from treatment as affiliates, except to the extent that
the Federal Reserve Board decides to treat these subsidiaries as affiliates.
Concurrently with the adoption of Regulation W, the Federal Reserve
Board has proposed a regulation which would further limit the amount of loans
that could be purchased by a bank from an affiliate to not more than 100% of
Royal Bank's capital and surplus.
MONETARY POLICY
The earnings of Royal Bank are affected by the policies of regulatory
authorities including the Federal Reserve Board. An important function of the
Federal Reserve System is to influence the money supply and interest rates.
Among the instruments used to implement those objectives are open market
operations in United States government securities, changes in reserve
requirements against member bank deposits and limitations on interest rates that
member banks may pay on time and savings deposits. These instruments are used in
varying combinations to influence overall growth and
11
distribution of bank loans and investments and deposits. Their use may also
affect rates charged on loans or paid for deposits.
The policies and regulations of the Federal Reserve Board have had and
will probably continue to have a significant effect on its reserve requirements,
deposits, loans and investment growth, as well as the rate of interest earned
and paid, and are expected to affect Royal Bank's operations in the future. The
effect of such policies and regulations upon the future business and earnings of
Royal Bank cannot be predicted.
EFFECTS OF INFLATION
Inflation has some impact on Royal Bancshares' operating costs. Unlike
many industrial companies, however, substantially all of Royal Bancshares'
assets and liabilities are monetary in nature. As a result, interest rates have
a more significant impact on Royal Bancshares' performance than the general
level of inflation. Over short periods of time, interest rates may not
necessarily move in the same direction or in the same magnitude as prices of
goods and services.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The accounting and reporting policies of Royal Bancshares conform to
accounting principles generally accepted in the United States of America and
general practices within the financial services industry. Critical accounting
policies, judgments and estimates relate to loans, the allowance for loan losses
and deferred tax assets. The policies which significantly affect the
determination of Royal Bancshares's financial position, results of operations
and cash flows, are summarized in Note A "Summary of Significant Accounting
Polices" of the Notes to Consolidated Financial Statements and are discussed in
the section captioned "Recent Accounting Pronouncements" of Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in Items 7 and 8 of this Report, each of which is incorporated herein
by reference.
Royal Bancshares 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 allowance for loan losses is calculated
with the objective of maintaining a reserve level believed by management to be
sufficient to absorb estimated credit losses. Management's determination of the
adequacy of the allowance is based on periodic evaluations of the loan portfolio
and other relevant factors. However, this evaluation is inherently subjective as
it requires material estimates, including, among others, expected default
probabilities, loss given default, expected commitment usage, the amounts of
timing of expected future cash flows on impaired loans, mortgages, and general
amounts for historical loss experience. The process also considers economic
conditions, uncertainties in estimating losses and inherent risks in the loan
portfolio. All of these factors may be susceptible to significant change. To the
extent actual outcomes differ from management estimates, additional provisions
for loan losses may be required that would adversely impact earnings in future
periods.
Royal Bancshares recognizes deferred tax assets and liabilities for the
future tax effects of temporary differences, net operating loss carry forwards
and tax credits. Deferred tax assets are subject to management's judgment based
upon available evidence that future realization is more likely than not. If
management determines that Royal Bancshares may be unable to realize all or part
of net deferred tax assets in the future, a direct charge to income tax expense
may be required to reduce the recorded value of the net deferred tax asset to
the expected realizable amount.
AVAILABLE INFORMATION
Upon a shareholder's written request, a copy of Royal Bancshares' Annual
Report on 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K,
as required to be filed with the SEC pursuant to Securities Exchange Act
Rule 13a-1, may be obtained without charge, on our website
www.royalbankamerica.com or from Jeffrey T. Hanuscin, Chief Financial Officer,
Royal Bank America, 732 Montgomery Avenue, Narberth, PA 19072.
12
ITEM 2. PROPERTIES
Royal Bank has twenty banking offices, which are located in Pennsylvania
and New Jersey.
ROYAL BANK AMERICA
Narberth Office (1) Villanova Office King of Prussia Office (1)
- ------------------------ ------------------------------- --------------------------
732 Montgomery Avenue 801 East Lancaster Avenue Rt. 202 at Wilson Road
Narberth, PA 19072 Villanova, PA 19085 King of Prussia, PA 19406
Walnut Street Office Shillington Office Bridgeport Office (1)
- ------------------------ ------------------------------- --------------------------
1230 Walnut Street 516 East Lancaster Avenue 105 W. 4th Street
Philadelphia, PA 19107 Shillington, PA 19607 Bridgeport, PA 19406
Fairmont Office (1) Trooper Office (1) Henderson Road Office
- ------------------------ ------------------------------- --------------------------
401 Fairmont Avenue Trooper and Egypt Roads Bielder and Henderson Roads
Philadelphia, PA 19123 Trooper, PA 19401 King of Prussia, PA 19406
Castor Office (1) Reading Office Phoenixville Office (1)
- ------------------------ ------------------------------- --------------------------
6331 Castor Avenue 501 Washington Avenue 808 Valley Forge Road
Philadelphia, PA 19149 Reading, PA 19601 Phoenixville, PA 19460
15th Street Office Jenkintown Office (1) Turnersville Office
- ------------------------ ------------------------------- --------------------------
30 South Street 600 Old York Road 3501 Black Horse Pike
Philadelphia, PA 19102 Jenkintown, PA 19046 Turnersville, NJ 08012
Grant Avenue Office (1) Narberth Training Center (1)(2) Storage Facility (1)
- ------------------------ ------------------------------- --------------------------
1650 Grant Avenue 814 Montgomery Avenue 3836 Spring Garden Street
Philadelphia, PA 19115 Narberth, PA 19072 Philadelphia, PA 19104
ROYAL ASIAN BANK DIVISION
Northeast Office Cheltenham Office Upper Darby Office
- ------------------------ ------------------------------- --------------------------
6526 Castor Avenue 418 Oak Lane 7001 West Chester Pike
Philadelphia, PA 19149 Philadelphia, PA 19126 Upper Darby, PA 19082
Loan Production Office
- ----------------------
215 Main Street
Fort Lee, NJ 07024
(1) Owned
(2) Used for employee training
Royal Bank owns eleven of the above properties. One property is subject
to a mortgage. The remaining ten properties are leased with expiration dates
between 2005 and 2012. During 2004, Royal Bank made aggregate lease payments of
approximately $664,000. Royal Bank believes that all of its properties are
attractive, adequately insured, and well maintained and are adequate for Royal
Bank's purposes. Royal Bank also owns a property located at 144 Narberth Avenue,
Narberth, PA, which may serve as a site for future expansion.
ITEM 3. LEGAL PROCEEDINGS
Management, after consulting with Royal Bancshares's legal counsel, is
not aware of any litigation that would have a material adverse effect on the
consolidated financial position of Royal Bancshares. There are no proceedings
pending other than routine litigation incident to the business of Royal
Bancshares. In addition, no material proceedings are known to be contemplated by
governmental authorities against Royal Bancshares.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
PART II
ITEM 5. MARKET FOR ROYAL BANK'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
On September 6, 1988, Royal Bancshares' Class A Common Stock commenced
trading on the NASDAQ National Market System (NASDAQ/NMS). Royal Bancshares'
NASDAQ Symbol is RBPAA and is included in the NASDAQ National Market Stock
Table, which is published in most major newspapers. There is no market for Royal
Bancshares' Class B Common Stock, as such is prohibited by the terms of the
Class B Common Stock. The following table shows the range of high, low-end and
closing bid prices for Royal Bancshares' stock as reported by NASDAQ.
BID PRICES
2004 HIGH LOW CLOSE
----------------------------------- -------- -------- --------
First Quarter...................... $ 26.471 $ 23.922 $ 25.000
Second Quarter..................... 25.588 20.931 24.314
Third Quarter...................... 24.892 21.618 23.794
Fourth Quarter..................... 29.304 23.441 26.490
2003 HIGH LOW CLOSE
----------------------------------- -------- -------- --------
First Quarter...................... $ 20.713 $ 17.061 $ 18.704
Second Quarter..................... 21.146 18.618 20.588
Third Quarter...................... 26.384 20.118 25.808
Fourth Quarter..................... 26.105 23.357 24.510
(Source: This summary reflects information supplied by NASDAQ.)
The bid information shown above is derived from statistical reports of
the NASDAQ Stock Market and reflects inter-dealer prices without retail mark-up,
mark-down or commissions and may not necessarily represent actual transactions.
The bid prices reflect the 2% stock dividend that was declared on December 15,
2004. The NASDAQ Stock Market, Inc., is a wholly-owned subsidiary of National
Association of Securities Dealers, Inc.
The approximate number of recorded holders of Royal Bancshares' Class A
and Class B Common Stock, as of February 28, 2005, is shown below:
TITLE OF CLASS NUMBER OF RECORD HOLDERS
----------------------------------- ------------------------
Class A Common Stock 367
Class B Common Stock 147
Because substantially all of the holders of Class B Common Stock are
also holders of Class A Common stock the number of record holders of the two
classes on a combined basis was approximately 420 as of February 28, 2005.
14
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following two tables discloses the number of outstanding options,
warrants and rights granted by Royal Bancshares to participants in equity
compensation plans, as well as the number of securities remaining available for
future issuance under the plans. The tables provide this information separately
for equity compensation plans that have and have not been approved by security
holders.
(c)
Number of securities
(a) remaining available for
Number of securities to (b) future issuance under
be issued upon Weighted-average equity compensation
exercise of outstanding exercise price of plans (excluding
options, warrants and outstanding options, securities reflected in
rights warrants and rights column (a))
------------------------ ------------------------ ------------------------
OUTSIDE DIRECTORS STOCK OPTION PLAN
Equity compensation plan approved
by stockholders 79,044 $ 17.29 66,903
Equity compensation plan not
approved by stockholders -- -- --
------------------------ ------------------------
Total 79,044 $ 17.29 66,903
(c)
Number of securities
(a) remaining available for
Number of securities to (b) future issuance under
be issued upon Weighted-average equity compensation
exercise of outstanding exercise price of plans (excluding
options, warrants and outstanding options, securities reflected in
rights warrants and rights column (a))
------------------------ ------------------------ ------------------------
EMPLOYEES STOCK OPTION PLAN
Equity compensation plan approved
by stockholders 593,539 $ 19.18 77,026
Equity compensation plan not
approved by stockholders -- -- --
------------------------ ------------------------
Total 593,539 $ 19.18 77,026
DIVIDENDS
Subject to certain limitations imposed by law, the Board of Directors of
Royal Bancshares may declare a dividend on shares of common stock.
Stock dividends. On October 20, 1999, the Board of Directors of Royal
Bancshares declared a 5% stock dividend on both its Class A Common Stock and
Class B Common Stock shares payable on January 17, 2000, to shareholders of
record on January 3, 2000. The stock dividend resulted in the issuance of
382,857 additional shares of Class A Common Stock and 84,234 additional shares
of Class B Common Stock.
On January 17, 2001, the Board of Directors of Royal Bancshares declared
a 5% stock dividend on both its Class A Common Stock and Class B Common Stock
shares payable on February 12, 2001, to shareholders of record on January 29,
2001. The stock dividend resulted in the issuance of 408,197 additional shares
of Class A Common Stock and 86,614 additional shares of Class B Common Stock.
15
On January 16, 2002, the Board of Directors of Royal Bancshares declared
a 6% stock dividend on both its Class A Common Stock and Class B Common Stock
shares payable on February 8, 2002, to shareholders of record on January 28,
2002. The stock dividend resulted in the issuance of 517,635 additional shares
of Class A common stock and 108,282 additional shares of Class B common stock.
On January 15, 2003, the Board of Directors of Royal Bancshares declared
a 3% stock dividend on both its Class A Common Stock and Class B Common Stock
shares payable on February 12, 2003, to shareholders of record on January 29,
2003. The stock dividend resulted in the issuance of 281,196 additional shares
of Class A common stock and 55,820 additional shares of Class B common stock.
On January 21, 2004, the Board of Directors of Royal Bancshares declared
a 2% stock dividend on both its Class A Common Stock and Class B Common Stock
shares payable on February 18, 2004, to shareholders of record on February 4,
2004. The stock dividend resulted in the issuance of 195,861 additional shares
of Class A common stock and 38,216 additional shares of Class B common stock.
On December 15, 2004, the Board of Directors of Royal Bancshares
declared a 2% stock dividend on both its Class A Common Stock and Class B Common
Stock shares payable on January 12, 2005, to shareholders of record on December
29, 2004. The stock dividend resulted in the issuance of 200,814 additional
shares of Class A common stock and 38,865 additional shares of Class B common
stock. Future stock dividends, if any, will be at the discretion of the Board of
Directors and will be dependent on the level of earnings and compliance with
regulatory requirements.
Cash Dividends. Royal Bancshares paid cash dividends in each quarter of
2004 and 2003 for holders of Class A Common Stock and for holders of Class B
Common Stock. This resulted in a charge to retained earnings of approximately
$12.2 million and $11.3 million for 2004 and 2003, respectively. The following
table sets forth on a quarterly basis dividends, paid to holders of each Class A
and Class B Common Stock for 2004 and 2003, adjusted to give effect to the stock
dividends paid.
CASH DIVIDENDS PER SHARE
-----------------------------
2004 CLASS A CLASS B
---------------------------------------- ------------- -------------
First Quarter........................... $ .2500 $ .2875
Second Quarter.......................... $ .2500 $ .2875
Third Quarter........................... $ .2500 $ .2875
Fourth Quarter.......................... $ .2500 $ .2875
CASH DIVIDENDS PER SHARE
-----------------------------
2003 CLASS A CLASS B
---------------------------------------- ------------- -------------
First Quarter........................... $ .2375 $ .2731
Second Quarter.......................... $ .2375 $ .2731
Third Quarter........................... $ .2375 $ .2731
Fourth Quarter.......................... $ .2500 $ .2875
Future dividends must necessarily depend upon net income, capital
requirements, and appropriate legal restrictions and other factors relevant at
the time the Board of Directors of Royal Bancshares considers dividend policy.
Cash necessary to fund dividends available for dividend distributions to the
shareholders of Royal Bancshares must initially come from dividends paid by
Royal Bank to Royal Bancshares. Therefore, the restrictions on the Royal Bank's
dividend payments are directly applicable to Royal Bancshares. Under the
Pennsylvania Banking Code of 1965, as amended, Royal Bank places a restriction
on the availability of capital surplus for payment of dividends.
Under the Pennsylvania Business Corporation Law of 1988, as amended,
Royal Bancshares may pay dividends only if after payment Royal Bancshares would
be able to pay its debts as they become due in the usual course of business and
the total assets are greater than the sum of its total liabilities plus the
amount that would be needed if Royal Bancshares were to be dissolved at the time
of the dividend to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
dividend. See Regulatory Matters Note to the Consolidated Financial Statements
in Item 8 of this report.
16
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial and operating information
for Royal Bancshares should be read in conjunction with Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and accompanying notes in Item 8:
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------------------------------
INCOME STATEMENT DATA (IN THOUSANDS) 2004 2003 2002 2001 2000
- ---------------------------------------------------- --------- --------- --------- --------- ---------
Interest income $ 67,541 $ 72,320 $ 77,104 $ 69,224 $ 58,875
Interest expense 27,301 29,941 36,491 31,808 22,549
--------- --------- --------- --------- ---------
Net interest income 40,240 42,379 40,613 37,416 36,326
Provision for loan losses 6 674 250 -- 250
--------- --------- --------- --------- ---------
Net interest income after loan losses 40,234 41,705 40,363 37,416 36,076
Gains on sale of loans 480 637 767 372 --
Gains on sale of real estate 2,102 568 455 188 53
Gains (losses) on investment securities 810 719 790 60 (1,302)
Income related to equity investments ("VIE") 7,133 -- -- -- --
Other income 2,635 1,780 1,188 1,118 1,207
--------- --------- --------- --------- ---------
Total other income 13,160 3,704 3,200 1,738 (42)
Income before other expenses & income taxes 53,394 45,410 43,563 39,154 36,034
Non-interest expense
Salaries and benefits 10,767 9,959 9,440 10,479 7,979
Expenses related to equity investments ("VIE") 4,780 -- -- -- --
Other 9,900 8,929 9,481 7,124 5,813
--------- --------- --------- --------- ---------
Total operating expenses 25,447 18,888 18,921 17,603 13,792
--------- --------- --------- --------- ---------
Income before taxes 27,947 26,522 24,642 21,551 22,242
Incomes taxes 7,914 7,996 7,237 5,797 7,982
--------- --------- --------- --------- ---------
Net income $ 20,033 $ 18,526 $ 17,405 $ 15,754 $ 14,260
========= ========= ========= ========= =========
Basic earnings per share (1) $ 1.60 $ 1.49 $ 1.41 $ 1.29 $ 1.18
--------- --------- --------- --------- ---------
Diluted earnings per share (1) $ 1.59 $ 1.49 $ 1.38 $ 1.27 $ 1.16
--------- --------- --------- --------- ---------
(1) Earnings per share has the weighted average number of shares used in the
calculation adjusted to reflect a 2% stock dividend in December 2004, a
2% stock dividend in January 2004, a 3% stock dividend in 2003, a 6%
stock dividend in 2002, a 5% stock dividend in 2001, and a 5% stock
dividend in 2000.
17
AS OF DECEMBER 31,
----------------------------------------------------------------------------
BALANCE SHEET DATA (IN THOUSANDS) 2004 2003 2002 2001 2000
- --------------------------------- ------------ ------------ ------------ ------------ ------------
Total assets $ 1,205,274 $ 1,154,410 $ 1,088,484 $ 930,980 $ 630,081
Total average assets 1,194,008 1,160,354 1,048,875 788,419 573,780
Loans, net 454,775 500,131 564,264 634,347 411,973
Total deposits 742,382 791,059 820,840 701,860 472,582
Total borrowings 222,000 212,000 124,500 70,225 30,000
Total stockholders equity 140,876 134,833 121,331 108,449 103,502
Total average stockholders equity 137,622 127,728 114,655 105,072 99,746
Return on average assets 1.7% 1.6% 1.7% 2.0% 2.5%
Return on average equity 14.6% 14.5% 15.2% 15.0% 14.3%
Average equity to average assets 11.5% 11.0% 10.9% 13.3% 17.4%
Cash dividend payout ratio 60.9% 61.1% 60.8% 56.9% 55.0%
AVERAGE BALANCES
The following table represents the average daily balances of assets,
liabilities and shareholders' equity and the respective interest paid on
interest bearing assets and interest bearing liabilities, as well as average
rates for the periods indicated:
2004 2003
-------------------------------------------- ------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------ ------------ ------------ ------------ ------------ ------------
ASSETS (In thousands)
Interest bearing deposits $ 34,702 $ 409 1.18% $ 40,856 $ 475 1.16%
Federal funds 8,644 102 1.18% 13,598 142 1.04%
Investment securities
Held to maturity 141,799 6,365 4.49% 46,302 3,087 6.67%
Available for sale 399,361 20,621 5.16% 446,210 22,007 4.93%
------------ ------------ ------------ ------------ ------------ ------------
Total investment securities 541,160 26,986 4.99% 492,512 25,094 5.10%
Loans
Commercial and Industrial 199,645 14,241 7.13% 225,224 15,812 7.02%
Real estate secured 267,757 25,504 9.53% 333,168 30,532 9.16%
Other loans 4,124 299 7.25% 4,373 265 6.06%
------------ ------------ ------------ ------------ ------------ ------------
Total loans 471,526 40,044 8.49% 562,765 46,609 8.28%
------------ ------------ ------------ ------------ ------------ ------------
Total interest earnings
assets 1,056,032 67,541 6.40% 1,109,731 72,320 6.52%
Non interest earnings assets
Cash & due from banks 9,720 8,348
Other assets 142,455 56,780
Allowance for loan loss (12,503) (12,472)
Unearned discount (1,696) (2,033)
------------ -------------
Total non-interest earning
assets 137,976 50,623
------------ -------------
Total assets $ 1,194,008 $ 1,160,354
============ =============
2002
-------------------------------------------
AVERAGE YIELD/
BALANCE INTEREST RATE
------------ ------------ -----------
ASSETS (In thousands)
Interest bearing deposits $ 32,760 $ 682 2.08%
Federal funds 16,780 272 1.62%
Investment securities
Held to maturity 53,226 4,019 7.55%
Available for sale 297,457 18,817 6.33%
------------ ------------ -----------
Total investment securities 350,683 22,836 6.51%
Loans
Commercial and Industrial 230,556 17,020 7.38%
Real estate secured 383,816 36,070 9.40%
Other loans 2,784 224 8.05%
------------ ------------ -----------
Total loans 617,156 53,314 8.64%
------------ ------------ -----------
Total interest earnings 1,017,379 77,104 7.58%
assets
Non interest earnings assets
Cash & due from banks 8,597
Other assets 38,039
Allowance for loan loss (12,108)
Unearned discount (3,032)
------------
Total non-interest earning
assets 31,496
------------
Total assets $ 1,048,875
------------
18
2004 2003
-------------------------------------------- ------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------ ------------ ------------ ------------ ------------ ------------
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits:
Savings $ 24,278 $ 152 0.63% $ 23,714 $ 182 0.77%
Now 34,181 244 0.71% 32,510 339 1.04%
Money market 426,895 7,721 1.81% 442,873 9,661 2.18%
Time deposits 218,756 8,577 3.92% 269,293 12,011 4.46%
------------ ------------ ------------ ------------ ------------ ------------
Total interest bearing deposits 704,110 16,694 2.37% 768,390 22,193 2.89%
Federal funds -- -- -- -- -- --
Borrowings 221,741 8,744 3.94% 183,339 7,748 4.23%
Obligation through equity
investments 55,558 1,639 2.95% -- -- --
Subordinate debt 4,448 224 5.06% -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Total interest bearing liabilities 985,857 27,301 2.77% 951,729 29,941 3.15%
------------ ------------ ------------ ------------ ------------ ------------
Non interest bearing deposits 57,789 56,814
Other liabilities 12,740 24,083
------------ ------------
Total liabilities 1,056,386 1,032,626
Shareholders' equity 137,622 127,728
------------ ------------
Total liabilities and
Shareholders' equity $ 1,194,008 $ 1,160,354
============ ============
Net interest income $ 40,240 $ 42,379
============ ============
Net interest margin 3.81% 3.82%
============ ============
2002
-------------------------------------------
AVERAGE YIELD/
BALANCE INTEREST RATE
------------ ------------ -----------
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits:
Savings $ 25,658 $ 370 1.44%
Now 34,866 697 2.00%
Money market 270,454 8,491 3.14%
Time deposits 385,370 19,358 5.02%
------------ ------------ ------------
Total interest bearing deposits 716,348 28,916 4.04%
Federal funds -- -- --
Borrowings 137,460 7,575 5.51%
Obligation through equity
investments -- -- --
Subordinate debt -- -- --
------------ ------------ ------------
Total interest bearing liabilities 853,808 36,491 4.27%
------------ ------------ ------------
Non interest bearing deposits 53,800
Other liabilities 26,602
------------
Total liabilities 934,210
Shareholders' equity 114,665
------------
Total liabilities and
Shareholders' equity $ 1,048,875
============
Net interest income $ 40,613
============
Net interest margin 3.99%
============
(1) Nonaccruing loans have been included in the appropriate average loan balance
category, but interest on these loans has not been included.
19
RATE VOLUME
The following table sets forth a rate/volume analysis, which segregates
in detail the major factors contributing to the change in net interest income
for the years ended December 31, 2004 and 2003, as compared to respective
previous periods, into amounts attributable to both rate and volume variances.
2004 VS 2003 2003 VS 2002
CHANGES DUE TO: CHANGES DUE TO:
-------------------------------- --------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
INTEREST INCOME
Interest bearing deposits in banks $ (73) $ 7 $ (66) $ 142 $ (349) $ (207)
Federal funds sold (57) 17 (40) (45) (85) (130)
Investments securities
Held to maturity 4,573 (1,295) 3,278 (491) (441) (932)
Available for sale (2,384) 998 (1,386) 7,972 (4,782) 3,190
-------- -------- -------- -------- -------- --------
Total investment securities 2,189 (297) 1,892 7,481 (5,223) 2,258
Loans
Commercial and industrial (1,820) 249 (1,571) (387) (821) (1,208)
Mortgages secured by real estate (6,192) 1,164 (5,028) (4,659) (880) (5,538)
Other loans (16) 50 34 106 (65) 41
-------- -------- -------- -------- -------- --------
Total loans (8,028) 1,463 (6,565) (4,940) (1,766) (6,705)
-------- -------- -------- -------- -------- --------
Total increase (decrease) in interest income (5,969) 1,190 (4,779) 2,638 (7,423) (4,784)
INTEREST EXPENSE
Deposits
Savings $ 4 $ (34) $ (30) $ (26) $ (162) $ (188)
Now and Money Market (959) (1,076) (2,035) 4,109 (3,297) 812
Time deposits (2,106) (1,328) (3,434) (5,353) (1,994) (7,347)
-------- -------- -------- -------- -------- --------
Total deposits (3,061) (2,438) (5,499) (1,270) (5,453) (6,723)
Borrowings 3,200 (341) 2,859 2,182 (2,009) 173
-------- -------- -------- -------- -------- --------
Total increase(decrease) in interest expense 139 (2,779) (2,640) 912 (7,462) (6,550)
Total increase(decrease) in net interest
income $ (6,108) $ 3,969 $ (2,139) $ 1,726 $ 39 $ 1,766
======== ======== ======== ======== ======== ========
LOANS
The following table reflects the composition of the loan portfolio of
Royal Bank and the percent of gross outstandings represented by each category at
the dates indicated.
AS OF DECEMBER 31,
(IN THOUSANDS)
----------------------------------------------------------------------------------
2004 2003 2002
------------------------ ------------------------ ------------------------
Comm'l and Industrial $ 208,204 44% $ 225,268 44% $ 241,373 42%
Real Estate Secured 258,747 55% 286,997 55% 333,972 57%
Other 4,087 1% 4,942 1% 3,509 1%
---------- ---------- ---------- ---------- ---------- ----------
Total gross loans 471,038 100% 517,207 100% 578,854 100%
Unearned income (1,540) (1,203) (1,082)
Discount on loans purchased -- (290) (1,038)
---------- ---------- ----------
469,498 515,714 576,734
Allowance for loan loss (12,519) (12,426) (12,470)
---------- ---------- ----------
Total net loans $ 456,979 $ 503,288 $ 564,264
========== ========== ==========
AS OF DECEMBER 31,
(IN THOUSANDS)
-----------------------------------------------------
2001 2000
------------------------ ------------------------
Comm'l and Industrial $ 218,498 34% $ 193,398 45%
Real Estate Secured 417,028 64% 230,999 54%
Other 13,909 2% 4,561 1%
---------- ---------- ---------- ----------
Total gross loans 649,435 100% 428,958 100%
Unearned income (1,056) (1,992)
Discount on loans purchased (2,144) (3,020)
---------- ----------
646,235 423,946
Allowance for loan loss (11,888) (11,973)
---------- ----------
Total net loans $ 634,347 $ 411,973
========== ==========
20
ANALYSIS OF ALLOWANCE FOR LOAN LOSS
YEAR ENDING DECEMBER 31,
(IN THOUSANDS)
--------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Total Loans $ 469,498 $ 515,714 $ 576,734 $ 646,235 $ 423,946
========== ========== ========== ========== ==========
Daily average loan balance $ 471,526 $ 562,765 $ 617,156 $ 543,854 $ 404,794
========== ========== ========== ========== ==========
Allowance for loan loss:
Balance at the beginning of the year $ 12,426 $ 12,470 $ 11,888 $ 11,973 $ 11,737
Charge offs by loan type:
Commercial -- 22 47 82 523
Real estate 204 789 878 435 105
---------- ---------- ---------- ---------- ----------
Total charge offs 204 811 925 517 628
Recoveries by loan type:
Commercial 37 26 19 212 596
Individual 4 2 32 32 4
Real estate 250 65 1,206 188 14
---------- ---------- ---------- ---------- ----------
Total recoveries 291 93 1,257 432 614
---------- ---------- ---------- ---------- ----------
Net recoveries (loan charge offs) 87 (718) 332 (85) (14)
Provision for loan loss 6 674 250 -- 250
---------- ---------- ---------- ---------- ----------
Balance at end of year $ 12,519 $ 12,426 $ 12,470 $ 11,888 $ 11,973
========== ========== ========== ========== ==========
Net charge offs to average loans 0.02% (0.13%) 0.05% (0.02%) --
========== ========== ========== ========== ==========
Allowance to total loans at year end 2.67% 2.41% 2.16% 1.84% 2.82%
========== ========== ========== ========== ==========
The allowance for loan losses is established through provisions for loan
losses based on management's on-going evaluation of the risks inherent in Royal
Bank's loan portfolio. Factors considered in the evaluation process include
growth of the loan portfolio, risk characteristics of the types of loans in the
portfolio, geographic and large borrower concentrations, current regional
economic and real estate market conditions that could affect the ability of
borrowers to pay, the value of underlying collateral, and trends in loan
delinquencies and charge-offs.
Royal Bank utilizes an internal rating system to monitor and evaluate
the credit risk inherent in its loan portfolio. All loans approved by the loan
committee, executive board committee and the Board of Directors are initially
assigned a rating of pass. The Vice President of Special Assets and the loan
review committee are expected to recommend changes in loan ratings when facts
come to their attention that warrant an upgrade or downgrade in a loan rating.
Problem and potential problem assets are assigned the three lowest ratings. Such
ratings coincide with the "Substandard", "Doubtful" and "Loss" classifications
used by federal regulators in their examination of financial institutions.
Generally, an asset is considered Substandard if it is inadequately protected by
the current net worth and paying capacity of the obligors and/or the collateral
pledged. Substandard assets have a well-defined weakness or weaknesses that
jeopardize the liquidation of the debt. Assets classified as Doubtful have all
the weaknesses inherent in those classified Substandard with the added
characteristics that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, highly questionable and
improbable. Assets classified as Loss are those considered uncollectable and of
such little value that their continuance as assets is not warranted. On a
regular basis, the Loan Review Committee and senior management review the status
of each loan.
While Royal Bank believes that it has established an adequate allowance
for loan losses, there can be no assurance that the regulators, in reviewing
Royal Bank's loan portfolio, will not request Royal Bancshares to materially
increase its allowances for loan losses. Although management believes that
adequate specific and general loan loss allowances have been established, actual
losses are dependant upon future events and, as such, further additions to the
level of specific and general loss allowances could become necessary.
21
LOANS AND LEASE FINANCING RECEIVABLES
The following table summarizes the loan portfolio by loan category and
amount that corresponds to the appropriate regulatory definitions.
AS OF DECEMBER 31,
(IN THOUSANDS)
---------------------------------
2004 2003 2002
--------- --------- ---------
Loans secured by real estate
Construction and land development $ 106,428 $ 107,463 $ 82,736
Secured by 1-4 family residential properties:
Revolving, open-end loans secured by 1-4 family residential
properties and extended under lines of credit 7,369 5,854 7,564
All other loans secured by 1-4 family residential properties:
Secured by first liens 36,136 50,716 116,248
Secured by junior liens 4,515 3,796 3,418
Secured by multi family (5 or more) residential properties 15,256 21,728 33,017
Secured by nonfarm nonresidential properties 85,545 97,902 87,448
Commercial and industrial loans to US addresses 208,204 225,268 241,373
Loans to individuals for household, family, and other personal
expenditures 1,346 1,182 3,146
Obligations of state and political subdivisions in the US 1,769 3,134 3,541
All other loans 4,470 163 363
Less: Any unearned income on loans listed above 1,540 1,492 2,120
--------- --------- ---------
Total loans and leases, net of unearned income $ 469,498 $ 515,714 $ 576,734
========= ========= =========
CREDIT QUALITY
The following table presents the principal amounts of nonaccruing loans
and other real estate.
AS OF DECEMBER 31,
(IN THOUSANDS)
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
Non-accruing loans (1)(2) $ 4,526 $ 11,328 $ 11,908 $ 10,794 $ 3,548
Other real estate 5,424 4,371 1,444 884 --
----------- ----------- ----------- ----------- -----------
Total nonperforming assets $ 9,950 $ 15,699 $ 13,352 $ 11,678 $ 3,548
=========== =========== =========== =========== ===========
Nonperforming assets to total assets 0.83% 1.36% 1.23% 1.25% 0.56%
=========== =========== =========== =========== ===========
Nonperforming loans to total loans 0.96% 2.20% 2.06% 1.67% 0.84%
=========== =========== =========== =========== ===========
Allowance for loan loss to nonperforming loans 276.54% 109.69% 104.72% 110.14% 337.46%
=========== =========== =========== =========== ===========
(1) Generally, a loan is placed on nonaccruing status when it has been
delinquent for a period of 90 days or more unless the loan is both well
secured and in the process of collection.
(2) If interest had been accrued on these nonaccruing loans, such income would
have approximated $209,000 for 2004, $401,000 for 2003, $473,000 for 2002,
$526,000 for 2001, $319,000 for 2000.
22
INVESTMENT SECURITIES
The contractual maturity distribution and weighted average rate of Royal
Bancshares' investments held to maturity and available for sale portfolios at
December 31, 2004 are presented in the following table. Weighted average rates
on tax-exempt obligations have been computed on a fully taxable equivalent basis
assuming a tax rate of 35%.
AS OF DECEMBER 31, 2004
(IN THOUSANDS)
------------------------------------------------------------------------------
AFTER 1 YEAR BUT AFTER 5 YEARS, BUT
WITHIN 1 YEAR WITHIN 5 YEARS WITHIN 10 YEARS
----------------------- ----------------------- ------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- ---------- ---------- ---------- ---------- ----------
SECURITIES HELD TO MATURITY
Mortgage backed
securities $ -- --% $ 52 9.0% $ -- --%
Agencies -- --% 125,000 3.6% 60,000 4.0%
Other securities 16,695 8.3% 10,300 5.7% -- --%
---------- ---------- ---------- ---------- ---------- ----------
Total $ 16,695 8.3% $ 135,352 3.7% $ 60,000 4.0%
========== ========== ========== ========== ========== ==========
AVAILABLE FOR SALE
Mortgage backed
securities $ -- --% $ 4,128 3.5% $ 6,028 3.5%
CMO'S -- --% -- --% -- --%
Agencies -- --% -- --% 58,793 3.8%
Foreign 6,380 8.2% 3,125 8.0% -- --%
Trust Preferred -- --% -- --% -- --%
Other securities 21,227 3.4% 110,475 5.5% 3,843 5.7%
---------- ---------- ---------- ---------- ---------- ----------
Total $ 27,607 4.5% $ 117,728 5.5% $ 68,664 3.9%
========== ========== ========== ========== ========== ==========
AFTER 10 YEARS TOTAL
------------------------ ------------------------
AMOUNT RATE AMOUNT RATE
---------- ---------- ---------- ----------
SECURITIES HELD TO MATURITY
Mortgage backed
securities $ 180 3.8% $ 232 5.0%
Agencies -- --% 185,000 3.7%
Other securities -- --% 26,995 7.3%
---------- ---------- ---------- ----------
Total $ 180 3.8% $ 212,227 4.2%
========== ========== ========== ==========
AVAILABLE FOR SALE
Mortgage backed
securities $ 42,039 4.5% $ 52,195 4.3%
CMO'S 29,473 4.4% 29,473 4.4%
Agencies 34,512 4.9% 93,305 4.2%
Foreign -- --% 9,505 8.1%
Trust Preferred 39,562 9.7% 39,562 9.7%
Other securities 1,348 6.0% 136,893 5.2%
---------- ---------- ---------- ----------
Total $ 146,935 6.0% $ 360,934 5.3%
========== ========== ========== ==========
The following tables presents the consolidated book values and
approximate fair value at December 31, 2004 and 2003, respectively, for each
major category of Royal Bancshares' investment securities portfolio for held to
maturity securities and available for sale securities.
23
AS OF DECEMBER 31,
(IN THOUSANDS)
---------------------------------------------------------------------
2004 2003 2002
--------------------- --------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- --------- --------- --------- --------- ---------
SECURITIES HELD TO MATURITY
Mortgage backed securities $ 232 232 $ 340 $ 340 $ 538 $ 538
US agencies 185,000 184,267 91,630 91,333 -- --
Other securities 26,995 27,366 21,121 22,602 30,076 32,207
--------- --------- --------- --------- --------- ---------
Total $ 212,227 $ 211,865 $ 113,091 $ 114,275 $ 30,614 $ 32,745
========= ========= ========= ========= ========= =========
SECURITIES AVAILABLE FOR SALE
Mortgage backed securities $ 81,303 $ 81,669 $ 110,596 $ 111,875 $ 235,965 $ 236,633
US agencies 94,997 93,305 122,785 121,112 -- --
Trust preferred securities 37,196 39,562 36,251 37,139 39,160 37,329
Other securities 141,679 146,398 161,488 170,713 130,598 135,405
--------- --------- --------- --------- --------- ---------
Total $ 355,175 $ 360,934 $ 431,120 $ 440,839 $ 405,723 $ 409,367
========= ========= ========= ========= ========= =========
DEPOSITS
The average balance of Royal Bank's deposits by major classifications
for each of the last three years is presented in the following table.
AS OF DECEMBER 31,
(IN THOUSANDS)
-----------------------------------------------------------------------
2004 2003 2002
--------------------- --------------------- ---------------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
--------- --------- --------- --------- --------- ---------
Demand deposits:
Non interest bearing $ 57,789 --% $ 56,814 --% $ 53,800 --%
Interest bearing (NOW) 34,181 0.71% 32,510 1.04% 34,866 2.00%
Money market deposits 426,895 1.81% 442,873 2.18% 270,454 3.14%
Savings deposits 24,278 0.63% 23,714 0.77% 25,658 1.44%
Certificate of deposit 218,756 3.92% 269,293 4.46% 385,370 5.02%
--------- --------- ---------
Total deposits $ 761,899 $ 825,204 $ 770,148
========= ========= =========
24
The remaining maturity of Certificates of Deposit of $100,000 or
greater:
AS OF DECEMBER 31,
(IN THOUSANDS)
-----------------------
MATURITY 2004 2003
- -------- ---------- ----------
Three months or less $ 13,309 $ 6,396
Over three months through twelve months 27,426 47,549
Over twelve months through five years 48,590 46,128
Over five years 1,271 4,050
---------- ----------
Total $ 90,596 $ 104,123
========== ==========
SHORT AND LONG TERM BORROWINGS
YEAR ENDING DECEMBER 31,
(IN THOUSANDS)
---------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ----------
Short term borrowings $ 17,500 $ -- $ 3,000 $ 30,000 $ 3,000
Long term borrowings:
Other borrowings -- -- -- 2,725 --
Obligations through equity investments 56,249 -- -- -- --
Subordinated debt 25,774 -- -- -- --
FHLB advances 204,500 212,000 124,500 67,500 30,000
--------- --------- --------- --------- ---------
Total borrowings $ 304,023 $ 212,000 $ 127,500 $ 100,225 $ 30,000
========= ========= ========= ========= =========
25
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results
of operations should be read in conjunction with the Consolidated Financial
Statements of Royal Bancshares and related notes (see Item 8).
FINANCIAL CONDITION
Total assets increased $51 million, or 4%, to $1.21 billion at December
31, 2004 from $1.15 billion at year-end 2003.
Cash and Cash Equivalents. Cash and cash equivalents are comprised of
cash on hand, and cash in interest bearing and non-interest bearing accounts in
banks, in addition to federal funds sold. Cash and cash equivalents increased
$2.0 million, to $27.1 million at December 31, 2004. The average balance of cash
and cash equivalents was approximately $53.1 million for 2004 versus
$62.8 million for 2003. The majority of this average balance is held in
interest-bearing accounts or invested daily in overnight fed funds. The average
balance of these funds that earn interest was $43.3 million in 2004. The
increase in the balance of cash and cash equivalents at year end was primarily
due to larger balances maintained with the Federal Reserve Bank along with
pending funding needs.
Investment Securities Held to Maturity. Held to maturity ("HTM")
investment securities represents approximately 13.4% of average earning assets
during 2004 and are comprised of primarily government agency bonds and corporate
debt securities of investment grade quality, at the time of purchase. During
2004, HTM investment securities increased by $99.1 million to $212.2 million at
December 31, 2004, from $113.1 million at December 31, 2003. The increase was
primarily due to a change with the investments committee strategy to hold
government agency bonds with a maximum maturity of five years as Held to
Maturity.
Investment Securities Available for Sale. AFS investment securities
represent 37.8% of average earning assets during 2004 and are primarily
comprised of government secured agency bonds and government secured
mortgaged-backed securities, capital trust security issues of regional banks,
domestic corporate debt and U.S. denominated foreign corporate debt. At December
31, 2004, AFS investment securities were $360.9 million as compared to
$440.8 million at December 31, 2003, a decrease of $79.9 million. This decrease
was primarily due to maturities, calls and principal payments of existing
portfolio.
Loans. Royal Bancshares' primary earning assets are loans, representing
approximately 44.7% of average earning assets during 2004. The loan portfolio
has historically been comprised primarily of business demand loans and
commercial mortgages in roughly equal amounts, and to a significantly lesser
extent, consumer loans comprised of one to four family residential and home
equity loans. During 2004, total loans decreased $45.3 million from
$500.1 million at December 31, 2003 to $454.8 million at December 31, 2004
primarily due to an increased number of loans being paid in full as compared to
new originations. In the current interest rate environment, Royal Bank has
avoided lending in transactions where its management perceived the risk/reward
ratio to be too high.
Deposits. Royal Bancshares' deposits are the primary source of funding.
Total deposits decreased $48.7 million, or 6.2%, from $791.1 million at December
31, 2003 to $742.4 million at December 31, 2004. This decrease in deposits is
primarily due to allowing brokered deposits to mature and not replacing the high
cost funds. At December 31, 2004, brokered deposits were $65.3 million as
compared to $80.9 million at December 31, 2003. Certificate of deposit accounts
decreased $34.4 million, or 14.5% from $236.9 million at December 31, 2003 to
$202.5 million at December 31, 2004. Other deposit categories comprised of
demand, NOW, money markets and savings deposits decreased $14.3 million during
2004 over their levels at December 31, 2004. The decrease in all savings
categories is primarily due to a reduction in interest rates offered.
FHLB Borrowings. Borrowings are comprised of long-term borrowings
(advances) and short-term borrowings (overnight borrowings, advances). Long-term
FHLB borrowings decreased $7.5 million to $204.5 million at December 31, 2004
from $212.0 million at December 31, 2003 due to an advance being reclassified as
a result of its remaining maturity being less than one year. At December 31,
2004 short term FHLB borrowings was $17.5 million. The average balance of
borrowings during 2004 was $221.7 million versus $183.3 million for 2003.
26
Other Borrowings. During 2004, Royal Bancshares completed a private
placement of preferred trust securities in the aggregate amount of $25 million
for a term of 30 years with a call feature of 5 years. In addition, as result of
the adoption of FIN46(R) Royal Bancshares consolidated into its statement of
condition $56.2 million of debt related to real estate equity investment of
which $0 is guaranteed by Royal Bancshares.
Shareholders' Equity. Shareholders' equity increased $6.0 million or
4.5% in 2004 to $140.9 million primarily due to net income of $20.0 million
partially offset by $12.2 million in cash dividends paid in 2004. Additionally,
shareholders' equity was affected by the decrease in market value of AFS
investment securities during 2004, which resulted in an downward adjustment of
$2.6 million.
RESULTS OF OPERATIONS
General. Royal Bancshares' 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
affected 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.
Net Income. Net income in 2004 was $20.0 million as compared to $18.5
million in 2003 and $17.4 million in 2002. Basic earnings per share were $1.60,
$1.49 and $1.41 for 2004, 2003, and 2002, respectively. The $1.5 million
increase in net income for 2004 represents an 8% increase over 2003, and is
primarily attributable to an increase in non-interest income specifically with
income from Bank Owned Life Insurance and gains from the disposition of Other
Real Estate Owned. The $1.1 million increase in net income for 2003 represents a
6% increase over 2002, and is primarily attributed to the reduction of interest
paid on deposits and borrowings as compared to income relating to loans and
investment security portfolio, and to lesser extent, non-recurring fees and
accretion income.
Net Interest Income. Net interest income is Royal Bancshares' primary
source of income. Its level is a function of the average balance of
interest-earning assets, the average balance of interest-bearing liabilities,
and the spread between the yield on assets and liabilities. In turn, these
factors are influenced by the pricing and mix of Royal Bancshares'
interest-earning assets and funding sources. Additionally, net interest income
is affected by market and economic conditions, which influence rates on loan and
deposit growth.
Net interest income was $40.2 million in 2004 as compared to $42.4
million in 2003. The decrease in net interest income in 2004 of $2.2 million was
primarily due to the reduction of the yield on earning assets along with a
decline in the spread of earning assets as compared to costing liabilities in
2004.
The increase in 2003 of net interest income of $1.8 million is primarily
due to the reduction of interest paid on deposits and borrowings. Interest paid
on interest bearing liabilities decreased $6.6 million from $36.5 million in
2002, to $29.9 million in 2003. The reduction is primarily due the reduction of
rates offered during 2003.
27
LOANS AND MORTGAGES
2004 2003 2002
-------------- -------------- --------------
Average loan outstandings $ 471,525,000 $ 562,765,000 $ 617,156,000
Interest and fees on loans $ 40,044,000 $ 46,609,000 $ 53,314,000
Average Yield 8.49% 8.28% 8.64%
Royal Bancshares continues to originate both fixed rate and variable
rate loans. At December 31, 2004 variable rate loans represented 45% of total
loans. Together with some match funding of fixed rate deposits to fixed rate
loans, variable rate loans have helped Royal Bank manage interest rate risk.
In 2004, the average balance of loans decreased $91.2 million to $471.5
million primarily due a large amount of loans being paid off as interest rates
remained at historically low levels. The average yield on loans increased by 21
basis points in 2004 primarily due to the average loan run off being at a lower
yield than the 2003 average yield , along with the Federal Reserve increasing
the short term rates in the second half of 2004.
In 2003, the average balance of loans decreased $54.3 million to $562.8
million primarily due a large amount of loans being paid off as interest rates
remained at historically low levels. The average yield on loans decreased 36
basis points in 2003 primarily due to interest rates re-pricing at lower levels
on variable rate loans.
HTM INVESTMENT SECURITIES
2004 2003 2002
-------------- -------------- --------------
Average HTM investment securities $ 141,799,000 $ 46,302,000 $ 53,226,000
Interest income $ 6,365,000 $ 3,087,000 $ 4,019,000
Average yield 4.49% 6.67% 7.55%
HTM investment securities are comprised primarily of taxable corporate
debt issues and US government agencies. The corporate debt issues are investment
grade at the time of purchase. It is Royal Bancshares' expressed intention to
hold these securities to maturity.
In 2004, the yield on HTM investment securities decreased 218 basis
points to 4.49% from 6.67% in 2003. This decrease was primarily due to the
purchasing of low credit risk government agency bonds that are yielding 3.0% to
4.5 %. The government agencies at December 31, 2004 have step up and/or call
features.
In 2003, the yield on HTM investment securities decreased 88 basis
points to 6.67% from 7.55% in 2002. This decrease was primarily due to higher
yielding investments that have maturing and being replaced with lower yielding
investments as a result of current market conditions.
AFS INVESTMENT SECURITIES
2004 2003 2002
-------------- -------------- --------------
Average AFS investment securities $ 399,361,000 $ 446,210,000 $ 297,457,000
Interest and dividend income $ 20,621,000 $ 22,007,000 $ 18,817,000
Average yield 5.16% 4.93% 6.33%
28
AFS investment securities are comprised primarily of government secured
mortgage-backed securities, government agencies, non-rated and rated capital
trust security issues of regional banks, rated domestic and US denominated
foreign corporate debt securities and to a lesser extent preferred and common
stock.
In 2004, the average balance of AFS investment securities decreased
$46.8 million to $399.4 million primarily due classifying new purchases from
investment runoff as held to maturity. The 23 basis point increase in average
yield is primarily due to higher yields earned on mortgage back securities
resulting from slower principal repayments speeds.
In 2003, the average balance of AFS investment securities increased
$148.8 million to $446.2 million primarily due to the redeployment of excess
cash on hand to achieve a higher rate of return than overnight funds. The 140
basis point decrease in average yield is primarily due to the lower yields on
the new investment purchases.
INTEREST EXPENSE ON NOW AND MONEY MARKET DEPOSITS
2004 2003 2002
-------------- -------------- --------------
Average NOW & Money Market deposits $ 461,076,000 $ 475,383,000 $ 305,320,000
Interest expense $ 7,965,000 $ 10,000,000 $ 9,188,000
Average cost of funds 1.73% 2.10% 3.01%
In 2004 the average cost of funds on NOW and money market deposits
decreased 37 basis points to 1.73% from 2.10% in 2003 primarily due to a decline
in the interest rate paid on these deposits. In 2003 the average cost of funds
on NOW and money market deposits decreased 91 basis points to 2.10% from 3.01%
in 2002 primarily due to a decline in the interest rate paid on these deposits.
INTEREST EXPENSE ON TIME DEPOSITS
2004 2003 2002
-------------- -------------- --------------
Average time deposits $ 218,756,000 $ 269,293,000 $ 385,370,000
Interest expense $ 8,577,000 $ 12,011,000 $ 19,358,000
Average cost of funds 3.92% 4.46% 5.02%
In 2004, the average balance of time deposits decreased $50.5 million to
$218.8 million. This decrease in average time deposits is primarily due to the
maturity of higher yielding brokered deposits that were not renewed. In 2003,
the average balance of time deposits decreased $116.1 million to $269.3 million.
This decrease in average time deposits is primarily due to the maturity of
higher yielding brokered deposits.
Although rates in general continued to move upward in 2004, the reaction
of deposits to rate changes (both increases and decreases) is slower than the
change in the prime rate because these time deposits must mature before a rate
adjustment would become effective. At December 31, 2004, 45% of time deposits
were comprised of certificates of deposits accounts with balances of $100,000 or
more, while in 2003, 44% of time deposits were comprised of certificates of
deposit accounts with balances of $100,000 or more. These types of deposit have
traditionally been considered more rate volatile than other types of deposits,
however Royal Bank's penalty for early redemption somewhat mitigates this
volatility.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for loan losses is an amount charged to expense to provide
for future losses on existing loans. In order to determine the amount of the
provision for loan loss, Royal Bank conducts a quarterly review of the loan
portfolio to evaluate overall credit quality. This evaluation consists of an
analysis of individual loans and overall risk characteristics and size of the
loan, and takes into consideration current economic and market conditions,
changes in non-performing loans, the capability of specific borrowers to repay
loan obligations as well as current collateral values.
In 2004, a provision for loan losses was recorded at $6 thousand, as
compared to $674 thousand in 2003 due to charges off's relating to delinquent
tax liens held by Crusader Servicing Corporation. During 2004 senior management
29
determined that loan loss reserve was adequate and no additional provision was
required for the period. Net recoveries were $87 thousand in 2004 as compared to
net charge-offs of $718 thousand in 2003.
In 2003, a provision for loan losses was recorded at $674 thousand, as
compared to $250 thousand in 2002 due to senior management assessment that the
level of loan loss reserve was not adequate. Net charge-offs were $718 thousand
in 2003 as compared to net recoveries of $332 thousand for 2002.
The allowance for possible loan loss at December 31, 2004 was $12.5
million, or 2.67% of net loans as compared to $12.4 million at December 31, 2003
or 2.41% of net loans, and $12.5 million at December 31, 2002, or 2.16% of net
loans.
NON-INTEREST INCOME
Non-interest income includes service charges on depositors' accounts,
safe deposit rentals and various services such as cashing checks, issuing money
orders and traveler's checks, and similar activities. In addition, other forms
of non-interest income is derived from changes in the cash value of BOLI, fees
collected on the sale of residential mortgages in the secondary market and
income relating to the VIE's which Royal Bancshares has an investment. Most
components of non-interest income are a modest and stable source of income, with
exceptions of one-time gains and losses from the sale of investments securities
and other real estate owned, from period to period these sources of income may
vary considerably. Service charges on depositors' accounts, safe deposit rentals
and other fees are periodically reviewed by management to remain competitive
with other local banks.
In 2004, total non-interest income increased $9.5 million to $13.2
million at December 31, 2004. This increase is primarily due income earned on
the purchase of BOLI, income related to the consolidation of the VIEs and the
sale of other real estate owned.
In 2003, total non-interest income increased $0.5 million primarily due
income earned on the purchase of Bank Owned Life Insurance ("BOLI") and the sale
of insurance products through an affiliation with the MONY Group.
NON-INTEREST EXPENSE
Non-interest expense includes compensation and employee benefits,
occupancy, advertising, FDIC insurance, state taxes, depreciation, and other
expenses such as auditing, automatic teller machines (ATMs), data processing,
legal, outside service charges, postage, printing and other expenses relating to
other real estate owned. Effective 2004, Royal Bancshares through the adoption
of FIN46(R) consolidates the expenses related to equity investments.
Non-interest expense increased $6.5 million to $25.4 million in 2004,
from $18.9 million in 2003. Salaries and employee benefits increased $809
thousand to $10.8 million in 2004, from $10.0 million in 2003. This was
primarily due to annual salary increases and the addition of the Royal Asian
Bank, a division of Royal Bank. Occupancy expense increased $179 thousand to
$1.5 million in 2004 primarily due to the addition Royal Asian Bank. Other
operating expenses increased $792 thousand to $8.4 million in 2004. As a result
of consolidation of the "VIE" non-interest expense increased $4.8 million during
2004.
Non-interest expense decreased $34 thousand to $18.9 million in 2003,
from $18.9 million in 2002. Salaries and employee benefits increased $519
thousand to $10.0 million in 2003, from $9.4 million in 2002. This was primarily
due to annual salary increases and an increase in pension cost. Occupancy
expense increased $151 thousand to $1.3 million in 2003 primarily due the
addition of our Turnersville Branch. Other operating expenses decreased $704
thousand to $7.6 million in 2003.
ACCOUNTING FOR INCOME TAXES
The provision for federal income taxes was $7.9 million in 2004 as
compared to $8.0 million for 2003, and $7.2 million for 2002 representing an
effective tax rate of 28%, 30% and 29%, respectively. The reduction in effective
tax rate in 2004 was primarily due to the addition of BOLI and increased level
of earnings offset by the use of tax goodwill related to the acquisition of
Knoblauch State Bank in 1995.
30
ACCOUNTING FOR DEBT AND EQUITY SECURITIES
Royal Bancshares accounts for investment securities in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." This standard requires investments in securities to be classified
in one of three categories; held to maturity, trading or available for sale.
Debt securities that Royal Bank has the positive intent and ability to hold to
maturity are classified as held to maturity and are reported at amortized cost.
As Royal Bank does not engage in security trading, the balance of its debt
securities and any equity securities are classified as available for sale. Net
unrealized gains and losses for such securities, net of tax effect, are required
to be recognized as a separate component of shareholders' equity and excluded
from the determination of net income.
ASSET LIABILITY MANAGEMENT
The primary functions of asset-liability management are to assure
adequate liquidity and maintain an appropriate balance between interest earning
assets and interest bearing liabilities. This process is overseen by the
Asset-Liability Committee ("ALCO") which monitors and controls, among other
variables, the liquidity, balance sheet structure and interest rate risk of the
consolidated company within policy parameters established and outlined in the
Funds, Cash Flow and Liquidity Policies and Procedures which are reviewed by the
Board of Directors at least annually. Additionally, the ALCO committee meets
periodically and reports on liquidity, interest rate sensitivity and projects
financial performance in various interest rate scenarios.
Liquidity. Liquidity is the ability of the financial institution to
ensure that adequate funds will be available to meet its financial commitments
as they become due. In managing its liquidity position, the financial
institution evaluates all sources of funds, the largest of which is deposits.
Also taken into consideration is the repayment of loans. These sources provide
the financial institution with alternatives to meet its short-term liquidity
needs. Longer-term liquidity needs may be met by issuing longer-term deposits
and by raising additional capital.
Royal Bancshares generally maintains a liquidity ratio equal to or greater
than 25% of total deposits and short-term liabilities. Liquidity is specifically
defined as the ratio of net cash, short term and marketable assets to net
deposits and short-term liabilities. The liquidity ratio for the years ended
December 31, 2004, 2003 and 2002 was 39%, 60% and 42%, respectively. Management
believes that Royal Bancshares' liquidity position continues to be adequate,
continues to be in excess of its peer group level and meets or exceeds the
liquidity target set forth in the Asset/Liability Management Policy. Management
believes that due to its financial position, it will be able to raise deposits
as needed to meet liquidity demands. However, any financial institution could
have unmet liquidity demands at any time.
Contractual Obligations and Other Commitments. The following table sets
forth contractual obligations and other commitments representing required and
potential cash outflows as of December 31, 2004.
Less than More than 5
(in thousands) Total 1 year 1-3 years 4-5 years years
------------------------- --------- --------- --------- --------- -----------
FHLB Advances $ 222,000 $ 17,500 $ 30,000 $ 15,000 $ 159,500
Operating leases 2,541 648 937 702 254
Standby letters of credit 1,797 1,637 160 -- --
Time deposits 202,520 86,566 58,255 53,130 4,569
--------- --------- --------- --------- -----------
Total $ 428,858 $ 106,351 $ 89,352 $ 68,832 $ 164,323
========= ========= ========= ========= ===========
Interest-Rate Sensitivity. Interest rate sensitivity is a function of
the repricing characteristics of the financial institution's assets and
liabilities. These include the volume of assets and liabilities repricing, the
timing of repricing, and the relative levels of repricing. Attempting to
minimize the interest rate sensitivity gaps is a continual challenge in a
changing rate environment. The interest sensitivity report examines the
positioning of the interest rate risk exposure in a changing interest rate
environment. Ideally the rate sensitive assets and liabilities will be
maintained in a matched position to minimize interest rate risk.
The interest rate sensitivity analysis is an important management tool,
however, it does have some inherent shortcomings. It is a "static" analysis.
Although certain assets and liabilities may have similar maturities or
repricing,
31
they may react in different degrees to changes in market interest rates.
Additionally, repricing characteristics of certain assets and liabilities may
vary substantially within a given period.
The following table summarizes repricing intervals for interest earning
assets and interest bearing liabilities as of December 31, 2004, and the
difference or "gap" between them on an actual and cumulative basis for the
periods indicated. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities.
During a period of falling interest rates, a positive gap would tend to
adversely affect net interest income, while a negative gap would tend to result
in an increase in net interest income. During a period of rising interest rates,
a positive gap would tend to result in an increase in net interest income while
a negative gap would tend to affect net interest income adversely. At December
31, 2004, Royal Bancshares is in an asset sensitive positive of $191.4 million,
which indicates assets will reprice somewhat faster than liabilities within one
year.
INTEREST RATE SENSITIVITY
(IN MILLIONS)
DAYS
---------------------- 1 TO 5 OVER 5 NON-RATE
0 - 90 91 - 365 YEARS YEARS SENSITIVE TOTAL
--------- --------- --------- --------- --------- ---------
ASSETS (1)
Interest-bearing deposits in banks $ 13.3 $ -- $ -- $ -- $ 12.8 $ 26.1
Federal funds sold 1.0 -- -- -- -- 1.0
Investment securities:
Available for sale 5.6 38.0 237.3 80.0 -- 360.9
Held to maturity 32.8 34.1 145.3 -- -- 212.2
--------- --------- --------- --------- --------- ---------
Total investment securities 38.4 72.1 382.6 80.0 -- 573.1
Loans:(2)
Fixed rate 52.9 40.6 146.0 18.8 -- 258.3
Variable rate 187.9 21.1 -- -- (12.5) 196.5
--------- --------- --------- --------- --------- ---------
Total loans 240.8 61.7 146.0 18.8 (12.5) 454.8
Other assets -- -- -- -- 150.3 150.3
--------- --------- --------- --------- --------- ---------
Total Assets $ 293.5 $ 133.8 $ 528.6 $ 98.8 $ 150.6 $ 1,205.3
========= ========= ========= ========= ========= =========
LIABILITIES & CAPITAL
Deposits:
Non interest bearing deposits $ -- $ -- $ -- $ -- $ 64.4 $ 64.4
Interest bearing deposits 29.8 89.4 356.3 -- -- 475.5
Certificate of deposits 29.1 27.4 141.4 4.6 -- 202.5
--------- --------- --------- --------- --------- ---------
Total deposits 58.9 116.8 497.7 4.6 64.4 742.4
Borrowings 22.7 37.5 107.3 79.5 57.0 304.0
Other liabilities -- -- -- .3 17.7 18.0
Capital -- -- -- -- 140.9 140.9
--------- --------- --------- --------- --------- ---------
Total liabilities & capital $ 81.6 $ 154.3 $ 605.3 $ 84.1 $ 280.0 $ 1,205.3
========= ========= ========= ========= ========= =========
Net interest rate GAP $ 211.9 $ (20.5) $ (76.7) $ 14.7 $ (129.4)
========= ========= ========= ========= =========
Cumulative interest rate GAP $ 211.9 $ 191.4 $ 114.7 $ 129.4 $ --
========= ========= ========= ========= =========
GAP to total assets 18% -2%
========= =========
GAP to total equity 150% -15%
========= =========
Cumulative GAP to total assets 18% 16%
========= =========
Cumulative GAP to total equity 150% 136%
========= =========
(1) Interest earning assets are included in the period in which the balances
are expected to be repaid and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments, and contractual maturities.
(2) Reflects principal maturing within the specified periods for fixed and
repricing for variable rate loans; includes nonperforming loans.
32
The method of analysis of interest rate sensitivity in the table above
has a number of limitations. Certain assets and liabilities may react
differently to changes in interest rates even though they reprice or mature in
the same time periods. The interest rates on certain assets and liabilities may
change at different times than changes in market interest rates, with some
changing in advance of changes in market rates and some lagging behind changes
in market rates. Also, certain assets have provisions, which limit changes in
interest rates each time the interest rate changes and for the entire term of
the loan. Additionally, prepayments and withdrawals experienced in the event of
a change in interest rates may deviate significantly from those assumed in the
interest rate sensitivity table. Additionally, the ability of some borrowers to
service their debt may decrease in the event of an interest rate increase.
CAPITAL ADEQUACY
The table shown below sets forth Royal Bancshares' consolidated capital
level and performance ratios:
REGULATORY
2004 2003 2002 MINIMUM
---- ---- ---- ----------
CAPITAL LEVEL
Leverage ratio 13.9% 11.1% 11.4% 3.0%
Risk based capital ratio:
Tier 1 19.2% 15.3% 14.6% 4.0%
Total 20.4% 16.5% 15.9% 8.0%
CAPITAL PERFORMANCE
Return on average assets 1.7% 1.6% 1.7% -
Return on average equity 14.6% 14.5% 15.2% -
Royal Bancshares' sources of capital have been derived from the issuance
of stock as well as retained earnings. While Royal Bancshares has not had a
stock offering since 1986, total shareholders' equity has increased primarily
due to steady increases in retained earnings. At December 31, 2004, Royal
Bancshares had an average equity to average asset ratio of 11.5%. Royal
Bancshares has no current plans to raise capital through new stock offerings and
indeed, seeks ways to leverage its existing capital.
The capital ratios set forth above 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 the banking regulators. At December
31, 2004, Royal Bancshares was required to have minimum Tier 1 and total capital
ratios of 4.0% and 8.0%, respectively, and a minimum Tier 1 leverage ratio of
4.0%. In order for Royal Bancshares to be considered well capitalized, as
defined by the banking regulators, Royal Bancshares must have Tier 1 and total
capital ratios of 6.0% and 10.0%, respectively, and a minimum Tier 1 leverage
ratio of 5.0%. At December 31, 2004, Royal Bancshares met the criteria for a
well capitalized institution, and management believes that, under current
regulations, Royal Bancshares will continue to meet its minimum capital
requirements in the foreseeable future.
MANAGEMENT OPTIONS TO PURCHASE SECURITIES
In May 2001, the directors of the Royal Bancshares approved the amended
Royal Bancshares of Pennsylvania Non-qualified Stock Option and Appreciation
Right Plan (the Plan). The shareholders in connection with the formation of the
holding company reapproved the Plan. The Plan is an incentive program under
which Bank officers and other key employees may be awarded additional
compensation in the form of options to purchase up to 1,500,000 shares of the
Royal Bancshares' Class A common stock (but not in excess of 15% of outstanding
shares). At the time a stock option is granted, a stock appreciation right for
an identical number of shares may also be granted. The option price is equal to
the fair market value at the date of the grant. At December 31, 2004, 593,539
options have been granted which are exercisable at 20% per year. At December 31,
2004, options covering 186,112 shares were exercisable by 94 employees.
In May 2001, the directors of the Royal Bancshares approved an amended
non-qualified Outside Directors Stock Option Plan. The shareholders in
connection with the formation of the holding company reapproved this Plan. Under
the terms of the plan, 250,000 shares of Class A stock are authorized for
grants. Each director is entitled to a grant of an option to purchase 1,500
shares of stock annually, which is exercisable one year from the grant date. The
options were granted at the fair market value at the date of the grant. At
December 31, 2004, 79,044 options were outstanding and options covering 62,214
shares were exercisable.
33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
A simulation model is used to estimate the impact of various changes, both
upward and downward, in market interest rates and volumes of assets and
liabilities on the net income. This model produces an interest rate exposure
report that forecast changes in the market value of portfolio equity under
alternative interest rate environment. The market value of portfolio is defined
as the present value of existing assets and liabilities. The calculated
estimates of changes in the market value of portfolio value are as follows:
As of December 31, 2004 (Dollars in Thousands)
Market Value of Percent of
Changes in Rates Portfolio Equity Change
------------------ ---------------- ----------
+ 200 basis points 153,256 -4.9%
+ 100 basis points 160,427 -0.5%
Flat rate 161,202 0%
- 100 basis points 153,474 -4.8%
- 200 basis points 135,774 -15.8%
The assumptions used in evaluating the vulnerability of earnings and
capital to changes in interest rates are based on management's considerations of
past experience, current position and anticipated future economic conditions.
The interest rate sensitivity of assets and liabilities as well as the estimated
effect of changes in interest rates on the market value of portfolio equity
could vary substantially if different assumptions are used or actual experience
differs from what the calculations may be based.
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). Royal Bancshares currently has no SPEs. Royal Bancshares adopted
the provisions of FIN 46 effective for the period ending March 31, 2004, which
required Royal Bancshares to consolidate its investment in real estate
partnerships. Prior to FIN 46 and 46(R), Royal Bancshares accounted for its
investment in the real estate partnerships under the equity method of
accounting.
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.
34
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement 123(R), "Share-Based Payment," an Amendment of FASB Statements No. 123
and APB No. 95. The Statement 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. Statement 123(R) requires that 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 fixed plan employee stock options only be
disclosed in the footnotes to the financial statements. The Statement eliminates
the ability to account for share-based compensation transactions using APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Royal Bancshares is
currently evaluating this Statement and its effects on its results of
operations.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
DECEMBER 31, 2004 AND 2003
36
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Royal
Bancshares of Pennsylvania, Inc. and Subsidiaries as of December 31, 2004, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of Royal Bancshares's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
consolidated financial statements of Royal Bancshares of Pennsylvania, Inc. for
the years ended December 31, 2003 and 2002 were audited by other auditors, whose
report dated January 22, 2004, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
As discussed in Note A to the consolidated financial statements, Royal
Bancshares of Pennsylvania, Inc. adopted the provisions of Financial Accounting
Standards Board Interpretation No. 46, "Consolidation of Variable Interest
Entities," on March 31, 2004.
In our opinion, the 2004 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Royal Bancshares of Pennsylvania, Inc. and Subsidiaries as of
December 31, 2004, and the consolidated results of their operations and their
consolidated cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of Royal
Bancshares of Pennsylvania, Inc. and Subsidiaries internal control over
financial reporting as of December 31, 2004, based on the criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 14,
2005 expressed an unqualified opinion on management's assessment of internal
control over financial reporting and an adverse opinion on the effectiveness of
internal control over financial reporting because of the effects of a material
weakness identified in management's assessment process.
/s/ Beard Miller Company LLP
Reading, Pennsylvania
March 14, 2005
37
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
---------------------------------
2004 2003
--------------- ---------------
(In thousands, except share data)
ASSETS
Cash and due from banks $ 26,109 $ 17,470
Federal funds sold 1,000 7,600
--------------- ---------------
Total cash and cash equivalents 27,109 25,070
Investment securities held to maturity (fair value of $211,865 and
$114,275 in 2004 and 2003, respectively) 212,227 113,091
Investment securities available for sale - at fair value 360,934 440,839
Federal Home Loan Bank stock, at cost 11,100 11,407
Loans held for sale 2,204 3,157
Loans 467,294 512,557
Less allowance for loan losses 12,519 12,426
--------------- ---------------
Net loans 454,775 500,131
Premises and equipment, net 8,780 7,480
Real estate owned via equity investments 63,653 -
Accrued interest receivable 15,634 16,353
Bank owned life insurance 21,214 20,248
Other assets 27,644 16,634
--------------- ---------------
Total assets $ 1,205,274 $ 1,154,410
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 64,371 $ 58,942
Interest bearing 678,011 732,117
--------------- ---------------
Total deposits 742,382 791,059
Accrued interest payable 5,602 7,733
Other liabilities 8,736 7,920
Borrowings 222,000 212,000
Obligations related to equity investments 56,249 -
Subordinated debentures 25,774 -
--------------- ---------------
Total liabilities 1,060,743 1,018,712
Minority interests 3,655 865
Stockholders' equity
Common stock
Class A, par value $2.00 per share; authorized, 18,000,000 shares;
issued, 10,276,672 and 10,027,284 shares in 2004 and 2003, respectively 20,553 20,054
Class B, par value $0.10 per share; authorized, 2,000,000 shares;
issued, 1,939,490 and 1,909,742 shares in 2004 and 2003, respectively 194 191
Additional paid in capital 92,037 85,448
Retained earnings 26,558 24,990
Accumulated other comprehensive income 3,799 6,415
--------------- ---------------
143,141 137,098
Treasury stock - at cost, 215,388 Class A shares in 2004 and 2003 (2,265) (2,265)
--------------- ---------------
Total stockholders' equity 140,876 134,833
--------------- ---------------
Total liabilities and stockholders' equity $ 1,205,274 $ 1,154,410
=============== ===============
The accompanying notes are an integral part of these statements.
38
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31,
------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
(In thousands, except per share data)
Interest income
Loans, including fees $ 40,044 $ 46,609 $ 53,314
Investment securities held to maturity 6,365 3,087 4,019
Investment securities available for sale 20,621 22,007 18,817
Deposits in banks 409 475 682
Federal funds sold 102 142 272
-------------- -------------- --------------
TOTAL INTEREST INCOME 67,541 72,320 77,104
-------------- -------------- --------------
Interest expense
Deposits 16,918 22,193 28,916
Borrowings 8,744 7,748 7,575
Obligations related to equity investments 1,639 - -
-------------- -------------- --------------
TOTAL INTEREST EXPENSE 27,301 29,941 36,491
-------------- -------------- --------------
NET INTEREST INCOME 40,240 42,379 40,613
Provision for loan losses 6 674 250
-------------- -------------- --------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 40,234 41,705 40,363
-------------- -------------- --------------
Other income
Service charges and fees 1,496 1,125 1,124
Gains on sale of investment securities available for sale 810 719 790
Income related to equity investments 7,133 - -
Income from bank owned life insurance 966 248 -
Gains on sale of other real estate 2,102 568 457
Gains on sale of loans 480 637 767
Other income 173 407 62
-------------- -------------- --------------
13,160 3,704 3,200
-------------- -------------- --------------
Other expenses
Salaries and employee benefits 10,767 9,958 9,440
Occupancy and equipment 1,509 1,330 1,180
Expenses related to equity investments 4,780 - -
Other operating expenses 8,391 7,599 8,301
-------------- -------------- --------------
25,447 18,887 18,921
-------------- -------------- --------------
INCOME BEFORE INCOME TAXES 27,947 26,522 24,642
Income taxes 7,914 7,996 7,237
-------------- -------------- --------------
NET INCOME $ 20,033 $ 18,526 $ 17,405
============== ============== ==============
Per share data
Net income - basic $ 1.60 $ 1.49 $ 1.41
============== ============== ==============
Net income - diluted $ 1.59 $ 1.49 $ 1.38
============== ============== ==============
The accompanying notes are an integral part of these statements.
39
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
Years ended December 31, 2004, 2003 and 2002
(In thousands, except per share data)
Class A common stock Class B common stock Additional
----------------------------- ------------------------------ paid in
Shares Amount Shares Amount capital
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2001 8,849 $ 17,698 1,805 $ 180 $ 65,011
Net income for the year ended
December 31, 2002 - - - - -
Conversion of Class B common stock
to Class A common stock 60 120 (52) (5) -
6% stock dividends declared 518 1,036 108 11 11,285
Cash in lieu of fractional shares - - - - -
Stock options exercised 168 336 - - 688
Cash dividends on common stock
(Class A $0.93, Class B $1.07) - - - - -
Other comprehensive income, net of
reclassifications and taxes - - - - -
------------- ------------- ------------- ------------- -------------
Comprehensive income
Balance, December 31, 2002 9,595 19,190 1,861 186 76,984
Net income for the year ended
December 31, 2003 - - - - -
Conversion of Class B common stock
to Class A common stock 8 16 (7) (1) -
3% stock dividends declared 281 562 55 6 6,443
Cash in lieu of fractional shares - - - - -
Stock options exercised 143 286 - - 2,021
Cash dividends on common stock
(Class A $0.96, Class B $1.11) - - - - -
Other comprehensive income, net of
reclassifications and taxes - - - - -
------------- ------------- ------------- ------------- -------------
Comprehensive income
Balance, December 31, 2003 10,027 20,054 1,909 191 85,448
Accumulated
other
Retained comprehensive Treasury Comprehensive
earnings income (loss) stock income
------------- ------------- ------------- -------------
Balance, December 31, 2001 $ 30,457 $ (2,632) $ (2,265)
Net income for the year ended
December 31, 2002 17,405 - - $ 17,405
Conversion of Class B common stock
to Class A common stock (115) - - -
6% stock dividends declared (12,331) - - -
Cash in lieu of fractional shares (7) - - -
Stock options exercised - - - -
Cash dividends on common stock
(Class A $0.93, Class B $1.07) (10,590) - - -
Other comprehensive income, net of
reclassifications and taxes - 5,047 - 5,047
------------- ------------- ------------- -------------
Comprehensive income $ 22,452
=============
Balance, December 31, 2002 24,819 2,415 (2,265)
Net income for the year ended
December 31, 2003 18,526 - - $ 18,526
Conversion of Class B common stock
to Class A common stock (15) - - -
3% stock dividends declared (7,011) - - -
Cash in lieu of fractional shares (8) - - -
Stock options exercised - - - -
Cash dividends on common stock
(Class A $0.96, Class B $1.11) (11,321) - - -
Other comprehensive income, net of
reclassifications and taxes - 4,000 - 4,000
------------- ------------- ------------- -------------
Comprehensive income $ 22,526
=============
Balance, December 31, 2003 24,990 6,415 (2,265)
(Continued)
40
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity - Continued
Years ended December 31, 2004, 2003 and 2002
(In thousands, except per share data)
Class A common stock Class B common stock Additional
----------------------------- ------------------------------ paid in
Shares Amount Shares Amount capital
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2003 10,027 $ 20,054 1,909 $ 191 $ 85,448
Net income for the year ended
December 31, 2004 - - - - -
Conversion of Class B common stock
to Class A common stock 10 20 (1) - -
2% stock dividends declared 196 392 31 3 5,842
Cash in lieu of fractional shares - - - - -
Stock options exercised 44 87 - - 747
Cash dividends on common stock
(Class A $1.00, Class B $1.15) - - - - -
Other comprehensive income, net of
reclassifications and taxes - - - - -
------------- ------------- ------------- ------------- -------------
Comprehensive income
Balance, December 31, 2004 10,277 $ 20,553 1,939 $ 194 $ 92,037
============= ============= ============= ============= =============
Accumulated
other
Retained comprehensive Treasury Comprehensive
earnings income (loss) stock income
------------- ------------- ------------- -------------
Balance, December 31, 2003 $ 24,990 $ 6,415 $ (2,265)
Net income for the year ended
December 31, 2004 20,033 - - $ 20,033
Conversion of Class B common stock
to Class A common stock (19) - - -
2% stock dividends declared (6,236) - - -
Cash in lieu of fractional shares (11) - - -
Stock options exercised - - - -
Cash dividends on common stock
(Class A $1.00, Class B $1.15) (12,199) - - -
Other comprehensive income, net of
reclassifications and taxes - (2,616) - (2,616)
------------- ------------- ------------- -------------
Comprehensive income $ 17,417
=============
Balance, December 31, 2004 $ 26,558 $ 3,799 $ (2,265)
============= ============= =============
The accompanying notes are an integral part of this statement.
41
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended December 31,
2004 2003 2002
-------------- -------------- --------------
(In thousands)
Cash flows from operating activities
Net income $ 20,033 $ 18,526 $ 17,405
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 2,633 1,035 1,297
Provision for loan losses 6 674 250
Amortization of premiums and discounts on loans,
mortgage-backed securities and investments 7,577 289 (1,495)
Income tax benefit on stock options 331 -- --
Provision (benefit) for deferred income taxes (1,442) 2,078 (32)
Gains on sale other real estate (2,102) (568) (457)
Gains on sale of loans (480) (637) (767)
Gains on sales of investment securities available for sale (810) (719) (790)
(Increase) decrease in accrued interest receivable 719 (2,575) (2,082)
Decrease (increase) in other assets (9,191) (26,021) 842
Decrease in accrued interest payable (2,131) (3,673) (228)
Increase (decrease) in other liabilities 3,666 1,238 (1,452)
-------------- -------------- --------------
Net cash provided by (used in) operating activities 18,809 (10,353) 12,491
-------------- -------------- --------------
Cash flows from investing activities
Proceeds from calls and maturities of investment securities
held to maturity 153,714 9,982 60,563
Purchases of investment securities held to maturity (255,150) (89,310) -
Proceeds from calls and maturities of investment securities
available for sale 60,836 201,341 309,710
Proceeds from sales of investment securities available for sale 27,860 91,339 115,250
Redemption (purchase) of Federal Home Loan Bank stock 307 (3,532) (4,074)
Purchases of investment securities available for sale (13,812) (321,451) (699,480)
Net decrease in loans 46,256 61,647 70,581
Purchases of premises and equipment (67,586) (513) (787)
-------------- -------------- --------------
Net cash used in investing activities (47,575) (50,497) (148,237)
-------------- -------------- --------------
(Continued)
42
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows - Continued
Year ended December 31,
2004 2003 2002
-------------- -------------- --------------
(In thousands, except per share data)
Cash flows from financing activities
Increase (decrease) in non-interest bearing and interest bearing $ (14,295) $ 63,511 $ 253,560
demand deposits and savings accounts
Decrease in certificates of deposit (34,382) (93,292) (134,579)
Principal payments on mortgage (60) (62) (49)
Obligations through equity investments 56,249 - -
Proceeds from subordinated debentures, net 25,000 - -
Cash dividends in lieu of fractional shares (11) (8) (7)
Proceeds from borrowings, net of repayments 10,000 84,500 27,275
Issuance of common stock under stock option plans 503 2,021 688
Cash dividends paid (12,199) (11,321) (10,589)
-------------- -------------- --------------
Net cash provided by financing activities 30,805 45,349 136,299
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 2,039 (15,501) 553
Cash and cash equivalents at beginning of year 25,070 40,571 40,018
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 27,109 $ 25,070 $ 40,571
============== ============== ==============
Supplemental disclosure of cash flow information
Cash paid during the year for
Interest $ 29,432 $ 33,615 $ 36,719
============== ============== ==============
Income taxes $ 8,705 $ 7,000 $ 5,650
============== ============== ==============
The accompanying notes are an integral part of these statements.
43
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Royal Bancshares of Pennsylvania, Inc. (Royal Bancshares), through its
subsidiary Royal Bank America, Inc. (Royal Bank), offers a full range of
banking services to individual and corporate customers located in
Pennsylvania, New Jersey and Delaware. Royal Bank competes with other
banking and financial institutions in certain markets, including financial
institutions with resources substantially greater than its own. Commercial
banks, savings banks, savings and loan associations, credit unions and money
market funds actively compete for savings and time deposits and for various
types of loans. Such institutions, as well as consumer finance and insurance
companies, may be considered competitors of Royal Bank with respect to one
or more of the services it renders.
1. Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of
Royal Bancshares and its wholly-owned subsidiaries, Royal Investments of
Delaware, Inc. and Royal Bank, including Royal Bank's subsidiaries, Royal
Real Estate of Pennsylvania, Inc., Royal Investment America, LLC, and
Crusader Servicing Corporation. Both Royal Bancshares' Trusts' are not
consolidated as further discussed in Note A17. During 2004, Royal Bancshares
through Royal Bank started a banking division called Royal Asian Bank which
operates three branches in Pennsylvania and anticipates opening two branches
in Northern New Jersey during the first quarter of 2005. All significant
inter-company transactions and balances have been eliminated.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the balance sheet and revenues and
expenditures for the period. Therefore, actual results could differ
significantly from those estimates.
The principal estimates that are particularly susceptible to significant
change in the near term relate to the allowance for loan losses and the
valuation of deferred tax assets. In connection with the allowance for loan
losses estimate, when circumstances warrant, management obtains independent
appraisals for significant properties. However, future changes in real
estate market conditions and the economy could affect Royal Bancshares'
allowance for loan losses.
In addition to being subject to competition from other financial
institutions, Royal Bancshares is subject to regulations of certain federal
agencies and, accordingly, it is periodically examined by those regulatory
authorities.
(Continued)
44
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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 applied 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). Royal Bancshares currently
has no SPEs. Royal Bancshares adopted the provisions of FIN 46 effective for
the period ended March 31, 2004, which required Royal Bancshares to
consolidate its investments in real estate partnerships. Prior to FIN 46 and
46(R), Royal Bancshares accounted for its investments in the real estate
partnerships under the equity method of accounting.
Royal Bancshares' investments in real estate partnerships is further
discussed in Note A -17.
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 did not have a material effect
on Royal Bancshares consolidated financial statements.
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement 123(R), "Share-Based Payment," an Amendment of SFAS No. 123 and
APB No. 95. The Statement 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. Statement 123(R)
requires that 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
fixed plan employee stock options only be disclosed in the footnotes to the
financial statements. The Statement eliminates the ability to account for
share-based compensation transactions using APB Opinion No. 25, "Accounting
for Stock Issued to Employees." This statement is effective for all
share-based payment transactions entered into after June 15, 2005 and to any
awards modified, repurchased, or cancelled after that date. Royal Bancshares
is currently evaluating this Statement and its effects on its results of
operations.
(Continued)
45
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
2. Investment Securities
Investment securities are classified in one of three categories: held to
maturity, available for sale or trading. Debt securities that Royal
Bancshares has the positive intent and ability to hold to maturity are
classified as held to maturity and are reported at amortized cost. As Royal
Bancshares does not engage in security trading, the balance of its debt
securities and any equity securities are classified as available for sale.
Net unrealized gains and losses for such investment securities available for
sale, net of tax effect, are required to be recognized as a separate
component of stockholders' equity and excluded from the determination of net
income. Gains or losses on disposition are computed by the specific
identification method.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair value
of held-to-maturity and available-for-sale securities below their cost that
are deemed to be other than temporary are reflected in earnings as realized
losses. In estimating other-than-temporary impairment losses, management
considers (1) the length of time and the extent to which the fair value has
been less than cost, (2) the financial condition and near- term prospects of
the issuer, and (3) the intent and ability of Royal Bancshares to retain its
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.
3. Loans held for sale
Residential mortgage loans are only originated for sale to the secondary
mortgage loans market. These loans have a prior sales commitment on a best
efforts basis in place prior to the loan closing. These loans are classified
as loans held for sale and are carried at the lower of cost or estimated
fair value. Fair value is determined by the purchase price quoted in the
sales agreement.
Royal Bancshares accounts for the transfer of financial assets in accordance
with SFAS No. 140 "Accounting for Transfers and Servicing of Assets and
Extinguishments of Liabilities." The standard is based on consistent
application of a financial-components approach that recognizes the financial
and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered and
derecognizes liabilities when extinguished. The standard provides consistent
guidelines for distinguishing transfers of financial assets from transfers
that are secured borrowings.
4. Loans and Allowance for Loan Losses
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff are stated at the amount of unpaid
principal, reduced by unearned income and an allowance for loan and lease
losses. The allowance for loan losses is maintained at a level believed
adequate by management to absorb potential losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio, past loan loss experience, current economic
conditions, volume, growth, and composition of the loan portfolio, and other
relevant factors. The allowance is increased by provisions for loan losses
charged against income. Decreases in the allowance result from management's
determination that the
(Continued)
46
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
allowance for loan losses exceeds their estimates of potential loan loss.
This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
Royal Bancshares generally accounts for its impaired loans in accordance
with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosure," which requires that a creditor measure
impairment based on the present value of expected future cash flows
discounted at the loan's effective interest rate, except that as a practical
expedient, a creditor may measure impairment based on a loan's observable
market price, or the fair value of the collateral if the loan is
collateral-dependent. Regardless of the measurement method, a creditor must
measure impairment based on the fair value of the collateral when the
creditor determines that foreclosure is probable.
Large groups of smaller balance homogeneous loans are collectively evaluated
for impairment. Accordingly, Royal Bancshares does not separately identify
individual consumer and residential loans for impairment disclosures, unless
such loans are the subject of a restructuring agreement.
Interest on loans is accrued and credited to operations based upon the
principal amount outstanding. Accretion of unearned discounts on loans has
been added to the related interest income. Accrual of interest is
discontinued on a loan when management believes that the borrower's
financial condition is such that collection of interest is doubtful and
generally when a loan becomes 90 days past due as to principal or interest.
When interest accruals are discontinued, interest credited to income in the
current year is reversed and interest accrued in the prior year is charged
to the allowance for loan losses.
On July 6, 2001, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 102 "Selected Loan Loss Allowance Methodology
and Documentation Issues." SAB No. 102 provides guidance on the development,
documentation, and application of a systematic methodology for determining
the allowance for loans and leases in accordance with US GAAP and is
effective upon issuance. The adoption of SAB No. 102 did not have a material
impact on Royal Bancshares's financial position or results of operations.
In October 2003, the AICPA issued Statement of Position (SOP) 03-3,
Accounting for Loans or Certain Debt Securities Acquired in a Transfer. This
statement addresses accounting for differences between contractual cash
flows and cash flows expected to be collected from an investor's initial
investment in loans or debt securities (loans) acquired in a transfer as a
result of credit quality deterioration. The statement requires recognition
of the excess of all cash flows expected at acquisition over the investor's
initial investment in the loan as interest income on a level-yield basis
over the life of the loan as the accretable yield. The loan's contractual
required payments receivable in excess of the amount of its cash flows
expected at acquisition (nonaccretable difference) should not be recognized
as an adjustment to yield, a loss accrual or a valuation allowance for
credit risk. This statement is effective for loans acquired in fiscal years
beginning after December 31, 2004. Early adoption is permitted. The
adoptions of SOP 03-3 is not expected to have a material impact on the
Company's financial position or results of operations.
(Continued)
47
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Royal Bancshares adopted FIN 45 "Guarantor's Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of Indebtedness
of Others" on January 1, 2003 ("FIN 45"). FIN 45 requires a guarantor
entity, at the inception of a guarantee covered by the measurement
provisions of the interpretation, to record a liability for the fair value
of the obligation undertaken in issuing the guarantee. Royal Bancshares has
financial and performance letters of credit. Financial letters of credit
require a company to make a payment if the customer's condition
deteriorates, as defined in agreements. Performance letters of credits
require Royal Bancshares to make payments if the customer fails to perform
certain non-financial contractual obligation. Royal Bancshares previously
did not record a liability when guaranteeing obligations unless it became
probable that Royal Bancshares would have to perform under the guarantee.
5. Other Real Estate
The adjusted fair market value is determined by reducing the fair market
value by estimated costs for the disposition of the property. Costs relating
to holding the property are expensed when incurred. Other real estate owned
of approximately $5,424,000 and $4,371,000 at December 31, 2004 and 2003,
respectively, is included in other assets on the consolidated balance
sheets.
6. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation,
which is computed principally on accelerated methods over the estimated
useful lives of the assets. Leasehold improvements are amortized on the
accelerated methods over the shorter of the estimated useful lives of the
improvements or the terms of the related leases.
7. Bank-Owned Life Insurance
Royal Bank has purchased life insurance policies on certain executives.
These policies are recorded in other assets at their cash surrender value,
or the amount that can be realized. Income from these policies and changes
in the cash surrender value are recorded in other income.
8. Income Taxes
Under the liability method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities as measured by the enacted tax rates which
will be in effect when these differences reverse. Deferred tax expense is
the result of changes in deferred tax assets and liabilities. The principal
types of differences between assets and liabilities for financial statement
and tax return purposes are the allowance for loan losses, deferred
compensation plans, asset valuation reserves and net operating loss
carryovers.
(Continued)
48
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
9. Per Share Information
Basic per share data excludes dilution and is computed by dividing income
available to common shareholders by the weighted average common shares
outstanding during the period. Diluted per share data 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, using the
treasury stock method.
10. Stock Option Plans
Royal Bancshares currently accounts for stock options under SFAS No. 123,
"Accounting for Stock-Based Compensation," as Amended by SFAS No.148, which
contains a fair value-based method for valuing stock-based compensation that
entities may use to measure compensation cost at the grant date based on the
fair value of the award. Compensation is recognized over the service period,
which is usually the vesting period. Alternatively, SFAS No. 123 permits
entities to continue accounting for employee stock options and similar
equity instruments under Accounting Principles Board (APB) Opinion 25,
"Accounting for Stock Issued to Employees." Entities that continue to
account for stock options using APB Opinion 25 are required to make a pro
forma disclosure of net income and earnings per share, as if the fair
value-based method of accounting defined in SFAS No. 123 had been applied.
Effective June 15, 2005, Royal Bancshares will apply SFAS No. 123(R).
At December 31, 2004, Royal Bancshares had both a director and employee
stock-based compensation plan, which is more fully described in Note L.
Royal Bancshares accounts for that plan under the recognition and
measurement principles of APB Opinion No.25 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
following table illustrates the effect on net loss and loss per share if
Royal Bancshares had applied the fair value recognition provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation.
2004 2003 2002
---------- ---------- ----------
Net income, as reported $ 20,033 $ 18,526 $ 17,405
Less: Stock-based compensation costs under
fair value based method for all awards, net of tax (490) (425) (435)
---------- ---------- ----------
Pro forma net income (loss) $ 19,543 18,101 16,970
Earnings per share -Basic As Reported $ 1.60 $ 1.49 $ 1.41
Pro forma 1.56 1.46 1.37
Earnings per share -Diluted As Reported 1.59 1.49 1.38
Pro forma 1.56 1.46 1.37
(Continued)
49
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
11. Benefit Plans
Royal Bancshares has a noncontributory nonqualified, defined benefit pension
plan covering certain eligible employees. Net pension expense consists of
service costs, interest costs, return on pension assets and amortization of
unrecognized initial net assets. Royal Bancshares accrues pension costs as
incurred.
12. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, short-term investments and federal funds
sold. Generally, federal funds are purchased and sold for one-day periods.
13. Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires all entities to disclose the estimated fair value of their assets
and liabilities considered to be financial instruments. Financial
instruments consist primarily of investment securities, loans, deposits and
borrowings.
14. Advertising Costs
Royal Bancshares and Royal Bank expense advertising costs as incurred.
15. Comprehensive Income
Royal Bancshares reports comprehensive income which includes net income as
well as certain other items, which result in a change to equity during the
period.
The income tax effects allocated to comprehensive income is as follows (in
thousands):
December 31, 2004
--------------------------------------
Tax Net of
Before tax (benefit) tax
amount expense amount
---------- ---------- ----------
Unrealized losses on securities
Unrealized holding losses arising during period $ (3,150) $ (1,069) $ (2,081)
Less reclassification adjustment for gains
realized in net income 810 275 535
---------- ---------- ----------
Other comprehensive income, net $ (3,960) $ (1,344) $ (2,616)
========== ========== ==========
(Continued)
50
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
December 31, 2003
------------------------------------
Tax Net of
Before tax (benefit) tax
amount expense amount
---------- ---------- ----------
Unrealized gains on securities
Unrealized holding gains arising during period $ 6,791 $ 2,316 $ 4,475
Less reclassification adjustment for gains
realized in net income 719 244 475
---------- ---------- ----------
Other comprehensive income, net $ 6,072 $ 2,072 $ 4,000
========== ========== ==========
December 31, 2002
------------------------------------
Tax Net of
Before tax (benefit) tax
amount expense amount
---------- ---------- ----------
Unrealized gains on securities
Unrealized holding gains arising during period $ 8,436 $ 2,868 $ 5,568
Less reclassification adjustment for gains
realized in net income 790 269 521
---------- ---------- ----------
Other comprehensive income, net $ 7,646 $ 2,599 $ 5,047
========== ========== ==========
16. Reclassifications
Certain reclassifications of prior year amounts have been made to conform to
the current year presentation.
17. Variable Interest Entities (VIE)
Real estate owned via equity investments
Royal Bancshares, 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. Royal Bancshares 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 Royal Bancshares and 50% for the
development company. Brook View has total assets of $13.1 million and total
borrowings of $12.8 million of which $-0- is guaranteed by Royal Bancshares.
Royal Bancshares has determined that Brook View is a VIE and it is the
primary beneficiary. Royal Bancshares' exposure to loss due to its
investment in and receivables due from Brook View is $187,000.
Royal Bancshares, 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
51
total of 308 units in a gated apartment community. The development company
is the general partner of the project. Royal Bancshares 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
Royal Bancshares and 50% for the development company. Burrough's Mill has
total assets of $36.1 million and total borrowings of $28.6 million of which
$-0- is guaranteed by Royal Bancshares. Royal Bancshares has determined that
Burrough's Mill is a VIE and it is the primary beneficiary. Royal
Bancshares' exposure to loss due to its investment in and receivables due
from Burrough's Mill is $4.2 million.
Royal Bancshares, 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. Royal Bancshares invested 93% 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 Royal Bancshares and
50% for the development company. Main Street has total assets of $4.1
million and total borrowings at $2.9 million of which $-0- is guaranteed by
Royal Bancshares. Royal Bancshares has determined that Main Street is a VIE
and it is the primary beneficiary. Royal Bancshares' exposure to loss due to
its investment in and receivables due from Main Street is $729,000.
(Continued)
52
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Royal Bancshares, 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. Royal Bancshares
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 Royal Bancshares and 50% for the investment company. 212 C has total
assets of $13.8 million and total borrowings of $11.9 million, of which $-0-
is guaranteed by Royal Bancshares. Royal Bancshares has determined that 212
C is a VIE and it is the primary beneficiary. Royal Bancshares' exposure to
loss due to its investment in and receivables due from 212 C is $1.6
million.
Trust Preferred Securities
Management has determined that Royal Capital Trust I/II (the Trusts) qualify
as VIE's under FASB Interpretation 46 (FIN 46), "Consolidation of Variable
Interest Entities," as revised. The Trusts issued mandatory redeemable
preferred stock to investors and loaned the proceeds to Royal Bancshares.
Royal Bancshares adopted the provision under the revised interpretation, FIN
46(R), in the first quarter of 2004. Accordingly, Royal Bancshares does not
consolidate the Trusts. FIN 46(R) precludes consideration of the call option
embedded in the preferred stock when determining if Royal Bancshares has the
right to a majority of the Trusts' expected residual returns. The
deconsolidation resulted in the investment in the common stock of the Trusts
to be included in other assets as of December 31, 2004 and the corresponding
increase in outstanding debt of $774,000. In addition, the income received
on Royal Bancshares' common stock investment is included in other income.
18. Interest Rate Swaps
For asset/liability management purposes, Royal Bancshares uses interest rate
swap agreements to hedge various exposures or to modify interest rate
characteristics of various balance sheet accounts. Such derivatives are used
as part of the asset/liability management process and linked to specific
liabilities and have a high correlation between the contract and the
underlying item being hedged, both at inception and throughout the hedge
period.
Royal Bancshares currently utilizes interest rate swap agreements to convert
a portion of its fixed rate time deposits to a variable rate (fair value
hedge) to fund variable rate loans. Interest rate swaps are contracts in
which a series of interest flows are exchanged over a prescribed period. The
notional amount ($25 million) on which interest payments are based is not
exchanged.
NOTE B - SEGMENT INFORMATION
SFAS No. 131, "Segment Reporting," established standards for public business
enterprises to report information about operating segments in their annual
financial statements and requires that those enterprises report selected
information about operating segments in subsequent interim financial reports
issued to shareholders. It also established standards for related disclosure
about products and services, geographic areas, and major customers.
Operating segments are components of an enterprise, which are evaluated
regularly by the chief operating decision maker in deciding how to allocate
and assess resources and performance. Royal Bancshares' chief operating
decision maker is the President and Chief Executive Officer. Royal
Bancshares has identified its reportable operating segment as "Community
Banking."
53
Royal Bancshares' 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 Royal Bank. For example, commercial lending is
dependent upon the ability of Royal Bank to fund itself with retail deposits
and other borrowings and to manage interest rate and credit risk. This
situation is also similar for consumer and residential mortgage lending.
Royal Bancshares' tax lien operation does not meet the quantitative
thresholds for requiring disclosure, but has different characteristics than
the community banking operation. Royal Bancshares' tax lien operation
consists of purchasing delinquent tax certificates from local municipalities
at auction. The tax lien segment is managed as a single strategic unit which
generates revenue from a nominal interest rate achieved at the individual
auctions along with periodic penalties imposed.
As a result of the adoption of FIN 46(R), Royal Bancshares is reporting on a
consolidated basis its interest in four equity investments as VIE's which
have different characteristics than the community banking segment. Royal
Bancshares has investments in two apartment complexes and two buildings
leased as commercial office space.
The accounting policies used in this disclosure of business segments are the
same as those described in the summary of significant accounting policies.
(Continued)
54
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE B - SEGMENT INFORMATION - Continued
Selected segment information and reconciliations to consolidated financial
information is as follows:
Community Tax Lien Equity
(in thousands) Bank Operation Investments Consolidated
--------------------------------- ------------ ------------ ------------ ------------
DECEMBER 31, 2004
Total assets $ 1,088,031 $ 50,196 $ 67,047 $ 1,205,274
============ ============ ============ ============
Total deposits 742,382 - - 742,382
============ ============ ============ ============
Net interest income (losses) 38,846 3,024 (1,630) 40,240
Provision for loan losses - 6 - 6
Total non-interest income 4,800 1,227 7,133 13,160
Total non-interest expense 17,295 3,372 4,780 25,447
Income taxes 7,525 389 - 7,914
------------ ------------ ------------ ------------
Net Income $ 18,826 $ 484 $ 723 $ 20,033
============ ============ ============ ============
DECEMBER 31, 2003
Total assets $ 1,103,619 $ 50,791 $ - $ 1,154,410
============ ============ ============ ============
Total deposits 791,059 - - 791,059
============ ============ ============ ============
Net interest income 38,773 3,606 - 42,379
Provision for loan loss 500 174 - 674
Total non-interest income 3,196 508 - 3,704
Total non-interest expense 16,023 2,864 - 18,887
Income taxes 7,528 468 - 7,996
------------ ------------ ------------ ------------
Net Income $ 17,918 $ 608 $ - $ 18,526
============ ============ ============ ============
Interest paid to the Community Bank segment by the Tax Lien Operation was
approximately $1,896,000 and $1,879,000 for the years ending December 31,
2004 and 2003, respectively.
(Continued)
55
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE C - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of
Royal Bancshares's investment securities held to maturity and available for
sale are summarized as follows (in thousands):
2004
----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
------------ ------------ ------------ ------------
Investment securities held to maturity
Corporate securities $ 26,995 $ 371 $ - $ 27,366
U.S. government agencies 185,000 9 (742) 184,267
Mortgage backed securities 232 - - 232
------------ ------------ ------------ ------------
$ 212,227 $ 380 $ (742) $ 211,865
============ ============ ============ ============
2004
----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
------------ ------------ ------------ ------------
Investment securities available for sale
Preferred and common stock $ 5,113 $ 250 $ - $ 5,363
Corporate bonds 125,750 4,104 (48) 129,806
U.S. government agencies 94,977 - (1,672) 93,305
Trust preferred securities 37,196 2,754 (388) 39,562
Foreign bonds 9,212 293 - 9,505
Mortgage backed securities 81,303 496 (130) 81,669
Other securities 1,624 100 - 1,724
------------ ------------ ------------ ------------
$ 355,175 $ 7,997 $ (2,238) $ 360,934
============ ============ ============ ============
(Continued)
56
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE C - INVESTMENT SECURITIES - Continued
2003
----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
------------ ------------ ------------ ------------
Investment securities held to maturity
Corporate securities $ 21,121 $ 1,481 $ - $ 22,602
U.S. government agencies 91,630 168 (465) 91,333
Mortgage backed securities 340 - - 340
------------ ------------ ------------ ------------
$ 113,091 $ 1,649 $ (465) $ 114,275
============ ============ ============ ============
2003
----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
------------ ------------ ------------ ------------
Investment securities available for sale
Preferred and common stock $ 40 $ 15 $ - $ 55
Corporate bonds 148,487 8,474 (12) 156,949
U.S. government agencies 122,785 139 (1,812) 121,112
Trust preferred securities 36,251 3,049 (2,161) 37,139
Foreign bonds 11,363 803 - 12,166
Mortgage backed securities 110,596 1,345 (66) 111,875
Other securities 1,598 - (55) 1,543
------------ ------------ ------------ ------------
$ 431,120 $ 13,825 $ (4,106) $ 440,839
============ ============ ============ ============
(Continued)
57
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE C - INVESTMENT SECURITIES - Continued
The amortized cost and estimated fair value of investment securities at
December 31, 2004, by contractual maturity, are shown below (in thousands).
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
2004
----------------------------------------------------------
Held to maturity Available for sale
--------------------------- ---------------------------
Amortized Fair Amortized Fair
cost value cost value
------------ ------------ ------------ ------------
Within 1 year $ 16,695 $ 17,066 $ 21,944 $ 22,217
After 1 but within 5 years 135,352 134,710 113,630 117,728
After 5 but within 10 years 60,000 59,909 69,800 68,664
After 10 years 180 180 144,661 146,935
Preferred and common stock - - 5,140 5,390
------------ ------------ ------------ ------------
$ 212,227 $ 211,865 $ 355,175 $ 360,934
============ ============ ============ ============
Proceeds from the sale of investment securities available for sale during
2004, 2003 and 2002 were $68,576,000, $91,339,000 and $115,250,000,
respectively, resulting in gross realized gain (loss) of $900,000 ($90,000),
$1,016,000 ($297,000), and $881,000 ($91,000) and during 2004, 2003 and
2002, respectively.
As of December 31, 2004 and 2003, investment securities with a book value of
$130,184,000 and $11,185,000, respectively, were pledged as collateral to
secure public deposits and for other purposes required or permitted by law.
The table below indicates the length of time individual securities have been
in a continuous unrealized loss position at December 31, 2004:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
----------------------- ------------------------ -----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
DESCRIPTION OF SECURITIES value losses value losses value losses
- --------------------------- ---------- ---------- ---------- ---------- ---------- ----------
US government agencies $ 99,199 $ (778) $ 78,364 $ (1,636) $ 177,563 $ (2,414)
Mortgage backed securities 401 (2) 23,217 (128) 23,618 (130)
Trust preferred 10,000 (385) 4,330 (3) 14,330 (388)
Corporate bonds 6,149 (48) -- -- 6,149 (48)
---------- ---------- ---------- ---------- ---------- ----------
Total temporarily
impaired securities $ 115,749 $ (1,213) $ 105,911 $ (1,767) $ 221,660 $ (2,980)
========== ========== ========== ========== ========== ==========
(Continued)
58
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE C - INVESTMENT SECURITIES - Continued
In management's opinion the unrealized losses reflect changes in interest
rates subsequent to the purchase of specific securities. There were 22
securities in the less than twelve month category and 7 in the twelve or
more month category and of the $222 million fair value of investments, $201
million consisted of government bonds and government secured mortgage backed
securities. Royal Bancshares has the ability to hold these securities until
maturity or market price recovery. Management believes that the unrealized
losses represent temporary impairments of the securities.
NOTE D - LOANS
Major classifications of loans are as follows (in thousands):
2004 2003
---------- ----------
Commercial and Industrial $ 208,204 $ 225,268
Commercial mortgages 193,611 204,396
Residential 28,513 41,590
Tax liens 34,419 37,855
Other 4,090 4,941
---------- ----------
468,834 514,050
Less
Unearned income (1,540) (1,203)
Unamortized discount on purchased loans - (290)
---------- ----------
Total loans $ 467,294 $ 512,557
========== ==========
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $4,526,000 and $11,328,000 at December 31, 2004
and 2003, respectively. If interest had been accrued, such income would have
been approximately $209,000, $401,000 and $473,000 for the years ended
December 31, 2004, 2003 and 2002, respectively. Management believes it has
adequate collateral to limit its credit risk with these loans.
Royal Bancshares granted loans to the officers and directors of Royal
Bancshares and to their associates. Related party loans are made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with unrelated
persons and do not involve more than normal risk of collectibility. The
aggregate dollar amount of these loans was $4,723,000 and $4,667,000 at
December 31, 2004 and 2003, respectively. During 2004, one new loan in the
amount of $85,000 was made and repayments totaled $179,000.
(Continued)
59
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE D - LOANS - Continued
Impaired loans, which include the loans on which the accrual of interest has
been discontinued, was approximately $4,526,000 and $11,328,000 at December
31, 2004 and 2003, respectively. Royal Bancshares has identified 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. The
income recognized on impaired loans during 2004 and 2003 was $-0- and
$1,000, respectively.
Total cash collected on impaired loans during 2004 was $919,000 of which
$919,000 was credited to the principal balance outstanding on such loans.
Royal Bancshares' policy for interest income recognition on impaired loans
is to recognize income on currently performing restructured loans under the
accrual method. Royal Bancshares 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 Royal Bancshares. If these factors do not exist, Royal
Bancshares does not recognize income.
Royal Bancshares primarily grants commercial and real estate loans in the
greater Philadelphia metropolitan area. Royal Bancshares has concentrations
of credit risk in real estate development loans at December 31, 2004. A
substantial portion of its debtors' ability to honor these contracts is
dependent upon the economic sector.
Changes in the allowance for loan losses were as follows (in thousands):
2004 2003 2002
---------- ---------- ----------
Balance at beginning of year $ 12,426 $ 12,470 $ 11,888
Charge-offs (204) (811) (925)
Recoveries 291 93 1,257
---------- ---------- ----------
Net (charge-offs) recoveries 87 (718) 332
Provision for loan losses 6 674 250
---------- ---------- ----------
Balance at end of year $ 12,519 $ 12,426 $ 12,470
========== ========== ==========
NOTE E - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (in thousands):
Estimated
Useful
Lives 2004 2003
-------------- ---------- ----------
Land - $ 2,396 $ 2,396
Buildings and leasehold improvements 7 - 31.5 years 8,178 6,989
Furniture and fixtures 3 - 7 years 6,812 5,605
---------- ----------
17,386 14,990
Less accumulated depreciation and amortization 8,606 7,510
---------- ----------
$ 8,780 $ 7,480
========== ==========
Depreciation and amortization in expense, related to premises and equipment,
was approximately $977,000, $944,000 and $1,297,000 for the years ended
2004, 2003 and 2002, respectively.
(Continued)
60
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE F - DEPOSITS
Deposits are summarized as follows (in thousands):
2004 2003
------------- -------------
Demand $ 64,371 $ 58,942
NOW and money market 451,671 471,140
Savings 23,820 24,075
Time, $100,000 and over 90,596 104,123
Other time 111,924 132,779
------------- -------------
$ 742,382 $ 791,059
============= =============
Maturities of certificates of deposit for the next five years and thereafter
are as follows (in thousands):
2005 $ 86,566
2006 40,053
2007 18,202
2008 41,282
2009 11,848
Thereafter 4,569
-------------
$ 202,520
=============
NOTE G - BORROWINGS
1. Advances from the Federal Home Loan Bank
At December 31, 2004, advances from the Federal Home Loan Bank (FHLB)
totaling $222,000,000 will mature within one to ten years. The advances are
collateralized by FHLB stock and certain first mortgage loans, and
mortgage-backed securities. These advances had a weighted average interest
rate of 3.88%.
Outstanding borrowings mature as follows (in thousands):
2005 $ 17,500
2006 30,000
2007 -
2008 -
2009 15,000
Thereafter 159,500
-------------
$ 222,000
=============
(Continued)
61
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE G - BORROWINGS - Continued
2. Subordinated Debentures
On October 27, 2004, Royal Bancshares 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, Royal Bancshares
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 reset 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 Royal
Bancshares. Royal Bancshares 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 Federal Reserve has issued final guidance on the regulatory capital
treatment for trust preferred securities issued by Trust as a result of the
adoption of FIN 46(R). The proposed rule would retain current maximum
percentage of total capital permitted for Trust Preferred Securities at 25%,
but would enact other changes to the rules governing Trust Preferred
Securities that affect their use as a part of the collection of entities
known as "restricted core capital elements." The rule would take effect
March 31, 2009; however, a five year transition period starting March 31,
2004 and leading up to that date would allow bank holding companies to
continue to count Trust Preferred Securities as Tier 1 Capital after
applying FIN 46(R). Management has evaluated the effects of the proposed
rule and does not anticipate a material impact on its capital ratios when
the proposed rule is finalized.
(Continued)
62
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE H - LEASE COMMITMENTS
Royal Bancshares leases various premises under non-cancelable agreements,
which expire through 2012 and require minimum annual rentals. The
approximate minimum rental commitments under the leases are as follows for
the year ended December 31, (in thousands):
2005 $ 648,000
2006 481,000
2007 456,000
2008 442,000
2009 260,000
Thereafter 254,000
-------------
$ 2,541,000
=============
Rental expense for all leases was approximately $664,000, $612,000 and
$614,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
NOTE I - COMMON STOCK
Each holder of Class A and Class B common stock is entitled to one vote for
each Class A share and ten votes for each Class B share held. Holders of
either class of common stock are entitled to equal per share dividends when
declared.
The Class B shares may not be transferred in any manner except to the
holder's immediate family. Class B shares may be converted to Class A shares
at the rate of 1.15 to 1.
Per share information and weighted average shares outstanding have been
restated to reflect the 2% stock dividend of December 2004, the 2% stock
dividend of January 2004, the 3% stock dividend of January 2003, and the 6%
stock dividend of January 2002.
NOTE J - INCOME TAXES
The components of the income tax expense included in the consolidated
statements of income are as follows (in thousands):
2004 2003 2002
---------- ---------- ----------
Income tax expense (benefit)
Current $ 9,356 $ 9,221 $ 7,269
Deferred federal tax (1,442) (1,225) (32)
---------- ---------- ----------
$ 7,914 $ 7,996 $ 7,237
========== ========== ==========
The difference between the applicable income tax expense and the amount
computed by applying the statutory federal income tax rate of 35% in 2004,
and 34% in 2003 and 2002 is as follows (in thousands):
63
2004 2003 2002
---------- ---------- ----------
Computed tax expense at statutory rate $ 9,781 $ 9,286 $ 8,620
Tax-exempt income (466) (263) (101)
Low-income housing tax credit (545) (545) (545)
Other, net (619) (482) (737)
Effect of 35% rate bracket (237) - -
---------- ---------- ----------
Applicable income tax expense $ 7,914 $ 7,996 $ 7,237
========== ========== ==========
(Continued)
64
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE J - INCOME TAXES - Continued
Deferred tax assets and liabilities consist of the following (in thousands):
2004 2003
---------- ----------
Deferred tax assets
Allowance for loan losses $ 5,366 $ 4,153
Asset valuation reserves 836 812
Goodwill from Knoblauch State Bank 808 785
Accrued pension liability 1,156 886
Net operating loss carryovers from Knoblauch State Bank 7,140 7,449
Other 46 149
---------- ----------
15,352 14,234
Less valuation allowance (7,140) (7,449)
---------- ----------
8,212 6,785
---------- ----------
Deferred tax liabilities
Unrealized gains on investment securities available for sale 1,957 3,304
Penalties on delinquent tax certificates 243 283
Other 720 692
---------- ----------
2,920 4,279
---------- ----------
Net deferred tax asset, included in other assets $ 5,292 $ 2,506
========== ==========
Royal Bancshares has approximately $21,000,000 of net operating loss
carryovers from the acquisition of Knoblauch State Bank (KSB). These losses
will fully expire in 2009. The utilization of these losses is subject to
limitation under Section 382 of the Internal Revenue Code. As a result, a
valuation allowance has been established to eliminate the deferred tax asset
attributable to these net operating losses.
During 2004, 2003 and 2002, Royal Bancshares realized a tax benefit related
to the net operating loss carryovers from the acquisition of KSB. The
deferred tax asset associated with those loss carryovers is fully offset by
a valuation allowance. Accordingly, the realized tax benefit is reflected as
a reduction of the goodwill associated with the acquisition and a
corresponding reduction of deferred income tax benefit for the year.
In addition, Royal Bancshares has approximately $15,700,000 of tax goodwill
from the acquisition of KSB. The ability to deduct this goodwill for tax
purposes will expire in 2015. The utilization of this goodwill for tax
purposes was subject to the limitations under Section 382 of the Internal
Revenue Code. For 2004, 2003 and 2002 approximately $1,353,000 has been
utilized for tax purposes.
(Continued)
65
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE J - INCOME TAXES - Continued
During 2004, the Internal Revenue Service ("IRS") commenced an examination
of Royal Bancshares's tax treatment relating to tax goodwill acquired in
Royal's 1995 purchase of Knoblauch State Bank. A final determination has not
been made. Upon completion of the examination, management will address the
financial statement implications of the IRS examination findings, if any.
NOTE K - EARNINGS PER SHARE
Basic and diluted EPS are calculated as follows (in thousands, except per
share data):
2004
----------------------------------------
Average
Income shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
Basic EPS
Income available to common shareholders $ 20,033 12,505 $ 1.60
Effect of dilutive securities
Stock options - 102 (0.01)
----------- ------------- ---------
Diluted EPS
Income available to common shareholders plus
assumed exercise of options $ 20,033 12,607 $ 1.59
=========== ============= =========
All options to purchase shares of common stock were included in the
computation of 2004 diluted EPS because the exercise price was less than the
average market price of the common stock.
2003
----------------------------------------
Average
Income shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
Basic EPS
Income available to common shareholders $ 18,526 12,392 $ 1.49
Effect of dilutive securities
Stock options - 53 -
----------- ------------- ---------
Diluted EPS
Income available to common shareholders plus
assumed exercise of options $ 18,526 12,445 $ 1.49
=========== ============= =========
(Continued)
66
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE K - EARNINGS PER SHARE - Continued
All options to purchase shares of common stock were included in the
computation of 2003 diluted EPS because the exercise price was less than the
average market price of the common stock.
2002
----------------------------------------
Average
Income shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
Basic EPS
Income available to common shareholders $ 17,405 12,324 $ 1.41
Effect of dilutive securities
Stock options - 258 (0.03)
----------- ------------- ---------
Diluted EPS
Income available to common shareholders plus
assumed exercise of options $ 17,405 12,582 $ 1.38
=========== ============= =========
All options to purchase shares of common stock were included in the
computation of 2002 diluted EPS because the exercise price was less than the
average market price of the common stock.
NOTE L - STOCK OPTION PLANS
Royal Bancshares has two stock-based compensation plans, which are described
below. Royal Bancshares accounts for these plans under APB Opinion No. 25.
1. Outside Directors' Stock Option Plan
Royal Bancshares adopted a non-qualified outside Directors' Stock Option
Plan (the Director's Plan). Under the terms of the Director's Plan, 250,000
shares of Class A stock are authorized for grants. Each director is entitled
to a grant of an option to purchase 1,500 shares of stock annually, which
are exercisable one year after the grant date. The options were granted at
the fair market value at the date of the grant.
(Continued)
67
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE L - STOCK OPTION PLANS - Continued
Stock option transactions consist of the following:
2004 2003 2002
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at beginning
of year 71,462 $ 14.91 80,291 $ 14.12 75,296 $ 11.47
Granted 16,830 23.97 16,683 19.96 16,037 19.56
Exercised (9,248) 11.54 (25,512) 12.03 (11,043) 9.66
Cancelled - - - - - -
---------- ---------- ----------
Outstanding at end of year 79,044 $ 17.29 71,462 $ 14.91 80,290 $ 14.12
========== ========== ==========
Weighted average fair
value of options
granted during the
year $ 5.25 $ 3.62 $ 8.70
The following table summarizes information about options outstanding and
exercisable at December 31, 2004:
Options outstanding Options exercisable
----------------------------------------- ---------------------------
Weighted
average Weighted Weighted
remaining average average
Range of Number contractual exercise Number exercise
exercise prices outstanding life (years) price exercisable price
-------------------------- ----------- ------------ ------------ ------------ ------------
$7.11 - 9.78 6,327 1.8 $ 8.89 6,327 $ 8.89
$11.34 - 14.75 27,439 4.9 12.93 27,439 12.93
$19.19 - 23.97 45,278 8.3 21.10 28,448 19.40
----------- ------------
79,044 62,214
=========== ============
(Continued)
68
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE L - STOCK OPTION PLANS - Continued
2. Employee Stock Option and Appreciation Right Plan
Royal Bancshares adopted a Stock Option and Appreciation Right Plan (the
Plan). The Plan is an incentive program under which Company officers and
other key employees may be awarded additional compensation in the form of
options to purchase up to 1,500,000 shares of Royal Bancshares' Class A
common stock (but not in excess of 15% of outstanding shares). At the time a
stock option is granted, a stock appreciation right for an identical number
of shares may also be granted. The option price is equal to the fair market
value at the date of the grant. The options are exercisable at 20% per year
beginning one year after the date of grant and must be exercised within ten
years of the grant.
Stock option transactions consist of the following:
2004 2003 2002
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at beginning
of year 428,433 $ 15.76 498,803 $ 14.12 512,410 $ 10.24
Granted 255,385 23.97 157,421 19.96 163,543 19.56
Exercised (34,643) 11.54 (120,511) 11.43 (160,775) 5.72
Cancelled (55,636) 20.51 (107,280) 17.16 (16,374) 17.27
---------- ---------- ----------
Outstanding at end of year 593,539 19.18 428,433 $ 15.76 498,803 $ 14.12
========== ========== ==========
Weighted average fair
value of options
granted during the
year $ 5.25 $ 3.62 $ 8.70
The following table summarizes information about options outstanding and
exercisable at December 31, 2004:
Options outstanding Options exercisable
------------------------------------------ ---------------------------
Weighted
average Weighted Weighted
remaining average average
Range of Number contractual exercise Number exercise
exercise prices outstanding life (years) price exercisable price
------------------------- ------------ ------------ ------------ ------------ ------------
$9.80 - 12.76 157,853 5.3 $ 12.22 116,102 $ 12.03
$14.78 - 19.57 200,427 7.3 19.04 70,010 18.35
$23.97 235,259 9.2 23.97 -- --
------------ ------------
593,539 186,112
============ ============
69
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE M - PENSION PLAN
Royal Bancshares has a noncontributory nonqualified defined benefit pension
plan covering certain eligible employees. Royal Bancshares-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 five consecutive
years during the last 10 years of employment. Royal Bancshares's policy is
to fund pension costs allowable for income tax purposes. The following table
sets forth the plan's funded status and amounts recognized in Royal
Bancshares's consolidated balance sheets (in thousands):
2004 2003
------------- -------------
Change in benefit obligation
Benefit obligation at beginning of year $ 3,591 $ 3,048
Service cost 722 317
Interest cost 205 214
Other changes (215) 12
------------- -------------
Benefits obligation at end of year $ 4,303 $ 3,591
============= =============
Weighted-average assumptions used to determine benefit obligations, end of
year
December 31
-------------------
2004 2003
-------- --------
Discount rate 6.00% 7.00%
Rate of compensation increase 4.00% 4.00%
The asset allocation for Royal Bancshares's pension plans and the end of
2004 and 2003 consists of insurance policies under Royal Bancshares Owned
Life Insurance program. The cash surrender value for these policies was
approximately $1,203,000 and $993,000 for the years ended December 31, 2004
and 2003, respectively.
Net pension cost included the following components (in thousands):
2004 2003 2002
---------- ---------- ----------
Service cost $ 570 $ 410 $ 208
Interest cost 205 214 191
---------- ---------- ----------
Net periodic benefit cost $ 775 $ 624 $ 399
========== ========== ==========
(Continued)
70
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE M - PENSION PLAN-Continued
Royal Bancshares has a capital accumulation and salary reduction plan under
Section 401(k) of the Internal Revenue Code of 1986, as amended. Under the
plan, all employees are eligible to contribute from 1% to a maximum of 15%
of their annual salary, with Royal Bancshares matching 100% of any
contribution between 1% and 5% subject to a $2,500 per employee annual
limit. Matching contributions to the plan were approximately $162,000,
$199,000 and $187,000 for the years ended December 31, 2004, 2003 and 2002,
respectively.
NOTE N - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
Royal Bancshares is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit and standby
letters of credit. Such financial instruments are recorded in the financial
statements when they become payable. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The contract amounts of those
instruments reflect the extent of involvement Royal Bancshares has in
particular classes of financial instruments.
Royal Bancshares' exposure to credit loss in the event of non-performance
by the other party to commitments to extend credit and standby letters of
credit is represented by the contractual amount of those instruments. Royal
Bancshares uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
The contract amounts are as follows (in thousands):
December 31,
-----------------------------
2004 2003
------------- -------------
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit $ 119,458 $ 59,829
Standby letters of credit and financial guarantees written 1,797 5,099
Financial Instruments whose notional amount exceed the amount the amount
of credit risk.
Interest rate swap agreements $ 25,000 $ 20,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, and others are for staged
construction, the total commitment amounts do not necessarily represent
immediate cash requirements.
(Continued)
71
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE N - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK - Continued
Royal Bancshares evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary
by Royal Bancshares upon extension of credit, is based on management's
credit evaluation. Collateral held varies but may include personal or
commercial real estate, accounts receivable, inventory and equipment.
Standby letters of credit are conditional commitments issued by Royal
Bancshares to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing and
similar transactions. Most guarantees extend for one year and expire in
decreasing amounts through 2005. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan
facilities to customers. Royal Bancshares holds personal or commercial real
estate, accounts receivable, inventory and equipment as collateral
supporting those commitments for which collateral is deemed necessary. The
extent of collateral held for those commitments is approximately 80%.
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an entity's
assets and liabilities considered to be financial instruments. For Royal
Bancshares, as for most financial institutions, the majority of its assets
and liabilities are considered financial instruments as defined in SFAS No.
107. However, many of such instruments lack an available trading market, as
characterized by a willing buyer and seller engaging in an exchange
transaction. Also, it is Royal Bancshares's general practice and intent to
hold its financial instruments to maturity and not to engage in trading or
sales activities. Therefore, Royal Bancshares had to use significant
estimations and present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair value may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the
wide range of permitted assumptions and methodologies in the absence of
active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair value.
Fair values have been estimated using data which management considered the
best available and estimation methodologies deemed suitable for the
pertinent category of financial instrument. The estimation methodologies,
resulting fair values and recorded carrying amounts at December 31, 2004 and
2003 were as follows:
(Continued)
72
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
Fair value of financial instruments actively traded in a secondary market
has been estimated using quoted market prices as follows (in thousands):
2004 2003
----------------------- -----------------------
Estimated Carrying Estimated Carrying
fair value amount fair value amount
---------- ---------- ---------- ----------
Cash and cash equivalents $ 27,109 $ 27,109 $ 25,070 $ 25,070
Investment securities held to maturity 211,865 212,227 114,275 113,091
Investment securities available for sale 360,934 360,934 452,246 452,246
Fair value of financial instruments with stated maturities has been
estimated using present value cash flow, discounted at a rate approximating
current market for similar assets and liabilities, as follows (in
thousands):
2004 2003
----------------------- -----------------------
Estimated Carrying Estimated Carrying
fair value amount fair value amount
---------- ---------- ---------- ----------
Deposits with stated maturities $ 208,198 $ 202,520 $ 245,409 $ 236,902
Borrowings 224,437 222,000 217,319 212,000
Subordinated debt 25,774 25,774 -- --
Obligations from equity investments 56,249 56,249 -- --
Fair value of financial instrument liabilities with no stated maturities has
been estimated to equal the carrying amount (the amount payable on demand),
totaling approximately $539,862,000 and $554,157,000 at December 31, 2004
and 2003, respectively.
Fair value of the net loan portfolio has been estimated using present value
cash flow, discounted at the treasury rate adjusted for non-interest
operating costs and giving consideration to estimated prepayment risk and
credit loss factors, as follows (in thousands):
2004 2003
----------------------- -----------------------
Estimated Carrying Estimated Carrying
fair value amount fair value amount
---------- ---------- ---------- ----------
Loans held for sale $ 2,221 $ 2,204 $ 3,181 $ 3,157
Net loans 467,401 467,294 513,479 512,557
The fair value of accrued interest receivable and payable approximates
carrying amounts.
(Continued)
73
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
The fair value of commitments to extend credit is estimated based on the
amount of unamortized deferred loan commitment fees. The fair value of
letters of credit is based on the amount of unearned fees plus the estimated
cost to terminate the letters of credit. Fair values of unrecognized
financial instruments including commitments to extend credit and the fair
value of letters of credit are considered immaterial.
The fair value of interest rate swaps are based on upon the estimated amount
Royal Bank would receive or pay to terminate the contract or agreements,
taking into account current interest rates and, when appropriate, the
current creditworthiness of the counterparties. The fair value of the
interest rate swaps agreements are considered immaterial.
Royal Bancshares' remaining assets and liabilities are not considered
financial instruments. No disclosure of the relationship value of Royal
Bancshares's deposits is required by SFAS No. 107.
NOTE P - REGULATORY MATTERS
1. Payment of Dividends
Under the Pennsylvania Business Corporation Law, Royal Bancshares may pay
dividends only if it is solvent and would not be rendered insolvent by the
dividend payment. There are also restrictions set forth in the Pennsylvania
Banking Code of 1965 (the Code) and in the Federal Deposit Insurance Act
(FDIA) concerning the payment of dividends by Royal Bancshares. Under the
Code, no dividends may be paid except from "accumulated net earnings"
(generally retained earnings). Under the FDIA, no dividend may be paid if a
bank is in arrears in the payment of any insurance assessment due to the
Federal Deposit Insurance Corporation (FDIC).
In addition, dividends paid by Royal Bank to Royal Bancshares would be
prohibited if the effect thereof would cause Royal Bank's capital to be
reduced below applicable minimum capital requirements.
2. Capital Ratios
Royal Bancshares and Royal Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possible
additional discretionary--actions by regulators that, if undertaken, could
have a direct material effect on Royal Bancshares' financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, Royal Bancshares must meet specific capital guidelines
that involve quantitative measures of Royal Bancshares' assets, liabilities
and certain off-balance-sheet items as calculated under regulatory
accounting practices. Royal Bancshares and Royal Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulations to ensure capital adequacy
require Royal Bancshares and Royal Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and of
Tier I capital (as defined) to average assets (as defined). As of
December 31, 2004, management believes that Royal Bank meets all capital
adequacy requirements to which it is subject.
(Continued)
74
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE P - REGULATORY MATTERS - Continued
As of December 31, 2004, Royal Bank met all regulatory requirements for
classification as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, Royal Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed Royal Bank's
category.
Royal Bancshares' and Royal Bank's actual capital amounts and ratios are
also presented in the table (in thousands).
2004
---------------------------------------------------------------------------
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
----------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- ---------- ---------- ----------
Total capital (to risk-
weighted assets)
Company (consolidated) $ 176,557 20.43% $ 69,149 8.00% N/A N/A
Bank 124,847 14.55% 68,663 8.00% $ 85,829 10.00%
Tier I capital (to risk-
weighted assets)
Company (consolidated) 165,731 19.17% 34,574 4.00% N/A N/A
Bank 114,096 13.29% 34,332 4.00% 51,497 6.00%
Tier I capital(to average
assets, leverage)
Company (consolidated) 165,731 13.93% 35,692 3.00% N/A N/A
Bank 114,096 9.59% 35,692 3.00% 59,487 5.00%
(Continued)
75
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE P - REGULATORY MATTERS - Continued
2003
---------------------------------------------------------------------------
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
----------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- ---------- ---------- ----------
Total capital (to risk-
weighted assets)
Company (consolidated) $ 139,876 16.50% $ 67,792 8.00% N/A N/A
Bank 113,922 13.73% 66,371 8.00% $ 82,964 10.00%
Tier I capital (to risk-
weighted assets)
Company (consolidated) 129,283 15.30% 33,896 4.00% N/A N/A
Bank 103,523 12.47% 33,186 4.00% 49,778 6.00%
Tier I capital(to average
assets, leverage)
Company (consolidated) 129,283 11.10% 34,811 3.00% N/A N/A
Bank 103,523 8.99% 34,556 3.00% 57,593 5.00%
NOTE Q - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Condensed financial information for the parent company only follows (in
thousands).
CONDENSED BALANCE SHEETS
December 31,
-----------------------------
2004 2003
------------- -------------
Assets
Cash $ 30,326 $ 4,775
Investment in Royal Investments of Delaware, Inc. - at equity 21,178 20,995
Investment in Royal Bank America - at equity 114,109 109,063
Other assets 1,037 -
------------- -------------
$ 166,650 $ 134,833
============= =============
Subordinated debentures $ 25,774 $ -
Stockholders' equity 140,876 134,833
------------- -------------
$ 166,650 $ 134,833
============= =============
(Continued)
76
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE Q - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued
CONDENSED STATEMENTS OF INCOME
Year ended December 31,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
Income
Equity in undistributed net earnings of subsidiaries $ 7,888 $ 7,241 $ 6,840
Dividends from subsidiary bank 12,199 11,321 10,589
Other income - 25 49
---------- ---------- ----------
Total income 20,087 18,587 17,478
---------- ---------- ----------
Expenses
Other expenses 83 81 85
Income tax benefit (29) (20) (12)
---------- ---------- ----------
Total expenses 54 61 73
---------- ---------- ----------
Net income $ 20,033 $ 18,526 $ 17,405
========== ========== ==========
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
Cash flows from operating activities
Net income $ 20,033 $ 18,526 $ 17,405
Adjustments to reconcile net income to net cash
provided by operating activities
Undistributed earnings from subsidiaries (7,888) (7,241) (6,840)
Operating expenses 83 81 85
Rental income - (25) (49)
Non-cash income tax benefit (29) (20) (12)
---------- ---------- ----------
Net cash provided by operating activities 12,199 11,321 10,589
---------- ---------- ----------
Cash flows from financing activities
Cash dividends paid (12,199) (11,321) (10,589)
Proceeds from subordinated debentures 25,000 - -
Other, net 551 2,248 1,083
---------- ---------- ----------
Net cash provided by (used in) financing
activities 13,352 (9,073) (9,506)
---------- ---------- ----------
Net increase in cash 25,551 2,248 1,083
---------- ---------- ----------
Cash at beginning of year 4,775 2,527 1,444
---------- ---------- ----------
Cash at end of year $ 30,326 $ 4,775 $ 2,527
========== ========== ==========
(Continued)
77
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
NOTE R - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summarizes the consolidated results of operations during 2004
and 2003, on a quarterly basis, for Royal Bancshares (in thousands except
per share data):
2004
-----------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Interest income $ 16,990 $ 16,515 $ 16,508 $ 17,528
Net interest income 10,181 9,722 9,539 10,798
Provision for loan losses - 1 4 1
Income before income taxes 7,008 7,318 6,217 7,404
Net income 5,363 5,112 4,394 5,164
Net income per share
Basic $ 0.43 $ 0.41 $ 0.35 $ 0.41
Diluted $ 0.42 $ 0.41 $ 0.35 $ 0.41
2003
-----------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Interest income $ 17,939 $ 18,197 $ 17,753 $ 18,431
Net interest income 10,885 10,967 10,123 10,404
Provision for loan losses 160 197 167 150
Income before income taxes 7,325 6,984 5,879 6,334
Net income 5,383 4,763 3,980 4,400
Net income per share
Basic $ 0.43 $ 0.39 $ 0.32 $ 0.35
Diluted $ 0.43 $ 0.39 $ 0.32 $ 0.35
78
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As reported on its Report on Form 8-K filed with the SEC on October 21,
2004, on October 18, 2004, Royal Bancshares dismissed its then independent
accountants, Grant Thornton, LLP and appointed Beard Miller Company LLP as its
new independent accountants, each effective immediately. The decisions to
dismiss Grant Thornton and to engage Beard Miller were approved by Royal
Bancshares' Audit Committee. The Audit Committee's decision was based upon a
response to a competitive bid requested by Royal Bancshares. The reports on
Royal Bancshares' financial statements from Grant Thornton for the past two
fiscal years, or any period prior to that period, have not contained an adverse
opinion or disclaimer of opinion, nor were qualified or modified as to any
uncertainty, audit scope, or accounting principles. There have been no
disagreements with Grant Thornton on any matter of accounting principles or
practices, financial statement disclosures, or auditing scope of procedure
during the two most recent fiscal years, or any subsequent interim period
through the date of dismissal or in any of the years prior to that period,
which, if not resolved to the satisfaction of Grant Thornton, would have caused
Grant Thornton to make reference to the subject matter of the disagreement in
connection with its report.
During the two most recent fiscal years, or any subsequent interim
period through the date of dismissal of Grant Thornton, there were no
disagreements with Grant Thornton on any of the kinds of events listed in Item
304 (a)(1)(v)(A) through (D) of Regulation S-K.
During the years ended December 31, 2003 and 2002 and the subsequent
interim period through the date of engaging Beard Miller, neither Royal
Bancshares nor anyone on its behalf consulted Beard Miller on any of the matters
or reportable events listed in Item 304 (a) (2) (i) and (ii) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
EFFECTIVENESS OF DISCLOSURE 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, we discovered a weakness within our residential mortgage
originations department regarding procedures and policy manuals. This weakness
has been corrected as of December 31, 2004.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Royal Bancshares is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over
financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended, as a process designed by, or under
the supervision of, Royal Bancshares' principal executives and principal
financial officers and effected by the Royal Bancshares' Board of Directors,
management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of Royal
Bancshares;
o Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of
79
Royal Bancshares are being made only in accordance with authorizations of
management and directors of Royal Bancshares; and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of Royal Bancshares' assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
A material weakness is a significant deficiency (as defined in Public Company
Accounting Oversight Board Auditing Standard No. 2), or a combination of
significant deficiencies, that results in there being more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected on a timely basis by management or
employees in the normal course of performing their assigned functions.
Management assessed the effectiveness of Royal Bancshares' internal control over
financial reporting as of December 31, 2004. Management's assessment identified
the following material weakness in Royal Bancshares' internal control over
financial reporting.
o Royal Bancshares' analysis of the allowance for loan losses for impaired
loans is based on classifications of loans into various categories and loss
percentages that are commonly used for regulatory purposes. For
non-classified loans, the estimated reserve is based on what Royal
Bancshares deems to be appropriate. This estimate is not supported by
documentation discussed in the FFIEC's July 2001 policy statement and SAB
No. 102, which include trends in loan categories, such as delinquencies,
restructurings, concentrations and volume, and actual charge-off and
recovery histories to the net charge-off estimates.
In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Management is required by the Securities
and Exchange Commission to report, as of December 31, 2004, that Royal
Bancshares' internal control over financial reporting was not effective based on
its maintaining the allowance for loan loss according to regulatory
requirements, but not putting in place the documentation required under SAB No.
102.
POST YEAR-END REMEDIATION TO ADDRESS THE MATERIAL WEAKNESS IS AS FOLLOWS:
o Management is in the process of developing procedures and analytical
worksheets to ensure compliance and which will be reviewed by senior
management on a quarterly basis.
Royal Bancshares Independent Registered Public Accounting Firm has issued an
audit report on management's assessment of the Corporation's internal control
over financial reporting.
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Royal Bancshares of Pennsylvania, Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Royal
Bancshares of Pennsylvania, Inc. (the Company) did not maintain effective
internal control over financial reporting as of December 31, 2004, because of
the effect of a material weakness identified in management's assessment, based
on criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
80
The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of consolidation financial statements for external
purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of consolidated financial statements
in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim consolidated financial statements will not
be prevented or detected. The following material weakness has been identified
and included in management's assessment. Management has identified, as a
material weakness, its documentation for the allowance for loan losses as
required under Staff Accounting Bulletin (SAB) No. 102 not being in place. The
Company's analysis of the allowance for loan losses for impaired loans is based
on classifications of loans into various categories and loss percentages that
are commonly used for regulatory purposes. For non-classified loans, the
estimated reserve is based on what the Company deems to be appropriate. This
estimate is not supported by documentation discussed in the Federal Financial
Institutions Examination Council July 2001 policy statement and SAB No. 102,
which include trends in loan categories, such as delinquencies, restructurings,
concentrations and volume, and actual charge-off and recovery histories to the
net charge-off estimates. This material weakness was considered in determining
the nature, timing, and extent of audit tests applied in our audit of the 2004
consolidated financial statements, and this report does not affect our report
dated March 14, 2005 on those consolidated financial statements.
In our opinion, management's assessment that Royal Bancshares of
Pennsylvania, Inc. did not maintain effective internal control over financial
reporting as of December 31, 2004, because of the effect of the material
weakness described above on the achievement of the objectives of the control
criteria, is fairly stated, in all material respects, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, Royal Bancshares of
Pennsylvania, Inc. has not maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We do not express an opinion or any other form of assurance on
management's statement referring to post year-end remediation to address the
material weakness.
81
Reading, Pennsylvania
March 14, 2005
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required in this Item, relating to directors, executive
officers, and control persons is set forth in Royal Bancshares' Proxy Statement
to be used in connection with the 2005 Annual Meeting of Shareholders under the
heading "Remuneration of Directors and Officers and Other Transactions", which
pages are incorporated herein by reference.
AUDIT COMMITTEE. Royal Bancshares has a separately-designated standing
Audit Committee established in accordance with Section 3(a)(58)(A) of the
Exchange Act. The members of the Audit Committee are Gregory T. Reardon
(Chairman), Jack R. Loew, Anthony J. Micale and Edward B. Tepper as an advisor
each of whom is independent as that term is used in Item 7(d)(3)(iv) of Schedule
14A under the Exchange Act.
AUDIT COMMITTEE FINANCIAL EXPERT. Royal Bancshares' Board of Directors
has determined that Gregory T. Reardon, the Audit Committee Chairman, is an
audit committee financial expert as defined in Item 401(h) of Regulation S-K of
the Exchange Act and is independent as that term is used in Item 7(d)(3)(iv) of
Schedule 14A under the Exchange Act.
BENEFICIAL OWNERSHIP - COMPLIANCE. Section 16(a) of the Securities
Exchange Act of 1934, as amended, requires Royal Bancshares' officers and
directors, and persons who own more than 10 percent of the registered class of
Royal Bancshares' equity securities, to file reports of ownership and changes in
ownership with the SEC. Officers, directors and greater than 10 percent
shareholders are required by SEC regulation to furnish the Corporation copies of
all Section 16(a) forms they file.
Based solely on its review of forms that were received from certain
reporting persons, Royal Bancshares believes that during the period January 1,
2004 through December 31, 2004, its officers and directors were in compliance
with all filing requirements applicable to them.
82
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item, relating to executive
compensation, is set forth in the Royal Bancshares' Proxy Statement to be used
in connection with the 2005 Annual Meeting of Shareholders, under the heading
"Renumeration of Directors and Officers and Other Transactions", which pages are
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item, relating to beneficial ownership
of the Registrant's Common Stock, is set forth in Royal Bancshares' Proxy
Statement to be used in connection with the 2005 Annual Meeting of Shareholders,
under the heading "Information About Nominees, Continuing Directors and
Executive Officers", which pages are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item, relating to transactions with
management and others, certain business relationships and indebtedness of
management, is set forth in Royal Bancshares' Proxy Statement to be used in
connection with the 2005 Annual Meeting of Shareholders, under the heading
"Interest of Management and Others in Certain Transactions", which pages are
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item appears under the heading "AUDIT
FEES" of the Proxy Statement to be used in connection with the 2005 Annual
Meeting of Shareholders, which pages are incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. 1. Financial Statements
The following financial statements are included by reference in
Part II, Item 8 hereof.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets.
Consolidated Statements of Income.
Consolidated Statements of Changes in Stockholders' Equity.
Consolidated Statement of Cash Flows.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Financial Statement Schedules are omitted because the required
information is either not applicable, not required or is shown in
the respective financial statements or in the notes thereto.
3. The following Exhibits are files herewith or incorporated by
reference as a part of this Annual Report.
2 Purchase and Assumption Agreement, dated as of March 12,
2001, among Royal Bank of Pennsylvania, Crusader Holding
Corporation, Crusader Savings Bank, F.S.B. and Asset
Investment Corporation. (Incorporated by reference to
Exhibit 2 to Registrant's Report on Form 8-K, filed with
the Commission on March 15, 2001.)
83
3(i) Articles of Incorporation. (Incorporated by reference to
Exhibit 3(i) to Registrant's Registration Statement
No. 0-26366 on Form S-4.)
3(ii) By-laws. (Incorporated by reference to Exhibit 99 to
Registrant's Current Report on Form 8-K, filed with the
Commission on March 13, 2001.)
4.1 Junior Subordinated Debt Security Due 2034 issued by
Royal Bancshares of Pennsylvania, Inc. to JPMorgan Chase
Bank, as Institutional Trustee, dated October 27, 2004.
(Incorporated by reference to Exhibit 4.1 to
Registrant's Current Report 8-K (included as Exhibit A
to Exhibit 10.1) filed with the Commission on
November 1, 2004.))
4.2 Junior Subordinated Debt Security Due 2034 issued by
Royal Bancshares of Pennsylvania, Inc. to JPMorgan Chase
Bank, as Institutional Trustee, dated October 27, 2004.
(Incorporated by reference to Exhibit 4.2 to
Registrant's Current Report 8-K (included as Exhibit A
to Exhibit 10.2) filed with the Commission on
November 1, 2004.))
4.3 Indenture by and between Royal Bancshares of
Pennsylvania, Inc. and JPMorgan Chase Bank, as Trustee,
dated October 27, 2004. (Incorporated by reference to
Exhibit 10.1 to Registrant's Current Report on Form 8-K
filed with the Commission on November 1, 2004.)
4.4 Indenture by and between Royal Bancshares of
Pennsylvania, Inc. and JPMorgan Chase Bank, as Trustee,
dated October 27, 2004. (Incorporated by reference to
Exhibit 10.2 to Registrant's Current Report on Form 8-K
filed with the Commission on November 1, 2004.)
4.5 Guarantee Agreement by and between Royal Bancshares of
Pennsylvania, Inc. and JPMorgan Chase Bank, as Guarantee
Trustee, dated October 27, 2004. (Incorporated by
reference to Exhibit 10.3 to Registrant's Current Report
on Form 8-K filed with the Commission on November 1,
2004.)
4.6 Guarantee Agreement by and between Royal Bancshares of
Pennsylvania, Inc. and JPMorgan Chase Bank, as Guarantee
Trustee, October 27, 2004. (Incorporated by reference to
Exhibit 10.4 to Registrant's Current Report on Form 8-K
filed with the Commission on November 1, 2004.)
10.1 Stock Option and Appreciation Right Plan. (Incorporated
by reference to the Registrant's Registration Statement
No. 333-25855, on form S-8 filed with the Commission on
April 5, 1997).
10.2 Outside Directors' Stock Option Plan. (Incorporated by
reference to the Registrant's Registration Statement
No. 333-25855, on form S-8 filed with the Commission on
April 5, 1997).
10.3 Employment agreement between Royal Bancshares of
Pennsylvania, Inc. and Joseph P. Campbell, President and
Chief Executive Officer, entered into on April 23, 2004.
(Incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10- Q filed with
the Commission on November 9, 2004.)
10.4 Employment agreement between Royal Bancshares of
Pennsylvania, Inc. and James J. McSwiggan, Executive
Vice President, entered into on April 23, 2004.
(Incorporated by
84
reference to Exhibit 10.3 to Registrant's Quarterly
Report on Form 10-Q filed with the Commission on
November 9, 2004.)
10.5 Employment agreement between Royal Bank America and
Robert R. Tabas, entered into on April 23, 2004.
(Incorporated by reference to Exhibit 10.6 to
Registrant's Quarterly Report on Form 10-Q filed with
the Commission on November 9, 2004.)
10.6 Employment agreement between Royal Bancshares of
Pennsylvania, Inc. and Murray Stempel, Senior Vice
President, entered into on April 23, 2004. (Incorporated
by reference to Exhibit 10.4 to Registrant's Quarterly
Report on Form 10-Q filed with the Commission on
November 9, 2004.)
10.7 Employment agreement between Royal Bancshares of
Pennsylvania, Inc. and John Decker, Senior Vice
President, entered into on April 23, 2004. (Incorporated
by reference to Exhibit 10.2 to Registrant's Quarterly
Report on Form 10-Q filed with the Commission on
November 9, 2004.)
10.8 Employment agreement between Royal Bank America and
Edward Shin, entered into on April 23, 2004.
(Incorporated by reference to Exhibit 10.5 to
Registrant's Quarterly Report on Form 10-Q filed with
the Commission on November 9, 2004.)
11. Statement Re: Computation of Earnings Per Share.
Included at Item 8, hereof, Note K, "Per Share
Information".
12. Statement re: Computation of Ratios. (Included at Item 8
here of, Note P, "Regulatory Matters.")
14. Royal Bancshares of Pennsylvania, Inc. Code of Ethics.
21. Subsidiaries of Registrant.
23a. Consent of Independent Accountants from Beard Miller
Company LLP.
23b. Consent of Independent Accountants from Grant Thornton
LLP.
31.1 Rule 13a-14(a)/15-d-14(a) Certification of Chief
Executive Officer
31.2 Rule 13a-14(a)/15-d-14(a) Certification of Chief
Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial Officer.
99.1 Opinion letter of Independent Accounts Grant Thornton
LLP.
(b) Reports on Form 8-K filed by the Registrant during the fourth quarter
and through this Form 10K filing are as follows:
Royal Bancshares filed a report on Form 8-K with the Securities and
Exchange Commission as of October 18, 2004 announcing the dismissal of
independent accounts from Grant Thornton LLP and appointed Beard Miller
Company LLP.
Royal Bancshares filed a report on Form 8-K with the Securities and
Exchange Commission as of October 25, 2004, reporting its third quarter
earnings and the declaration of its 38th consecutive cash dividend.
Royal Bancshares filed a report on Form 8-K with the Securities and
Exchange Commission as of October 27, 2004, reporting the completion of
private placement of an aggregate $25 million of trust preferred
securities and the formations of two Delaware Trust affiliates.
85
Royal Bancshares filed a report on Form 8-K with the Securities and
Exchange Commission as of December 16, 2004, announcing the declaration
of 2% stock dividend on both Class A and Class B shares.
Royal Bancshares filed a report on Form 8-K with the Securities and
Exchange Commission as of January 20, 2005, reporting its forth quarter
earnings and the declaration of its 39th consecutive cash dividend.
Royal Bancshares filed a report on Form 8-K with the Securities and
Exchange Commission as of January 25, 2005, announcing the promotions of
senior management.
(c) The exhibits required to be filed by this Item are listed under Item
14(a)3 above.
(d) Not applicable.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of l934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
86
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Joseph P. Campbell
- -----------------------
Joseph P. Campbell
Chief Executive Officer
March 14, 2005.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURES
By: /s/ Joseph P. Campbell March 14, 2005.
- ----------------------------------
Joseph P. Campbell
CEO/President/Director
By: /s/ Jeffrey T. Hanuscin March 14, 2005.
- ----------------------------------
Jeffrey T. Hanuscin
Chief Financial Officer
By:/s/ James J. McSwiggan March 14, 2005.
- ----------------------------------
James J. McSwiggan
Director/Chief Operating Officer
By:/s/Robert R. Tabas March 14, 2005.
- ----------------------------------
Robert R. Tabas
Chairman of the Board
By:/s/ Albert Ominsky March 14, 2005.
- ----------------------------------
Albert Ominsky
Director
By:/s/ Anthony J. Micale March 14, 2005.
- ----------------------------------
Anthony J. Micale
Director
By:/s/ Gregory T. Reardon March 14, 2005.
- ----------------------------------
Gregory T. Reardon
Director
By:/s/ Murray Stempel,III March 14, 2005.
- ----------------------------------
Murray Stempel, III
Director/ Senior Vice President
By:/s/ John M. Decker March 14, 2005.
- ----------------------------------
John M. Decker
Director/ Senior Vice President
87
By:/s/ Carl M. Cousins March 14, 2005.
- ----------------------------------
Carl M. Cousins
Director
By:/s/ Lee E. Tabas March 14, 2005.
- ----------------------------------
Lee E. Tabas
Director
By:/s/ Jack R. Loew March 14, 2005.
- ----------------------------------
Jack R. Loew
Director
By:/s/ Howard Wurzak March 14, 2005.
- ----------------------------------
Howard Wurzak
Director
By:/s/ Evelyn Rome Tabas March 14, 2005.
- ----------------------------------
Evelyn Rome Tabas
Director
By:/s/ Mitchell L. Morgan March 14, 2005.
- ----------------------------------
Mitchell L. Morgan
Director
By:/s/ Edward B. Tepper March 14, 2005.
- ----------------------------------
Edward B. Tepper
Director
By:/s/ Linda Tabas Stempel March 14, 2005.
- ----------------------------------
Linda Tabas Stempel
Director
88
ROYAL BANCSHARES OF PENNSYLVANIA, INC.
ANNUAL REPORT ON FORM 10-K
EXHIBIT INDEX
2. Purchase and Assumption Agreement, dated as of March 12, 2001, among
Royal Bank of Pennsylvania, Crusader Holding Corporation, Crusader
Savings Bank, F.S.B. and Asset Investment Corporation. (Incorporated by
reference to Exhibit 2 to Registrant's Report on Form 8-K, filed with
the Commission on March 15, 2001.)
3(i) Articles of Incorporation. (Incorporated by reference to Exhibit 3(i) to
Registrant's Registration Statement No. 0-26366 on Form S-4.)
3(ii) By-laws. (Incorporated by reference to Exhibit 99 to Registrant's
Current Report on Form 8-K, filed with the Commission on March 13,
2001.)
4.1 Junior Subordinated Debt Security Due 2034 issued by Royal Bancshares of
Pennsylvania, Inc. to JPMorgan Chase Bank, as Institutional Trustee,
dated October 27, 2004. (Incorporated by reference to Exhibit 4.1 to
Registrant's Current Report on Form 8-K (included as Exhibit A to
Exhibit 10.1) filed with the Commission on November 1, 2004.))
4.2 Junior Subordinated Debt Security Due 2034 issued by Royal Bancshares of
Pennsylvania, Inc. to JPMorgan Chase Bank, as Institutional Trustee,
dated October 27, 2004. (Incorporated by reference to Exhibit 4.2 to
Registrant's Current Report on Form 8-K (included as Exhibit A to
Exhibit 10.2) filed with the Commission on November 1, 2004.))
4.3 Indenture by and between Royal Bancshares of Pennsylvania, Inc. and
JPMorgan Chase Bank, as Trustee, dated October 27, 2004. (Incorporated
by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K
filed with the Commission on November 1, 2004.)
4.4 Indenture by and between Royal Bancshares of Pennsylvania, Inc. and
JPMorgan Chase Bank, as Trustee, dated October 27, 2004. (Incorporated
by reference to Exhibit 10.2 to Registrant's Current Report on Form 8-K
filed with the Commission on November 1, 2004.)
4.5 Guarantee Agreement by and between Royal Bancshares of Pennsylvania,
Inc. and JPMorgan Chase Bank, as Guarantee Trustee, dated October 27,
2004. (Incorporated by reference to Exhibit 10.3 to Registrant's Current
Report on Form 8-K filed with the Commission on November 1, 2004.)
4.6 Guarantee Agreement by and between Royal Bancshares of Pennsylvania,
Inc. and JPMorgan Chase Bank, as Guarantee Trustee, October 27, 2004.
(Incorporated by reference to Exhibit 10.4 to Registrant's Current
Report on Form 8-K filed with the Commission on November 1, 2004.)
10.1 Stock Option and Appreciation Right Plan. (Incorporated by reference to
the Registrant's Registration Statement N0. 333-25855, on form S-8 filed
with the Commission on April 5, 1997).
10.2 Outside Directors' Stock Option Plan. (Incorporated by reference to the
Registrant's Registration Statement N0. 333-25855, on form S-8 filed
with the Commission on April 5, 1997).
10.3 Employment agreement between Royal Bancshares of Pennsylvania, Inc. and
Joseph P. Campbell, President and Chief Executive Officer, entered into
on April 23, 2004. (Incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q filed with the Commission on
November 9, 2004.)
89
10.4 Employment agreement between Royal Bancshares of Pennsylvania, Inc. and
James J. McSwiggan, Executive Vice President, entered into on April 23,
2004. (Incorporated by reference to Exhibit 10.3 to Registrant's
Quarterly Report on Form 10-Q filed with the Commission on November 9,
2004.)
10.5 Employment agreement between Royal Bank America and Robert R. Tabas,
entered into on April 23, 2004. (Incorporated by reference to Exhibit
10.6 to Registrant's Quarterly Report on Form 10-Q filed with the
Commission on November 9, 2004.)
10.6 Employment agreement between Royal Bancshares of Pennsylvania, Inc. and
Murray Stempel, Senior Vice President, entered into on April 23, 2004.
(Incorporated by reference to Exhibit 10.4 to Registrant's Quarterly
Report on Form 10-Q filed with the Commission on November 9, 2004.)
10.7 Employment agreement between Royal Bancshares of Pennsylvania, Inc. and
John Decker, Senior Vice President, entered into on April 23, 2004.
(Incorporated by reference to Exhibit 10.2 to Registrant's Quarterly
Report on Form 10-Q filed with the Commission on November 9, 2004.)
10.8 Employment agreement between Royal Bank America and Edward Shin, entered
into on April 23, 2004. (Incorporated by reference to Exhibit 10.5 to
Registrant's Quarterly Report on Form 10-Q filed with the Commission on
November 9, 2004.)
11. Statement Re: Computation of Earnings Per Share. (Included at Item 8,
hereof, Note K, "Per Share Information".)
12. Statements re: Computation of Ratios. (Included at Item 8 here of, Note
P, "Regulatory Matters.")
14. Royal Bancshares of Pennsylvania, Inc. Code of Ethics.
21. Subsidiaries of Registrant.
23.1 Consent of Independent Accountants from Beard Miller Company LLP.
23.2 Consent of Independent Accountants Grant Thornton LLP.
31.1 Rule 13a-14(a)/15-d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15-d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial Officer.
99.1 Opinion letter of Independent Accounts Grant Thornton LLP.
90