UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-26366
ROYAL BANCSHARES OF PENNSYLVANIA, INC.
(Exact name of registrant as specified in its charter)
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Pennsylvania
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23-2812193 |
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(State of other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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732 Montgomery Avenue, Narberth, Pennsylvania
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19072 |
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(Address of principal executive offices)
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(Zip Code) |
(610) 668-4700
(Issuers telephone number, including area code)
(Former name, former address and former year, if changed since last report)
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Securities registered pursuant to Section 12(b) of the Act: |
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Name of Each Exchange on Which Registered
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Title of Each Class |
The NASDAQ Stock Market, LLC
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Class A Common Stock ($2.00 par value) |
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Securities registered pursuant to Section 12(g) of the Act: |
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Name of Each Exchange on Which Registered
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Title of Each Class |
None |
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Class B Common Stock ($0.10 par value) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act.
o Yes þ No
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 þ No o
Indicate by checkmark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding twelve
months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants 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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or smaller reporting company (as defined in Exchange Act Rule 12b-2).
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
(Do not check if a smaller reporting company)
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Small reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the
Exchange Act) Yes o No þ
The aggregate market value of Registrants Common Stock held by non-affiliates is $9,325,987 based
on the June 30, 2009 closing price of the Registrants Common Stock of $1.87 per share.
As of February 28, 2010, the Registrant had 11,355,466 and 2,086,689 shares outstanding of Class A
and Class B common stock, respectively.
Documents Incorporated by Reference
Portions of the following documents are incorporated by reference: the definitive Proxy Statement
of the Registrant relating to Registrants Annual meeting of Shareholders to be held on May 19,
2010Part III.
TABLE OF CONTENTS
Forward Looking Statements
From time to time, Royal Bancshares of Pennsylvania, Inc. (the Company) may include
forward-looking statements relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development activities and
similar matters in this and other filings with the Securities and Exchange Commission. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements.
When we use words such as believes, expects, anticipates or similar expressions, we are
making forward-looking statements. In order to comply with the terms of the safe harbor, the
Company notes that a variety of factors could cause the Companys actual results and experience to
differ materially from the anticipated results or other expectations expressed in the Companys
forward-looking statements. The risks and uncertainties that may affect the operations, performance
development and results of the Companys business include the following: general economic
conditions, including their impact on capital expenditures; interest rate fluctuations; business
conditions in the banking industry; the regulatory environment: the nature, extent, and timing of
governmental actions and reforms, including the rules of participation for the Troubled Asset
Relief Program voluntary Capital Purchase Plan under the Emergency Economic Stabilization Act of
2008, which may be changed unilaterally and retroactively by legislative or regulatory actions;
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.
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PART I
ITEM 1. BUSINESS
Royal Bancshares of Pennsylvania, Inc.
Royal Bancshares of Pennsylvania, Inc. (the Company), is a Pennsylvania business corporation and
a two bank holding company registered under the Federal Bank Holding Company Act of 1956, as
amended (the Holding Company Act). The Company 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 the Company and were
exchanged on a one-for-one basis for common stock of the Company. On July 17, 2006, Royal Asian
Bank (Royal Asian) was chartered by the Commonwealth of Pennsylvania Department of Banking and
commenced operation as a Pennsylvania state-chartered bank. Prior to obtaining a separate charter,
the business of Royal Asian was operated as a division of Royal Bank. The principal activities of
the Company are supervising Royal Bank and Royal Asian, collectively known as the Banks, which
engage in a general banking business principally in Montgomery, Chester, Bucks, Philadelphia and
Berks counties in Pennsylvania and in Northern and Southern New Jersey and Delaware. The Company
also has a wholly owned non-bank subsidiary, Royal Investments of Delaware, Inc., which is engaged
in investment activities. On November 21, 2007, the Company established Royal Captive Insurance
Company, a wholly owned subsidiary. Royal Captive Insurance was formed to insure commercial
property and comprehensive umbrella liability for the Company and its affiliates. At December 31,
2009, the Company had consolidated total assets of approximately $1.3 billion, total deposits of
approximately $881.8 million and shareholders equity of approximately $104.3 million. The
Companys two Delaware trusts, Royal Bancshares Capital Trust I and Royal Bancshares Capital Trust
II, are not consolidated per requirements under Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) Topic 810, Consolidation (ASC Topic 810).
The Company has three reportable operating segments, Community Banking, Tax Liens, and Equity
Investments. The Equity Investments are consolidated under ASC Topic 810 as described in Note 20
- Segment Information of the Notes to Consolidated Financial Statements in Item 8 of this report.
Regulatory Actions
On July 15, 2009, Royal Bank agreed to enter into a Stipulation and Consent to the Issuance of an
Order to Cease and Desist (the Orders) with each of the Federal Deposit Insurance Corporation
(FDIC) and the Commonwealth of Pennsylvania Department of Banking (Department). The material
terms of the Orders are identical and require Royal Bank to: (i) have and retain qualified
management, and notify the FDIC and the Department of any changes in Royal Banks Board of
Directors or senior management; (ii) increase participation of Royal Banks Board of Directors in
Royal Banks affairs by having the board assume full responsibility for approving Royal Banks
policies and objectives and for supervising Royal Banks management; (iii) eliminate all assets
classified as Loss and formulate a written plan to reduce assets classified as Doubtful and
Substandard at its regulatory examination; (iv) develop a written plan to reduce delinquent
loans, and restrict additional advances to borrowers with existing credits classified as Loss,
Doubtful or Substandard; (v) develop a written plan to reduce Royal Banks commercial real
estate loan concentration; (vi) maintain, after establishing an adequate allowance for loan and
lease losses, a ratio of Tier 1 capital to total assets (leverage ratio) equal to or greater than
8% and a ratio of qualifying total capital to risk-weighted assets (total risk-based capital ratio)
equal to or greater than 12%; (vii) formulate and implement written profit plans and comprehensive
budgets for each year during which the Orders are in effect; (viii) formulate and implement a
strategic plan covering at least three years, to be reviewed quarterly and revised annually; (ix)
revise the liquidity and funds management policy and update and review the policy annually; (x)
refrain from increasing the amount of brokered deposits held by Royal Bank and develop a plan to
reduce the reliance on non-core deposits and wholesale funding sources; (xi) refrain from paying
cash dividends without prior approval of the FDIC and the Department; (xii) refrain from making
payments to or entering contracts with Royal Banks Holding Company or other Royal Bank affiliates
without prior approval of the FDIC and the Department; (xiii) submit to the FDIC for review and
approval an executive compensation plan that incorporates qualitative as well as profitability
performance standards for Royal Banks executive officers; (xiv) establish a compliance
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committee of the Board of Directors of Royal Bank with the responsibility to ensure Royal Banks
compliance with the Orders; and (xv) prepare and submit quarterly reports to the FDIC and the
Department detailing the actions taken to secure compliance with the Orders. The Orders will
remain in effect until modified or terminated by the FDIC and the Department.
The Orders do not restrict Royal Bank from transacting its normal banking business. Royal Bank
will continue to serve its customers in all areas including making loans (with the exception of new
non-owner occupied commercial real estate and construction loans), establishing lines of credit,
accepting deposits and processing banking transactions. Customer deposits remain fully insured to
the highest limits set by the FDIC. The FDIC and the Department did not impose or recommend any
monetary penalties in connection with the Orders.
Following are the actions Royal Bank has taken to respond to and comply with the Orders as of the
date of this report:
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Board Oversight and Senior Management |
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The Board of Directors has increased their participation in the affairs of Royal Bank. A
new Regulatory Compliance Committee comprised of outside directors and management was
created in the third quarter of 2009. The purpose of the Committee is to monitor compliance
with the Orders. Royal Bank has recently completed an internal assessment of senior
managements qualifications and has submitted the report to the FDIC and the Department for
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Reduction of Classified Assets |
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Royal Bank has eliminated from its books via charge-off all assets classified as Loss.
Royal Bank submitted to the FDIC and the Department a Plan for the Reduction of Classified
Assets (classified assets plan) required under the Orders. The FDIC and the Department
have approved the classified assets plan. No advances were made on any classified loan
unless approved by the Board of Directors and determined to be in Royal Banks best
interest. Royal Bank was successful in reducing net classified loans (outstanding loan
balance less charge-offs and specific reserves) and other real estate owned (OREO) from
$149.6 million at June 30, 2009 to $106.2 million at December 31, 2009. |
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Reduction of Delinquencies |
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Royal Bank submitted to the FDIC and the Department a Plan for the Reduction of
Delinquencies (delinquency reduction plan) required under the Orders. The FDIC and the
Department have approved the delinquency reduction plan. No advances were made on any
delinquent loan unless approved by the Board of Directors and determined to be in Royal
Banks best interest. Royal Bank was successful in reducing delinquent loans from $36.3
million at June 30, 2009 to $27.5 million at December 31, 2009. |
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Reduction of Commercial Real Estate Concentrations |
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Royal Bank submitted to the FDIC and the Department a Plan for the Reduction of Commercial
Real Estate Concentrations (CRE concentration plan) required under the Orders. The FDIC
and the Department have approved the CRE concentration plan. Management has been working
diligently to reduce the concentration in commercial real estate loans (CRE loans). Royal
Bank was successful in reducing the CRE concentration from $289.1 million at June 30, 2009
to $253.7 million at December 31, 2009, which amounted to 227.7% of total capital and 251.7%
of Tier 1 capital. At year end 2009, Royals total CRE loans were below 300% of capital and
were almost $49 million less than what was projected under the CRE concentration Plan. |
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At December 31, 2009, total construction/land loans (CL loans) amounted to $114.9 million,
or 102.9% of total capital and 113.7% of Tier 1 capital. CL loans were approximately $39
million less than what was projected under the CRE concentration plan at year end 2009. |
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Capital Maintenance |
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Under the Orders, Royal Bank must maintain a minimum total risk-based capital ratio and a
minimum Tier 1 leverage ratio of 12% and 8%, respectively. At December 31, 2009, Royal
Banks total risk-based capital and Tier 1 leverage ratios were 13.37% and 8.09%,
respectively. |
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Budget Plan |
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Royal Bank submitted to the FDIC and the Department a revised 2009 budget and profit plan
required under the Orders. The FDIC and the Department have approved the 2009 budget and
profit plan. In addition Royal Bank has submitted to the FDIC and the Department a 2010
budget and profit plan. |
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Strategic Plan |
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Royal Bank submitted to the FDIC and the Department a three-year strategic plan required
under the Orders. The FDIC and the Department have approved the three-year strategic plan.
The Board of Directors and senior management are executing the strategic plan and will
incorporate any modifications as deemed necessary by our regulators. |
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Liquidity and Funds Management |
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Royal Bank submitted to the FDIC and the Department a liquidity and funds management plan
(liquidity plan) required under the Orders. The FDIC and the Department have approved the
liquidity plan. At December 31, 2009, Royal Bank had $56.7 million in cash on hand and
$143.5 million in unpledged agency securities. At December 31, 2009, the liquidity to
deposits ratio was 33.1% compared to Royal Banks 12% target and the liquidity to total
liabilities was 24.0% compared to Royal Banks 10% target. |
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Brokered Deposits and Borrowings |
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Royal Bank submitted to the FDIC and the Department a plan for reduction of reliance on
non-core deposits and wholesale funding sources plan (brokered deposit plan) required
under the Orders. The FDIC and the Department have approved the brokered deposit plan.
Since entering the Orders Royal Bank has not renewed, accepted, or rolled over any maturing
brokered certificates of deposit (CDs); nor has Royal Bank issued new brokered CDs.
Brokered CDs declined $20 million from $226.9 million at June 30, 2009 to $206.9 million at
December 31, 2009. Royal Bank has redeemed an additional $23.8 million in brokered CDs
through February 2010. Borrowings declined $26.1 million from $283.9 million at June 30,
2009 to $257.8 million at December 31, 2009. The borrowing amounts do not include the
$3.8 million in obligations owned via equity investment which are not guaranteed by Royal
Bank or any of its subsidiaries. |
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Cash Dividends and other Payments to the Company |
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Royal Bank will seek approval from the FDIC and the Department prior to declaring a cash
dividend to the Company and prior to making payments or entering into new contracts with our
affiliates. |
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Executive Compensation |
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Royal Bank submitted to the FDIC an executive compensation plan (compensation plan)
required under the Orders. The FDIC has approved the compensation plan. Royal Bank was not
required to submit the compensation plan to the Department. |
Royal Bank has submitted all required quarterly reports to the FDIC and the Department detailing
the actions taken to secure compliance with the Orders as of the date of this report.
On March 17, 2010, the Company agreed to enter into a Written Agreement (the Federal Reserve
Agreement) with the Federal Reserve Bank of Philadelphia (the Reserve Bank).
The material terms of the Federal Reserve Agreement provide that:
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the Companys Board of Directors will take appropriate steps to fully utilize the
Companys financial and managerial resources to serve as a source of strength to its
subsidiary banks, including taking steps to ensure that Royal Bank complies with the
Orders previously entered into with the FDIC and the Department on July 15, 2009; |
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the Companys Board of Directors will, within 60 days of the Federal Reserve Agreement,
submit to the Reserve Bank a written plan to strengthen board oversight of the management
and operations of the consolidated operation; |
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the Company will not declare or pay any dividends without the prior written approval of
the Reserve Bank and the Director of the Division of Banking Supervision and Regulation of
the Board of Governors of the Federal Reserve System; |
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the Company and its non-bank subsidiaries will not make any distributions of interest,
principal, or other sums on subordinated debentures or trust preferred securities without
the prior approval of the Reserve Bank and the Director of the Division of Banking
Supervision and Regulation of the Board of Governors of the Federal Reserve System; |
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the Company and its nonbank subsidiaries will not, directly or indirectly, incur,
increase, or guarantee any debt without the prior written approval of the Reserve Bank; |
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the Company will not, directly or indirectly, purchase or redeem any shares of its stock
without the prior written approval of the Reserve Bank; |
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the Company will, within 60 days of the Federal Reserve Agreement, submit to the Reserve
Bank an acceptable written capital plan to maintain sufficient capital at the Company on a
consolidated basis, which plan will at a minimum address: regulatory requirements for the
Company and the Banks, the adequacy of the Banks capital taking into account the volume of
classified credits, the allowance for loan and lease losses, current and projected asset
growth, and projected retained earnings; the source and timing of additional funds
necessary to fulfill the consolidated organizations and the Banks future capital
requirements; supervisory requests for additional capital at the Banks or the requirements
of any supervisory action imposed on the Banks by federal or state regulators; and
applicable legal requirements that the Company serve as a source of strength to the Banks; |
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the Company will, within 60 days of the Federal Reserve Agreement, submit to the Reserve
Bank cash flow projections for 2010 showing planned sources and uses of cash for debt
service, operating expenses, and other purposes, and will submit similar cash flow
projections for each subsequent calendar year at least one month prior to the beginning of
such year; |
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the Company will comply with applicable legal notice provisions in advance of
appointing any new director or senior executive officer or changing the responsibilities of
any senior executive officer such that the officer would assume a different senior
executive officer position, and comply with restrictions on indemnification and severance
payments imposed by the Federal Deposit Insurance Act; and |
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the Companys Board of Directors will, within 30 days after the end of each quarter,
submit progress reports to the Reserve Bank detailing the form and manner of all actions
taken to secure compliance with the Agreement and the results thereof, together with a
parent company-level balance sheet, income statement, and, as applicable, report of changes
in shareholders equity. |
The Federal Reserve Agreement will remain in effect and enforceable until stayed, modified,
terminated or suspended by the Reserve Bank.
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. The deposits
of Royal Bank are insured by the FDIC.
During the third quarter of 2006, Royal Bank formed a subsidiary, RBA ABL Group, LP, to originate
asset based loans. The Bank owned 60% of the subsidiary. Royal Bank discontinued operating ABL in
January 2008, with no material impact on operating results. The one outstanding loan relationship
at ABL was transferred to Royal Bank and sold during the second quarter of 2008 for an amount equal
to all sums due under the loan.
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During the fourth quarter of 2006, Royal Bank formed a subsidiary, Royal Tax Lien Services, LLC, to
purchase and service delinquent tax liens. The Bank owns 60% of the subsidiary.
During the fourth quarter of 2006, Royal Bank formed a subsidiary, RBA Capital, LP, to originate
structured debt. The Bank owns 60% of the subsidiary. During the fourth quarter of 2008,
management decided to wind down the operation of RBA Capital. During 2009, the operations of the
subsidiary were folded into Royal Bank.
On October 17, 2008, Royal Bank established RBA Property LLC, a wholly owned subsidiary. RBA
Property was formed to hold other real estate owned acquired through foreclosure of collateral
associated with non-performing loans.
On December 1, 2008, Royal Bank established Narberth Property Acquisition LLC, a wholly owned
subsidiary. Narberth Property Acquisition was formed to hold other real estate owned acquired
through foreclosure of collateral associated with non-performing loans.
On November 4, 2009, Royal Bank established Rio Marina LLC, a wholly owned subsidiary. Rio Marina
LLC was formed to hold other real estate owned acquired through foreclosure of collateral
associated with non-performing loans.
Royal Bank derives its income principally from interest charged on loans, interest earned on
investment securities, and fees received in connection with the origination of loans and other
services. Royal Banks principal expenses are interest expense on deposits and operating expenses.
Operating revenues, deposit growth, investment maturities, loan sales and the repayment of
outstanding loans provide the majority of funds for activities.
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.
Service Area: Royal Banks primary service area includes Pennsylvania, primarily Montgomery,
Chester, Bucks, Delaware, Berks and Philadelphia counties, and New Jersey. 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 fifteen branches located throughout
Montgomery, Philadelphia and Berks counties and New Jersey. Royal Bank also considers New York,
Maryland, and Delaware as a part of its service area for certain products and services. In the
past, Royal Bank had frequently conducted business with clients located outside of its service
area. Royal Bank has loans in twenty-six states via loan originations and/or participations with
other lenders who have broad experience in those respective markets. Royal Banks headquarters are
located at 732 Montgomery Avenue, Narberth, PA.
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, brokerage firms, 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. The Company has not elected financial
holding company status.
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Employees: Royal Bank employed approximately 166 persons on a full-time equivalent basis as of
December 31, 2009.
Deposits: At December 31, 2009, total deposits of Royal Bank were distributed among demand deposits
(7%), money market deposit, savings and Super Now accounts (29%) and time deposits (64%). At
year-end 2009, deposits increased $138.9 million to $822.4 million, from year-end 2008, or 20%.
NOW and money market accounts increased $40.4 million while time deposits increased $94.9 million.
Included in Royal Banks deposits are approximately $29.9 million of intercompany deposits that are
eliminated through consolidation.
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 Banks size, objective of profit maintenance and stable capital structure.
Lending: At December 31, 2009, Royal Bank had a total net loan portfolio of $594.1 million,
representing 49% 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, asset based loans, small business leases and installment loans. At year-end
2009, loans decreased $25.2 million from year end 2008.
Royal Asian Bank
Royal Asian was incorporated in the Commonwealth of Pennsylvania on October 4, 2005, and was
chartered by the Commonwealth of Pennsylvania Department of Banking and commenced operation as a
Pennsylvania state-chartered bank on July 17, 2006. Royal Asian is an insured bank by the FDIC.
Royal Asian derives its income principally from interest charged on loans and fees received in
connection with other services. Royal Asians principal expenses are interest expense on deposits
and operating expenses. Operating revenues, deposit growth, and the repayment of outstanding loans
provide the majority of funds for activities.
On September 25, 2009, the Company announced that it had entered into a stock purchase agreement
(the Agreement), dated as of September 24, 2009, with a newly formed corporation organized by the
President of Royal Asian to purchase all of the outstanding common stock of Royal Asian owned by
the Company. On December 21, 2009, the Company announced it was terminating the Agreement because
the investor group pursuing the buyout was unable to raise sufficient capital to meet the terms of
the agreement and ensure all regulatory approvals necessary to complete the transaction would be
obtained. As a result of the Companys termination of the Agreement, the $251,000 escrow amount
previously deposited by Buyer, which was to be credited toward payment of the purchase price, was
retained by the Company as liquidated damages and recorded in other income.
Service Area: Royal Asians primary service area includes Philadelphia County in Pennsylvania,
northern New Jersey, and New York City. The service area includes residential areas and industrial
and commercial businesses of the type usually found within a major metropolitan area. Royal Asian
serves this area from five branches located throughout Philadelphia, northern New Jersey, and New
York City. Royal Asian also considers Maryland and Delaware as a part of its service area for
certain products and services. Occasionally, Royal Asian has conducted business with clients
located outside of its service area.
Royal Asian 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
Asian also offers collections, internet banking, safe deposit boxes and bill payment along with
other customary bank services (excluding trust) to its customers. Drive-up, ATM, and night
depository facilities are available. Certain international services are offered via a SWIFT
machine which provides international access to transfer information through a secured web based
system. This system is for informational purposes only and no funds are transferred through SWIFT.
Services may be added or deleted from time to time. The services offered and the business of
Royal Asian is not subject to significant seasonal fluctuations. Royal Asian through its
affiliation with Royal Bank is a member of the Federal Reserve FedLine Wire Transfer System.
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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 Asian, on competitive
terms.
Employees: Royal Asian employed approximately 24 persons on a full-time equivalent basis as of
December 31, 2009.
Deposits: At December 31, 2009, total deposits of Royal Asian were distributed among demand
deposits (10%), money market deposit, savings and Super Now accounts (16%) and time deposits (74%).
At year-end 2009 total deposits were $89.3 million.
Lending: At December 31, 2009, Royal Asian had a total net loan portfolio of $64.7 million,
representing 63% of total assets. The loan portfolio is categorized into commercial demand,
commercial mortgages, construction, and installment loans.
Current market and regulatory trends in banking are changing the basic nature of the banking
industry. Royal Asian 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 Asians size, objective of profit maintenance and stable capital structure.
Non-Bank Subsidiaries
On June 30, 1995, the Company established a special purpose Delaware investment company, Royal
Investment of Delaware (RID), as a wholly owned subsidiary. Its legal headquarters is 1105 N.
Market Street, Suite 1300, Wilmington, DE 19899. RID buys, holds and sells investment securities.
At December 31, 2009, total assets of RID were $30.1 million, of which $2.0 million was held in
cash and cash equivalents and $6.9 million was held in investment securities. RID had net interest
income of $1.2 million and $1.4 million for 2009 and 2008, respectively. Non-interest income for
2009 was a loss of $5.8 million compared to a loss of $4.6 million for 2008. During 2009, RID
recorded $5.5 million in impairment charges on investment securities of which $3.8 million was
related to a managed common stock portfolio, and recorded investment losses of $353,000. During
the third quarter of 2009, the Company sold the managed common stock portfolio and minimized
additional losses to $130,000, or 1% of their aggregate cost. Royal Bank has extended loans to
RID, secured by securities and as per the provisions of Regulation W. During the third quarter of
2009, RID paid off the $9.4 million loan from Royal Bank. In addition RID paid a $10.0 million
dividend to Royal Bancshares during the third quarter of 2009.
During 2008, RID took a $3.8 million impairment charge on two bank preferred stocks and recorded
investment losses of $828,000. RIDs net loss for 2009 was $5.1 million compared to a net loss of
$2.3 million in 2008. The amounts above include the activity related to RIDs wholly owned
subsidiary Royal Preferred LLC.
The Company, through its wholly owned subsidiary Royal Bank, holds a 60% ownership interest in
Crusader Servicing Corporation (CSC). Its legal headquarters is located 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 on the
property, and obtaining certain foreclosure rights as defined by local statute. On February 2,
2007, due to a change in CSC management, Royal Bank and other shareholders, constituting a majority
of CSC shareholders, voted to liquidate CSC under an orderly, long term plan adopted by CSC
management. Royal Bank continues acquiring tax liens through its subsidiary, Royal Tax Lien
Services, LLC (RTL) which was formed in November 2006. At December 31, 2009, total assets of CSC
were $16.2 million. Included in total assets is $2.5 million for the Strategic Municipal
Investments (SMI) portfolio, which is comprised of residential, commercial, and land tax liens,
primarily in Alabama. In 2005, the Company entered into a partnership with SMI, ultimately
acquiring a 50% ownership interest in SMI. In connection with acquiring this ownership interest,
CSC extended an $18 million line of credit to SMI, which was used by SMI to purchase tax lien
portfolios at a discount. As a result of the recent deterioration in residential, commercial and
land values principally
9
in Alabama, management concluded based on an analysis of the portfolio in the fourth quarter of
2008 that the loan was impaired by approximately $2.5 million as evidenced in the provision for
loan and lease losses. During 2009, the loan was impaired by an additional $500,000. CSC
charged-off $3.0 million related to this loan in 2009. The outstanding SMI loan balance was $2.5
million at December 31, 2009. In 2009, CSC had net interest income of $468,000 compared to
$849,000 for 2008. The 2009 provision for loan and lease losses was $624,000 compared to $2.6
million for 2008. The provision is mainly related to the SMI impairments mentioned above. For
2009 and 2008 other income was $179,000 and $555,000, respectively. Other income is mostly
comprised of gain on sale of Real Estate Owned (REO) properties. Other expense was $693,000 and
$576,000 for 2009 and 2008, respectively. CSC recorded a net loss of $402,000 in 2009 compared to
a net loss of $1.0 million in 2008. The 2009 and 2008 losses were impacted by the increase in the
provision for loan and lease losses.
On June 23, 2003, the Company, through its wholly owned subsidiary Royal Bank, established Royal
Investments America, LLC (RIA) as a wholly owned subsidiary. Its legal headquarters is located
at 732 Montgomery Avenue, Narberth, Pennsylvania. RIA was formed to invest in equity real estate
ventures subject to limitations imposed by regulation. At December 31, 2009, total assets of RIA
prior to consolidation under ASC Topic 810 were $8.6 million. During 2009, RIA had net income of
$709,000 compared to net income of $852,000 for 2008.
On October 27, 2004, the Company formed two Delaware trust affiliates, Royal Bancshares Capital
Trust I and Royal Bancshares Capital Trust II, in connection with the sale of an aggregate of $25.0
million of a private placement of trust preferred securities.
On July 25, 2005, the Company, through its wholly owned subsidiary Royal Bank, formed Royal Bank
America Leasing, LP (Royal Leasing). Royal Bank holds a 60% ownership interest in Royal Leasing.
Its legal headquarters is located at 550 Township Line Road, Blue Bell, Pennsylvania. Royal
Leasing was formed to originate small business leases. Royal Leasing originates small ticket
leases through its internal sales staff and through independent brokers located throughout its
business area. In general, Royal Leasing will portfolio individual small ticket leases in amounts
of up to $250,000. Leases originated in amounts in excess of that are sold for a profit to other
leasing companies. On occasion, Royal Bank will purchase municipal leases originated by Royal
Leasing for its own portfolio. These purchases are at market based pricing and terms that Royal
Leasing would expect to receive from unrelated third-parties. From time to time Royal Leasing will
sell small lease portfolios to third-parties and will, on occasion, purchase lease portfolios from
other originators. During 2009 and 2008, neither sales nor purchases of lease portfolios were
material. At December 31, 2009, total assets of Royal Leasing were $37.8 million. For 2009, Royal
Leasing had net interest income of $1.8 million, a 39% increase from $1.3 million for 2008. For
2009 provision for lease losses was $1.3 million compared to $1.1 million for 2008. The increase
in the provision was primarily related to the 48% growth in the lease portfolio. Other income
decreased $13,000 from $403,000 for 2008 to $390,000 for 2009. Other expense was $335,000 and
$661,000 for 2009 and 2008, respectively. Royal Leasing recorded net income of $382,000 for the
year ended December 31, 2009 compared to a net loss of $26,000 for the year ended December 31,
2008.
On September 1, 2006, the Company, through its wholly owned subsidiary Royal Bank, formed RBA ABL
Group, LP (ABL). Royal Bank held a 60% ownership interest in ABL. Its legal headquarters was
located at 732 Montgomery Avenue, Narberth, Pennsylvania 19072. ABL was formed to originate asset
based loans. Royal Bank discontinued operating ABL in January 2008, with no material impact on
operating results.
On October 1, 2006, the Company, through its wholly owned subsidiary Royal Bank, formed RBA
Capital, LP (RBA Capital). Royal Bank held a 60% ownership interest in RBA Capital and its legal
headquarters was located at 150 North Radnor Chester Road, Radnor, Pennsylvania 19087. RBA
Capital was formed to lend to lenders on a re-discounted basis, which indicates the main business
line of RBA Capital is the extension of loans to other lenders. These other lenders are not
typically financial institutions, but rather individuals, smaller corporations, or partnerships
that make small loans including, but not limited to, loans to contractors, home buyers or the
purchasers of smaller, owner occupied, commercial real estate buildings. RBA Capital on occasion
referred loans to Royal Bank, or for certain larger loans it originates, participated with Royal
Bank in the loan. Royal Bank paid RBA Capital a referral fee for loans referred from RBA Capital or
for loans participated with RBA Capital. All transactions between Royal Bank and RBA Capital are on
commercially reasonable terms at market rates and terms that would be paid, received or granted by
unrelated third-parties.
10
During the fourth quarter of 2008, management decided to wind down the operation of RBA Capital and
during 2009 took 100% ownership of the Company, which is currently managed as a separate division
of Royal Bank. At December 31, 2009 RBA Capital had outstanding loans of $30.7 million, which
declined by $7.1 million from the level at the end of 2008, consistent with the goal of having all
existing loans pay off during the next few years. At December 31, 2008, total assets of RBA Capital
were $37.5 million compared to $33.2 million at December 31, 2007. The net loss for 2008 increased
$310,000 from $4,000 for 2007 to $314,000 for 2008 due mainly to a higher provision for loan losses
of $582,000 year over year.
On November 17, 2006, the Company, through its wholly owned subsidiary Royal Bank, formed Royal Tax
Lien Services, LLC (RTL). Royal Bank holds a 60% ownership interest in RTL. Its legal
headquarters is located at 732 Montgomery Avenue, Narberth, Pennsylvania 19072. RTL was formed to
purchase and service delinquent tax certificates. RTL typically acquires delinquent property tax
liens through public auctions in various jurisdictions, assuming a lien position that is generally
superior to any mortgage liens that are on the property, and obtaining certain foreclosure rights
as defined by local statute. At December 31, 2009, total assets of RTL were $88.9 million compared
to $64.3 million at December 31, 2008. Tax certificates outstanding grew $16.4 million from $46.7
million at December 31, 2008 to $63.1 million at December 31, 2009. For 2009, RTL had net interest
income of $5.5 million compared to $3.3 million for 2008. Provision for loan and lease losses was
$0 compared to $56,000 for 2009 and 2008, respectively. Other expense increased $726,000 from $1.5
million for 2008 to $2.2 million for 2009 primarily due to an increase in legal fees as a result of
an internal investigation related to the U.S Department of Justice investigation described in Item
3-Legal Proceedings of this Report. Net income for 2009 grew $926,000 from $1.2 million for 2008
to $2.1 million for 2009.
On November 21, 2007, the Company established Royal Captive Insurance Company, a wholly owned
subsidiary. Royal Captive Insurance was formed to insure commercial property and comprehensive
umbrella liability for the Company and its affiliates. At December 31, 2009, total assets of Royal
Captive Insurance were $2.7 million compared to $2.6 million at December 31, 2008.
On June 16, 2006, the Company, through its wholly owned subsidiary RID, established Royal Preferred
LLC as a wholly owned subsidiary. Royal Preferred LLC was formed to purchase a subordinated
debenture from Royal Bank. At December 31, 2009, Royal Preferred LLC had total assets of
approximately $21 million.
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
The Company 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 the Company 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 the
Companys 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 the
Companys reputation.
Future Acquisitions
The Companys 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. The Company currently has no
formal commitments with respect to future acquisitions although discussions with acquisition
candidates take place occasionally.
11
Concentrations, Seasonality
The Company 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. The Company has
seen a deterioration in economic conditions as it pertains to real estate loans. Construction and
land, non-residential real estate, and residential loans represent 33%, 27% and 20%, respectively
of the $73.7 million in non-accrual loans at December 31, 2009. The business of the Company and
its subsidiaries is not seasonal in nature.
Environmental Compliance
The Company 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
2009, and are not expected to have a material effect on such expenditures, earnings or competitive
position in 2010.
Supervision and Regulation
Bank holding companies and banks operate in a highly regulated environment and are regularly
examined by federal and state regulatory authorities.
The following discussion concerns various federal and state laws and regulations and the potential
impact of such laws and regulation on the Company 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. The Company cannot determine
the likelihood or timing of any such proposals or legislations or the impact they may have on the
Company and its subsidiaries. A change in law, regulations or regulatory policy may have a
material effect on the Companys business.
Holding Company
The Company, 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 the Company wishes to issue
additional shares of its Common Stock, in order, for example, to raise capital or to grant stock
options, the Company will have to comply with the registration requirements of the Securities Act
of 1933 as amended, or find an applicable exemption from registration.
The Company 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 the Company 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 the Company 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, the Company 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 its subsidiaries. Further, under the Holding Company Act and the Federal
Reserve Boards regulations, 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
12
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 the banks, 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 the banks, 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 the bank holding
company or any of the holding companys subsidiaries, on investments in the stock or other
securities of the 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), the Company is permitted to
control an unlimited number of banks. However, the Company 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 or Royal Asian, 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.
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 Department,
may acquire control of a bank and trust company or a national bank located in Pennsylvania. A
Pennsylvania-chartered institution may maintain a bank, branches in any other state, the District
of Columbia, or a territory or possession of the United States upon the written approval of the
Department.
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 a bank or bank holding company or
to vote 25% or more of any class of voting securities of a bank or bank holding company.
Royal Bank and Royal Asian
As previously mentioned under Regulatory Action, Royal Bank is operating under the Orders with
the FDIC and the Department. The deposits of the Banks are insured by the FDIC. The Banks are
subject to supervision, regulation and examination by the Department and by the FDIC. In
addition, the Banks are subject to a variety of local, state and federal laws that affect its
operation.
The Department and the FDIC routinely examine Pennsylvania state-chartered, non-member banks such
as the Banks in areas such as reserves, loans, investments, management practices and other aspects
of operations. These examinations are designed for the protection of depositors rather than the
Companys shareholders.
Federal and state banking laws and regulations govern, among other things, the scope of a banks
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 and Royal Asian) 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
the Banks 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
13
have participated in such violations or unsound practices; (iii) restricts lending by the Banks to
its executive officers, directors, principal shareholders or related interests thereof; and (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 the Banks 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 banks 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
another bank. The CRA also requires the federal banking agencies to make public disclosures of
their evaluation of each banks 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 the bank holding company or its
subsidiaries, on investments in the stock or other securities of the 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 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 the Banks. It cannot be
predicted whether any such legislation will be adopted or how such legislation would affect the
business of either Royal Bank or Royal Asian. As a consequence of the extensive regulation of
commercial banking activities in the United States, the Banks business is particularly susceptible
to being affected by federal legislation and regulations that may increase the costs of doing
business.
Under the 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 the Bank are 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 and Royal Asian. The
most significant of these provisions are discussed below.
The FDIC is required to conduct periodic full-scope, on-site examinations of Royal Bank and Royal
Asian. 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. Under the Orders as described
in
14
Regulatory Action under Item 1 Business of this Report, Royal Bank is required to
maintain a minimum Tier 1 leverage ratio of 8% and a Total risk-based capital ratio of 12% during
the term of the Orders. Royal Bank and Royal Asian both meet the capital ratio requirements of 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 institutions 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.
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 FDICs real estate
guidelines require all real estate loans to be based upon proper loan documentation and a recent
independent appraisal of the property.
The FDICs guidelines establish the following limits for LTV ratios:
|
|
|
|
|
Loan Category |
|
LTV limit |
|
Raw land |
|
|
65 |
% |
Land development |
|
|
65 |
% |
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 the Banks 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, each 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 their total capital.
15
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 the Banks 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 the Banks 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 the Banks violate any provision or
regulation under this Act.
Gramm-Leach-Bliley Act of 1999
The Gramm-Leach-Bliley Act of 1999 (GLBA), also known as the Financial Services Modernization Act
repeals the two anti-affiliation provisions of the Glass-Steagall Act. GLBA 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.
In addition, GLBA provides a uniform framework for the functional regulation of the activities of
banks, savings institutions and their holding companies; broadens the activities that may be
conducted by national banks, banking subsidiaries of bank holding companies, and their financial
subsidiaries; and adopts a number of provisions related to the capitalization, membership,
corporate governance, and other measures designed to modernize the Federal Home Loan Bank system.
Privacy provision: GLBA provides an enhanced framework for protecting the privacy of consumer
information. The FDIC and other banking regulatory agencies, as required under GLBA, have adopted
rules limiting the ability of banks and other financial institutions to disclose nonpublic
information about consumers to nonaffiliated third parties. Among other things, these provisions
require banks and other financial institutions to have in place safeguards to ensure the security
and confidentiality of customer records and information, to protect against anticipated threats or
hazards to the security or integrity of such records, and to protect against unauthorized access to
or use of such records that could result in substantial harm or inconvenience to a customer. GLBA
also requires financial institutions to provide customers at the outset of the relationship and
annually thereafter written disclosures concerning the institutions privacy policies.
GLBA also 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, the Banks will be permitted to form subsidiaries to engage in the
activities authorized by GLBA to the same extent as a national bank. In order to form a financial
subsidiary, either bank must be well-capitalized, and either bank would be subject to the same
capital deduction, risk management and affiliate transaction rules as applicable to national banks.
To the extent that GLBA permits banks, securities firms, and insurance companies to affiliate, the
financial services industry may experience further consolidation. GLBA 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 the Company and the Banks face from larger institutions and other types of companies offering
financial products, many of which may have substantially more financial resources than the Company
and the Banks.
USA Patriot Act of 2001
A major focus of governmental policy in recent years that impacts financial institutions has been
combating money laundering and terrorist financing. The Patriot Act broadened anti-money laundering
regulations to apply to additional types of financial institutions and strengthened the ability of
the U. S. Government to help prevent and prosecute
16
international money laundering and the financing
of terrorism. The potential impact of the Patriot Act on financial institutions of all kinds is
significant and wide ranging. The Patriot Act requires regulated financial institutions, among
other things, to establish an anti-money laundering program that includes training and auditing
components, to take additional precautions with non-U.S. owned accounts, and to comply with
regulations related to verifying client identification at account opening. The Patriot Act also
provides rules to promote cooperation among financial institutions, regulators and law enforcement
entities in identifying parties that may be involved in terrorism or money laundering. Failure of a
financial institution to comply with the requirements of the Patriot Act could have serious legal
and reputational consequences for the institution. The Company has implemented systems and
procedures to meet the requirements of the regulation and will continue to revise and update
policies, procedures and necessary controls to reflect changes required by the Patriot Act.
Sarbanes-Oxley Act of 2002
The primary aims of the Sarbanes-Oxley Act of 2002 (SOX) was 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 addresses, among other matters,
requirements for audit committee membership and responsibilities, requirements of management to
evaluate the Companys disclosure controls and procedures and its internal control over financial
reporting, including certification of financial statements and the effectiveness of internal
controls by the primary executive officer and primary financial officer; established standards for
auditors and regulation of audits, including independence provisions that restrict non-audit
services that accountants may provide to their audit clients; and expanded the disclosure
requirements for our Company insiders; and increased various civil and criminal penalties for fraud
and other violations of securities laws.
Emergency Economic Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008 (EESA) was enacted on October 3, 2008. EESA was
designed to enable the federal government, under terms and conditions developed by the Secretary of
the Treasury, to insure troubled assets, including mortgage-backed securities, and collect premiums
from participating financial institutions. EESA includes, among other provisions: (a) the $700
billion Troubled Asset Relief Program (TARP), under which the Secretary of the Treasury was
authorized to purchase, insure, hold, and sell a wide variety of financial instruments,
particularly those that are based on or related to residential or commercial mortgages originated
or issued on or before March 14, 2008; and (b) an increase in the amount of deposit insurance
provided by the FDIC.
Under the TARP, the United States Department of Treasury (Treasury) authorized a voluntary
Capital Purchase Program (CPP) to purchase up to $250 billion of senior preferred shares of
qualifying financial institutions that elected to participate by November 14, 2008. On February
20, 2009, the Company issued to Treasury, 30,407 shares of Series A Preferred Stock and a warrant
to purchase 1,104,370 shares of Class A common stock for an aggregate purchase price of $30.4
million under the TARP CPP. (See Note 14 Shareholders Equity of the Notes to Consolidated
Financial Statements in Item 8 of this Report.) Companies participating in the TARP CPP were
required to adopt certain standards relating to executive compensation. The terms of the TARP CPP
also limit certain uses of capital by the issuer, including with respect to repurchases of
securities and increases in dividends.
American Recovery and Reinvestment Act of 2009
On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (ARRA) was enacted.
ARRA is intended to provide a stimulus to the U.S. economy in the wake of the economic downturn
brought about by the subprime mortgage crisis and the resulting credit crunch. The bill included
federal tax cuts, expansion of unemployment benefits and other social welfare provisions, and
domestic spending in education, healthcare, and infrastructure, including the energy structure.
Under ARRA, an institution that received funds under TARP, such as the Company, is subject to
certain restrictions and standards throughout the period in which any obligation arising under TARP
remains outstanding (except for the time during which the federal government holds only warrants to
purchase common stock of the issuer). The following summarizes the significant requirements of
ARRA and applicable Treasury regulations:
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Limits on compensation incentives for risks by senior executive officers; |
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A requirement for recovery of any compensation paid based on inaccurate financial
information; |
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A prohibition on golden parachute payments to specified officers or employees,
which term is generally defined as any payment for departure from a company for any
reason; |
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A prohibition on compensation plans that would encourage manipulation of reported
earnings to enhance the compensation of employees; |
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A prohibition on bonus, retention award, or incentive compensation to designated
employees, except in the form of long-term restricted stock; |
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A requirement that the board of directors adopt a luxury expenditures policy; |
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A requirement that shareholders be permitted a separate nonbinding vote on executive
compensation; |
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A requirement that the chief executive officer and the chief financial officer
provide a written certification of compliance with the standards, when established, to
the SEC. |
Under ARRA, subject to consultation with the appropriate federal banking agency, Treasury is
required to permit a recipient of TARP funds to repay any amounts previously provided to or
invested in the recipient by Treasury without regard to whether the institution has replaced the
funds from any other source or to any waiting period.
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, the
banks holding company and companies that are under common control with the bank. The Company is
considered to be an affiliate of Royal Bank and Royal Asian. In general, subject to certain
specified exemptions, a bank or its subsidiaries are limited in their ability to engage in covered
transactions with affiliates:
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To an amount equal to 10% of either Banks capital and surplus, in the case of
covered transactions with any one affiliate; and |
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To an amount equal to 20% of either Banks 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 the bank or its subsidiary, as those prevailing at the time for comparable
transactions with nonaffiliated companies. A covered transaction includes:
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A loan or extension of credit to an affiliate; |
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A purchase of, or an investment in, securities issued by an affiliate; |
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A purchase of assets from an affiliate, with some exceptions; |
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The acceptance of securities issued by an affiliate as collateral for a loan or
extension of credit to any party; and |
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This issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate. |
In addition, under Regulation W:
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A bank and its subsidiaries may not purchase a low-quality asset from an affiliate; |
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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 |
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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 Banks capital and surplus.
FDIC Insurance Assessments
The Federal Deposit Insurance Reform Act of 2005 (the Reform Act), which was signed into law in
2006, resulted in a number of changes to how banks are assessed deposit premiums. Under the new
risk-related premium schedule established by the Reform Act, the FDIC assigns each depository
institution to one of several supervisory groups based on both capital adequacy and the FDICs
judgment of the institutions strength in light of supervisory evaluations, including examination
reports, statistical analyses and other information relevant to measuring the risk posed by the
institution.
The Reform Act merged the former BIF and SAIF into a single Deposit Insurance Fund (DIF),
increased deposit insurance coverage for IRAs to $250,000, provides for the future increase of
deposit insurance on all other accounts (presently limited to $250,000 per account) by indexing the
coverage to the rate of inflation, authorizes the FDIC to set the reserve ratio of the combined DIF
at a level between 1.15% and 1.50%, and permits the FDIC to establish assessments to be paid by
insured banks to maintain the minimum ratios. The required reserve ratio will depend upon the
growth of insured deposits at all banks in the U.S., the number and size of any bank failures, and
the FDICs assessment of the risk in the banking industry at any given time.
On October 14, 2008, the FDIC announced its temporary Transaction Account Guarantee Program
(TAGP) which provides full coverage for non-interest bearing deposit accounts. Royal Bank and
Royal Asian are both participating in the program which guarantees all personal and business
non-interest bearing checking accounts. This unlimited coverage expires on June 30, 2010.
Additionally the FDIC temporarily raised the insurance limit from $100,000 to $250,000 per
depositor until December 31, 2013. Participation in the TAGP added an additional eleven basis
points to the Companys total FDIC assessment for 2009 and is expected to add 25 basis points for
the first six months of 2010.
On February 27, 2009, the FDICs Board of Directors voted to amend the restoration plan for DIF.
Failures of FDIC-insured institutions had caused the reserve ratio of DIF to decline from 1.19
percent as of March 30, 2008, to 0.76 percent as of September 30, 2008. Consequently, the 2009 DIF
assessment rates reflected an increase of seven to nine basis points and range from $0.07 for those
institutions with the least risk, up to $0.775 for every $100 of insured deposits for institutions
deemed to have the highest risk. In May 2009, the Board imposed a five basis point emergency
special assessment for every $100 of insured deposits on June 30, 2009. The Banks emergency
special assessment was $601,000 and was collected on September 30, 2009. Additionally, in November
2009, the FDIC
adopted a final rule imposing a 13-quarter prepayment of FDIC insurance premiums payable on
December 30, 2009. The FDIC exempted Royal Bank from making this prepayment of approximately $11.8
million. Royal Asians prepaid assessment amounted to $557,000.
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In addition to deposit insurance, the Banks are also subject to assessments to pay the interest on
Financing Corporation bonds. The Financing Corporation was created by Congress to issue bonds to
finance the resolution of failed thrift institutions. Commercial banks and thrifts are subject to
the same assessment for Financing Corporation bonds. The FDIC sets the Financing Corporation
assessment rate every quarter. For the first quarter of 2010, the Financing Corporations
assessment for Royal Bank and Royal Asian, (and all other banks), is an annual rate of $.0106 for
each $100 of deposits. The Financing Corporation bonds are expected to be paid off between 2017
and 2019.
Other Legislation
In addition to the Federal Deposit Insurance Reform Act described above, the Financial Services
Regulatory Relief Act of 2006 was also enacted. This legislation is a wide ranging law that
affects many previously enacted financial regulatory laws. The overall intent of the law is to
simplify regulatory procedures and requirements applicable to all banks, and to conform conflicting
provisions. The Relief Act conforms a number of separate statutes to provide equal definitions and
treatment for national banks, state banks, and for federal savings banks in a number of respects.
The law streamlines certain reporting requirements, and provides for bank examinations on an 18
month schedule for smaller banks that qualify. The law also authorizes the Federal Reserve to pay
interest to banks for the required deposit reserves maintained by banks at the Federal Reserve, but
such interest would not begin to be paid until 2012. While this law has many facets that should
benefit the Banks overall, the individual provisions of this law are not considered currently
material to the Banks when considered alone.
Congress is currently considering major financial industry legislation, and the federal banking
agencies routinely propose new regulations. The Company cannot predict how any new legislation, or
new rules adopted by the federal banking agencies, may affect its business or the business of the
Banks in the future.
Monetary Policy
The earnings of Royal Bank and Royal Asian 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 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 either Banks operations
in the future. The effect of such policies and regulations upon the future business and earnings
of either Banks cannot be predicted.
Effects of Inflation
Inflation can impact the countrys overall economy, which in turn can impact the business and
revenues of the Company and its subsidiaries. Inflation has some impact on the Companys operating
costs. Unlike many industrial companies, however, substantially all of the Companys assets and
liabilities are monetary in nature. As a result, interest rates have a more significant impact on
the Companys 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.
Available Information
Upon a shareholders written request, a copy of the Companys Annual Report on Form 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 Exchange Act Rule
13a-1, may be obtained without charge from our Chief Executive Officer, Royal Bancshares of
Pennsylvania, Inc. 732 Montgomery Avenue, Narberth, PA 19072 or on our website
www.royalbankamerica.com.
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ITEM 1A. RISK FACTORS
An investment in our common stock involves risks. Before making an investment decision, investors
should carefully consider the risks described below in conjunction with the other information in
this report, including our consolidated financial statements and related notes. If any of the
following risks or other risks, which have not been identified or which we may believe are
immaterial or unlikely, actually occurs, our business, financial condition and results of
operations could be harmed. In such a case, the trading price of our common stock could decline,
and investors may lose all or part of their investment.
Risks Related to Our Business
Our business may be impacted by the existence of the Orders for Royal Bank and the Federal Reserve
Agreement with the Federal Reserve Bank of Philadelphia.
Our success as a business is dependent upon pursuing various alternatives in not only achieving the
growth and expansion of our banking franchise but also in managing our day to day operations. The
existence of the Orders and the Federal Reserve Agreement may limit or impact our ability to pursue
all previously available alternatives in the management of the Company. Our ability to retain
existing retail and commercial customers as well as the ability to attract potentially new
customers may be impacted by the existence of the Orders and the Federal Reserve Agreement. The
Company has been successful in commercial real estate lending however, our ability to expand into
potentially attractive commercial real estate or construction loans at this time would most likely
be limited. Our ability to obtain lines of credit, to receive attractive collateral treatment from
funding sources, and to pursue all attractive funding alternatives in this current low interest
rate environment could be potentially impacted and thereby limit liquidity alternatives. The Banks
ability to pay dividends to the Company, which provides funding for cash dividends to the Companys
shareholders, will be limited as a result of the Orders. Moreover, the Company is prohibited from
paying cash dividends without the prior written approval of the Reserve Bank and the Director of
the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve
System. Our ability to raise capital in the current economic environment could be potentially
limited or impacted as a result of the Orders. Attracting new management talent is critical to the
success of our business and could be potentially impacted due to the existence of the Orders and
the Federal Reserve Agreement.
Our business is subject to the success of the local economies and real estate markets in which we
operate.
Our success significantly depends on the growth in population, income levels, loans and deposits
and on the continued stability in real estate values in our markets. If the communities in which
we operate do not grow or if prevailing economic conditions locally or nationally are unfavorable,
our business may be adversely affected. Adverse economic conditions in our specific market areas,
specifically decreases in real estate property values due to the nature of our loan portfolio, over
80% of which is secured by real estate, could reduce our growth rate, affect the ability of
customers to repay their loans and generally affect our financial condition and results of
operations. The Company is less able than a larger institution to spread the risks of unfavorable
local economic conditions across a large number of more diverse economies.
Our concentration of non-residential real estate and construction loans is subject to unique risks
that could adversely affect our earnings.
Our non-residential real estate and construction and land development loan portfolio was $418.3
million at December 31, 2009 comprising 61% of total loans. Non-residential real estate and
construction and development loans are often riskier and tend to have significantly larger balances
than home equity loans or residential mortgage loans to individuals. While we believe that the
commercial real estate concentration risk is mitigated by diversification among the types and
characteristics of real estate collateral properties, sound underwriting practices, and ongoing
portfolio monitoring and market analysis, the repayments of these loans usually depends on the
successful operation of a business or the sale of the underlying property. As a result, these
loans are more likely to be unfavorably affected by adverse conditions in the real estate market or
the economy in general. The remaining loans in the portfolio are commercial or industrial loans.
These loans are collateralized by various business assets the value of which may decline during
adverse market and economic conditions. Adverse conditions in the real estate market and the
economy may result in increasing levels of loan charge-offs and nonperforming assets and the
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reduction of earnings. When we take collateral in foreclosures and similar proceedings, we are
required to mark the related asset to the then fair market value of the collateral, which may
ultimately result in a loss.
Further, under guidance adopted by the federal banking regulators, banks which have concentrations
in construction, land development or commercial real estate loans (other than loans for majority
owner occupied properties) would be expected to maintain higher levels of risk management and,
potentially, higher levels of capital. It is possible that the Banks may be required to maintain
higher levels of capital than it would be otherwise be expected to maintain as a result of the
Banks commercial real estate loans, which may require the Company to obtain additional capital
sooner than it would otherwise seek it, which may reduce shareholder returns.
Our allowance for loan and lease losses may not be adequate to cover actual losses.
Like all financial institutions, we maintain an allowance for loan and lease losses to provide for
loan defaults and non-performance. Our allowance for loan and lease losses is based on our
historical loss experience as well as an evaluation of the risks associated with our loan
portfolio, including the size and composition of the loan portfolio, current economic conditions
and geographic concentrations within the portfolio. Our allowance for loan and lease losses may
not be adequate to cover actual loan and lease losses and future provisions for loan and lease
losses could materially and adversely affect our financial results.
Our current level of nonperforming loans and future growth may require us to raise additional
capital but that capital may not be available.
We are required by regulatory authorities to maintain adequate capital levels to support our
operations. We anticipate that our current capital will satisfy our regulatory requirements for the
foreseeable future. Under the Orders as described in Regulatory Action under Item 1 Business
of this Report, Royal Bank is required to maintain a minimum Tier 1 leverage ratio of 8% and a
Total risk-based capital ratio of 12% during the term of the Orders. In order to maintain our
well-capitalized status and to support future growth we may need to raise capital. Our ability to
raise additional capital will depend, in part, on conditions in the capital markets at that time,
which are outside our control, and on our financial performance. In addition, on February 20,
2009, we issued 30,407 shares of Fixed Rate Cumulative Preferred Stock, Series A, to the United
States Department of Treasury under its TARP Capital Purchase Program, The Series A Preferred
Stock issued to Treasury has a liquidation preference of $1,000 per share and contains other
provisions, including restrictions on the payment of dividends on common stock and on repurchases
of any shares of preferred stock ranking equal to or junior to the Series A Preferred Stock or
common stock while the Series A Preferred Stock is outstanding, which provisions may make it more
difficult to raise additional capital on favorable terms while the Series A Preferred Stock is
outstanding. Therefore, we may be unable to raise additional capital, or to raise capital on terms
acceptable to us. If we cannot raise additional capital when required, our ability to further
expand operations through both internal growth and acquisitions could be materially impaired. In
addition, if we decide to raise additional capital, the existing shareholders are subject to
dilution.
We may suffer losses in our loan portfolio despite our underwriting practices.
The Company seeks to mitigate the risks inherent in its loan portfolio by adhering to specific
underwriting practices. These practices often include: analysis of a borrowers credit history,
financial statements, tax returns and cash flow projections; valuation of collateral based on
reports of independent appraisers; and verification of liquid assets. Although we believe that our
underwriting criteria are appropriate for the various kinds of loans we make, the Company may incur
losses on loans that meet these criteria.
Holders of our Series A Preferred Stock have certain voting rights that may adversely affect our
common shareholders, and the holders of the Series A Preferred Stock may have interests different
from our common shareholders.
In the event we fail to pay dividends on the Series A Preferred Stock for a total of at least six
quarterly dividend periods (whether or not consecutive), the Treasury will have the right to
appoint two directors to our Board of Directors until all accrued but unpaid dividends have been
paid. Otherwise, except as required by law, holders of the Series A Preferred Stock have limited
voting rights.
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For as long as shares of the Series A Preferred Stock are outstanding, in addition to any other
vote or consent of the shareholders required by law or our Articles of Incorporation, the vote or
consent of holders of at least 66 2/3% of the shares of the Series A Preferred Stock outstanding is
required for any authorization or issuance of shares ranking senior to the Series A Preferred
Stock; any amendments to the rights of the Series A Preferred Stock so as to adversely affect the
rights, privileges, or voting power of the Series A Preferred Stock; or initiation and completion
of any merger, share exchange or similar transaction unless the shares of Series A Preferred Stock
remain outstanding, or if we are not the surviving entity in such transaction, are converted into
or exchanged for preference securities of the surviving entity and the shares of Series A Preferred
Stock remaining outstanding or such preference securities have the rights, preferences, privileges
and voting power of the Series A Preferred Stock.
The holders of our Series A Preferred Stock, including the Treasury, may have different interests
from the holders of our common stock, and could vote to block the forgoing transactions, even when
considered desirable by, or in the best interests of the holders of our common stock.
Our ability to pay dividends depends primarily on dividends from our banking subsidiary, which are
subject to regulatory limits and we are subject to other dividend limitations.
We are a bank holding company and our operations are conducted by direct and indirect subsidiaries,
each of which is a separate and distinct legal entity. Substantially all of our assets are held by
our direct and indirect subsidiaries. Our ability to pay dividends depends on our receipt of
dividends from our direct and indirect subsidiaries. Our two banking subsidiaries, Royal Bank and
Royal Asian, are our primary source of dividends. Dividend payments from our banking subsidiary
are subject to legal and regulatory limitations, generally based on net profits and retained
earnings, imposed by the various banking regulatory agencies. The ability of Royal Bank and Royal
Asian to pay dividends is also subject to its profitability, financial condition, capital
expenditures and other cash flow requirements. At December 31, 2009, as a result of significant
losses within Royal Bank, the Company had negative retained earnings and therefore would not have
been able to declare and pay any cash dividends. There is no assurance that our subsidiaries will
be able to pay dividends in the future or that we will generate adequate cash flow to pay dividends
in the future. Under the Orders as described in Regulatory Action under Item 1 Business of
this Report, Royal Bank must receive prior approval from the FDIC and the Department before
declaring and paying a dividend to the Company.
As a result of our participation in the Treasurys TARP CPP on February 20, 2009, we are required
to receive Treasurys approval for any increases in the dividend above the amount of the last
regular quarterly common stock dividend paid prior to October 14, 2008 ($0.15 per Class A share and
$0.1725 per Class B share) and any repurchases of common stock. These restrictions on the payment
of dividends and the repurchases of common stock will remain in effect until the earlier date of
the third anniversary of the closing date of the preferred shares and the date of the redemption of
the preferred shares. In addition, under the terms of the TARP CPP, we are not permitted to declare
or pay cash dividends on, or redeem or otherwise acquire, stock that is junior to or on parity with
the Series A Preferred Stock issued to Treasury at any time when we have not declared and paid full
dividends on the Series A Preferred Stock. We suspended regular quarterly cash dividends on the
Series A Preferred Stock in August 2009 and, accordingly, are not permitted at this time to pay
dividends on our Class A or Class B Common Stock.
Under the terms of the Federal Reserve Agreement, we are prohibited from paying any dividends on
shares of our stock without the prior written approval of the Reserve Bank and the Director of the
Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve
System.
Failure to pay dividends on our stock could have a material adverse effect on the market price of
our Class A Common Stock.
Competition from other financial institutions may adversely affect our profitability.
We face substantial competition in originating loans, both commercial and consumer. This
competition comes principally from other banks, savings institutions, mortgage banking companies
and other lenders. Many of our competitors enjoy advantages, including greater financial resources
and higher lending limits, a wider geographic presence, more accessible branch office locations,
the ability to offer a wider array of services or more favorable
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pricing alternatives, as well as
lower origination and operating costs. This competition could reduce our net income by decreasing
the number and size of loans that we originate and the interest rates we may charge on these loans.
In attracting business and consumer deposits, Royal Bank and Royal Asian face substantial
competition from other insured depository institutions such as banks, savings institutions and
credit unions, as well as institutions offering uninsured investment alternatives, including money
market funds. Many of our competitors enjoy advantages, including greater financial resources,
more aggressive marketing campaigns, better brand recognition and more branch locations. These
competitors may offer higher interest rates than we do, which could decrease the deposits that we
attract or require us to increase our rates to retain existing deposits or attract new deposits.
Increased deposit competition could adversely affect our ability to generate the funds necessary
for lending operations. As a result, we may need to seek other sources of funds that may be more
expensive to obtain and could increase our cost of funds.
The Companys banking and non-banking subsidiaries also compete with non-bank providers of
financial services, such as brokerage firms, consumer finance companies, credit unions, insurance
agencies and governmental organizations which may offer more favorable terms. Some of our non-bank
competitors are not subject to the same extensive regulations that govern our banking operations.
As a result, such non-bank competitors may have advantages over the Companys banking and
non-banking subsidiaries in providing certain products and services. This competition may reduce
or limit our margins on banking and non-banking services, reduce our market share, and adversely
affect our earnings and financial condition.
The Company has a lower level of core deposits and a higher level of wholesale funding relative
to our peer institutions.
Over the past several years, the Company has achieved significant growth in our loan portfolio.
Because the Companys deposits have not grown at similar rates, we have had to supplement our
funding sources to include the national market (brokered CDs) to attract funds. During an
environment when interest rates are rising and the related U.S. Treasury interest rate curve is
flattening, the use of this funding source may result in an increase in interest costs
disproportionate to loan yields. This could result in reduced net interest income.
Our ability to manage liquidity is always critical in our operation, but more so today given the
uncertainty within the capital markets.
We monitor and manage our liquidity position on a regular basis to insure that adequate funds are
in place to manage the day to day operations and to cover routine fluctuations in available funds.
However, our funding decisions can be influenced by unplanned events. These unplanned events
include, but are not limited to, the inability to fund asset growth, difficulty renewing or
replacing funds that mature, the ability to maintain or draw down lines of credit with other
financial institutions, significant customer withdrawals of deposits, and market disruptions.
During the first quarter of 2010, the Federal Home Loan Bank of Pittsburgh, notified Royal Bank
that they were being placed on an over collateralized delivery requirement of 105%. The FHLBs
decision was based primarily upon the level of Royal Banks non-performing assets and net loss.
The available amount for future borrowings will be based on the amount of collateral to be pledged.
We have a liquidity contingency plan in the event liquidity falls below an acceptable level,
however in todays economic environment, we are not certain that those sources of liquid funds will
be available in the future when required. As a result, loan growth may be curtailed to maintain
adequate liquidity, loans may need to be sold in the secondary market, investments may need to be
sold or deposits may need to be raised at above market interest rates to maintain liquidity.
Negative publicity could damage our reputation and adversely impact our business and financial
results.
Reputation risk, or the risk to the Companys earnings and capital from negative publicity, is
inherent in our business. Negative publicity can result from the Companys actual or alleged
conduct in any number of activities, including lending practices, corporate governance and
acquisitions, and actions taken by government regulators and community organizations in response to
those activities. Negative publicity can adversely affect our ability to keep
and attract customers and can expose the Company to litigation and regulatory action. Although the
Company takes steps to minimize reputation risk in dealing with customers and other constituencies,
the Company, as a larger diversified financial services company with a high industry profile, is
inherently exposed to this risk.
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Risks Related to Our Industry
Recent legislative and regulatory initiatives to address difficult market and economic conditions
may not stabilize the U.S. banking system.
On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the EESA) became law.
EESA, among other measures, authorizes Treasury to purchase from financial institutions and their
holding companies up to $700 billion in mortgage loans, mortgage-related securities and certain
other financial instruments, including debt and equity securities issued by financial institutions
and their holding companies, under the Troubled Asset Relief Program, or TARP. The purpose of
TARP is to restore confidence and stability to the U.S. banking system and to encourage financial
institutions to increase their lending to customers and to each other. Under the TARP Capital
Purchase Program, Treasury is purchasing equity securities from participating institutions. EESA
also increased federal deposit insurance on most deposit accounts from $100,000 to $250,000. This
increase is in place until June 30, 2010 and is not covered by deposit insurance premiums paid by
the banking industry.
EESA followed, and has been followed by, numerous actions by the Board of Governors of the Federal
Reserve System, the U.S. Congress, Treasury, the FDIC, the SEC and others to address the current
liquidity and credit crisis that has followed the sub-prime meltdown that commenced in 2007. These
measures include homeowner relief that encourage loan restructuring and modification; the
establishment of significant liquidity and credit facilities for financial institutions and
investment banks; the lowering of the federal funds rate; emergency action against short selling
practices; a temporary guarantee program for money market funds; the establishment of a commercial
paper funding facility to provide back-stop liquidity to commercial paper issuers; and coordinated
international efforts to address illiquidity and other weaknesses in the banking sector.
Additional similar actions may be forthcoming.
The purpose of these legislative and regulatory actions is to stabilize the U.S. banking system.
EESA and the other regulatory initiatives described above may not have their desired effects. If
the volatility in the markets continues and economic conditions fail to improve or worsen, our
business, financial condition, results of operations and cash flows could be materially and
adversely affected.
Difficult market conditions and economic trends have adversely affected our industry and our
business.
We are exposed to downturns in the U. S. housing market. Dramatic declines in the housing market
over the past year, with decreasing home prices and increasing delinquencies and foreclosures, may
have a negative impact on the credit performance of mortgage, consumer, commercial and construction
loan portfolios resulting in significant write-downs of assets by many financial institutions. In
addition, the values of real estate collateral supporting many loans have declined and may continue
to decline. General downward economic trends, reduced availability of commercial credit and
increasing unemployment may negatively impact the credit performance of commercial and consumer
credit, resulting in additional write-downs. Concerns over the stability of the financial markets
and the economy have resulted in decreased lending by financial institutions to their customers and
to each other. This market turmoil and tightening of credit has led to increased commercial and
consumer deficiencies, lack of customer confidence, increased market volatility and widespread
reduction in general business activity. Competition among depository institutions for deposits has
increased significantly. Financial institutions have experienced decreased access to deposits or
borrowings. The resulting economic pressure on consumers and businesses and the lack of confidence
in the financial markets may adversely affect our business, financial condition, results of
operations and stock price. We do not expect that the difficult market conditions will improve in
the immediate future. A worsening of these conditions would likely exacerbate the adverse effects
of these difficult market conditions on us and others in the industry. In particular, we may face
the following risks in connection with these events:
|
|
|
We expect to face increased regulation of our industry. Compliance with such
regulation may increase our costs and limit our ability to pursue business
opportunities. |
|
|
|
|
Our ability to assess the creditworthiness of customers and to estimate the losses
inherent in our credit exposure is made more complex by these difficult market and
economic conditions. |
|
|
|
|
We also may be required to pay even higher Federal Deposit Insurance Corporation
premiums than the recently increased level, because financial institution failures
resulting from the depressed market |
25
|
|
|
conditions have depleted and may continue to
deplete the deposit insurance fund and reduce its ratio of reserves to insured
deposits. |
|
|
|
|
Our ability to borrow from other financial institutions or the Federal Home Loan
Bank on favorable terms or at all could be adversely affected by further disruptions in
the capital markets or other events. |
|
|
|
|
We may experience a prolonged decrease in dividend income from our investment in
Federal Home Loan Bank stock. |
|
|
|
|
We may experience increases in foreclosures, delinquencies and customer
bankruptcies, as well as more restricted access to funds. |
|
|
|
|
The unrealized losses in our investment portfolio may increase or be deemed other
than temporary. |
Our business is subject to interest rate risk and variations in interest rates may negatively
affect our financial performance.
Changes in the interest rate environment may reduce profits. The primary source of our income is
the differential or spread between the interest earned on loans, securities and other
interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing
liabilities. As prevailing interest rates change, net interest spreads are affected by the
difference between the maturities and re-pricing characteristics of interest-earning assets and
interest-bearing liabilities. In addition, loan volume and yields are affected by market interest
rates on loans, and rising interest rates generally are associated with a lower volume of loan
originations. An increase in the general level of interest rates may also adversely affect the
ability of certain borrowers to pay the interest on and principal of their obligations.
Accordingly, changes in levels of market interest rates could materially adversely affect our net
interest spread, asset quality, loan origination volume and overall profitability.
Future governmental regulation and legislation could limit our future growth.
The Company and our subsidiaries are subject to extensive state and federal regulation, supervision
and legislation that govern almost all aspects of the operations of the Company and our
subsidiaries. These laws may change from time to time and are primarily intended for the
protection of consumers, depositors and the deposit insurance funds. Any changes to these laws may
negatively affect our ability to expand our services and to increase the value of our business.
While we cannot predict what effect any presently contemplated or future changes in the laws or
regulations or their interpretations would have on the Company, these changes could be materially
adverse to shareholders.
Changes in consumer use of banks and changes in consumer spending and saving habits could adversely
affect the Companys financial results.
Technology and other changes now allow many consumers to complete financial transactions without
using banks. For example, consumers can pay bills and transfer funds directly without going through
a bank. This disintermediation could result in the loss of fee income, as well as the loss of
customer deposits and income generated from those deposits. In addition, changes in consumer
spending and saving habits could adversely affect our operations, and may be unable to timely
develop competitive new products and services in response to these changes that are accepted by new
and existing customers.
Acts or threats of terrorism and political or military actions taken by the United States or other
governments could adversely affect general economic or industry conditions.
Geopolitical conditions may also affect our earnings. Acts or threats or terrorism and political
or military actions taken by the United States or other governments in response to terrorism, or
similar activity, could adversely affect general economic or industry conditions.
26
Other Risks
Our directors, executive officers and principal shareholders own a significant portion of our
common stock and can influence shareholder decisions.
Our directors, executive officers and principal shareholders, as a group, beneficially owned
approximately 57% of Class A common stock and 86% of Class B common stock as of February 28, 2010.
As a result of their ownership, the directors, executive officers and principal shareholders will
have the ability, by voting their shares in concert, to influence the outcome of any matter
submitted to our shareholders for approval, including the election of directors. The directors and
executive officers may vote to cause the Company to take actions with which the other shareholders
do not agree or that are not beneficial to all shareholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Royal Bank has fifteen banking offices, which are located in Pennsylvania and New Jersey.
|
|
|
|
|
|
|
Bala Plaza Office (3)
|
|
Bridgeport Office (1) |
30 South Street
|
|
231 St. Asaphs Road
|
|
105 W. 4th Street |
Philadelphia, PA 19102
|
|
Bala Cynwyd, PA 19004
|
|
Bridgeport, PA 19406 |
|
|
|
|
|
Castor Office (1)
|
|
Fairmont Office (1)
|
|
Grant Avenue Office (1) |
6331 Castor Avenue
|
|
401 Fairmont Avenue
|
|
1650 Grant Avenue |
Philadelphia, PA 19149
|
|
Philadelphia, PA 19123
|
|
Philadelphia, PA 19115 |
|
|
|
|
|
Henderson Road Office
|
|
Jenkintown Office (1)
|
|
King of Prussia Office (1) |
Biedler and Henderson Roads
|
|
600 Old York Road
|
|
655 West DeKalb Pike |
King of Prussia, PA 19406
|
|
Jenkintown, PA 19046
|
|
King of Prussia, PA 19406 |
|
|
|
|
|
Narberth Office (1)
|
|
Narberth Training Center (1)(2)
|
|
Phoenixville Office (1) |
732 Montgomery Avenue
|
|
814 Montgomery Avenue
|
|
808 Valley Forge Road |
Narberth, PA 19072
|
|
Narberth, PA 19072
|
|
Phoenixville, PA 19460 |
|
|
|
|
|
Shillington Office
|
|
Trooper Office (1)
|
|
Turnersville Office |
516 East Lancaster Avenue
|
|
Trooper and Egypt Roads
|
|
3501 Black Horse Pike |
Shillington, PA 19607
|
|
Trooper, PA 19401
|
|
Turnersville, NJ 08012 |
|
|
|
|
|
Villanova Office
|
|
Walnut Street Office
|
|
Storage Facility (1) |
801 East Lancaster Avenue
|
|
1230 Walnut Street
|
|
3836 Spring Garden Street |
Villanova, PA 19085
|
|
Philadelphia, PA 19107
|
|
Philadelphia, PA 19104 |
|
|
|
|
|
Royal Asian Bank has five offices located in Pennsylvania, New Jersey, and New York. |
|
|
|
|
|
Cheltenham Office
|
|
Flushing
|
|
Fort Lee Office |
418 Oak Lane
|
|
136-52 37th Avenue
|
|
1550 Lemoine Avenue |
Philadelphia, PA 19126
|
|
Flushing, NY 11354
|
|
Fort Lee, NJ 07024 |
|
|
|
|
|
Palisades Park
|
|
Upper Darby Office |
|
|
232 Broad Street
|
|
7001 West Chester Pike |
|
|
Palisades Park, NJ 07650
|
|
Upper Darby, PA 19082 |
|
|
|
|
|
(1) |
|
Owned |
|
(2) |
|
Used for employee training |
27
|
|
|
(3) |
|
Loan production office |
Royal Bank owns eleven of the above properties. The remaining seven properties are leased with
expiration dates between 2010 and 2014. During 2009, Royal Bank made aggregate lease payments of
approximately $779,000. Royal Asians five properties are leased with expiration dates between
2010 and 2017. During 2009, Royal Asian made aggregate lease payments of approximately $441,000.
The Company believes that all of its properties are attractive, adequately insured, and well
maintained and are adequate for the Banks purposes. During the second quarter of 2008, the Company
sold the property located at 144 Narberth Avenue, Narberth, PA, for a $2.0 million gain.
ITEM 3. LEGAL PROCEEDINGS
Management is not aware of any litigation that would have a material adverse effect on the
consolidated financial position or results of operations of the Company. There are no proceedings
pending other than routine litigation incident to the business of the Company.
As described under Item 1 Business of this Report, Royal Bank holds a 60% equity interest in
each of Crusader Servicing Corporation (CSC) and Royal Tax Lien Services, LLC (RTL). CSC and
RTL acquire, through public auction, delinquent tax liens in various jurisdictions thereby assuming
a superior lien position to most other lien holders, including mortgage lien holders. On March 4,
2009, each of CSC and RTL received a grand jury subpoena issued by the U.S. District Court for New
Jersey upon application of the Antitrust Division of the U.S. Department of Justice (DOJ). The
subpoena seeks certain documents and information relating to an ongoing investigation being
conducted by the DOJ. Royal Bank has been advised that neither CSC nor RTL are targets of the DOJ
investigation, but they are subjects of the investigation. Royal Bank, CSC and RTL are cooperating
in the investigation.
ITEM 4. (REMOVED AND RESERVED)
28
PART II
|
|
|
ITEM 5. |
|
MARKET FOR REGISTRANTS COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS, AND ISSUER
PURCHASES OF EQUITY SECURITIES |
The Companys Class A Common Stock commenced trading on the NASDAQ Global Market under the symbol
RBPAA. There is no market for the Companys Class B Common Stock. The Class B shares may not be
transferred in any manner except to the holders immediate family. Class B shares may be converted
to Class A shares at the rate of 1.15 to 1.
The following table shows the range of high and low closing prices for the Companys stock as
reported by NASDAQ.
|
|
|
|
|
|
|
|
|
Closing Prices |
2009 |
|
High |
|
Low |
First Quarter |
|
$ |
4.25 |
|
|
$ |
2.05 |
|
Second Quarter |
|
|
2.65 |
|
|
|
1.71 |
|
Third Quarter |
|
|
2.10 |
|
|
|
1.40 |
|
Fourth Quarter |
|
|
1.80 |
|
|
|
1.05 |
|
|
|
|
|
|
|
|
|
|
2008 |
|
High |
|
Low |
First Quarter |
|
$ |
15.88 |
|
|
$ |
9.14 |
|
Second Quarter |
|
|
15.34 |
|
|
|
8.87 |
|
Third Quarter |
|
|
9.44 |
|
|
|
4.81 |
|
Fourth Quarter |
|
|
6.41 |
|
|
|
3.33 |
|
The approximate number of recorded holders of the Companys Class A and Class B Common Stock,
as of March 3, 2010, is shown below:
|
|
|
|
|
Title of Class |
|
Number of record holders |
|
Class A Common stock |
|
|
293 |
|
Class B Common stock |
|
|
142 |
|
Dividends
Subject to certain limitations imposed by law or the Companys articles of incorporation, the Board
of Directors of the Company may declare a dividend on shares of Class A or Class B Common Stock.
Stock dividends: On December 18, 2005, the Board of Directors of the Company declared a 2% stock
dividend on both its Class A Common Stock and Class B Common Stock shares payable on January 17,
2006, to shareholders of record on January 4, 2006. The stock dividend resulted in the issuance of
205,120 additional shares of Class A common stock and 19,426 additional shares of Class B common
stock. There were 20,117 Class B shares deferred (agreed to by the Tabas Family Trust) until the
2006 Annual Shareholders Meeting where Management requested the Companys shareholders to approve
amending the Companys Articles of Incorporation to increase the number of Class B shares
authorized. The 20,117 deferred share of Class B common stock were issued on June 27, 2006.
On December 20, 2006, the Board of Directors of the Company declared a 5% stock dividend on both
its Class A Common Stock and Class B Common Stock shares payable on January 17, 2007, to
shareholders of record on January 3, 2007. The stock dividend resulted in the issuance of 526,825
additional shares of Class A common stock and 100,345
29
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. There were no
stock dividends declared in 2009, 2008, and 2007.
Cash Dividends: The Company paid cash dividends in the first two quarters of 2008 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 $4.0 million. The Company did not pay cash dividends on its
common stock in 2009. In July of 2008, the Company suspended cash dividends on its common stock to
preserve capital and maintain liquidity in response to current financial and economic trends. At
December 31, 2008, as a result of significant losses within Royal Bank, the Company had negative
retained earnings and therefore would not have been able to declare and pay any cash dividends.
The following table sets forth on a quarterly basis dividends paid to holders of each Class A and
Class B Common Stock for 2008.
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends Per Share |
|
2008 |
|
Class A |
|
|
Class B |
|
First Quarter |
|
$ |
0.15000 |
|
|
$ |
0.172500 |
|
Second Quarter |
|
$ |
0.15000 |
|
|
$ |
0.172500 |
|
Third Quarter |
|
$ |
|
|
|
$ |
|
|
Fourth Quarter |
|
$ |
|
|
|
$ |
|
|
Future dividends depend upon net income, capital requirements, and appropriate legal
restrictions and other factors relevant at the time the Board of Directors of the Company considers
dividend policy. Cash necessary to fund dividends available for dividend distributions to the
shareholders of the Company must initially come primarily from dividends paid by its direct and
indirect subsidiaries, including Royal Bank to the Company. As a result of the Orders as described
under Regulatory Action in Item 1 Business of this Report, Royal Bank must obtain approval
from the FDIC and the Department prior to declaring a cash dividend to the Company. Therefore, the
restrictions on Royal Banks dividend payments are directly applicable to the Company. 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, the Company may pay dividends
only if after payment the Company 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 the Company 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 Note 13 Shareholders Equity of the Notes to
Consolidated Financial Statements in Item 8 of this Report.
As a result of the investment by Treasury under the TARP CPP on February 20, 2009, the Company is
required to receive Treasurys approval for any increases in the dividend above the amount of the
last regular quarterly common stock dividend paid prior to October 14, 2008 ($0.15 per Class A
share and $0.1725 per Class B share) and any repurchases of common stock. These restrictions on the
payment of dividends and the repurchases of common stock by the Company become effective
immediately and remain in effect until the earlier date of the third anniversary of the closing
date of the preferred shares and the date of the redemption of the preferred shares.
On August 13, 2009, the Companys board of directors determined to suspend regular quarterly cash
dividends on the $30.4 million in Series A Preferred Stock. The Companys board of directors took
this action in consultation with the Federal Reserve Bank of Philadelphia as required by recent
regulatory policy guidance. The Company currently has sufficient capital and liquidity to pay the
scheduled dividends on the preferred stock; however, the Company believes this decision will better
support the capital position of Royal Bank, a wholly owned subsidiary of the Company. As of
December 31, 2009, the Series A Preferred stock dividend in arrears is $774,000 which is comprised
of $760,000 in dividends and $14,000 in interest, which have not been recognized in the
consolidated financial statements.
30
COMMON STOCK PERFORMANCE GRAPH
The performance graph shows cumulative investment returns to shareholders based on the assumption
that an investment of $100 was made on December 31, 2004, (with all dividends reinvested), in each
of the following:
|
|
|
Royal Bancshares of Pennsylvania, Inc. Class A common stock; |
|
|
|
|
The stock of all United States companies trading on the NASDAQ Global Market; |
|
|
|
|
Common stock of 2009 Peer Group consists of nineteen banks headquartered in the
Mid-Atlantic region, trade on the major exchange and have total assets between $750
million and $1.5 billion. |
|
|
|
|
SNL Bank and Thrift Index |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending |
|
Index |
|
12/31/04 |
|
|
12/31/05 |
|
|
12/31/06 |
|
|
12/31/07 |
|
|
12/31/08 |
|
|
12/31/09 |
|
Royal Bancshares of Pennsylvania, Inc. |
|
|
100.00 |
|
|
|
91.22 |
|
|
|
113.52 |
|
|
|
50.19 |
|
|
|
15.60 |
|
|
|
6.09 |
|
NASDAQ Composite |
|
|
100.00 |
|
|
|
101.37 |
|
|
|
111.03 |
|
|
|
121.92 |
|
|
|
72.49 |
|
|
|
104.31 |
|
SNL Bank and Thrift |
|
|
100.00 |
|
|
|
101.57 |
|
|
|
118.68 |
|
|
|
90.50 |
|
|
|
52.05 |
|
|
|
51.35 |
|
Royal Bancshares Peer Group* |
|
|
100.00 |
|
|
|
94.01 |
|
|
|
104.26 |
|
|
|
82.19 |
|
|
|
66.74 |
|
|
|
59.18 |
|
31
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial and operating information for the Company should be
read in conjunction with Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations and the Consolidated Financial Statements and accompanying notes in Item 8
of this Report:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data |
|
For the years ended December 31, |
|
(In thousands, except share data) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Interest income |
|
$ |
66,043 |
|
|
$ |
72,764 |
|
|
$ |
86,736 |
|
|
$ |
93,006 |
|
|
$ |
76,460 |
|
Interest expense |
|
|
37,439 |
|
|
|
38,109 |
|
|
|
48,873 |
|
|
|
46,372 |
|
|
|
31,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
28,604 |
|
|
|
34,655 |
|
|
|
37,863 |
|
|
|
46,634 |
|
|
|
44,664 |
|
Provision for loan and lease losses |
|
|
20,605 |
|
|
|
21,841 |
|
|
|
13,026 |
|
|
|
1,803 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after loan and lease losses |
|
|
7,999 |
|
|
|
12,814 |
|
|
|
24,837 |
|
|
|
44,831 |
|
|
|
44,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of premises & equipment |
|
|
|
|
|
|
1,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of premises & equipment related to real estate owned via equity investments |
|
|
1,817 |
|
|
|
1,679 |
|
|
|
1,860 |
|
|
|
3,036 |
|
|
|
16,779 |
|
Income from bank owned life insurance |
|
|
1,099 |
|
|
|
1,233 |
|
|
|
875 |
|
|
|
847 |
|
|
|
845 |
|
Service charges and fees |
|
|
1,419 |
|
|
|
1,186 |
|
|
|
1,348 |
|
|
|
1,404 |
|
|
|
1,293 |
|
Gains on sales related to real estate joint
ventures |
|
|
|
|
|
|
1,092 |
|
|
|
350 |
|
|
|
|
|
|
|
|
|
Income related to real estate owned
via equity investments |
|
|
1,302 |
|
|
|
965 |
|
|
|
1,384 |
|
|
|
3,591 |
|
|
|
747 |
|
Gains on sale of real estate |
|
|
294 |
|
|
|
429 |
|
|
|
1,111 |
|
|
|
2,129 |
|
|
|
2,494 |
|
Gains on sale of loans |
|
|
914 |
|
|
|
190 |
|
|
|
404 |
|
|
|
379 |
|
|
|
508 |
|
(Losses) gains on investment securities |
|
|
1,892 |
|
|
|
(1,313 |
) |
|
|
5,358 |
|
|
|
383 |
|
|
|
227 |
|
Gain from refinance of assets related to real
estate owned via equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,892 |
|
Other income |
|
|
578 |
|
|
|
148 |
|
|
|
198 |
|
|
|
202 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income,excluding other-than-temporary
impairment losses |
|
|
9,315 |
|
|
|
7,600 |
|
|
|
12,888 |
|
|
|
11,971 |
|
|
|
24,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other than-temporary-impairment losses on investment securities |
|
|
(13,431 |
) |
|
|
(23,388 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Portion of loss recognized in other comprehensive loss |
|
|
2,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings |
|
|
(11,041 |
) |
|
|
(23,388 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (loss) income |
|
|
(1,726 |
) |
|
|
(15,788 |
) |
|
|
12,888 |
|
|
|
11,971 |
|
|
|
24,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before other expenses & income taxes |
|
|
6,273 |
|
|
|
(2,974 |
) |
|
|
37,725 |
|
|
|
56,802 |
|
|
|
69,489 |
|
Non-interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
12,235 |
|
|
|
15,044 |
|
|
|
12,215 |
|
|
|
13,451 |
|
|
|
13,488 |
|
Impairment related to real estate owned via equity investments |
|
|
|
|
|
|
1,500 |
|
|
|
8,500 |
|
|
|
|
|
|
|
|
|
Expenses related to real estate owned via equity investments |
|
|
907 |
|
|
|
966 |
|
|
|
1,590 |
|
|
|
1,606 |
|
|
|
262 |
|
Impairment related to real estate joint venture |
|
|
|
|
|
|
|
|
|
|
5,927 |
|
|
|
|
|
|
|
|
|
Other |
|
|
24,514 |
|
|
|
15,023 |
|
|
|
11,800 |
|
|
|
9,595 |
|
|
|
10,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
37,656 |
|
|
|
32,533 |
|
|
|
40,032 |
|
|
|
24,652 |
|
|
|
24,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before tax expense (benefit) |
|
|
(31,383 |
) |
|
|
(35,507 |
) |
|
|
(2,307 |
) |
|
|
32,150 |
|
|
|
44,758 |
|
Income tax expense (benefit) |
|
|
474 |
|
|
|
2,643 |
|
|
|
(1,568 |
) |
|
|
10,015 |
|
|
|
12,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(31,857 |
) |
|
$ |
(38,150 |
) |
|
$ |
(739 |
) |
|
$ |
22,135 |
|
|
$ |
32,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less net income (loss) attributable to noncontrolling interest |
|
|
1,402 |
|
|
|
(68 |
) |
|
|
(1,303 |
) |
|
|
567 |
|
|
|
68 |
|
Net (loss) income attributable to Royal Bancshares |
|
|
(33,259 |
) |
|
|
(38,082 |
) |
|
|
564 |
|
|
|
21,568 |
|
|
|
32,053 |
|
Less Series A Preferred stock accumulated dividend and accretion |
|
|
(1,672 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholders |
|
|
(34,931 |
) |
|
|
(38,082 |
) |
|
|
564 |
|
|
|
21,568 |
|
|
|
32,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per common share (1) |
|
$ |
(2.64 |
) |
|
$ |
(2.86 |
) |
|
$ |
0.04 |
|
|
$ |
1.60 |
|
|
$ |
2.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per common share (1) |
|
$ |
(2.64 |
) |
|
$ |
(2.86 |
) |
|
$ |
0.04 |
|
|
$ |
1.59 |
|
|
$ |
2.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Earnings per share has the weighted average number of shares used in the calculation
adjusted to reflect a 5% stock dividend in December 2006 and a 2% stock dividend in December 2005. |
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data |
|
For the years ended December 31, |
(In thousands) |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
Total Assets |
|
|
1,292,726 |
|
|
|
1,175,586 |
|
|
|
1,278,475 |
|
|
|
1,356,311 |
|
|
|
1,301,019 |
|
Total average assets (2) |
|
|
1,295,126 |
|
|
|
1,189,518 |
|
|
|
1,314,361 |
|
|
|
1,317,688 |
|
|
|
1,258,137 |
|
Loans, net |
|
|
656,533 |
|
|
|
671,814 |
|
|
|
625,193 |
|
|
|
580,759 |
|
|
|
539,360 |
|
Total deposits |
|
|
881,755 |
|
|
|
760,068 |
|
|
|
770,152 |
|
|
|
859,457 |
|
|
|
697,409 |
|
Total average deposits |
|
|
857,742 |
|
|
|
724,384 |
|
|
|
869,884 |
|
|
|
761,267 |
|
|
|
699,540 |
|
Total borrowings (1) |
|
|
283,601 |
|
|
|
313,805 |
|
|
|
339,251 |
|
|
|
301,203 |
|
|
|
427,130 |
|
Total average borrowings (1) |
|
|
307,225 |
|
|
|
307,597 |
|
|
|
254,757 |
|
|
|
377,139 |
|
|
|
350,662 |
|
Total shareholders equity (3) |
|
|
101,156 |
|
|
|
79,687 |
|
|
|
146,367 |
|
|
|
163,254 |
|
|
|
155,508 |
|
Total average shareholders equity |
|
|
107,511 |
|
|
|
131,155 |
|
|
|
158,695 |
|
|
|
158,372 |
|
|
|
145,601 |
|
Return on average assets |
|
|
(2.57 |
%) |
|
|
(3.20 |
%) |
|
|
0.04 |
% |
|
|
1.64 |
% |
|
|
2.55 |
% |
Return on average equity |
|
|
(30.94 |
%) |
|
|
(29.04 |
%) |
|
|
0.36 |
% |
|
|
13.62 |
% |
|
|
22.01 |
% |
Average equity to average assets |
|
|
8.30 |
% |
|
|
11.03 |
% |
|
|
12.07 |
% |
|
|
12.10 |
% |
|
|
11.57 |
% |
Dividend payout ratio |
|
|
0.00 |
% |
|
|
(10.52 |
%) |
|
|
2743.40 |
% |
|
|
66.10 |
% |
|
|
40.10 |
% |
(1) |
|
Includes obligations through VIE equity investments and subordinated debt. |
|
(2) |
|
Includes premises and equipment of VIE. |
|
(3) |
|
Excludes noncontrolling interest. |
ITEM 7. MANAGEMENTS 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 the Company and the related Notes
in Item 8 of this Report.
Results of Operations
General: The Companys results of operations depend primarily on net interest income,
which is the difference between interest income on interest earning assets and interest expense on
interest bearing liabilities. Interest earning assets consist principally of loans and investment
securities, while interest bearing liabilities consist primarily of deposits and borrowings. Net
income is also affected by the provision for loan and lease 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 Loss/Income: The Company recorded a net loss of $33.3 million in 2009, which amounted
to an improvement of $4.8 million from the net loss of $38.1 million recorded in 2008. The reduced
net loss was attributed to a modest decrease in the provision for loan and lease losses, a smaller
loss in other income and a reduction in income taxes due to the valuation allowance in 2008 which
resulted in a non-cash charge of $15.5 million. The lower loss in other income was primarily the
result of a reduction in the impairment losses on investment securities year over year. Partially
offsetting these positive changes was a decline in net interest income associated with a higher
level of non-performing loans throughout 2009 and the lagged re-pricing of the deposits and
borrowings that fund earning assets coupled with an increase in other expense. The increase in
other expense was comprised mainly of Other Real Estate Owned (OREO) impairment charges and
expenses, such as taxes and insurance, to maintain the OREO properties and increased FDIC
insurance.
Significant matters that impacted earnings in 2009 are as follows:
|
|
|
|
|
Impairment losses on investment securities |
|
$11.0 million |
Provision for loan and lease losses |
|
$20.6 million |
OREO and related expenses |
|
$7.8 million |
FDIC assessments |
|
$3.8 million |
33
Other (loss) income recorded a loss of $1.7 million in 2009 which was an improvement of $14.1
million from 2008 due primarily to a reduction of impairment on investment securities. Impairment
losses on investment securities of $11.0 million, which declined $12.3 million from the previous
year, were related to five trust preferred securities, three corporate bonds, various common
stocks, a preferred stock and two private label collateralized mortgage obligations. Impairment
losses in 2008 were attributed to the bankruptcy filing of Lehman Brothers Holdings, Inc.
(Lehman), the FDIC seizure of Washington Mutual, impairments related to two bank preferred stocks
and two collateralized mortgage obligations. Net interest income of $28.6 million declined $6.1
million, or 17.5%, due to the lagged re-pricing of the deposits and borrowings during 2009
associated with longer maturities of these liabilities relative to assets and the higher level of
nonperforming loans throughout 2009. The provision for loan and lease losses of $20.6 million in
2009 represented a decrease of $1.2 million from the prior years results. Income taxes of
$474,000 in 2009 was primarily due to the sale of the BOLI and declined $2.2 million from
the prior year resulting from the establishment of the valuation allowance for the deferred tax
assets in 2008.
Other expense of $37.7 million in 2009 increased $5.1 million, or 15.7%, due to OREO impairment
charges of $4.5 million associated with foreclosed properties, OREO expenses increasing by $3.0
million and increased FDIC and state assessments of $3.1 million due to increased rates for insured
deposits. The significant increase in OREO expenses reflected the increased foreclosed properties
within OREO that require periodic payments for taxes, insurance, maintenance and other expenses.
Partially offsetting these expense increases were reductions in salary primarily due to a one-time
contractual payment of $2.1 million in 2008 to the former President and a $1.5 million reduction in
impairment losses for real estate owned via equity investment.
Non-performing loans at December 31, 2009 amounted to $73.7 million which amounted to a decline of
$12.1 million from year end 2008 while OREO at December 31, 2009 amounted to $30.3 million versus
$10.3 million at year end 2008. Basic and diluted losses per common share were both $2.64 for 2009
compared to basic and diluted losses per common share of $2.86 in 2008.
The Company recorded a net loss of $38.1 million in 2008, which amounted to a decrease of $38.6
million from the net income of $564,000 recorded in 2007. The decline year over year was attributed
to an increase in the provision for loan and lease losses related to an increase in non-performing
loans of $8.8 million, impairment losses on investment securities of $23.4 million, a non-cash
charge of $15.5 million related to the establishment of a valuation allowance for the deferred tax
asset for the portion of the future tax benefit that more likely than not will not be utilized in
the future, and a decline in net interest income of $3.2 million associated with increased
non-performing loans and the negative impact of declining rates on the variable rate segment of the
loan portfolio. Partially offsetting these unfavorable charges was a decrease of $8.8 million in
other expense, which was attributed to non-recurring real estate joint ventures and real estate
owned via equity investment impairment losses recorded in 2007. The $15.5 million deferred tax
asset valuation allowance could be reversed going forward and result in the recognition of an
income tax benefit to the extent the Company generates adequate income.
For 2007, included in the operating results is a $1.0 million reduction to net income related to
the following accounting errors: a $667,000 reduction in net income resulting from an accounting
error related to investments in real estate joint ventures, a $417,000 reduction in net income
associated with an accounting error related to the consolidation of an investment in real estate
owned via an equity investment and an increase in net income of $60,000 related to an error in the
accounting for deferred loan costs per ASC Subtopic 20 under ASC Topic 310.
Net Interest Income and Margin: Net interest income is the Companys 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 the Companys
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.
The Company utilizes the effective yield interest method for recognizing interest income as
required by ASC Subtopic 20, Nonrefundable Fees and Other Costs (ASC Subtopic 20) under FASB
ASC Topic 310, Receivables (ASC Topic 310). ASC Subtopic 20 also guides our accounting for
nonrefundable fees and costs associated with lending activities such as discounts, premiums, and
loan origination fees. In the case of loan restructurings, if the terms of the new loan resulting
from a loan refinancing or restructuring other than a troubled debt restructuring are at least as
favorable to the Company as the terms for comparable loans to other customers with similar
collection risks who are not
34
refinancing or restructuring a loan with the Company, the refinanced
loan is accounted for as a new loan. This condition is met if the new loans effective yield is at
least equal to the effective yield for such loans. Any unamortized net fees or costs and any
prepayment penalties from the original loan shall be recognized in interest income when the new
loan is granted.
Net interest income was $28.6 million in 2009 as compared to $34.7 million in 2008. The decrease
in net interest income in 2009 of $6.1 million, or 17.5%, was primarily due to the increased level
of non-performing loans, lower yields on performing loans and investments, and an increased level
of interest bearing deposits related to increased liquidity, which were partially offset by lower
rates paid on brokered and retail certificates of deposit. (See the Average Balance table
included in this discussion.) Net interest income was $34.7 million in 2008 as compared to $37.9
million in 2007.
For the full year December 31, 2009, total interest income amounted to $66.0 million versus $72.8
million for full year 2008 resulting in a decline of $6.7 million, or 9.2%. The decrease was
attributable to a lower yield on average interest earning assets year over year, which was
partially offset by a higher level of interest earning assets. Average interest earning assets for
2009 of $1.2 billion increased $94.0 million, or 8.5%, above the level of 2008. Average cash and
cash equivalents increased $27.0 million, or doubled, average investment securities increased
$28.2 million, or 7.1%, and average total loans increased $38.8 million, or 5.7%. The increased
levels of interest bearing deposits and investment securities, which were entirely comprised of
government agencies, were mainly due to increased retail deposits and the desire to maintain higher
liquidity levels during this weak housing market and economy. The growth in average total loans
during 2009 resulted from new business relationships, new advances under existing lines of credit
and a lower level of loan payoffs resulting from the weak economy.
The decline in the yield on average interest earning assets also contributed to the decline in
interest income year over year (5.53% in 2009 versus 6.61% in 2008). This 108 basis point decline
was comprised of a decline of 176 basis points on interest bearing deposits, a decline of 90 basis
points on investment securities and a 98 basis point decline in total loans. The decline in the
yield on interest bearing deposits year over year was attributed to a continued decline in short
term market interest rates throughout most of 2008 that significantly impacted the average yield in
2009. The decline of the yield on investment securities was mainly related to the growth of
investment securities and the replacement of sold and called investment securities with lower
yielding and lower risk-weighted, government agency securities that resulted in reduced credit risk
within the investment portfolio but higher interest rate risk when interest rates rise. The
interest income associated with investment securities declined $2.3 million, or 10.1%, as a result
of the significantly increased concentration of lower yielding, government agency securities
despite the $28.2 million, or 7.1%, increase in average balances. The yield reduction on average
total loans resulted from lower market interest rates, which mainly impacted new loans and the
continued increase in non-performing loans. Interest income on loans declined by $4.1 million, or
8.2%, which was attributed to lost interest on the increased level of average non-accrual loans,
and the impact of lower yielding new loans. At year end 2009, the variable rate portfolio
represented approximately 56% of total loans; however the Company was able to mitigate a portion of
this negative impact through the utilization of rate floors in many of the commercial loan
agreements that exceeded the current prime rate.
At December 31, 2009, non-performing loans to total loans amounted to 10.7% of total loans, whereas
the same ratio at December 31, 2008, amounted 12.2%. The total interest income lost as a result of
non-performing loans during 2009 amounted to $6.2 million, which amounted to an increase of $1.1
million, or 20.3%, from 2008.
Interest income for 2008 amounted to $72.8 million, which resulted in a decline of $14.0 million,
or 16.1%, from the level of $86.7 million in 2007. The change year over year was attributed to an
increase in the level of non-performing loans during 2008 and the negative impact on interest
income of the decline of interest rates through the fourth quarter of 2007 and throughout 2008,
which contributed to a decrease in loan yields of 151 basis points. This decline was partially
offset by an increase in the yield on investment securities year over year of 43 basis points due
to the reduction in government agency securities during the first half of 2008, which generally
have a lower yield relative to the remainder of the investment portfolio.
Interest expense of $37.4 million for the full year 2009 decreased $670,000, or 1.8%, from the
level of $38.1 million in 2008. This change resulted from an increase in average interest-bearing
liabilities, which was more than offset by a reduction in the interest rates paid on those
liabilities. Average interest-bearing liabilities in 2009 amounted to $1.1 billion, which represented an increase of $127.7 million, or 13.1%, from the prior years average
of $974.8 million.
35
The majority of the change was attributed to an increase in average
interest-bearing deposits of $128.0 million, or 19.2%. This increase was primarily related to new
retail certificates of deposit coupled with a very high retention rate of maturing retail
certificates of deposit. The new retail certificates of deposit were attributable to a very
successful campaign to attract deposits in advance of the disclosure of the Orders to maintain and
assure adequate liquidity and to provide the Company with the ability to reduce its concentration
of brokered deposits as required under the Orders.
Rates paid on all major liability categories declined year over year with the exception of savings
accounts due to the general decline in market rates during 2008, which were attributed to the
Federal Reserves lowering of the prime rate by 400 basis points. The most significant declines
were as follows: certificates of deposits declined by 71 basis points, money market accounts
declined by 110 basis points, now accounts declined by 81 basis points, and subordinated debt
declined by 116 basis points.
Interest expense of $38.1 million for the year ended December 31, 2008 decreased $10.8 million, or
22%, from the level of 2007 due to an decrease in the average interest-bearing liabilities as well
as a decrease in the average rates paid on interest bearing liabilities relative to the previous
year. Average interest-bearing liabilities in 2008 declined $81.3 million, or 8%, from the prior
years average, which was primarily associated with a decline in average interest-bearing deposits
which were partially offset by an increase in average borrowings. The net reduction in
interest-bearing liabilities reflected a decline in funding needs elated to a corresponding
reduction in investment securities.
The net interest margin amounted to 2.39% during the full year 2009 which amounted to a reduction
of 76 basis points from the prior years level. The decline of 108 basis points in interest-earning
assets was primarily due to lower yields on all major interest-earning asset categories due to
lower market rates in 2008 and 2009 coupled with a higher level of average non-performing loans in
2009. This was partially offset by average lower rates paid on interest-bearing liabilities of 51
basis points. The reduction of rates paid on interest-bearing liabilities have lagged the decline
in interest-earning assets due to the immediate interest rate reduction on prime based loans in
2008 and the shift to lower yielding, cash-flowing government agency investment securities within
interest-earning assets while without a corresponding re-pricing of a significant portion of
interest bearing liabilities. Many of the higher rate retail certificates of deposit did not mature
until the second half of 2009, a significant portion of higher rate brokered deposits and FHLB
advances do not mature until 2010. In addition, the Company added slightly higher cost certificates
of deposits through a successful retail campaign, mostly within the second quarter of 2009, to
maintain liquidity in this current economic environment and in light of the requirement of the
Orders to reduce reliance on brokered certificates of deposit.
During 2008 the net interest margin of 3.15% amounted to a modest increase of 4 basis points above
the level of 3.11% for 2007. The negative impact of falling interest rates on the variable rate
segment of the loan portfolio and the added impact of the increased level of non-performing loans
added to the already existing net interest margin compression. However management was able to
mitigate this negative effect by shifting the mix of earning assets through redeploying part of the
matured and called investment securities into higher yielding loans and not replacing the remainder
thereby reducing the overall size of the balance sheet. The shifting of liabilities more towards
cost-effective FHLB advances and PNC borrowings and away from maturing higher cost certificates of
deposit also contributed to the modest increase in net interest margin. In addition, immediate
savings were realized for interest bearing deposits other than time deposits as market interest
rates declined during 2008.
Average Balances
The following table represents the average daily balances of assets, liabilities and shareholders
equity and the respective interest earned and paid on interest bearing assets and interest bearing
liabilities, as well as average rates for the periods indicated:
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Average |
|
|
|
|
|
|
Yield / |
|
|
Average |
|
|
|
|
|
|
Yield / |
|
|
Average |
|
|
|
|
|
|
Yield / |
|
(Dollars in thousands) |
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits |
|
$ |
51,578 |
|
|
$ |
164 |
|
|
|
0.32 |
% |
|
$ |
23,788 |
|
|
$ |
495 |
|
|
|
2.08 |
% |
|
$ |
35,158 |
|
|
$ |
1,896 |
|
|
|
5.39 |
% |
Federal funds |
|
|
553 |
|
|
|
1 |
|
|
|
0.18 |
% |
|
|
1,323 |
|
|
|
24 |
|
|
|
1.81 |
% |
|
|
2,900 |
|
|
|
147 |
|
|
|
5.07 |
% |
Investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity |
|
|
|
|
|
|
|
|
|
|
0.00 |
% |
|
|
56,658 |
|
|
|
3,241 |
|
|
|
5.72 |
% |
|
|
205,686 |
|
|
|
10,032 |
|
|
|
4.88 |
% |
Available for sale |
|
|
426,829 |
|
|
|
20,121 |
|
|
|
4.71 |
% |
|
|
341,982 |
|
|
|
19,141 |
|
|
|
5.60 |
% |
|
|
338,620 |
|
|
|
18,143 |
|
|
|
5.36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
426,829 |
|
|
|
20,121 |
|
|
|
4.71 |
% |
|
|
398,640 |
|
|
|
22,382 |
|
|
|
5.61 |
% |
|
|
544,306 |
|
|
|
28,175 |
|
|
|
5.18 |
% |
Loans & Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial demand loans |
|
|
384,831 |
|
|
|
18,439 |
|
|
|
4.79 |
% |
|
|
395,109 |
|
|
|
25,270 |
|
|
|
6.40 |
% |
|
|
376,002 |
|
|
|
31,874 |
|
|
|
8.48 |
% |
Real estate secured |
|
|
294,414 |
|
|
|
24,285 |
|
|
|
8.25 |
% |
|
|
256,124 |
|
|
|
22,153 |
|
|
|
8.65 |
% |
|
|
238,929 |
|
|
|
22,187 |
|
|
|
9.29 |
% |
Other loans and leases |
|
|
36,276 |
|
|
|
3,032 |
|
|
|
8.36 |
% |
|
|
25,528 |
|
|
|
2,440 |
|
|
|
9.56 |
% |
|
|
21,681 |
|
|
|
2,457 |
|
|
|
11.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
715,521 |
|
|
|
45,756 |
|
|
|
6.39 |
% |
|
|
676,761 |
|
|
|
49,863 |
|
|
|
7.37 |
% |
|
|
636,612 |
|
|
|
56,518 |
|
|
|
8.88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earnings assets |
|
|
1,194,481 |
|
|
|
66,042 |
|
|
|
5.53 |
% |
|
|
1,100,512 |
|
|
|
72,764 |
|
|
|
6.61 |
% |
|
|
1,218,976 |
|
|
|
86,736 |
|
|
|
7.12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest earnings assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & due from banks |
|
|
11,752 |
|
|
|
|
|
|
|
|
|
|
|
7,552 |
|
|
|
|
|
|
|
|
|
|
|
12,369 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
115,173 |
|
|
|
|
|
|
|
|
|
|
|
106,447 |
|
|
|
|
|
|
|
|
|
|
|
97,649 |
|
|
|
|
|
|
|
|
|
Allowance for loan loss |
|
|
(25,061 |
) |
|
|
|
|
|
|
|
|
|
|
(23,301 |
) |
|
|
|
|
|
|
|
|
|
|
(12,405 |
) |
|
|
|
|
|
|
|
|
Unearned discount |
|
|
(1,219 |
) |
|
|
|
|
|
|
|
|
|
|
(1,692 |
) |
|
|
|
|
|
|
|
|
|
|
(2,228 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assets |
|
|
100,645 |
|
|
|
|
|
|
|
|
|
|
|
89,006 |
|
|
|
|
|
|
|
|
|
|
|
95,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,295,126 |
|
|
|
|
|
|
|
|
|
|
$ |
1,189,518 |
|
|
|
|
|
|
|
|
|
|
$ |
1,314,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings |
|
$ |
14,802 |
|
|
$ |
83 |
|
|
|
0.56 |
% |
|
$ |
15,125 |
|
|
$ |
76 |
|
|
|
0.50 |
% |
|
$ |
16,461 |
|
|
$ |
85 |
|
|
|
0.52 |
% |
Now |
|
|
46,046 |
|
|
|
478 |
|
|
|
1.04 |
% |
|
|
48,414 |
|
|
|
894 |
|
|
|
1.85 |
% |
|
|
52,975 |
|
|
|
1,185 |
|
|
|
2.24 |
% |
Money market |
|
|
153,146 |
|
|
|
2,797 |
|
|
|
1.83 |
% |
|
|
168,972 |
|
|
|
4,947 |
|
|
|
2.93 |
% |
|
|
199,921 |
|
|
|
8,486 |
|
|
|
4.24 |
% |
Time deposits |
|
|
581,202 |
|
|
|
21,984 |
|
|
|
3.78 |
% |
|
|
434,662 |
|
|
|
19,497 |
|
|
|
4.49 |
% |
|
|
531,965 |
|
|
|
27,384 |
|
|
|
5.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits |
|
|
795,196 |
|
|
|
25,342 |
|
|
|
3.19 |
% |
|
|
667,173 |
|
|
|
25,414 |
|
|
|
3.81 |
% |
|
|
801,322 |
|
|
|
37,140 |
|
|
|
4.63 |
% |
Federal funds |
|
|
|
|
|
|
|
|
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
0.00 |
% |
Borrowings |
|
|
271,000 |
|
|
|
10,717 |
|
|
|
3.95 |
% |
|
|
266,284 |
|
|
|
11,008 |
|
|
|
4.13 |
% |
|
|
205,823 |
|
|
|
9,374 |
|
|
|
4.55 |
% |
Obligation through VIE equity investments |
|
|
10,451 |
|
|
|
243 |
|
|
|
2.33 |
% |
|
|
15,539 |
|
|
|
251 |
|
|
|
1.62 |
% |
|
|
23,160 |
|
|
|
623 |
|
|
|
2.69 |
% |
Subordinated debt |
|
|
25,774 |
|
|
|
1,136 |
|
|
|
4.41 |
% |
|
|
25,774 |
|
|
|
1,436 |
|
|
|
5.57 |
% |
|
|
25,774 |
|
|
|
1,736 |
|
|
|
6.74 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities |
|
|
1,102,421 |
|
|
|
37,438 |
|
|
|
3.40 |
% |
|
|
974,770 |
|
|
|
38,109 |
|
|
|
3.91 |
% |
|
|
1,056,079 |
|
|
|
48,873 |
|
|
|
4.63 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest bearing deposits |
|
|
62,546 |
|
|
|
|
|
|
|
|
|
|
|
57,211 |
|
|
|
|
|
|
|
|
|
|
|
68,562 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
22,648 |
|
|
|
|
|
|
|
|
|
|
|
26,382 |
|
|
|
|
|
|
|
|
|
|
|
31,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,187,615 |
|
|
|
|
|
|
|
|
|
|
|
1,058,363 |
|
|
|
|
|
|
|
|
|
|
|
1,155,666 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
107,511 |
|
|
|
|
|
|
|
|
|
|
|
131,155 |
|
|
|
|
|
|
|
|
|
|
|
158,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,295,126 |
|
|
|
|
|
|
|
|
|
|
$ |
1,189,518 |
|
|
|
|
|
|
|
|
|
|
$ |
1,314,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
28,604 |
|
|
|
|
|
|
|
|
|
|
$ |
34,655 |
|
|
|
|
|
|
|
|
|
|
$ |
37,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
2.39 |
% |
|
|
|
|
|
|
|
|
|
|
3.15 |
% |
|
|
|
|
|
|
|
|
|
|
3.11 |
% |
|
|
|
(1) |
|
Non-accrual loans have been included in the appropriate average loan balance category, but
interest on these loans has not been included. |
|
(2) |
|
Portions of interest related to obligations through VIE are capitalized on the VIEs books. |
37
The following table sets forth a rate/volume analysis, which segregates in detail the major factors
contributing to the change in net interest income exclusive of interest on obligation through VIE,
for the years ended December 31, 2009 and 2008, as compared to respective previous periods, into
amounts attributable to both rate and volume variances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 versus 2008 |
|
|
2008 versus 2007 |
|
|
|
Changes due to: |
|
|
Changes due to: |
|
(In thousands) |
|
Volume |
|
|
Rate |
|
|
Total |
|
|
Volume |
|
|
Rate |
|
|
Total |
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks |
|
$ |
88 |
|
|
$ |
(419 |
) |
|
$ |
(331 |
) |
|
$ |
(237 |
) |
|
$ |
(1,164 |
) |
|
$ |
(1,401 |
) |
Federal funds sold |
|
|
(1 |
) |
|
|
(22 |
) |
|
|
(23 |
) |
|
|
(28 |
) |
|
|
(95 |
) |
|
|
(123 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short term earning assets |
|
|
87 |
|
|
|
(441 |
) |
|
|
(354 |
) |
|
|
(265 |
) |
|
|
(1,259 |
) |
|
|
(1,524 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity |
|
|
(3,241 |
) |
|
|
|
|
|
|
(3,241 |
) |
|
|
(8,583 |
) |
|
|
1,790 |
|
|
|
(6,793 |
) |
Available for sale |
|
|
4,023 |
|
|
|
(3,043 |
) |
|
|
980 |
|
|
|
255 |
|
|
|
745 |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments securities |
|
|
782 |
|
|
|
(3,043 |
) |
|
|
(2,261 |
) |
|
|
(8,328 |
) |
|
|
2,535 |
|
|
|
(5,793 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial demand loans |
|
|
(551 |
) |
|
|
(4,339 |
) |
|
|
(4,890 |
) |
|
|
1,329 |
|
|
|
(6,984 |
) |
|
|
(5,655 |
) |
Commercial mortgages |
|
|
1,250 |
|
|
|
(1,223 |
) |
|
|
27 |
|
|
|
634 |
|
|
|
(2,161 |
) |
|
|
(1,527 |
) |
Residential and home equity loans |
|
|
(77 |
) |
|
|
(127 |
) |
|
|
(204 |
) |
|
|
(267 |
) |
|
|
(147 |
) |
|
|
(414 |
) |
Lease receivables |
|
|
987 |
|
|
|
(366 |
) |
|
|
621 |
|
|
|
459 |
|
|
|
(380 |
) |
|
|
79 |
|
Real estate tax liens |
|
|
2,945 |
|
|
|
(637 |
) |
|
|
2,308 |
|
|
|
1,900 |
|
|
|
7 |
|
|
|
1,907 |
|
Other loans |
|
|
(15 |
) |
|
|
(14 |
) |
|
|
(29 |
) |
|
|
(26 |
) |
|
|
(70 |
) |
|
|
(96 |
) |
Loan fees |
|
|
(1,939 |
) |
|
|
|
|
|
|
(1,939 |
) |
|
|
(949 |
) |
|
|
|
|
|
|
(949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
2,600 |
|
|
|
(6,706 |
) |
|
|
(4,106 |
) |
|
|
3,080 |
|
|
|
(9,735 |
) |
|
|
(6,655 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest income |
|
$ |
3,469 |
|
|
$ |
(10,190 |
) |
|
$ |
(6,721 |
) |
|
$ |
(5,513 |
) |
|
$ |
(8,459 |
) |
|
$ |
(13,972 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market |
|
$ |
(456 |
) |
|
$ |
(2,109 |
) |
|
$ |
(2,565 |
) |
|
$ |
(1,227 |
) |
|
$ |
(2,603 |
) |
|
$ |
(3,830 |
) |
Savings |
|
|
(2 |
) |
|
|
9 |
|
|
|
7 |
|
|
|
(7 |
) |
|
|
(2 |
) |
|
|
(9 |
) |
Time deposits |
|
|
5,871 |
|
|
|
(3,385 |
) |
|
|
2,486 |
|
|
|
(4,633 |
) |
|
|
(3,254 |
) |
|
|
(7,887 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
5,413 |
|
|
|
(5,485 |
) |
|
|
(72 |
) |
|
|
(5,867 |
) |
|
|
(5,859 |
) |
|
|
(11,726 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
|
192 |
|
|
|
(482 |
) |
|
|
(290 |
) |
|
|
2,558 |
|
|
|
(928 |
) |
|
|
1,630 |
|
Trust preferred |
|
|
|
|
|
|
(300 |
) |
|
|
(300 |
) |
|
|
|
|
|
|
(296 |
) |
|
|
(296 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Borrowings |
|
|
192 |
|
|
|
(782 |
) |
|
|
(590 |
) |
|
|
2,558 |
|
|
|
(1,224 |
) |
|
|
1,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest expense |
|
|
5,605 |
|
|
|
(6,267 |
) |
|
|
(662 |
) |
|
|
(3,309 |
) |
|
|
(7,083 |
) |
|
|
(10,392 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in net interest income |
|
$ |
(2,136 |
) |
|
$ |
(3,923 |
) |
|
$ |
(6,059 |
) |
|
$ |
(2,204 |
) |
|
$ |
(1,376 |
) |
|
$ |
(3,580 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Possible Loan and Lease Losses
The provision for loan and lease losses was $20.6 million in 2009 compared to $21.8 million in
2008. The provision was comprised of $11.0 million in specific reserves for individual loans that
became impaired during 2009. The Company recorded $19.2 million in net charge-offs. The remaining
2009 provision was based on the formula allowance reflecting historical losses, as adjusted by loan
category and additional provision related to new loans as well as other qualitative and
quantitative factors.
The Company recorded a $21.8 million provision for loan and lease losses in 2008. The Company
recognized $12.2 million in net charge-offs in 2008. The 2008 provision included $12.9 million in
specific reserves for impaired loans and was impacted by the growth in non-accrual loans and the
historical losses with the remaining provision The remaining provision was based on the formula
allowance reflecting historical losses, as adjusted by loan category and additional provision
related to new loans.
The Company recorded a $13.0 million provision for loan and lease losses in 2007. The provision
included $7.8 million in specific provision based on the Companys calculation of allowance for
individual impaired loans during 2007. The
38
remaining 2007 provision of $5.2 million was the
formula allowance reflecting historical losses, as adjusted by loan category.
Total Other (Loss) Income
Other (loss) income includes service charges on depositors accounts, safe deposit rentals and
various services such as cashing checks, issuing money orders and travelers checks, and similar
activities. In addition, other forms of non-interest income are derived from changes in the cash
value of bank owned life insurance (BOLI), and income relating to real estate owned via equity
investment. Most components of other income are a modest and stable source of income, with
exceptions of one-time gains and losses from the sale of investment securities, other real estate
owned, and real estate owned via equity investments. 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.
Total other (loss) income amounted to a loss of $1.7 million in the current year which amounted to
an improvement of $14.1 million from the loss of $15.8 million in 2008. The change was mainly
associated with higher service charges and fees of $233,000, increased income of $337,000 related
to real estate owned via equity investment, increased gains of $724,000 on the sale of loans and
leases, net gains of $1.9 million on the sales of investment securities versus a loss of $1.3
million in 2008, increased other income of $430,000 and a reduction in net impairment losses on AFS
investment securities amounting to $12.3 million. Offsetting these favorable changes was a
reduction of gains on the sale of premises ($2.0 million in 2008 versus none in 2009), a decline of
$134,000 in BOLI income and gains on the sales related to real estate joint ventures ($1.1 million
in 2008 versus none in 2009). The increase in gains on the sale of loans was mainly attributed to
SBA loan sales within Royal Asian during the past year. Net impairment losses on AFS investment
securities amounted to $11.0 million in 2009, which included five trust preferred securities
totaling $3.0 million, various common stocks amounting to $4.3 million, three corporate bonds
amounting to $1.4 million, a preferred stock of $1.1 million, two real estate funds totaling
$769,000 and two private label CMOs in the amount of $459,000. Refer to Note 3 Investment
Securities to the consolidated financial statements for more information on the impairment
charges. The decline in BOLI income was due to the sale of approximately $23 million of BOLI
insurance in the second half of 2009 to reduce the level of risk-weighted assets on the balance
sheet to enhance the risk-based capital ratio of Royal Bank.
Total other (loss) income decreased $28.7 million from income of $12.9 million in 2007 to a loss of
$15.8 million in 2008. This decrease was mainly attributed to impairment losses on AFS securities
of $23.4 million during 2008, a decrease in gains from the sale of AFS securities of $6.7 million
($1.3 million loss in 2008 compared to a $5.4 million gain in 2007) and a decrease in gains from
the sale of other real estate owned of $682,000. These decreases were partially offset by a
$2.0 million increase in gains from the sale of premises and a $742,000 increase from gains on
sales related to real estate joint ventures. The impairment losses on AFS investment securities
amounted to $18.4 millions and were comprised of corporate bonds of Lehman and Washington Mutual,
two collateralized mortgage obligations (CMO) and preferred stock investments in two financial
institutions that were deemed by management to be other than temporarily impaired and were
written down to zero value. In addition, the Company recorded a $5 million impairment charge on the
entire carrying value of a CMO that was pledged as collateral for a swap with Lehman Brothers
Special Financing, Inc. (LBSF) due to uncertainty surrounding the recovery of the collateral. As
a consequence of the bankruptcy filing of Lehman an affiliate of LBSF, the Company sued LBSF to
recover possession of its collateral.
Total Other Expense
Total other expense of $37.7 million increased $5.2 million, or 15.7%, in 2009 above the prior
years results. While management was able to reduce selected expense categories throughout 2009,
expense increases primarily associated with FDIC insurance rate increase, OREO costs related to
foreclosed properties and legal expense increases associated with non-performing loans more than
offset managements expense reduction initiatives. Employee salaries and benefits of $12.2 million
during 2009 declined $2.8 million from the level of 2008 due to a modest reduction in headcount and
the temporary elimination of selected benefits within 2009 and the contractual payout to the former
Company president in 2008 of $2.1 million. Professional and legal fees of $4.4 million in the
current year increased $584,000, or 15.4%, above the previous year due mainly to increased legal
fees associated with non-performing loans and an internal investigation related to the U.S
Department of Justice investigation described in Item 3-Legal
39
Proceedings of this Report which
was partially offset by a decline in professional fees related to reduced consulting and recruiting
expense. Occupancy and equipment amounted to $3.4 million, which represented an increase of
$521,000, or 18.2%, due primarily to increased rental rates for some of the leased facilities and
additional space that was leased for the lending and credit departments at the end of 2008.
Impairment of real estate owned via equity investment, which was related to a real estate
partnership project to convert apartments into condominiums, amounted to $1.5 million in 2008 due
to lower projected operating cash flows. This project experienced significant improvement during
the second half of the current year due to increased sales and related cash flows and resulted in
no further impairment in 2009. FDIC and state assessments expense of $3.8 million in 2009 increased
$3.1 million from the prior year almost entirely due to higher FDIC insurance rates during the past
year. Both Royal Bank and Royal Asian Bank were charged higher rates in 2009 consistent with other
FDIC insured financial institutions to increase insurance funds, based upon the individual risk
profile of each Bank, due to recent and expected future failures of financial institutions.
The OREO impairment charges of $4.5 million reflected a reduction in value of five OREO properties
based upon updated appraisals during 2009 while there was no corresponding expense in 2008. OREO
and loan collection expense of $3.2 million in 2009 amounted to an increase of $3.0 million year
over year and was mainly due to tax payments, insurance, maintenance costs, utilities and other
related expenses. During 2009 the level of OREO properties increased by $20.0 million to $30.3
million at year end 2009, which resulted in a significant increase in ongoing costs to maintain the
OREO properties. Other operating expense of $3.0 million in 2009 declined $1.8 million, or 37.1%,
from the previous year. This expense category is comprised of data processing, postage, telephone,
travel and entertainment, advertising, printing and supplies, dues and subscriptions and other
miscellaneous expense. The reduction was primarily due to gains associated with the real estate
partnership investment of $1.2 million associated with the sales of the converted condominium
partnership project previously noted above whereas in 2008 a loss of $254,000 was posted due to
much slower sales activity. The Companys portion of the net gains from the partnership investment
is recorded as a reduction to expenses while losses are posted as a charge to expense.
Other expense amounted to $32.5 million in 2008, which represented a decrease of $7.5 million, or
19%, from the level of the previous year. Significant decreases in both impairment of real estate
owned via equity investment ($1.5 million in 2008 versus $8.5 million in 2007) due to improved, but
continued lower projected operating cash flows and impairment of real estate joint ventures (no
impairment in 2008 versus $5.9 million in 2007) for a 55 unit condominium building accounted for a
majority of the improvement in expenses year over year. These reductions were partially offset by
expense increases associated with salaries and employee benefits mainly related to the contract
payout of the former Company president and higher medical benefits expense, professional and legal
fees related to non-performing loans and recruiting expense, and other operating expense increases.
Accounting for Income Tax Expense (Benefit)
In 2009, the Company recorded tax expense of $474,000 compared to $2.6 million in 2008. Although
the Company recorded a $35.4 million net loss for 2008, the tax expense was the result of the
Company establishing a $15.5 million valuation allowance for the deferred tax asset. The Company
recorded a $1.6 million tax benefit in 2007. The 2007 tax benefit was the result of the Company
recording a $1.0 million loss before income taxes during 2007 and the tax benefit associated with
the organization of the Royal Captive Insurance Company during 2007.
As of December 31, 2009 and December 31, 2008, management concluded that it was more likely than
not that the Company would not generate sufficient future taxable income to realize all of the
deferred tax assets. Managements conclusion was based on consideration of the relative weight of
the available evidence and the uncertainty of future market conditions on results of operations.
As a result, the Company recorded a non-cash charge of $15.5 million in the consolidated statements
of operations in the three month period ended December 31, 2008 related to the establishment of a
valuation allowance for the deferred tax asset for the portion of the future tax benefit that more
likely than not will not be utilized in the future. During 2009, the Company established an
additional valuation allowance of $10.2 million, which was a result of the net operating loss for
the year and the portion of the future tax benefit that more likely than not will not be utilized
in the future. The additional valuation allowance did not impact the net loss as no tax benefit
was recorded during 2009. As of December 31, 2009 the valuation allowance for deferred tax assets
totaled $25.7 million, which excludes the $97,000 valuation allowance related to equity
40
securities. The deferred tax asset of $414,000 relates to projected reversals of temporary differences in 2010
that are projected to be carried back to a prior year.
Our effective tax rate is the provision (benefit) for federal income taxes, excluding the tax
effect of extraordinary items, expressed as a percentage of income or loss before federal income
taxes. The effective tax rate for the twelve months ended December 31, 2009 and 2008 was 1.5% and
7.5%, respectively. In general our effective tax rate is different from the federal statutory rate
of 35% primarily due to the benefits related to certain insurance that is non-taxable, equity
investments that provide tax credits, and the establishment of a valuation allowance which was
$25.7 million as of December 31, 2009.
Results of Operations by Business Segments
Under FASB ASC Topic 280, Segment Reporting (ASC Topic 280), management of the Company has
identified three reportable operating segments, Community Banking, Tax Liens and Equity
Investments; and two operating segments that do not meet the quantitative thresholds for requiring
disclosure, but have different characteristics than the Community Banking, Tax Liens and Equity
Investments segments, and from each other, RBA Leasing and RBA Capital (Other in the segment
table in Note 20 Segment Information of the Notes to Consolidated Financial Statements in Item
8 of this Report.)
|
|
|
Community Bank segment: At December 31, 2009, the Community Bank segment had
total assets of $1.1 billion, an increase of $100.5 million or 10% from $1.0
billion at December 31, 2008. Total deposits grew $121.7 million or 16% from
$760.1 million at December 31, 2008 to $881.8 million at December 31, 2009. Net
interest income for 2009 was $19.1 million compared to $27.4 million for 2008
representing an $8.3 million, or 30%, decline. The reduction in net interest
income was related to the increased level of non-performing loans, lower yields on
performing loans and investments and an increased level of interest bearing
deposits related to increased liquidity, which were partially offset by lower rates
paid on brokered and retail certificates of deposit. The loan loss provision was
$18.7 million for 2009 compared to $17.4 million for 2008. For 2009, total other
loss was $4.8 million compared to $19.1 million for 2008. This loss is mostly
attributed to $4.8 million in impairment charges recorded on the available-for-sale
investment portfolio for 2009 compared to $23.4 million for 2008. In 2009 total
other expense was $32.9 million, an increase of $7.5 million, or 30%, from $25.4
million in 2008. The increase is mostly associated with FDIC
insurance rate increase, OREO costs related to foreclosed properties and legal
expense. The net loss for 2009 was $35.9 million compared to a net loss of $37.6
million for 2008. |
|
|
|
|
Tax Lien segment: At December 31, 2009, the Tax Lien segment had total assets
of $105.0 million compared to $85.0 million at December 31, 2008 representing an
increase of $20.1 million, or 24%. Net interest income increased $1.2 million, or
24%, from $4.8 million in 2008 to $6.0 million in 2009. The provision for losses
declined from $2.6 million in 2008 to $624,000 in 2009. The 2008 provision was
related to a specific reserve for a non-accrual loan with a tax lien portfolio
located in Alabama. Total other income was $313,000 in 2009 compared to $560,000
in 2008. Total other income is derived mostly from the gains on sale of OREO
property. Total other expense increased $214,000, or 8%, from $2.7 million for
2008 to $2.9 million for 2009. The increase in other total expense was related to
legal fees. Net income was $1.0 million in 2009 compared to $85,000 for 2008. |
|
|
|
|
Equity Investment segment: At December 31, 2009 the Equity Investment segment
had total assets of $8.7 million compared to $17.4 million at December 31, 2008
representing a decline of $8.7 million, or 50%. The decline was primarily related
to a significant number of condominium sales in 2009. Net income for 2009 was
$179,000 compared to net loss of $351,000 for 2008. |
41
Accounting for Debt and Equity Securities
The Company accounts for investment securities in accordance with FASB ASC Topic 320,
Investments-Debt & Equity Securities (ASC Topic 320). ASC Topic 320 requires investments in
securities to be classified in one of three categories; held to maturity, trading or available for
sale. Debt securities that the Company has the intent and ability to hold to maturity are
classified as held to maturity and are reported at amortized cost. All of the Companys debt and
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.
Financial Condition
Total assets increased $117.1 million, or 10.0%, to $1.3 billion at December 31, 2009 from $1.2
billion at year-end 2008.
Cash and Cash Equivalents: Cash and cash equivalents consist 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 $44.0 million from $14.3 million at December 31, 2008 to $58.3
million at December 31, 2009. The average balance of cash and cash equivalents was approximately
$63.9 million for 2009 versus $32.7 million for 2008. The increase during 2009 was primarily
related to maintaining strong liquidity during this current economic environment, which resulted in
excess cash relative to historical operating requirements for the Company. The majority of this
average balance was held in interest-bearing accounts with other financial institutions which were
paying a higher interest rate than federal funds. The excess cash is invested daily in overnight
and federal funds. The average balance of these funds that earn interest was $51.6 million in
2009.
Investment Securities Available for Sale (AFS): AFS investment securities represented
36% of average interest earning assets during 2009 and consisted of government secured agency
bonds, government secured mortgaged-backed securities, collateralized mortgage obligations
(CMOs), collateralized debt obligations (CDOs), capital trust security issues of regional
banks, domestic corporate debt and third party managed equity funds. At December 31, 2009, AFS
investment securities were $438.7 million as compared to $350.3 million at December 31, 2008, an
increase of $88.4 million. This increase was primarily associated with the increased level of
interest bearing deposits during 2009 without a corresponding increase in loans due to the weak
economy. As a result, a significant portion of the interest bearing deposits was invested entirely
in government agency investment securities. The increase in government agencies was partially
offset by a reduction in third party managed equity funds and corporate debt due to sales and
impairment associated with these investment securities.
Loans: The Companys primary earning assets are loans, representing approximately 60% of
average earning assets during 2009. The loan portfolio consists primarily of business demand loans
and commercial mortgages secured by real estate, real estate tax liens, lease receivables, and to a
significantly lesser extent, residential loans comprised of one to four family residential and home
equity loans. During 2009, total loans decreased $13.8 million to $686.9 million at December 31,
2009 from $700.7 million at December 31, 2008. The decline was primarily due to transfers to OREO
of approximately $29.2 million in non-performing construction and land development,
non-residential, and residential real estate loans, loan charge-offs of $19.8 million, which were
offset by net loan growth of $35.2 million.
Non-residential real estate, construction loans and land development make up a significant portion
of our loan portfolio and represented 61% of total loans at December 31, 2009, which amounted to a
decline from 71% of total loans at December 31, 2008. Management believes our current loan loss reserve is
adequate to cover losses arising from these loan categories as well as all others within the
portfolio. We continue to monitor these loans, with emphasis on construction, land development and
non-residential real estate loans, due to the continuing deterioration in market conditions to
evaluate the impact these loans will have on our loan loss reserve.
Allowance for loan and lease losses: The Companys loan and lease portfolio (the credit
portfolio) is subject to varying degrees of credit risk. The Company maintains an allowance for
loan and lease losses (the allowance) to absorb possible losses in the loan and lease portfolio.
The allowance is based on the review and evaluation of the loan and lease portfolio, along with
ongoing, quarterly assessments of the probable losses inherent in that portfolio. The allowance
represents an estimation made pursuant to FASB ASC Topic 450, Contingencies (ASC Topic
42
450) or FASB ASC Topic 310, Receivables (ASC Topic 310). The adequacy of the allowance is determined
through evaluation of the credit portfolio, and involves consideration of a number of factors, as
outlined below, to establish a prudent level. Determination of the allowance is inherently
subjective and requires significant estimates, including estimated losses on pools of homogeneous
loans and leases based on historical loss experience and consideration of current economic trends,
which may be susceptible to significant change. Loans and leases deemed uncollectible are charged
against the allowance, while recoveries are credited to the allowance. Management adjusts the level
of the allowance through the provision for loan and lease losses, which is recorded as a current
period expense. The Companys systematic methodology for assessing the appropriateness of the
allowance includes: (1) the formula allowance reflecting historical losses, as adjusted, by loan
category, and (2) the specific allowance for risk-rated credits on an individual or portfolio
basis.
The Company uses three major components in determining the appropriate value of the loan and lease
loss allowance: standards required under ASC Topic 310, an historical loss factor, and an
environmental factor. Utilizing standards required under ASC Topic 310, loans are evaluated for
impairment on an individual basis considering current collateral values (current appraisals or rent
rolls for income producing properties), all known relevant factors that may affect loan
collectability, and risks inherent in different kinds of lending (such as source of repayment,
quality of borrower and concentration of credit quality). Once a loan is determined to be impaired
(or is classified) such loans will be deducted from the portfolio and the net remaining balance
will be used in the historical and environmental analysis.
The formula allowance, which is based upon historical loss factors, as adjusted, establishes
allowances for the major loan and lease categories based upon a five year rolling average of the
historical loss experienced. The factors used to adjust the historical loss experience address
various risk characteristics of the Companys loan and lease portfolio including: (1) trends in
delinquencies and other non-performing loans, (2) changes in the risk profile related to large
loans in the portfolio, (3) changes in the growth trends of categories of loans comprising the loan
and lease portfolio, (4) concentrations of loans and leases to specific industry segments, and (5)
changes in economic conditions on both a local and national level.
Management recognizes the higher credit risk associated with commercial and construction loans. As
a result of the higher credit risk related to commercial and construction loans, the Company
computes its formula allowance (which is based upon historical loss factors, as adjusted) using
higher quantitative risk weighting factors than used for its consumer related loans. As an example,
the Company applies an internal quantitative risk-weighting factor for construction loans which is
approximately three times higher than the quantitative risk-weighting factor used for multi-family
real estate loans. These higher economic risk factors for commercial and construction loans are
used to compensate for the higher volatility of commercial and construction loans to changes in the
economy and various real estate markets.
A loan is considered impaired when it is probable that interest and principal will not be collected
according to the contractual terms of the loan agreement. Analysis resulting in specific
allowances, including those on loans identified for evaluation of impairment, includes
consideration of the borrowers overall financial condition, resources and payment record, support
available from financial guarantors and the sufficiency of collateral. For such loans that are
classified as impaired, an allowance is established when the discounted cash flows (or collateral
value or observable market price) of the impaired loan are lower than the carrying value of that
loan. These factors are combined to estimate the probability and severity of inherent losses. Then
a specific allowance is established based on the Companys calculation of the potential loss in
individual loans. Additional allowances may also be established in special circumstances involving
a particular group of credits or portfolio when management becomes aware that losses incurred may
exceed those determined by application of the risk factors.
43
Analysis of the Allowance for Loan and Lease Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Total Loans |
|
$ |
686,864 |
|
|
$ |
700,722 |
|
|
$ |
644,475 |
|
|
$ |
602,958 |
|
|
$ |
549,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily average loan balance |
|
$ |
715,521 |
|
|
$ |
676,761 |
|
|
$ |
636,612 |
|
|
$ |
618,591 |
|
|
$ |
510,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the year |
|
$ |
28,908 |
|
|
$ |
19,282 |
|
|
$ |
11,455 |
|
|
$ |
10,276 |
|
|
$ |
12,519 |
|
Charge-offs by loan type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate residential |
|
|
1,361 |
|
|
|
37 |
|
|
|
195 |
|
|
|
631 |
|
|
|
142 |
|
Real Estate residential-mezzanine |
|
|
|
|
|
|
2,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development |
|
|
6,231 |
|
|
|
3,852 |
|
|
|
2,408 |
|
|
|
|
|
|
|
|
|
Construction and land develop-mezzanine |
|
|
2,756 |
|
|
|
1,540 |
|
|
|
1,579 |
|
|
|
|
|
|
|
|
|
Real Estate non-residential |
|
|
7,404 |
|
|
|
1,330 |
|
|
|
294 |
|
|
|
5 |
|
|
|
2,162 |
|
Real Estate non-residential-mezzanine |
|
|
1,132 |
|
|
|
1,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases |
|
|
676 |
|
|
|
642 |
|
|
|
286 |
|
|
|
11 |
|
|
|
|
|
Commercial and industrial |
|
|
258 |
|
|
|
1,009 |
|
|
|
704 |
|
|
|
|
|
|
|
28 |
|
Tax certificates |
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
25 |
|
|
|
1 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73 |
|
|
|
2 |
|
|
|
|
Total charge-offs |
|
|
19,818 |
|
|
|
12,327 |
|
|
|
5,466 |
|
|
|
745 |
|
|
|
2,335 |
|
Recoveries by loan type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development |
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
|
|
Real Estate residential |
|
|
190 |
|
|
|
6 |
|
|
|
28 |
|
|
|
100 |
|
|
|
68 |
|
Real Estate non-residential |
|
|
431 |
|
|
|
|
|
|
|
4 |
|
|
|
14 |
|
|
|
7 |
|
Commercial and industrial |
|
|
15 |
|
|
|
106 |
|
|
|
201 |
|
|
|
2 |
|
|
|
12 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
4 |
|
|
|
|
Total recoveries |
|
|
636 |
|
|
|
112 |
|
|
|
267 |
|
|
|
121 |
|
|
|
91 |
|
|
|
|
Net loan (charge-offs) recoveries |
|
|
(19,182 |
) |
|
|
(12,215 |
) |
|
|
(5,199 |
) |
|
|
(624 |
) |
|
|
(2,244 |
) |
Provision for loan and lease losses |
|
|
20,605 |
|
|
|
21,841 |
|
|
|
13,026 |
|
|
|
1,803 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
30,331 |
|
|
$ |
28,908 |
|
|
$ |
19,282 |
|
|
$ |
11,455 |
|
|
$ |
10,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries to average loans |
|
|
(2.68 |
%) |
|
|
(1.80 |
%) |
|
|
(0.82 |
%) |
|
|
(0.10 |
%) |
|
|
(0.44 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance to total loans at year-end |
|
|
4.42 |
% |
|
|
4.13 |
% |
|
|
2.99 |
% |
|
|
1.90 |
% |
|
|
1.87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
Analysis of the Allowance for Loan and Lease Losses by Loan Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
Percent of |
|
|
|
|
|
Percent of |
|
|
|
|
|
Percent of |
|
|
|
|
|
Percent of |
|
|
|
|
|
Percent of |
|
|
|
|
|
|
outstanding |
|
|
|
|
|
outstanding |
|
|
|
|
|
outstanding |
|
|
|
|
|
outstanding |
|
|
|
|
|
outstanding |
|
|
|
|
|
|
loans in each |
|
|
|
|
|
loans in each |
|
|
|
|
|
loans in each |
|
|
|
|
|
loans in each |
|
|
|
|
|
loans in each |
|
|
Reserve |
|
category to |
|
Reserve |
|
category to |
|
Reserve |
|
category to |
|
Reserve |
|
category to |
|
Reserve |
|
category to |
(In thousands, except percentages) |
|
Amount |
|
total loans |
|
Amount |
|
total loans |
|
Amount |
|
total loans |
|
Amount |
|
total loans |
|
Amount |
|
total loans |
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
6,542 |
|
|
|
15.1 |
% |
|
$ |
2,403 |
|
|
|
12.3 |
% |
|
$ |
2,124 |
|
|
|
12.0 |
% |
|
$ |
559 |
|
|
|
7.0 |
% |
|
$ |
494 |
|
|
|
5.0 |
% |
Construction |
|
|
4,713 |
|
|
|
7.6 |
% |
|
|
11,548 |
|
|
|
23.8 |
% |
|
|
7,674 |
|
|
|
14.4 |
% |
|
|
4,117 |
|
|
|
29.0 |
% |
|
|
3,230 |
|
|
|
31.0 |
% |
Land development (1) |
|
|
3,182 |
|
|
|
9.7 |
% |
|
|
2,359 |
|
|
|
10.6 |
% |
|
|
|
|
|
|
12.2 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
Construction and land development -
mezzanine |
|
|
|
|
|
|
0.0 |
% |
|
|
1,415 |
|
|
|
0.3 |
% |
|
|
2,493 |
|
|
|
1.0 |
% |
|
|
409 |
|
|
|
1.0 |
% |
|
|
167 |
|
|
|
1.0 |
% |
Real Estate residential |
|
|
2,762 |
|
|
|
7.1 |
% |
|
|
747 |
|
|
|
3.9 |
% |
|
|
1,014 |
|
|
|
6.5 |
% |
|
|
845 |
|
|
|
7.0 |
% |
|
|
925 |
|
|
|
8.0 |
% |
Real Estate residential mezzanine |
|
|
1,000 |
|
|
|
0.4 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
Real Estate non-residential |
|
|
9,824 |
|
|
|
40.3 |
% |
|
|
5,172 |
|
|
|
33.4 |
% |
|
|
4,746 |
|
|
|
40.5 |
% |
|
|
4,941 |
|
|
|
46.0 |
% |
|
|
4,758 |
|
|
|
41.0 |
% |
Real Estate non-residential -
mezzanine |
|
|
|
|
|
|
0.0 |
% |
|
|
1,188 |
|
|
|
0.6 |
% |
|
|
204 |
|
|
|
1.4 |
% |
|
|
224 |
|
|
|
1.0 |
% |
|
|
374 |
|
|
|
1.0 |
% |
Real Estate multi-family |
|
|
215 |
|
|
|
3.2 |
% |
|
|
133 |
|
|
|
2.0 |
% |
|
|
59 |
|
|
|
1.1 |
% |
|
|
36 |
|
|
|
1.0 |
% |
|
|
145 |
|
|
|
4.0 |
% |
Real Estate multi-family mezzanine |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
6 |
|
|
|
0.5 |
% |
|
|
20 |
|
|
|
1.0 |
% |
|
|
132 |
|
|
|
1.0 |
% |
Tax certificates |
|
|
290 |
|
|
|
10.6 |
% |
|
|
2,735 |
|
|
|
9.1 |
% |
|
|
185 |
|
|
|
7.1 |
% |
|
|
|
|
|
|
5.0 |
% |
|
|
|
|
|
|
6.0 |
% |
Lease financing |
|
|
1,757 |
|
|
|
5.7 |
% |
|
|
1,183 |
|
|
|
3.7 |
% |
|
|
763 |
|
|
|
3.1 |
% |
|
|
293 |
|
|
|
2.0 |
% |
|
|
75 |
|
|
|
1.0 |
% |
Other |
|
|
25 |
|
|
|
0.3 |
% |
|
|
15 |
|
|
|
0.2 |
% |
|
|
14 |
|
|
|
0.2 |
% |
|
|
11 |
|
|
|
0.0 |
% |
|
|
41 |
|
|
|
1.0 |
% |
Unallocated |
|
|
21 |
|
|
|
0.0 |
% |
|
|
10 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
(65 |
) |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
30,331 |
|
|
|
100.0 |
% |
|
$ |
28,908 |
|
|
|
100.0 |
% |
|
$ |
19,282 |
|
|
|
100.0 |
% |
|
$ |
11,455 |
|
|
|
100.0 |
% |
|
$ |
10,276 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Beginning in 2008, the Company began segregating land development loans from the rest of
the loan portfolio. |
The amount of the allowance is reviewed and approved by the Chief Operating Officer (COO), Chief
Financial Officer (CFO) and the Chief Accounting Officer (CAO) on at least a quarterly basis.
The provision for loan and lease losses was $20.6 million in 2009 compared to $21.8 million in
2008. The 2009 provision was the result of $11.0 million in required specific reserves based on
the Companys impairment analysis in accordance with ASC Topic 310 and net charge-offs of $19.2
million recorded in 2009. The remaining 2009 provision was based on the formula allowance
reflecting historical losses, as adjusted by loan category and additional provision related to new
loans. The historical loss calculation of the formula component of the allowance for loan and
lease losses has been specifically impacted by the recent charge-off history of the Company. The
deteriorating real estate market that continued from 2008 into 2009 has negatively impacted
construction and real estate loans throughout the banking industry. This weak sales market has
affected land development, construction and mezzanine loans of the Company. The Company has
considered these economic conditions in its methodologies used in setting the allowance for loan
and lease losses. Construction and land loans, non-residential and residential real estate loans
represent 33%, 27% and 20%, respectively of the $73.7 million in non-accrual loans at December 31,
2009. Total charge-offs recorded in 2009 related to construction and land development loans and
non-residential real estate loans were $17.5 million, or 88%, of total charge-offs in 2009.
The provision for loan and lease losses was $21.8 million in 2008 compared to $13.0 million in
2007. The increase in the provision was the result of an $8.3 million increase in the specific
reserve based on the Companys impairment analysis. The increase in the provision for loan and
lease losses during 2008 is a reflection of the deteriorating real estate market that continued
from 2007 into 2008. It has caused housing sales to slow and has negatively impacted construction
loans throughout the banking industry. This weak sales market has affected land development,
construction and mezzanine loans of the Company. Consequently, non-accrual loans increased $60.4
million from $25.4 million at December 31, 2007 to $85.8 million at December 31, 2008.
Construction, commercial and non-residential real estate loans represented 64%, 14% and 11%, of the
total December 31, 2008 non-accrual loans, respectively. The downturn in the real estate market is
also reflected in the charge-offs of construction and land development loans and construction and
land development mezzanine loans. These two loan categories represented $6.5 million, or 53%, of
total charge-offs in 2008.
The provision for loan and lease losses was $13.0 million in 2007. During 2007 the Company recorded
$7.8 million in specific reserves based on the Companys calculation of potential losses in
individual impaired loans. The
remaining 2007 provision of $5.2 million was the formula allowance reflecting historical losses, as
adjusted by credit category. The 2007 provision for loan and lease losses reflected the impact of
deteriorating economic conditions as it pertained to real estate related loans. Non-accrual loans
were $25.4 million at December 31, 2007.
45
Construction loans and non-residential real estate loans
represented 69% and 25% of the total December 31, 2007 non-accrual loans, respectively. The
downturn in the real estate market was also reflected in the charge-offs of construction and land
development loans and construction and land development mezzanine loans. These two loan categories
represented $4.0 million, or 73%, of total charge-offs in 2007.
Management believes that the allowance for loan and lease loss at December 31, 2009 is adequate.
However, its determination requires significant judgment, and estimates of probable losses inherent
in the credit portfolio can vary significantly from the amounts actually observed. While management
uses available information to recognize probable losses, future changes to the allowance may be
necessary based on changes in the credits comprising the portfolio and changes in the financial
condition of borrowers, such as may result from changes in economic conditions. In addition,
regulatory agencies, as an integral part of their examination process, periodically review the
credit portfolio and the allowance. Such review may result in additional provisions based on their
judgment of information available at the time of each examination. During 2009, there were changes
in assumptions that affected the allowance. These changes included increasing the risk factors as a
result of deteriorating economic conditions on both a local and national level as it pertains to
construction and land development loans, non-residential real estate loans and single family
residential loans. The Company also increased the risk factors associated with the rise in the
trends in delinquencies of both construction and real estate loans.
Deposits: The Companys deposits are an important source of funding. Total deposits of
$881.8 million at December 31, 2009 increased $121.7 million, or 16.0%, from $760.1 million at
December 31, 2008. The increase occurred in time deposit accounts, money market accounts and
demand deposits, which were modestly offset by a decline in brokered deposits. Time deposit
accounts of $382.2 million at December 31, 2009 increased $100.2 million, or 36%, from $282.0
million at December 31, 2008 to due to a successful marketing campaign in the second quarter to
enhance liquidity and provide the future opportunity to pay down maturing brokered deposits and
FHLB advances. Money market accounts of $168.9 million increased $23.5 million, or 16%, mainly
due to the increased desire of customers to shift money to liquid accounts in the event of rising
interest rates in the near future. Demand deposits increased $12.3 million, or 24%, which was
primarily due to increased small business lending. Brokered deposits of $206.9 million at December
31, 2009 declined $11.3 million, or 5%, from year end 2008 as the Company paid off all maturing
brokered deposits during the second half of 2009 as required under the Orders.
FHLB Borrowings: Borrowings consist of long-term borrowings (advances) and short-term
borrowings (overnight borrowings, advances). Total FHLB borrowings, which include $22.0 million in
overnight borrowings, declined from $230.6 million at year end 2008 to $209.5 million at December
31, 2009 due to pay downs of maturing advances. Short term borrowings amounted to $114.5 million at
December 31, 2009 versus $37.0 million at December 31, 2008 while long term advances for the
periods ending December 31, 2009 and 2008 were $95.0 million and $193.6 million, respectively. The
shift in the long term advances to short term borrowings mostly reflected the term of the
maturities at year end 2009 versus 2008.
Other Borrowings: During 2004, the Company completed a private placement of trust
preferred securities in the aggregate amount of $25.0 million for a term of 30 years with a call
feature of 5 years. These securities were eligible to be called in October 2009 by the Company.
The maturity date of these securities is October 2034. On August 13, 2009, the Companys Board of
Directors determined to suspend interest payments on the trust preferred securities. The Companys
Board of Directors took this action in consultation with the Federal Reserve Bank of Philadelphia
as required by recent regulatory policy guidance. The Company currently has sufficient capital and
liquidity to pay the scheduled interest payments; however, the Company believes this decision will
better support the capital position of Royal Bank, a wholly owned subsidiary of the Company. As of
December 31, 2009 the trust preferred interest payment in arrears was $529,000 and has been
recorded in interest expense and accrued interest payable.
During 2006, the Company entered into a borrowing relationship with PNC Bank in the amount of $5.6
million, which amounted to $4.7 million at December 31, 2009, due to monthly payments. During
2008, the Company increased the borrowings outstanding with PNC by $40.0 million. These repurchase
agreements are callable between 2011 and 2013 and have a final maturity date of January 7, 2018.
In addition, the Company consolidated
into its statement of condition $3.7 million of debt related to a real estate equity investment of
which none is guaranteed by the Company.
46
Other Liabilities: At December 31, 2009, other liabilities of $16.9 million increased $2.9
million from December 31, 2008. This was principally due to an increase of $1.3 million related to
unfunded pension plan obligations and increased accruals of $1.2 million for unpaid expenses,
mainly FDIC insurance.
Shareholders Equity: Shareholders equity increased $21.5 million, or 27%, in 2009 to
$101.2 million primarily due to the Company receiving on February 20, 2009, approximately $30.4
million via the issuance of preferred stock under the Treasurys TARP CPP program and a reduction
in accumulated other comprehensive loss of $24.5 million, which was partially offset by net losses
of $33.3 million. The significant reduction in accumulated other comprehensive loss occurred mainly
in the second half of 2009 due to improvements in valuations in both the bond and stock markets
that positively impacted the investment portfolio.
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 ALCO Policy 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.
The Company generally targets liquidity ratios equal to or greater than 12% and 10% of total
deposits and total liabilities, respectively, effective in 2009. The liquidity ratios are
specifically defined as the ratio of net cash, available FHLB and other lines of credit, and
unpledged marketable securities relative to both total deposits and total liabilities. At December
31, 2009, liquidity as a percent of deposits was 33% and liquidity as a percent of total
liabilities was 24%. For the years ended December 31, 2008 and 2007, the liquidity was measured
against the combined total of net deposits and short-term liabilities and the liquidity ratio
amounted to 27% and 38%, respectively. Management believes that the Companys liquidity position
continues to be adequate 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.
Our funding decisions can be influenced by unplanned events, which include, but are not limited to,
the inability to fund asset growth, difficulty renewing or replacing funds that mature, the ability
to maintain or draw down lines of credit with other financial institutions, significant customer
withdrawals of deposits, and market disruptions. In 2010, FHLB notified Royal Bank that they were
being placed on overcollateralization status with a 105% pledged collateral requirement. The
available amount for future borrowings will be based on the amount of collateral to be pledged. We
have a liquidity contingency plan in the event liquidity falls below an acceptable level, however
in todays economic environment, events could arise that may render sources of liquid funds
unavailable in the future when required. During the second quarter of 2009, the Company established
a liquidity committee that meets monthly to increase the oversight role of liquidity management
during this recessionary economy.
47
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, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009 |
|
|
|
|
|
|
|
Less than one |
|
|
One to three |
|
|
Four to five |
|
|
More than five |
|
(In thousands) |
|
Total |
|
|
year |
|
|
years |
|
|
years |
|
|
years |
|
FHLB advances |
|
$ |
209,501 |
|
|
$ |
114,500 |
|
|
$ |
45,001 |
|
|
$ |
50,000 |
|
|
$ |
|
|
Operating leases |
|
|
3,315 |
|
|
|
1,088 |
|
|
|
1,494 |
|
|
|
616 |
|
|
|
117 |
|
PNC Bank |
|
|
44,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,674 |
|
Benefit obligations |
|
|
8,672 |
|
|
|
510 |
|
|
|
1,208 |
|
|
|
1,324 |
|
|
|
5,630 |
|
Commitments to extend credit |
|
|
1,630 |
|
|
|
1,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit |
|
|
3,477 |
|
|
|
3,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt |
|
|
25,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,774 |
|
Non-interest bearing deposits |
|
|
63,168 |
|
|
|
63,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits |
|
|
229,477 |
|
|
|
94,916 |
|
|
|
134,561 |
|
|
|
|
|
|
|
|
|
Time deposits |
|
|
589,110 |
|
|
|
392,219 |
|
|
|
181,564 |
|
|
|
9,879 |
|
|
|
5,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,178,798 |
|
|
$ |
671,508 |
|
|
$ |
363,828 |
|
|
$ |
61,819 |
|
|
$ |
81,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Rate Sensitivity: Interest rate sensitivity is a function of the repricing
characteristics of the financial institutions 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 rate 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, 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 re-pricing intervals for interest earning assets and interest
bearing liabilities as of December 31, 2009, 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,
2009, the Company is in a slightly asset sensitive position of $2.4 million, which indicates that
within one year the repricing of assets is slightly sooner than the repricing of liabilities.
Interest Rate Swaps: For asset/liability management purposes, the Company uses interest
rate swaps which are agreements between the Company and another party (known as counterparty) where
one stream of future interest payments is exchanged for another based on a specified principal
amount (known as notional amount). The Company will use interest rate swaps 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, are 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.
The Company had utilized 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 and investments as well
as convert a portion of variable rate borrowings (cash flow hedge) to fund fixed rate loans.
Interest rate swap contracts represent a series of interest flows exchanged over a prescribed
period. Each quarter the Company used the Volatility Reduction Measure (VRM) to determine the
effectiveness of their fair value hedges.
48
As a consequence of the 2008 third quarter Lehman bankruptcy filing, the swap agreements and cash
flow hedge that existed at the end of the 2008 second quarter were terminated. The Company had an
agency mortgage-backed security (approximately $5.0 million) that was pledged as collateral at
Lehman for our swap agreements. In October 2008, the Company sued Lehman Brothers Special
Financing, Inc. (LBSF) to recover possession of its collateral. The Company intends to continue
to vigorously pursue return of the collateral pledged in connection with the interest rate swap.
Because of the uncertainty surrounding the litigation and the bankruptcy of Lehman, the Company
classified the collateral as other-than-temporarily impaired as of December 31, 2008.
Interest Rate Sensitivity
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009 |
|
|
|
|
|
|
91 365 |
|
One to five |
|
Over five |
|
Non-rate |
|
|
(In millions) |
|
0 90 days |
|
days |
|
years |
|
years |
|
sensitive |
|
Total |
|
|
|
Assets (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits in banks |
|
$ |
33.0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
25.3 |
|
|
$ |
58.3 |
|
Federal funds sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities |
|
|
70.4 |
|
|
|
65.8 |
|
|
|
197.2 |
|
|
|
105.5 |
|
|
|
(0.2 |
) |
|
|
438.7 |
|
Loans: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
|
23.2 |
|
|
|
64.4 |
|
|
|
173.0 |
|
|
|
29.2 |
|
|
|
|
|
|
|
289.8 |
|
Variable rate |
|
|
299.3 |
|
|
|
65.4 |
|
|
|
34.6 |
|
|
|
|
|
|
|
(30.3 |
) |
|
|
369.0 |
|
|
|
|
Total loans |
|
|
322.5 |
|
|
|
129.8 |
|
|
|
207.6 |
|
|
|
29.2 |
|
|
|
(30.3 |
) |
|
|
658.8 |
|
Other assets (3) |
|
|
|
|
|
|
19.3 |
|
|
|
|
|
|
|
|
|
|
|
117.6 |
|
|
|
136.9 |
|
|
|
|
Total Assets |
|
$ |
425.9 |
|
|
$ |
214.9 |
|
|
$ |
404.8 |
|
|
$ |
134.7 |
|
|
$ |
112.4 |
|
|
$ |
1,292.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest bearing deposits |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
63.2 |
|
|
$ |
63.2 |
|
Interest bearing deposits |
|
|
19.7 |
|
|
|
75.2 |
|
|
|
134.6 |
|
|
|
|
|
|
|
|
|
|
|
229.5 |
|
Certificate of deposits |
|
|
89.8 |
|
|
|
302.4 |
|
|
|
191.4 |
|
|
|
5.5 |
|
|
|
|
|
|
|
589.1 |
|
|
|
|
Total deposits |
|
|
109.5 |
|
|
|
377.6 |
|
|
|
326.0 |
|
|
|
5.5 |
|
|
|
63.2 |
|
|
|
881.8 |
|
Borrowings (1) |
|
|
54.0 |
|
|
|
97.3 |
|
|
|
128.7 |
|
|
|
|
|
|
|
3.7 |
|
|
|
283.7 |
|
Other liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.9 |
|
|
|
22.9 |
|
Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104.3 |
|
|
|
104.3 |
|
|
|
|
Total liabilities & capital |
|
$ |
163.5 |
|
|
$ |
474.9 |
|
|
$ |
454.7 |
|
|
$ |
5.5 |
|
|
$ |
194.1 |
|
|
$ |
1,292.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate GAP |
|
$ |
262.4 |
|
|
$ |
(260.0 |
) |
|
$ |
(49.9 |
) |
|
$ |
129.2 |
|
|
$ |
(81.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest rate GAP |
|
$ |
262.4 |
|
|
$ |
2.4 |
|
|
$ |
(47.5 |
) |
|
$ |
81.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAP to total assets |
|
|
20 |
% |
|
|
(20 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAP to total equity |
|
|
252 |
% |
|
|
(249 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative GAP to total assets |
|
|
20 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative GAP to total equity |
|
|
252 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 non-performing loans. |
|
(3) |
|
Includes FHLB stock. |
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.
49
The interest rates on certain assets and liabilities
may change at different times than changes in market interest rates, with some changes 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 below sets forth the Companys and the Banks capital ratios and the Companys
performance ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
Company |
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratio |
|
|
9.8 |
% |
|
|
10.3 |
% |
|
|
13.6 |
% |
Risk based capital ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 |
|
|
14.2 |
% |
|
|
11.8 |
% |
|
|
17.0 |
% |
Total |
|
|
15.5 |
% |
|
|
13.0 |
% |
|
|
18.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Royal Bank |
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratio |
|
|
8.1 |
% |
|
|
7.8 |
% |
|
|
10.2 |
% |
Risk based capital ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 |
|
|
12.1 |
% |
|
|
9.0 |
% |
|
|
13.2 |
% |
Total |
|
|
13.4 |
% |
|
|
10.3 |
% |
|
|
14.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Royal Asian |
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratio |
|
|
12.5 |
% |
|
|
14.0 |
% |
|
|
15.7 |
% |
Risk based capital ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 |
|
|
15.7 |
% |
|
|
17.4 |
% |
|
|
20.2 |
% |
Total |
|
|
17.0 |
% |
|
|
18.7 |
% |
|
|
21.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital performance |
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
(2.57 |
%) |
|
|
(3.20 |
%) |
|
|
0.04 |
% |
Return on average equity |
|
|
(30.94 |
%) |
|
|
(29.04 |
%) |
|
|
0.36 |
% |
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, 2009, the Company 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%.
At December 31, 2009, the Company met the regulatory minimum capital requirements, and management
believes that, under current regulations, the Company will continue to meet its minimum capital
requirements in the foreseeable future. At December 31, 2009, both Royal Bank and Royal Asian met
the criteria for a well capitalized institution which is a leverage ratio of 5%, a Tier 1 ratio of
8%, and a total capital ratio of 10%. Under the Orders as described in Regulatory Action under
Item 1 Business in this Report, Royal Bank is required to maintain a minimum Tier 1 leverage
ratio of 8% and a Total risk-based capital ratio of 12% during the term of the Orders. Royal Bank
met those requirements at December 31, 2009. See Note 14 Regulatory Capital Requirements of
the Notes to Consolidated Financial Statements in Item 8 of this Report.
On February 20, 2009, as part of the Capital Purchase Program (CPP) established by the United
States Department of Treasury (Treasury), the Company issued to Treasury 30,407 shares of the
Companys Fixed Rate Cumulative
Perpetual Preferred Stock, Series A, without par value per share (the Series A Preferred Stock),
and a liquidation preference of $1,000 per share. In conjunction with the purchase of the Series A
Preferred Stock, Treasury received a warrant to purchase 1,104,370 shares of the Companys Class A
common stock. The aggregate purchase price for the Series A Preferred Stock and Warrant was $30.4
million in cash. The Series A Preferred Stock qualifies as Tier
50
1 capital and pays cumulative
dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The
Series A Preferred Stock may generally be redeemed by the Company at any time following
consultation with its primary banking regulators. The warrant issued to Treasury has a 10-year
term and is immediately exercisable upon its issuance, with an exercise price, subject to
anti-dilution adjustments, equal to $4.13 per share of the common stock.
Management Options to Purchase Securities
The 2007 Long-Term Incentive Plan was approved by Shareholders at the May 16, 2007 Annual Meeting.
All employees and non-employee directors of the Company and its designated subsidiaries are
eligible participants. The plan includes 1,000,000 shares of Class A common stock (of which 250,000
shares may be issued as restricted stock), subject to customary anti-dilution adjustments, or
approximately 9.0% of total outstanding shares of the Class A common stock. As of December 31,
2009, 191,072 shares from this plan have been 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. The restricted stock
is granted with an estimated fair value equal to the market value of the Company closing stock
price on the date of the grant. Restricted stock will vest three years from the grant date, if the
Company achieves specific goals set by the Compensation Committee and approved by the Board of
Directors. These goals include a three year average return on assets compared to peers, a three
year average return on equity compared to peers and a minimum return on both assets and equity over
the three year period.
In May 2001, the directors of the Company 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 re-approved 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 1,800,000 shares of the Companys Class A
common stock (but not in excess of 19% of outstanding shares). In May 2006, the shareholders
approved an increase of the number of shares of Class A Common Stock available for issuance under
the Plan by 150,000 to 1,800,000 and extended the plan for an additional year 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, 2009, 401,626 of the options that have been granted are outstanding, which are exercisable at
20% per year. At December 31, 2009, options covering 357,737 shares were exercisable. The ability
to grant new options under this plan has expired.
In May 2001, the directors of the Company approved an amended non-qualified Outside Directors
Stock Option Plan. The shareholders in connection with the formation of the Holding Company
re-approved 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 are granted at the fair
market value at the date of the grant. At December 31, 2009, 90,197 of the options that have been
granted are outstanding, and all are exercisable. The ability to grant new options under this plan
has expired.
Loans
The following table reflects the composition of the loan portfolio and the percent of gross loans
outstanding represented by each category at the dates indicated.
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(Dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Commercial and industrial |
|
$ |
104,063 |
|
|
|
15.1 |
% |
|
$ |
86,278 |
|
|
|
12.3 |
% |
|
$ |
77,856 |
|
|
|
12.1 |
% |
|
$ |
43,019 |
|
|
|
7.2 |
% |
|
$ |
30,075 |
|
|
|
5.5 |
% |
Construction |
|
|
52,196 |
|
|
|
7.6 |
% |
|
|
167,204 |
|
|
|
23.8 |
% |
|
|
92,779 |
|
|
|
14.4 |
% |
|
|
172,745 |
|
|
|
29.1 |
% |
|
|
173,757 |
|
|
|
31.5 |
% |
Construction and land development -
mezzanine |
|
|
|
|
|
|
0.0 |
% |
|
|
2,421 |
|
|
|
0.3 |
% |
|
|
6,443 |
|
|
|
1.0 |
% |
|
|
5,177 |
|
|
|
0.9 |
% |
|
|
3,345 |
|
|
|
0.6 |
% |
Land development (1) |
|
|
66,878 |
|
|
|
9.7 |
% |
|
|
74,168 |
|
|
|
10.6 |
% |
|
|
78,874 |
|
|
|
12.2 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
Real Estate residential |
|
|
48,498 |
|
|
|
7.1 |
% |
|
|
27,480 |
|
|
|
3.9 |
% |
|
|
42,286 |
|
|
|
6.5 |
% |
|
|
43,338 |
|
|
|
7.3 |
% |
|
|
41,900 |
|
|
|
7.6 |
% |
Real Estate non-residential |
|
|
277,234 |
|
|
|
40.3 |
% |
|
|
234,573 |
|
|
|
33.4 |
% |
|
|
261,350 |
|
|
|
40.5 |
% |
|
|
268,162 |
|
|
|
45.2 |
% |
|
|
228,222 |
|
|
|
41.4 |
% |
Real Estate non-residential -
mezzanine |
|
|
|
|
|
|
0.0 |
% |
|
|
4,111 |
|
|
|
0.6 |
% |
|
|
8,749 |
|
|
|
1.4 |
% |
|
|
8,283 |
|
|
|
1.4 |
% |
|
|
7,477 |
|
|
|
1.4 |
% |
Real Estate multi-family |
|
|
22,017 |
|
|
|
3.2 |
% |
|
|
14,059 |
|
|
|
2.0 |
% |
|
|
6,887 |
|
|
|
1.1 |
% |
|
|
3,953 |
|
|
|
0.7 |
% |
|
|
22,158 |
|
|
|
4.0 |
% |
Real Estate residential mezzanine |
|
|
2,480 |
|
|
|
0.4 |
% |
|
|
335 |
|
|
|
0.0 |
% |
|
|
3,504 |
|
|
|
0.5 |
% |
|
|
2,129 |
|
|
|
0.4 |
% |
|
|
2,646 |
|
|
|
0.5 |
% |
Tax certificates |
|
|
73,106 |
|
|
|
10.6 |
% |
|
|
64,168 |
|
|
|
9.1 |
% |
|
|
46,090 |
|
|
|
7.1 |
% |
|
|
32,235 |
|
|
|
5.4 |
% |
|
|
35,548 |
|
|
|
6.4 |
% |
Lease financing |
|
|
39,097 |
|
|
|
5.7 |
% |
|
|
26,123 |
|
|
|
3.7 |
% |
|
|
19,778 |
|
|
|
3.1 |
% |
|
|
13,404 |
|
|
|
2.3 |
% |
|
|
2,623 |
|
|
|
0.5 |
% |
Other |
|
|
2,173 |
|
|
|
0.3 |
% |
|
|
1,243 |
|
|
|
0.2 |
% |
|
|
1,424 |
|
|
|
0.2 |
% |
|
|
1,333 |
|
|
|
0.2 |
% |
|
|
3,868 |
|
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total gross loans |
|
$ |
687,742 |
|
|
|
100 |
% |
|
$ |
702,163 |
|
|
|
100 |
% |
|
$ |
646,020 |
|
|
|
100 |
% |
|
$ |
593,778 |
|
|
|
100 |
% |
|
$ |
551,619 |
|
|
|
100 |
% |
Unearned income |
|
|
(878 |
) |
|
|
|
|
|
|
(1,441 |
) |
|
|
|
|
|
|
(1,545 |
) |
|
|
|
|
|
|
(1,564 |
) |
|
|
|
|
|
|
(1,983 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
686,864 |
|
|
|
|
|
|
$ |
700,722 |
|
|
|
|
|
|
$ |
644,475 |
|
|
|
|
|
|
$ |
592,214 |
|
|
|
|
|
|
$ |
549,636 |
|
|
|
|
|
Allowance for loan loss |
|
|
(30,331 |
) |
|
|
|
|
|
|
(28,908 |
) |
|
|
|
|
|
|
(19,282 |
) |
|
|
|
|
|
|
(11,455 |
) |
|
|
|
|
|
|
(10,276 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net loans |
|
$ |
656,533 |
|
|
|
|
|
|
$ |
671,814 |
|
|
|
|
|
|
$ |
625,193 |
|
|
|
|
|
|
$ |
580,759 |
|
|
|
|
|
|
$ |
539,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Land development balances were segregated only from construction and land development for
2009, 2008, and 2007. |
Credit Quality
The following table presents the principal amounts of non-accrual loans and other real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
(Dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Non-accrual loans (1) |
|
$ |
73,679 |
|
|
$ |
85,830 |
|
|
$ |
25,401 |
|
|
$ |
6,748 |
|
|
$ |
4,371 |
|
Other real estate owned |
|
|
30,317 |
|
|
|
10,346 |
|
|
|
1,048 |
|
|
|
924 |
|
|
|
3,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets |
|
$ |
103,996 |
|
|
$ |
96,176 |
|
|
$ |
26,449 |
|
|
$ |
7,672 |
|
|
$ |
8,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets to total assets |
|
|
8.04 |
% |
|
|
8.18 |
% |
|
|
2.07 |
% |
|
|
0.57 |
% |
|
|
0.63 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans |
|
|
10.73 |
% |
|
|
12.25 |
% |
|
|
3.94 |
% |
|
|
1.14 |
% |
|
|
0.79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss to non-accrual loans |
|
|
41.17 |
% |
|
|
33.68 |
% |
|
|
75.91 |
% |
|
|
169.75 |
% |
|
|
235.09 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans |
|
|
686,864 |
|
|
|
700,722 |
|
|
|
644,475 |
|
|
|
|
|
|
|
|
|
Total Assets |
|
|
1,292,726 |
|
|
|
1,175,586 |
|
|
|
1,278,475 |
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses |
|
|
30,331 |
|
|
|
28,908 |
|
|
|
19,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALL / Loans & Leases (MD & A) |
|
|
4.42 |
% |
|
|
4.13 |
% |
|
|
2.99 |
% |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Generally, a loan is placed in non-accrual 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. |
52
Non-accrual loan activity for each of the four quarters in 2009 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter Actvity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments and |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
other |
|
|
|
|
|
|
Transfer to |
|
|
Balance at |
|
(In thousands) |
|
December 31, 2008 |
|
|
Additions |
|
|
decreases |
|
|
Charge-offs |
|
|
OREO |
|
|
March 31, 2009 |
|
Construction |
|
$ |
41,485 |
|
|
$ |
4,966 |
|
|
$ |
(14,120 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
32,331 |
|
Land development |
|
|
11,044 |
|
|
|
4,442 |
|
|
|
(807 |
) |
|
|
(913 |
) |
|
|
(7,301 |
) |
|
|
6,465 |
|
Construction & land development -
mezzanine |
|
|
2,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,421 |
|
Real Estate-Non-Residential |
|
|
6,324 |
|
|
|
2,244 |
|
|
|
|
|
|
|
(1,035 |
) |
|
|
(1,930 |
) |
|
|
5,603 |
|
Real Estate-Non-Residential -
mezzanine |
|
|
3,612 |
|
|
|
|
|
|
|
|
|
|
|
(1,132 |
) |
|
|
|
|
|
|
2,480 |
|
Commercial & Industrial |
|
|
12,145 |
|
|
|
1,530 |
|
|
|
(412 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
13,248 |
|
Residential real estate |
|
|
1,472 |
|
|
|
210 |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
1,675 |
|
Leasing |
|
|
711 |
|
|
|
|
|
|
|
(33 |
) |
|
|
(153 |
) |
|
|
|
|
|
|
525 |
|
Tax certificates |
|
|
6,616 |
|
|
|
|
|
|
|
(95 |
) |
|
|
(1,221 |
) |
|
|
|
|
|
|
5,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
85,830 |
|
|
$ |
13,392 |
|
|
$ |
(15,474 |
) |
|
$ |
(4,469 |
) |
|
$ |
(9,231 |
) |
|
$ |
70,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2nd Quarter Actvity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments and |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
other |
|
|
|
|
|
|
Transfer to |
|
|
Balance at |
|
(In thousands) |
|
March 31, 2009 |
|
|
Additions |
|
|
decreases |
|
|
Charge-offs |
|
|
OREO |
|
|
June 30, 2009 |
|
Construction |
|
$ |
32,331 |
|
|
$ |
179 |
|
|
$ |
(1,509 |
) |
|
$ |
(4,357 |
) |
|
$ |
(7,551 |
) |
|
$ |
19,093 |
|
Land development |
|
|
6,465 |
|
|
|
9,882 |
|
|
|
(1,471 |
) |
|
|
(426 |
) |
|
|
(402 |
) |
|
|
14,048 |
|
Construction & land development -
mezzanine |
|
|
2,421 |
|
|
|
335 |
|
|
|
|
|
|
|
(298 |
) |
|
|
|
|
|
|
2,458 |
|
Real Estate-Non-Residential |
|
|
5,603 |
|
|
|
12,986 |
|
|
|
(2,355 |
) |
|
|
(228 |
) |
|
|
|
|
|
|
16,006 |
|
Real Estate-Non-Residential -
mezzanine |
|
|
2,480 |
|
|
|
498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,978 |
|
Commercial & Industrial |
|
|
13,248 |
|
|
|
9,706 |
|
|
|
(273 |
) |
|
|
(239 |
) |
|
|
|
|
|
|
22,442 |
|
Residential real estate |
|
|
1,675 |
|
|
|
1,244 |
|
|
|
(143 |
) |
|
|
(153 |
) |
|
|
|
|
|
|
2,623 |
|
Residential real estate mezzanine |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasing |
|
|
525 |
|
|
|
381 |
|
|
|
|
|
|
|
(157 |
) |
|
|
|
|
|
|
749 |
|
Tax certificates |
|
|
5,300 |
|
|
|
11 |
|
|
|
(94 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
5,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
70,048 |
|
|
$ |
35,222 |
|
|
$ |
(5,845 |
) |
|
$ |
(5,869 |
) |
|
$ |
(7,953 |
) |
|
$ |
85,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3rd Quarter Actvity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
other |
|
|
|
|
|
|
|
|
|
|
Transfer to |
|
|
Balance at |
|
(In thousands) |
|
June 30, 2009 |
|
|
Additions |
|
|
decreases |
|
|
Reclassed |
|
|
Charge-offs |
|
|
OREO |
|
|
September 30, 2009 |
|
Construction |
|
$ |
19,093 |
|
|
$ |
11,496 |
|
|
$ |
(2,480 |
) |
|
$ |
(5,955 |
) |
|
$ |
(1,444 |
) |
|
$ |
(76 |
) |
|
$ |
20,634 |
|
Land development |
|
|
14,048 |
|
|
|
|
|
|
|
(1,483 |
) |
|
|
|
|
|
|
(380 |
) |
|
|
|
|
|
|
12,185 |
|
Construction & land development -
mezzanine |
|
|
2,458 |
|
|
|
|
|
|
|
|
|
|
|
2,480 |
|
|
|
(2,123 |
) |
|
|
|
|
|
|
2,815 |
|
Real Estate-Non-Residential |
|
|
16,006 |
|
|
|
1,990 |
|
|
|
(2,509 |
) |
|
|
|
|
|
|
(727 |
) |
|
|
(644 |
) |
|
|
14,116 |
|
Real Estate-Non-Residential -
mezzanine |
|
|
2,978 |
|
|
|
|
|
|
|
|
|
|
|
(2,480 |
) |
|
|
(498 |
) |
|
|
|
|
|
|
|
|
Commercial & Industrial |
|
|
22,442 |
|
|
|
76 |
|
|
|
(487 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,031 |
|
Residential real estate |
|
|
2,623 |
|
|
|
15 |
|
|
|
(231 |
) |
|
|
5,955 |
|
|
|
|
|
|
|
|
|
|
|
8,362 |
|
Leasing |
|
|
749 |
|
|
|
336 |
|
|
|
|
|
|
|
|
|
|
|
(157 |
) |
|
|
|
|
|
|
928 |
|
Tax certificates |
|
|
5,206 |
|
|
|
|
|
|
|
(454 |
) |
|
|
|
|
|
|
(1,827 |
) |
|
|
|
|
|
|
2,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
85,603 |
|
|
$ |
13,913 |
|
|
$ |
(7,644 |
) |
|
$ |
|
|
|
$ |
(7,156 |
) |
|
$ |
(720 |
) |
|
$ |
83,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4th Quarter Actvity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
other |
|
|
|
|
|
|
|
|
|
|
Transfer to |
|
|
Balance at |
|
(In thousands) |
|
September 30, 2009 |
|
|
Additions |
|
|
decreases |
|
|
Reclassed |
|
|
Charge-offs |
|
|
OREO |
|
|
December 31, 2009 |
|
Construction |
|
$ |
20,634 |
|
|
$ |
3,570 |
|
|
$ |
(575 |
) |
|
$ |
(4,901 |
) |
|
$ |
(50 |
) |
|
$ |
(362 |
) |
|
$ |
18,316 |
|
Land development |
|
|
12,185 |
|
|
|
|
|
|
|
(792 |
) |
|
|
|
|
|
|
|
|
|
|
(5,485 |
) |
|
|
5,908 |
|
Construction & land development
mezzanine |
|
|
2,815 |
|
|
|
|
|
|
|
|
|
|
|
(2,480 |
) |
|
|
(335 |
) |
|
|
|
|
|
|
|
|
Real Estate-Non-Residential |
|
|
14,116 |
|
|
|
2,508 |
|
|
|
(395 |
) |
|
|
3,871 |
|
|
|
(516 |
) |
|
|
|
|
|
|
19,584 |
|
Real Estate-Non-Residential
mezzanine |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial |
|
|
22,031 |
|
|
|
55 |
|
|
|
(10,578 |
) |
|
|
276 |
|
|
|
(5 |
) |
|
|
|
|
|
|
11,779 |
|
Residential real estate |
|
|
8,362 |
|
|
|
9,763 |
|
|
|
(1,122 |
) |
|
|
754 |
|
|
|
(1,208 |
) |
|
|
(4,104 |
) |
|
|
12,445 |
|
Residential real estate mezzanine |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,480 |
|
|
|
|
|
|
|
|
|
|
|
2,480 |
|
Leasing |
|
|
928 |
|
|
|
|
|
|
|
(77 |
) |
|
|
|
|
|
|
(224 |
) |
|
|
|
|
|
|
627 |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax certificates |
|
|
2,925 |
|
|
|
|
|
|
|
(385 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
83,996 |
|
|
$ |
15,896 |
|
|
$ |
(13,924 |
) |
|
$ |
|
|
|
$ |
(2,338 |
) |
|
$ |
(9,951 |
) |
|
$ |
73,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 non-accrual and impaired loans was $73.7 million compared to $85.8
million at December 31, 2008. The $12.1 million decline in non-accrual loans was the result of a
$42.9 million reduction in existing non-accrual loan balances through payments or loans becoming
current and placed back on accrual, $27.8 million transferred to other real estate owned, and $19.8
million in charge-offs which collectively were offset by $78.4 million in additions. The largest
increases in non-accrual loans (after reclassifications) occurred in non-residential and
residential real estate, which amounted to $8.3 million and 4.3 million, respectively. The largest
declines in non-accrual loans (after reclassifications) occurred in construction and land
development loans and tax certificates, which amounted to $19.9 million and $4.1 million,
respectively.
The following is a detail listing of the significant additions to non-accrual loans during 2009:
First Quarter 2009 new non-accrual loans:
|
|
A $2.5 million loan, in which the bank is a participant, became
non-accrual during the first quarter of 2009. The loan is
collateralized by a first lien Deed of Trust on two parcels comprising
141.59 acres in Highland, Howard County, Maryland. The land was
purchased in August, 2005. The original plan was to build 37 single
family lots averaging over 3 acres each under contract with a national
builder to take down these lots over a minimum of two years. The
contract with the builder has been amended five times. To date, there
have been only five lots taken down. The loan has been declared in
default and judgment confessed. A foreclosure action was commenced.
During the first quarter of 2009, an impairment analysis was performed
in accordance with ASC Topic 310 and the loan was deemed impaired. As
a result, a charge-off was recorded in the amount of $913,000. During
the second quarter of 2009, the lead bank negotiated the sale of the
loan which was scheduled to close in the third quarter. Accordingly
the loan has been transferred to loans and leases held for sale. An
additional charge-off of $416,000 was recorded in the second quarter
of 2009 which was based on the expected proceeds from the sale of the
loan. The sale of the loan was delayed due to the Office of Thrift
Supervision and the FDIC closing the lead bank in late August. The
sale of the loan was finally completed in the first quarter of 2010. |
|
|
|
Two loans in the aggregate amount of $4.8 million for a construction
project in Minneapolis, Minnesota, to renovate a historic building
into a luxury hotel and to construct 86 residential condominiums
connected to the hotel became non-accrual during the first quarter of
2009. The two loans are under a forbearance agreement. These loans
are loan participations in larger loans in the aggregate of $60.3
million. The hotel is fully operational and the construction of the
condominiums is complete. As of the date of this filing,
approximately 22% percent of the condominiums have been sold. An
impairment analysis performed in accordance with ASC Topic 310
indicated impairment. Consequently, the Company established a
specific reserve of $221,000 for these loans. |
|
|
|
A $1.9 million loan for a fully leased 100,000 square foot industrial
building and 1.5 acre parcel of land located in New Morgan,
Pennsylvania became non-accrual in the first quarter of 2009. The
loan was paid in full during the second quarter of 2009. |
54
|
|
One loan of RBA Capital in the amount of $1.5 million was related to
one borrower extending loans to third-party buyers of single family
residences in need of rehab work. During the first quarter of 2009,
the borrower failed to meet certain loan covenants and terms and the
loan was classified as impaired. RBA Capital has taken over
management of this portfolio and is in the process of working out the
underlying assets in the portfolio. The
independent valuations showed a portfolio value of over $2.0 million and the expectation is that
all of the principal and expenses will be recovered. |
Second Quarter 2009 new non-accrual loans:
|
|
A $9.2 million commercial participation loan became
non-accrual during the second quarter of 2009. The
borrower is located in Fort Lauderdale, Florida and
the loan is secured by aircraft. Current
appraisals of the aircraft indicated additional
impairment in accordance with ASC Topic 310. As a
result in the fourth quarter of 2009, the Company
increased the valuation allowance $2.9 million to
$4.0 million for this loan. The outstanding loan
balance at December 31, 2009 was $9.0 million. |
|
|
|
A $1.1 million loan on 5 condominium units located
in Philadelphia, Pennsylvania became non-accrual in
the second quarter of 2009. The loan was declared
in default and judgment confessed. During the
fourth quarter of 2009, the Company foreclosed on
the collateral for this loan. It was transferred to
OREO at cost or $1.0 million. |
|
|
|
A $5.3 million loan on a commercial building located
in Conshohocken, Pennsylvania became non-accrual in
the second quarter of 2009. The loan is secured by
a first mortgage on the property with assignment of
rents and leases and a $1.0 million life insurance
policy on the guarantor. The building is currently
100% leased. The Company is currently
working with the borrower to bring the loan current.
A current appraisal indicated impairment in
accordance with ASC Topic 310. Consequently, the
Company established a specific reserve of $1.2
million for this loan. As of December 31, 2009, the
outstanding loan balance was $5.1 million. |
|
|
|
A $1.9 million loan for a commercial building became
non-accrual in the second quarter of 2009. The loan
is secured by a second mortgage with assignment of
rents on a property located in Wayne, New Jersey.
The current appraisal and occupancy rate indicated
impairment in accordance with ASC Topic 310. As a
result, the Company established a valuation
allowance of $544,000 for this loan. The loan has
been declared in default and has been referred for
foreclosure. |
|
|
|
A $5.8 million land development loan comprised of a
$5.5 million loan and a $335,000 mezzanine loan
became non-accrual in the second quarter of 2009.
The loan is secured by a first mortgage on vacant
land in Brigantine, New Jersey. The site is
approved for nine single family lots. The borrower
is awaiting final approval to change the use to a
42-unit hotel condominium development. The Company
declared the loan in default and confessed judgment.
In the fourth quarter of 2009, the Company
foreclosed on the collateral for the loan. The
Company charged-off the $335,000 mezzanine loan and
transferred $5.5 million to OREO. |
|
|
|
A $1.2 million loan for a hotel became non-accrual
in the second quarter of 2009. The loan is secured
by first mortgages on a 12-unit hotel and a
commercial building in Philadelphia, Pennsylvania.
In July, the borrower brought the loan current and
agreed to list the property for sale. |
|
|
|
A $3.5 million loan for a commercial building became
non-accrual in the second quarter of 2009. The loan
is secured by a first mortgage on a commercial
building located in Jamaica, New York and a $500,000
life insurance policy on the guarantor. The loan
has been declared in default and foreclosure
commenced. As of December 31, 2009, the outstanding
loan balance was $3.3 million. |
|
|
|
A $4.6 million land development participation loan,
comprised of a $4.1 million loan and a $498,000
mezzanine loan, became non-accrual in the second
quarter of 2009. The project is a 114-unit
townhouse development located in Millville,
Delaware. Current appraisals did not indicate
impairment in accordance with ASC Topic 310. In the
third quarter, the Company charged-off the mezzanine
loan. At December 31, 2009 the balance of the loan
was $3.2 million. |
55
Third Quarter 2009 new non-accrual loans:
|
|
A $3.5 million construction project in Malvern,
Pennsylvania, in which the Company is a participant,
became non-accrual during the third quarter of 2009.
The aggregate loan balance at December 31, 2009 was
approximately $69.4 million. The loan provides financing of a 1.9MM sq. ft mixed use development
project. There is substantial pre-leasing of the project. However, plans for vertical take-out
construction financing have not materialized, the loan has matured and a satisfactory extension
has not been agreed upon. The loan has been declared in default and the lead bank is working
with the borrower on a forbearance agreement. A third quarter appraisal did not indicate
impairment in accordance with ASC Topic 310. |
|
|
|
An acquisition and development loan to develop a 133
unit age-restricted community in Richland Township,
Pennsylvania became non-accrual during the third
quarter of 2009. The borrower had contracted with a
national home builder to purchase the lots upon
completion of improvements under a take down
agreement. As the housing market began to
deteriorate, the national home builder pulled the
agreement and walked away from the project. As a
result, the Company approved a $2.0 million
construction loan to the borrower for the purpose of
constructing Townhomes and Quads on the lots
designated for the national home builder. The
current outstanding balance of the residential
construction loans is $7.8 million. The project to
date is in the process of going into a Forbearance
Agreement. A fourth quarter appraisal indicated
impairment in accordance with ASC Topic 310.
Consequently, the Company established a specific
reserve of $1.8 million for this loan. |
Fourth Quarter 2009 new non-accrual loans:
|
|
An acquisition and construction loan to build a
ten-story condominium building which will contain
two ground floor commercial spaces and eleven
residential condominium units became non-accrual
during the fourth quarter of 2009. The projected is
located in New York, New York. The building will be
a total of 17,713 square feet, with 14,672 of
sellable space. The project is currently
approximately 76% complete. The current principal
balance is $3.4 million. A current appraisal
indicated impairment in accordance with ASC Topic
310. Consequently, the Company established a
specific reserve of $663,000 for this loan. |
|
|
|
A construction loan to develop a 36-unit condominium
project located in Kill Devil Hills, North Carolina
became non-accrual during the fourth quarter of
2009. The Borrower has sold 1 unit to date with
numerous presale agreements falling through
primarily due to end-buyers inability to secure
mortgages. A default occurred in November 2009.
The Company initiated legal proceedings against the
Borrower and Guarantors in February 2010. Attempts
to negotiate an acceptable modification or
forbearance agreement have not yet been successful
although discussions are continuing simultaneously
to the Company pursuing its legal remedies. The
current outstanding principal balance is $16.3
million of which 50% has been sold to 3rd
party banks. Royal Bank is the lead bank. A current
appraisal indicated impairment in accordance with
ASC Topic 310. Consequently, the Company established
a specific reserve of $1.2 million for this loan. |
The Company identifies a loan as impaired when it is probable that interest and principal will not
be collected according to the contractual term of the loan agreement. The Company recognizes
income under the accrual basis when the principal payments on the loans become current and the
collateral on the loan is sufficient to cover the outstanding obligation to the Company. If these
factors do not exist, the Company does not recognize income.
The following is a summary of information pertaining to impaired loans and leases:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
Impaired loans and leases with a valuation allowance |
|
$ |
46,670 |
|
|
$ |
69,350 |
|
Impaired loans and leases without a valuation allowance |
|
|
27,009 |
|
|
|
16,480 |
|
|
|
|
|
|
|
|
Total impaired loans and leases |
|
$ |
73,679 |
|
|
$ |
85,830 |
|
|
|
|
|
|
|
|
Valuation allowance related to impaired loans and leases |
|
$ |
10,958 |
|
|
$ |
12,882 |
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
(In thousands) |
|
2009 |
|
2008 |
|
2007 |
Average investment in impaired loans and leases |
|
$ |
79,754 |
|
|
$ |
55,134 |
|
|
$ |
24,741 |
|
Interest income recognized on impaired loans and leases |
|
$ |
242 |
|
|
$ |
302 |
|
|
$ |
763 |
|
Interest income recognized on a cash basis
on impaired loans and leases |
|
$ |
242 |
|
|
$ |
302 |
|
|
$ |
763 |
|
Total cash collected on impaired loans and leases during 2009, 2008, and 2007 was $21.6 million,
$7.6 million, and $16.6 million, respectively, of which $21.3 million, $7.3 million, and $15.8
million was credited to the principal balance outstanding on such loans, respectively.
Potential problem loans are loans not currently classified as non-accrual loans that management has
doubt as to the borrowers ability to comply with present repayment terms. Potential problems
loans were $21.4 million at December 31, 2009. Most of these loans were past due 30 days but less
than 90 days.
The Company granted loans to the officers and directors of the Company and to their associates. In
accordance with Regulation O 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 collectability.
The aggregate dollar amount of these loans was $4.8 million and $4.3 million at December 31, 2009
and 2008. During 2009 there were two new loans approved totaling $650,000. Total payments
received on related party loans in 2009 were $160,000.
The Company classifies its leases as capital leases, in accordance to FASB ASC Topic 840, Leases.
The difference between the Companys gross investment in the lease and the cost or carrying amount
of the leased property, if different, is recorded as unearned income, which is amortized to income
over the lease term by the interest method.
The Companys policy for income recognition on restructured loans is to recognize income on
currently performing restructured loans under the accrual method. As of December 31, 2009, the
Company did not have any restructured loans.
The Company grants commercial and real estate loans, including construction and land development
primarily in the greater Philadelphia metropolitan area as well as selected locations throughout
the mid-Atlantic region. The Company also has participated with other financial institutions in
selected construction and land development loans outside these geographic areas. The Company has a
concentration of credit risk in commercial real estate, construction and land development loans at
December 31, 2009. A substantial portion of its debtors ability to honor these contracts is
dependent upon the housing sector specifically and the economy in general.
Other Real Estate Owned (OREO): OREO increased $20.0 million from $10.3 million at December 31,
2008 to $30.3 million at December 31, 2009. Set forth below is a table which details the changes
in OREO from December 31, 2008 to December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
(In thousands) |
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
Beginning balance |
|
$ |
10,346 |
|
|
$ |
20,244 |
|
|
$ |
29,310 |
|
|
$ |
25,611 |
|
Capital improvements |
|
|
711 |
|
|
|
1,626 |
|
|
|
94 |
|
|
|
|
|
Sales |
|
|
|
|
|
|
|
|
|
|
(2,958 |
) |
|
|
(3,625 |
) |
Assets acquired on non-accrual loans |
|
|
9,231 |
|
|
|
7,953 |
|
|
|
720 |
|
|
|
11,252 |
|
Other |
|
|
(44 |
) |
|
|
37 |
|
|
|
(324 |
) |
|
|
(165 |
) |
Impairment charge |
|
|
|
|
|
|
(550 |
) |
|
|
(1,231 |
) |
|
|
(2,756 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
20,244 |
|
|
$ |
29,310 |
|
|
$ |
25,611 |
|
|
$ |
30,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
During the first quarter of 2009, the Company acquired the collateral for three loans through,
or in lieu of, foreclosure. At the time of the transfer to OREO, the Company recorded a charge-off
of $867,000 through the allowance for loan and lease losses on one of the properties due to the
loan balance exceeding the fair market value of the collateral. On another property during the
fourth quarter of 2008, the Company recorded a charge-off of $2.3 million through the allowance for
loan and lease losses and transferred the remaining balance to OREO in the first quarter of 2009.
Additionally, in the second quarter of 2009, the Company established a $550,000 valuation allowance
against the carrying value of an asset transferred to OREO during the first quarter of 2009. The
Company had negotiated the sale of that asset and used the offered purchase price in valuing the
asset. The remaining asset acquired was recorded to OREO at the carrying value of the loan, which
approximated fair value.
During the second quarter of 2009, the Company acquired the collateral for four loans through, or
in lieu of, foreclosure. At the time of the transfer to OREO, the Company recorded $3.8 million in
charge-offs on two of the loans, for which $2.9 million had previously been reserved in the
allowance for loan and lease losses in accordance with ASC Topic 310. A third loan had a $954,000
charge-off recorded against the allowance for loan and lease losses in 2008 and was transferred to
OREO at the carrying value, which approximated fair value. The last loan was transferred at the
carrying value, which approximated fair value.
During the third quarter of 2009, the Company acquired the collateral for one loan relationship
through foreclosure. At the time of the transfer to OREO, the Company recorded a $400,000
charge-off on the loan, for which $367,000 million had previously been reserved in the allowance
for loan and lease losses in accordance with ASC Topic 310. Also during the third quarter, the
Company sold the collateral for a loan that was transferred to OREO in the first quarter of 2009
and recorded a $279,000 gain. In addition, the Company established valuation allowances of
$869,000 and $362,000 against the carrying value of assets transferred to OREO during the second
quarter of 2009 and the fourth quarter of 2008, respectively.
During the fourth quarter of 2009, the Company acquired the collateral for five loans through, or
in lieu of, foreclosure. At the time of the transfer to OREO, the Company recorded $1.8 million in
charge-offs on three of the loans, for which $1.2 million had previously been reserved in the
allowance for loan and lease losses in accordance with ASC Topic 310. The Company charged-off the
$335,000 mezzanine loan related to the fourth loan and the fifth loan was transferred at cost.
In the fourth quarter of 2009, the Company sold the collateral related to three loans which were
foreclosed on prior to 2009. The first sale is related to a five building condominium project in
Raleigh, North Carolina that the Company foreclosed on during the fourth quarter of 2008. In 2009,
the Company completed the construction of two of the buildings. In the fourth quarter of 2009, the
Company held an auction of the 51 completed condominiums. As of December 31, 2009, the Company
closed on 24 of the condominiums for net proceeds of $3.1 million. As of February 25, 2010,
another 16 condominiums have been sold for net proceeds of $2.0 million. In the fourth quarter of
2009, the Company recorded approximately a $2.4 million valuation allowance based on a current
appraisal of the three remaining pad sites. The Company is actively marketing those three sites.
The second sale in the fourth quarter of 2009 was a home located in King George, Virginia. The
Company recorded net proceeds of $453,000 and recorded a $47,000 loss. The third sale was a small
home in Columbus, Ohio. The Company received $7,000 in net proceeds and recorded a loss of
$16,000.
Additionally, in the fourth quarter of 2009 the Company recorded valuation allowances of $157,000
and $170,000 on loans that were transferred to OREO in the first and second quarters of 2009,
respectively. The $157,000 valuation allowance is based on a new appraisal of the property. The
$170,000 valuation allowance is based on an agreement of sale which was executed in the fourth
quarter of 2009.
The Company is working to satisfactorily sell the remaining OREO properties using existing
relationships and possible future auctions. However the Company recognizes that due to the
continued weak housing and commercial real estate markets the successful disposition of the
properties will likely take considerable time.
58
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) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Loans secured by real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development |
|
$ |
52,196 |
|
|
$ |
167,204 |
|
|
$ |
92,779 |
|
Construction and land development mezzanine |
|
|
|
|
|
|
2,421 |
|
|
|
6,443 |
|
Land development |
|
|
66,878 |
|
|
|
74,168 |
|
|
|
78,874 |
|
Secured by 1-4 family residential properties: |
|
|
|
|
|
|
|
|
|
|
|
|
Revolving, open-end loans secured by 1-4 family residential
properties and extended under lines of credit |
|
|
1,272 |
|
|
|
1,322 |
|
|
|
2,094 |
|
All other loans secured by 1-4 family residential properties: |
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first liens |
|
|
44,053 |
|
|
|
21,607 |
|
|
|
32,485 |
|
Secured by junior liens |
|
|
3,173 |
|
|
|
4,551 |
|
|
|
7,707 |
|
Secured by junior liens mezzaninie |
|
|
2,480 |
|
|
|
|
|
|
|
|
|
Secured by multi family (5 or more) residential properties |
|
|
22,017 |
|
|
|
14,059 |
|
|
|
6,887 |
|
Secured by multi family (5 or more) res. Properties mezzanine |
|
|
|
|
|
|
335 |
|
|
|
275 |
|
Secured by non-farm nonresidential properties |
|
|
277,234 |
|
|
|
234,573 |
|
|
|
262,550 |
|
Secured by non-farm nonresidential properties mezzanine |
|
|
|
|
|
|
4,111 |
|
|
|
10,778 |
|
Tax certificates |
|
|
73,106 |
|
|
|
64,168 |
|
|
|
46,090 |
|
Commercial and industrial loans |
|
|
104,063 |
|
|
|
86,278 |
|
|
|
77,793 |
|
Loans to individuals for household, family, and other personal
expenditures |
|
|
1,514 |
|
|
|
1,031 |
|
|
|
1,157 |
|
Obligations of state and political subdivisions in the U.S. |
|
|
|
|
|
|
47 |
|
|
|
63 |
|
Lease financing receivables (net of unearned income) |
|
|
39,097 |
|
|
|
26,123 |
|
|
|
19,778 |
|
All other loans |
|
|
659 |
|
|
|
165 |
|
|
|
267 |
|
Less: Net deferred loan fees |
|
|
(878 |
) |
|
|
(1,441 |
) |
|
|
(1,545 |
) |
|
|
|
|
|
|
|
|
|
|
Total loans and leases, net of unearned income |
|
$ |
686,864 |
|
|
$ |
700,722 |
|
|
$ |
644,475 |
|
|
|
|
|
|
|
|
|
|
|
Credit Classification Process
The loan review function is outsourced to a third party vendor which applies the Companys loan
rating system to specific credits. The Company uses a nine point grading risk classification system
commonly used in the financial services industry. The riskier classifications include Watch,
Special Mention, Substandard, Doubtful and Loss. Upon completion of a loan review, a copy of any
review receiving an adverse classification by the reviewer is presented to the Loan Review
Committee for discussion. Minutes outlining in detail the Committees findings and recommendations
are issued after each meeting for follow-up by individual loan officers. The Committee is comprised
of the voting members of the Officers Loan Committee. The CCO is the primary bank officer dealing
with the third party vendor during the reviews.
All loans are subject to initial loan review. Additional review is undertaken with respect to loans
providing potentially greater exposure. This is accomplished by:
a. Reviewing all loans of $1 million or more annually;
b. Reviewing 25% of all loans from $500,000 up to $1 million annually;
c. Reviewing 2% of all loans below $500,000 annually; and
d. Reviewing any loan requested specifically by the Companys management
Loans on the Companys Special Assets Committee list are also subject to loan review even though
they are receiving the daily attention of the assigned officer and monthly attention of the Special
Assets Committee.
59
A watch list is maintained and reviewed at each meeting of the Loan Review Committee. Loans are
added to the watch list, even though current or less than 30 days delinquent if they exhibit
elements of substandard creditworthiness. The watch list contains a statement for each loan as to
why it merits special attention, and this list is distributed to the Board of Directors on a
monthly basis. Loans may be removed from the watch list if the Loan Review Committee determines
that exception items have been resolved or creditworthiness has improved. Additionally, if loans
become serious collection matters and are listed on the Companys monthly delinquent loan or
Special Assets Committee lists, they may be removed from the watch list. During the third quarter
of 2009, as a result of the level of classified assets within the loan portfolio, the Company
established the CCIC Committee (Classified, Charge-off and Impairment Committee) to formalize the
process and documentation required to classify, remove from classification, impair or charge off a
loan within the Banks. The Committee, which is comprised of the President, Vice Chairman, Chief
Credit Officer, Chief Lending Officer and Chief Risk Officer, meets as required and provides
regular updated reports to the Board of Directors.
All loans, at the time of presentation to the appropriate loan committee, are given an initial loan
risk rating by the CCO. From time to time, and at the general direction of any of the various
loan committees, the ratings may be changed based on the findings of that committee. Items
considered in assigning ratings include the financial strength of the borrower and/or guarantors,
the type of collateral, the collateral lien position, the type of loan and loan structure, any
potential risk inherent in the specific loan type, higher than normal monitoring of the loan or any
other factor deemed appropriate by any of the various committees for changing the rating of the
loan. Any such change in rating is reflected in the minutes of that committee.
Investment Securities
The following tables present the consolidated book values and approximate fair value at December
31, 2009, 2008 and 2007, respectively, for each major category of the Companys investment
securities portfolio for HTM and AFS securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Accumulated Other |
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss (AOCI) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-credit |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
related |
|
|
|
|
|
|
Amortized |
|
|
unrealized |
|
|
Non-OTTI |
|
|
OTTI in |
|
|
|
|
As of December 31, 2009 |
|
cost |
|
|
gains |
|
|
in OCI |
|
|
OCI |
|
|
Fair value |
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential |
|
$ |
21,393 |
|
|
$ |
234 |
|
|
$ |
(26 |
) |
|
$ |
|
|
|
$ |
21,601 |
|
U.S. government agencies |
|
|
1,150 |
|
|
|
3 |
|
|
|
(2 |
) |
|
|
|
|
|
|
1,151 |
|
Preferred stocks |
|
|
2,500 |
|
|
|
|
|
|
|
(270 |
) |
|
|
|
|
|
|
2,230 |
|
Common stocks |
|
|
381 |
|
|
|
71 |
|
|
|
(8 |
) |
|
|
|
|
|
|
444 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies |
|
|
316,911 |
|
|
|
2,871 |
|
|
|
(1,281 |
) |
|
|
|
|
|
|
318,501 |
|
Non-agency |
|
|
23,010 |
|
|
|
145 |
|
|
|
(875 |
) |
|
|
(1,082 |
) |
|
|
21,198 |
|
Collateralized debt obligations |
|
|
24,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,825 |
|
Corporate bonds |
|
|
7,911 |
|
|
|
9 |
|
|
|
(423 |
) |
|
|
(630 |
) |
|
|
6,867 |
|
Trust preferred securities |
|
|
32,926 |
|
|
|
2,064 |
|
|
|
(177 |
) |
|
|
(678 |
) |
|
|
34,135 |
|
Other securities |
|
|
7,892 |
|
|
|
8 |
|
|
|
(133 |
) |
|
|
|
|
|
|
7,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale |
|
$ |
438,899 |
|
|
$ |
5,405 |
|
|
$ |
(3,195 |
) |
|
$ |
(2,390 |
) |
|
$ |
438,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Accumulated Other |
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss (AOCI) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized Losses |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Non-credit |
|
|
|
|
|
|
Amortized |
|
|
unrealized |
|
|
Non-OTTI in |
|
|
related OTTI |
|
|
|
|
As of December 31, 2008 |
|
cost |
|
|
gains |
|
|
AOCI |
|
|
in AOCI |
|
|
Fair value |
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential |
|
$ |
53,871 |
|
|
$ |
1,190 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
55,061 |
|
U.S. government agencies |
|
|
48,109 |
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
48,191 |
|
Preferred stocks |
|
|
4,000 |
|
|
|
|
|
|
|
(1,703 |
) |
|
|
|
|
|
|
2,297 |
|
Common stocks |
|
|
19,907 |
|
|
|
8 |
|
|
|
(7,208 |
) |
|
|
|
|
|
|
12,707 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies |
|
|
77,848 |
|
|
|
1,649 |
|
|
|
(72 |
) |
|
|
|
|
|
|
79,425 |
|
Non-agency |
|
|
43,711 |
|
|
|
|
|
|
|
(6,221 |
) |
|
|
|
|
|
|
37,490 |
|
Collateralized debt obligations |
|
|
35,000 |
|
|
|
|
|
|
|
(8,840 |
) |
|
|
|
|
|
|
26,160 |
|
Corporate bonds |
|
|
57,445 |
|
|
|
641 |
|
|
|
(6,748 |
) |
|
|
|
|
|
|
51,338 |
|
Trust preferred securities |
|
|
36,316 |
|
|
|
606 |
|
|
|
(6,778 |
) |
|
|
|
|
|
|
30,144 |
|
Other securities |
|
|
7,631 |
|
|
|
54 |
|
|
|
(196 |
) |
|
|
|
|
|
|
7,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale |
|
$ |
383,838 |
|
|
$ |
4,230 |
|
|
$ |
(37,766 |
) |
|
$ |
|
|
|
$ |
350,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Accumulated Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss (AOCI) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Non-credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized |
|
|
Non-OTTI |
|
|
related OTTI |
|
|
|
|
|
|
Carrying |
|
As of December 31, 2007 |
|
Amortized cost |
|
|
gains |
|
|
in AOCI |
|
|
in AOCI |
|
|
Fair value |
|
|
value |
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential |
|
$ |
105 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
105 |
|
|
$ |
105 |
|
U.S. government agencies |
|
|
80,000 |
|
|
|
13 |
|
|
|
(234 |
) |
|
|
|
|
|
|
79,779 |
|
|
|
80,000 |
|
Collateralized debt obligations |
|
|
60,000 |
|
|
|
1,200 |
|
|
|
(740 |
) |
|
|
|
|
|
|
60,460 |
|
|
|
60,000 |
|
Corporate bonds |
|
|
2,800 |
|
|
|
312 |
|
|
|
|
|
|
|
|
|
|
|
3,112 |
|
|
|
2,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity investment securities |
|
$ |
142,905 |
|
|
$ |
1,525 |
|
|
$ |
(974 |
) |
|
$ |
|
|
|
$ |
143,456 |
|
|
$ |
142,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential |
|
$ |
33,090 |
|
|
$ |
383 |
|
|
$ |
(187 |
) |
|
$ |
|
|
|
$ |
33,286 |
|
|
|
|
|
U.S. government agencies |
|
|
104,982 |
|
|
|
51 |
|
|
|
(153 |
) |
|
|
|
|
|
|
104,880 |
|
|
|
|
|
Common stocks |
|
|
20,696 |
|
|
|
17 |
|
|
|
(821 |
) |
|
|
|
|
|
|
19,892 |
|
|
|
|
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies |
|
|
40,688 |
|
|
|
700 |
|
|
|
|
|
|
|
|
|
|
|
41,388 |
|
|
|
|
|
Non-agency |
|
|
41,629 |
|
|
|
265 |
|
|
|
(156 |
) |
|
|
|
|
|
|
41,738 |
|
|
|
|
|
Collateralized debt obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
86,136 |
|
|
|
523 |
|
|
|
(1,239 |
) |
|
|
|
|
|
|
85,420 |
|
|
|
|
|
Trust preferred securities |
|
|
44,117 |
|
|
|
2,151 |
|
|
|
(2,169 |
) |
|
|
|
|
|
|
44,099 |
|
|
|
|
|
Other securities |
|
|
4,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investment securities |
|
$ |
375,963 |
|
|
$ |
4,090 |
|
|
$ |
(4,725 |
) |
|
$ |
|
|
|
$ |
375,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The contractual maturity distribution and weighted average rate of the Companys AFS debt
securities at December 31, 2009 are presented in the following table. Mortgage-backed securities
and collateralized mortgage obligations are presented within the category that represents the total
weighted average expected maturity.
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
After one year, but |
|
|
After five years, but |
|
|
|
|
|
|
|
|
|
Within one year |
|
|
within five years |
|
|
within ten years |
|
|
After ten years |
|
|
Total |
|
(In thousands, except percentages) |
|
Amount |
|
|
Rate |
|
|
Amount |
|
|
Rate |
|
|
Amount |
|
|
Rate |
|
|
Amount |
|
|
Rate |
|
|
Amount |
|
|
Rate |
|
Mortgage-backed securities-residential |
|
$ |
|
|
|
|
|
|
|
$ |
21,601 |
|
|
|
5.31 |
% |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
21,601 |
|
|
|
5.31 |
% |
U.S. government agencies |
|
|
|
|
|
|
|
|
|
|
1,151 |
|
|
|
1.68 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,151 |
|
|
|
1.68 |
% |
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies |
|
|
22,115 |
|
|
|
5.57 |
% |
|
|
271,233 |
|
|
|
4.65 |
% |
|
|
25,153 |
|
|
|
4.39 |
% |
|
|
|
|
|
|
|
|
|
|
318,501 |
|
|
|
4.69 |
% |
Non-agency |
|
|
|
|
|
|
|
|
|
|
19,540 |
|
|
|
5.39 |
% |
|
|
1,658 |
|
|
|
0.65 |
% |
|
|
|
|
|
|
|
|
|
|
21,198 |
|
|
|
5.01 |
% |
Collateralized debt obligations |
|
|
24,825 |
|
|
|
3.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,825 |
|
|
|
3.15 |
% |
Corporate bonds |
|
|
732 |
|
|
|
0.77 |
% |
|
|
6,135 |
|
|
|
5.58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,867 |
|
|
|
5.14 |
% |
Trust preferred securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,135 |
|
|
|
9.53 |
% |
|
|
34,135 |
|
|
|
9.53 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AFS debt securities |
|
$ |
47,672 |
|
|
|
4.24 |
% |
|
$ |
319,660 |
|
|
|
4.78 |
% |
|
$ |
26,811 |
|
|
|
4.13 |
% |
|
$ |
34,135 |
|
|
|
9.53 |
% |
|
$ |
428,278 |
|
|
|
5.02 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company assesses whether OTTI is present when the fair value of a security is less than
its amortized cost. All investment securities are evaluated for OTTI under FASB ASC Topic 320,
Investments-Debt & Equity Securities (ASC Topic 320). The non-agency collateralized mortgage
obligations that are rated below AA are evaluated under FASB ASC Topic 320 Subtopic 40, Beneficial
Interests in Securitized Financial Assets under FASB ASC Topic 325, Investments-Other. In
determining whether OTTI exists, management considers numerous factors, including but not limited
to: (1) the length of time and the extent to which the fair value is less than the amortized cost,
(2) the Companys intent to hold or sell the security, (3) the financial condition and results of
the issuer including changes in capital, (4) the credit rating of the issuer, (5) analysts earnings
estimate, (6) industry trends specific to the security, and (7) timing of debt maturity and status
of debt payments.
At December 31, 2009 investment securities were $438.7 million with a net unrealized loss of
$180,000 compared to $350.3 million with a net unrealized loss of $33.4 million at December 31,
2008. The improvement in gross unrealized losses is related to $11.0 million in impairment charges
recorded in earnings in 2009 and to the overall improvement in the fair values of the securities in
the Companys investment portfolio. The gross unrealized losses have improved significantly in the
last two quarters as the financial markets have begun to recover. Refer to Note 3- Investment
Securities to the Consolidated Financial Statements in Item 8 for more information.
Deposits
The average balance of the Companys deposits by major classifications for each of the last three
years is presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
(In thousands, except percentages) |
|
Balance |
|
|
Rate |
|
|
Balance |
|
|
Rate |
|
|
Balance |
|
|
Rate |
|
Demand deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest bearing |
|
$ |
62,546 |
|
|
|
|
|
|
$ |
57,211 |
|
|
|
|
|
|
$ |
68,562 |
|
|
|
|
|
Interest bearing (NOW) |
|
|
46,046 |
|
|
|
1.04 |
% |
|
|
48,414 |
|
|
|
1.85 |
% |
|
|
52,975 |
|
|
|
2.24 |
% |
Money market deposits |
|
|
153,146 |
|
|
|
1.83 |
% |
|
|
168,972 |
|
|
|
2.93 |
% |
|
|
199,921 |
|
|
|
4.24 |
% |
Savings deposits |
|
|
14,802 |
|
|
|
0.56 |
% |
|
|
15,125 |
|
|
|
0.50 |
% |
|
|
16,461 |
|
|
|
0.52 |
% |
Certificate of deposit |
|
|
581,202 |
|
|
|
3.78 |
% |
|
|
434,662 |
|
|
|
4.49 |
% |
|
|
531,965 |
|
|
|
5.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
857,742 |
|
|
|
|
|
|
$ |
724,384 |
|
|
|
|
|
|
$ |
869,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
The remaining maturity of Certificates of Deposit of $100,000 or greater:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
Three months or less |
|
$ |
19,960 |
|
|
$ |
12,575 |
|
Over three months through twelve months |
|
|
78,985 |
|
|
|
68,825 |
|
Over twelve months through five years |
|
|
40,790 |
|
|
|
24,623 |
|
Over five years |
|
|
1,917 |
|
|
|
1,760 |
|
|
|
|
|
|
|
|
Total |
|
$ |
141,652 |
|
|
$ |
107,783 |
|
|
|
|
|
|
|
|
Short and Long Term Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Short term borrowings |
|
$ |
114,500 |
|
|
$ |
37,000 |
|
|
$ |
102,000 |
|
|
$ |
53,000 |
|
|
$ |
104,500 |
|
Long term borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other borrowings |
|
|
44,674 |
|
|
|
45,112 |
|
|
|
5,411 |
|
|
|
5,587 |
|
|
|
|
|
Obligations through RE owned via equity invest(1) |
|
|
3,652 |
|
|
|
12,350 |
|
|
|
18,566 |
|
|
|
29,342 |
|
|
|
47,356 |
|
Subordinated debt |
|
|
25,774 |
|
|
|
25,774 |
|
|
|
25,774 |
|
|
|
25,774 |
|
|
|
25,774 |
|
FHLB advances |
|
|
95,001 |
|
|
|
193,569 |
|
|
|
187,500 |
|
|
|
187,500 |
|
|
|
249,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
$ |
283,601 |
|
|
$ |
313,805 |
|
|
$ |
339,251 |
|
|
$ |
301,203 |
|
|
$ |
427,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This obligation is consolidated from requirements under ASC Topic 810 of which $0 is
guaranteed by the Company. |
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, 2009 |
(In thousands, except percentages) |
|
Market Value of |
|
Percent of |
Changes in Rates |
|
Portfolio Equity |
|
Change |
+ 200 basis points |
|
$ |
79,554 |
|
|
|
(21.56 |
%) |
+ 100 basis points |
|
|
92,611 |
|
|
|
(8.69 |
%) |
Flat rate |
|
|
101,423 |
|
|
|
0.00 |
% |
- 100 basis points |
|
|
103,343 |
|
|
|
1.89 |
% |
- 200 basis points |
|
|
103,555 |
|
|
|
2.10 |
% |
The assumptions used in evaluating the vulnerability of earnings and capital to changes in interest
rates are based on managements 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.
63
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company 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 investment securities,
loans, allowance for loan and lease losses and deferred tax assets. The policies which
significantly affect the determination of the Companys financial position, results of operations
and cash flows are summarized in Note 1 Summary of Significant Accounting Polices to the
Consolidated Financial Statements and are discussed in the section captioned Recent Accounting
Pronouncements of Managements 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.
Investment Securities
Management determines the appropriate classification of debt securities at the time of purchase and
re-evaluates such designation as of each balance sheet date.
Investments in debt securities that the Company has the positive intent and ability to hold to
maturity are classified as held to maturity securities and reported at amortized cost. Debt and
equity securities that are bought and held principally for the purpose of selling them in the near
term are classified as trading securities and reported at fair value, with unrealized holding gains
and losses included in earnings. Debt and equity securities not classified as trading securities,
nor as held to maturity securities are classified as available for sale securities and reported at
fair value, with unrealized holding gains or losses, net of deferred income taxes, reported in the
accumulated other comprehensive income component of shareholders equity. The Company held no
trading securities at December 31, 2009 and 2008. Discounts and premiums are accreted/amortized to
income by use of the level-yield method. Gain or loss on sales of securities available for sale is
based on the specific identification method.
FASB recently issued accounting guidance related to the recognition and presentation of
other-than-temporary impairment, which the Company adopted effective June 30, 2009 (Pending
Content of FASB ASC 320-1). This recent accounting guidance amends the recognition guidance for
other-than-temporary impairments of debt securities and expands the financial statement disclosures
for other-than-temporary impairment losses on debt and equity securities. The recent guidance
replaced the intent and ability indication in current guidance by specifying that (a) if a
company does not have the intent to sell a debt security prior to recovery and, (b) it is more
likely than not that it will not have to sell the debt security prior to recovery, the security
would not be considered other-than-temporarily impaired unless there is a credit loss.
When an entity does not intend to sell the security, and it is more likely than not, the entity
will not have to sell the security before recovery of its cost basis, it will recognize the credit
component of an other-than-temporary impairment of a debt security in earnings and the remaining
portion in other comprehensive income. For held-to-maturity debt securities, the amount of an
other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of
a previous other-than-temporary impairment should be amortized prospectively over the remaining
life of the security on the basis of the timing of future estimated cash flows of the security.
Prior to the adoption of the recent accounting guidance on June 30, 2009, management considered, in
determining whether other-than-temporary impairment exists (1) the length of time and the extent to
which the fair value has been less than amortized cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Company to retain the investment in
the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
For more information on the fair value of the Companys investment securities and other financial
instruments refer to Note 3 Investment Securities and Note 19 - Fair Values of Financial
Instruments to the Consolidated Financial Statements included in Item 8 of this Report.
Allowance for Loan and Lease Losses
The Company considers that the determination of the allowance for loan and lease losses involves a
higher degree of judgment and complexity than its other significant accounting policies. The
allowance for loan and lease losses is
64
calculated with the objective of maintaining a reserve level believed by management to be
sufficient to absorb estimated credit losses. Managements 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 and lease losses may be required that would adversely impact
earnings in future periods. See Note 1 Summary of Significant Accounting Policies to the
Consolidated Financial Statements included in Item 8 of this report.
Deferred Tax Assets
The Company 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
managements judgment based upon available evidence that future realization is more likely than
not. If management determines that the Company may be unable to realize all or part of 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.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 Summary Of Significant Accounting Policies to the Consolidated Financial Statements
included in Item 8 of this Report.
65
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, 2009 and 2008
66
Report of Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholders
Royal Bancshares of Pennsylvania, Inc.
We have audited the accompanying consolidated balance sheets of Royal Bancshares of
Pennsylvania, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated
statements of operations, changes in shareholders equity and comprehensive loss, and cash flows
for each of the years in the three-year period ended December 31, 2009. Royal Bancshares of
Pennsylvania, Inc.s management is responsible for these financial statements. Our responsibility
is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits 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 consolidated financial statements are free of
material misstatement. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Royal Bancshares of Pennsylvania, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2009 in conformity with
accounting principles generally accepted in the United States of America.
/s/ ParenteBeard LLC
ParenteBeard LLC
Malvern, Pennsylvania
March 29, 2010
67
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
ASSETS |
|
2009 |
|
|
2008 |
|
|
|
(In thousands, except share data) |
|
Cash and due from banks |
|
$ |
25,289 |
|
|
$ |
5,910 |
|
Interest bearing deposits |
|
|
33,009 |
|
|
|
7,349 |
|
Federal funds sold |
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
58,298 |
|
|
|
14,259 |
|
|
Investment securities available-for-sale (AFS) at fair value |
|
|
438,719 |
|
|
|
350,302 |
|
Federal Home Loan Bank (FHLB) stock, at cost |
|
|
10,952 |
|
|
|
10,952 |
|
|
|
|
|
|
|
|
Total investment securities and FHLB stock |
|
|
449,671 |
|
|
|
361,254 |
|
|
|
|
|
|
|
|
|
|
Loans and leases held for sale |
|
|
2,254 |
|
|
|
267 |
|
|
Loans and leases |
|
|
686,864 |
|
|
|
700,722 |
|
Less allowance for loan and lease losses |
|
|
30,331 |
|
|
|
28,908 |
|
|
|
|
|
|
|
|
Net loans and leases |
|
|
656,533 |
|
|
|
671,814 |
|
|
Bank owned life insurance |
|
|
8,263 |
|
|
|
30,016 |
|
Real estate owned via equity investment |
|
|
12,492 |
|
|
|
18,927 |
|
Accrued interest receivable |
|
|
14,942 |
|
|
|
13,580 |
|
Other real estate owned (OREO), net |
|
|
30,317 |
|
|
|
10,346 |
|
Premises and equipment, net |
|
|
6,306 |
|
|
|
6,926 |
|
Investment in real estate joint ventures |
|
|
2,520 |
|
|
|
2,520 |
|
Other assets |
|
|
51,130 |
|
|
|
45,677 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,292,726 |
|
|
$ |
1,175,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
Non-interest bearing |
|
$ |
63,168 |
|
|
$ |
50,886 |
|
Interest bearing |
|
|
818,587 |
|
|
|
709,182 |
|
|
|
|
|
|
|
|
Total deposits |
|
|
881,755 |
|
|
|
760,068 |
|
|
|
|
|
|
|
|
|
|
Accrued interest payable |
|
|
6,150 |
|
|
|
6,102 |
|
Short-term borrowings |
|
|
114,500 |
|
|
|
22,000 |
|
Long-term borrowings |
|
|
139,675 |
|
|
|
253,681 |
|
Obligations related to real estate owned via equity investment |
|
|
3,652 |
|
|
|
12,350 |
|
Subordinated debentures |
|
|
25,774 |
|
|
|
25,774 |
|
Other liabilities |
|
|
16,906 |
|
|
|
14,026 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,188,412 |
|
|
|
1,094,001 |
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
Royal Bancshares of Pennsylvania, Inc. equity: |
|
|
|
|
|
|
|
|
Preferred stock, Series A perpetual, $1,000 liquidation
value, 500,000 shares
authorized, 30,407 shares issued and outstanding at
December 31, 2009 and
0 shares at December 31, 2008 |
|
|
27,945 |
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
Class A, par value $2.00 per share, authorized
18,000,000 shares; issued,
11,352,482 and 11,345,127 at December 31, 2009 and
2008, respectively |
|
|
22,705 |
|
|
|
22,690 |
|
Class B, par value $0.10 per share, authorized
3,000,0000 shares; issued,
2,089,284 and 2,095,681 at December 31, 2009 and
2008, respectively |
|
|
209 |
|
|
|
210 |
|
Additional paid in capital |
|
|
126,117 |
|
|
|
123,425 |
|
Accumulated deficit |
|
|
(67,197 |
) |
|
|
(33,561 |
) |
Accumulated other comprehensive loss |
|
|
(1,652 |
) |
|
|
(26,106 |
) |
Treasury stock at cost, shares of Class A, 498,488 at
December 31, 2009
and 2008, respectively |
|
|
(6,971 |
) |
|
|
(6,971 |
) |
|
|
|
|
|
|
|
|
Total Royal Bancshares of Pennsylvania, Inc.
shareholders equity |
|
|
101,156 |
|
|
|
79,687 |
|
Noncontrolling interest |
|
|
3,158 |
|
|
|
1,898 |
|
Total shareholders equity |
|
|
104,314 |
|
|
|
81,585 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,292,726 |
|
|
$ |
1,175,586 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
68
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands, except per share data) |
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases, including fees |
|
$ |
45,757 |
|
|
$ |
49,863 |
|
|
$ |
56,518 |
|
Investment securities held to maturity, taxable |
|
|
|
|
|
|
3,241 |
|
|
|
10,032 |
|
Investment securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable interest |
|
|
20,102 |
|
|
|
19,066 |
|
|
|
18,068 |
|
Tax exempt interest |
|
|
19 |
|
|
|
75 |
|
|
|
75 |
|
Deposits in banks |
|
|
164 |
|
|
|
495 |
|
|
|
1,896 |
|
Federal funds sold |
|
|
1 |
|
|
|
24 |
|
|
|
147 |
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income |
|
|
66,043 |
|
|
|
72,764 |
|
|
|
86,736 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
25,342 |
|
|
|
25,414 |
|
|
|
37,140 |
|
Short-term borrowings |
|
|
169 |
|
|
|
674 |
|
|
|
530 |
|
Long-term borrowings |
|
|
11,685 |
|
|
|
11,770 |
|
|
|
10,580 |
|
Obligations related to real estate owned via equity investments |
|
|
243 |
|
|
|
251 |
|
|
|
623 |
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense |
|
|
37,439 |
|
|
|
38,109 |
|
|
|
48,873 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
|
28,604 |
|
|
|
34,655 |
|
|
|
37,863 |
|
Provision for loan and lease losses |
|
|
20,605 |
|
|
|
21,841 |
|
|
|
13,026 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income after Provision for Loan and Lease Losses |
|
|
7,999 |
|
|
|
12,814 |
|
|
|
24,837 |
|
|
|
|
|
|
|
|
|
|
|
|
Other (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
Gains on sales of premises and equipment |
|
|
|
|
|
|
1,991 |
|
|
|
|
|
Gains on sale of premises and equipment related to real estate owned via equity investments |
|
|
1,817 |
|
|
|
1,679 |
|
|
|
1,860 |
|
Income from bank owned life insurance |
|
|
1,099 |
|
|
|
1,233 |
|
|
|
875 |
|
Service charges and fees |
|
|
1,419 |
|
|
|
1,186 |
|
|
|
1,348 |
|
Gains on sales related to real estate joint ventures |
|
|
|
|
|
|
1,092 |
|
|
|
350 |
|
Income related to real estate owned via equity investments |
|
|
1,302 |
|
|
|
965 |
|
|
|
1,384 |
|
Gains on sales of other real estate owned |
|
|
294 |
|
|
|
429 |
|
|
|
1,111 |
|
Gains on sales of loans and leases |
|
|
914 |
|
|
|
190 |
|
|
|
404 |
|
Net gains (losses) on investment securities available for sale |
|
|
1,892 |
|
|
|
(1,313 |
) |
|
|
5,358 |
|
Other income |
|
|
578 |
|
|
|
148 |
|
|
|
198 |
|
|
|
|
|
|
|
|
|
|
|
Other income,excluding other than temporary impairment losses |
|
|
9,315 |
|
|
|
7,600 |
|
|
|
12,888 |
|
|
|
|
|
|
|
|
|
|
|
Total other than temporary impairment losses on investment securities |
|
|
(13,431 |
) |
|
|
(23,388 |
) |
|
|
|
|
Portion of loss recognized in other comprehensive loss |
|
|
2,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings |
|
|
(11,041 |
) |
|
|
(23,388 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other (Loss) Income |
|
|
(1,726 |
) |
|
|
(15,788 |
) |
|
|
12,888 |
|
|
|
|
|
|
|
|
|
|
|
Other expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Employee salaries and benefits |
|
|
12,235 |
|
|
|
15,044 |
|
|
|
12,215 |
|
Professional and legal fees |
|
|
4,367 |
|
|
|
3,783 |
|
|
|
1,997 |
|
Occupancy and equipment |
|
|
3,381 |
|
|
|
2,860 |
|
|
|
2,506 |
|
Impairment of real estate owned via equity investments |
|
|
|
|
|
|
1,500 |
|
|
|
8,500 |
|
Pennsylvania shares tax |
|
|
1,299 |
|
|
|
1,369 |
|
|
|
1,158 |
|
Expenses related to real estate owned via equity investments |
|
|
907 |
|
|
|
966 |
|
|
|
1,590 |
|
Stock option expense |
|
|
226 |
|
|
|
703 |
|
|
|
657 |
|
Directors fees |
|
|
676 |
|
|
|
675 |
|
|
|
643 |
|
Impairment of real estate joint venture |
|
|
|
|
|
|
|
|
|
|
5,927 |
|
FDIC and state assessments |
|
|
3,801 |
|
|
|
658 |
|
|
|
235 |
|
OREO impairment charge |
|
|
4,537 |
|
|
|
|
|
|
|
|
|
OREO and loan collection expenses |
|
|
3,218 |
|
|
|
188 |
|
|
|
|
|
Other operating expenses |
|
|
3,009 |
|
|
|
4,787 |
|
|
|
5,907 |
|
|
|
|
|
|
|
|
|
|
|
Total Other Expenses |
|
|
37,656 |
|
|
|
32,533 |
|
|
|
41,335 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Income Tax |
|
|
(31,383 |
) |
|
|
(35,507 |
) |
|
|
(2,307 |
) |
|
Income tax expense (benefit) |
|
|
474 |
|
|
|
2,643 |
|
|
|
(1,568 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(31,857 |
) |
|
$ |
(38,150 |
) |
|
$ |
(739 |
) |
|
|
|
|
|
|
|
|
|
|
|
Less net income (loss) attributable to noncontrolling interest |
|
|
1,402 |
|
|
|
(68 |
) |
|
|
(1,303 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income attributable to Royal Bancshares of
Pennsylvania, Inc. |
|
$ |
(33,259 |
) |
|
$ |
(38,082 |
) |
|
$ |
564 |
|
|
Less Preferred stock Series A accumulated dividend and accretion |
|
$ |
1,672 |
|
|
$ |
|
|
|
$ |
|
|
|
Net (loss) income available to common shareholders |
|
$ |
(34,931 |
) |
|
$ |
(38,082 |
) |
|
$ |
564 |
|
|
Per common share data |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income basic |
|
$ |
(2.64 |
) |
|
$ |
(2.86 |
) |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income diluted |
|
$ |
(2.64 |
) |
|
$ |
(2.86 |
) |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
Cash dividends- Class A shares |
|
$ |
|
|
|
$ |
0.30 |
|
|
$ |
1.15 |
|
|
|
|
|
|
|
|
|
|
|
Cash dividends- Class B shares |
|
$ |
|
|
|
$ |
0.35 |
|
|
$ |
1.32 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
69
ROYAL BANCSHARES OF PENNSYLVANIA INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders Equity and Comprehensive Loss
For the year ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
other |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Preferred stock |
|
|
Class A common stock |
|
|
Class B common stock |
|
|
paid in |
|
|
Accumulated |
|
|
comprehensive |
|
|
Treasury |
|
|
Noncontrolling |
|
|
Shareholders |
|
(In thousands, except preferred share data) |
|
Series A |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
deficit |
|
|
loss |
|
|
stock |
|
|
Interest |
|
|
Equity |
|
|
Balance January 1, 2009 |
|
$ |
|
|
|
|
11,345 |
|
|
$ |
22,690 |
|
|
|
2,096 |
|
|
$ |
210 |
|
|
$ |
123,425 |
|
|
$ |
(33,561 |
) |
|
$ |
(26,106 |
) |
|
$ |
(6,971 |
) |
|
$ |
1,898 |
|
|
$ |
81,585 |
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,259 |
) |
|
|
|
|
|
|
|
|
|
|
1,402 |
|
|
|
(31,857 |
) |
Transfer of noncontrolling interest related to RBA Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(142 |
) |
|
|
(142 |
) |
Other comprehensive income, net of
reclassifications and taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,454 |
|
|
|
|
|
|
|
|
|
|
|
24,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(7,545 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock conversion from Class B to Class A |
|
|
|
|
|
|
7 |
|
|
|
15 |
|
|
|
(7 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid on preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(359 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(359 |
) |
Issuance of Series A perpetual preferred stock
(30,407 shares) and warrants to purchase
common stock (1,140,307 shares) |
|
|
27,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,407 |
|
Accretion of discount on preferred stock |
|
|
363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(363 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226 |
|
|
|
|
Balance December 31, 2009 |
|
$ |
27,945 |
|
|
|
11,352 |
|
|
$ |
22,705 |
|
|
|
2,089 |
|
|
$ |
209 |
|
|
$ |
126,117 |
|
|
$ |
(67,197 |
) |
|
$ |
(1,652 |
) |
|
$ |
(6,971 |
) |
|
$ |
3,158 |
|
|
$ |
104,314 |
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
70
ROYAL BANCSHARES OF PENNSYLVANIA INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders Equity and Comprehensive Loss
For the year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
earnings |
|
|
other |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Preferred stock |
|
|
Class A common stock |
|
|
Class B common stock |
|
|
paid in |
|
|
(accumulated |
|
|
comprehensive |
|
|
Treasury |
|
|
Noncontrolling |
|
|
Shareholders |
|
(In thousands, except dividend per share data) |
|
Series A |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
deficit) |
|
|
loss |
|
|
stock |
|
|
Interest |
|
|
Equity |
|
Balance,
January 1,
2008 |
|
$ |
|
|
|
|
11,329 |
|
|
$ |
22,659 |
|
|
|
2,097 |
|
|
$ |
210 |
|
|
$ |
122,578 |
|
|
$ |
8,527 |
|
|
$ |
(1,582 |
) |
|
$ |
(6,025 |
) |
|
$ |
1,867 |
|
|
$ |
148,234 |
|
Comprehensive
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,082 |
) |
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
(38,051 |
) |
Other comprehensive loss, net of
reclassifications
and taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,524 |
) |
|
|
|
|
|
|
|
|
|
|
(24,524 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(62,575 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock conversion from Class B to
Class A |
|
|
|
|
|
|
1 |
|
|
|
2 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Cash dividends on common stock
(Class A
$0.30; Class B $0.345) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,005 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,005 |
) |
Purchase of treasury stock (100 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(946 |
) |
|
|
|
|
|
|
(946 |
) |
Stock options
exercised |
|
|
|
|
|
|
15 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173 |
|
Stock option
expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
703 |
|
|
|
|
Balance
December 31,
2008 |
|
$ |
|
|
|
|
11,345 |
|
|
$ |
22,690 |
|
|
|
2,096 |
|
|
$ |
210 |
|
|
$ |
123,425 |
|
|
$ |
(33,561 |
) |
|
$ |
(26,106 |
) |
|
$ |
(6,971 |
) |
|
$ |
1,898 |
|
|
$ |
81,585 |
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
71
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders Equity and Comprehensive Loss
For the year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
other |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Preferred stock |
|
|
Class A common stock |
|
|
Class B common stock |
|
|
paid in |
|
|
Retained |
|
|
comprehensive |
|
|
Treasury |
|
|
Noncontrolling |
|
|
Shareholders |
|
(In thousands, except dividend per share data) |
|
Series A |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
earnings |
|
|
loss |
|
|
stock |
|
|
Interest |
|
|
Equity |
|
|
|
|
Balance,
January 1,
2007 |
|
$ |
|
|
|
|
11,287 |
|
|
$ |
22,575 |
|
|
|
2,108 |
|
|
$ |
211 |
|
|
$ |
121,542 |
|
|
$ |
23,464 |
|
|
$ |
(2,273 |
) |
|
$ |
(2,265 |
) |
|
$ |
3,170 |
|
|
$ |
166,424 |
|
Comprehensive
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
564 |
|
|
|
|
|
|
|
|
|
|
|
(1,303 |
) |
|
|
(739 |
) |
Adjustment related to adoption
of FASB No. 158, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,006 |
|
|
|
|
|
|
|
|
|
|
|
1,006 |
|
Other comprehensive loss, net
of reclassifications and taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(315 |
) |
|
|
|
|
|
|
|
|
|
|
(315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(48 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock conversion from
Class B to Class A |
|
|
|
|
|
|
14 |
|
|
|
28 |
|
|
|
(12 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash in lieu of fractional
shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
Stock dividend
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
(13 |
) |
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
exercised |
|
|
|
|
|
|
28 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
334 |
|
Stock option
expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
657 |
|
Tax benefit
stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114 |
|
Purchase of treasury stock
(183 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,760 |
) |
|
|
|
|
|
|
(3,760 |
) |
Cash dividends on common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Class A
$1.15, Class B $1.3225) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,473 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,473 |
) |
|
|
|
Balance,
December 31,
2007 |
|
$ |
|
|
|
|
11,329 |
|
|
$ |
22,659 |
|
|
|
2,097 |
|
|
$ |
210 |
|
|
$ |
122,578 |
|
|
$ |
8,527 |
|
|
$ |
(1,582 |
) |
|
$ |
(6,025 |
) |
|
$ |
1,867 |
|
|
$ |
148,234 |
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
72
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(31,857 |
) |
|
$ |
(38,150 |
) |
|
$ |
(739 |
) |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
907 |
|
|
|
1,059 |
|
|
|
1,306 |
|
Net (income) loss attributable to noncontrolling interest |
|
|
(1,402 |
) |
|
|
68 |
|
|
|
1,303 |
|
Stock compensation expense |
|
|
226 |
|
|
|
703 |
|
|
|
657 |
|
Impairment charge for other real estate owned |
|
|
4,537 |
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
20,605 |
|
|
|
21,841 |
|
|
|
13,026 |
|
Net amortization (accretion) of discounts and premiums on loans, mortgage-backed
securities and investments |
|
|
518 |
|
|
|
(2,242 |
) |
|
|
(2,793 |
) |
(Benefit) provision for deferred income taxes |
|
|
(174 |
) |
|
|
10,462 |
|
|
|
(4,118 |
) |
Gains on sales of other real estate owned |
|
|
(294 |
) |
|
|
(429 |
) |
|
|
(1,111 |
) |
Gain on sales of real estate joint ventures |
|
|
|
|
|
|
(1,092 |
) |
|
|
(350 |
) |
Proceeds from sales of loans and leases |
|
|
10,844 |
|
|
|
2,613 |
|
|
|
|
|
Gains on sales of premises and equipment |
|
|
|
|
|
|
(1,991 |
) |
|
|
|
|
Gains on sales of loans and leases |
|
|
(914 |
) |
|
|
(190 |
) |
|
|
(404 |
) |
Net (gains) losses on sales of investment securities |
|
|
(1,892 |
) |
|
|
1,313 |
|
|
|
(5,358 |
) |
Distributions from investments in real estate |
|
|
(200 |
) |
|
|
(241 |
) |
|
|
(167 |
) |
Gain from sale of premises of real estate owned via equity investment |
|
|
(1,817 |
) |
|
|
(1,679 |
) |
|
|
(1,860 |
) |
Impairment of real estate owned via equity investments |
|
|
|
|
|
|
1,500 |
|
|
|
8,500 |
|
Impairment of available-for-sale investment securities |
|
|
11,041 |
|
|
|
23,388 |
|
|
|
|
|
Income from bank owned life insurance |
|
|
(1,099 |
) |
|
|
(1,233 |
) |
|
|
(875 |
) |
Impairment of real estate joint venture |
|
|
|
|
|
|
|
|
|
|
5,927 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in accrued interest receivable |
|
|
(1,362 |
) |
|
|
1,676 |
|
|
|
1,238 |
|
Increase in other assets |
|
|
(5,225 |
) |
|
|
(10,766 |
) |
|
|
(2,766 |
) |
Increase (decrease) in accrued interest payable |
|
|
48 |
|
|
|
(2,498 |
) |
|
|
(2,054 |
) |
Increase (decrease) in other liabilities |
|
|
5,292 |
|
|
|
3,364 |
|
|
|
(5,518 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
7,782 |
|
|
|
7,476 |
|
|
|
3,844 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from calls/maturities of held-to-maturity investment securities |
|
|
|
|
|
|
105,265 |
|
|
|
115,024 |
|
Proceeds from calls/maturities of investment securities available for sale |
|
|
148,268 |
|
|
|
169,901 |
|
|
|
105,041 |
|
Purchases of investment securities held to maturity |
|
|
|
|
|
|
|
|
|
|
(2,500 |
) |
Proceeds from sales of investment securities available for sale |
|
|
184,226 |
|
|
|
15,775 |
|
|
|
20,773 |
|
Purchase of investment securities available for sale |
|
|
(398,312 |
) |
|
|
(179,257 |
) |
|
|
(194,839 |
) |
Redemption (purchase) Federal Home Loan Bank stock |
|
|
|
|
|
|
2,510 |
|
|
|
(2,186 |
) |
Net increase in loans |
|
|
(49,260 |
) |
|
|
(81,207 |
) |
|
|
(57,524 |
) |
Capital improvements to foreclosed assets |
|
|
(2,431 |
) |
|
|
|
|
|
|
|
|
Proceeds from sale of foreclosed assets |
|
|
7,877 |
|
|
|
1,186 |
|
|
|
2,174 |
|
Proceeds from sale of premises and equipment |
|
|
|
|
|
|
2,065 |
|
|
|
|
|
Purchase of premises and equipment |
|
|
(287 |
) |
|
|
(692 |
) |
|
|
(728 |
) |
Purchase of life insurance |
|
|
|
|
|
|
(5,000 |
) |
|
|
|
|
Proceeds from surrender of life insurance |
|
|
22,628 |
|
|
|
|
|
|
|
|
|
Net proceeds from sale of premises of real estate owned via equity investments |
|
|
11,354 |
|
|
|
9,064 |
|
|
|
19,368 |
|
Distributions from real estate owned via equity investments |
|
|
200 |
|
|
|
241 |
|
|
|
167 |
|
Net decrease (increase) in real estate joint ventures |
|
|
|
|
|
|
5,219 |
|
|
|
(2,572 |
) |
Net decrease in real estate owned via equity investments |
|
|
(9,537 |
) |
|
|
(8,885 |
) |
|
|
(7,451 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(85,274 |
) |
|
|
36,185 |
|
|
|
(5,253 |
) |
|
|
|
|
|
|
|
|
|
|
73
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in non-interest bearing and interest bearing demand deposits and
savings accounts |
|
|
32,719 |
|
|
|
(65,443 |
) |
|
|
(29,009 |
) |
Increase (decrease) in certificates of deposit |
|
|
88,968 |
|
|
|
55,359 |
|
|
|
(60,296 |
) |
Principal payments on mortgage |
|
|
|
|
|
|
|
|
|
|
(67 |
) |
Net (decrease) increase in short-term borrowings |
|
|
|
|
|
|
(80,000 |
) |
|
|
49,000 |
|
Proceeds from long-term borrowings |
|
|
|
|
|
|
65,000 |
|
|
|
|
|
Repayments of long-term borrowings |
|
|
(21,506 |
) |
|
|
(4,230 |
) |
|
|
(175 |
) |
Repayment of mortgage debt of real estate owned via equity investments |
|
|
(8,698 |
) |
|
|
(6,216 |
) |
|
|
(10,776 |
) |
Income tax benefit on stock options |
|
|
|
|
|
|
|
|
|
|
114 |
|
Proceeds from the issuance of preferred stock |
|
|
30,407 |
|
|
|
|
|
|
|
|
|
Cash dividends paid |
|
|
(359 |
) |
|
|
(4,005 |
) |
|
|
(15,473 |
) |
Cash in lieu of fractional shares |
|
|
|
|
|
|
|
|
|
|
(14 |
) |
Purchase of treasury stock |
|
|
|
|
|
|
(946 |
) |
|
|
(3,760 |
) |
Issuance of common stock under stock option plans |
|
|
|
|
|
|
174 |
|
|
|
334 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
121,531 |
|
|
|
(40,307 |
) |
|
|
(70,122 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
44,039 |
|
|
|
3,354 |
|
|
|
(71,531 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
14,259 |
|
|
|
10,905 |
|
|
|
82,436 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
58,298 |
|
|
$ |
14,259 |
|
|
$ |
10,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure
Interest |
|
$ |
37,391 |
|
|
$ |
40,607 |
|
|
$ |
50,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
|
|
|
$ |
|
|
|
$ |
6,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers to other real estate owned |
|
$ |
29,660 |
|
|
$ |
10,055 |
|
|
$ |
1,188 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
74
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Basis of Financial Statement Presentation
Nature of Operations
Royal Bancshares of Pennsylvania, Inc. (the Company), through its wholly owned subsidiaries Royal
Bank America (Royal Bank) and Royal Asian Bank (Royal Asian), (collectively referred to as the
Banks), offers a full range of banking services to individual and corporate customers primarily
located in the Mid-Atlantic states. The Banks compete 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 brokerage firms 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 both Banks with respect to one or more of the services it renders.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Royal Investments of Delaware, Inc., Royal Captive Insurance Company,
Royal Preferred, LLC, Royal Asian (effective July 17, 2006) and Royal Bank, including Royal Banks
subsidiaries, Royal Real Estate of Pennsylvania, Inc., Royal Investment America, LLC, RBA Property
LLC, Narberth Property Acquisition LLC, Rio Marina LLC, and the following which are owned 60% by
Royal Bank: Royal Bank America Leasing, LP, RBA Capital, LP, Crusader Servicing Corporation and
Royal Tax Lien Services, LLC. Royal Bank owned 60% of RBA ABL Group, LP which ceased operations in
2008. Both of the Companys Trusts are not consolidated as further discussed below in Variable
Interest Entities. All significant intercompany transactions and balances have been eliminated.
Use of Estimates
In preparing the consolidated financial statements in accordance with GAAP, 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 and lease losses, the valuation of deferred tax assets, real
estate owned via equity investments, investment in real estate joint ventures, and other than
temporary impairment losses on investment securities. In connection with the allowance for loan
and lease 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 the Companys allowance for loan and lease losses. In addition, regulatory
agencies, as an integral part of their examination process, periodically review the credit
portfolio and the allowance. Such review may result in additional provisions based on their
judgment of information available at the time of each examination.
Significant Concentration of Credit Risk
Most of the Companys activities are with customers located within the Mid-Atlantic region of the
country. Note 3 Investment Securities to the Consolidated Financial Statements discusses the
types of securities in which the Company invests. Note 4 Loans and Leases to the Consolidated
Financial Statements discusses the types of lending in which the Company engages. The Company 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. The Company has 78% of its
investment portfolio in securities issued by government sponsored entities.
75
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
No substantial portion of loans is concentrated within a single industry or group of related
industries, except a significant majority of loans are secured by real estate. There are numerous
risks associated with commercial and consumer lending that could impact the borrowers ability to
repay on a timely basis. They include, but are not limited to: the owners business expertise,
changes in local, national, and in some cases international economies, competition, governmental
regulation, and the general financial stability of the borrowing entity. The Company has seen a
deterioration in economic conditions as it pertains to real estate loans. Construction and land
loans, non-residential and residential real estate loans represent 33%, 27% and 20%, respectively
of the $73.7 million in non-accrual loans at December 31, 2009.
The Company attempts to mitigate these risks by making an analysis of the borrowers business and
industry history, its financial position, as well as that of the business owner. The Company will
also require the borrower to provide financial information on the operation of the business
periodically over the life of the loan. In addition, most commercial loans are secured by assets
of the business or those of the business owner, which can be liquidated if the borrower defaults,
along with the personal surety of the business owner.
Variable Interest Entities (VIE)
Real estate owned via equity investments: The Company, together with third party real estate
development companies, forms variable interest entities (VIEs) to construct various real estate
development projects. These VIEs account for acquisition, development and construction costs of
the real estate development projects in accordance with FASB ASC Topic 970, Real Estate-General,
and account for capitalized interest on those projects in accordance with FASB ASC Topic 835,
Interest. Due to the present economic conditions, management has made a decision to curtail new
equity investments.
In accordance with ASC Topic 976, the full accrual method is used to recognize profit on real
estate sales. Profits on the sales of this real estate are recorded when cash in excess of the
amount of the original investment is received, and calculation of same is made in accordance with
the terms of the partnership agreement, the Company is no longer obligated to perform significant
activities after the sale to earn profits, there is no continuing involvement with the property
and; finally, the usual risks and rewards of ownership in the transaction had passed to the
acquirer.
At December 31, 2009, the Company had one VIE which is consolidated into the Companys financial
statements. This VIE met the requirements for consolidation under FASB ASC Topic 810,
Consolidation (ASC Topic 810) based on Royal Investments America being the primary financial
beneficiary. This was determined based on the amount invested by Royal Investments America
compared to the Companys partners. In September 2005, the Company, together with a real estate
development company, formed a limited partnership. Royal Investments America is a limited partner
in the partnership (the Partnership). The Partnership was formed to convert an apartment complex
into condominiums. The development company is the general partner of the Partnership. The Company
invested 66% of the initial capital contribution, or $2.5 million, with the development company
investing the remaining equity of $1.3 million. The Company is entitled to earn a preferred return
on the $2.5 million capital contribution. In addition, the Company made two mezzanine loans
totaling $9.2 million at market terms and interest rates. Royal Bank loaned $814,000 to the
Partnership during the fourth quarter of 2009 and is obligated to fund up to $2.7 million if
required for the remaining costs associated with capital improvements, operating and marketing
expenses. As of December 31, 2009, the Partnership also had $3.7 million outstanding of senior debt
with another bank. Upon the repayment of the mezzanine loan interest and principal and the initial
capital contributions and preferred return, the Company and the development company will both
receive 50% of the remaining distribution, if any.
In accordance with ASC Topic 360, the Partnership assesses the recoverability of fixed assets based
on estimated future operating cash flows. The Company had recognized $10 million in impairment
charges related to this asset through December 31, 2008. No further impairment of this asset
occurred in 2009. The measurement and recognition of the impairment was based on estimated future
discounted operating cash flows.
76
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
At December 31, 2009, the Partnership had total assets of $14.9 million of which $12.5 million is
real estate as reflected on the consolidated balance sheet and total borrowings of $13.7 million,
of which $10.0 million relates to the Companys loans discussed above. None of the third party
borrowings are guaranteed by the Company. The Company has made an investment of $12.5 million in
this Partnership ($2.5 million capital contribution and $10.0 million of loans). The impairments
mentioned above have contributed to an overall reduction in the Companys investment. At December
31, 2009, the remaining amount of the investment in and receivables due from the Partnership
totaled $9.2 million.
On August 13, 2009, the Company received a Senior Loan Default Notice from the Senior Lender as a
result of the Partnership not making the required repayment by July 9, 2009. The Company signed a
forbearance agreement and an intercreditor agreement between the Company and the Senior Lender on
October 23, 2009 which extended the loan until December 9, 2010. As part of the agreement to
extend the loan for 14 months, the senior debt lender required the Partnership to provide
additional funds to cover current and potential future cash requirements for capital improvements,
operating expenses and marketing costs. Royal Bank loaned $814,000 to the Partnership during the
fourth quarter of 2009 and is obligated to fund up to $2.7 million if required for the remaining
costs associated with capital improvements, operating and marketing expenses. The initial loan
amount and any additional funds loaned to the Partnership will be repaid from the cash flow after
the senior debt is paid in full, but prior to any other payments to partners. On October 25, 2009
the senior debt lender filed for bankruptcy protection, which has not impacted the relationship
between the Partnership and the senior debt lender.
Trust Preferred Securities: Royal Bancshares Capital Trust I/II (Trusts) issued mandatory
redeemable preferred stock to investors and loaned the proceeds to the Company. The Trusts hold,
as their sole asset, subordinated debentures issued by the Company in 2004. The Company does not
consolidate the Trusts as ASC Topic 810 precludes consideration of the call option embedded in the
preferred stock when determining if the Company has the right to a majority of the Trusts expected
returns. The non-consolidation results in the investment in common stock of the Trusts to be
included in other assets with a corresponding increase in outstanding debt of $774,000. In
addition, the income received on the Companys common stock investments is included in other
income. The Federal Reserve Bank has issued final guidance on the regulatory treatment for the
trust-preferred securities issued by the Trusts as a result of the adoption of ASC Topic 810. The
final rule would retain the 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 final adoption of the rule has delayed the effective date until March 31,
2011. Management is evaluating the effects of the final rule and does not anticipate a material
impact on its capital ratios. Refer to Note 9 Borrowings and Subordinated Debentures to the
Consolidated Financial Statements for more information.
Reclassifications
The Company reviewed the financial reporting of its real estate acquisition, development and
construction (ADC) loans during 2007. As a result of this review, the Company determined that
three ADC loans totaling $13.2 million should have been accounted for as investments in real estate
joint ventures in accordance with ASC Topic 310 and ASC Topic 976. An investment in a real estate
joint venture of this nature is distinguished from an equity investment in real estate by the fact
that the Company is not a party to an operating agreement and has no legal ownership of the entity
that owns the real estate. One investment in the amount of $4.7 million was to fund the purchase of
property for construction of an office and residential building. This investment paid off during
the second quarter of 2008 and resulted in a gain on sales related to real estate joint ventures of
$1.1 million. A second investment for $6.0 million was to fund the construction of a 55 unit
condominium building. This investment was impaired for its full amount during the third quarter of
2007 and was charged to operating expenses. The third
investment in the amount of $2.5 million was to fund the acquisition of a marina project which
amounts to the total investments in real estate joint ventures as of December 31, 2009 and 2008.
In addition, certain other reclassifications have been made in the Consolidated Financial
Statements for 2008 and 2007 to conform to the classifications in 2009. These reclassifications
had no effect on net income (loss).
77
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due
from banks, interest-bearing deposits and federal funds sold. Generally, federal funds are
purchased and sold for one-day periods.
Investment Securities
Management determines the appropriate classification of debt securities at the time of purchase and
re-evaluates such designation as of each balance sheet date.
Investments in debt securities that the Company has the positive intent and ability to hold to
maturity are classified as held to maturity securities and reported at amortized cost. Debt and
equity securities that are bought and held principally for the purpose of selling them in the near
term are classified as trading securities and reported at fair value, with unrealized holding gains
and losses included in earnings. Debt and equity securities not classified as trading securities,
nor as held to maturity securities are classified as available for sale securities and reported at
fair value, with unrealized holding gains or losses, net of deferred income taxes (when
applicable), reported in the accumulated other comprehensive income component of shareholders
equity. The Company held no trading securities at December 31, 2009 and 2008. Discounts and
premiums are accreted/amortized to income by use of the level-yield method. Gain or loss on sales
of securities available for sale is based on the specific identification method.
FASB recently issued accounting guidance related to the recognition and presentation of
other-than-temporary impairment, which the Company adopted effective June 30, 2009 (Pending
Content of FASB ASC 320-1). This recent accounting guidance amends the recognition guidance for
other-than-temporary impairments of debt securities and expands the financial statement disclosures
for other-than-temporary impairment losses on debt and equity securities. The recent guidance
replaced the intent and ability indication in current guidance by specifying that (a) if a
company does not have the intent to sell a debt security prior to recovery and, (b) it is more
likely than not that it will not have to sell the debt security prior to recovery, the security
would not be considered other-than-temporarily impaired unless there is a credit loss.
When an entity does not intend to sell the security, and it is more likely than not, the entity
will not have to sell the security before recovery of its cost basis, it will recognize the credit
component of an other-than-temporary impairment of a debt security in earnings and the remaining
portion in other comprehensive income. For held-to-maturity debt securities, the amount of an
other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of
a previous other-than-temporary impairment should be amortized prospectively over the remaining
life of the security on the basis of the timing of future estimated cash flows of the security.
Prior to the adoption of the recent accounting guidance on June 30, 2009, management considered, in
determining whether other-than-temporary impairment exists (1) the length of time and the extent to
which the fair value has been less than amortized cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Company to retain the investment in
the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
On September 26, 2008 the Company reclassified the remainder of its HTM investment securities to
AFS. The transferred investment securities had a total book value of $37.6 million and a fair value
of $34.7 million. The unrealized loss of $2.9 million on these securities was recorded, net of tax,
as other comprehensive loss, an adjustment to shareholders equity. As a result per ASC Topic 320,
the Company will not classify any future purchases of investment securities as HTM for at least one
more year.
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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank of Pittsburgh (FHLB), the Company is required to
purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. The stock
can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be
at par. As a result of these restrictions, there is no active market for the FHLB stock. As of
December 31, 2009 and 2008, FHLB stock totaled $11.0 million.
In December 2008, the FHLB voluntarily suspended dividend payments on its stock, as well as the
repurchase of excess stock from members. The FHLB cited a significant reduction in the level of
core earnings resulting from lower short-term interest rates, the increased cost of liquidity, and
constrained access to the debt markets at attractive rates and maturities as the main reasons for
the decision to suspend dividends and the repurchase of excess capital stock. The FHLB last paid a
dividend in the third quarter of 2008.
FHLB stock is held as a long-term investment and its value is determined based on the ultimate
recoverability of the par value. The Company evaluates impairment quarterly. The decision of
whether impairment exists is a matter of judgment that reflects managements view of the FHLBs
long-term performance, which includes factors such as the following: (1) its operating performance,
(2) the severity and duration of declines in the fair value of its net assets related to its
capital stock amount, (3) its liquidity position, and (4) the impact of legislative and regulatory
changes on the FHLB. On February 22, 2010, the FHLB filed an 8-K to report their results for the
year ended December 31, 2009. For the year ended December 31, 2009, the FHLB had a net loss of
$37.4 million compared to net income of $19.4 million for the year ended December 31, 2008
primarily related to credit-related losses on their mortgage-backed securities portfolio. At
December 31, 2009, GAAP capital was $3.7 billion as compared to a $4.1 billion at December 31,
2008. The FHLB was in compliance with its risk-based, total and leverage capital requirements at
December 31, 2009. The FHLB previously announced that it is updating its capital restoration plan.
The FHLB has the capacity to issue additional debt if necessary to raise cash. If needed, the FHLB
also has the ability to secure funding available to GSEs through the U.S. Treasury. Based on the
capital adequacy and the liquidity position of the FHLB, management believes that the par value of
its investment in FHLB stock will be recovered. Accordingly, there is no other-than-temporary
impairment related to the carrying amount of the Companys FHLB stock as of December 31, 2009.
Further deterioration of the FHLBs capital levels may require the Company to deem its restricted
investment in FHLB stock to be other-than-temporarily impaired.
Loans and Leases and Allowance for Loan and Lease Losses
The Companys loan and lease portfolio (the credit portfolio) is subject to varying degrees of
credit risk. The Company maintains an allowance for loan and lease losses (the allowance) to
absorb possible losses in the loan and lease portfolio. The allowance is based on the review and
evaluation of the loan and lease portfolio, along with ongoing, quarterly assessments of the
probable losses inherent in that portfolio. The allowance represents an estimation made pursuant to
FASB ASC Topic 450, Contingencies (ASC Topic 450) or FASB ASC Topic 310, Receivables (ASC
Topic 310). The adequacy of the allowance is determined through evaluation of the credit
portfolio, and involves consideration of a number of factors, as outlined below, to establish a
prudent level. Determination of the allowance is inherently subjective and requires significant
estimates, including estimated losses on pools of homogeneous loans and leases based on historical
loss experience and consideration of current economic trends, which may be susceptible to
significant change. Loans and leases deemed uncollectible are charged against the allowance, while
recoveries are credited to the allowance. Management adjusts the level of the allowance through the
provision for loan and lease losses, which is recorded as a current period expense. The Companys
systematic methodology for assessing the appropriateness of the allowance includes: (1) the formula
allowance reflecting historical losses, as adjusted, by loan category, and (2) the specific
allowance for risk-rated credits on an individual or portfolio basis.
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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
The Company uses three major components in determining the appropriate value of the loan and lease
loss allowance: standards required under ASC Topic 310, a historical loss factor, and an
environmental factor. Utilizing standards required under ASC Topic 310, loans are evaluated for
impairment on an individual basis considering current collateral values (current appraisals or rent
rolls for income producing properties), all known relevant factors that may affect loan
collectability, and risks inherent in different kinds of lending (such as source of repayment,
quality of borrower and concentration of credit quality). Once a loan is determined to be impaired
(or is classified) such loans will be deducted from the portfolio and the net remaining balance
will be used in the historical and environmental analysis.
The formula allowance, which is based upon historical loss factors, as adjusted, establishes
allowances for the major loan and lease categories based upon a five year rolling average of the
historical loss experienced. The factors used to adjust the historical loss experience address
various risk characteristics of the Companys loan and lease portfolio including: (1) trends in
delinquencies and other non-performing loans, (2) changes in the risk profile related to large
loans in the portfolio, (3) changes in the growth trends of categories of loans comprising the loan
and lease portfolio, (4) concentrations of loans and leases to specific industry segments, and (5)
changes in economic conditions on both a local and national level.
Management recognizes the higher credit risk associated with commercial and construction loans. As
a result of the higher credit risk related to commercial and construction loans, the Company
computes its formula allowance (which is based upon historical loss factors, as adjusted) using
higher quantitative risk weighting factors than used for its consumer related loans. As an example,
the Company applies an internal quantitative risk-weighting factor for construction loans which is
approximately three times higher than the quantitative risk-weighting factor used for multi-family
real estate loans. These higher economic risk factors for commercial and construction loans are
used to compensate for the higher volatility of commercial and construction loans to changes in the
economy and various real estate markets.
A loan is considered impaired when it is probable that interest and principal will not be collected
according to the contractual terms of the loan agreement. Analysis resulting in specific
allowances, including those on loans identified for evaluation of impairment, includes
consideration of the borrowers overall financial condition, resources and payment record, support
available from financial guarantors and the sufficiency of collateral. For such loans that are
classified as impaired, an allowance is established when the discounted cash flows (or collateral
value or observable market price) of the impaired loan are lower than the carrying value of that
loan. These factors are combined to estimate the probability and severity of inherent losses. Then
a specific allowance is established based on the Companys calculation of the potential loss in
individual loans. Additional allowances may also be established in special circumstances involving
a particular group of credits or portfolio when management becomes aware that losses incurred may
exceed those determined by application of the risk factors.
The Company classifies its leases as capital leases, in accordance to FASB ASC Topic 840, Leases.
The difference between the Companys gross investment in the lease and the cost or carrying amount
of the leased property, if different, is recorded as unearned income, which is amortized to income
over the lease term by the interest method.
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 borrowers
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, all
unpaid interest is reversed from interest income.
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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
The Banks utilize the effective yield interest method for recognizing interest income as required
by ASC Subtopic 20, Nonrefundable Fees and Other Costs under ASC Topic 310. This pronouncement
also guides our accounting for nonrefundable fees and costs associated with lending activities such
as discounts, premiums, and loan origination fees. In the case of loan restructurings, if the
terms of the new loan resulting from a loan refinancing or restructuring other than a troubled debt
restructuring are at lease as favorable to the Banks as the terms for comparable loans to other
customers with similar collection risks who are not refinancing or restructuring a loan with the
Banks, the refinanced loan is accounted for as a new loan. This condition is met if the new loans
effective yield is at least equal to the effective yield for such loans. Any unamortized net fees
or costs and any prepayment penalties from the original loan shall be recognized in interest income
when the new loan is granted.
The Company accounts for guarantees in accordance with FASB ASC Topic 460 Guarantees (ASC Topic
460). ASC Topic 460 requires a guarantor entity, at the inception of a guarantee covered by the
measurement provisions of the interpretation, to record a liability for the fair value of the
obligation undertaken in issuing the guarantee. The Company has financial and performance letters
of credit. Financial letters of credit require a company to make a payment if the customers
condition deteriorates, as defined in agreements. Performance letters of credits require the
Company to make payments if the customer fails to perform certain non-financial contractual
obligations.
Other Real Estate Owned
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially
recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis.
Subsequent to foreclosure, valuations are periodically performed by management and the assets are
carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in other expenses.
Premises and Equipment
Land is carried at cost. 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. Expected term includes lease
options periods to the extent that the exercise of such options is reasonably assured.
Interest Rate Swaps
For asset/liability management purposes, the Company uses interest rate swaps which are agreements
between the Company and another party (known as counterparty) where one stream of future interest
payments is exchanged for another based on a specified principal amount (known as notional amount).
The Company will use interest rate swaps 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, are 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.
The Company had utilized 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 and investments as well
as convert a portion of variable rate borrowings (cash flow hedge) to fund fixed rate loans.
Interest rate swap contracts represent a series of interest flows and are exchanged over a
prescribed period. Each quarter the Company used the Volatility Reduction Measure (VRM) to
determine the effectiveness of their fair value hedges.
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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
As a consequence of the 2008 third quarter Lehman Brothers Holdings, Inc. (Lehman) bankruptcy
filing, the swap agreements and cash flow hedge that existed at the end of the 2008 second quarter
were terminated. The Company had an agency mortgage-backed security (approximately $5.0 million)
that was pledged as collateral at Lehman for our swap agreements. In October 2008, the Company sued
Lehman Brothers Special Financing, Inc. (LBSF) to recover possession of its collateral. The
Company intends to continue to vigorously pursue return of the collateral pledged in connection
with the interest rate swap. Because of the uncertainty surrounding the litigation and the
bankruptcy of Lehman, the Company classified the collateral as other-than-temporarily impaired as
of December 31, 2008. Additionally, the Company had an interest receivable associated with the
cash flow hedge of approximately $240,000 that was written down to $0 during the third quarter of
2008. The Company did not have any interest rate swaps agreements at December 31, 2009 and 2008.
Investments in Real Estate Joint Ventures
The Company has one investment in a real estate joint venture and accounts for it in accordance
with ASC Topic 310 and FASB ASC Topic 976, Real Estate-Retail Land (ASC Topic 976) because the
Company is not a party to an operating agreement and has no legal ownership of the entity that owns
the real estate. The real estate joint venture is an investment in a marina project. As of
December 31, 2009 and 2008, the balance of the marina project investment was $2.5 million.
Bank-Owned Life Insurance
Royal Bank has purchased life insurance policies on certain executives. These policies are
reflected on the consolidated balance sheets 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. During the third quarter of 2009, the Company surrendered approximately $23.0
million in bank owned life insurance and incurred an excise tax expense of $474,000.
Transfer of Financial Assets
The Company accounts for the transfer of financial assets in accordance with FASB ASC Topic 860,
Transfers and Servicing (ASC Topic 860). ASC Topic 860 revises the standards for accounting
for the securitizations and other transfers of financial assets and collateral.
Transfers of financial assets are accounted for as sales, when control over the assets has been
surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have
be isolated from the Company, (2) the transferee obtains the right (free of conditions that
constrain it from taken advantage of that right) to pledge or exchange the transferred assets, and
(3) the Company does not maintain effective control over the transferred asset through an agreement
to repurchase them before maturity.
Advertising Costs
Advertising costs are expensed as incurred. The Companys advertising costs were $184,000,
$206,000, and $376,000 for 2009, 2008, and 2007, respectively.
Benefit Plans
The Company has a noncontributory nonqualified, defined benefit pension plan covering certain
eligible employees. The plan provides retirement benefits under pension trust agreements. The
benefits are based on years of service and the employees compensation during the highest three
consecutive years during the last 10 years of employment. Net pension expense consists of service
costs and interest costs. The Company accrues pension costs as incurred.
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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
Stock Compensation
FASB ASC Topic 718, Compensation-Stock Compensation (ASC Topic 816) requires that the
compensation cost relating to share-based payment transactions be recognized in consolidated
financial statements. The costs are measured based on the fair value of the equity or liability
instruments issued. ASC Topic 816 covers a wide range of share-based compensation arrangements
including stock options, restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. The effect of the Statement is to require entities to
measure the cost of employee services received in exchange for stock options based on the
grant-date fair value of the award, and to recognize the cost over the period the employee is
required to provide services for the award. ASC Topic 816 permits entities to use any
option-pricing model that meets the fair value objective in the Statement. The Company recorded
compensation expense relating to stock options and restricted stock of $226,000, $703,000 and
$657,000 during 2009, 2008 and 2007, respectively.
At December 31, 2009, the Company had a director stock-based, an employee stock-based, and a long
term incentive compensation plans, which are more fully described in Note 16 Stock Compensation
Plans to the Consolidated Financial Statements.
Income Taxes
The Company accounts for income taxes in accordance with the income tax accounting guidance set
forth in FASB ASC Topic 740, Income Taxes (ASC Topic 740). ASC Topic 740 sets out a consistent
framework to determine the appropriate level of tax reserves to maintain for uncertain tax
positions.
The income tax accounting guidance results in two components of income tax expense: current and
deferred. Current income tax expense reflects taxes to be paid or refunded for the current period
by applying the provisions of the enacted tax law to the taxable income or excess of expenses over
revenues. The Company determines deferred income taxes using the liability method. Under this
method, the net deferred tax asset or liability is based on the tax effects of the differences
between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws
are recognized in the period in which they occur.
Deferred income tax expense (benefit) results from changes in deferred tax assets and liabilities
between periods. Deferred tax assets are recognized if it is more likely than not, based on the
technical merits, that the tax position will be realized or sustained upon examination. The term
more likely than not means a likelihood of more than 50 percent; the terms examined and upon
examination also include resolution of the related appeals or litigation processes, if any. A tax
position that meets the more-likely-than-not recognition threshold is initially and subsequently
measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of
being realized upon settlement with a taxing authority that has full knowledge of all relevant
information. The determination of whether or not a tax position has met the more-likely-than-not
recognition threshold considers the facts, circumstances, and information available at the
reporting date and is subject to managements judgment. Deferred tax assets are reduced by a
valuation allowance if, based on the weight of evidence available, it is more likely than not that
some portion or all of a deferred tax asset will not be realized.
The Company recognized interest and penalties on income taxes as a component of income tax expense.
Treasury Stock
Common stock shares repurchased are recorded at treasury stock cost.
Earnings (Losses) Per Share Information
Basic per share data excludes dilution and is computed by dividing income (loss) 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.
The Class B shares of the Company may be converted to Class A shares at the rate of 1.15 to 1.
83
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in accordance with FASB ASC Topic 220,
Comprehensive Income (ASC Topic 220), which requires the reporting of all changes in equity
during the reporting period except investments from and distributions to shareholders. Net income
(loss) is a component of comprehensive income (loss) with all other components referred to in the
aggregate as other comprehensive income. Comprehensive income (loss) consists of net income (loss)
and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains
and losses on available for sale investment securities, non-credit related losses on
other-than-temporarily impaired investment securities, and adjustment to net periodic pension cost
which are also recognized as separate components of equity.
Fair Value of Financial Instruments
For information on the fair value of the Companys financial instruments refer to Note 19 Fair
Value of Financial Instruments to the Consolidated Financial Statements.
Restrictions on Cash and Amounts Due From Banks
Royal Bank is required to maintain average balances on hand with the Federal Reserve Bank. At
December 31, 2009 and 2008, these reserve balances amounted to $100,000. At December 31, 2009 and
2008, Royal Asian was not required to maintain an average balance with the Federal Reserve Bank.
2. Recent Accounting Pronouncements
On July 1, 2009, the Financial Accounting Standards Board (FASB) Accounting Standards
CodificationTM (ASC or Codification) became effective as the sole authoritative
source of U.S. generally accepted accounting principles (GAAP). This codification was issued
under FASB Statement No. 168, The FASB Accounting Standards CodificationTM and the
Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162 and
can now be found under FASB ASC Topic 105, Generally Accepted Accounting Principles.
Codification is the source of authoritative GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. Codification
supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered
non-SEC accounting literature not included in the Codification became nonauthoritative. Accounting
literature included in the Codification is referenced by Topic, Subtopic, Section, Paragraph and
Subparagraph. The adoption of Codification did not have a material impact on the Companys
consolidated financial statements.
In December 2008, the FASB issued new guidance under ASC Topic 715, Compensation-Retirement
Benefits (ASC Topic 715). The new guidance provides direction on an employers disclosures
about plan assets of a defined benefit pension or other postretirement plan. The disclosures about
plan assets required by this guidance shall be provided for fiscal years ending after December 15,
2009. The adoption of this guidance did not have a material impact on the Companys consolidated
financial position and results of operations.
In December 2008, the FASB issued guidance under ASC Topic 860 Transfers and Servicing (ASC
Topic 860). The new guidance requires public entities to provide additional disclosures about
transfers of financial assets. It also requires public enterprises, including sponsors that have a
variable interest in a variable interest entity, to provide additional disclosures about their
involvement with variable interest entities. Additionally, it requires certain disclosures to be
provided by a public enterprise that is (a) a sponsor of a qualifying special purpose entity (SPE)
that holds a variable interest in the qualifying SPE but was not the transferor of financial assets
to the qualifying SPE and (b) a servicer of a qualifying SPE that holds a significant variable
interest in the qualifying SPE but was not the transferor of financial assets to the qualifying
SPE. The disclosures required are intended to provide greater transparency to financial statement
users about a transferors continuing involvement with transferred financial assets and an
enterprises involvement with variable interest entities and qualifying SPEs. The new guidance
under
ASC Topic 860 is effective for reporting periods (annual or interim) ending after December 15,
2008. The implementation of this guidance did not have a material impact on the Companys
consolidated financial position and results of operations.
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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
In January 2009, the FASB issued new guidance under FASB ASC Topic 325, Investments-Other
Subtopic 40, Beneficial Interests in Securitized Financial Assets (ASC Topic 325-40). This
guidance is meant to achieve a consistent determination of whether an other-than-temporary
impairment has occurred. The guidance also retains and emphasizes the objective of an
other-than-temporary impairment assessment and the related disclosure requirements under FASB ASC
Topic 320, Investments-Debt & Equity Securities (ASC Topic 320). ASC Topic 325-40 was
effective for interim and annual reporting periods ending after December 15, 2008, and was applied
prospectively. Retrospective application to a prior interim or annual reporting period was not
permitted. The implementation of this guidance did not have an impact on the Companys consolidated
financial position and results of operations.
In April 2009, the FASB issued new guidance under ASC Topic 320, which applies to debt securities,
is intended to provide greater clarity to investors about the credit and noncredit components of an
other-than-temporary (OTTI) event and to more effectively communicate when an OTTI event has
occurred. Under these circumstances as required by the new guidance, OTTI is considered to have
occurred (1) if an entity intends to sell the security; (2) if it is more likely than not an
entity will be required to sell the security before recovery of its amortized cost basis; or
(3) the present value of expected cash flows is not sufficient to recover the entire amortized cost
basis. The more likely than not criteria is a lower threshold than the probable criteria used
under previous guidance. This guidance requires that credit-related OTTI is recognized in earnings
while noncredit-related OTTI on securities not expected to be sold is recognized in other
comprehensive income (OCI). Noncredit-related OTTI is based on other factors, including
illiquidity. Presentation of OTTI is made in the statement of income on a gross basis with an
offset for the amount of OTTI recognized in OCI. For securities classified as HTM, the amount of
OTTI recognized in OCI is accreted to the credit-adjusted expected cash flow amounts of the
securities over future periods. If applicable, noncredit-related OTTI recognized in earnings
previous to April 1, 2009 would be reclassified from retained earnings to accumulated OCI as a
cumulative effect transition adjustment. The Company adopted this guidance for the quarter ended
June 30, 2009 and did not record a cumulative effect adjustment as of April 1, 2009 because prior
OTTI recorded in earnings was all credit related. The adoption of this guidance resulted in
reducing the loss recognized in earnings on debt securities determined to be other-than-temporarily
impaired as of December 31, 2009 by $8.0 million. Refer to Note 3 Investment Securities to the
Consolidated Financial Statements for additional disclosures regarding the adoption of this
guidance.
In April 2009, the FASB issued new guidance under ASC Topic 820, Fair Value Measurements and
Disclosures (ASC Topic 820) which provides additional guidance for estimating fair value when
the volume and level of activity for an asset or liability has significantly declined. The new
guidance also offers direction on identifying circumstances when a transaction is not orderly.
The new guidance became effective for interim and annual reporting periods ending after June
15, 2009, and was applied prospectively. The implementation of the new guidance resulted in an
adjustment to the fair values associated with Level 3 trust preferred securities. The net impact
of the adjustment was an immaterial decline in the fair value of the securities.
In May 2009, the FASB issued guidance under ASC Topic 855, Subsequent Events (ASC Topic 855),
which established general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued. In
particular, ASC Topic 855 set forth: (1) the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, (2) the circumstances under which
an entity should recognize events or transactions occurring after the balance sheet date in its
financial statements and (3) the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. The guidance was effective for interim
and annual financial periods ending after June 15, 2009 and did not have a material impact on the
Companys consolidated financial statements. In February 2010, the FASB issued ASU 2010-09,
Amendments to Certain Recognition and Disclosure Requirements, which updates
ASC Topic 855. ASU 2010-09 clarifies the evaluation date for subsequent events. An
entity that is a SEC filer is required to evaluate subsequent events through the date that the
financial statements are issued. Additionally, an entity that is an SEC filer is not required to
disclose the date through which subsequent events have been evaluated. This change alleviates
potential conflicts between ASC Topic 855 Subtopic 10 and the SECs requirements. ASU 2010-09 is
effective immediately and did not have a material impact on our consolidated financial statements.
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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
In June 2009, the FASB issued additional guidance under ASC Topic 860. The purpose of the new
guidance is to improve the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial performance, and
cash flows; and a transferors continuing involvement, if any, in transferred financial assets. The
new guidance must be applied as of the beginning of each reporting entitys first annual reporting
period that begins after November 15, 2009, for interim periods within that first annual reporting
period and for interim and annual reporting periods thereafter. Earlier application is prohibited.
The new guidance must be applied to transfers occurring on or after the effective date.
Additionally, on and after the effective date, the concept of a qualifying special purpose entity
is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose
entities (as defined under previous accounting standards) should be evaluated for consolidation by
reporting entities on and after the effective date in accordance with the applicable consolidation
guidance. If the evaluation on the effective date results in consolidation, the reporting entity
should apply the transition guidance provided in the pronouncement that requires consolidation. The
Company does not expect the adoption of this guidance to have a significant impact on the
consolidated financial statements.
In June 2009, the FASB issued updated guidance under ASC Topic 810 Consolidation (ASC Topic
810). The purpose of the new guidance under ASC Topic 810 is to improve financial reporting by
enterprises involved with variable interest entities. The FASB undertook this project to address
(1) the effects on certain provisions in ASC Topic 860 as a result of the elimination of the
qualifying special-purpose entity concept in ASC Topic 860, and (2) constituent concerns about the
application of certain key provisions of ASC Topic 810, including those in which the accounting and
disclosures do not always provide timely and useful information about an enterprises involvement
in a variable interest entity. The new guidance shall be effective as of the beginning of each
reporting entitys first annual reporting period that begins after November 15, 2009, for interim
periods within that first annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. The Company does not expect the adoption of this
guidance to have a significant impact on the consolidated financial statements.
In August 2009, the FASB issued Accounting Standards Update (ASU) 2009-05, Measuring Liabilities
at Fair Value, which updates ASC Topic 820. The updated guidance clarifies that the fair value of
a liability can be measured in relation to the quoted price of the liability when it trades as an
asset in an active market, without adjusting the price for restrictions that prevent the sale of
the liability. This guidance was effective beginning October 1, 2009. The guidance did not change
the way the Companys valuation techniques for measuring liabilities at fair value.
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value
Measurements, which updates ASC Topic 820. This guidance is intended to provide a greater level
of disaggregated information and more robust disclosures about valuation techniques and inputs to
fair value measurements. A reporting entity should disclose separately the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for
the transfers. Additionally, a reporting entity should provide disclosures about the
valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair
value measurements. Those disclosures are required for fair value measurements that fall in either
Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are
effective for interim and annual reporting periods beginning after December 15, 2009. The Company
does not expect the adoption of this guidance to have a significant impact on the consolidated
financial statements.
86
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 2 REGULATORY ORDERS
On July 15, 2009, Royal Bank agreed to enter into a Stipulation and Consent to the Issuance of an
Order to Cease and Desist (the Orders) with each of the Federal Deposit Insurance Corporation
(FDIC) and the Commonwealth of Pennsylvania Department of Banking (Department). The material
terms of the Orders are identical and require Royal Bank to: (i) have and retain qualified
management, and notify the FDIC and the Department of any changes in Royal Banks Board of
Directors or senior management; (ii) increase participation of Royal Banks Board of Directors in
Royal Banks affairs by having the board assume full responsibility for approving Royal Banks
policies and objectives and for supervising Royal Banks management; (iii) eliminate all assets
classified as Loss and formulate a written plan to reduce assets classified as Doubtful and
Substandard at its regulatory examination; (iv) develop a written plan to reduce delinquent
loans, and restrict additional advances to borrowers with existing credits classified as Loss,
Doubtful or Substandard; (v) develop a written plan to reduce Royal Banks commercial real
estate loan concentration; (vi) maintain, after establishing an adequate allowance for loan and
lease losses, a ratio of Tier 1 capital to total assets (leverage ratio) equal to or greater than
8% and a ratio of qualifying total capital to risk-weighted assets (total risk-based capital ratio)
equal to or greater than 12%; (vii) formulate and implement written profit plans and comprehensive
budgets for each year during which the Orders are in effect; (viii) formulate and implement a
strategic plan covering at least three years, to be reviewed quarterly and revised annually; (ix)
revise the liquidity and funds management policy and update and review the policy annually; (x)
refrain from increasing the amount of brokered deposits held by Royal Bank and develop a plan to
reduce the reliance on non-core deposits and wholesale funding sources; (xi) refrain from paying
cash dividends without prior approval of the FDIC and the Department; (xii) refrain from making
payments to or entering contracts with Royal Banks Holding Company or other Royal Bank affiliates
without prior approval of the FDIC and the Department; (xiii) submit to the FDIC for review and
approval an executive compensation plan that incorporates qualitative as well as profitability
performance standards for Royal Banks executive officers; (xiv) establish a compliance committee
of the Board of Directors of Royal Bank with the responsibility to ensure Royal Banks compliance
with the Orders; and (xv) prepare and submit quarterly reports to the FDIC and the Department
detailing the actions taken to secure compliance with the Orders. The Orders will remain in effect
until modified or terminated by the FDIC and the Department.
The Orders do not restrict Royal Bank from transacting its normal banking business. Royal Bank
will continue to serve its customers in all areas including making loans (with the exception of new
non-owner occupied commercial real estate and construction loans), establishing lines of credit,
accepting deposits and processing banking transactions. Customer deposits remain fully insured to
the highest limits set by the FDIC. The FDIC and the Department did not impose or recommend any
monetary penalties in connection with the Orders.
Following are the actions Royal Bank has taken to respond to and comply with the Orders as of the
date of this report:
|
1. |
|
Board Oversight and Senior Management |
|
|
|
|
The Board of Directors has increased their participation in the affairs of Royal Bank. A
new Regulatory Compliance Committee comprised of outside directors and management was
created in the third quarter of 2009. The purpose of the Committee is to monitor compliance
with the Orders. Royal Bank has recently completed an internal assessment of senior
managements qualifications and has submitted the report to the FDIC and the Department for
their review. |
|
|
2. |
|
Reduction of Classified Assets |
|
|
|
|
Royal Bank has eliminated from its books via charge-off all assets classified as
Loss. Royal Bank submitted to the FDIC and the Department a Plan for the Reduction of
Classified Assets (classified assets plan) required under the Orders. The FDIC and the
Department have approved the classified assets plan. No advances were made on any
classified loan unless approved by the Board of Directors and determined to be in Royal
Banks best interest. Royal Bank was successful in reducing net classified loans
(outstanding loan balance less charge-offs and specific reserves) and other real estate
owned (OREO) from $149.6 million at June 30, 2009 to $106.2 million at December 31, 2009.
|
87
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 2 REGULATORY ORDERS Continued
|
3. |
|
Reduction of Delinquencies |
|
|
|
|
Royal Bank submitted to the FDIC and the Department a Plan for the Reduction of
Delinquencies (delinquency reduction plan) required under the Orders. The FDIC and the
Department have approved the delinquency reduction plan. No advances were made on any
delinquent loan unless approved by the Board of Directors and determined to be in Royal
Banks best interest. Royal Bank was successful in reducing delinquent loans from $36.3
million at June 30, 2009 to $27.5 million at December 31, 2009. |
|
|
4. |
|
Reduction of Commercial Real Estate Concentrations |
|
|
|
|
Royal Bank submitted to the FDIC and the Department a Plan for the Reduction of Commercial
Real Estate Concentrations (CRE concentration plan) required under the Orders. The FDIC
and the Department have approved the CRE concentration plan. Management has been working
diligently to reduce the concentration in commercial real estate loans (CRE loans). Royal
Bank was successful in reducing the CRE concentration from $289.1 million at June 30, 2009
to $253.7 million at December 31, 2009, which amounted to 227.7% of total capital and 251.7%
of Tier 1 capital. At year end 2009, Royals total CRE loans were below 300% of capital and
were almost $49 million less than what was projected under the CRE concentration Plan. |
|
|
|
|
At December 31, 2009, total construction/land loans (CL loans) amounted to $114.9 million,
or 102.9% of total capital and 113.7% of Tier 1 capital. CL loans were approximately $39
million less than what was projected under the CRE concentration plan at year end 2009. |
|
|
5. |
|
Capital Maintenance |
|
|
|
|
Under the Orders, Royal Bank must maintain a minimum total risk-based capital ratio and a
minimum Tier 1 leverage ratio of 12% and 8%, respectively. At December 31, 2009, Royal
Banks total risk-based capital and Tier 1 leverage ratios were 13.37% and 8.09%,
respectively. |
|
|
6. |
|
Budget Plan |
|
|
|
|
Royal Bank submitted to the FDIC and the Department a revised 2009 budget and profit plan
required under the Orders. The FDIC and the Department have approved the 2009 budget and
profit plan. In addition Royal Bank has submitted to the FDIC and the Department a 2010
budget and profit plan. |
|
|
7. |
|
Strategic Plan |
|
|
|
|
Royal Bank submitted to the FDIC and the Department a three-year strategic plan required
under the Orders. The FDIC and the Department have approved the three-year strategic plan.
The Board of Directors and senior management are executing the strategic plan and will
incorporate any modifications as deemed necessary by our regulators. |
|
|
8. |
|
Liquidity and Funds Management |
|
|
|
|
Royal Bank submitted to the FDIC and the Department a liquidity and funds management plan
(liquidity plan) required under the Orders. The FDIC and the Department have approved the
liquidity plan. At December 31, 2009, Royal Bank had $56.7 million in cash on hand and
$143.5 million in unpledged agency
securities. At December 31, 2009, the liquidity to deposits ratio was 33.1% compared to
Royal Banks 12% target and the liquidity to total liabilities was 24.0% compared to Royal
Banks 10% target. |
|
|
9. |
|
Brokered Deposits and Borrowings |
|
|
|
|
Royal Bank submitted to the FDIC and the Department a plan for reduction of reliance on
non-core deposits and wholesale funding sources plan (brokered deposit plan) required
under the Orders. The FDIC and the Department have approved the brokered deposit plan.
Since entering the Orders Royal Bank has not renewed, accepted, or rolled over any maturing
brokered certificates of deposit (CDs); nor has Royal Bank issued new brokered CDs.
Brokered CDs declined $20 million from $226.9 million at June 30, 2009 to $206.9 million at
December 31, 2009. Royal Bank has redeemed an additional $23.8 million in brokered CDs
through February 2010. Borrowings declined $26.1 million from $283.9 million at June 30,
2009 to $257.8 million at December 31, 2009. The borrowing amounts do not include the
$3.8 million in obligations owned via equity investment which are not guaranteed by Royal
Bank or any of its subsidiaries.
|
88
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 2 REGULATORY ORDERS Continued
|
10. |
|
Cash Dividends and other Payments to the Company |
|
|
|
|
Royal Bank will seek approval from the FDIC and the Department prior to declaring a cash
dividend to the Company and prior to making payments or entering into new contracts with our
affiliates. |
|
|
11. |
|
Executive Compensation |
|
|
|
|
Royal Bank submitted to the FDIC an executive compensation plan (compensation plan)
required under the Orders. The FDIC has approved the compensation plan. Royal Bank was not
required to submit the compensation plan to the Department. |
Royal Bank has submitted all required quarterly reports to the FDIC and the Department detailing
the actions taken to secure compliance with the Orders as of the date of this report.
|
|
NOTE 3 INVESTMENT SECURITIES |
The amortized cost, gross unrealized gains and losses, and fair value of the Companys
available-for-sale investment securities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Accumulated Other |
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
Comprehensive Loss (AOCI) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-credit |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
related |
|
|
|
|
|
|
Amortized |
|
|
unrealized |
|
|
Non-OTTI |
|
|
OTTI in |
|
|
|
|
(In thousands) |
|
cost |
|
|
gains |
|
|
in OCI |
|
|
OCI |
|
|
Fair value |
|
Investment securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential |
|
$ |
21,393 |
|
|
$ |
234 |
|
|
$ |
(26 |
) |
|
$ |
|
|
|
$ |
21,601 |
|
U.S. government agencies |
|
|
1,150 |
|
|
|
3 |
|
|
|
(2 |
) |
|
|
|
|
|
|
1,151 |
|
Preferred stocks |
|
|
2,500 |
|
|
|
|
|
|
|
(270 |
) |
|
|
|
|
|
|
2,230 |
|
Common stocks |
|
|
381 |
|
|
|
71 |
|
|
|
(8 |
) |
|
|
|
|
|
|
444 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies |
|
|
316,911 |
|
|
|
2,871 |
|
|
|
(1,281 |
) |
|
|
|
|
|
|
318,501 |
|
Non-agency |
|
|
23,010 |
|
|
|
145 |
|
|
|
(875 |
) |
|
|
(1,082 |
) |
|
|
21,198 |
|
Collateralized debt obligations |
|
|
24,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,825 |
|
Corporate bonds |
|
|
7,911 |
|
|
|
9 |
|
|
|
(423 |
) |
|
|
(630 |
) |
|
|
6,867 |
|
Trust preferred securities |
|
|
32,926 |
|
|
|
2,064 |
|
|
|
(177 |
) |
|
|
(678 |
) |
|
|
34,135 |
|
Other securities |
|
|
7,892 |
|
|
|
8 |
|
|
|
(133 |
) |
|
|
|
|
|
|
7,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale |
|
$ |
438,899 |
|
|
$ |
5,405 |
|
|
$ |
(3,195 |
) |
|
$ |
(2,390 |
) |
|
$ |
438,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 3 INVESTMENT SECURITIES Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Accumulated Other |
|
|
|
|
As of December 31, 2008 |
|
|
|
|
|
Comprehensive Loss (AOCI) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized Losses |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Non-credit |
|
|
|
|
|
|
Amortized |
|
|
unrealized |
|
|
Non-OTTI in |
|
|
related OTTI |
|
|
|
|
(In thousands) |
|
cost |
|
|
gains |
|
|
AOCI |
|
|
in AOCI |
|
|
Fair value |
|
Investment securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential |
|
$ |
53,871 |
|
|
$ |
1,190 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
55,061 |
|
U.S. government agencies |
|
|
48,109 |
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
48,191 |
|
Preferred stocks |
|
|
4,000 |
|
|
|
|
|
|
|
(1,703 |
) |
|
|
|
|
|
|
2,297 |
|
Common stocks |
|
|
19,907 |
|
|
|
8 |
|
|
|
(7,208 |
) |
|
|
|
|
|
|
12,707 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies |
|
|
77,848 |
|
|
|
1,649 |
|
|
|
(72 |
) |
|
|
|
|
|
|
79,425 |
|
Non-agency |
|
|
43,711 |
|
|
|
|
|
|
|
(6,221 |
) |
|
|
|
|
|
|
37,490 |
|
Collateralized debt obligations |
|
|
35,000 |
|
|
|
|
|
|
|
(8,840 |
) |
|
|
|
|
|
|
26,160 |
|
Corporate bonds |
|
|
57,445 |
|
|
|
641 |
|
|
|
(6,748 |
) |
|
|
|
|
|
|
51,338 |
|
Trust preferred securities |
|
|
36,316 |
|
|
|
606 |
|
|
|
(6,778 |
) |
|
|
|
|
|
|
30,144 |
|
Other securities |
|
|
7,631 |
|
|
|
54 |
|
|
|
(196 |
) |
|
|
|
|
|
|
7,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale |
|
$ |
383,838 |
|
|
$ |
4,230 |
|
|
$ |
(37,766 |
) |
|
$ |
|
|
|
$ |
350,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The investment portfolio grew $88.4 million from $350.3 million at December 31, 2008 to $438.7
million at December 31, 2009. During 2009, the Company restructured the portfolio by increasing
investments in securities issued by government sponsored entities by $158.6 million and reducing
investments in corporate bonds and non-agency collateralized mortgage obligations by $44.5 million
and $16.3 million, respectively.
The amortized cost and fair value of investment securities at December 31, 2009, by contractual
maturity, are shown below. 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.
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
Amortized |
|
|
|
|
(In thousands) |
|
cost |
|
|
Fair value |
|
Within 1 year |
|
$ |
25,556 |
|
|
$ |
25,557 |
|
After 1 but within 5 years |
|
|
8,330 |
|
|
|
7,286 |
|
After 5 but within 10 years |
|
|
|
|
|
|
|
|
After 10 years |
|
|
32,926 |
|
|
|
34,135 |
|
Mortgage-backed securities-residential |
|
|
21,393 |
|
|
|
21,601 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies |
|
|
316,911 |
|
|
|
318,501 |
|
Non-agency |
|
|
23,010 |
|
|
|
21,198 |
|
|
|
|
|
|
|
|
Total available for sale debt securities |
|
|
428,126 |
|
|
|
428,278 |
|
|
|
|
|
|
|
|
|
|
No contractual maturity |
|
|
10,773 |
|
|
|
10,441 |
|
|
|
|
|
|
|
|
Total available for sale securities |
|
$ |
438,899 |
|
|
$ |
438,719 |
|
|
|
|
|
|
|
|
Proceeds from the sales of investments available for sale during 2009, 2008 and 2007 were $184.2
million, $15.8 million, and $20.8 million, respectively resulting in net realized gains (losses) of
$1.9 million, ($1.3 million), and $5.4 million during 2009, 2008, and 2007, respectively.
90
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 3 INVESTMENT SECURITIES Continued
As of December 31, 2009, investment securities with a market value of $154.9 million were pledged
as collateral to secure advances with the FHLB.
The Company assesses whether OTTI is present when the fair value of a security is less than its
amortized cost. All investment securities are evaluated for OTTI under FASB ASC Topic 320,
Investments-Debt & Equity Securities (ASC Topic 320). The non-agency collateralized mortgage
obligations that are rated below AA are evaluated under FASB ASC Topic 320 Subtopic 40, Beneficial
Interests in Securitized Financial Assets under FASB ASC Topic 325, Investments-Other. In
determining whether OTTI exists, management considers numerous factors, including but not limited
to: (1) the length of time and the extent to which the fair value is less than the amortized cost,
(2) the Companys intent to hold or sell the security, (3) the financial condition and results of
the issuer including changes in capital, (4) the credit rating of the issuer, (5) analysts earnings
estimate, (6) industry trends specific to the security, and (7) timing of debt maturity and status
of debt payments.
Effective April 1, 2009, the Company adopted new provisions under ASC Topic 320 specific to OTTI.
Under the new guidance which applies to existing and new debt securities, OTTI is considered to
have occurred (1) if an entity intends to sell the security; (2) if it is more likely than not an
entity will be required to sell the security before recovery of its amortized cost basis; or (3)
the present value of the expected cash flows is not sufficient to recover the entire amortized cost
basis. In addition, the amount of the OTTI recognized in earnings depends on whether an entity
intends to sell or will more likely than not be required to sell the security. If an entity
intends to sell the security or will be required to sell the security, the OTTI shall be recognized
in earnings equal to the entire difference between the fair value and the amortized cost basis at
the balance sheet date. If an entity does not intend to sell the security and it is not more
likely than not that the entity will be required to sell the security before the recovery of its
amortized cost basis, the OTTI shall be separated into two amounts, the credit-related loss and the
loss related to other factors. The credit-related loss is based on the present value of the
expected cash flows and is recognized in earnings. The noncredit-related loss is based on other
factors such as illiquidity and is recognized in other comprehensive income. Under the new
guidance, if applicable, noncredit-related OTTI recognized in earnings previous to April 1, 2009
would be reclassified from retained earnings to accumulated OCI as a cumulative effect transition
adjustment. The Company did not record a cumulative effect adjustment as of April 1, 2009 because
prior OTTI recorded in earnings was all credit-related.
The tables below indicate the length of time individual securities have been in a continuous
unrealized loss position at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Number of |
|
|
|
|
|
|
Unrealized |
|
|
Number of |
|
|
|
|
|
|
Unrealized |
|
|
Number of |
|
(In thousands) |
|
Fair value |
|
|
losses |
|
|
positions |
|
|
Fair value |
|
|
losses |
|
|
positions |
|
|
Fair value |
|
|
losses |
|
|
positions |
|
Investment securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential |
|
$ |
11,922 |
|
|
$ |
(26 |
) |
|
|
3 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
11,922 |
|
|
$ |
(26 |
) |
|
|
3 |
|
U.S. government agencies |
|
|
398 |
|
|
|
(2 |
) |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
398 |
|
|
|
(2 |
) |
|
|
4 |
|
Preferred stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,230 |
|
|
|
(270 |
) |
|
|
1 |
|
|
|
2,230 |
|
|
|
(270 |
) |
|
|
1 |
|
Common stocks |
|
|
41 |
|
|
|
(8 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41 |
|
|
|
(8 |
) |
|
|
3 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies |
|
|
111,661 |
|
|
|
(1,281 |
) |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111,661 |
|
|
|
(1,281 |
) |
|
|
25 |
|
Non-agency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,487 |
|
|
|
(1,957 |
) |
|
|
5 |
|
|
|
12,487 |
|
|
|
(1,957 |
) |
|
|
5 |
|
Collateralized debt obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,602 |
|
|
|
(1,053 |
) |
|
|
2 |
|
|
|
5,602 |
|
|
|
(1,053 |
) |
|
|
2 |
|
Trust preferred securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,630 |
|
|
|
(855 |
) |
|
|
4 |
|
|
|
12,630 |
|
|
|
(855 |
) |
|
|
4 |
|
Other securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,158 |
|
|
|
(133 |
) |
|
|
1 |
|
|
|
1,158 |
|
|
|
(133 |
) |
|
|
1 |
|
Total available for sale |
|
$ |
124,022 |
|
|
$ |
(1,317 |
) |
|
|
35 |
|
|
$ |
34,107 |
|
|
$ |
(4,268 |
) |
|
|
13 |
|
|
$ |
158,129 |
|
|
$ |
(5,585 |
) |
|
|
48 |
|
91
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 3 INVESTMENT SECURITIES Continued
The AFS portfolio had gross unrealized losses of $5.6 million at December 31, 2009, which declined
from gross unrealized losses of $37.8 million at December 31, 2008. The improvement in gross
unrealized losses is related to $11.0 million in impairment charges recorded in earnings in 2009 as
described below and to the overall improvement in the fair values of the securities in the
Companys investment portfolio. The gross unrealized losses have improved significantly in the
last two quarters as the financial markets have begun to recover. In determining the Companys
intent not to sell and it is not more likely than not that the Company will be required to sell the
investments before recovery of their amortized cost basis, management considers the following
factors: current liquidity and availability of other non-pledged assets that permits the investment
to be held for an extended period of time but not necessarily until maturity, capital planning, and
any specific investment committee goals or guidelines related to the disposition of specific
investments.
Preferred stocks: As of December 31, 2009, the Company had one preferred stock holding of
a financial institution with a total fair value of $2.2 million and an unrealized loss of $270,000,
or 10.8% of its aggregate cost. Management evaluated analysts near term earnings estimates and
recent stock price recovery in relation to the severity and duration of the unrealized loss. While
the stock is rated below investment grade, the stock price has seen a 21% price recovery since the
second quarter of 2009. The issuer is current with dividend payments. Management believes that
the fair value of the preferred stock was not a result of the financial condition and near term
projections of the issuer but rather reflected investor concerns about recent losses in the
financial services industry related to subprime, construction and commercial real estate lending, a
recent acquisition, and other non credit-related factors. Because the Company does not intend to
sell the stock before recovery of its cost basis and will not more likely than not be required to
sell the stock before recovery of its cost basis, it does not consider the impairment to be
other-than-temporary at December 31, 2009. During the third quarter of 2009, the Company sold a
preferred stock holding in a financial institution for a gain of $296,000. The Company had
previously recorded an OTTI charge to earnings on this preferred stock in the first quarter of 2009
for $1.1 million.
Common stocks: As of December 31, 2009, the Company had three common stocks of financial
institutions with a total fair value of $41,000 and an unrealized loss of $8,000, or 15.6% of its
aggregate cost. The Company recorded an OTTI charge to earnings of $62,000 related to two of these
three common stocks during the second quarter of 2009. Because the Company does not intend to sell
these stocks before recovery of their cost basis and will not more likely than not be required to
sell the stocks before recovery of their cost basis, it does not consider the unrealized loss to be
other-than-temporary at December 31, 2009. Total impairment charges recorded in 2009 related to
these common stocks were $543,000.
At June 30, 2009, the Company had 276 large cap, small cap and mid-cap common stocks in six
separate accounts managed exclusively for the benefit of the Company by an investment management
company. The total fair value was $13.7 million and unrealized losses were $2.3 million, or 15% of
their aggregate cost. The Company had recorded impairment losses of $3.8 million on this portfolio
during the first six months of 2009. As a result of the improvement in the stock market during
the third quarter of 2009 management concluded that it was in the best interest of the Company to
sell the entire managed common stock portfolios. Several analysts had indicated that the market was
poised for a correction after increasing almost 50% since late in the first quarter of 2009.
During the third quarter the Company sold these stocks and minimized the loss to $130,000, or 1% of
their aggregate cost.
For all debt security types discussed below the fair value is based on prices provided by brokers
and safekeeping custodians with the exception of trust preferred securities which is described
below.
92
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 3 INVESTMENT SECURITIES Continued
U.S. government issued or sponsored collateralized mortgage obligations (Agency CMOs):
As of December 31, 2009, the Company had 25 Agency CMOs with a fair value of $111.7 million and
gross unrealized losses of $1.3 million, or 1.1% of their aggregate cost. All of the Agency CMOs
had been in an unrealized loss position for less than one year. The unrealized loss is attributable
to a combination of factors, including relative changes in interest rates since the time of
purchase. The contractual cash flows for these securities are guaranteed by U.S. government
agencies and U.S. government-sponsored enterprises. Based on its assessment of these factors,
management believes that the unrealized losses on these debt securities are a function of changes
in investment spreads and interest rate movements and not changes in credit quality. Management
expects to recover the entire amortized cost basis of these securities. The Company does not
intend to sell these securities before recovery of their cost basis and will not more likely than
not be required to sell these securities before recovery of their cost basis. Therefore,
management has determined that these securities are not other-than-temporarily impaired at December
31, 2009.
Non-agency collateralized mortgage obligations (Non-agency CMOs): As of December 31,
2009, the Company had five non-agency CMOs with a fair value of $12.5 million and gross unrealized
losses of $2.0 million, or 13.6% of their aggregate cost. All five of the non-agency CMO bonds
were in an unrealized loss position for more than twelve months. Three bonds accounted for $1.9
million, or 99% of the gross unrealized loss. During the second quarter of 2009, the Company
concluded that two of these three bonds were other-than-temporarily impaired and recognized in
earnings the credit-related loss of $459,000. The Company evaluated the impairment to determine if
it could expect to recover the entire amortized cost basis of the non-agency CMO bonds by
considering numerous factors including credit default rates, conditional prepayment rates, current
and expected loss severities, delinquency rates, and geographic concentrations. Two of the bonds
are below investment grade and the third bond is rated A.
Management utilized discounted cash flow analysis as required under ASC Topic 320 and ASC Topic 325
to determine the credit component of the unrealized loss for the three bonds. As a result,
management concluded that there was no additional credit-related loss on the two bonds that were
previously deemed other-than-temporarily impaired. In addition there was no credit-related loss on
the third bond. Management expects to fully collect the amortized cost basis of all five bonds.
The Company does not intend to sell the non-agency CMOs and it is not more likely than not that the
Company will be required to sell the investments before recovery of their amortized cost basis.
Therefore, the Company does not consider the remaining five bonds to be other-than-temporarily
impaired as of December 31, 2009. The total gross unrealized loss of $2.0 million recognized in
comprehensive income is comprised of the $1.1 million in noncredit-related losses on the two bonds
deemed other-than-temporarily impaired and $875,000 in unrealized losses on the three bonds not
considered other-than-temporarily impaired.
Collateralized debt obligations (CDOs): As of December 31, 2009, the Company had one CDO
with an amortized cost and fair value of $24.8 million. The Company sold this CDO in January of
2010 and wrote down the $25.0 million par value to the sales price as of December 31, 2009
realizing a loss of $175,000. In December 2009, two CDOs totaling $10.0 million matured and the
Company was paid in full.
93
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 3 INVESTMENT SECURITIES Continued
Corporate bonds: As of December 31, 2009, the Company had two corporate bonds with a fair
value of $5.6 million and gross unrealized losses of $1.1 million, or 15.8% of their aggregate
cost. One of the corporate bonds was deemed other-than-temporarily impaired as of June 30, 2009
resulting in a $305,000 credit-related loss recognized in earnings. Both bonds have been in an
unrealized loss position for longer than twelve months and are below investment grade. The
Companys unrealized losses in investments in corporate bonds represent credit risk of the
underlying issuers, which are finance companies. As previously mentioned management also considered
(1) the length of time and the extent to which the fair value is less than the amortized cost, (2)
the Companys intent to hold or sell the security, (3) the financial condition and results of the
issuer including changes in capital, (4) the credit rating of the issuer, (5) analysts earnings
estimate, (6) industry trends specific to the security, and (7) timing of debt maturity and status
of debt payments. Management utilized discounted cash flow analysis based upon the credit ratings
of the securities, liquidity risk premiums, and the recent corporate spreads for similar securities
to arrive at the credit risk component as required under ASC Topic 320 to determine the credit risk
component of the corporate bonds. Based on these analyses, there was no further credit-related
loss on the one bond that was deemed other-than-temporarily impaired and the other bond was not
deemed other-than-temporarily impaired. Because the Company does not intend to sell the corporate
bonds and it is not more likely than not that the Company will be required to sell the bonds before
recovery of their amortized cost basis, which may be maturity, the Company recognized the
non-credit related loss of $630,000 on the bond that was deemed other-than-temporarily impaired and
$423,000 in unrealized losses on the other bond in comprehensive income at December 31, 2009.
During the third quarter the Company sold two bonds that were deemed other-than-temporarily
impaired. One of the bonds which had credit-related losses of $725,000 in the second quarter of
2009 was sold for a gain of $180,000. The other bond which had credit-related losses of $322,000
in the second quarter of 2009 was sold for a $768,000 loss. During the third quarter, the issuer
of the other bond had indicated that the government would not likely support the company and has
subsequently filed for bankruptcy. In order to limit the potential losses associated with this
investment the Company decided to sell the security.
Trust preferred securities: At December 31, 2009, the Company had eleven trust preferred
securities issued by eight individual name companies (reflecting, where applicable the impact of
mergers and acquisitions of issuers subsequent to original purchase) in the financial
services/banking industry. The valuations of trust preferred securities were based upon the fair
market values of active trades for four of the securities and ASC Topic 320 using cash flow
analysis for the remaining seven securities. Contractual cash flows and a market rate of return
were used to derive fair value for each of these securities. Factors that affected the market rate
of return included (1) any uncertainty about the amount and timing of the cash flows, (2) the
credit risk, (3) liquidity of the instrument, and (4) observable yields from trading data and
bid/ask indications. Credit risk spreads and liquidity premiums were analyzed to derive the
appropriate discount rate. As of December 31, 2009, the Company has four trust preferred
securities with a fair value of $12.6 million and gross unrealized losses of $855,000, or 6.3% of
their aggregate cost. All four of the trust preferred securities have been in an unrealized loss
position for twelve months or longer. Two of the securities are below investment grade and two
securities are not rated. Three of the four trust preferred securities were deemed
other-than-temporarily impaired at June 30, 2009.
94
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 3 INVESTMENT SECURITIES Continued
The unrealized losses in investments in trust preferred securities of the Company reflect the
credit concerns related to the financial institutions that issued these long term financial
obligations. The recent financial losses and reductions of capital coupled with bank failures and
the overall market uncertainty within the financial services industry has resulted in lower values
for all trust preferred securities. Management then applied a discounted cash flow analysis based
upon the credit ratings of the securities, liquidity risk premiums, and the recent corporate
spreads for similar securities to arrive at the credit risk component of the unrealized loss as
required by ASC Topic 320. As a result, there was no additional credit-related loss on two of
three bonds previously deemed other-than-temporarily impaired. The third bond previously deemed
other-than-temporarily impaired had an additional credit-related loss of $468,000. Because the
Company does not intend to sell these three securities and it is not more likely than not that the
Company will be required to sell the bonds before recovery of their amortized cost basis, which may
be maturity, only the credit-related loss was recognized in earnings. The resulting credit-related
loss was $468,000 at December 31, 2009 and the remaining noncredit-related loss of $678,000 was
recognized in other comprehensive income. Because the Company does not intend to sell the trust
preferred security and it is not more likely than not that the Company will be required to sell the
security before recovery of its amortized cost basis, which may be maturity, the Company does not
consider the fourth security to be other-than-temporarily impaired as of December 31, 2009. The
total gross unrealized loss of $855,000 recognized in comprehensive income is comprised of the
$678,000 in noncredit-related losses on the three securities deemed other-than-temporarily impaired
and $177,000 in unrealized loss on the one security not considered other-than-temporarily impaired.
During the fourth quarter the Company decided to negotiate the early redemption of one trust
preferred security by its issuer, which is in the troubled real estate market of Florida. At June
30, 2009, this trust preferred security was deemed other-than-temporarily impaired and the
credit-related loss of $1.0 million was recognized in earnings. At December 31, 2009, the Company
wrote down the value of the security to the negotiated redemption price of 78. Consequently, an
additional impairment charge of $535,000 was recognized in earnings in the fourth quarter of 2009.
In addition the Company decided to sell a second trust preferred security that was deemed
other-than-temporarily impaired at June 30, 2009. The decision to sell was due to the
concentration risk associated with this issuer. This security is a level one security and the
amortized cost was written down to its fair market value at December 31, 2009. The resulting
impairment charge of $64,000 was recognized in earnings in the fourth quarter of 2009. For 2009
total impairment charges on trust preferred securities were $3.0 million which included
credit-related losses of $2.9 million.
Other securities: As of December 31, 2009, the Company had eight investments in real
estate and SBA funds. As of December 31, 2009, one of the private equity real estate funds has a
fair value of $1.2 million and an unrealized loss of $133,000, or 10.3% of the cost basis. It has
been in an unrealized loss position for greater than twelve months. Management reviewed the funds
financials and asset values, its near-term projections, consulted with the fund managers, and
considered any unusual situation pertaining to a specific fund, such as significant changes in the
dividend, industry trend or critical negative factor. Because the Company does not intend to sell
the private equity fund and it is not more likely than not that the Company will be required to
sell the private equity fund before recovery of its amortized cost basis, it does not consider the
impairment to be other-than-temporary.
The Company has two investments in private equity global commercial real estate investment funds
with a total fair value of $894,000 at December 31, 2009. After reviewing the funds financials
and asset values, its near-term projections, and consultations with the fund managers, the Company
does not anticipate recovery to the original cost basis. One of the funds was deemed
other-than-temporarily impaired as of June 30, 2009 and resulted in total impairment charges of
$295,000 being recognized in earnings during 2009. The second fund was deemed
other-than-temporarily impaired as of September 30, 2009 and resulted in total impairment charges
of $474,000 being recognized in earnings during 2009. The declines in value reflect the current
worldwide recession in general and the specific reduction in values of commercial real estate
globally.
The Company will continue to monitor all of the above investments to determine if the discounted
cash flow analysis, continued negative trends, market valuations or credit defaults result in
impairment that is other than temporary.
95
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 3 INVESTMENT SECURITIES Continued
The following table presents a roll-forward of the balance of credit-related impairment losses on
debt securities held at December 31, 2009 for which a portion of an other-than-temporary impairment
was recognized in other comprehensive income:
|
|
|
|
|
(In thousands) |
|
|
|
|
Balance at January 1, 2009 |
|
$ |
|
|
Credit-related impairment loss on debt securities for which an
other-than-temporary impairment was not previously recognized |
|
|
4,821 |
|
Reductions for securities sold during the period (realized) |
|
|
(1,061 |
) |
Reductions for securities for which the amount previously recognized
in other comprehensive income was recognized in earnings because
the Company intends to sell the security |
|
|
(1,864 |
) |
|
|
|
|
Balance at December 31, 2009 |
|
$ |
1,896 |
|
|
|
|
|
The following table summarizes other-than-temporary impairment losses on securities recognized in
earnings in the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended |
|
|
|
December 31, |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Mortgage-backed securities-residential |
|
$ |
|
|
|
$ |
4,953 |
|
|
$ |
|
|
Non-agency collateralized
mortgage obligations |
|
|
459 |
|
|
|
3,188 |
|
|
|
|
|
Corporate bonds |
|
|
1,353 |
|
|
|
11,497 |
|
|
|
|
|
Trust preferred securities |
|
|
3,009 |
|
|
|
|
|
|
|
|
|
Common stocks |
|
|
4,334 |
|
|
|
|
|
|
|
|
|
Preferred stocks |
|
|
1,117 |
|
|
|
3,750 |
|
|
|
|
|
Other securities |
|
|
769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,041 |
|
|
$ |
23,388 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The tables below indicate the length of time individual securities have been in a continuous
unrealized loss position at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Number of |
|
|
|
|
|
|
Unrealized |
|
|
Number of |
|
|
|
|
|
|
Unrealized |
|
|
Number of |
|
(In thousands) |
|
Fair value |
|
|
losses |
|
|
positions |
|
|
Fair value |
|
|
losses |
|
|
positions |
|
|
Fair value |
|
|
losses |
|
|
positions |
|
Investment securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
U.S. government agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stocks |
|
|
1,940 |
|
|
|
(560 |
) |
|
|
1 |
|
|
|
357 |
|
|
|
(1,143 |
) |
|
|
1 |
|
|
|
2,297 |
|
|
|
(1,703 |
) |
|
|
2 |
|
Common stocks |
|
|
12,657 |
|
|
|
(7,208 |
) |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,657 |
|
|
|
(7,208 |
) |
|
|
7 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies |
|
|
5,228 |
|
|
|
(72 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,228 |
|
|
|
(72 |
) |
|
|
2 |
|
Non-agency |
|
|
25,483 |
|
|
|
(5,328 |
) |
|
|
8 |
|
|
|
12,008 |
|
|
|
(893 |
) |
|
|
5 |
|
|
|
37,491 |
|
|
|
(6,221 |
) |
|
|
13 |
|
Collateralized debt obligations |
|
|
20,353 |
|
|
|
(4,647 |
) |
|
|
1 |
|
|
|
5,807 |
|
|
|
(4,193 |
) |
|
|
2 |
|
|
|
26,160 |
|
|
|
(8,840 |
) |
|
|
3 |
|
Corporate bonds |
|
|
23,794 |
|
|
|
(5,902 |
) |
|
|
10 |
|
|
|
8,643 |
|
|
|
(846 |
) |
|
|
2 |
|
|
|
32,437 |
|
|
|
(6,748 |
) |
|
|
12 |
|
Trust preferred securities |
|
|
22,818 |
|
|
|
(6,484 |
) |
|
|
9 |
|
|
|
1,720 |
|
|
|
(294 |
) |
|
|
1 |
|
|
|
24,538 |
|
|
|
(6,778 |
) |
|
|
10 |
|
Other securities |
|
|
1,470 |
|
|
|
(196 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,470 |
|
|
|
(196 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale |
|
$ |
113,743 |
|
|
$ |
(30,397 |
) |
|
|
40 |
|
|
$ |
28,535 |
|
|
$ |
(7,369 |
) |
|
|
11 |
|
|
$ |
142,278 |
|
|
$ |
(37,766 |
) |
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 3 INVESTMENT SECURITIES Continued
During 2008, the Company recorded an impairment charge to earnings of $18.4 million related to
corporate bonds, collateralized mortgage obligations (CMOs) and preferred stocks of financial
institutions. Management concluded that these investments were other than temporarily impaired.
In addition, the Company recorded an impairment charge of approximately $5.0 million relating to a
government mortgage-backed security previously pledged in connection with an interest rate swap
agreement entered into in 2002. See Note 1 Summary of Significant Accounting Policies to the
Consolidated Financial Statements for further discussion.
NOTE 4 LOANS AND LEASES
Major classifications of loans are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
Loans secured by real estate: |
|
|
|
|
|
|
|
|
Construction |
|
$ |
52,196 |
|
|
$ |
167,204 |
|
Construction and land development mezzanine |
|
|
|
|
|
|
2,421 |
|
Land development |
|
|
66,878 |
|
|
|
74,168 |
|
Secured by 1-4 family residential real estate: |
|
|
|
|
|
|
|
|
Revolving, open-end loans secured by residential real
estate and extended under lines of credit |
|
|
1,272 |
|
|
|
1,322 |
|
All other loans secured by 1-4 family residential real
estate: |
|
|
|
|
|
|
|
|
Secured by first liens |
|
|
44,053 |
|
|
|
21,607 |
|
Secured by junior liens |
|
|
3,173 |
|
|
|
4,551 |
|
Secured by multi family (5 or more) residential real estate |
|
|
22,017 |
|
|
|
14,059 |
|
Secured by residential real estate mezzanine |
|
|
2,480 |
|
|
|
335 |
|
Secured by non-farm nonresidential real estate |
|
|
277,234 |
|
|
|
234,573 |
|
Secured by non-farm nonresidential real estate mezzanine |
|
|
|
|
|
|
4,111 |
|
Tax certificates |
|
|
73,106 |
|
|
|
64,168 |
|
Commercial and industrial loans |
|
|
104,063 |
|
|
|
86,278 |
|
Loans to individuals for household, family, and other personal
expenditures |
|
|
1,514 |
|
|
|
1,031 |
|
Obligations of state and political subdivisions in the U.S. |
|
|
|
|
|
|
47 |
|
Lease financing receivables (net of unearned income) |
|
|
39,097 |
|
|
|
26,123 |
|
All other loans |
|
|
659 |
|
|
|
165 |
|
Less: Deferred loan fees |
|
|
(878 |
) |
|
|
(1,441 |
) |
|
|
|
|
|
|
|
Total loans and leases, net of unearned income |
|
$ |
686,864 |
|
|
$ |
700,722 |
|
|
|
|
|
|
|
|
The Company granted loans to the officers and directors of the Company and to their associates. In
accordance with Regulation O, 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 collectability.
The aggregate dollar amount of these loans was $4.8 million and $4.3 million at December 31, 2009
and 2008. During 2009 there were two new loans approved totaling $650,000. Total payments
received on related party loans in 2009 were $160,000.
The Company classifies its leases as capital leases, in accordance with FASB ASC Topic 840,
Leases. The difference between the Companys gross investment in the lease and the cost or
carrying amount of the leased property, if different, is recorded as unearned income, which is
amortized to income over the lease term by the interest method.
97
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 4 LOANS AND LEASES Continued
The Companys policy for income recognition on restructured loans is to recognize income on
currently performing restructured loans under the accrual method. As of December 31, 2009, the
Company did not have any restructured loans.
The Company identifies a loan as impaired when it is probable that interest and principal will not
be collected according to the contractual terms of the loan agreement. The Company does not accrue
interest income on impaired loans. Excess proceeds received over the principal amounts due on
impaired loans are recognized as income on a cash basis.
The following is a summary of information pertaining to impaired loans:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
Impaired loans and leases with a valuation allowance |
|
$ |
46,670 |
|
|
$ |
69,350 |
|
Impaired loans and leases without a valuation allowance |
|
|
27,009 |
|
|
|
16,480 |
|
|
|
|
|
|
|
|
Total impaired loans and leases |
|
$ |
73,679 |
|
|
$ |
85,830 |
|
|
|
|
|
|
|
|
Valuation allowance related to impaired loans and leases |
|
$ |
10,958 |
|
|
$ |
12,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Average investment in impaired loans and leases |
|
$ |
79,754 |
|
|
$ |
55,134 |
|
|
$ |
24,741 |
|
Interest income recognized on impaired loans and leases |
|
$ |
242 |
|
|
$ |
302 |
|
|
$ |
763 |
|
Interest income recognized on a cash basis
on impaired loans and leases |
|
$ |
242 |
|
|
$ |
302 |
|
|
$ |
763 |
|
Non-accrual and impaired loans and leases amounted to $73.7 million and $85.8 million at December
31, 2009 and 2008, respectively. Construction and land loans, non-residential and residential real
estate loans represent 33%, 27% and 20%, respectively of the $73.7 million in non-accrual loans at
December 31, 2009. The $12.1 million decline in non-accrual loans was the result of a $42.9
million reduction in existing non-accrual loan balances through payments or loans becoming current
and placed back on accrual, $27.8 million transferred to other real estate owned, and $19.8 million
in charge-offs which collectively were offset by $78.4 million in additions. If interest had been
accrued, such income would have been approximately $6.2 million, $5.1 million, and $3.0 million,
for the years ended December 31, 2009, 2008, and 2007, respectively. At December 31, 2009, the
Company had no troubled debt restructured loans or loans past due 90 days or more on which interest
continues to accrue. The $1.9 million decline in the valuation allowance was primarily related to
$12.6 million in charge-offs recorded in 2009 on loans that were impaired at December 31, 2008
offset by a $10.9 million valuation allowance on loans that became impaired in 2009.
Total cash collected on impaired loans and leases during 2009, 2008, and 2007 was $21.6 million,
$7.6 million, and $16.6 million, respectively, of which $21.3 million, $7.3 million, and $15.8
million was credited to the principal balance outstanding on such loans, respectively.
The Company grants commercial and real estate loans, including construction and land development
primarily in the greater Philadelphia metropolitan area as well as selected locations throughout
the mid-Atlantic region. The Company also has participated with other financial institutions in
selected construction and land development loans outside these geographic areas. The Company has a
concentration of credit risk in commercial real estate and construction and land development loans
at December 31, 2009. A substantial portion of its debtors ability to honor these contracts is
dependent upon the housing sector specifically and the economy in general.
98
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 4 LOANS AND LEASES Continued
Changes in the allowance for loan and lease losses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Balance at the beginning of the year |
|
$ |
28,908 |
|
|
$ |
19,282 |
|
|
$ |
11,455 |
|
Charge-offs |
|
|
(19,818 |
) |
|
|
(12,327 |
) |
|
|
(5,466 |
) |
Recoveries |
|
|
636 |
|
|
|
112 |
|
|
|
267 |
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(19,182 |
) |
|
|
(12,215 |
) |
|
|
(5,199 |
) |
Provision for loan and lease losses |
|
|
20,605 |
|
|
|
21,841 |
|
|
|
13,026 |
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of year |
|
$ |
30,331 |
|
|
$ |
28,908 |
|
|
$ |
19,282 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 OTHER REAL ESTATE OWNED
Other real estate owned (OREO) increased $20.0 million from $10.3 million at December 31, 2008 to
$30.3 million at December 31, 2009. Set forth below is a table which details the changes in OREO
from December 31, 2008 to December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
(In thousands) |
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
Beginning balance |
|
$ |
10,346 |
|
|
$ |
20,244 |
|
|
$ |
29,310 |
|
|
$ |
25,611 |
|
Capital improvements |
|
|
711 |
|
|
|
1,626 |
|
|
|
94 |
|
|
|
|
|
Sales |
|
|
|
|
|
|
|
|
|
|
(2,958 |
) |
|
|
(3,625 |
) |
Assets acquired on non-accrual loans |
|
|
9,231 |
|
|
|
7,953 |
|
|
|
720 |
|
|
|
11,252 |
|
Other |
|
|
(44 |
) |
|
|
37 |
|
|
|
(324 |
) |
|
|
(165 |
) |
Impairment charge |
|
|
|
|
|
|
(550 |
) |
|
|
(1,231 |
) |
|
|
(2,756 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
20,244 |
|
|
$ |
29,310 |
|
|
$ |
25,611 |
|
|
$ |
30,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2009, the Company acquired the collateral for three loans through,
or in lieu of, foreclosure. At the time of the transfer to OREO, the Company recorded a charge-off
of $867,000 through the allowance for loan and lease losses on one of the properties due to the
loan balance exceeding the fair market value of the collateral. On another property during the
fourth quarter of 2008, the Company recorded a charge-off of $2.3 million through the allowance for
loan and lease losses and transferred the remaining balance to OREO in the first quarter of 2009.
Additionally, in the second quarter of 2009, the Company established a $550,000 valuation allowance
against the carrying value of an asset transferred to OREO during the first quarter of 2009. The
Company had negotiated the sale of that asset and used the offered purchase price in valuing the
asset. The remaining asset acquired was recorded to OREO at the carrying value of the loan, which
approximated fair value.
During the second quarter of 2009, the Company acquired the collateral for four loans through, or
in lieu of, foreclosure. At the time of the transfer to OREO, the Company recorded $3.8 million in
charge-offs on two of the loans, for which $2.9 million had previously been reserved in the
allowance for loan and lease losses in accordance with ASC Topic 310. A third loan had a $954,000
charge-off recorded against the allowance for loan and lease losses in 2008 and was transferred to
OREO at the carrying value, which approximated fair value. The last loan was transferred at the
carrying value, which approximated fair value.
99
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 5 OTHER REAL ESTATE OWNED Continued
During the third quarter of 2009, the Company acquired the collateral for one loan relationship
through foreclosure. At the time of the transfer to OREO, the Company recorded a $400,000
charge-off on the loan, for which $367,000 million had previously been reserved in the allowance
for loan and lease losses in accordance with ASC Topic 310. Also during the third quarter, the
Company sold the collateral for a loan that was transferred to OREO in the first quarter of 2009
and recorded a $279,000 gain. In addition, the Company established valuation allowances of
$869,000 and $362,000 against the carrying value of assets transferred to OREO during the second
quarter of 2009 and the fourth quarter of 2008, respectively.
During the fourth quarter of 2009, the Company acquired the collateral for five loans through, or
in lieu of, foreclosure. At the time of the transfer to OREO, the Company recorded $1.8 million in
charge-offs on three of the loans, for which $1.2 million had previously been reserved in the
allowance for loan and lease losses in accordance with ASC Topic 310. The Company charged-off the
$335,000 mezzanine loan related to the fourth loan and the fifth loan was transferred at cost.
In the fourth quarter of 2009, the Company sold the collateral related to three loans which were
foreclosed on prior to 2009. The first sale is related to a five building condominium project in
Raleigh, North Carolina that the Company foreclosed on during the fourth quarter of 2008. In 2009,
the Company completed the construction of two of the buildings. In the fourth quarter of 2009, the
Company held an auction of the 51 completed condominiums. As of December 31, 2009, the Company
closed on 24 of the condominiums for net proceeds of $3.1 million. As of February 25, 2010,
another 16 condominiums have been sold for net proceeds of $2.0 million. In the fourth quarter of
2009, the Company recorded approximately a $2.4 million valuation allowance based on a current
appraisal of the three remaining pad sites. The Company is actively marketing those three sites.
The second sale in the fourth quarter of 2009 was a home located in King George, Virginia. The
Company recorded net proceeds of $453,000 and recorded a $47,000 loss. The third sale was a small
home in Columbus, Ohio. The Company received $7,000 in net proceeds and recorded a loss of
$16,000.
Additionally, in the fourth quarter of 2009 the Company recorded valuation allowances of $157,000
and $170,000 on loans that were transferred to OREO in the first and second quarters of 2009,
respectively. The $157,000 valuation allowance is based on a new appraisal of the property. The
$170,000 valuation allowance is based on an agreement of sale which was executed in the fourth
quarter of 2009.
The Company is working to satisfactorily sell the remaining OREO properties using existing
relationships and possible future auctions. However the Company recognizes that due to the
continued weak housing and commercial real estate markets the successful disposition of the
properties will likely take considerable time.
NOTE 6 PREMISES AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
Estimated |
|
|
|
|
|
|
|
(In thousands) |
|
Useful Lives |
|
|
2009 |
|
|
2008 |
|
Land |
|
|
|
|
|
$ |
2,396 |
|
|
$ |
2,396 |
|
Buildings and leasehold improvements |
|
5 - 39 years |
|
|
8,082 |
|
|
|
8,010 |
|
Furniture, fixtures and equipment |
|
3 - 7 years |
|
|
6,922 |
|
|
|
6,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,400 |
|
|
|
17,117 |
|
Less accumulated depreciation and amortization |
|
|
|
|
|
|
(11,094 |
) |
|
|
(10,191 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,306 |
|
|
$ |
6,926 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense, related to premises and equipment, was approximately
$907,000, $1.1 million, and $1.3 million, for the years ended 2009, 2008, and 2007, respectively.
Depreciation and amortization related to real estate owned via equity investments is not included
in the above table.
100
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 7 LEASE COMMITMENTS
The Company leases various premises under non-cancelable operating lease agreements, which expire
through 2017 and require minimum annual rentals. The approximate minimum rental commitments under
the leases are as follows for the year ended December 31:
|
|
|
|
|
|
|
As of |
|
(In thousands) |
|
December 31, 2009 |
|
2010 |
|
$ |
1,088 |
|
2011 |
|
|
829 |
|
2012 |
|
|
665 |
|
2013 |
|
|
401 |
|
2014 |
|
|
215 |
|
Thereafter |
|
|
117 |
|
|
|
|
|
Total lease commitments |
|
$ |
3,315 |
|
|
|
|
|
The leases contain options to extend for periods from one to ten years. The cost of such lease
extensions is not included in the above table. Rental expense for all leases was approximately
$1.2 million, $1.3 million, and $1.1 million for the years ended December 31, 2009, 2008 and 2007,
respectively.
NOTE 8 DEPOSITS
Deposits are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
Demand |
|
$ |
63,168 |
|
|
$ |
50,886 |
|
NOW |
|
|
45,248 |
|
|
|
48,431 |
|
Money Market |
|
|
168,893 |
|
|
|
145,438 |
|
Savings |
|
|
15,336 |
|
|
|
15,171 |
|
Time deposits (over $100) |
|
|
141,652 |
|
|
|
107,783 |
|
Time deposits (under $100) |
|
|
240,557 |
|
|
|
174,184 |
|
Brokered deposits |
|
|
206,901 |
|
|
|
218,175 |
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
881,755 |
|
|
$ |
760,068 |
|
|
|
|
|
|
|
|
Maturities of time deposits for the next five years and thereafter are as follows:
|
|
|
|
|
|
|
As of |
|
(In thousands) |
|
December 31, 2009 |
|
2010 |
|
$ |
392,219 |
|
2011 |
|
|
170,324 |
|
2012 |
|
|
11,240 |
|
2013 |
|
|
5,848 |
|
2014 |
|
|
4,031 |
|
Thereafter |
|
|
5,448 |
|
|
|
|
|
Total certificates of deposit |
|
$ |
589,110 |
|
|
|
|
|
101
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 9 BORROWINGS AND SUBORIDNATED DEBENTURES
1. Advances from the Federal Home Loan Bank
Royal Bank has a $150 million line of credit with the FHLB of which $22.0 million was outstanding
as of December 31, 2009. At December 31, 2009, advances from the FHLB totaling $209.5 million,
which includes the $22.0 million mentioned above, will mature within one day to four years. The
FHLB advances had a weighted average interest rate of 3.91%. The advances and the line of credit
are collateralized by FHLB stock, government agencies and mortgage-backed securities, residential
loans, and commercial real estate loans. As of December 31, 2009, investment securities with a
market value of $154.9 million were pledged as collateral to the FHLB. The average balance of
advances with the FHLB during 2009 was $226.9 million.
The available borrowing capacity is based on qualified collateral. During the first quarter of
2010, Royal Bank was notified by the FHLB that they were being placed on an over collateralized
delivery requirement of 105%. The FHLBs decision was based primarily upon the level of Royal
Banks non-performing assets and net loss. The available amount for future borrowings will be
based on the amount of collateral to be pledged.
At December 31, 2008, advances from FHLB totaled $230.6 million with maturities within one day to
five years. These advances had a weighted average interest rate of 4.00%. The average balance of
advances with the FHLB during 2008 was $223.2 million.
Presented below are the Companys FHLB borrowings allocated by the year in which they mature with
their corresponding weighted average rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
|
|
(Dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
|
Amount |
|
|
Rate |
|
|
Amount |
|
|
Rate |
|
Advances maturing in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
|
|
|
|
|
|
|
$ |
37,000 |
|
|
|
2.63 |
% |
2010 |
|
|
114,500 |
|
|
|
4.41 |
% |
|
|
92,500 |
|
|
|
5.30 |
% |
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
30,000 |
|
|
|
4.32 |
% |
|
|
30,000 |
|
|
|
4.32 |
% |
2013 |
|
|
50,000 |
|
|
|
2.64 |
% |
|
|
50,000 |
|
|
|
2.64 |
% |
Amortizing advance, due April 2012, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
requiring monthly principal and
interest of $558,400 |
|
|
15,001 |
|
|
|
3.46 |
% |
|
|
21,069 |
|
|
|
3.46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FHLB borrowings |
|
$ |
209,501 |
|
|
|
|
|
|
$ |
230,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. Other borrowings
The Company has a note payable with PNC Bank (PNC) at December 31, 2009 in the amount of $4.7
million with a maturity date of August 25, 2016. The note payable balance at December 31, 2008 was
$5.1 million. The interest rate is a variable rate using rate index of one month LIBOR + 15 basis
points and adjusts monthly. The interest rate at December 31, 2009 and 2008 was 0.38% and 1.59%,
respectively.
At December 31, 2009 and 2008, the Company had additional borrowings of $40 million from PNC which
will mature on January 7, 2018. These borrowings are secured by
government agencies and mortgaged-backed securities. These borrowings have a weighted average interest rate of 3.65%. As of
December 31, 2009, investment securities with a market value of $53.5 million were pledged as
collateral to secure all borrowings with PNC.
102
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 9 BORROWINGS AND SUBORDINATED DEBENTURES Continued
3. Subordinated debentures
The Company has outstanding $25.0 million of Trust Preferred Securities issued through two Delaware
trust affiliates, Royal Bancshares Capital Trust I (Trust I) and Royal Bancshares Capital Trust
II (Trust II) (collectively, the Trusts). The Company issued an aggregate principal amount of
$12.9 million of floating rate junior subordinated debt securities to Trust I, which debt
securities bear an interest rate of 2.40% at December 31, 2009, and reset quarterly at 3-month
LIBOR plus 2.15%, and an aggregate principal amount of $12.9 million of fixed/floating rate junior
subordinated deferrable interest to Trust II, which debt securities had an initial interest rate of
5.80% until December 2009 and now resets quarterly at 3-month LIBOR plus 2.15%. The interest rate
at December 31, 2009 was 2.40%.
Each of Trust I and Trust II issued an aggregate principal amount of $12.5 million of capital
securities bearing fixed and/or fixed/floating interest rates corresponding to the debt securities
held by each trust to an unaffiliated investment vehicle and an aggregate principal amount of
$387,000 of common securities bearing fixed and/or fixed/floating interest rates corresponding to
the debt securities held by each trust to the Company. The Company has fully and unconditionally
guaranteed all of the obligations of the Trusts, including any distributions and payments on
liquidation or redemption of the capital securities.
On August 13, 2009, the Companys Board of Directors determined to suspend interest payments on the
trust preferred securities. The Companys Board of Directors took this action in consultation with
the Federal Reserve Bank of Philadelphia as required by recent regulatory policy guidance. The
Company currently has sufficient capital and liquidity to pay the scheduled interest payments;
however, the Company believes this decision will better support the capital position of Royal Bank,
a wholly owned subsidiary of the Company. As of December 31, 2009 the trust preferred interest
payment in arrears was $529,000 and has been recorded in interest expense and accrued interest
payable.
NOTE 10 INCOME TAXES
The components of the income tax expense (benefit) included in the consolidated statements of
operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Income tax expense (benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
648 |
|
|
$ |
(7,819 |
) |
|
$ |
2,620 |
|
Deferred |
|
|
(174 |
) |
|
|
10,462 |
|
|
|
(4,188 |
) |
Income tax expense (benefit) |
|
$ |
474 |
|
|
$ |
2,643 |
|
|
$ |
(1,568 |
) |
103
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 10 INCOME TAXES Continued
The difference between the applicable income tax expense and the amount computed by applying the
statutory federal income tax rate of 35% in 2009, 2008, and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Computed tax benefit at statutory rate |
|
$ |
(11,474 |
) |
|
$ |
(12,404 |
) |
|
$ |
(351 |
) |
Tax-exempt income |
|
|
(120 |
) |
|
|
(170 |
) |
|
|
(229 |
) |
Low-income housing tax credit |
|
|
|
|
|
|
|
|
|
|
|
|
Nondeductible expense |
|
|
58 |
|
|
|
69 |
|
|
|
78 |
|
Bank owned life insurance |
|
|
1,306 |
|
|
|
(432 |
) |
|
|
(306 |
) |
Bank owned life insurance excise penalty |
|
|
474 |
|
|
|
|
|
|
|
|
|
Other non-taxable income |
|
|
|
|
|
|
(413 |
) |
|
|
(391 |
) |
Other, net |
|
|
|
|
|
|
496 |
|
|
|
(369 |
) |
Increase in valuation allowance |
|
|
10,230 |
|
|
|
15,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applicable income tax expense (benefit) |
|
$ |
474 |
|
|
$ |
2,643 |
|
|
$ |
(1,568 |
) |
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses |
|
$ |
10,616 |
|
|
$ |
10,118 |
|
Tax net operating loss carryforward |
|
|
3,164 |
|
|
|
|
|
Asset valuation reserves |
|
|
431 |
|
|
|
431 |
|
Security writedowns |
|
|
1,780 |
|
|
|
|
|
OREO writedowns |
|
|
1,395 |
|
|
|
|
|
Investment in partnerships |
|
|
3,732 |
|
|
|
3,654 |
|
Accrued pension liability |
|
|
4,191 |
|
|
|
3,641 |
|
Accrued stock-based compensation |
|
|
767 |
|
|
|
732 |
|
Net operating loss carryovers from Knoblauch State Bank |
|
|
1,232 |
|
|
|
1,232 |
|
Unrealized losses on investment securities available for sale |
|
|
61 |
|
|
|
11,738 |
|
Other |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets before valuation allowance |
|
|
27,374 |
|
|
|
31,546 |
|
|
|
|
|
|
|
|
Less valuation allowance |
|
|
(25,727 |
) |
|
|
(15,497 |
) |
Less valuation allowance for equity securities |
|
|
(97 |
) |
|
|
(3,119 |
) |
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
1,550 |
|
|
|
12,930 |
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Penalties on delinquent tax certificates |
|
|
559 |
|
|
|
420 |
|
Accretion on investments |
|
|
395 |
|
|
|
488 |
|
Prepaid deductions |
|
|
212 |
|
|
|
337 |
|
Other |
|
|
(30 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
1,136 |
|
|
|
1,215 |
|
|
|
|
|
|
|
|
Net deferred tax assets, included in other assets |
|
$ |
414 |
|
|
$ |
11,715 |
|
|
|
|
|
|
|
|
As of December 31, 2009 the Company had net operating income tax loss carryforwards of approximately $9.0 million which are available to be carried forward to future tax years. These loss carryforwards will expire in 2029 if not utilized.
104
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 10 INCOME TAXES Continued
The Company has approximately $22.0 million of net operating loss carryovers from the acquisition
of Knoblauch State Bank (KSB) of which $3.5 million was available to be utilized as of December
31, 2009. The utilization of these losses is subject to limitation under Section 382 of the
Internal Revenue Code.
The Company recognizes deferred tax assets and liabilities for the future tax consequences related
to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases, and for tax credits. The deferred tax assets, net of valuation
allowances, totaled $414,000 and $11.7 million at December 31, 2009 and 2008, respectively.
Management evaluated the deferred tax assets for recoverability using a consistent approach which
considers the relative impact of negative and positive evidence, including historical profitability
and projections of future reversals of temporary differences and future taxable income. The
Company is required to establish a valuation allowance for deferred tax assets and record a charge
to income or shareholders equity if management determines, based on available evidence at the time
the determination is made, that it is more likely than not that some portion or all of the deferred
tax assets will not be realized. In evaluating the need for a valuation allowance, the Company
estimates future taxable income based on management approved business plans and ongoing tax
planning strategies. This process involves significant management judgment about assumptions that
are subject to change from period to period based on changes in tax laws or variances between
projected operating performance, actual results and other factors.
As of December 31, 2009, the Company was in a cumulative book taxable loss position for the
three-year period ended December 31, 2009. For purposes of establishing a deferred tax asset
valuation allowance, this cumulative book taxable loss position is considered significant objective
evidence that the Company may not be able to realize some portion of the deferred tax assets in the
future. The cumulative book taxable loss position was caused by the negative impact on results
from the banking operations, investment impairments and loan and lease losses over the past two
years. These conditions deteriorated dramatically during the three month period ended December 31,
2008 and continued throughout 2009, causing a significant increase in the pre-tax losses due in
part to much higher credit losses, and downward revisions to projections of future results.
As of December 31, 2009 and 2008, management concluded that it was more likely than not that the
Company would not generate sufficient future taxable income to realize all of the deferred tax
assets. Managements conclusion was based on consideration of the relative weight of the available
evidence and the uncertainty of future market conditions on results of operations. As a result,
the Company recorded a non-cash charge of $15.5 million in the
consolidated statements of operations in
the three month period ended December 31, 2008 related to the establishment of a valuation
allowance for the deferred tax asset for the portion of the future tax benefit that more likely
than not will not be utilized in the future. During 2009, the Company established an additional
valuation allowance of $10.2 million, which was a result of the net operating loss for the year and
the portion of the future tax benefit that more likely than not will not be utilized in the future.
The additional valuation allowance did not impact the net loss as no tax benefit was recorded
during 2009.
As of December 31, 2009 the valuation allowance for deferred tax assets totaled $25.7 million,
which excludes the $97,000 valuation allowance related to equity securities. The deferred tax
assets of $414,000 relates to projected reversals of temporary differences in 2010 that management
believes are more likely than not realizable.
As a result of the January 1, 2007 adoption of new guidance issued under FASB ASC Topic 740 Income
Taxes (ASC Topic 740) the Company recognizes the financial statement benefit of a tax position
only after determining that the relevant tax authority would more likely than not sustain the
position following an audit. For tax positions meeting the more-likely-than-not threshold, the
amount recognized in the financial statements is the largest benefit that has a greater than 50
percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At
the adoption date, the Bank applied the new guidance of ASC Topic 740 to all tax positions for
which the statute of limitations remained open. There was no material effect on the Companys
consolidated financial position or results of operations and no adjustment to retained earnings as
a result of the adoption of the new guidance under ASC Topic 740.
105
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 10 INCOME TAXES Continued
The Company is subject to income taxes in the U. S. and various state and local jurisdictions. As
of December 31, 2009, tax years 2006 through 2009 are subject to examination by various taxing
authorities. Tax regulations are subject to interpretation of the related tax laws and regulations
and require significant judgment to apply.
NOTE 11 FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Company 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 the Company has in
particular classes of financial instruments.
The Companys 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. The Company 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:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
|
|
|
Financial instruments whose contract amounts represent credit risk |
|
|
|
|
|
|
|
|
Open-end lines of credit |
|
$ |
44,829 |
|
|
$ |
98,549 |
|
Commitments to extend credit |
|
|
1,630 |
|
|
|
1,840 |
|
Standby letters of credit and financial guarantees written |
|
|
3,477 |
|
|
|
4,563 |
|
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.
The Company evaluates each customers creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of credit, is based on
managements credit evaluation. Collateral held varies but may include personal or commercial real
estate, accounts receivable, inventory or equipment.
Standby letters of credit are conditional commitments issued by the Company 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 the
first quarter of 2011. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The
Company holds personal or commercial real estate, accounts
receivable, inventory or equipment as
collateral supporting those commitments for which collateral is deemed necessary. The extent of
collateral held for those commitments is approximately 75%.
106
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 12 LEGAL CONTINGENCIES
Various legal claims arise from time to time in the normal course of business which, in the opinion
of management, will have no material effect on the Companys consolidated financial statements.
Royal Bank holds a 60% equity interest in each of Crusader Servicing Corporation (CSC) and Royal
Tax Lien Services, LLC (RTL). CSC and RTL acquire, through public auction, delinquent tax liens
in various jurisdictions thereby assuming a superior lien position to most other lien holders,
including mortgage lien holders. On March 4, 2009, each of CSC and RTL received a grand jury
subpoena issued by the U.S. District Court for New Jersey upon application of the Antitrust
Division of the U.S. Department of Justice (DOJ). The subpoena seeks certain documents and
information relating to an ongoing investigation being conducted by the DOJ. Royal Bank has been
advised that neither CSC nor RTL are targets of the DOJ investigation, but they are subjects of
the investigation. Royal Bank, CSC and RTL are cooperating in the investigation.
NOTE 13 SHAREHOLDERS EQUITY
1. Preferred Stock
On February 20, 2009, as part of the Capital Purchase Program (CPP) established by the United
States Department of Treasury (Treasury), the Company issued to Treasury 30,407 shares of the
Companys Fixed Rate Cumulative Perpetual Preferred Stock, Series A, without par value per share
(the Series A Preferred Stock), and a liquidation preference of $1,000 per share. In conjunction
with the purchase of the Series A Preferred Stock, Treasury received a warrant to purchase
1,104,370 shares of the Companys Class A common stock. The aggregate purchase price for the
Series A Preferred Stock and warrant was $30.4 million in cash. The Series A Preferred Stock
qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum for the first
five years, and 9% per annum thereafter. The Series A Preferred Stock may generally be redeemed by
the Company at any time following consultation with its primary banking regulators. The warrant
issued to Treasury has a 10-year term and is immediately exercisable upon its issuance, with an
exercise price, subject to anti-dilution adjustments, equal to $4.13 per share of the common stock.
The Companys utilized the extra capital provided by the CPP funds to support its efforts to
prudently and transparently provide lending and liquidity while also balancing the goal to remain
well-capitalized.
2. Common Stock
The Companys Class A common stock trades on the NASDAQ Global Market under the symbol RBPAA.
There is no market for the Companys Class B common stock. The Class B shares may not be
transferred in any manner except to the holders immediate family. Class B shares may be converted
to Class A shares at the rate of 1.15 to 1. 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 conversion equivalent per
share dividends when declared.
On May 16, 2007, the Companys Board of Directors authorized the repurchase of up to 670,000 shares
of the Companys common stock. For the year ended December 31, 2008, 100,000 shares were
repurchased at an average price of $9.46. There were no common stock repurchases in 2009.
3. Payment of Dividends
Under the Pennsylvania Business Corporation Law, the Company 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 the Company. 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 and Royal Asian to the Company would be prohibited if the
effect thereof would cause the Banks capital to be reduced below applicable minimum capital
requirements.
107
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 13 SHAREHOLDERS EQUITY Continued
On August 13, 2009, the Companys board of directors determined to suspend regular quarterly cash
dividends on the $30.4 million in Series A Preferred Stock. The Companys Board of Directors took
this action in consultation with the Federal Reserve Bank of Philadelphia as required by recent
regulatory policy guidance. The Company currently has sufficient capital and liquidity to pay the
scheduled dividends on the preferred stock; however, the Company believes this decision will better
support the capital position of Royal Bank, a wholly owned subsidiary of the Company. As of
December 31, 2009, the Series A Preferred stock dividend in arrears is $774,000 which is comprised
of $760,000 in dividends and $14,000 in interest which have not been recognized in the consolidated
financial statements.
In July of 2008, the Company suspended cash dividends on its common stock to preserve capital and
maintain liquidity in response to current financial and economic trends. At December 31, 2009, as a
result of significant losses within Royal Bank, the Company had negative retained earnings and
therefore would not have been able to declare and pay any cash dividends. Under the Orders as
described in Note 2 Regulatory Orders to the Consolidated Financial Statements, Royal Bank must
receive prior approval from the FDIC and the Department before declaring and paying a dividend to
the Company.
Additionally, as a result of the CPP completed between the Treasury and the Company on February 20,
2009, the Company is required to receive Treasurys approval for any increases in the dividend
above the amount of the last regular quarterly common stock dividend paid and any repurchases of
Company common stock. These restrictions on the payment of dividends and the repurchases of common
stock by the Company become effective immediately and remain in effect until the earlier date of
the third anniversary of the closing date of the preferred shares and the date of the redemption of
the preferred shares.
NOTE 14 REGULATORY CAPITAL REQUIREMENTS
The Company and the Banks 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 the Companys financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Companys assets, liabilities
and certain off-balance-sheet items as calculated under regulatory accounting practices. The
Companys and the Banks 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 the Company and
the Banks 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, 2009, management believes that the
Banks meet all capital adequacy requirements to which they are subject.
As of December 31, 2009, the Banks met all regulatory requirements for classification as well
capitalized under the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the table. Under the Orders as described in Note 2 Regulatory
Orders to the Consolidated Financial Statements, Royal Bank is required to maintain a minimum Tier
1 leverage ratio of 8% and a Total risk-based capital ratio of 12% during the term of the Orders.
As shown in the table below, Royal Bank met these requirements as of December 31, 2009.
108
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 14 REGULATORY CAPITAL REQUIREMENTS Continued
The Companys and the Banks actual capital amounts and ratios are also presented in the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be well |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
capitalized under |
|
|
|
|
|
|
|
|
|
|
|
For capital |
|
|
prompt corrective |
|
|
|
Actual |
|
|
adequacy purposes |
|
|
action provisions |
|
(Dollars in thousands) |
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
Total capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company (consolidated) |
|
$ |
141,854 |
|
|
|
15.45 |
% |
|
$ |
73,446 |
|
|
|
8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Royal Bank |
|
|
111,412 |
|
|
|
13.37 |
% |
|
|
66,685 |
|
|
|
8.00 |
% |
|
$ |
83,357 |
|
|
|
10.00 |
% |
Royal Asian |
|
|
14,085 |
|
|
|
16.99 |
% |
|
|
6,630 |
|
|
|
8.00 |
% |
|
|
8,288 |
|
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company (consolidated) |
|
$ |
130,145 |
|
|
|
14.18 |
% |
|
$ |
36,723 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Royal Bank |
|
|
100,772 |
|
|
|
12.09 |
% |
|
|
33,343 |
|
|
|
4.00 |
% |
|
|
50,014 |
|
|
|
6.00 |
% |
Royal Asian |
|
|
13,036 |
|
|
|
15.73 |
% |
|
|
3,315 |
|
|
|
4.00 |
% |
|
|
4,973 |
|
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital (to average assets, leverage) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company (consolidated) |
|
$ |
130,145 |
|
|
|
9.78 |
% |
|
$ |
53,255 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Royal Bank |
|
|
100,772 |
|
|
|
8.09 |
% |
|
|
49,810 |
|
|
|
4.00 |
% |
|
|
62,262 |
|
|
|
5.00 |
% |
Royal Asian |
|
|
13,036 |
|
|
|
12.52 |
% |
|
|
4,164 |
|
|
|
4.00 |
% |
|
|
5,205 |
|
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be well |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
capitalized under |
|
|
|
|
|
|
|
|
|
|
|
For capital |
|
|
prompt corrective |
|
|
|
Actual |
|
|
adequacy purposes |
|
|
action provisions |
|
(Dollars in thousands) |
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
Total capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company (consolidated) |
|
$ |
136,273 |
|
|
|
13.04 |
% |
|
$ |
83,611 |
|
|
|
8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Royal Bank |
|
|
97,478 |
|
|
|
10.26 |
% |
|
|
76,007 |
|
|
|
8.00 |
% |
|
$ |
95,008 |
|
|
|
10.00 |
% |
Royal Asian |
|
|
14,739 |
|
|
|
18.65 |
% |
|
|
6,322 |
|
|
|
8.00 |
% |
|
|
7,903 |
|
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company (consolidated) |
|
$ |
123,013 |
|
|
|
11.77 |
% |
|
$ |
41,806 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Royal Bank |
|
|
85,406 |
|
|
|
8.99 |
% |
|
|
38,003 |
|
|
|
4.00 |
% |
|
|
57,005 |
|
|
|
6.00 |
% |
Royal Asian |
|
|
13,749 |
|
|
|
17.40 |
% |
|
|
3,161 |
|
|
|
4.00 |
% |
|
|
4,742 |
|
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital (to average assets, leverage) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company (consolidated) |
|
$ |
123,013 |
|
|
|
10.30 |
% |
|
$ |
47,780 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Royal Bank |
|
|
85,406 |
|
|
|
7.81 |
% |
|
|
43,758 |
|
|
|
4.00 |
% |
|
|
54,698 |
|
|
|
5.00 |
% |
Royal Asian |
|
|
13,749 |
|
|
|
13.97 |
% |
|
|
3,936 |
|
|
|
4.00 |
% |
|
|
4,921 |
|
|
|
5.00 |
% |
109
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 15 PENSION PLANS
The Company has a noncontributory nonqualified defined benefit pension plan covering certain
eligible employees. The Company-sponsored pension plan provides retirement benefits under pension
trust agreements. The benefits are based on years of service and the employees compensation during
the highest three consecutive years during the last 10 years of employment. The Company accounts
for its pension in accordance with FASB ASC Topic 715 Compensation-Retirement Benefits (ASC
Topic 715). ASC Topic 715 requires the recognition of a plans over-funded or under-funded status
as an asset or liability with an offsetting adjustment to Accumulated OCI. ASC Topic 715 requires
the determination of the fair values of plans assets at a companys year-end and recognition of
actuarial gains and losses, prior service costs or credits, and transition assets or obligations as
a component of Accumulated OCI. These amounts will be subsequently recognized as components of net
periodic benefits cost. Further, actuarial gains and losses that arise in subsequent periods that
are not initially recognized as a component of net periodic benefit cost will be recognized as a
component of Accumulated OCI.
Those amounts will subsequently be recognized as a component of net periodic benefit cost as they
are amortized during future periods.
The following table sets forth the plans funded status and amounts recognized in the Companys
consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
Change in benefit obligation |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
10,233 |
|
|
$ |
9,156 |
|
Service cost |
|
|
505 |
|
|
|
472 |
|
Interest cost |
|
|
563 |
|
|
|
526 |
|
Benefits paid |
|
|
(69 |
) |
|
|
(56 |
) |
Amortization of actuarial loss |
|
|
317 |
|
|
|
135 |
|
|
|
|
|
|
|
|
Benefits obligation at end of year |
|
$ |
11,549 |
|
|
$ |
10,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized prior service cost |
|
|
538 |
|
|
|
628 |
|
Unrecognized actuarial loss |
|
|
1,478 |
|
|
|
1,189 |
|
|
|
|
|
|
|
|
|
|
$ |
2,016 |
|
|
$ |
1,817 |
|
|
|
|
|
|
|
|
The accumulated benefit obligation at December 31, 2009 and 2008 was $11.0 million and $9.6
million, respectively.
Weighted-average assumptions used to determine benefit obligations and net periodic pension cost,
end of year:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.50 |
% |
|
|
5.50 |
% |
Rate of compensation increase |
|
|
4.00 |
% |
|
|
4.00 |
% |
110
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 15 PENSION PLANS Continued
Net pension cost included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Service cost |
|
$ |
505 |
|
|
$ |
472 |
|
|
$ |
513 |
|
Interest cost |
|
|
563 |
|
|
|
526 |
|
|
|
491 |
|
Amortization prior service cost |
|
|
90 |
|
|
|
94 |
|
|
|
94 |
|
Amortization prior service loss |
|
|
27 |
|
|
|
23 |
|
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
1,185 |
|
|
$ |
1,115 |
|
|
$ |
1,178 |
|
|
|
|
|
|
|
|
|
|
|
Benefit payments to be made from the Non-qualified Pension Plan are as follows:
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
Non-Qualified |
|
(In thousands) |
|
Pension Plans |
|
2010 |
|
$ |
510 |
|
2011 |
|
|
578 |
|
2012 |
|
|
630 |
|
2013 |
|
|
662 |
|
2014 |
|
|
662 |
|
Next five years thereafter |
|
|
5,630 |
|
Benefit payments are expected to be made from insurance policies owned by Royal Bank. The
cash surrender value for these policies was approximately $1.9 million and $1.7 million as of
December 31, 2009 and 2008, respectively.
Defined Contribution Plan
The Company 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 up to the maximum allowed by IRS regulation, with the Company matching 100% of any
contribution between 1% and 5% subject to a $2,500 per employee annual limit. During 2009, no
matching contribution was made as a result of a management decision to reduce costs. Matching contributions to the plan were approximately $0, $248,000, and $235,000 for
the years ended December 31, 2009, 2008, and 2007, respectively.
NOTE 16 STOCK COMPENSATION PLANS
Under the Companys Directors and Employees Stock Option Plan, the Company may grant options to
its directors, officers and employees for up to 2.1 million shares of common stock. Non-qualified
stock options may be granted under the Plan. The exercise price of each option equals the market
price of the Companys stock on the date of grant and an options maximum term is ten years.
Vesting periods range from one to five years from the date of grant. The Company recognized
compensation expense for stock options and restricted stock in the amounts of $226,000, $703,000
and $657,000 for December 31, 2009, 2008 and 2007, respectively. The Company did not grant any
options to purchase common stock in 2009.
111
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 16 STOCK COMPENSATION PLANS Continued
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 (1) |
|
|
2008 (2) |
|
|
2007 (1) |
|
|
2007 (2) |
|
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
4.85 |
% |
|
|
4.85 |
% |
Expected life |
|
7.5 years |
|
5.5 years |
|
7.5 years |
|
5.5 years |
Expected volatility |
|
|
49.90 |
% |
|
|
45.18 |
% |
|
|
29.68 |
% |
|
|
26.35 |
% |
Risk-free interest rate |
|
|
3.51 |
% |
|
|
3.51 |
% |
|
|
4.79 |
% |
|
|
4.58 |
% |
|
|
|
(1) |
|
Amounts represent weighted average assumption for options granted during 2008 and 2007 to
employees under the Long Term Incentive Plan. |
|
(2) |
|
Amounts represent weighted average assumption for options granted during 2008 and 2007 to
directors under the Long Term Incentive Plan. |
The expected volatility is based on historical volatility. The risk-free interest rates for
periods within the contractual life of the awards are based on the U.S. Treasury yield curve in
effect at the time of the grant. The expected life is based on historical exercise experience.
The dividend yield assumption is based on the Companys history and expectation of dividend
payouts.
1. Outside Directors Stock Option Plan
The Company adopted a non-qualified outside Directors Stock Option Plan (the Directors Plan).
Under the terms of the Directors Plan, 250,000 shares of Class A stock were authorized for grants.
Each director was entitled to a grant of an option to purchase 1,500 shares of stock annually.
The options were granted at the fair market value at the date of the grant. The options are
exercisable one year after the date of grant date and must be exercised within ten years of the
grant.
A summary of the status of the Directors Plan is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
(1) |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Options |
|
|
Price |
|
|
Term (yrs) |
|
|
Value |
|
|
Options |
|
|
Price |
|
|
Options |
|
|
Price |
|
Options outstanding at beginning of year |
|
|
95,950 |
|
|
$ |
18.82 |
|
|
|
4.4 |
|
|
|
|
|
|
|
100,294 |
|
|
$ |
18.62 |
|
|
|
102,552 |
|
|
$ |
18.41 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,258 |
) |
|
|
9.13 |
|
Forfeited |
|
|
(1,575 |
) |
|
|
21.78 |
|
|
|
|
|
|
|
|
|
|
|
(4,344 |
) |
|
|
13.75 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(4,178 |
) |
|
|
10.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at the end of the year |
|
|
90,197 |
|
|
$ |
19.15 |
|
|
|
3.6 |
|
|
$ |
|
|
|
|
95,950 |
|
|
$ |
18.82 |
|
|
|
100,294 |
|
|
$ |
18.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at the end of the year |
|
|
90,197 |
|
|
$ |
19.15 |
|
|
|
3.6 |
|
|
$ |
|
|
|
|
95,950 |
|
|
$ |
18.82 |
|
|
|
100,294 |
|
|
$ |
18.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate intrinsic value of a stock option in the table above represents the total
pre-tax intrinsic value (the amount by which the current market value of the underlying stock
exceeds the exercise price of the option) that would have been received by the option holders had
they exercised their options on December 31, 2009. The
intrinsic value varies based on the changes in the market value in the Companys stock. Because
the exercise price exceeded the market value of the options, the average intrinsic value was $0 at
December 31, 2009. |
112
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 16 STOCK COMPENSATION PLANS Continued
Information pertaining to options outstanding at December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
Average |
|
Range of |
|
Number |
|
|
Exercise |
|
|
Remaining |
|
exercise prices |
|
Outstanding |
|
|
Price |
|
|
Term (yrs) |
|
$11.00 - $12.00 |
|
|
14,944 |
|
|
$ |
11.81 |
|
|
|
0.7 |
|
$17.00 - $20.00 |
|
|
27,063 |
|
|
|
18.11 |
|
|
|
2.6 |
|
$21.00 - $22.38 |
|
|
48,190 |
|
|
|
22.02 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,197 |
|
|
$ |
19.15 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 all outstanding shares are fully vested (exercisable). The ability to
grant new options under this plan has expired.
2. Employee Stock Option and Appreciation Right Plan
The Company 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 1.8 million shares of the Companys Class A
common stock (but not in excess of 19% 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 were
exercisable at 20% per year beginning one year after the date of grant and must be exercised within
ten years of the grant.
A summary of the status of the Plan is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
(1) |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Options |
|
|
Price |
|
|
Term (yrs) |
|
|
Value |
|
|
Options |
|
|
Price |
|
|
Options |
|
|
Price |
|
Options outstanding at beginning of year |
|
|
685,873 |
|
|
$ |
19.72 |
|
|
|
3.4 |
|
|
|
|
|
|
|
799,831 |
|
|
$ |
19.64 |
|
|
|
853,804 |
|
|
$ |
19.47 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,588 |
) |
|
|
11.89 |
|
|
|
(24,718 |
) |
|
|
11.83 |
|
Forfeited |
|
|
(263,866 |
) |
|
|
19.44 |
|
|
|
|
|
|
|
|
|
|
|
(99,370 |
) |
|
|
20.23 |
|
|
|
(29,255 |
) |
|
|
21.60 |
|
Expired |
|
|
(20,381 |
) |
|
|
16.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at the end of the year |
|
|
401,626 |
|
|
$ |
20.09 |
|
|
|
4.2 |
|
|
$ |
|
|
|
|
685,873 |
|
|
$ |
19.72 |
|
|
|
799,831 |
|
|
$ |
19.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at the end of the year |
|
|
357,737 |
|
|
$ |
19.88 |
|
|
|
4.0 |
|
|
$ |
|
|
|
|
525,789 |
|
|
$ |
19.05 |
|
|
|
479,441 |
|
|
$ |
18.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate intrinsic value of a stock option in the table above represents the total pre-tax
intrinsic value (the amount by which the current market value of the underlying stock exceeds the
exercise price of the option) that would have been received by the option holders had they
exercised their options on December 31, 2009. The
intrinsic value varies based on the changes in the market value in the Companys stock. Because
the exercise price exceeded the market value of the options, the average intrinsic value was $0 at
December 31, 2009. |
113
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 16 STOCK COMPENSATION PLANS Continued
Information pertaining to options outstanding at December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
|
Options exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
Range of |
|
Number |
|
|
Exercise |
|
|
Remaining |
|
|
Number |
|
|
Exercise |
|
exercise prices |
|
Outstanding |
|
|
Price |
|
|
Term (yrs) |
|
|
Outstanding |
|
|
Price |
|
$11.00 - $12.00 |
|
|
41,516 |
|
|
$ |
11.86 |
|
|
|
1.0 |
|
|
|
41,516 |
|
|
$ |
11.86 |
|
$17.00 - $20.00 |
|
|
94,642 |
|
|
|
18.09 |
|
|
|
2.8 |
|
|
|
94,642 |
|
|
|
18.09 |
|
$21.00 - $22.38 |
|
|
265,468 |
|
|
|
22.09 |
|
|
|
5.2 |
|
|
|
221,579 |
|
|
|
22.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401,626 |
|
|
$ |
20.09 |
|
|
|
4.2 |
|
|
|
357,737 |
|
|
$ |
19.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides detail for non-vested shares under the Employees Plan as of December
31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Exercise |
|
|
|
of shares |
|
|
Price |
|
Non-vested options December 31, 2008 |
|
|
160,084 |
|
|
$ |
20.91 |
|
Forfeited |
|
|
(59,551 |
) |
|
|
21.95 |
|
Vested |
|
|
(56,644 |
) |
|
|
22.08 |
|
|
|
|
|
|
|
|
Non-vested options December 31, 2009 |
|
|
43,889 |
|
|
$ |
21.81 |
|
|
|
|
|
|
|
|
There were a total of 43,889 unvested options at December 31, 2009, with a $201,000 fair value and
approximately $138,000 remained to be recognized in expense over a weighted-average period of 1.5
years. The net total intrinsic value for options that were exercised during 2008 and 2007 was
$31,000 and $277,000, respectively. There were no options exercised in 2009. The ability to grant
new options under this plan has expired.
3. Long-Term Incentive Plan
The 2007 Long-Term Incentive Plan was approved by Shareholders at the May 16, 2007 Annual Meeting.
The plan consists of both a restricted and an unrestricted stock option plan. All employees and
non-employee directors of the Company and its designated subsidiaries are eligible participants.
The plan includes one million shares of Class A common stock, subject to customary anti-dilution
adjustments, or approximately 9.0% of the total outstanding shares of the Class A common stock.
As of December 31, 2009, 172,390 shares from the unrestricted plan have been granted. The option
price is equal to the fair market value at the date of the grant. The employee 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 date. Directors options are exercisable on the one year anniversary of the
date of grant and must be exercised within ten years of the grant date.
114
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 16 STOCK COMPENSATION PLANS Continued
A summary of the status of the unrestricted portion of the Plan is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
(1) |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Options |
|
|
Price |
|
|
Term (yrs) |
|
|
Value |
|
|
Options |
|
|
Price |
|
|
Options |
|
|
Price |
|
Options outstanding at beginning of year |
|
|
161,901 |
|
|
$ |
10.89 |
|
|
|
8.4 |
|
|
|
|
|
|
|
76,940 |
|
|
$ |
20.08 |
|
|
|
|
|
|
$ |
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,450 |
|
|
|
4.50 |
|
|
|
76,940 |
|
|
|
20.08 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(26,102 |
) |
|
|
14.38 |
|
|
|
|
|
|
|
|
|
|
|
(10,489 |
) |
|
|
20.08 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(487 |
) |
|
|
20.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at the end of the year |
|
|
135,312 |
|
|
$ |
10.19 |
|
|
|
8.2 |
|
|
$ |
|
|
|
|
161,901 |
|
|
$ |
10.89 |
|
|
|
76,940 |
|
|
$ |
20.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at the end of the year |
|
|
62,295 |
|
|
$ |
12.78 |
|
|
|
7.9 |
|
|
$ |
|
|
|
|
28,340 |
|
|
$ |
20.08 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of options
granted during the year |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
2.38 |
|
|
|
|
|
|
$ |
4.12 |
|
|
|
|
(1) |
|
The aggregate intrinsic value of a stock option in the table above represents the total
pre-tax intrinsic value (the amount by which the current market value of the underlying stock
exceeds the exercise price of the option) that would have been received by the option holders had
they exercised their options on December 31, 2009. The intrinsic value varies based on the changes
in the market value in the Companys stock. Because the exercise price exceeded the market value
of the options, the average intrinsic value was $0 at December 31, 2009. |
Information pertaining to options outstanding at December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
|
Options exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
Range of |
|
Number |
|
|
Exercise |
|
|
Remaining |
|
|
Number |
|
|
Exercise |
|
exercise prices |
|
Outstanding |
|
|
Price |
|
|
Term (yrs) |
|
|
Outstanding |
|
|
Price |
|
$4.50 |
|
|
85,900 |
|
|
$ |
4.50 |
|
|
|
8.8 |
|
|
|
29,180 |
|
|
$ |
4.50 |
|
$20.08 |
|
|
49,412 |
|
|
|
20.08 |
|
|
|
7.2 |
|
|
|
33,115 |
|
|
|
20.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,312 |
|
|
$ |
10.19 |
|
|
|
8.2 |
|
|
|
62,295 |
|
|
$ |
12.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides detail for non-vested shares under the Long-Term Incentive Plan as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Exercise |
|
|
|
of shares |
|
|
Price |
|
Non-vested options December 31, 2008 |
|
|
133,561 |
|
|
$ |
8.95 |
|
Granted |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(25,249 |
) |
|
|
14.19 |
|
Vested |
|
|
(35,295 |
) |
|
|
7.20 |
|
|
|
|
|
|
|
|
Non-vested options December 31, 2009 |
|
|
73,017 |
|
|
$ |
7.98 |
|
|
|
|
|
|
|
|
There were a total of 73,017 unvested options at December 31, 2009, with a $207,000 fair value and
approximately $178,000 remained to be recognized in expense over a weighted-averaged period of 3.75
years.
115
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 16 STOCK COMPENSATION PLANS Continued
Under the aforementioned Long-Term Incentive Plan, approved by shareholders in May 2007, the
Company is authorized to grant share-based incentive compensation awards for corporate performance
to employees. These awards may be granted in form of shares of the Companys common stock,
performance-restricted restricted stock.
The vesting of awards is contingent upon meeting certain return on asset and return on equity
goals. The awards are not permitted to be transferred during the restricted time period of three
years from the date of the award and are subject to forfeiture to the extent that the performance
restrictions are not satisfied. Awards are also forfeited if the employee terminates his or her
service prior to the end of the restricted time period, unless such termination is in accordance
with the Companys mandatory retirement age. Vested awards are converted to shares of the
Companys common stock at the end of the restricted time period.
The fair market value of each employee based award is estimated based on the fair market value of
the Companys common stock on the date of the grant and probable performance goals to be achieved
and estimated forfeitures. If such goals are not met, no compensation cost would be recognized and
any recognized compensation cost would be reversed.
Aggregate information regarding the performance based awards as of December 31, 2009 is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
(1) |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Options |
|
|
Price |
|
|
Term (yrs) |
|
|
Value |
|
|
Options |
|
|
Price |
|
|
Options |
|
|
Price |
|
Restricted options at the beginning of year |
|
|
10,152 |
|
|
$ |
11.43 |
|
|
|
|
|
|
|
|
|
|
|
18,682 |
|
|
$ |
11.43 |
|
|
|
|
|
|
$ |
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,682 |
|
|
|
11.43 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(1,096 |
) |
|
|
11.43 |
|
|
|
|
|
|
|
|
|
|
|
(8,530 |
) |
|
|
11.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted options at the end of year |
|
|
9,056 |
|
|
$ |
11.43 |
|
|
|
|
|
|
$ |
|
|
|
|
10,152 |
|
|
$ |
11.43 |
|
|
|
18,682 |
|
|
$ |
11.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at the end of the year |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately $54,000 remained to be recognized in expense.
NOTE 17 EARNINGS PER COMMON SHARE
Basic and diluted EPS are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009 |
|
|
|
Loss |
|
|
Average shares |
|
|
Per share |
|
(In thousands, except for per share data) |
|
(numerator) |
|
|
(denominator) |
|
|
Amount |
|
Basic and Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common shareholders |
|
$ |
(34,931 |
) |
|
|
13,256 |
|
|
$ |
(2.64 |
) |
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, 713,098 options to purchase shares of common stock and restricted stock
awards were anti-dilutive in the computation of diluted EPS, as exercise price exceeded average
market price and as a result of the net loss for the year. Additionally 30,407 warrants were also
anti-dilutive.
116
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 17 EARNINGS PER COMMON SHARE Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008 |
|
|
|
Loss |
|
|
Average shares |
|
|
Per share |
|
(In thousands, except for per share data) |
|
(numerator) |
|
|
(denominator) |
|
|
Amount |
|
Basic and Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common shareholders |
|
$ |
(38,082 |
) |
|
|
13,294 |
|
|
$ |
(2.86 |
) |
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, 933,087 options to purchase shares of common stock and restricted stock
awards were anti-dilutive in the computation of diluted EPS, as exercise price exceeded average
market price and as a result of the net loss for the year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007 |
|
|
|
Income |
|
|
Average shares |
|
|
Per share |
|
(In thousands, except for per share data) |
|
(numerator) |
|
|
(denominator) |
|
|
Amount |
|
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders |
|
$ |
564 |
|
|
|
13,433 |
|
|
$ |
0.04 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
14 |
|
|
|
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders plus
assumed exercise of options |
|
$ |
564 |
|
|
|
13,447 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
All options to purchase shares of common stock were included in the computation of 2007 diluted EPS
because the exercise price was less than the average market price of the common stock.
NOTE 18 COMPREHENSIVE INCOME (LOSS)
FASB ASC Topic 220, Comprehensive Income (ASC Topic 220), requires the reporting of all changes
in equity during the reporting period except investments from and distributions to shareholders.
Net income (loss) is a component of comprehensive income (loss) with all other components referred
to in the aggregate as other comprehensive income.
117
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 18 COMPREHENSIVE INCOME (LOSS) Continued
The components of other comprehensive income (loss) and the related tax effects are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009 |
|
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
Before tax |
|
|
expense |
|
|
Net of tax |
|
(In thousands) |
|
amount |
|
|
(benefit) |
|
|
amount |
|
Unrealized gains on investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains arising during period |
|
$ |
26,597 |
|
|
$ |
9,269 |
|
|
$ |
17,328 |
|
Reduction in deferred tax valuation allowance
related to preferred and common stock |
|
|
|
|
|
|
(3,022 |
) |
|
|
3,022 |
|
Non-credit loss portion of other-than-temporary impairments |
|
|
(2,390 |
) |
|
|
(836 |
) |
|
|
(1,554 |
) |
Less adjustment for impaired investments |
|
|
(11,041 |
) |
|
|
(3,864 |
) |
|
|
(7,177 |
) |
Less reclassification adjustment for gains
realized in net loss |
|
|
1,892 |
|
|
|
662 |
|
|
|
1,230 |
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on investment securities |
|
|
33,356 |
|
|
|
14,657 |
|
|
|
24,743 |
|
Unrecognized benefit obligation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
|
(562 |
) |
|
|
(197 |
) |
|
|
(365 |
) |
Less reclassification adjustment for amortization |
|
|
(117 |
) |
|
|
(41 |
) |
|
|
(76 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(445 |
) |
|
|
(156 |
) |
|
|
(289 |
) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net |
|
$ |
32,911 |
|
|
$ |
14,501 |
|
|
$ |
24,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008 |
|
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
Before tax |
|
|
expense |
|
|
Net of tax |
|
(In thousands) |
|
amount |
|
|
(benefit) |
|
|
amount |
|
Unrealized losses on investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses arising during period |
|
$ |
(54,527 |
) |
|
$ |
(19,084 |
) |
|
$ |
(35,443 |
) |
Less deferred tax valuation allowance related to
preferred and common stock |
|
|
|
|
|
|
(3,119 |
) |
|
|
3,119 |
|
Market value adjustment on transfer of held-to-maturity
securities to available-for-sale |
|
|
(2,987 |
) |
|
|
(1,045 |
) |
|
|
(1,942 |
) |
Less adjustment for impaired investments |
|
|
(23,388 |
) |
|
|
(8,184 |
) |
|
|
(15,204 |
) |
Less reclassification adjustment for losses
realized in net loss |
|
|
(1,313 |
) |
|
|
(460 |
) |
|
|
(853 |
) |
|
|
|
|
|
|
|
|
|
|
Unrealized losses on investment securities |
|
|
(32,813 |
) |
|
|
(8,366 |
) |
|
|
(24,447 |
) |
Unrecognized benefit obligation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
|
(235 |
) |
|
|
(82 |
) |
|
|
(153 |
) |
Less reclassification adjustment for amortization |
|
|
(117 |
) |
|
|
(41 |
) |
|
|
(76 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(118 |
) |
|
|
(41 |
) |
|
|
(77 |
) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net |
|
$ |
(32,931 |
) |
|
$ |
(8,407 |
) |
|
$ |
(24,524 |
) |
|
|
|
|
|
|
|
|
|
|
118
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 18 COMPREHENSIVE INCOME (LOSS) Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 |
|
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
Before tax |
|
|
expense |
|
|
Net of tax |
|
(In thousands) |
|
amount |
|
|
(benefit) |
|
|
amount |
|
Unrealized losses on investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains arising during period |
|
$ |
4,369 |
|
|
$ |
1,529 |
|
|
$ |
2,840 |
|
Less reclassification adjustment for gains
realized in net income |
|
|
5,358 |
|
|
|
1,875 |
|
|
|
3,483 |
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on investment securities |
|
|
(989 |
) |
|
|
(346 |
) |
|
|
(643 |
) |
Unrecognized benefit obligation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial gain |
|
|
333 |
|
|
|
117 |
|
|
|
216 |
|
Less reclassification adjustment for amortization |
|
|
172 |
|
|
|
60 |
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
505 |
|
|
|
177 |
|
|
|
328 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net |
|
$ |
(484 |
) |
|
$ |
(169 |
) |
|
$ |
(315 |
) |
|
|
|
|
|
|
|
|
|
|
The other components of accumulated other comprehensive loss included in shareholders equity
at December 31, 2009, 2008, and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Unrecognized benefit obligation |
|
$ |
(1,478 |
) |
|
$ |
(1,189 |
) |
|
$ |
(1,267 |
) |
Unrealized losses on AFS investments |
|
|
(174 |
) |
|
|
(24,917 |
) |
|
|
(643 |
) |
Adjustment to net periodic pension cost |
|
|
|
|
|
|
|
|
|
|
328 |
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(1,652 |
) |
|
$ |
(26,106 |
) |
|
$ |
(1,582 |
) |
|
|
|
|
|
|
|
|
|
|
Refer to Note 15 Pension Plans to the Consolidated Financial Statements for more information.
NOTE 19 FAIR VALUE OF FINANCIAL INSTRUMENTS
Under FASB ASC Topic 820 Fair Value Measurements and Disclosures (ASC Topic 820), fair values
are based on the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. When available,
Management uses quoted market prices to determine fair value. If quoted prices are not available,
fair value is based upon valuation techniques such as matrix pricing or other models that use,
where possible, current market-based or independently sourced market parameters, such as interest
rates. If observable market-based inputs are not available, the Company uses unobservable inputs to
determine appropriate valuation adjustments using discounted cash flow methodologies.
In April 2009, the FASB issued guidance under ASC Topic 820 for estimating fair value when the
volume and level of activity for an asset or liability has significantly declined and for
identifying circumstances when a transaction is not orderly.
ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation
methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted
prices in active markets for identical assets
or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy under ASC Topic 820 are as follows:
|
Level 1: |
|
Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities. |
119
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 19 FAIR VALUE OF FINANCIAL INSTRUMENTS Continued
|
Level 2: |
|
Quoted prices in markets that are not active, or inputs that are observable
either directly or indirectly, for substantially the full term of the asset or
liability. Includes debt securities with quoted prices that are traded less frequently
then exchange-traded instruments. Valuation techniques include matrix pricing which is
a mathematical technique used widely in the industry to value debt securities without
relying exclusively on quoted market prices for the specific securities but rather by
relying on the securities relationship to other benchmark quoted prices. |
|
Level 3: |
|
Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable (i.e., supported with little
or no market activity). |
A financial instruments level within the fair value hierarchy is based on the lowest level of
input that is significant to the fair value measurement.
Items Measured on a Recurring Basis
The Companys available for sale investment securities are recorded at fair value on a recurring
basis.
Fair value for Level 1 securities are determined by obtaining quoted market prices on nationally
recognized securities exchanges. Level 1 securities include obligations of U.S. government-sponsored agencies, preferred and common
stocks and four trust preferred securities which are actively traded.
Level 2 securities include debt securities with quoted prices, which are traded less frequently
than exchange-traded instruments, whose value is determined using matrix pricing with inputs that
are observable in the market or can be derived principally from or corroborated by observable
market data. The prices were obtained from third party vendors. This category generally includes
mortgage-backed securities and CMOs issued by
U.S. government and government-sponsored agencies, non-agency CMOs and corporate bonds.
The Company engaged third parties to assist in valuing Level 3 securities which include seven trust
preferred securities and three collateralized debt obligations (CDOs). The fair value for the
trust preferred securities were derived by using contractual cash flows and a market rate of return
for each of these securities. Factors that affected the market rate of return included (1) any
uncertainty about the amount and timing of the cash flows, (2) the credit risk, (3) liquidity of
the instrument, and (4) observable yields from trading data and bid/ask indications. Credit risk
spreads and liquidity premiums were analyzed to derive the appropriate discount rate. The CDO
valuations were determined using a copula method, which is a type of market standard valuation
modeling for structured credit derivative products that is dependent on the correlated default
events of the obligors within the underlying collateral pool, corporate bond spreads, and the
timing of the maturity of the CDOs to arrive at indicative pricing. The analysis did not look at
indicators of defaults but instead it analyzed what would happen to the principal if actual
defaults occurred. The analysis used a 0% recovery rate. In addition, management used two
independent third parties to validate the fair values received.
120
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 19 FAIR VALUE OF FINANCIAL INSTRUMENTS Continued
For financial assets measured at fair value on a recurring basis, the fair value measurements by
level within the fair value hierarchy used at December 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2009 |
|
Fair Value Measurements Using |
|
|
|
|
(In thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Fair Value |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential |
|
$ |
|
|
|
$ |
21,601 |
|
|
$ |
|
|
|
$ |
21,601 |
|
U.S. government agencies |
|
|
1,151 |
|
|
|
|
|
|
|
|
|
|
|
1,151 |
|
Preferred stocks |
|
|
2,230 |
|
|
|
|
|
|
|
|
|
|
|
2,230 |
|
Common stocks |
|
|
444 |
|
|
|
|
|
|
|
|
|
|
|
444 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies |
|
|
|
|
|
|
318,501 |
|
|
|
|
|
|
|
318,501 |
|
Non-agency |
|
|
|
|
|
|
21,198 |
|
|
|
|
|
|
|
21,198 |
|
Collateralized debt obligations |
|
|
|
|
|
|
|
|
|
|
24,825 |
|
|
|
24,825 |
|
Corporate bonds |
|
|
|
|
|
|
6,867 |
|
|
|
|
|
|
|
6,867 |
|
Trust preferred securities |
|
|
11,895 |
|
|
|
|
|
|
|
22,240 |
|
|
|
34,135 |
|
Other securities |
|
|
|
|
|
|
|
|
|
|
7,767 |
|
|
|
7,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale |
|
$ |
15,720 |
|
|
$ |
368,167 |
|
|
$ |
54,832 |
|
|
$ |
438,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2008 |
|
Fair Value Measurements Using |
|
|
|
|
(In thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Fair Value |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential |
|
$ |
|
|
|
$ |
55,061 |
|
|
$ |
|
|
|
$ |
55,061 |
|
U.S. government agencies |
|
|
48,191 |
|
|
|
|
|
|
|
|
|
|
|
48,191 |
|
Preferred stocks |
|
|
|
|
|
|
|
|
|
|
2,297 |
|
|
|
2,297 |
|
Common stocks |
|
|
540 |
|
|
|
|
|
|
|
12,167 |
|
|
|
12,707 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies |
|
|
|
|
|
|
79,425 |
|
|
|
|
|
|
|
79,425 |
|
Non-agency |
|
|
|
|
|
|
37,490 |
|
|
|
|
|
|
|
37,490 |
|
Collateralized debt obligations |
|
|
|
|
|
|
|
|
|
|
26,160 |
|
|
|
26,160 |
|
Corporate bonds |
|
|
|
|
|
|
51,338 |
|
|
|
|
|
|
|
51,338 |
|
Trust preferred securities |
|
|
|
|
|
|
|
|
|
|
30,144 |
|
|
|
30,144 |
|
Other securities |
|
|
|
|
|
|
|
|
|
|
7,489 |
|
|
|
7,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale |
|
$ |
48,731 |
|
|
$ |
223,314 |
|
|
$ |
78,257 |
|
|
$ |
350,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 19 FAIR VALUE OF FINANCIAL INSTRUMENTS Continued
The following table presents additional information about assets measured at fair value on a
recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
|
|
|
|
|
|
|
|
|
|
|
Investment Securities |
|
|
|
Available-for-Sale |
|
|
|
December 31, |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
Balance at the beginning of the period |
|
$ |
78,257 |
|
|
$ |
68,969 |
|
Total gains/(losses) (realized/unrealized): |
|
|
|
|
|
|
|
|
Included in earnings |
|
|
(3,246 |
) |
|
|
(5,578 |
) |
Included in other comprehensive income (loss) |
|
|
11,611 |
|
|
|
(19,529 |
) |
Purchases, issuances, and settlements, net |
|
|
(8,971 |
) |
|
|
(7,900 |
) |
Transfers in and/or out of Level 3 |
|
|
(22,819 |
) |
|
|
42,295 |
|
|
|
|
|
|
|
|
Balance at the end of the period |
|
$ |
54,832 |
|
|
$ |
78,257 |
|
|
|
|
|
|
|
|
During 2009, the Company transferred out of Level 3 and into Level 1 four trust preferred
securities that are actively traded and for which quoted prices are available. In addition, the
Company also transferred from Level 3 to Level 1 the individual stocks from the six accounts that
were managed exclusively for the Company by an investment management company for which quoted
prices were available.
Items Measured on a Nonrecurring Basis
Non-accrual loans are evaluated for impairment on an individual basis under FASB ASC Topic 310
Receivables. The impairment analysis includes current collateral values, known relevant factors
that may affect loan collectability, and risks inherent in different kinds of lending. When the
collateral value or discounted cash flows less costs to sell is less than the carrying value of the
loan a specific reserve (valuation allowance) is established. Loans held for sale are carried at
the lower of cost or fair value. In the second quarter the Company transferred one impaired
participation loan to loans held for sale. During the second quarter of 2009, the lead bank
negotiated the sale of the loan which closed in the first quarter of 2010. Other real estate owned
(OREO) is carried at the lower of cost or fair value. Fair value is based upon independent
market prices, appraised values of the collateral or managements estimation of the value of the
collateral. These assets are included as Level 3 fair values, based upon the lowest level of input
that is significant to the fair value measurements.
For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by
level within the fair value hierarchy used at December 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2009 |
|
Fair Value Measurements Using |
|
|
|
|
(In thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Fair Value |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
35,712 |
|
|
$ |
35,712 |
|
Other real estate owned |
|
|
|
|
|
|
|
|
|
|
30,317 |
|
|
|
30,317 |
|
Loans held for sale |
|
|
|
|
|
|
|
|
|
|
2,254 |
|
|
|
2,254 |
|
122
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 19 FAIR VALUE OF FINANCIAL INSTRUMENTS Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2008 |
|
Fair Value Measurements Using |
|
|
|
|
(In thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Fair Value |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
56,468 |
|
|
$ |
56,468 |
|
Other real estate owned |
|
|
|
|
|
|
|
|
|
|
10,346 |
|
|
|
10,346 |
|
Loans held for sale |
|
|
|
|
|
|
|
|
|
|
267 |
|
|
|
267 |
|
Effective June 30, 2009, the Company adopted new guidance under FASB ASC Topic 825 Financial
Instruments. The new guidance requires interim and annual disclosures made by publicly traded
companies to include the fair value of its financial instruments, whether recognized or not
recognized in the statement of financial position. The methodologies for estimating the fair value
of financial instruments that are measured on a recurring or nonrecurring basis are discussed
above.
The following information should not be interpreted as an estimate of the fair value of the entire
Company since a fair value calculation is
only provided for a limited portion of the Companys assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity
used in making the estimates, comparisons between the Companys disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the
fair values of the Companys financial instruments at December 31, 2009 and 2008.
Cash and cash equivalents (carried at cost):
The carrying amounts reported in the balance sheet for cash and short-term instruments approximate
those assets fair values.
Securities:
Management uses quoted market prices to determine fair value of securities (level 1). If quoted
prices are not available, fair value is based upon valuation techniques such as matrix pricing or
other models that use, where possible, current market-based or independently sourced market
parameters, such as interest rates (level 2). If observable market-based inputs are not available,
the Company uses unobservable inputs to determine appropriate valuation adjustments using
discounted cash flow methodologies (level 3).
Loans receivable (carried at cost):
The fair values of loans are estimated using discounted cash flow analyses, using market rates at
the balance sheet date that reflect the credit and interest rate-risk inherent in the loans.
Projected future cash flows are calculated based upon contractual maturity or call dates, projected
repayments and prepayments of principal. Generally, for variable rate loans that reprice
frequently and with no significant change in credit risk, fair values are based on carrying values.
Impaired loans (generally carried at fair value):
Impaired loans are accounted for under ASC Topic 310. Impaired loans are those in which the Company
has measured impairment generally based on the fair value of the loans collateral. Fair value is
generally determined based upon independent third-party appraisals of the properties, or discounted
cash flows based on the expected proceeds. These assets are included as Level 3 fair values, based
upon the lowest level of input that is significant to the fair value measurements.
Restricted investment in bank stock (carried at cost):
The carrying amount of restricted investment in bank stock approximates fair value, and considers
the limited marketability of such securities.
Accrued interest receivable and payable (carried at cost):
The carrying amount of accrued interest receivable and accrued interest payable approximates its
fair value.
123
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 19 FAIR VALUE OF FINANCIAL INSTRUMENTS Continued
Deposit liabilities (carried at cost):
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook
savings and money market accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit
are estimated using a discounted cash flow calculation that applies interest rates currently being
offered in the market on certificates to a schedule of aggregated expected monthly maturities on
time deposits.
Short-term borrowings (carried at cost):
The carrying amounts of short-term borrowings approximate their fair values.
Long-term debt (carried at cost):
Fair values of FHLB advances and other long-term borrowings are estimated using discounted cash
flow analysis, based on quoted prices for new FHLB advances with similar credit risk
characteristics, terms and remaining maturity. These prices obtained from this active market
represent a market value that is deemed to represent the transfer price if the liability were
assumed by a third party.
Subordinated debt (carried at cost):
Fair values of junior subordinated debt are estimated using discounted cash flow analysis, based on
market rates currently offered on such debt with similar credit risk characteristics, terms and
remaining maturity.
Off-balance sheet financial instruments (disclosed at cost):
Fair values for the Companys off-balance sheet financial instruments (lending commitments and
letters of credit) are based on fees currently charged in the market to enter into similar
agreements, taking into account, the remaining terms of the agreements and the counterparties
credit standing. They are not shown in the table because the amounts are immaterial.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Carrying |
|
|
Estimated |
|
|
Carrying |
|
|
Estimated |
|
(In thousands) |
|
amount |
|
|
fair value |
|
|
amount |
|
|
fair value |
|
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
58,298 |
|
|
$ |
58,298 |
|
|
$ |
14,259 |
|
|
$ |
14,259 |
|
Investment securities available for sale |
|
|
438,719 |
|
|
|
438,719 |
|
|
|
350,302 |
|
|
|
350,302 |
|
Loans, net |
|
|
656,533 |
|
|
|
652,716 |
|
|
|
671,814 |
|
|
|
672,449 |
|
Federal Home Loan Bank stock |
|
|
10,952 |
|
|
|
10,952 |
|
|
|
10,952 |
|
|
|
10,952 |
|
Accrued interest receivable |
|
|
14,942 |
|
|
|
14,942 |
|
|
|
13,580 |
|
|
|
13,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
63,168 |
|
|
|
63,168 |
|
|
|
50,886 |
|
|
|
50,886 |
|
NOW and money markets |
|
|
214,141 |
|
|
|
214,141 |
|
|
|
193,869 |
|
|
|
193,869 |
|
Savings |
|
|
15,336 |
|
|
|
15,336 |
|
|
|
15,171 |
|
|
|
15,171 |
|
Time deposits |
|
|
589,110 |
|
|
|
578,824 |
|
|
|
500,142 |
|
|
|
513,707 |
|
Short-term borrowings |
|
|
114,500 |
|
|
|
114,500 |
|
|
|
22,000 |
|
|
|
22,000 |
|
Long-term borrowings |
|
|
139,675 |
|
|
|
131,093 |
|
|
|
253,681 |
|
|
|
263,552 |
|
Subordinated debt |
|
|
25,774 |
|
|
|
12,617 |
|
|
|
25,774 |
|
|
|
25,774 |
|
Obligations from equity investments |
|
|
3,652 |
|
|
|
3,652 |
|
|
|
12,350 |
|
|
|
12,350 |
|
Accrued interest payable |
|
|
6,150 |
|
|
|
6,150 |
|
|
|
6,102 |
|
|
|
6,102 |
|
124
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 20 SEGMENT INFORMATION
FASB ASC Topic 280, Segment Reporting (ASC Topic 280) 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
makers in deciding how to allocate and assess resources and performance. The Companys chief
operating decision makers are the Chief Executive Officer and the President. The Company has
identified its reportable operating segments as Community Banking, Tax Liens and Equity
Investments. The Company has two operating segments that do not meet the quantitative thresholds
for requiring disclosure, but have different characteristics than the Community Banking, Tax Liens
and Equity Investments segments, and from each other, RBA Leasing and RBA Capital (Other in the
segment table below). The Tax Liens segment includes Crusader Servicing Corporation and Royal Tax
Lien Services, LLC (collectively the Tax Lien Operation); and the Equity Investments segment is a
wholly owned subsidiary of Royal Bank, Royal Investments America, that previously made equity
investments in real estate and had extended mezzanine loans to real estate projects. At December
31, 2009 and 2008, one such equity investment in real estate meets the requirements for
consolidation under ASC Topic 810 based on Royal Investments America being the primary financial
beneficiary, and therefore the Company is reporting on a consolidated basis said investment as a
Variable Interest Entity (VIE). This was determined based on the amount invested by Royal
Investments America compared to our partners. The VIE is included below in the Equity Investment
category.
In June 2009, the FASB issued updated guidance under ASC Topic 810. The purpose of the new guidance is to improve financial reporting by
enterprises involved with variable interest entities. The FASB undertook this project to address
(1) the effects on certain provisions in ASC Topic 860, as a result of the elimination of the
qualifying special-purpose entity concept in ASC Topic 860, and (2) constituent concerns about the
application of certain key provisions of ASC Topic 810, including those in which the accounting and
disclosures do not always provide timely and useful information about an enterprises involvement
in a variable interest entity. The new guidance shall be effective as of the beginning of each
reporting entitys first annual reporting period that begins after November 15, 2009, for interim
periods within that first annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. The Company does not expect the adoption of this
guidance to have a significant impact on the consolidated financial statements.
Community banking
The Companys Community Banking segment which includes Royal Bank America and Royal Asian Bank
(the Banks) consists of commercial and retail banking. The Community Banking business
segment is managed as a single strategic unit which generates revenue from a
variety of products and services provided by the Banks. For example, commercial lending is
dependent upon the ability of the Banks to fund cash needed to make loans with retail deposits and
other borrowings and to manage interest rate and credit risk. While the Banks make very few
consumer loans, cash needed to make such loans would be funded similarly to commercial loans.
On September 25, 2009, the Company announced that it had entered into a stock purchase agreement
(the Agreement), dated as of September 24, 2009, with a newly formed corporation organized by the
President of Royal Asian to purchase all of the outstanding common stock of Royal Asian owned by
the Company. On December 21, 2009, the Company announced it was terminating the Agreement because
the investor group pursuing the buyout was unable to raise sufficient capital to meet the terms of
the Agreement and ensure all regulatory approvals necessary to complete the transaction would be
obtained. As a result of the Companys termination of the Agreement, the $251,000 escrow amount
previously deposited by Buyer, which was to be credited toward payment of the purchase price, was
retained by the Company as liquidated damages and recorded in other income.
125
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 20 SEGMENT INFORMATION Continued
Tax lien operation
The Companys Tax Lien Operation consists of purchasing delinquent tax certificates from local
municipalities at auction and then processing those liens to either encourage the property holder
to pay off the lien, or to foreclose and sell the property. The tax lien operation earns income
based on interest rates (determined at auction) and penalties assigned by the municipality along
with gains on sale of foreclosed properties.
Equity investments
In September 2005, the Company, together with a real estate development company, formed a limited
partnership. The Company is a limited partner in the partnership (Partnership). The Partnership
was formed to convert an apartment complex into condominiums. The development company is the
general partner of the Partnership. The Company invested 66% of the initial capital contribution,
or $2.5 million, with the development company investing the remaining equity of $1.3 million. The
Company is entitled to earn a preferred return on the $2.5 million capital contribution. In
addition, the Company made two mezzanine loans totaling $9.2 million at market terms and interest
rates. As of December 31, 2009, the Partnership also had $3.7 million outstanding of senior debt
with another bank. Royal Bank loaned $814,000 to the Partnership during the fourth quarter of 2009
and is obligated to fund up to $2.7 million if required for the remaining costs associated with
capital improvements, operating and marketing expenses. Upon the repayment of the mezzanine loan
interest and principal and the initial capital contributions and preferred return, the Company and
the development company will both receive 50% of the remaining distribution, if any. The Company
is not obligated to pay the senior debt.
In accordance with the FASB ASC Topic 360, Property, Plant and Equipment (ASC Topic 360), the
Partnership assesses for impairment by evaluating the recoverability of the condominiums based on
estimated future operating cash flows. The Company had previously recognized $10.0 million in
impairment ($1.5 million in 2008 and $8.5 million in 2007). There was no further impairment in
2009. The measurement and recognition of the impairment was based on estimated future discounted
operating cash flows. The Companys investment in this entity is further discussed in Note 1 -
Summary of Significant Accounting Policies to the Consolidated Financial Statements.
Other segments
RBA Capital and RBA Leasing are reported in this category. RBA Capital is a re-discount lender.
RBA Leasing is a small ticket leasing company. Neither RBA Capital nor RBA Leasing met the
threshold requirements under ASC Topic 280 that would preclude them from being combined and
reported below as Other segments. During the fourth quarter of 2008, management decided to wind
down the operation of RBA Capital. The operations of the subsidiary are now part of Royal Bank
however they continue to be shown in the Other segments section of the table below since the type
of lending is different than that of Royal Bank. See the Non-Bank Subsidiaries in Item 1
Business of this Report.
126
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 20 SEGMENT INFORMATION Continued
Selected segment information and reconciliations to consolidated financial information are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Community |
|
|
Tax Lien |
|
|
Equity |
|
|
|
|
|
|
|
December 31, 2009 |
|
Banking |
|
|
Operation |
|
|
Investment |
|
|
Other |
|
|
Consolidated |
|
Total assets |
|
$ |
1,110,457 |
|
|
$ |
105,020 |
|
|
$ |
8,689 |
|
|
$ |
68,561 |
|
|
$ |
1,292,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
881,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
881,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
50,589 |
|
|
$ |
10,424 |
|
|
$ |
|
|
|
$ |
5,030 |
|
|
$ |
66,043 |
|
Interest expense |
|
|
31,507 |
|
|
|
4,462 |
|
|
|
243 |
|
|
|
1,227 |
|
|
|
37,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) |
|
|
19,082 |
|
|
|
5,962 |
|
|
|
(243 |
) |
|
|
3,803 |
|
|
|
28,604 |
|
Provision for loan losses |
|
|
18,730 |
|
|
|
624 |
|
|
|
|
|
|
|
1,251 |
|
|
|
20,605 |
|
Total other (loss) income |
|
|
(4,772 |
) |
|
|
313 |
|
|
|
2,343 |
|
|
|
390 |
|
|
|
(1,726 |
) |
Total other expenses |
|
|
32,911 |
|
|
|
2,870 |
|
|
|
907 |
|
|
|
969 |
|
|
|
37,656 |
|
Income tax expense (benefit) |
|
|
(1,414 |
) |
|
|
1,081 |
|
|
|
417 |
|
|
|
390 |
|
|
|
474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(35,917 |
) |
|
$ |
1,701 |
|
|
$ |
775 |
|
|
$ |
1,583 |
|
|
$ |
(31,857 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest |
|
|
(28 |
) |
|
|
680 |
|
|
|
596 |
|
|
|
153 |
|
|
|
1,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Royal Bancshares |
|
$ |
(35,889 |
) |
|
$ |
1,021 |
|
|
$ |
179 |
|
|
$ |
1,430 |
|
|
$ |
(33,259 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Community |
|
|
Tax Lien |
|
|
Equity |
|
|
|
|
|
|
|
December 31, 2008 |
|
Banking |
|
|
Operation |
|
|
Investment |
|
|
Other |
|
|
Consolidated |
|
Total assets |
|
$ |
1,009,992 |
|
|
$ |
84,965 |
|
|
$ |
17,405 |
|
|
$ |
63,224 |
|
|
$ |
1,175,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
760,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
760,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
59,001 |
|
|
$ |
8,289 |
|
|
$ |
|
|
|
$ |
5,474 |
|
|
$ |
72,764 |
|
Interest expense |
|
|
31,620 |
|
|
|
3,499 |
|
|
|
251 |
|
|
|
2,739 |
|
|
|
38,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) |
|
|
27,381 |
|
|
|
4,790 |
|
|
|
(251 |
) |
|
|
2,735 |
|
|
|
34,655 |
|
Provision for loan losses |
|
|
17,424 |
|
|
|
2,607 |
|
|
|
|
|
|
|
1,810 |
|
|
|
21,841 |
|
Total other (loss) income |
|
|
(19,095 |
) |
|
|
560 |
|
|
|
2,177 |
|
|
|
570 |
|
|
|
(15,788 |
) |
Total other expenses |
|
|
25,393 |
|
|
|
2,656 |
|
|
|
966 |
|
|
|
2,018 |
|
|
|
31,033 |
|
Impairment -real estate owned via equity investment |
|
|
|
|
|
|
|
|
|
|
1,500 |
|
|
|
|
|
|
|
1,500 |
|
Income tax expense (benefit) |
|
|
3,070 |
|
|
|
(55 |
) |
|
|
(189 |
) |
|
|
(183 |
) |
|
|
2,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(37,601 |
) |
|
$ |
142 |
|
|
$ |
(351 |
) |
|
$ |
(340 |
) |
|
$ |
(38,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest |
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
(125 |
) |
|
|
(68 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Royal Bancshares |
|
$ |
(37,601 |
) |
|
$ |
85 |
|
|
$ |
(351 |
) |
|
$ |
(215 |
) |
|
$ |
(38,082 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Community |
|
|
Tax Lien |
|
|
Equity |
|
|
|
|
|
|
|
December 31, 2007 |
|
Banking |
|
|
Operation |
|
|
Investment |
|
|
Other |
|
|
Consolidated |
|
Total assets |
|
$ |
1,140,373 |
|
|
$ |
63,211 |
|
|
$ |
22,711 |
|
|
$ |
52,180 |
|
|
$ |
1,278,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
770,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
770,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
77,022 |
|
|
$ |
5,702 |
|
|
$ |
|
|
|
$ |
4,012 |
|
|
$ |
86,736 |
|
Interest expense |
|
|
42,649 |
|
|
|
3,289 |
|
|
|
623 |
|
|
|
2,312 |
|
|
|
48,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) |
|
|
34,373 |
|
|
|
2,413 |
|
|
|
(623 |
) |
|
|
1,700 |
|
|
|
37,863 |
|
Provision for loan losses |
|
|
11,964 |
|
|
|
150 |
|
|
|
|
|
|
|
912 |
|
|
|
13,026 |
|
Total other income |
|
|
8,498 |
|
|
|
1,069 |
|
|
|
2,814 |
|
|
|
507 |
|
|
|
12,888 |
|
Total other expenses |
|
|
21,283 |
|
|
|
1,644 |
|
|
|
1,590 |
|
|
|
1,088 |
|
|
|
25,605 |
|
Impairment -real estate joint venture |
|
|
5,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,927 |
|
Impairment -real estate owned via equity investment |
|
|
|
|
|
|
|
|
|
|
8,500 |
|
|
|
|
|
|
|
8,500 |
|
Income tax expense (benefit) |
|
|
60 |
|
|
|
536 |
|
|
|
(2,236 |
) |
|
|
72 |
|
|
|
(1,568 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
3,637 |
|
|
$ |
1,152 |
|
|
$ |
(5,663 |
) |
|
$ |
135 |
|
|
$ |
(739 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest |
|
|
|
|
|
|
173 |
|
|
|
(1,510 |
) |
|
|
34 |
|
|
|
(1,303 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Royal Bancshares |
|
$ |
3,637 |
|
|
$ |
979 |
|
|
$ |
(4,153 |
) |
|
$ |
101 |
|
|
$ |
564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 20 SEGMENT INFORMATION Continued
Interest income earned by the Community Banking segment related to the Tax Lien Operation was
approximately $4.5 million, $3.5 million, and $3.3 million for the years ended December 31, 2009,
2008, and 2007, respectively.
Interest income earned by the Community Banking segment related to the Other Segment was
approximately $1.2 million, $2.7 million, and $2.3 million for the three years ended December 31,
2009, 2008, and 2007. The reduction in interest income earned by the Community Banking segment
related to the Other Segment for 2009 is due to RBA Capital no longer paying interest to Royal
Bank.
NOTE 21 CONDENSED FINANCIAL INFORMATION PARENT COMPANY ONLY
Condensed financial information for the parent company only follows.
CONDENSED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
Cash |
|
$ |
2,783 |
|
|
$ |
3,028 |
|
Investment in non-bank subsidiaries |
|
|
30,722 |
|
|
|
37,336 |
|
Investment in Royal Bank |
|
|
75,865 |
|
|
|
45,893 |
|
Investment in Royal Asian |
|
|
13,036 |
|
|
|
13,798 |
|
Loans, net |
|
|
3,750 |
|
|
|
4,559 |
|
Other assets |
|
|
774 |
|
|
|
847 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
126,930 |
|
|
$ |
105,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debentures |
|
$ |
25,774 |
|
|
$ |
25,774 |
|
Stockholders equity |
|
|
101,156 |
|
|
|
79,687 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
126,930 |
|
|
$ |
105,461 |
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Income |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiary banks |
|
$ |
|
|
|
$ |
4,005 |
|
|
$ |
15,474 |
|
Other income |
|
|
51 |
|
|
|
222 |
|
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
Total Income |
|
|
51 |
|
|
|
4,227 |
|
|
|
15,572 |
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses |
|
|
880 |
|
|
|
1,172 |
|
|
|
220 |
|
Provision for loan losses |
|
|
809 |
|
|
|
701 |
|
|
|
|
|
Interest on subordinated debentures |
|
|
1,136 |
|
|
|
1,436 |
|
|
|
1,736 |
|
|
|
|
|
|
|
|
|
|
|
Total Expenses |
|
|
2,825 |
|
|
|
3,309 |
|
|
|
1,956 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and equity in undistributed
net loss |
|
|
(2,774 |
) |
|
|
918 |
|
|
|
13,616 |
|
Income tax expense (benefit) |
|
|
109 |
|
|
|
(578 |
) |
|
|
(43 |
) |
Equity in undistributed net losses |
|
|
(30,376 |
) |
|
|
(39,578 |
) |
|
|
(13,095 |
) |
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(33,259 |
) |
|
$ |
(38,082 |
) |
|
$ |
564 |
|
|
|
|
|
|
|
|
|
|
|
128
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 21 CONDENSED FINANCIAL INFORMATION PARENT COMPANY ONLY Continued
CONDENSED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(33,259 |
) |
|
$ |
(38,082 |
) |
|
$ |
564 |
|
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed losses from subsidiaries |
|
|
31,461 |
|
|
|
41,014 |
|
|
|
14,831 |
|
Provision for loan losses |
|
|
809 |
|
|
|
701 |
|
|
|
|
|
Non-cash income tax expense (benefit) |
|
|
109 |
|
|
|
(578 |
) |
|
|
(43 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(880 |
) |
|
|
3,055 |
|
|
|
15,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Royal Bank |
|
|
(39,907 |
) |
|
|
|
|
|
|
|
|
Dividend proceeds from Royal Investments of Delaware, Inc. |
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(29,907 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Loan payoffs (fundings) |
|
|
|
|
|
|
1,229 |
|
|
|
(590 |
) |
Cash dividends paid |
|
|
(359 |
) |
|
|
(4,005 |
) |
|
|
(15,473 |
) |
Issuance of common stock under stock option plans |
|
|
|
|
|
|
174 |
|
|
|
334 |
|
Issuance of preferred stock |
|
|
30,407 |
|
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
(946 |
) |
|
|
(3,760 |
) |
Income tax benefit on stock options |
|
|
|
|
|
|
|
|
|
|
114 |
|
Other, net |
|
|
494 |
|
|
|
(700 |
) |
|
|
312 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
30,542 |
|
|
|
(4,248 |
) |
|
|
(19,063 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(245 |
) |
|
|
(1,193 |
) |
|
|
(3,711 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
3,028 |
|
|
|
4,221 |
|
|
|
7,932 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
2,783 |
|
|
$ |
3,028 |
|
|
$ |
4,221 |
|
|
|
|
|
|
|
|
|
|
|
129
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 22 SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summarizes the consolidated results of operations during 2009 and 2008, on a
quarterly basis, for the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009 |
|
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
First |
|
(In thousands, except per share data) |
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
Interest income |
|
$ |
16,320 |
|
|
$ |
16,799 |
|
|
$ |
16,570 |
|
|
$ |
16,354 |
|
Net interest income |
|
|
7,417 |
|
|
|
7,229 |
|
|
|
6,889 |
|
|
|
7,069 |
|
Provision for loan and lease losses |
|
|
7,136 |
|
|
|
3,716 |
|
|
|
6,956 |
|
|
|
2,797 |
|
Net interest income (loss) after provision |
|
|
281 |
|
|
|
3,513 |
|
|
|
(67 |
) |
|
|
4,272 |
|
Other income (loss) |
|
|
2,556 |
|
|
|
2,705 |
|
|
|
(3,404 |
) |
|
|
(3,583 |
) |
Other expenses |
|
|
12,282 |
|
|
|
9,829 |
|
|
|
8,319 |
|
|
|
7,226 |
|
Loss before income tax |
|
|
(9,445 |
) |
|
|
(3,611 |
) |
|
|
(11,790 |
) |
|
|
(6,537 |
) |
Net loss |
|
$ |
(9,445 |
) |
|
$ |
(4,085 |
) |
|
$ |
(11,790 |
) |
|
$ |
(6,537 |
) |
Less net income attributable to noncontrolling interest |
|
|
641 |
|
|
|
281 |
|
|
|
264 |
|
|
|
216 |
|
Net loss attributable to Royal Bancshares
of Pennsylavania, Inc. |
|
$ |
(10,086 |
) |
|
$ |
(4,366 |
) |
|
$ |
(12,054 |
) |
|
$ |
(6,753 |
) |
Net loss available to common shareholders |
|
$ |
(10,573 |
) |
|
$ |
(4,852 |
) |
|
$ |
(12,538 |
) |
|
$ |
(6,968 |
) |
Net loss per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.79 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.95 |
) |
|
$ |
(0.53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.79 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.95 |
) |
|
$ |
(0.53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating results for the fourth quarter of 2009 amounted to a loss of $10.1 million compared
to a loss of $27.3 million in the comparable quarter of 2008. The $17.2 million improvement was
attributed to the establishment of a valuation allowance for the deferred tax asset in 2008, and
year over year favorable changes in the following: a lower provision, increased fee income related
to a reduction of investment impairment and a decreased level of operating expenses. During the
fourth quarter of 2008, the Company recorded a non-cash charge of $15.5 million
related to the establishment of a valuation allowance for the deferred tax asset for the portion of
the future tax benefit that more likely than not will not be utilized in the future. The loan loss
provision amounted to $7.1 million in the fourth quarter of 2009 versus $8.8 million in the
comparable quarter of 2008. This year over year improvement was attributed to a decline in specific
reserves for impaired loans and a specific reserve related to a loan collateralized by a tax lien
portfolio held by the Companys subsidiary in 2008. Other income amounted to $2.6 million in the
fourth quarter of 2009 resulting in an increase of $8.1 million from the prior years linked
quarter. A $6.2 million investment impairment charge coupled with investment security losses of
$151,000 in the fourth quarter of 2008 as opposed to investment impairment of $1.2 million and
investment security gains of $846,000 in the comparable quarter of 2009 accounted for a majority of
the increase. Other expenses of $12.3 million for the fourth quarter of 2009 increased by $1.4
million, or 13%, from the comparable quarter of 2008 due primarily to increased legal fees for
non-performing loans, higher OREO expenses due to increased foreclosed properties, and increased
FDIC insurance due to overall rate increases by the FDIC. These expense increases were partially
offset in 2009 due to non-recurring charges in the fourth quarter of 2008 for the cost of a
separation and transition agreement of $2.1 million for the former president and an impairment
charge of $1.5 million associated with real estate owned via equity investment.
130
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 22 SUMMARY OF QUARTERLY RESULTS (UNAUDITED) Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008 |
|
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
First |
|
(In thousands, except per share data) |
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
Interest income |
|
$ |
17,358 |
|
|
$ |
17,632 |
|
|
$ |
17,702 |
|
|
$ |
20,072 |
|
Net interest income |
|
|
7,391 |
|
|
|
8,115 |
|
|
|
9,250 |
|
|
|
9,899 |
|
Provision for loan and lease losses |
|
|
8,754 |
|
|
|
5,275 |
|
|
|
4,531 |
|
|
|
3,281 |
|
Net interest (loss) income after provision |
|
|
(1,363 |
) |
|
|
2,840 |
|
|
|
4,719 |
|
|
|
6,618 |
|
Other (loss) income |
|
|
(5,510 |
) |
|
|
(14,022 |
) |
|
|
2,452 |
|
|
|
1,292 |
|
Other expenses |
|
|
11,417 |
|
|
|
7,471 |
|
|
|
7,041 |
|
|
|
6,604 |
|
(Loss) income before income tax |
|
|
(18,293 |
) |
|
|
(18,653 |
) |
|
|
130 |
|
|
|
1,309 |
|
Net (loss) income |
|
$ |
(27,835 |
) |
|
$ |
(11,820 |
) |
|
$ |
315 |
|
|
$ |
1,190 |
|
Less net (loss) income attributable to noncontrolling interest |
|
|
(570 |
) |
|
|
192 |
|
|
|
163 |
|
|
|
147 |
|
Net (loss) income attributable to Royal Bancshares
of Pennsylavania, Inc. |
|
$ |
(27,265 |
) |
|
$ |
(12,012 |
) |
|
$ |
152 |
|
|
$ |
1,043 |
|
Net (loss) income available to common shareholders |
|
$ |
(27,265 |
) |
|
$ |
(12,012 |
) |
|
$ |
152 |
|
|
$ |
1,043 |
|
Net (loss) income per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(2.05 |
) |
|
$ |
(0.90 |
) |
|
$ |
0.01 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(2.05 |
) |
|
$ |
(0.90 |
) |
|
$ |
0.01 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 23 SUBSEQUENT EVENTS
On March 17, 2010, the Company agreed to enter into a Written Agreement (the Federal Reserve
Agreement) with the Federal Reserve Bank of Philadelphia (the Reserve Bank).
The material terms of the Federal Reserve Agreement provide that:
|
|
|
the Companys Board of Directors will take appropriate steps to fully utilize the
Companys financial and managerial resources to serve as a source of strength to its
subsidiary banks, including taking steps to
ensure that Royal Bank complies with the Orders previously entered into with the FDIC and
the Department on July 15, 2009; |
|
|
|
|
the Companys Board of Directors will, within 60 days of the Federal Reserve Agreement,
submit to the Reserve Bank a written plan to strengthen board oversight of the management
and operations of the consolidated operation; |
|
|
|
|
the Company will not declare or pay any dividends without the prior written approval of
the Reserve Bank and the Director of the Division of Banking Supervision and Regulation of
the Board of Governors of the Federal Reserve System; |
|
|
|
|
the Company and its non-bank subsidiaries will not make any distributions of interest,
principal, or other sums on subordinated debentures or trust preferred securities without
the prior approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation of
the Board of Governors of the Federal Reserve System; |
|
|
|
|
the Company and its nonbank subsidiaries will not, directly or indirectly, incur,
increase, or guarantee any debt without the prior written approval of the Reserve Bank; |
|
|
|
|
the Company will not, directly or indirectly, purchase or redeem any shares of its stock
without the prior written approval of the Reserve Bank; |
131
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 23 SUBSEQUENT EVENTS Continued
|
|
|
the Company will, within 60 days of the Federal Reserve Agreement, submit to the Reserve
Bank an acceptable written capital plan to maintain sufficient capital at the Company on a
consolidated basis, which plan will at a minimum address: regulatory requirements for the
Company and the Banks, the adequacy of the Banks capital taking into account the volume of
classified credits, the allowance for loan and lease losses, current and projected asset
growth, and projected retained earnings; the source and timing of additional funds
necessary to fulfill the consolidated organizations and the Banks future capital
requirements; supervisory requests for additional capital at the Banks or the requirements
of any supervisory action imposed on the Banks by federal or state regulators; and
applicable legal requirements that the Company serve as a source of strength to the Banks; |
|
|
|
|
the Company will, within 60 days of the Federal Reserve Agreement, submit to the Reserve
Bank cash flow projections for 2010 showing planned sources and uses of cash for debt
service, operating expenses, and other purposes, and will submit similar cash flow
projections for each subsequent calendar year at least one month prior to the beginning of
such year; |
|
|
|
|
the Company will comply with applicable legal notice provisions in advance of
appointing any new director or senior executive officer or changing the responsibilities of
any senior executive officer such that the officer would assume a different senior
executive officer position, and comply with restrictions on indemnification and severance
payments imposed by the Federal Deposit Insurance Act; and |
|
|
|
|
the Companys Board of Directors will, within 30 days after the end of each quarter,
submit progress reports to the Reserve Bank detailing the form and manner of all actions
taken to secure compliance with the Federal Reserve Agreement and the results thereof,
together with a parent company-level balance sheet, income statement, and, as applicable,
report of changes in shareholders equity. |
The Federal Reserve Agreement will remain in effect and enforceable until stayed, modified,
terminated or suspended by the Reserve Bank.
132
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures that are designed to ensure that
information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as
amended (the Exchange Act), is recorded, processed, summarized and reported within the time
periods specified in the Securities Exchange Commissions rules and forms. As of the end of the
period covered by this report, the Company evaluated, under the supervision and with the
participation of our management, including our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rule 13a-15(e) of the Exchange Act. Based on that evaluation our CEO and
CFO concluded that the Companys disclosure controls and procedures were effective as December 31,
2009.
Changes in Internal Control over Financial Reporting
Beginning in the fourth quarter of 2008 and continuing through 2009, management implemented
remedial changes for a material weakness described in Item 9A(T) of the Companys Annual Report on
Form 10-K for the year ended December 31, 2008 relating to the accounting for deferred income
taxes. To remediate this weakness, the Company engaged a nationally recognized independent public
accounting firm to review the Companys accounting procedures related to deferred income taxes for
December 31, 2008 and March 31, 2009. The Company continued to consult with the independent public
accounting firm during 2009, and completed final internal validation of the revised procedures
relating to the accounting for deferred income taxes during the fourth quarter of 2009.
Other than the remedial efforts described in the preceding paragraph, there were no changes in our
internal control over financial reporting during the quarter ended December 31, 2009 that
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Managements Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing and maintaining adequate internal control
over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. The
Companys management, with the participation of the Companys principal executive officer and
principal financial officer, has assessed the effectiveness of our internal control over financial
reporting based on the framework in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
Based on its assessment under the COSO framework, the Companys management concluded that the
Companys control over financial reporting was effective as of December 31, 2009.
There are inherent limitations to the effectiveness of any controls system. A controls system, no
matter how well designed and operated, can provide only reasonable, not absolute, assurance that
its objectives are met. Further, the design of a control system must reflect the fact that there
are limits on resources, and the benefits of controls must be considered relative to their costs
and their impact on the business model.
This annual report does not include an attestation report of the Companys registered accounting
firm regarding internal control over financial reporting. Managements report was not subject to
attestation by the Companys registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only managements report in
this annual report.
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Robert R. Tabas
|
|
|
|
By:
|
|
/s/ Robert A. Kuehl
|
|
|
|
|
Robert R. Tabas
|
|
|
|
|
|
Robert A. Kuehl |
|
|
|
|
Principal Executive Officer
|
|
|
|
|
|
Principal Financial Officer and
Principal Accounting Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2010
|
|
|
|
|
|
|
|
133
ITEM 9B. OTHER INFORMATION
None.
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF REGISTRANT AND CORPORATE GOVERNANCE
The information required in this Item, relating to directors, executive officers, and control
persons is set forth in the Companys Proxy Statement to be used in connection with the 2010 Annual
Meeting of Shareholders under the captions Information About Nominees, Continuing Directors and
Executive Officers, Section 16(a) Beneficial Ownership Reporting Compliance, Meetings and
Committees of the Board of Directors, and Interests of Management and Others in Certain
Transactions, which pages are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item, relating to executive compensation, is set forth in the
Companys Proxy Statement to be used in connection with the 2010 Annual Meeting of Shareholders,
under the captions Summary Compensation Table, Grants of Plan-Based Awards 2009, Outstanding
Equity Awards Table, Option Exercises and Stock Vested Table, Retirement Plans, Non-Qualified
Deferred Compensation Plans, Other Potential Post-Employment Payments, Director Compensation
Table, Outstanding Options Held by Directors, and Compensation Committee Report, which pages
are incorporated herein by reference.
In the TARP CPP Agreement, the Company agreed that, until such time as Treasury ceases to own any
debt or preferred equity securities of the Company acquired pursuant to the Purchase Agreement, the
Company will take all necessary action to ensure that its benefit plans with respect to its senior
executive officers comply with Section 111(b) of the Emergency Economic Stabilization Act of 2008,
as it may be amended from time to time (the EESA), and any rules or regulations promulgated
thereunder, and has agreed to not adopt any benefit plans with respect to, or which covers, its
senior executive officers that do not comply with the EESA any rules or regulations promulgated
thereunder, and the applicable executives have consented to the foregoing.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDERS MATTERS
The information required by this Item, relating to beneficial ownership of the Registrants Common
Stock, is set forth in the Companys Proxy Statement to be used in connection with the 2010 Annual
Meeting of Shareholders, under the captions Principal Shareholders and Information About
Nominees, Continuing Directors and Executive Officers, which pages are incorporated herein by
reference.
Securities Authorized for Issuance Under Equity Compensation Plans
The following tables provide certain information regarding securities issued or issuable under the
Companys equity compensation plans as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
|
remaining available for |
|
|
|
Number of Securities to |
|
|
Weighted average |
|
|
issuance under equity |
|
|
|
be issued upon exercise |
|
|
exercise price of |
|
|
plans (excluding |
|
|
|
of outstanding options, |
|
|
outstanding options, |
|
|
securities reflected in first |
|
Outside Director Stock Option Plan |
|
warrants and rights |
|
|
warrants and rights |
|
|
column) |
|
Equity compensation plan approved by security holders |
|
|
90,197 |
|
|
$ |
19.15 |
|
|
|
|
|
Equity compensation plan not approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
90,197 |
|
|
$ |
19.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
|
remaining available for |
|
|
|
Number of Securities to |
|
|
Weighted average |
|
|
issuance under equity |
|
|
|
be issued upon exercise |
|
|
exercise price of |
|
|
plans (excluding |
|
|
|
of outstanding options, |
|
|
outstanding options, |
|
|
securities reflected in first |
|
Employee Stock Option Plan |
|
warrants and rights |
|
|
warrants and rights |
|
|
column) |
|
Equity compensation plan approved by security holders |
|
|
401,626 |
|
|
$ |
20.09 |
|
|
|
|
|
Equity compensation plan not approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
401,626 |
|
|
$ |
20.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
|
remaining available for |
|
|
|
Number of Securities to |
|
|
Weighted average |
|
|
issuance under equity |
|
|
|
be issued upon exercise |
|
|
exercise price of |
|
|
plans (excluding |
|
|
|
of outstanding options, |
|
|
outstanding options, |
|
|
securities reflected in first |
|
Long Term Incentive Plan |
|
warrants and rights |
|
|
warrants and rights |
|
|
column) |
|
Equity compensation plan approved by security holders |
|
|
144,368 |
|
|
$ |
10.27 |
|
|
|
808,928 |
|
Equity compensation plan not approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
144,368 |
|
|
$ |
10.27 |
|
|
|
808,928 |
|
|
|
|
|
|
|
|
|
|
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item, relating to transactions with management and others, certain
business relationships and indebtedness of management, is set forth in the Companys Proxy
Statement to be used in connection with the 2010 Annual Meeting of Shareholders, under the caption
Interests of Management and Others in Certain Transactions, which pages are incorporated herein
by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item appears under the caption Audit Committee Report of the
Proxy Statement to be used in connection with the 2010 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 Operations. |
|
|
|
|
|
|
Consolidated Statements of Changes in Shareholders 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. |
|
|
|
|
|
|
|
(b.) |
|
The following Exhibits are filed herewith or incorporated by reference as a part of this
Annual Report. |
135
|
|
|
3.1
|
|
Articles of Incorporation of the Company. (Incorporated by reference to
Exhibit 3.1 to the Companys Annual Report on Form 10-K for the year ended December 31,
2008.) |
|
|
|
3.2
|
|
Bylaws of the Company. (Incorporated by reference to Exhibit 3.2 to the
Companys Annual Report on Form 10-K for the year ended December 31, 2008.) |
|
|
|
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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants 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 Registrants Current Report on Form 8-K filed with the
Commission on November 1, 2004.) |
|
|
|
10.1
|
|
Stock Option and Appreciation Right Plan. As amended on March 15, 2005
(Incorporated by reference to the Registrants Registration Statement N0. 333-135226,
on form S-8 filed with the Commission on June 22, 2006).* |
|
|
|
10.2
|
|
Stock Option and Appreciation Right Plan. As amended on May 16, 2005
(Incorporated by reference to the Registrants Registration Statement N0. 333-129894,
on form S-8 filed with the Commission on November 22, 2005).* |
|
|
|
10.3
|
|
Outside Directors Stock Option Plan. (Incorporated by reference to the
Registrants Registration Statement N0. 333-25855, on form S-8 filed with the
Commission on April 5, 1997).* |
|
|
|
10.4
|
|
Transition Agreement dated October 10, 2008 between Royal Bancshares of
Pennsylvania, Inc. (Corporation), and Joseph P. Campbell. (Incorporated by reference
to Exhibit 10.1 to Registrants current Report on Form 8-K as filed with the Commission
on October 16, 2008.) |
|
|
|
10.5
|
|
Employment Agreement dated September 22, 2006 by and among Royal Bancshares of
Pennsylvania, Inc. (Corporation), Royal Bank America (Bank), and James J.
McSwiggan, Jr., Chief Operating Officer of the Corporation and the Bank.
(Incorporated by reference to Exhibit 10.2 to Registrants Quarterly Report on Form
10-Q dated March 31, 2007, as filed with the Commission on May 15, 2007.)* |
|
|
|
10.6
|
|
Employment Agreement dated February 22, 2007 by and among Royal Bancshares of
Pennsylvania, Inc. (Corporation), Royal Bank America (Bank), and Murray Stempel, III, |
136
|
|
|
|
|
Executive Vice President and Chief Lending Officer of the Corporation and the Bank.
(Incorporated by reference to Exhibit 10.3 to Registrants Quarterly Report on Form
10-Q dated March 31, 2007, as filed with the Commission on May 15, 2007.)* |
|
|
|
10.7
|
|
Employment Agreement dated February 23, 2007 by and among Royal Bancshares of
Pennsylvania, Inc. (Corporation), Royal Bank America (Bank), and Robert R. Tabas,
Executive Vice President of the Corporation and the Bank. (Incorporated by reference
to Exhibit 10.5 to Registrants Quarterly Report on Form 10-Q dated March 31, 2007, as
filed with the Commission on May 15, 2007.)* |
|
|
|
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 Registrants Quarterly
Report on Form 10-Q filed with the Commission on November 9, 2004.)* |
|
|
|
10.9
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Royal Bancshares of Pennsylvania, Inc. 2007 Long-Term Incentive Plan.
(Incorporated by reference to Exhibit A to the Companys definitive Proxy Statement
dated April 6, 2007).* |
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10.10
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Amendment to Employment Agreement, dated February 18, 2009, between Royal
Bancshares of Pennsylvania, Inc., Royal Bank America, and James J. McSwiggan, Jr.
(Incorporated by reference to exhibit 10.2 to Registrants Current Report on Form 8-K
filed with the Commission on February 24, 2009.)* |
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10.11
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Letter Agreement, including Securities Purchase Agreement Standard Terms,
dated December 19, 2008, between Royal Bancshares of Pennsylvania, Inc. and the United
States Department of the Treasury. (Incorporated by reference to exhibit 10.1 to
Registrants Current Report on Form 8-K filed with the Commission on February 26,
2009.) |
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10.12
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Side Letter Agreement, dated February 20, 2009, between Royal Bancshares of
Pennsylvania, Inc. and the United States Department of the Treasury. (Incorporated by
reference to exhibit 10.2 to Registrants Current Report on Form 8-K filed with the
Commission on February 26, 2009.) |
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10.13
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Form of Letter Agreement, dated December 19, 2008, between Royal Bancshares of
Pennsylvania, Inc. and certain of its executive officers relating to executive
compensation limitations under the United States Treasury Departments Capital Purchase
Program.* |
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10.14
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Employment Agreement, dated June 1, 2008, between the Company, Royal Bank
America and Robert A. Kuehl. (Incorporated by reference to Exhibit 10.15 to the
Companys Amendment No. 2 on Form 10-K/A filed on November 13, 2009.) |
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10.15
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Royal Bank America Supplemental Executive Retirement Plan. (Incorporated by
reference to Exhibit 10.5 to the Companys Quarterly Report on Form 10-Q filed on
November 13, 2009.) |
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10.16
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SERP Participation Agreement, as amended Robert Tabas. (Incorporated by
reference to Exhibit 10.6 to the Companys Quarterly Report on Form 10-Q filed on
November 13, 2009.) |
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10.17
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SERP Participation Agreement, as amended James J. McSwiggan. (Incorporated
by reference to Exhibit 10.7 to the Companys Quarterly Report on Form 10-Q filed on
November 13, 2009.) |
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10.18
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SERP Participation Agreement, as amended Murray Stempel. (Incorporated by
reference to Exhibit 10.8 to the Companys Quarterly Report on Form 10-Q filed on
November 13, 2009.) |
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10.19
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FDIC Stipulation and Consent to the Issuance of an Order to Cease and Desist.
(Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K
(File No 000-26366) filed with the Commission on July 16, 2009). |
137
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10.20
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FDIC Order to Cease and Desist. (Incorporated by reference to Exhibit 10.2 to
the Companys Current Report on Form 8-K (File No 000-26366) filed with the Commission
on July 16, 2009). |
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10.21
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Pennsylvania Department of Banking Stipulation and Consent and Order to Cease
and Desist. (Incorporated by reference to Exhibit 10.3 to the Companys Current Report
on Form 8-K (File No 000-26366) filed with the Commission on July 16, 2009). |
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10.22
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Form of Written Agreement between the Company and the Federal Reserve Bank of
Philadelphia dated as of March 17, 2010. (Incorporated by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K filed with the Commission on March 18, 2010). |
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11.
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Statement re: Computation of Earnings Per Share. Included at Item 8, hereof,
Note 17, Earnings Per Common Share. |
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12.
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Statement re: Computation of Ratios. (Included at Item 8 here of, Note 14,
Regulatory Capital Requirements.) |
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21.
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Subsidiaries of Registrant. |
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23.
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Consent of Independent Registered Public Accounting Firm. |
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31.1
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Rule 13a-14(a)/15-d-14(a) Certification of Principal Executive Officer |
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31.2
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Rule 13a-14(a)/15-d-14(a) Certification of Principal Financial Officer |
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32.1
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Section 1350 Certification of Principal Executive Officer. |
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32.2
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Section 1350 Certification of Principal Financial Officer. |
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99.1
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Certification of Principal Executive Officer pursuant to the Emergency Economic
Stabilization Act of 2008. |
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99.2
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Certification of Principal Financial Officer pursuant to the Emergency Economic
Stabilization Act of 2008. |
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* |
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Denotes compensation plan or arrangement. |
138
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.
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By:
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/s/ Robert R. Tabas
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By:
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/s/ Robert A. Kuehl |
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Robert R. Tabas
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Robert A. Kuehl
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Chief Executive Officer
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Chief Financial Officer |
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(Principal Executive Officer)
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(Principal Financial Officer |
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and Principal Accounting Officer) |
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March 29, 2010
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March 29, 2010 |
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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
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By:
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/s/ Robert R. Tabas
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By:
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/s/ James J. McSwiggan |
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Robert R. Tabas
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James J. McSwiggan
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Chief Executive Officer/ Chairman of the Board
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President/Chief Operating Officer/Director |
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March 29, 2010
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March 29, 2010 |
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By:
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/s/ Edward F. Bradley
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By:
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/s/ Samuel Goldstein |
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Edward F. Bradley
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Samuel Goldstein |
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Director
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Director |
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March 29, 2010
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March 29, 2010 |
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By:
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/s/ Anthony Micale
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By:
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/s/ Gregory Reardon |
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Anthony Micale
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Gregory Reardon |
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Director
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Director |
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March 29, 2010
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March 29, 2010 |
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By:
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/s/ Linda Tabas Stempel
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By:
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/s/ Murray Stempel, III |
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Linda Tabas Stempel
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Murray Stempel, III |
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Director
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Vice Chairman of the Board |
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March 29, 2010
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March 29, 2010 |
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By:
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/s/ Edward B. Tepper
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By:
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/s/ Howard Wurzak |
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Edward B. Tepper
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Howard Wurzak |
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Director
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Director |
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March 29, 2010
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March 29, 2010 |
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139