UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
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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, 2010
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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
incorporation or organization)
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(I.R.S. Employer
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)
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 |
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The NASDAQ Stock Market, LLC
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Class A Common Stock ($2.00 par value) |
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 |
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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. o Yes þ No
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 a smaller reporting company. See the definitions
of large accelerated filer, accelerated filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Small reporting company þ |
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(Do not check if a smaller reporting company) |
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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 the Registrants Common Stock held by non-affiliates is $15,428,819
based on the June 30, 2010 closing price of the Registrants Common Stock of $3.00 per share.
As of February 28, 2011, the Registrant had 11,359,788 and 2,082,930 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 18,
2011Part III.
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 are located at 732
Montgomery Avenue, Narberth, Pennsylvania 19072. 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 (the
Department) 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. On
December 30, 2010, the Company completed the sale of all of the outstanding common stock of Royal
Asian to an ownership group led by the President and Chief Executive Officer of Royal Asian.
The principal activities of the Company are supervising Royal Bank which engages in general banking
business principally in Montgomery, Chester, Bucks, Philadelphia and Berks counties in
Pennsylvania, 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 provide
comprehensive umbrella liability coverage for the Company and its affiliates. During the fourth
quarter of 2010, Royal Captive Insurance was dissolved. The investments were sold for a gain of
approximately $8,000, $2.0 million was paid to the Company as a dividend, and the remaining funds,
in the approximate amount of $500,000, were transferred to the Company.
At December 31, 2010, the Company had consolidated total assets of approximately $980.6 million,
total deposits of approximately $693.9 million and shareholders equity of approximately $84.1
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; and one operating segment that does not meet the quantitative thresholds for
requiring disclosure, but has different characteristics than the Community Banking, Tax Liens and
Equity Investments segments, Leasing. 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
FDIC 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 FDIC and the
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
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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
continues to serve its customers in all areas including making 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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A 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 had previously completed an internal assessment of
senior managements qualifications and had submitted the report to the FDIC and the
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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
approved the classified assets plan. No material 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 classified loans, which includes loans held
for sale, and OREO from $149.6 million at June 30, 2009 to $109.9 million at December 31,
2010. |
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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 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 Banks delinquent loans (30 to 90 days) amounted to $36.3 million at June
30, 2009 versus $12.2 million at December 31, 2010. Royal Banks non-accrual loans held for
investment were $80.8 million and $43.2 million at June 30, 2009 and December 31, 2010,
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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 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, which includes loans held for sale,
from $289.1 million at June 30, 2009 to $214.1 million at December 31, 2010, which amounted
to 207.7% of total capital and 225.9% of Tier 1 capital, |
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respectively as of such dates. At December 31, 2010, total construction/land loans (CL
loans), which includes loans held for sale, amounted to $93.2 million, or 90.5%, of total
capital and 98.4% of Tier 1 capital. CL loans were approximately $20 million less than what
was projected under the CRE concentration plan at year end 2010. Based on capital levels
calculated under US GAAP, Royal Bank no longer has a concentration of commercial real estate
loans as defined in the joint agency Guidance on Concentrations in Commercial Real Estate
Lending, Sound Risk Management Practices issued on December 12, 2006 (Guidance). Based on
capital levels calculated under regulatory accounting principles (RAP), (see discussion
under Capital Adequacy in Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations.), CRE loans and CL loans as a percentage of total
capital and Tier 1 capital, respectively, are 239.6%, 263.5%, 104.3% and 114.8%. Under RAP,
Royal Bank would have a concentration in CL loans as defined in the Guidance. |
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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, 2010, based on
capital levels calculated under RAP, Royal Banks total risk-based capital and Tier 1
leverage ratios were 13.76% and 8.03%, respectively. At December 31, 2010, based on capital
levels calculated under US GAAP, Royal Banks total risk-based capital and Tier 1 leverage
ratios were 15.86% and 9.24%, respectively. Please see discussion in Capital Adequacy in
Item 7 Managements Discussion and Analysis of Financial Condition and Results of
Operations. |
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Budget Plan |
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Royal Bank submitted to the FDIC and the Department a revised 2010 budget and
profit plan required under the Orders. The FDIC and the Department approved the 2010
budget and profit plan. In addition, Royal Bank has submitted to the FDIC and the
Department a 2011 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 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. Additionally,
Royal Bank submitted a three-year strategic plan to the FDIC and Department covering 2011
through 2013. |
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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, 2010, Royal Bank had $51.7 million in cash on hand and $95.0
million in unpledged agency securities. At December 31, 2010, the liquidity to deposits
ratio was 31.4% compared to Royal Banks 12% target and the liquidity to total liabilities
ratio was 24.2% 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 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 $137.8 million from $226.9 million at June 30, 2009 to $89.1 million
at December 31, 2010. Borrowings declined $129.0 million from $283.9 million at June 30,
2009 to $154.9 million at December 31, 2010. |
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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 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 maintain compliance with the Orders as of the date of this Report.
Federal Reserve Agreement
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: (i) 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;
(ii) 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; (iii) 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; (iv) 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; (v) 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; (vi) the Company will not, directly or indirectly, purchase or redeem any
shares of its stock without the prior written approval of the Reserve Bank; (vii) 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 Royal Bank, the adequacy of Royal
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 Royal Banks
future capital requirements; supervisory requests for additional capital at Royal Bank or the
requirements of any supervisory action imposed on Royal Bank by federal or state regulators; and
applicable legal requirements that the Company serve as a source of strength to Royal Bank; (viii)
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; (ix) 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 (x) the
Companys board of directors will, within 45 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. The Company has submitted all progress reports and
responses required under the Federal Reserve Agreement as of the date of this Report.
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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 fourth quarter of 2006, Royal Bank formed a subsidiary, Royal Tax Lien Services, LLC, to
purchase and service delinquent tax liens. Royal Bank owns 60% of the subsidiary.
During the fourth quarter of 2006, Royal Bank formed a subsidiary, RBA Capital, LP, to originate
structured debt. Royal 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-four 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, Pennsylvania 19072.
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.
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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. Management believes this statute further narrowed the differences and intensified
competition among commercial banks, investment banks, insurance firms and other financial services
companies. The Company has not elected financial holding company status.
Employees: Royal Bank employed approximately 155 persons on a full-time equivalent basis as of
December 31, 2010.
Deposits: At December 31, 2010, total deposits of Royal Bank were distributed among demand deposits
(8%), money market deposit, savings and Super NOW accounts (34%) and time deposits (58%). At
year-end 2010, deposits decreased $125.1 million to $697.3 million, from year-end 2009, or 15%.
NOW and money market accounts decreased $3.6 million while time deposits decreased $120.0 million.
Included in Royal Banks deposits are approximately $3.3 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, 2010, Royal Bank had a total net loan portfolio of $475.7 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
2010, loans decreased $116.1 million from year end 2009.
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.
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.
On August 26, 2010, the Company announced that it had entered into a stock purchase agreement with
an investment group to purchase all of the outstanding common stock of Royal Asian owned by the
Company. The sale of Royal Asian was completed on December 30, 2010.
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, Delaware 19899. RID buys, holds and sells investment securities.
At December 31, 2010, total assets of RID were $29.1 million, of which $606,000 was held in cash
and cash equivalents and $6.0 million was held in investment securities. RID had net interest
income of $779,000 and $1.2 million for 2010 and 2009, respectively. Non-interest
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income for 2010 was a loss of $158,000 compared to a loss of $5.8 million for 2009. During 2010,
RID recorded a $158,000 loss on the sale of investment securities.
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. RIDs net income for
2010 was $382,000 compared to a net loss of $5.1 million in 2009. Royal Bank has
previously 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 $2.5 million dividend to Royal Bancshares in the third quarter of 2010 and a $10.0
million dividend to Royal Bancshares during the third quarter of 2009. 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, Pennsylvania 19072. 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, 2010, total assets of CSC
were $11.5 million. Included in total assets is $1.8 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 deterioration in residential, commercial and
land values principally in Alabama, management concluded that the loan was impaired based on an analysis of the portfolio in
the fourth quarter of 2008. Through 2009, CSC charged-off $3.0 million related to this loan.
There were no charge-offs related to SMI in 2010. The outstanding SMI loan balance was $1.8 million
at December 31, 2010. In 2010, CSC had net interest income of $368,000 compared to $468,000 for
2009. The 2010 provision for loan and lease losses was $59,000 compared to $624,000 for 2009. The
provision is mainly related to the SMI impairments mentioned above. For 2010 and 2009 other income
was $338,000 and $179,000, respectively. Other income is mostly comprised of gain on sale of real
estate owned (REO) properties. Other expense was $512,000 and $693,000 for 2010 and 2009,
respectively. CSC recorded net income of $81,000 in 2010 compared to a net loss of $402,000 in
2009. The 2009 loss was 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 19072. RIA was formed to invest in equity real estate
ventures subject to limitations imposed by regulation. At December 31, 2010, total assets of RIA
prior to consolidation under ASC Topic 810 were $4.0 million. During 2010, RIA had a net loss of
$4.5 million compared to net income of $709,000 for 2009. The net loss in 2010 was primarily a
result of a $2.6 million impairment recorded on an equity real estate investment and a $2.5 million
impairment recorded on a real estate joint venture.
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 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 19422. 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
9
occasion, purchase lease portfolios from other originators. During 2010 and 2009, neither sales nor
purchases of lease portfolios were material. At December 31, 2010, total assets of Royal Leasing
were $38.0 million. For 2010, Royal Leasing had net interest income of $2.5 million, a 39%
increase from $1.8 million for 2009. For 2010 provision for lease losses was $834,000 million
compared to $1.3 million for 2009. The decrease in the provision was primarily related to
improvement in the leasing portfolio year over year. Other income decreased $25,000 from $390,000
for 2009 to $365,000 for 2010. Other expense was $803,000 and $335,000 for 2010 and 2009,
respectively. The increase in other expense was related to $472,000 in distribution of management
fees. Royal Leasing recorded net income of $547,000 for the year ended December 31, 2010 compared
to a $382,000 for the year ended December 31, 2009.
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 was the extension of loans to other lenders. These other lenders were 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 originated, 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 were on
commercially reasonable terms at market rates and terms that would be paid, received or granted by
unrelated third-parties. 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.
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, 2010, total assets of RTL were $89.1 million compared
to $88.9 million at December 31, 2009. Tax certificates outstanding slightly increased $600,000
from $63.1 million at December 31, 2009 to $63.7 million at December 31, 2010. For 2010, RTL had
net interest income of $5.8 million compared to $5.0 million for 2009. Provision for loan and
lease losses was $70,000 compared to $0 for 2010 and 2009, respectively. Other expense decreased
$1.0 million from $2.2 million for 2009 to $1.2 million for 2010 primarily due to a decline in
legal and professional fees. Net income for 2010 grew $839,000 from $2.1 million for 2009 to $2.9
million for 2010. During the fourth quarter of 2010, the President of RTL resigned from his position with the Company.
He presently retains his equity interest in the Company and continues on the board of managers of RTL.
The duties of the President of RTL have been assumed by another officer of the Company.
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. During the fourth quarter of 2010, Royal
Captive Insurance was dissolved. The investments were sold for a gain of approximately
$8,000, $2.0 million was paid to the Company as a dividend, and the remaining funds, in the
approximate amount of $500,000, were transferred to the Company.
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, 2010, 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. Information available on
our website is not part or incorporated by reference into this Report or any other report filed by
this Company with the SEC.
10
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.
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 commercial loans represent 46%, 23% and 14%, respectively of
the $43.2 million in non-accrual loans held for investment at December 31, 2010. 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
2010, and are not expected to have a material effect on such expenditures, earnings or competitive
position in 2011.
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
11
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 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, if, after such acquisition, the registrant would own or
control more than 5% of the voting shares of such bank.
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
As previously mentioned under Regulatory Actions, Royal Bank is operating under the Orders with
the FDIC and the Department. The deposits of Royal Bank are insured by the FDIC. Royal Bank is
subject to supervision, regulation and examination by the Department and by the FDIC. In
addition, Royal Bank is subject to a variety of local, state and federal laws that affect its
operation.
12
The Department and the FDIC routinely examine Pennsylvania state-chartered, non-member banks such
as Royal Bank in areas such as reserves, loans, investments, management practices and other aspects
of operations. These examinations are designed for the protection of depositors rather 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) from engaging in any activity that would be an
unsafe and unsound banking practice or in violation of applicable law. Moreover, the FDIC Act: (i)
empowers the FDIC to issue cease-and-desist or civil money penalty orders against Royal Bank or its
executive officers, directors and/or principal shareholders based on violations of law or unsafe
and unsound banking practices; (ii) authorizes the FDIC to remove executive officers who have
participated in such violations or unsound practices; (iii) restricts lending by Royal Bank to its
executive officers, directors, principal shareholders or related interests thereof; 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 Royal Bank unless the FDIC has been given 60-days prior written notice and within that
time has not disapproved the acquisition or extended the period for disapproval.
Under the Community Reinvestment Act (CRA), the FDIC uses a five-point rating scale to assign a
numerical score for a 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 Royal Bank. It cannot be
predicted whether any such legislation will be adopted or how such legislation would affect the
business of Royal Bank. As a consequence of the extensive regulation of commercial banking
activities in the United States, Royal 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 banks 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.
13
Federal Deposit Insurance Corporation Improvement Act of 1991
General: The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDIC Improvement
Act) includes several provisions that have a direct impact on Royal Bank. The most significant of
these provisions are discussed below.
The FDIC is required to conduct periodic full-scope, on-site examinations of Royal Bank. In order
to minimize losses to the deposit insurance funds, the FDIC Improvement Act establishes a format to
monitor FDIC-insured institutions and to enable prompt corrective action by the appropriate
federal supervisory agency if an institution begins to experience any difficulty. The FDIC
Improvement Act establishes five capital categories. They are: (1) well capitalized, (2)
adequately capitalized, (3) undercapitalized, (4) significantly undercapitalized, and (5)
critically undercapitalized. The overall goal of these capital measures is to impose scrutiny and
operational restrictions on banks as they descend the capital categories from well capitalized to
critically undercapitalized.
Under current regulations, a well-capitalized institution is one that has at least a 10% total
risk-based capital ratio, a 6% Tier 1 risk-based capital ratio, a 5% Tier 1 Leverage Ratio, and is
not subject to any written order or final directive by the FDIC to meet and maintain a specific
capital level. 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. Royal Bank has met all of the capital ratio requirements under the Orders.
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.
14
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 Royal 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, Royal Bank would be allowed
to make real estate loans that do not conform to the LTV ratio limits, up to an amount not to
exceed 100% of their total capital.
Truth in Savings Act: The FDIC Improvement Act also contains the Truth in Savings Act. The
purpose of this Act is to require the clear and uniform disclosure of the rates of interest that
are payable on deposit accounts by Royal Bank and the fees that are assessable against deposit
accounts, so that consumers can make a meaningful comparison between the competing claims of banks
with regard to deposit accounts and products. This Act requires Royal Bank to include, in a clear
and conspicuous manner, the following information with each periodic statement of a deposit
account: (1) the annual percentage yield earned; (2) the amount of interest earned; (3) the amount
of any fees and charges imposed; and (4) the number of days in the reporting period. This Act
allows for civil lawsuits to be initiated by customers if Royal Bank violates any provision or
regulation under this Act.
Gramm-Leach-Bliley Act of 1999
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
15
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, Royal Bank 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, Royal Bank must be well-capitalized and 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 Royal Bank 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 Royal Bank.
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 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.
16
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.
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the
Dodd-Frank Act) was enacted into law. The Dodd-Frank Act significantly changes regulation of
financial institutions and the financial services industry, including: creating a Financial
Services Oversight Council to identify emerging systemic risks and improve interagency cooperation;
centralizing the responsibility for consumer financial protection by creating a new agency, the
Consumer Financial Protection Bureau, which will be responsible for implementing, examining and
enforcing compliance with federal consumer financial laws; permanently raising the current standard
maximum deposit insurance amount to $250,000; establishing strengthened capital standards for
banks, and
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disallowing trust preferred securities as qualifying as Tier 1 capital (subject to certain
exceptions and grandfather provisions for existing trust preferred securities); amending the Truth
in Lending Act with respect to mortgage originations and establishing new minimum mortgage
underwriting standards; strengthening the SECs powers to regulate securities markets; granting the
Federal Reserve Board the power to regulate debit card interchange fees; allowing the FDIC to raise
the ratio of reserves to deposits from 1.15% to 1.35% for deposit insurance purposes by September
30, 2020 and to offset the effect of increased assessments on insured depository institutions with
assets of less than $10 billion; allowing financial institutions to pay interest on business
checking accounts; and implementing provisions that affect corporate governance and executive
compensation at all publicly traded companies.
It is difficult to predict at this time the specific
impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on
community banks. Given the uncertainty associated with the manner in which the provisions of the
Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the
full extent of the impact such requirements will have on financial institutions operations is
presently unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of
our business activities, require changes to certain of our business practices, impose upon us more
stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our
business. These changes may also require us to invest significant management attention and
resources to evaluate and make necessary changes in order to comply with new statutory and
regulatory requirements.
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. 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 Royal 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 Royal 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 Royal 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 was
participating in the program which guaranteed all personal and business non-interest bearing
checking accounts. This unlimited coverage expired on December 31, 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 twenty-five basis points to the Companys
total FDIC assessment for 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. Royal 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.
Beginning with the second quarter of 2011, as mandated by the recently enacted Dodd-Frank Act, the
assessment base that the FDIC will use to calculate assessment premiums will be a banks average
assets minus average tangible equity. As the asset base of the banking industry is larger than the
deposit base, the range of assessment rates will change to a low or 2.5 basis points to a high of
45 basis points, per $100 of assets; however, the dollar amount of the actual premiums is expected
to be roughly the same.
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The FDIC is required under the Dodd-Frank Act to establish assessment rates that will allow the
Deposit Insurance Fund to achieve a reserve ratio of 1.35% of Insurance Fund insured deposits by
September 2020. In addition, the FDIC has established a designated reserve ratio of 2.0%, a
target ratio that, until it is achieved, will not likely result in the FDIC reducing assessment
rates. In attempting to achieve the mandated 1.35% ratio, the FDIC is required to implement
assessment formulas that charge banks over $10 billion in asset size more than banks under that
size. Those new formulas begin in the second quarter of 2011, but do not affect Royal Bank. Under
the Dodd-Frank Act, the FDIC is authorized to make reimbursements from the insurance fund to banks
if the reserve ratio exceeds 1.50%, but the FDIC has adopted the designated reserve ratio of 2.0%
and has announced that any reimbursements from the fund are indefinitely suspended.
In addition to deposit insurance, Royal Bank is 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 2011, the Financing Corporations
assessment for Royal Bank (and all other banks), is an annual rate of $.0102 for each $100 of
deposits. The Financing Corporation bonds are expected to be paid off between 2017 and 2019.
Other Legislation/Regulatory Requirements
Capital Framework and Basel III
The Basel Committee on Banking Supervision and the Financial Stability Board, which was established
by the Group of 20 (G-20) Finance Ministers and Central Bank Governors to take action to
strengthen regulation and supervision of the financial system with greater international
consistency, cooperation and transparency, have both committed to raise capital standards and
liquidity buffers within the banking system. On September 12, 2010, the G-20 Governors and Heads of
Supervision agreed to the phase-in of Basel III with full implementation by January 2015 of the
following minimum capital requirements: minimum tier 1 equity ratio of 6% (subject to an additional
capital conservation buffer of potentially of 2.5% and 5% with implementation by January 2019
imposed by regulatory agencies during periods of excess aggregate credit growth), and minimum total
capital to risk-weighted assets of 8%, subject to new deductions and adjustments to Tier 1 common
equity. The G-20 endorsed Basel III on November 12, 2010. The U.S. financial regulatory agencies
have indicated informally that they generally support Basel III and expect to propose regulations
implementing Basel III in mid 2011 with final adoption of implementing regulations in mid 2012.
Additionally, the Basel Committee is considering further amendments beyond the final framework that
include more stringent capital requirements for globally systemically important financial
institutions. The Company believes that our current capital levels already exceed the Basel III
capital requirements.
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 Royal Bank overall, the individual provisions of this law are not considered currently
material to Royal Bank 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 Royal
Bank in the future.
Monetary Policy
The earnings of Royal Bank are affected by the policies of regulatory authorities including the
Federal Reserve Board. An important function of the Federal Reserve System is to influence the
money supply and interest rates. Among the
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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 Royal Banks operations in
the future. The effect of such policies and regulations upon the future business and earnings of
Royal Bank cannot be predicted.
Effects of Inflation
Inflation 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, Pennsylvania 19072 or on our website
www.royalbankamerica.com.
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 limits and impacts 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. Royal
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
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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 held for
investment was $284.1 million at December 31, 2010 comprising 57% 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 non-performing
assets and the 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 Royal Bank may be required to maintain
higher levels of capital than it would be otherwise be expected to maintain as a result of Royal
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 non-performing 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. However, 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
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control, and on our financial performance. Under the Orders as described in Regulatory Actions
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
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.
Since the Company has failed to pay dividends on the Series A Preferred Stock for a total of six
quarterly dividend periods (whether or not consecutive), the Treasury currently has 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.
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 banking subsidiary, Royal Bank is 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 to pay dividends is also subject to
its profitability, financial condition, capital expenditures and other cash flow requirements. At
December 31, 2010, as a result of significant losses within Royal Bank, the Company had negative
retained earnings and therefore would not
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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 Actions 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 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 faces 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.
The Company achieved significant growth in the loan portfolio until two years ago. Because the
Companys retail deposits had not grown at similar rates, our funding sources were supplemented to
include the national market (brokered CDs) to attract additional funds. During an environment when
interest rates are rising and the related U.S.
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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. During the past 18 months, loan balances have declined and the Company has reduced
the outstanding amount of brokered CDs by $138 million, or 61%, in order to reduce this risk.
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. The
Federal Home Loan Bank of Pittsburgh had imposed an over collateralized delivery requirement of
105% on Royal Bank as a result of Royal Banks level of non-performing assets and losses incurred
in 2009. 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.
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 July 21, 2010, the Dodd-Frank Act was enacted into law. The Dodd-Frank Act significantly
changes regulation of financial institutions and the financial services industry, including the
creation of a Financial Services Oversight Council to identify emerging systemic risks and improve
interagency cooperation and the Consumer Financial Protection Bureau, which will be responsible for
implementing, examining and enforcing compliance with federal consumer financial laws. The
regulatory changes include, among other things, permanently raising the current standard maximum
deposit insurance amount to $250,000; establishing strengthened capital standards for banks, and
disallowing trust preferred securities as qualifying as Tier 1 capital (subject to certain
grandfather provisions for existing trust preferred securities); establishing new minimum mortgage
underwriting standards; strengthening the SECs powers to regulate securities markets; granting the
Federal Reserve Board the power to regulate debit card interchange fees; allowing financial
institutions to pay interest on business checking accounts; and implementing provisions that affect
corporate governance at all publicly traded companies. These changes are expected to impact our
compliance costs resulting from significant changes in our policies and procedures. Many aspects of
the Dodd-Frank Act are subject to rulemaking that will take effect over several years, thus making
it difficult to assess the impact of the statute on the Company, at this time.
On October 3, 2008, 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 TARP. The purpose
of TARP is to restore confidence and stability to the U.S. banking
25
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 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 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. |
26
|
§ |
|
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.
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 87% of Class B common stock as of February 28, 2011.
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.
27
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.
|
|
|
|
|
15th Street Office |
|
Bala Plaza Office (3) |
|
Bridgeport Office (1) |
30 South Street |
|
231 St. Asaph's 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 |
|
|
|
(1) |
|
Owned |
|
(2) |
|
Used for employee training |
|
(3) |
|
Loan production office |
Royal Bank owns eleven of the above properties. The remaining seven properties are leased with
expiration dates between 2011 and 2021. During 2010, Royal Bank made aggregate lease payments of
approximately $767,000. During 2010. Royal Asian made aggregate lease payments of approximately
$501,000. The Company believes that all of its properties are attractive, adequately insured, and
well maintained and are adequate for Royal Banks purposes.
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
28
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. It is possible that
the outcome of the investigation could result in fines and penalties being assessed against both
CSC and RTL, which could also result in reputational risk due to negative publicity. However, 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)
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 |
2010 |
|
High |
|
Low |
First Quarter |
|
$ |
2.77 |
|
|
$ |
1.24 |
|
Second Quarter |
|
|
4.17 |
|
|
|
2.46 |
|
Third Quarter |
|
|
3.01 |
|
|
|
1.74 |
|
Fourth Quarter |
|
|
2.04 |
|
|
|
1.29 |
|
|
|
|
|
|
|
|
|
|
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 |
|
The approximate number of recorded holders of the Companys Class A and Class B Common Stock,
as of February 28, 2011, is shown below:
|
|
|
|
|
Title of Class |
|
Number of record holders |
Class A Common stock |
|
|
275 |
|
Class B Common stock |
|
|
138 |
|
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.
29
Stock dividends: 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 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 since 2006.
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. In July 2008, the Company suspended cash
dividends on its common stock to preserve capital and maintain liquidity in response to current
financial and economic trends. The Company did not pay cash dividends on its common stock in 2010
and 2009.
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 Actions 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 14 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 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, 2010, the Series A Preferred stock dividend in arrears is $2.4 million, which has 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, 2005, (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 2010 Peer Group consists of twenty 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 |
|
|
12/31/05 |
|
|
12/31/06 |
|
|
12/31/07 |
|
|
12/31/08 |
|
|
12/31/09 |
|
|
12/31/10 |
|
|
Royal Bancshares of Pennsylvania, Inc. |
|
|
|
100.00 |
|
|
|
|
124.45 |
|
|
|
|
55.01 |
|
|
|
|
17.11 |
|
|
|
|
6.68 |
|
|
|
|
7.19 |
|
|
|
NASDAQ Composite |
|
|
|
100.00 |
|
|
|
|
110.39 |
|
|
|
|
122.15 |
|
|
|
|
73.32 |
|
|
|
|
106.57 |
|
|
|
|
125.91 |
|
|
|
SNL Bank and Thrift |
|
|
|
100.00 |
|
|
|
|
116.85 |
|
|
|
|
89.10 |
|
|
|
|
51.24 |
|
|
|
|
50.55 |
|
|
|
|
56.44 |
|
|
|
Royal Bancshares Peer Group* |
|
|
|
100.00 |
|
|
|
|
111.18 |
|
|
|
|
85.91 |
|
|
|
|
70.56 |
|
|
|
|
63.63 |
|
|
|
|
68.05 |
|
|
|
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) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Interest income |
|
$ |
57,262 |
|
|
$ |
66,043 |
|
|
$ |
72,764 |
|
|
$ |
86,736 |
|
|
$ |
93,006 |
|
Interest expense |
|
|
25,994 |
|
|
|
37,439 |
|
|
|
38,109 |
|
|
|
48,873 |
|
|
|
46,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
31,268 |
|
|
|
28,604 |
|
|
|
34,655 |
|
|
|
37,863 |
|
|
|
46,634 |
|
Provision for loan and lease losses |
|
|
22,140 |
|
|
|
20,605 |
|
|
|
21,841 |
|
|
|
13,026 |
|
|
|
1,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after loan and lease losses |
|
|
9,128 |
|
|
|
7,999 |
|
|
|
12,814 |
|
|
|
24,837 |
|
|
|
44,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of premises & equipment |
|
|
156 |
|
|
|
|
|
|
|
1,991 |
|
|
|
|
|
|
|
|
|
Gain on sale of premises & equipment related
to real estate owned via equity investments |
|
|
667 |
|
|
|
1,817 |
|
|
|
1,679 |
|
|
|
1,860 |
|
|
|
3,036 |
|
Income from bank owned life insurance |
|
|
379 |
|
|
|
1,099 |
|
|
|
1,233 |
|
|
|
875 |
|
|
|
847 |
|
Service charges and fees |
|
|
1,266 |
|
|
|
1,419 |
|
|
|
1,186 |
|
|
|
1,348 |
|
|
|
1,404 |
|
Gains on sales related to real estate joint
ventures |
|
|
|
|
|
|
|
|
|
|
1,092 |
|
|
|
350 |
|
|
|
|
|
Income related to real estate owned
via equity investments |
|
|
564 |
|
|
|
1,302 |
|
|
|
965 |
|
|
|
1,384 |
|
|
|
3,591 |
|
Gains on sale of real estate |
|
|
1,019 |
|
|
|
294 |
|
|
|
429 |
|
|
|
1,111 |
|
|
|
2,129 |
|
Gains on sale of loans |
|
|
510 |
|
|
|
914 |
|
|
|
190 |
|
|
|
404 |
|
|
|
379 |
|
Gains (loss) on investment securities |
|
|
1,290 |
|
|
|
1,892 |
|
|
|
(1,313 |
) |
|
|
5,358 |
|
|
|
383 |
|
Gain on sale of security claim |
|
|
1,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
737 |
|
|
|
578 |
|
|
|
148 |
|
|
|
198 |
|
|
|
202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, excluding other-than-temporary
impairment losses |
|
|
8,244 |
|
|
|
9,315 |
|
|
|
7,600 |
|
|
|
12,888 |
|
|
|
11,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other than-temporary-impairment losses on
investment securities |
|
|
(566 |
) |
|
|
(13,431 |
) |
|
|
(23,388 |
) |
|
|
|
|
|
|
|
|
Portion of loss recognized in other comprehensive loss |
|
|
87 |
|
|
|
2,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings |
|
|
(479 |
) |
|
|
(11,041 |
) |
|
|
(23,388 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (loss) |
|
|
7,765 |
|
|
|
(1,726 |
) |
|
|
(15,788 |
) |
|
|
12,888 |
|
|
|
11,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before other expenses & income taxes |
|
|
16,893 |
|
|
|
6,273 |
|
|
|
(2,974 |
) |
|
|
37,725 |
|
|
|
56,802 |
|
Non-interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
11,591 |
|
|
|
12,235 |
|
|
|
15,044 |
|
|
|
12,215 |
|
|
|
13,451 |
|
Impairment related to OREO |
|
|
7,374 |
|
|
|
4,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment related to real estate owned via
equity investments |
|
|
2,600 |
|
|
|
|
|
|
|
1,500 |
|
|
|
8,500 |
|
|
|
|
|
Expenses related to real estate owned via
equity investments |
|
|
529 |
|
|
|
907 |
|
|
|
966 |
|
|
|
1,590 |
|
|
|
1,606 |
|
Impairment related to real estate joint venture |
|
|
1,552 |
|
|
|
|
|
|
|
|
|
|
|
5,927 |
|
|
|
|
|
Other |
|
|
17,097 |
|
|
|
24,514 |
|
|
|
15,023 |
|
|
|
11,800 |
|
|
|
9,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
40,743 |
|
|
|
42,193 |
|
|
|
32,533 |
|
|
|
40,032 |
|
|
|
24,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before tax expense (benefit) |
|
|
(23,850 |
) |
|
|
(35,920 |
) |
|
|
(35,507 |
) |
|
|
(2,307 |
) |
|
|
32,150 |
|
Income tax expense (benefit) |
|
|
|
|
|
|
474 |
|
|
|
2,643 |
|
|
|
(1,568 |
) |
|
|
10,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(23,850 |
) |
|
$ |
(36,394 |
) |
|
$ |
(38,150 |
) |
|
$ |
(739 |
) |
|
$ |
22,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less net income (loss) attributable to noncontrolling interest |
|
|
243 |
|
|
|
1,402 |
|
|
|
(68 |
) |
|
|
(1,303 |
) |
|
|
567 |
|
Net (loss) income attributable to Royal Bancshares |
|
|
(24,093 |
) |
|
|
(37,796 |
) |
|
|
(38,082 |
) |
|
|
564 |
|
|
|
21,568 |
|
Less Series A Preferred stock accumulated dividend
and accretion |
|
|
(1,970 |
) |
|
|
(1,672 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholders |
|
|
(26,063 |
) |
|
|
(39,468 |
) |
|
|
(38,082 |
) |
|
|
564 |
|
|
|
21,568 |
|
|
Basic (loss) earnings per common share |
|
$ |
(1.97 |
) |
|
$ |
(2.64 |
) |
|
$ |
(2.86 |
) |
|
$ |
0.04 |
|
|
$ |
1.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per common share |
|
$ |
(1.97 |
) |
|
$ |
(2.64 |
) |
|
$ |
(2.86 |
) |
|
$ |
0.04 |
|
|
$ |
1.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data |
|
For the years ended December 31, |
(In thousands) |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
Total Assets |
|
|
980,626 |
|
|
|
1,292,726 |
|
|
|
1,175,586 |
|
|
|
1,278,475 |
|
|
|
1,356,311 |
|
Total average assets (2) |
|
|
1,177,922 |
|
|
|
1,295,126 |
|
|
|
1,189,518 |
|
|
|
1,314,361 |
|
|
|
1,317,688 |
|
Loans, net |
|
|
475,725 |
|
|
|
656,533 |
|
|
|
671,814 |
|
|
|
625,193 |
|
|
|
580,759 |
|
Total deposits |
|
|
693,913 |
|
|
|
881,755 |
|
|
|
760,068 |
|
|
|
770,152 |
|
|
|
859,457 |
|
Total average deposits |
|
|
791,026 |
|
|
|
857,742 |
|
|
|
724,384 |
|
|
|
869,884 |
|
|
|
761,267 |
|
Total borrowings (1) |
|
|
180,723 |
|
|
|
283,601 |
|
|
|
313,805 |
|
|
|
339,251 |
|
|
|
301,203 |
|
Total average borrowings (1) |
|
|
256,688 |
|
|
|
307,225 |
|
|
|
307,597 |
|
|
|
254,757 |
|
|
|
377,139 |
|
Total shareholders equity (3) |
|
|
84,093 |
|
|
|
101,156 |
|
|
|
79,687 |
|
|
|
146,367 |
|
|
|
163,254 |
|
Total average shareholders equity |
|
|
103,895 |
|
|
|
107,511 |
|
|
|
131,155 |
|
|
|
158,695 |
|
|
|
158,372 |
|
Return on average assets |
|
|
2.04 |
% |
|
|
(3.20 |
%) |
|
|
0.04 |
% |
|
|
1.64 |
% |
|
|
1.68 |
% |
Return on average equity |
|
|
(23.19 |
%) |
|
|
(29.04 |
%) |
|
|
0.36 |
% |
|
|
13.62 |
% |
|
|
22.01 |
% |
Average equity to average assets |
|
|
8.82 |
% |
|
|
8.30 |
% |
|
|
11.03 |
% |
|
|
12.10 |
% |
|
|
12.02 |
% |
Dividend payout ratio |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
(10.52 |
%) |
|
|
2743.40 |
% |
|
|
66.10 |
% |
|
|
|
(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.
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, 2010 and 2009. 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.
33
The Company adopted FASB guidance related to the recognition and presentation of
other-than-temporary impairment effective June 30, 2009. This 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 guidance replaced the intent and ability indication 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 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 20 - 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 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.
34
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: The Company recorded a net loss of $24.1 million in 2010, which represented a
$9.2 million improvement from the previous year. The reduction in the net loss was primarily
attributed to an increase in net interest income of $2.7 million, an improvement in other income of
$9.5 million, which was mainly associated with a reduction of impairment losses on the investment
portfolio, and a reduction in net income attributable to non-controlling interest of $1.2 million.
The increase in net interest income was primarily related to the re-pricing of maturing retail CDs
and the redemption of higher costing brokered CDs and FHLB advances. The increased other income was
associated mainly with a reduction in investment impairment and the sale of the Companys
collateral claim related to a pending lawsuit against Lehman Brothers Special Financing (LBSF)
for $1.7 million. Investment impairment, which amounted to $479,000 during 2010 as compared to
$11.0 million during 2009, improved due to the restructuring of the investment portfolio during the
past 18 months. During the fourth quarter of 2010 the Company sold its claim against LBSF for $1.7
million related to the collateral for an interest rate swap, which had previously been written off
in 2008 in the amount of $5.0 million, due to the uncertainty surrounding the litigation and
bankruptcy of Lehman Brothers Holdings, Inc., an affiliate of LBSF. Rather than wait for an
indefinite period of time to recover an undetermined amount through the bankruptcy proceedings, the
Company elected to sell its claim for its current fair market value. The reduced net income
attributable to non-controlling interest was principally due to the partners 50% share of the
impairment related to real estate owned via equity investments of $1.3 million being included in
the Companys other expense and then eliminated through a credit to non-controlling interest in the
Companys consolidated statement of operations in the current year.
Partially offsetting these favorable changes were an increase in the provision for loans and leases
of $1.5 million and an increase in total other expense of $3.1 million. The increase in the
provision was entirely associated with the pending classified asset pool sale, which amounts to
$11.4 million, and is described below. The increase in other expense was mainly associated with
increased OREO impairment charges of $2.8 million, which were almost entirely related to the asset
pool sale previously noted, impairment of $2.6 million related to real estate owned via equity
investments and impairment of real estate joint ventures of $1.6 million. The impairment related to
real estate owned via equity investments was due to lower projected operating cash flows resulting
from a significant decline in unit sales for a condo conversion project after the expiration of the
new home buyers tax credit at the end of the second quarter. The real estate joint venture
impairment was comprised of impairment on the entire investment of $2.5 million for an Ohio marina
project due to a significant decline in the projects value, which was partially offset by a
recovery of $968,000 from a real estate joint venture investment that was written off in 2007.
These expense increases were partially offset by reduced expenses in most of the other expense
categories.
The Company has signed a letter of intent to sell a pool of $54.1 million of classified assets in a
bulk sale, which includes $30.3 million of non-performing loans, $10.8 million of classified
accruing loans and $13.0 million of OREO properties. The pending sale is expected to close in the
second quarter. The asset pool sale resulted in an additional loss of $14.2 million during the
fourth quarter of 2010. The lower of cost or fair market value of the loans transferred to loans
held for sale (LHFS) was $29.6 million after recording credit losses of $11.4 million. In
addition, the Company recorded an OREO impairment charge of $2.8 million to reflect the projected
sales price of the properties included in the sale. The Company has been successful in selling OREO
properties that have been acquired through foreclosure during the past year at prices higher than
the pending pool sales approach provides. However, the pool sale allows for a significant reduction
in classified assets and improves the credit quality of the Companys loan portfolio and overall
balance sheet while also maintaining capital ratios as required under the Orders. The Company has
concluded that the non-GAAP financial measure, shown in the table below, is significant since the
impact of the pending asset sale amounts to 59% of the total net loss of $24.1 million for the year
ended December 31, 2010.
35
The impact of the asset pool sale on the results of operations for 2010 is provided in the non-GAAP
table below:
|
|
|
|
|
Net Loss for 2010 |
|
$ |
(24.1) million |
|
Increased provision (loans) |
|
11.4 million |
|
Increased impairment charge (OREO) |
|
2.8 million |
|
|
|
|
|
Total asset sale impact |
|
14.2 million |
|
|
|
|
|
Loss for 2010 without asset pool sale (non-GAAP) |
|
$ |
(9.9) million |
|
|
|
|
|
The net loss of $24.1 million excluding the effects of the loss of $14.2 million associated with
the asset pool sale on the 2010 financial results would have resulted in a loss of $9.9 million,
which is a non-GAAP measure, in 2010. The adjusted loss would have amounted to an improvement of
$23.4 million above the 2009 results on a non-GAAP basis.
Total non-performing loans at December 31, 2010 were $65.8 million and were comprised of $43.2
million in LHFI and $22.6 million in LHFS. Non-performing loans were $73.7 million at December 31,
2009. OREO at December 31, 2010, amounted to $29.2 million versus $30.3 million at year end 2009.
Basic and diluted losses per common share were both $1.97 for 2010 compared to basic and diluted
losses per common share of $2.64 in 2009.
The Company sold Royal Asian on December 30, 2010 to an ownership group led by the President and
CEO of Royal Asian, through the purchase of all of the outstanding common stock of Royal Asian
owned by the Company. The sale was completed under an agreement signed in August 2010. Under the
terms of the agreement, the purchase price for the stock was equal to the total shareholders
equity of Royal Asian, determined in accordance with generally accepted accounting principles as of
November 30, 2010, which amounted to $12.3 million. Originally launched in 2004, Royal Asian
provided banking products and services to businesses and consumers in the Korean-American
communities of Southeastern Pennsylvania, Northern New Jersey and Flushing, New York. As a result
of the sale of Royal Asian, the Companys consolidated assets declined by $86.6 million, loans
declined by $63.5 million and deposits declined by $73.4 million.
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 decrease in the provision for loan and lease losses of $1.2 million year over year, a reduced
loss of $14.1 million in other income, an increase of $5.1 million in other expense 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. The impairment losses on investment securities
amounted to $11.0 million in 2009 which declined from $23.3 million in 2008, which included the
bankruptcy of Lehman Brothers Holdings and the FDIC seizure of Washington Mutual. Partially
offsetting these positive changes was a decline in net interest income of $6.1 million, or 17.5%,
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 of $5.1 million, or 15.7%, was comprised mainly of OREO impairment
charges of $4.5 million related to foreclosed properties, OREO expenses of $3.0 million to maintain
the OREO properties and increased FDIC insurance of $3.1 million due to increased rates for insured
deposits. 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.
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
36
favorable to the Company as the terms for comparable loans to other customers with similar
collection risks who are not 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 $31.3 million in 2010 as compared to $28.6 million in 2009, which amounted
to an improvement of $2.7 million, or 9.3%. The increase was attributed mainly to lower rates paid
on deposits, primarily redeemed brokered deposits and maturing retail certificates of deposit, and
redeemed borrowings, mainly FHLB advances and a nonrecurring adjustment of $905,000 in the second
quarter of 2010 that was related to the correction of previously reversed interest income on a
participation loan from a previous year. This increase was partially offset by a decline in the
yield on interest earning assets, principally investment securities, and was accomplished despite
an overall decline of $111.3 million, or 9.3%, in the average balance of interest earning assets.
(See the Average Balance table included in this discussion.) Net interest income amounted to
$28.6 million in 2009, which reflected a decline of $6.1 million, or 17.5%, from the level recorded
in 2008 due primarily to the increased level of non-performing loans and reduced yields on interest
earnings assets.
Interest income for 2010 of $57.3 million amounted to a reduction of $8.8 million, or 13.3%, from
the level recorded in 2009. The decrease was attributable to a lower yield on interest earning
assets year over year, mainly associated with investment securities, and a lower level of average
interest earning assets related almost entirely to loans and investment securities. Interest income
for loans declined by $3.1 million, or 6.8%, and was mostly attributed to the reduction of average
total loans, which was related to charge-offs, pay downs and payoffs, that was accompanied by
minimal new loan growth. The decline was partially offset by an increase in the loan yield due to
an increased concentration of higher yielding loans within the loan portfolio and the $905,000
adjustment previously mentioned. Average balance of total loans amounted to $643.5 million during
2010, which amounted to a decline of $72.1 million, or 10.1%, from the average level during 2009.
The interest income on investment securities of $14.5 million declined $5.7 million, or 28.1%, due
to a decline in average investment securities, and a decline in the yield due to an increased
concentration in lower yielding, government agency securities. Average investment securities of
$381.8 million in 2010 represented a decline of $45.0 million, or 10.5%, from the prior years
average. The actual reduction in the investment securities portfolio from year end 2009 to year end
2010 amounted to $122.1 million, which was more pronounced than the reduction in the average year
over year decline. This resulted from the Companys strategic capital initiative of de-leveraging
the balance sheet coupled with the Orders funding requirement of reducing non-core deposits.
Consequently brokered CDs, amounting to $117.9 million, and FHLB advances, amounting to $98.8
million, were redeemed at their respective maturity dates during 2010.
The decline in the yield on average interest earning assets also contributed to the decline in
interest income year over year (5.29% in 2010 versus 5.53% in 2009). This 24 basis point reduction
was comprised of a decline of 5 basis points on interest bearing deposits, a decline of 92 basis
points on investment securities partially offset by a 24 basis point increase 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 2010. The decline of the yield on
investment securities was mainly related to the replacement of sold investment securities and
principal payments and prepayments on investment securities with lower yielding and lower
risk-weighted, government agency securities that resulted in the continued improvement of credit
risk within the investment portfolio but potentially higher interest rate risk when interest rates
rise. The yield increase on average total loans primarily resulted from the $905,000 adjustment to
interest income as previously mentioned and the change in the composition of the loans within the
portfolio during the past year. The 2010 loan composition change was comprised of an increase in
the percentage of leases and tax liens accompanied by a reduction in the percentage of commercial
real estate and construction loans. Leases and tax lien portfolios have the highest yields within
the loan portfolio while commercial real estate and construction loans, which historically have had
attractive but lower yields, are currently negatively impacted by non-performing loans. At year end
2010, the variable rate portfolio represented approximately 44% of total loans; however the Company
has mitigated a portion of this negative impact through the utilization of rate floors in many of
the commercial loan agreements that exceed the current prime rate.
At December 31, 2010, non-performing loans to total loans amounted to 8.9% of total loans, whereas
the same ratio at December 31, 2009, amounted 10.7%. The year over year increase was primarily
associated with the decline in
37
the loan portfolio during 2010. The total interest income lost as a result of non-performing loans
during 2010 amounted to $6.5 million, which amounted to an increase of $339,000, or 5.5%, from
2009.
For the full year ended 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 of 108 basis
points, which was partially offset by a higher level of interest earning assets. Yields on loans
and investment securities declined year over year by 98 basis points and 90 basis points,
respectively. Average interest earning assets for 2009 of $1.2 billion increased $94.0 million, or
8.5%, above the level of 2008. This increase was comprised of cash and cash equivalents of $27.0
million, investment securities of $28.2 million, and total loans of $38.8 million. 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. 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.
Interest expense of $26.0 million for the full year 2010 declined $11.4 million, or 30.6%, from the
level recorded in 2009. The improvement in interest expense was attributed to a reduced level of
average interest bearing liabilities year over year and a decrease in the interest rates paid on
those liabilities. Average interest bearing liabilities amounted to $985.2 million in 2010, which
represented a decline of $117.2 million, or 10.6%, from the previous year. The change was primarily
related to the redemption of higher cost brokered CDs and FHLB advances during the past year as
part of the previously noted deleveraging strategy and compliance with regulatory Orders.
Rates paid on all major liability categories declined year over year with the exception of savings
accounts due to the re-pricing of maturing retail certificates of deposit, the redemption of higher
cost brokered CDs and the redemption of higher cost FHLB advances. The interest rate paid on
average interest-bearing liabilities in 2010 of 2.64% amounted to a reduction of 76 basis points.
The most significant declines were as follows: certificates of deposits declined by 86 basis
points, money market accounts declined by 78 basis points, borrowings declined by 29 basis points
and subordinated debt declined by 190 basis points.
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. 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 to maintain and assure adequate liquidity coupled with a very high
retention rate of maturing retail certificates of deposit.
The net interest margin of 2.89% for the full year 2010 amounted to an increase of 50 basis points
from the prior years level of 2.39%. The improvement in the margin was primarily due to the
ability to re-price the liability side of the balance sheet, which had lagged the re-pricing of the
asset side in the previous year, and redeem higher cost funding sources throughout 2010. During the
past year the Company was able to re-price and retain almost all of the $230 million maturing
retail CDs at reduced interest rates while also redeeming $118 million of higher cost brokered CDs
and $98.8 million of higher cost FHLB advances. This positive trend was partially offset by a
decline of 24 basis points in the yield on average interest earning assets mainly attributable to a
decline in the yield on investment securities. The previously noted nonrecurring adjustment to net
interest income of $905,000 contributed 8 basis points of the overall 50 basis point improvement in
the net interest margin for 2010.
During 2009 the net interest margin amounted to 2.39% which resulted in a reduction of 76 basis
points from the level of 3.15% in 2008. The decline of 108 basis points in the yield on
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. However the rates paid on interest-bearing
liabilities lagged the decline in yields on interest-earning assets during 2009 since a significant
portion of interest bearing liabilities, mainly the higher rate retail certificates of deposit, did
not mature until the second half of 2009, and a significant portion of higher rate brokered
deposits and FHLB advances didnt mature until 2010. In addition, the Company added slightly higher
cost certificates of deposits to maintain liquidity and reduce reliance on brokered certificates of
deposit.
38
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
Average |
|
|
|
|
|
|
Yield / |
|
|
Average |
|
|
|
|
|
|
Yield / |
|
|
Average |
|
|
|
|
|
|
Yield / |
|
(Dollars in thousands) |
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits |
|
$ |
57,377 |
|
|
$ |
154 |
|
|
|
0.27 |
% |
|
$ |
51,578 |
|
|
$ |
164 |
|
|
|
0.32 |
% |
|
$ |
23,788 |
|
|
$ |
495 |
|
|
|
2.08 |
% |
Federal funds |
|
|
562 |
|
|
|
1 |
|
|
|
0.13 |
% |
|
|
553 |
|
|
|
1 |
|
|
|
0.18 |
% |
|
|
1,323 |
|
|
|
24 |
|
|
|
1.81 |
% |
Investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity |
|
|
|
|
|
|
|
|
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
0.00 |
% |
|
|
56,658 |
|
|
|
3,241 |
|
|
|
5.72 |
% |
Available for sale |
|
|
381,804 |
|
|
|
14,464 |
|
|
|
3.79 |
% |
|
|
426,829 |
|
|
|
20,121 |
|
|
|
4.71 |
% |
|
|
341,982 |
|
|
|
19,141 |
|
|
|
5.60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
381,804 |
|
|
|
14,464 |
|
|
|
3.79 |
% |
|
|
426,829 |
|
|
|
20,121 |
|
|
|
4.71 |
% |
|
|
398,640 |
|
|
|
22,382 |
|
|
|
5.61 |
% |
Loans & Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial demand loans |
|
|
307,515 |
|
|
|
15,857 |
|
|
|
5.16 |
% |
|
|
384,831 |
|
|
|
18,439 |
|
|
|
4.79 |
% |
|
|
395,109 |
|
|
|
25,270 |
|
|
|
6.40 |
% |
Real estate secured |
|
|
291,205 |
|
|
|
23,195 |
|
|
|
7.97 |
% |
|
|
294,414 |
|
|
|
24,285 |
|
|
|
8.25 |
% |
|
|
256,124 |
|
|
|
22,153 |
|
|
|
8.65 |
% |
Other loans and leases |
|
|
44,730 |
|
|
|
3,591 |
|
|
|
8.03 |
% |
|
|
36,276 |
|
|
|
3,032 |
|
|
|
8.36 |
% |
|
|
25,528 |
|
|
|
2,440 |
|
|
|
9.56 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
643,450 |
|
|
|
42,643 |
|
|
|
6.63 |
% |
|
|
715,521 |
|
|
|
45,756 |
|
|
|
6.39 |
% |
|
|
676,761 |
|
|
|
49,863 |
|
|
|
7.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earnings assets |
|
|
1,083,193 |
|
|
|
57,262 |
|
|
|
5.29 |
% |
|
|
1,194,481 |
|
|
|
66,042 |
|
|
|
5.53 |
% |
|
|
1,100,512 |
|
|
|
72,764 |
|
|
|
6.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest earnings assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & due from banks |
|
|
16,465 |
|
|
|
|
|
|
|
|
|
|
|
11,752 |
|
|
|
|
|
|
|
|
|
|
|
7,552 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
105,013 |
|
|
|
|
|
|
|
|
|
|
|
115,173 |
|
|
|
|
|
|
|
|
|
|
|
106,447 |
|
|
|
|
|
|
|
|
|
Allowance for loan loss |
|
|
(25,919 |
) |
|
|
|
|
|
|
|
|
|
|
(25,061 |
) |
|
|
|
|
|
|
|
|
|
|
(23,301 |
) |
|
|
|
|
|
|
|
|
Unearned discount |
|
|
(830 |
) |
|
|
|
|
|
|
|
|
|
|
(1,219 |
) |
|
|
|
|
|
|
|
|
|
|
(1,692 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assets |
|
|
94,729 |
|
|
|
|
|
|
|
|
|
|
|
100,645 |
|
|
|
|
|
|
|
|
|
|
|
89,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,177,922 |
|
|
|
|
|
|
|
|
|
|
$ |
1,295,126 |
|
|
|
|
|
|
|
|
|
|
$ |
1,189,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings |
|
$ |
15,959 |
|
|
$ |
90 |
|
|
|
0.56 |
% |
|
$ |
14,802 |
|
|
$ |
83 |
|
|
|
0.56 |
% |
|
$ |
15,125 |
|
|
$ |
76 |
|
|
|
0.50 |
% |
NOW |
|
|
42,990 |
|
|
|
395 |
|
|
|
0.92 |
% |
|
|
46,046 |
|
|
|
478 |
|
|
|
1.04 |
% |
|
|
48,414 |
|
|
|
894 |
|
|
|
1.85 |
% |
Money market |
|
|
166,386 |
|
|
|
1,754 |
|
|
|
1.05 |
% |
|
|
153,146 |
|
|
|
2,797 |
|
|
|
1.83 |
% |
|
|
168,972 |
|
|
|
4,947 |
|
|
|
2.93 |
% |
Time deposits |
|
|
503,217 |
|
|
|
14,683 |
|
|
|
2.92 |
% |
|
|
581,202 |
|
|
|
21,984 |
|
|
|
3.78 |
% |
|
|
434,662 |
|
|
|
19,497 |
|
|
|
4.49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits |
|
|
728,552 |
|
|
|
16,922 |
|
|
|
2.32 |
% |
|
|
795,196 |
|
|
|
25,342 |
|
|
|
3.19 |
% |
|
|
667,173 |
|
|
|
25,414 |
|
|
|
3.81 |
% |
Borrowings |
|
|
229,515 |
|
|
|
8,403 |
|
|
|
3.66 |
% |
|
|
271,000 |
|
|
|
10,717 |
|
|
|
3.95 |
% |
|
|
266,284 |
|
|
|
11,008 |
|
|
|
4.13 |
% |
Obligation through VIE equity investments |
|
|
1,399 |
|
|
|
22 |
|
|
|
1.57 |
% |
|
|
10,451 |
|
|
|
243 |
|
|
|
2.33 |
% |
|
|
15,539 |
|
|
|
251 |
|
|
|
1.62 |
% |
Subordinated debt |
|
|
25,774 |
|
|
|
647 |
|
|
|
2.51 |
% |
|
|
25,774 |
|
|
|
1,136 |
|
|
|
4.41 |
% |
|
|
25,774 |
|
|
|
1,436 |
|
|
|
5.57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities |
|
|
985,240 |
|
|
|
25,994 |
|
|
|
2.64 |
% |
|
|
1,102,421 |
|
|
|
37,438 |
|
|
|
3.40 |
% |
|
|
974,770 |
|
|
|
38,109 |
|
|
|
3.91 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest bearing deposits |
|
|
62,474 |
|
|
|
|
|
|
|
|
|
|
|
62,546 |
|
|
|
|
|
|
|
|
|
|
|
57,211 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
26,313 |
|
|
|
|
|
|
|
|
|
|
|
22,648 |
|
|
|
|
|
|
|
|
|
|
|
26,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,074,027 |
|
|
|
|
|
|
|
|
|
|
|
1,187,615 |
|
|
|
|
|
|
|
|
|
|
|
1,058,363 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
103,895 |
|
|
|
|
|
|
|
|
|
|
|
107,511 |
|
|
|
|
|
|
|
|
|
|
|
131,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,177,922 |
|
|
|
|
|
|
|
|
|
|
$ |
1,295,126 |
|
|
|
|
|
|
|
|
|
|
$ |
1,189,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
31,268 |
|
|
|
|
|
|
|
|
|
|
$ |
28,604 |
|
|
|
|
|
|
|
|
|
|
$ |
34,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
2.89 |
% |
|
|
|
|
|
|
|
|
|
|
2.39 |
% |
|
|
|
|
|
|
|
|
|
|
3.15 |
% |
|
|
|
(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. |
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, 2010 and 2009, as compared to respective previous periods, into
amounts attributable to both rate and volume variances.
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 versus 2009 |
|
|
2009 versus 2008 |
|
|
|
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 |
|
$ |
16 |
|
|
$ |
(26 |
) |
|
$ |
(10 |
) |
|
$ |
88 |
|
|
$ |
(419 |
) |
|
$ |
(331 |
) |
Federal funds sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(22 |
) |
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short term earning assets |
|
|
16 |
|
|
|
(26 |
) |
|
|
(10 |
) |
|
|
87 |
|
|
|
(441 |
) |
|
|
(354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,241 |
) |
|
|
|
|
|
|
(3,241 |
) |
Available for sale |
|
|
(1,730 |
) |
|
|
(3,927 |
) |
|
|
(5,657 |
) |
|
|
4,023 |
|
|
|
(3,043 |
) |
|
|
980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments securities |
|
|
(1,730 |
) |
|
|
(3,927 |
) |
|
|
(5,657 |
) |
|
|
782 |
|
|
|
(3,043 |
) |
|
|
(2,261 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial demand loans |
|
|
(3,536 |
) |
|
|
1,180 |
|
|
|
(2,356 |
) |
|
|
(551 |
) |
|
|
(4,339 |
) |
|
|
(4,890 |
) |
Commercial mortgages |
|
|
(156 |
) |
|
|
(724 |
) |
|
|
(880 |
) |
|
|
1,250 |
|
|
|
(1,223 |
) |
|
|
27 |
|
Residential and home equity loans |
|
|
(95 |
) |
|
|
(103 |
) |
|
|
(198 |
) |
|
|
(77 |
) |
|
|
(127 |
) |
|
|
(204 |
) |
Lease receivables |
|
|
693 |
|
|
|
(135 |
) |
|
|
558 |
|
|
|
987 |
|
|
|
(366 |
) |
|
|
621 |
|
Real estate tax liens |
|
|
127 |
|
|
|
(160 |
) |
|
|
(33 |
) |
|
|
2,945 |
|
|
|
(637 |
) |
|
|
2,308 |
|
Other loans |
|
|
5 |
|
|
|
(5 |
) |
|
|
|
|
|
|
(15 |
) |
|
|
(14 |
) |
|
|
(29 |
) |
Loan fees |
|
|
(205 |
) |
|
|
|
|
|
|
(205 |
) |
|
|
(1,939 |
) |
|
|
|
|
|
|
(1,939 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
(3,167 |
) |
|
|
53 |
|
|
|
(3,114 |
) |
|
|
2,600 |
|
|
|
(6,706 |
) |
|
|
(4,106 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (decrease) increase in interest income |
|
$ |
(4,881 |
) |
|
$ |
(3,900 |
) |
|
$ |
(8,781 |
) |
|
$ |
3,469 |
|
|
$ |
(10,190 |
) |
|
$ |
(6,721 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market |
|
$ |
160 |
|
|
$ |
(1,286 |
) |
|
$ |
(1,126 |
) |
|
$ |
(456 |
) |
|
$ |
(2,109 |
) |
|
$ |
(2,565 |
) |
Savings |
|
|
6 |
|
|
|
1 |
|
|
|
7 |
|
|
|
(2 |
) |
|
|
9 |
|
|
|
7 |
|
Time deposits |
|
|
(2,699 |
) |
|
|
(4,602 |
) |
|
|
(7,301 |
) |
|
|
5,871 |
|
|
|
(3,385 |
) |
|
|
2,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
(2,533 |
) |
|
|
(5,887 |
) |
|
|
(8,420 |
) |
|
|
5,413 |
|
|
|
(5,485 |
) |
|
|
(72 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
|
(1,558 |
) |
|
|
(757 |
) |
|
|
(2,315 |
) |
|
|
192 |
|
|
|
(482 |
) |
|
|
(290 |
) |
Trust preferred |
|
|
|
|
|
|
(489 |
) |
|
|
(489 |
) |
|
|
|
|
|
|
(300 |
) |
|
|
(300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Borrowings |
|
|
(1,558 |
) |
|
|
(1,246 |
) |
|
|
(2,804 |
) |
|
|
192 |
|
|
|
(782 |
) |
|
|
(590 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (decrease) increase in interest expense |
|
|
(4,091 |
) |
|
|
(7,133 |
) |
|
|
(11,224 |
) |
|
|
5,605 |
|
|
|
(6,267 |
) |
|
|
(662 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (decrease) increase in net interest income |
|
$ |
(790 |
) |
|
$ |
3,233 |
|
|
$ |
2,443 |
|
|
$ |
(2,136 |
) |
|
$ |
(3,923 |
) |
|
$ |
(6,059 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan and Lease Losses
The provision for loan and lease losses was $22.1 million in 2010 compared to $20.6 million in
2009. The Company recorded $30.4 million in net charge-offs of which $11.4 million was associated
with the mark to market of loans at December 31, 2010 that are expected to sell during the second
quarter that are part of the asset sale as described under the caption Net Loss in the Results
of Operations. The remaining 2010 provision was based on the formula allowance reflecting
historical losses and adjustments to qualitative factors.
The provision for loan and lease losses was $20.6 million in 2009. Included in the 2009 provision
was $11.0 million in specific reserves for individual loans that became impaired during 2009. The
Company recorded $19.2 million in net charge-offs in 2009.
The Company recorded a $21.8 million provision for loan and lease losses in 2008. The 2008 provision included $12.9 million in
specific reserves for impaired loans. The Company recorded $12.2 million in net charge-offs in
2008.
Total Other (Loss) Income
Other income (loss) 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-
40
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 income of $7.8 million in 2010 amounted to an improvement of $9.5 million from the
previous year due primarily to a reduction of $10.6 million in net impairment losses on AFS
investment securities, a one-time gain of $1.7 million on the sale of the Companys LBSF claim and
increased gains of $725,000 on the sale of other real estate, primarily related to the favorable
disposition in 2010 of two properties acquired through foreclosure. The 2010 impairment losses were
isolated to two real estate investments that amounted to $479,000 and reflected the restructuring
of the investment portfolio during the previous year. The 2009 impairment losses of $11.0 million
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. The
sale of the LBSF claim resulted in a gain of a previous impairment charge of $5.0 million in 2008
for the value of a CMO pledged as collateral for an interest rate swap with LBSF as previously
mentioned under the caption Net Loss in the Results of Operations.
Offsetting these favorable year over year results were a reduction of $720,000 in BOLI income, a
reduction of $602,000 in investment security gains ($1.3 million in 2010 versus $1.9 million in
2009), a decline in service fees of $153,000, a decline of $404,000 in gains on the sale of loans
and leases, mainly related to fewer SBA loan sales. Additionally, lower other income was associated
with reduced gains of $1.2 million on the sale of premises and equipment related to real estate
owned via equity investments ($667,000 versus $1.8 million) and a decrease of $738,000 in income
related to real estate owned via equity investments. 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 to enhance the risk-based capital ratio of Royal Bank. The reduction of income
related to real estate owned via equity investments and gains on the sale of premises and equipment
related to real estate owned via equity investments was primarily attributed to a slowdown in unit
sales for the real estate partnership project due to the expiration of the new home buyers tax
credit at the end of the second quarter.
Total other income (loss) amounted to a loss of $1.7 million in 2009 which equated 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 associated with the sale of approximately $23 million of BOLI insurance 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.
Total Other Expense
Total other expense amounted to $40.7 million in 2010, which represented an increase of $3.1
million, or 8.2%, above the level of 2009. The increase was principally related to an increase in
OREO impairment charges of $2.8 million, impairment of $2.6 million related to real estate owned
via equity investments and impairment of $1.6 million in real estate joint ventures. The OREO
impairment charges of $7.4 million was comprised of a $4.6 million reduction in value of seven
OREO properties during 2010 based upon updated annual appraisals and the December 31, 2010
increased valuation allowance associated with the pending sales value of OREO properties within the
loan and OREO sale discussed in Results of Operations that amounted to $2.8 million. The
impairment of real estate owned via equity investments was due to lower projected operating cash
flows resulting from a significant decline in unit
41
sales, which was primarily related to the expiration of the new home buyers tax credit at the end
of the second quarter. During the second quarter of 2010, the Company recorded a $2.5 million
impairment of real estate joint ventures, which amounted to the entire amount of the investment in
which the Company had a subordinate debt position due to the reduction in the collateral value as a
consequence of a significant decline in the cash flows generated from the property. The entire
amount of the partnerships impairment, including the partners share, is posted as a charge to
expense and included in the Companys other expense. The partners share of the losses is then
eliminated through a credit to noncontrolling interest on the Companys consolidated statement of
operations. Partially offsetting this impairment loss was a recovery of $968,000 from an investment
in a real estate joint venture that was written off in 2007 resulting in a $1.6 million net
impairment expense for real estate joint ventures in 2010. Total other expense, after adjusting for
the OREO impairment charge of $2.8 million related to the pending loan/OREO sale, would have been
$38.0 million and would have amounted to an increase of $312,000, or 0.8%.
Offsetting these expense increases during 2010 was a reduction of $644,000 in employee salaries and
benefits due to reduced headcount and the closing of the Blue Bell loan production office in 2009;
a decline of $754,000 in FDIC and state assessment expense due to lower deposit balances in 2010
and a change in the accounting method from a prepaid basis to an accrual method in the third
quarter of 2009; reduced OREO and loan collection expense of $682,000 mainly attributed to the
successful auction of an OREO property in 2010 and the resulting recovery of expenses; and a
decrease in directors fees of $321,000 due to a reduction in the number of directors, fewer
meetings and the elimination of inside directors fees. Additionally, reductions were experienced
in occupancy and equipment, stock option expense, professional and legal fees, expenses related to
real estate owned via equity investments, and other operating expense, which collectively
represented an expense decrease of $1.5 million. Other operating expense is comprised of data
processing, postage, telephone, travel and entertainment, advertising, printing and supplies, dues
and subscriptions and other miscellaneous 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,
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 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 leased facilities and additional
leased space for the lending and credit departments. Impairment of real estate owned via equity
investment, which amounted to $1.5 million in 2008 due to lower projected operating cash flows,
experienced significant improvement during the second half of 2009 due to increased sales and
related cash flows and resulted in no further impairment. 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 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 ongoing costs to maintain the OREO properties, such as (tax
payments, insurance, maintenance costs, utilities and other related expenses) due to the level of
OREO properties increasing by $20.0 million to $30.3 million at year end 2009. Other operating
expense of $3.0 million in 2009 declined $1.8 million, or 37.1%, from the previous year. 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.
42
Accounting for Income Tax Expense (Benefit)
In 2010, the Company recorded no tax expense as compared to $474,000 in 2009. The Company did not
record a tax benefit despite the net loss for 2010 since it concluded at December 31, 2010 that it
was more likely than not that the Company would not generate sufficient taxable income to realize
all of the deferred tax assets. The 2009 tax expense was entirely related to a 10% excise tax on
the surrender of approximately $23.0 million in BOLI. 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.
As of December 31, 2010 and December 31, 2009, 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.
The Company recorded a non-cash charge of $15.5 million in the consolidated statements of
operations in the 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 and 2010, the Company established
additional valuation allowances of $10.2 million and $7.7 million, respectively, which was a result
of the net operating losses for each 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 2010. As of December 31, 2010 the
valuation allowance for deferred tax assets totaled $33.5 million. The net deferred tax asset of
$414,000 relates to projected reversals of temporary differences in 2011 that are projected to be
carried back to a prior year.
The Companys 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, 2010 and 2009 was 0%
and 1.5%, 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 and the
establishment of a valuation allowance which was $32.1 million as of December 31, 2010.
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 one operating segment that does not meet the quantitative thresholds for
requiring disclosure, but has different characteristics than the Community Banking, Tax Liens and
Equity Investments segments, Leasing.
|
§ |
|
Community Bank segment: At December 31, 2010, the Community Bank segment had
total assets of $836.4 million, a decrease of $304.9 million or 27% from $1.1
billion at December 31, 2009. Total deposits declined $187.8 million or 21% from
$881.8 million at December 31, 2009 to $693.9 million at December 31, 2010. Net
interest income for 2010 was $22.3 million compared to $21.1 million for 2009
representing an increase of $1.2 million, or 6%. The improvement in net interest
income was primarily related to lower rates paid on deposits due to the maturities
of brokered and retail certificates of deposits, redeemed FHLB advances, and a
non-recurring adjustment to net interest income. The loan loss provision was $21.2
million for 2010 compared to $18.7 million for 2009. For 2010, total other income
was $6.2 million compared to a total other loss of $4.8 million for 2009. The
improvement is mostly attributed to a $10.5 million reduction in impairment charges
recorded on the available-for-sale investment portfolio in 2010 compared to 2009.
In 2010 total other expense was $35.1 million, an increase of $1.6 million, or 5%,
from $33.5 million in 2009. The increase is mostly associated with an increase in
OREO impairment charges of $2.8 million and impairment of $1.6 million in real
estate joint ventures. The net loss for 2010 was $25.1 million compared to a net
loss of $34.7 million for 2009. |
|
|
§ |
|
Tax Lien segment: At December 31, 2010, the Tax Lien segment had total assets
of $100.6 million compared to $105.0 million at December 31, 2009 representing a
decrease of $4.4 million, or 4%. Net interest income increased $536,000, or 9%,
from $6.0 million in 2009 to $6.5 million in 2010. The provision for losses
declined from $624,000 in 2009 to $129,000 in 2010. The 2009 |
43
|
|
|
provision was related to a specific reserve for a non-accrual loan with a tax lien
portfolio located in Alabama. Total other income was $389,000 in 2010 compared to
$313,000 in 2009. Total other income is derived mostly from the gains on sale of
OREO property. Total other expense decreased $1.2 million, or 42%, from $2.9
million for 2009 to $1.7 million for 2010. The decrease in other total expense was
related to a decline in legal and professional fees. Net income was $1.8 million in
2010 compared to $1.0 million for 2009. |
|
|
§ |
|
Equity Investment segment: At December 31, 2010 the Equity Investment segment
had total assets of $5.6 million compared to $8.7 million at December 31, 2009
representing a decline of $3.1 million, or 35%. The decline was primarily related
to a $2.6 million impairment charge as a result of a slow-down in condominium
unit sales following the end of the tax credit incentive that was being offered by
the government. The measurement and recognition of the impairment was based on
estimated future discounted operating cash flows. As a result of the impairment
charge, the net loss for 2010 was $1.2 million compared to net income for 2009 of
$179,000. |
Financial Condition
Total assets decreased $312.1 million, or 24.1%, to $980.6 million at December 31, 2010 from $1.3
billion at year-end 2009.
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 decreased $6.6 million from $58.3 million at December 31, 2009 to $51.7
million at December 31, 2010. The average balance of cash and cash equivalents was approximately
$74.4 million for 2010 versus $63.9 million for 2009. The high level of cash for 2010 and 2009 was
primarily related to maintaining strong liquidity during this current economic environment. 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 $57.4 million in 2010.
Investment Securities Available for Sale (AFS): AFS investment securities represented
35% of average interest earning assets during 2010 and consisted of government secured agency
bonds, government secured mortgage-backed securities, collateralized mortgage obligations (CMOs),
capital trust security issues of regional banks, domestic corporate debt and third party managed
equity funds. At December 31, 2010, AFS investment securities were $317.2 million as compared to
$438.7 million at December 31, 2009, a decrease of $121.5 million. The decrease was primarily due
to the sale of debt securities and government agencies to reduce credit risk and extension risk
within the investment portfolio and provide funds for the payoff of maturing retail CDs, brokered
CDs and FHLB advances. The sale of these investments was partially offset by the purchase of
liquid, cash-flowing mortgage backed securities and U. S. government agency CMOs.
Loans: The Companys primary earning assets are loans, representing approximately 59% of
average earning assets during 2010. 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 2010, total loans held for investment decreased $190.0 million to $496.9
million at December 31, 2009 from $686.9 million at December 31, 2009. The decline was primarily
due to a reduction of $63.5 million related to the Royal Asian sale, loan charge-offs of $31.7
million,
44
transfers to LHFS of $29.6 million, and transfers to OREO of approximately $16.8 million in
non-performing construction and land development, non-residential, and residential real estate
loans.
Non-residential real estate, construction loans and land development make up a significant portion
of our loan portfolio and represented 57% of total loans at December 31, 2010, which amounted to a
4% decline from 61% of total loans at December 31, 2009. Management believes our current loan loss
reserve is adequate at December 31, 2010 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 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) general reserves reflecting historical loss rates by loan type, (2)
specific reserves for risk-rated credits based on probable losses on an individual or portfolio
basis and (3) qualitative reserves based upon current economic conditions and other risk factors.
The loan portfolio is stratified into loan segments that have similar risk characteristics. The
general allowance is based upon historical loss rates using a three-year rolling average of the
historical loss experienced within each loan segment. The qualitative factors used to adjust the
historical loss experience address various risk characteristics of the Companys loan and lease
portfolio include evaluating: (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, (6) quality of loan review and board oversight, (7) changes in lending policies
and procedures, and (8) changes in lending staff. Each factor is assigned a value to reflect
improving, stable or declining conditions based on managements best judgment using relevant
information available at the time of the evaluation. Adjustments to the factors are supported
through documentation of changes in conditions in a report accompanying the allowance for loan loss
calculation.
The specific reserves are determined utilizing standards required under ASC Topic 310. 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. Non-accrual loans are evaluated for impairment on
an individual basis considering all known relevant factors that may affect loan collectability such
as the borrowers overall financial condition, resources and payment record, support available from
financial guarantors and the sufficiency of current collateral values (current appraisals or rent
rolls for income producing properties), and risks inherent in different kinds of lending (such as
source of repayment, quality of borrower and concentration of credit quality). Non-accrual loans
that experience insignificant payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrowers prior payment record
and the amount of the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and industrial loans, commercial real estate loans
and commercial construction loans by either the present value of expected future cash flows
discounted at the loans effective interest rate or the fair value of the collateral if the loan is
collateral dependent. An allowance for loan losses is established for an impaired loan if its
carrying value exceeds its estimated fair value. The estimated fair values of substantially all of
the Companys impaired loans are measured based on the estimated fair value of the loans
collateral. The
45
Company obtains third-party appraisals on the fair value of real estate collateral. Appraised
values are discounted to arrive at the estimated selling price of the collateral, which is
considered to be the estimated fair value. The discounts also include estimated costs to sell the
property. For commercial and industrial loans secured by non-real estate collateral, such as
accounts receivable, inventory and equipment, estimated fair values are determined based on the
borrowers financial statements, inventory reports, accounts receivable aging or equipment
appraisals or invoices. Indications of value from these sources are generally discounted based on
the age of the financial information or the quality of the assets. Large groups of smaller balance
homogeneous loans are collectively evaluated for impairment. Once a loan is determined to be
impaired it will be deducted from the portfolio and the net remaining balance will be used in the
general and qualitative analysis.
Analysis of the Allowance for Loan and Lease Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Total Loans |
|
$ |
496,854 |
|
|
$ |
686,864 |
|
|
$ |
700,722 |
|
|
$ |
644,475 |
|
|
$ |
602,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily average loan balance |
|
$ |
643,450 |
|
|
$ |
715,521 |
|
|
$ |
676,761 |
|
|
$ |
636,612 |
|
|
$ |
618,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the year |
|
$ |
30,331 |
|
|
$ |
28,908 |
|
|
$ |
19,282 |
|
|
$ |
11,455 |
|
|
$ |
10,276 |
|
Charge-offs by loan type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate residential |
|
|
731 |
|
|
|
1,361 |
|
|
|
37 |
|
|
|
195 |
|
|
|
631 |
|
Real Estate residential-mezzanine |
|
|
2,480 |
|
|
|
|
|
|
|
2,220 |
|
|
|
|
|
|
|
|
|
Construction and land development |
|
|
13,413 |
|
|
|
6,231 |
|
|
|
3,852 |
|
|
|
2,408 |
|
|
|
|
|
Construction and land develop-mezzanine |
|
|
|
|
|
|
2,756 |
|
|
|
1,540 |
|
|
|
1,579 |
|
|
|
|
|
Real Estate non-residential |
|
|
7,352 |
|
|
|
7,404 |
|
|
|
1,330 |
|
|
|
294 |
|
|
|
5 |
|
Real Estate non-residential-mezzanine |
|
|
|
|
|
|
1,132 |
|
|
|
1,675 |
|
|
|
|
|
|
|
|
|
Real Estate multi-family |
|
|
787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases |
|
|
972 |
|
|
|
676 |
|
|
|
642 |
|
|
|
286 |
|
|
|
11 |
|
Commercial and industrial |
|
|
5,930 |
|
|
|
258 |
|
|
|
1,009 |
|
|
|
704 |
|
|
|
|
|
Tax certificates |
|
|
49 |
|
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
25 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73 |
|
|
|
|
Total charge-offs |
|
|
31,714 |
|
|
|
19,818 |
|
|
|
12,327 |
|
|
|
5,466 |
|
|
|
745 |
|
Recoveries by loan type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development |
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
Real Estate residential |
|
|
313 |
|
|
|
190 |
|
|
|
6 |
|
|
|
28 |
|
|
|
100 |
|
Real Estate non-residential |
|
|
684 |
|
|
|
431 |
|
|
|
|
|
|
|
4 |
|
|
|
14 |
|
Real Estate multi-family |
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
81 |
|
|
|
15 |
|
|
|
106 |
|
|
|
201 |
|
|
|
2 |
|
Leases |
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
Total recoveries |
|
|
1,300 |
|
|
|
636 |
|
|
|
112 |
|
|
|
267 |
|
|
|
121 |
|
|
|
|
Net loan charge-offs |
|
|
(30,414 |
) |
|
|
(19,182 |
) |
|
|
(12,215 |
) |
|
|
(5,199 |
) |
|
|
(624 |
) |
Provision for loan and lease losses |
|
|
22,140 |
|
|
|
20,605 |
|
|
|
21,841 |
|
|
|
13,026 |
|
|
|
1,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance related to disposed assets |
|
|
(928 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
21,129 |
|
|
$ |
30,331 |
|
|
$ |
28,908 |
|
|
$ |
19,282 |
|
|
$ |
11,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans |
|
|
(4.73 |
%) |
|
|
(2.68 |
%) |
|
|
(1.80 |
%) |
|
|
(0.82 |
%) |
|
|
(0.10 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance to total loans at year-end |
|
|
4.25 |
% |
|
|
4.42 |
% |
|
|
4.13 |
% |
|
|
2.99 |
% |
|
|
1.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Analysis of the Allowance for Loan and Lease Losses by Loan Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
|
|
|
|
|
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 |
|
$ |
3,797 |
|
|
|
14.9 |
% |
|
$ |
6,542 |
|
|
|
15.1 |
% |
|
$ |
2,403 |
|
|
|
12.3 |
% |
|
$ |
2,124 |
|
|
|
12.0 |
% |
|
$ |
559 |
|
|
|
7.0 |
% |
Construction |
|
|
1,117 |
|
|
|
5.8 |
% |
|
|
4,713 |
|
|
|
7.6 |
% |
|
|
11,548 |
|
|
|
23.8 |
% |
|
|
7,674 |
|
|
|
14.4 |
% |
|
|
4,117 |
|
|
|
29.0 |
% |
Land development (1) |
|
|
2,859 |
|
|
|
10.2 |
% |
|
|
3,182 |
|
|
|
9.7 |
% |
|
|
2,359 |
|
|
|
10.6 |
% |
|
|
|
|
|
|
12.2 |
% |
|
|
|
|
|
|
0.0 |
% |
Construction and land development -
mezzanine |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
1,415 |
|
|
|
0.3 |
% |
|
|
2,493 |
|
|
|
1.0 |
% |
|
|
409 |
|
|
|
1.0 |
% |
Real Estate residential |
|
|
1,106 |
|
|
|
5.9 |
% |
|
|
2,762 |
|
|
|
7.1 |
% |
|
|
747 |
|
|
|
3.9 |
% |
|
|
1,014 |
|
|
|
6.5 |
% |
|
|
845 |
|
|
|
7.0 |
% |
Real Estate residential mezzanine |
|
|
|
|
|
|
0.0 |
% |
|
|
1,000 |
|
|
|
0.4 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
Real Estate non-residential |
|
|
9,534 |
|
|
|
39.0 |
% |
|
|
9,824 |
|
|
|
40.3 |
% |
|
|
5,172 |
|
|
|
33.4 |
% |
|
|
4,746 |
|
|
|
40.5 |
% |
|
|
4,941 |
|
|
|
46.0 |
% |
Real Estate non-residential -
mezzanine |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
1,188 |
|
|
|
0.6 |
% |
|
|
204 |
|
|
|
1.4 |
% |
|
|
224 |
|
|
|
1.0 |
% |
Real Estate multi-family |
|
|
652 |
|
|
|
2.1 |
% |
|
|
215 |
|
|
|
3.2 |
% |
|
|
133 |
|
|
|
2.0 |
% |
|
|
59 |
|
|
|
1.1 |
% |
|
|
36 |
|
|
|
1.0 |
% |
Real Estate multi-family mezzanine |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
6 |
|
|
|
0.5 |
% |
|
|
20 |
|
|
|
1.0 |
% |
Tax certificates |
|
|
380 |
|
|
|
14.2 |
% |
|
|
290 |
|
|
|
10.6 |
% |
|
|
2,735 |
|
|
|
9.1 |
% |
|
|
185 |
|
|
|
7.1 |
% |
|
|
|
|
|
|
5.0 |
% |
Lease financing |
|
|
1,670 |
|
|
|
7.8 |
% |
|
|
1,757 |
|
|
|
5.7 |
% |
|
|
1,183 |
|
|
|
3.7 |
% |
|
|
763 |
|
|
|
3.1 |
% |
|
|
293 |
|
|
|
2.0 |
% |
Other |
|
|
12 |
|
|
|
0.2 |
% |
|
|
25 |
|
|
|
0.3 |
% |
|
|
15 |
|
|
|
0.2 |
% |
|
|
14 |
|
|
|
0.2 |
% |
|
|
11 |
|
|
|
0.0 |
% |
Unallocated |
|
|
2 |
|
|
|
0.0 |
% |
|
|
21 |
|
|
|
0.0 |
% |
|
|
10 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
21,129 |
|
|
|
100.0 |
% |
|
$ |
30,331 |
|
|
|
100.0 |
% |
|
$ |
28,908 |
|
|
|
100.0 |
% |
|
$ |
19,282 |
|
|
|
100.0 |
% |
|
$ |
11,455 |
|
|
|
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 $22.1 million in 2010 compared to $20.6 million in
2009. Included in the 2010 provision was $11.4 million in charge-offs on loans transferred to
LHFS. The historical loss calculation of the allowance for loan and lease losses has been
specifically impacted by the recent charge-off history of the Company. The deterioration of the
real estate market these past few years has significantly impacted construction and real estate
loans throughout the banking industry. This weakened sales market has affected land development,
construction and real estate loans of the Company. Construction and land, non-residential real
estate, and commercial loans represent 46%, 23% and 14%, respectively of the $43.2 million in
non-accrual loans held for investment at December 31, 2010. Non-accrual loans classified as LHFS
were $22.6 million at December 31, 2010. Total charge-offs recorded in 2010 related to
construction and land development loans and non-residential real estate loans were $20.8 million,
or 66%, of total charge-offs in 2010.
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. The historical loss calculation of the allowance for loan and lease
losses had 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 had
affected land development, construction and mezzanine loans of the Company. 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, which included an $8.3 million
increase in specific reserves on impaired loans. The 2008 provision for loan and lease losses was
a reflection of the deteriorating real estate market that continued from 2007 into 2008. It had
caused housing sales to slow and negatively impacted construction loans throughout the banking
industry. The weak sales market had affected land development, construction and mezzanine loans of
the Company. Consequently, non-accrual loans increased $60.4 million 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
47
the real
estate market was also reflected in the charge-offs of construction
and land development loans and construction and land development mezzanine loans. Those two loan categories represented $6.5
million, or 53%, of total charge-offs in 2008.
Management believes that the allowance for loan and lease losses at December 31, 2010 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 2010, there were changes
in assumptions that affected the allowance. These changes included increasing the qualitative risk
factors related to economic conditions on both a local and national level and the trends in
delinquencies and other non-performing loans.
Deposits: The Companys deposits are an important source of funding. Total deposits of
$693.9 million at December 31, 2010 decreased $187.8 million, or 21.3%, from $881.8 million at
December 31, 2009. The decrease was partially related to an $89.3 million reduction as a result of
the disposition of Royal Asian. Brokered deposits declined $117.9 million, or 57%, from $206.9
million at December 31, 2009 to $89.0 million at December 31, 2010 as the Company redeemed all
maturing brokered deposits as required under the Orders. Time deposit accounts of $314.3 million at
December 31, 2010 decreased $67.9 million, or 18%, from $382.2 million at December 31, 2009
primarily as a result of the reduction of $65.8 million related to Royal Asian time deposits.
Money market accounts of $180.9 million increased $12.0 million (which includes a reduction of
$11.2 million related to Royal Asian money market accounts), or 7%, 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 decreased $10.3 million, or 16%, which was primarily due to a $9.4
million reduction related to Royal Asian demand deposits.
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 $209.5 million at year end 2009 to $110.7 million at December
31, 2010 due to pay downs of maturing advances to reduce our reliance on non-core funding sources.
Short term borrowings amounted to $22.0 million at December 31, 2010 versus $114.5 million at
December 31, 2009 while long term advances for the periods ending December 31, 2010 and 2009 were
$88.7 million and $95.0 million, respectively.
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
better supports the capital position of Royal Bank, a wholly owned subsidiary of the Company. As
of December 31, 2010 the trust preferred interest payment in arrears was $1.2 million and has been
recorded in interest expense and accrued interest payable.
At December 31, 2010, the Company has an amortizing loan outstanding with PNC Bank in the amount of
$4.2 million. The Company also has $40.0 million in repurchase agreements with PNC. These
repurchase agreements are callable between 2011 and 2013 and have a final maturity date of January
7, 2018.
Other Liabilities: At December 31, 2010, other liabilities of $17.9 million increased $1.0
million from December 31, 2009. This was principally due to an increase of $1.0 million related to
unfunded pension plan obligations.
Shareholders Equity: Shareholders equity decreased $20.5 million, or 20.2%, in 2010 to
$80.7 million primarily due net losses of $24.1 million which was partially offset by an increase
in accumulated other comprehensive income of $3.6 million due to improvements in valuations in both
the bond and stock markets that positively impacted the investment portfolio.
48
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 2010. 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, 2010, liquidity as a percent of deposits was 31% and liquidity as a percent of total
liabilities was 24%. At December 31, 2009, liquidity as a percent of deposits was 33% and
liquidity as a percent of total liabilities was 24%. 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. Royal Bank is on an overcollateralization status,
with a 105% pledged collateral requirement, with the FHLB. The available amount for future
borrowings will be based on the amount of collateral to be pledged. The Company has 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. The Companys liquidity committee meets monthly to increase the oversight
role of liquidity management during this challenging economic environment.
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, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2010 |
|
|
|
|
|
|
|
Less than one |
|
|
One to three |
|
|
Four to five |
|
|
More than five |
|
(In thousands) |
|
Total |
|
|
year |
|
|
years |
|
|
years |
|
|
years |
|
FHLB advances |
|
$ |
110,719 |
|
|
$ |
22,000 |
|
|
$ |
88,719 |
|
|
$ |
|
|
|
$ |
|
|
Operating leases |
|
|
3,135 |
|
|
|
771 |
|
|
|
1,286 |
|
|
|
495 |
|
|
|
583 |
|
PNC Bank |
|
|
44,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,230 |
|
Benefit obligations |
|
|
9,346 |
|
|
|
583 |
|
|
|
1,307 |
|
|
|
1,660 |
|
|
|
5,796 |
|
Standby letters of credit |
|
|
2,755 |
|
|
|
2,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt |
|
|
25,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,774 |
|
Non-interest bearing deposits |
|
|
52,872 |
|
|
|
52,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits |
|
|
237,668 |
|
|
|
103,943 |
|
|
|
133,725 |
|
|
|
|
|
|
|
|
|
Time deposits |
|
|
403,373 |
|
|
|
273,414 |
|
|
|
108,616 |
|
|
|
9,926 |
|
|
|
11,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
889,872 |
|
|
$ |
456,338 |
|
|
$ |
333,653 |
|
|
$ |
12,081 |
|
|
$ |
87,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
Interest-Rate Sensitivity: Interest rate sensitivity is a function of the re-pricing
characteristics of the financial institutions assets and liabilities. These include the volume of
assets and liabilities re-pricing, the timing of re-pricing, and the relative levels of re-pricing.
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 re-pricing, they may react in different degrees to changes in market
interest rates. Additionally, re-pricing 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, 2010, 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,
2010, the Company is in a liability sensitive position of $17.0 million, which indicates that
within one year the re-pricing of liabilities is sooner than the re-pricing of assets.
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2010 |
|
|
|
|
|
|
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 |
|
$ |
24.9 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
26.8 |
|
|
$ |
51.7 |
|
Federal funds sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities |
|
|
20.8 |
|
|
|
36.4 |
|
|
|
166.7 |
|
|
|
87.3 |
|
|
|
6.0 |
|
|
|
317.2 |
|
Loans: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
|
87.5 |
|
|
|
22.8 |
|
|
|
162.2 |
|
|
|
11.9 |
|
|
|
|
|
|
|
284.4 |
|
Variable rate |
|
|
169.4 |
|
|
|
38.1 |
|
|
|
22.6 |
|
|
|
11.9 |
|
|
|
(21.1 |
) |
|
|
220.9 |
|
|
|
|
Total loans |
|
|
256.9 |
|
|
|
60.9 |
|
|
|
184.8 |
|
|
|
23.8 |
|
|
|
(21.1 |
) |
|
|
505.3 |
|
Other assets (3) |
|
|
|
|
|
|
19.0 |
|
|
|
|
|
|
|
|
|
|
|
87.4 |
|
|
|
106.4 |
|
|
|
|
Total Assets |
|
$ |
302.6 |
|
|
$ |
116.3 |
|
|
$ |
351.5 |
|
|
$ |
111.1 |
|
|
$ |
99.1 |
|
|
$ |
980.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest bearing deposits |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
52.9 |
|
|
$ |
52.9 |
|
Interest bearing deposits |
|
|
26.0 |
|
|
|
78.0 |
|
|
|
133.6 |
|
|
|
|
|
|
|
|
|
|
|
237.6 |
|
Certificate of deposits |
|
|
66.3 |
|
|
|
207.1 |
|
|
|
118.6 |
|
|
|
11.4 |
|
|
|
|
|
|
|
403.4 |
|
|
|
|
Total deposits |
|
|
92.3 |
|
|
|
285.1 |
|
|
|
252.2 |
|
|
|
11.4 |
|
|
|
52.9 |
|
|
|
693.9 |
|
Borrowings (1) |
|
|
53.6 |
|
|
|
4.9 |
|
|
|
82.2 |
|
|
|
40.0 |
|
|
|
|
|
|
|
180.7 |
|
Other liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.9 |
|
|
|
21.9 |
|
Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84.1 |
|
|
|
84.1 |
|
|
|
|
Total liabilities & capital |
|
$ |
145.9 |
|
|
$ |
290.0 |
|
|
$ |
334.4 |
|
|
$ |
51.4 |
|
|
$ |
158.9 |
|
|
$ |
980.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate GAP |
|
$ |
156.7 |
|
|
$ |
(173.7 |
) |
|
$ |
17.1 |
|
|
$ |
59.7 |
|
|
$ |
(59.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest rate GAP |
|
$ |
156.7 |
|
|
$ |
(17.0 |
) |
|
$ |
0.1 |
|
|
$ |
59.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAP to total assets |
|
|
16 |
% |
|
|
(18 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAP to total equity |
|
|
186 |
% |
|
|
(207 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative GAP to total assets |
|
|
16 |
% |
|
|
(2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative GAP to total equity |
|
|
186 |
% |
|
|
(20 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest earning assets are included in the period in which the balances are expected to
be repaid and/or re-priced as a result of anticipated prepayments, scheduled rate adjustments,
and contractual maturities. |
|
(2) |
|
Reflects principal maturing within the specified periods for fixed and re-pricing 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
re-price or mature in the same time periods. The interest rates on certain assets and liabilities
may change at different times than changes in market interest rates, with some 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.
Interest Rate Swaps: For asset/liability management purposes, the Company has used
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
51
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.
As a consequence of the 2008 Lehman Brothers Holdings, Inc. (Lehman) bankruptcy filing, the swap
agreements and cash flow hedge that existed at the time of the bankruptcy filing 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. Because of the
uncertainty surrounding the litigation and the Lehman bankruptcy, the Company classified the
collateral as other-than-temporarily impaired for the entire amount as of December 31, 2008. In
the fourth quarter of 2010, the Company sold its claim and recorded a gain of $1.7 million. The
Company did not have any interest rate swaps agreements at December 31, 2010 and 2009.
Capital Adequacy
In connection with a recent bank regulatory examination, the FDIC concluded, based upon its
interpretation of the Consolidated Reports of Condition and Income (the Call Report) instructions
and under regulatory accounting principles (RAP), that income from Royal Banks tax lien business
should be recognized on a cash basis, not an accrual basis. Royal Banks current accrual method is
in accordance with US GAAP. Royal Bank disagrees with the FDICs conclusion and filed the Call
Report for September 30, 2010 and December 31, 2010 in accordance with US GAAP. However, a change
in the manner of revenue recognition for the tax lien business for regulatory accounting purposes
affects Royal Banks capital ratios as shown below. Royal Bank is in discussions with the FDIC to
resolve the difference of opinion.
The table below sets forth Royal Banks capital ratios under RAP, based on the FDICs
interpretation of the Call Report instructions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
2010 |
|
2009 |
|
2008 |
Royal Bank |
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratio |
|
|
8.03 |
% |
|
|
8.09 |
% |
|
|
7.81 |
% |
Risk based capital ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 |
|
|
12.49 |
% |
|
|
12.09 |
% |
|
|
8.99 |
% |
Total |
|
|
13.76 |
% |
|
|
13.37 |
% |
|
|
10.26 |
% |
The tables below reflect the adjustments to the net loss as well as the capital ratios under US
GAAP:
|
|
|
|
|
|
|
For the year ended |
|
(In thousands) |
|
December 31, 2010 |
|
RAP net loss |
|
$ |
(30,011 |
) |
Tax lien adjustment, net of noncontrolling interest |
|
|
8,126 |
|
|
|
|
|
US GAAP net loss |
|
$ |
(21,885 |
) |
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
As adjusted |
|
|
under RAP |
|
for US GAAP |
Total capital (to risk-weighted assets) |
|
|
13.76 |
% |
|
|
15.54 |
% |
Tier I capital (to risk-weighted assets) |
|
|
12.49 |
% |
|
|
14.27 |
% |
Tier I capital (to average assets, leverage) |
|
|
8.03 |
% |
|
|
9.24 |
% |
The tables below reflect the Companys capital ratios and the Companys performance ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
2010 |
|
2009 |
|
2008 |
Company |
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratio |
|
|
9.68 |
% |
|
|
9.78 |
% |
|
|
10.30 |
% |
Risk based capital ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 |
|
|
15.93 |
% |
|
|
14.18 |
% |
|
|
11.77 |
% |
Total |
|
|
17.21 |
% |
|
|
15.45 |
% |
|
|
13.04 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital performance |
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
(2.04 |
%) |
|
|
(2.57 |
%) |
|
|
(3.20 |
%) |
Return on average equity |
|
|
(23.19 |
%) |
|
|
(30.94 |
%) |
|
|
(29.04 |
%) |
The Company has filed the Consolidated Financial Statements for Bank Holding Companies-FR Y-9C
(FR Y-9C) as of December 31, 2010 consistent with GAAP and the FR Y-9C instructions. In the
event that a similar adjustment for RAP purposes would be required by the Federal Reserve on the
holding company level, the adjusted ratios are shown in the table below.
|
|
|
|
|
|
|
For the year ended |
|
(In thousands) |
|
December 31, 2010 |
|
US GAAP net loss |
|
$ |
(24,093 |
) |
Tax lien adjustment, net of noncontrolling interest |
|
|
(8,126 |
) |
|
|
|
|
RAP net loss |
|
$ |
(32,219 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
As adjusted |
|
|
under US GAAP |
|
for RAP |
Total capital (to risk-weighted assets) |
|
|
17.21 |
% |
|
|
15.48 |
% |
Tier I capital (to risk-weighted assets) |
|
|
15.93 |
% |
|
|
14.20 |
% |
Tier I capital (to average assets, leverage) |
|
|
9.68 |
% |
|
|
8.56 |
% |
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, 2010, 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, 2010, 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. 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, 2010. See Note 15 Regulatory Capital Requirements of
the Notes to Consolidated Financial
Statements in Item 8 of this Report. While Royal Bank met the criteria for a well capitalized
institution which is a
53
leverage ratio of 5%, a Tier 1 ratio of 8%, and a total capital ratio of
10%, Royal Bank, as a party to the Orders, must classify itself as adequately capitalized.
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.
Management Options to Purchase Securities
The 2007 Long-Term Incentive Plan was approved by shareholders at the 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,
2010, 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, 2010, 385,005 of the options that have been granted are outstanding, which are exercisable at
20% per year. At December 31, 2010, options covering 369,448 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, 2010, 74,086 of the options that have been
granted are outstanding, and all are exercisable. The ability to grant new options under this plan
has expired.
54
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
2006 |
|
|
|
|
|
Commercial and industrial |
|
$ |
74,027 |
|
|
|
14.9 |
% |
|
$ |
104,063 |
|
|
|
15.1 |
% |
|
$ |
86,278 |
|
|
|
12.3 |
% |
|
$ |
77,856 |
|
|
|
12.1 |
% |
|
$ |
43,019 |
|
|
|
7.2 |
% |
Construction |
|
|
29,044 |
|
|
|
5.8 |
% |
|
|
52,196 |
|
|
|
7.6 |
% |
|
|
167,204 |
|
|
|
23.8 |
% |
|
|
92,779 |
|
|
|
14.4 |
% |
|
|
172,745 |
|
|
|
29.1 |
% |
Construction
and land development mezzanine |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
2,421 |
|
|
|
0.3 |
% |
|
|
6,443 |
|
|
|
1.0 |
% |
|
|
5,177 |
|
|
|
0.9 |
% |
Land development (1) |
|
|
50,594 |
|
|
|
10.2 |
% |
|
|
66,878 |
|
|
|
9.7 |
% |
|
|
74,168 |
|
|
|
10.6 |
% |
|
|
78,874 |
|
|
|
12.2 |
% |
|
|
|
|
|
|
0.0 |
% |
Real Estate residential |
|
|
29,299 |
|
|
|
5.9 |
% |
|
|
48,498 |
|
|
|
7.1 |
% |
|
|
27,480 |
|
|
|
3.9 |
% |
|
|
42,286 |
|
|
|
6.5 |
% |
|
|
43,338 |
|
|
|
7.3 |
% |
Real Estate non-residential |
|
|
194,203 |
|
|
|
39.0 |
% |
|
|
277,234 |
|
|
|
40.3 |
% |
|
|
234,573 |
|
|
|
33.4 |
% |
|
|
261,350 |
|
|
|
40.5 |
% |
|
|
268,162 |
|
|
|
45.2 |
% |
Real Estate
non-residential mezzanine |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
4,111 |
|
|
|
0.6 |
% |
|
|
8,749 |
|
|
|
1.4 |
% |
|
|
8,283 |
|
|
|
1.4 |
% |
Real Estate multi-family |
|
|
10,277 |
|
|
|
2.1 |
% |
|
|
22,017 |
|
|
|
3.2 |
% |
|
|
14,059 |
|
|
|
2.0 |
% |
|
|
6,887 |
|
|
|
1.1 |
% |
|
|
3,953 |
|
|
|
0.7 |
% |
Real Estate residential mezzanine |
|
|
|
|
|
|
0.0 |
% |
|
|
2,480 |
|
|
|
0.4 |
% |
|
|
335 |
|
|
|
0.0 |
% |
|
|
3,504 |
|
|
|
0.5 |
% |
|
|
2,129 |
|
|
|
0.4 |
% |
Tax certificates |
|
|
70,443 |
|
|
|
14.2 |
% |
|
|
73,106 |
|
|
|
10.6 |
% |
|
|
64,168 |
|
|
|
9.1 |
% |
|
|
46,090 |
|
|
|
7.1 |
% |
|
|
32,235 |
|
|
|
5.4 |
% |
Lease financing |
|
|
38,725 |
|
|
|
7.8 |
% |
|
|
39,097 |
|
|
|
5.7 |
% |
|
|
26,123 |
|
|
|
3.7 |
% |
|
|
19,778 |
|
|
|
3.1 |
% |
|
|
13,404 |
|
|
|
2.3 |
% |
Other |
|
|
793 |
|
|
|
0.2 |
% |
|
|
2,173 |
|
|
|
0.3 |
% |
|
|
1,243 |
|
|
|
0.2 |
% |
|
|
1,424 |
|
|
|
0.2 |
% |
|
|
1,333 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total gross loans |
|
$ |
497,405 |
|
|
|
100 |
% |
|
$ |
687,742 |
|
|
|
100 |
% |
|
$ |
702,163 |
|
|
|
100 |
% |
|
$ |
646,020 |
|
|
|
100 |
% |
|
$ |
593,778 |
|
|
|
100 |
% |
Unearned income |
|
|
(551 |
) |
|
|
|
|
|
|
(878 |
) |
|
|
|
|
|
|
(1,441 |
) |
|
|
|
|
|
|
(1,545 |
) |
|
|
|
|
|
|
(1,564 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
496,854 |
|
|
|
|
|
|
$ |
686,864 |
|
|
|
|
|
|
$ |
700,722 |
|
|
|
|
|
|
$ |
644,475 |
|
|
|
|
|
|
$ |
592,214 |
|
|
|
|
|
Allowance for loan loss |
|
|
(21,129 |
) |
|
|
|
|
|
|
(30,331 |
) |
|
|
|
|
|
|
(28,908 |
) |
|
|
|
|
|
|
(19,282 |
) |
|
|
|
|
|
|
(11,455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net loans |
|
$ |
475,725 |
|
|
|
|
|
|
$ |
656,533 |
|
|
|
|
|
|
$ |
671,814 |
|
|
|
|
|
|
$ |
625,193 |
|
|
|
|
|
|
$ |
580,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Land development balances were not segregated from construction and land development for
2006. |
Credit Quality
The following table presents the principal amounts of non-accrual loans held for investment and
other real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Non-accrual loans (1) |
|
$ |
43,162 |
|
|
$ |
73,679 |
|
|
$ |
85,830 |
|
|
$ |
25,401 |
|
|
$ |
6,748 |
|
Other real estate owned |
|
|
29,244 |
|
|
|
30,317 |
|
|
|
10,346 |
|
|
|
1,048 |
|
|
|
924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets |
|
$ |
72,406 |
|
|
$ |
103,996 |
|
|
$ |
96,176 |
|
|
$ |
26,449 |
|
|
$ |
7,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets to total assets |
|
|
7.38 |
% |
|
|
8.04 |
% |
|
|
8.18 |
% |
|
|
2.07 |
% |
|
|
0.57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans |
|
|
8.69 |
% |
|
|
10.73 |
% |
|
|
12.25 |
% |
|
|
3.94 |
% |
|
|
1.14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss to non-accrual loans |
|
|
48.95 |
% |
|
|
41.17 |
% |
|
|
33.68 |
% |
|
|
75.91 |
% |
|
|
169.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans |
|
|
496,854 |
|
|
|
686,864 |
|
|
|
700,722 |
|
|
|
|
|
|
|
|
|
Total Assets |
|
|
980,626 |
|
|
|
1,292,726 |
|
|
|
1,175,586 |
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses |
|
|
21,129 |
|
|
|
30,331 |
|
|
|
28,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALL / Loans & Leases (MD & A) |
|
|
4.25 |
% |
|
|
4.42 |
% |
|
|
4.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
(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. |
55
Non-accrual loan activity for LHFI for each of the four quarters in 2010 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter Actvity |
|
|
|
Balance at |
|
|
|
|
|
|
Payments and |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
other |
|
|
|
|
|
|
Transfer to |
|
|
Balance at |
|
(In thousands) |
|
2009 |
|
|
Additions |
|
|
decreases |
|
|
Charge-offs |
|
|
OREO |
|
|
March 31, 2010 |
|
Construction |
|
$ |
18,316 |
|
|
$ |
2,130 |
|
|
$ |
(1,543 |
) |
|
$ |
(55 |
) |
|
$ |
|
|
|
$ |
18,848 |
|
Land development |
|
|
5,908 |
|
|
|
7,480 |
|
|
|
(2,857 |
) |
|
|
|
|
|
|
|
|
|
|
10,531 |
|
Real Estate-non-residential |
|
|
19,584 |
|
|
|
3 |
|
|
|
(420 |
) |
|
|
|
|
|
|
|
|
|
|
19,167 |
|
Commercial & industrial |
|
|
11,779 |
|
|
|
236 |
|
|
|
(637 |
) |
|
|
(2,031 |
) |
|
|
|
|
|
|
9,347 |
|
Residential real estate |
|
|
12,445 |
|
|
|
1,190 |
|
|
|
(427 |
) |
|
|
|
|
|
|
|
|
|
|
13,208 |
|
Residential
real estate mezzanine |
|
|
2,480 |
|
|
|
|
|
|
|
|
|
|
|
(1,463 |
) |
|
|
|
|
|
|
1,017 |
|
Multi-family |
|
|
|
|
|
|
8,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,311 |
|
Leasing |
|
|
627 |
|
|
|
466 |
|
|
|
|
|
|
|
(179 |
) |
|
|
|
|
|
|
914 |
|
Tax certificates |
|
|
2,540 |
|
|
|
|
|
|
|
(221 |
) |
|
|
|
|
|
|
|
|
|
|
2,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
73,679 |
|
|
$ |
19,816 |
|
|
$ |
(6,105 |
) |
|
$ |
(3,728 |
) |
|
$ |
|
|
|
$ |
83,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2nd Quarter Actvity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
other |
|
|
|
|
|
|
|
|
|
|
Transfer to |
|
|
Balance at |
|
(In thousands) |
|
March 31, 2010 |
|
|
Additions |
|
|
decreases |
|
|
Reclassed |
|
|
Charge-offs |
|
|
OREO |
|
|
June 30, 2010 |
|
Construction |
|
$ |
18,848 |
|
|
$ |
137 |
|
|
$ |
(1,932 |
) |
|
$ |
12,540 |
|
|
$ |
(4,119 |
) |
|
$ |
|
|
|
$ |
25,474 |
|
Land development |
|
|
10,531 |
|
|
|
7,910 |
|
|
|
(73 |
) |
|
|
300 |
|
|
|
(1,485 |
) |
|
|
|
|
|
|
17,183 |
|
Real Estate-non-residential |
|
|
19,167 |
|
|
|
5,192 |
|
|
|
(1,250 |
) |
|
|
(4,000 |
) |
|
|
(1,156 |
) |
|
|
(47 |
) |
|
|
17,906 |
|
Commercial & industrial |
|
|
9,347 |
|
|
|
96 |
|
|
|
(109 |
) |
|
|
|
|
|
|
(2,152 |
) |
|
|
(499 |
) |
|
|
6,683 |
|
Residential real estate |
|
|
13,208 |
|
|
|
187 |
|
|
|
(14 |
) |
|
|
(8,840 |
) |
|
|
|
|
|
|
|
|
|
|
4,541 |
|
Residential
real estate mezzanine |
|
|
1,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,017 |
) |
|
|
|
|
|
|
|
|
Multi-family |
|
|
8,311 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
(457 |
) |
|
|
(7,875 |
) |
|
|
|
|
Leasing |
|
|
914 |
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
(427 |
) |
|
|
|
|
|
|
599 |
|
Tax certificates |
|
|
2,319 |
|
|
|
10 |
|
|
|
(268 |
) |
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
2,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
83,662 |
|
|
$ |
13,665 |
|
|
$ |
(3,646 |
) |
|
$ |
|
|
|
$ |
(10,823 |
) |
|
$ |
(8,421 |
) |
|
$ |
74,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3rd Quarter Actvity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments and |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
Balance at |
|
|
|
|
|
|
other |
|
|
|
|
|
|
Transfer to |
|
|
September 30, |
|
(In thousands) |
|
June 30, 2010 |
|
|
Additions |
|
|
decreases |
|
|
Charge-offs |
|
|
OREO |
|
|
2010 |
|
Construction |
|
$ |
25,474 |
|
|
$ |
4,540 |
|
|
$ |
(293 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
29,721 |
|
Land development |
|
|
17,183 |
|
|
|
229 |
|
|
|
(1,024 |
) |
|
|
(61 |
) |
|
|
(1,649 |
) |
|
|
14,678 |
|
Real Estate-non-residential |
|
|
17,906 |
|
|
|
3,846 |
|
|
|
(352 |
) |
|
|
(42 |
) |
|
|
(911 |
) |
|
|
20,447 |
|
Commercial & industrial |
|
|
6,683 |
|
|
|
25 |
|
|
|
(478 |
) |
|
|
|
|
|
|
|
|
|
|
6,230 |
|
Residential real estate |
|
|
4,541 |
|
|
|
620 |
|
|
|
(747 |
) |
|
|
|
|
|
|
|
|
|
|
4,414 |
|
Multi-family |
|
|
|
|
|
|
4,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,992 |
|
Leasing |
|
|
599 |
|
|
|
315 |
|
|
|
|
|
|
|
(310 |
) |
|
|
|
|
|
|
604 |
|
Tax certificates |
|
|
2,051 |
|
|
|
|
|
|
|
(127 |
) |
|
|
|
|
|
|
|
|
|
|
1,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
74,437 |
|
|
$ |
14,567 |
|
|
$ |
(3,021 |
) |
|
$ |
(413 |
) |
|
$ |
(2,560 |
) |
|
$ |
83,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4th Quarter Actvity |
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
Payments and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royal Asian non- |
|
|
Balance at |
|
|
|
September 30, |
|
|
|
|
|
|
other |
|
|
|
|
|
|
Transfer to |
|
|
Loans transferred |
|
|
accrual loans |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
Additions |
|
|
decreases |
|
|
Charge-offs |
|
|
OREO |
|
|
to LHFS |
|
|
sold |
|
|
2010 |
|
Construction |
|
$ |
29,721 |
|
|
$ |
|
|
|
$ |
(730 |
) |
|
$ |
(4,263 |
) |
|
$ |
(3,883 |
) |
|
$ |
(8,373 |
) |
|
$ |
|
|
|
$ |
12,472 |
|
Land development |
|
|
14,678 |
|
|
|
1,210 |
|
|
|
(126 |
) |
|
|
(3,212 |
) |
|
|
(266 |
) |
|
|
(4,998 |
) |
|
|
|
|
|
|
7,286 |
|
Real Estate-non-residential |
|
|
20,447 |
|
|
|
6,065 |
|
|
|
(1,000 |
) |
|
|
(4,011 |
) |
|
|
(486 |
) |
|
|
(8,370 |
) |
|
|
(2,585 |
) |
|
|
10,060 |
|
Commercial & industrial |
|
|
6,230 |
|
|
|
100 |
|
|
|
(251 |
) |
|
|
(121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,958 |
|
Residential real estate |
|
|
4,414 |
|
|
|
240 |
|
|
|
(228 |
) |
|
|
(483 |
) |
|
|
(642 |
) |
|
|
(902 |
) |
|
|
|
|
|
|
2,399 |
|
Multi-family |
|
|
4,992 |
|
|
|
2,573 |
|
|
|
(4,811 |
) |
|
|
(301 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,453 |
|
Leasing |
|
|
604 |
|
|
|
261 |
|
|
|
|
|
|
|
(133 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
732 |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax certificates |
|
|
1,924 |
|
|
|
|
|
|
|
(84 |
) |
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
83,010 |
|
|
$ |
10,449 |
|
|
$ |
(7,230 |
) |
|
$ |
(12,562 |
) |
|
$ |
(5,277 |
) |
|
$ |
(22,643 |
) |
|
$ |
(2,585 |
) |
|
$ |
43,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans at December 31, 2010 were $65.8 million and were comprised of $43.2
million in LHFI and $22.6 million in LHFS. Non-accrual loans were $73.7 million at December 31,
2009. The $7.9 million decline in total non-accrual loans was the result of $19.9 million in
charge-offs related to impairment analysis and transfers to OREO, a $7.6 million charge to the
allowance for loan and lease losses on the $30.3 million carrying value of non-accrual loans
transferred to LHFS, $20.0 million reduction in existing non-accrual loan balances through payments
or loans becoming current and placed back on accrual, $16.3 million transferred to other real
estate owned, and a $2.6 million reduction related to the Royal Asian disposition which
collectively were offset by $58.5 million in additions.
The following is a detail listing of the significant additions to non-accrual loans during 2010:
First Quarter 2010 new non-accrual loans:
|
|
|
A $16.1 million participation loan for a student housing rental apartment complex
comprised of twelve 2-story townhouse type buildings located in Cumberland County,
Pennsylvania became non-accrual during the first quarter of 2010. The project consists
of 182 units. Royal Bank is the lead bank and had sold 48% to one local bank. During
the second quarter of 2010, Royal Bank received a deed in lieu of foreclosure and
transferred the collateral to OREO. |
|
|
|
|
A $12.5 million participation acquisition and development loan to a regional real
estate developer to fund environmental remediation, site improvement and soft costs
activities on parcels in Montgomery County, Pennsylvania became non-accrual during the
first quarter of 2010. The project has final land development approvals for two office
buildings with an approved floor area ratio of 300,790 square feet. Royal Bank is the
lead bank and had sold 44% to one local bank. In the fourth quarter of 2010, the
Company included this loan in the asset pool sale and transferred the loan to LHFS from
LHFI. |
|
|
|
|
Three loans totaling $2.6 million to fund acquisition and soft development costs to
develop a 100,000 square foot retail project located in Bucks County, Pennsylvania
became non-accrual during the first quarter of 2010. The loan has matured by its
terms. There is a signed land lease for a 10,000 square foot stand alone retail store
to a national drug store chain which can be developed separate from the remaining
90,000 square foot planned for an in-line shopping center. During the third quarter
the loans were restructured under market rates and terms and the two smaller loans were
paid off. In the fourth quarter of 2010, the Company included the remaining loan in
the asset pool sale and transferred the loan to LHFS from LHFI. |
|
|
|
|
A $1.2 million construction project in Worcester County, Maryland, in which the
Company is a participant, became non-accrual during the first quarter of 2010. The
project consists of 120.7 acres of which 86.5 acres are zoned for agricultural use.
The borrower was unable to obtain county approval to
have the land use reclassified to general commercial. The borrower is pursuing
annexation through the town but the process will take time. During the fourth quarter
the Company recorded a charged-off of $715,000 through the allowance for loan and lease
losses. |
57
Second Quarter 2010 new non-accrual loans:
|
|
|
A $5.9 million loan which was originally used for purchase money acquisition and to
fund ongoing predevelopment activity associated with a residential project in
Philadelphia, Pennsylvania became non-accrual during the second quarter of 2010. The
project consists of interconnected buildings containing 73,050 square feet of gross
area. After acquisition, the borrowers original plan was for the development of a
157,000 square foot, 97 unit condo project. The borrowers pursued and received
approvals as well as made substantial progress in the engineering and design. This was
to be ground-up construction requiring some demolition of the existing structure. In
2009, the sponsors made the decision to reposition the project to apartments given the
downturn in the for-sale residential market. Ultimately, the economic climate and the
deterioration of the sponsors financial condition led to a default in payment which
has resulted in a foreclosure action being commenced. During 2010, the Company
recorded total charge-offs of $1.9 million through the allowance for loan and lease
losses. |
|
|
|
|
A $4.5 million non-residential real estate loan became non-accrual during the second
quarter of 2010. The project is a hotel located in Monroe County, Pennsylvania. As a
result of deteriorating economic conditions, the loan was placed in default as a result
of non-payment. During the third quarter, the Company finalized a forbearance
agreement with the borrower and the loan is currently performing under the agreement. A
current appraisal did not indicate impairment in accordance with ASC Topic 310. |
|
|
|
|
A $1.6 million construction loan in Talbot County, Maryland which is collateralized
by two commercial building lots became non-accrual during the second quarter of 2010.
Both lots are approved and site improvements have been completed. The loan has matured
and the borrower failed to put forth a realistic forbearance proposal. The Company
recorded a $76,000 charge-off against the loan during the second quarter of 2010.
During the third quarter of 2010, Royal Bank foreclosed on the borrower and transferred
the collateral to OREO. |
Third Quarter 2010 new non-accrual loans:
|
|
|
A $5.0 million participation in a $10.1 million loan used to finance the purchase
and renovation of a 156 unit apartment complex located in New Castle County, Delaware
became non-accrual during the third quarter of 2010. The loan is an interest only loan
for two years, with one 12-month extension option. The project is approximately 75%
occupied and unable to service interest only debt service. The original strategy of
the project was to renovate, lease up, and ultimately refinance with long term
institutional financing, which at this time, is unavailable. In the fourth quarter the
Company negotiated with the borrower to payoff the loan and recorded an $181,000
charge-off through the allowance for loan and lease losses. |
|
|
|
|
A project consisting of 38 whole ownership condominiums and 396 1/8th
fractional ownership interests located in Routt County, Colorado became non-accrual
during the third quarter of 2010. To date there have been 14 whole ownership sales and
82 fractional sold. The original balance of the loan was $165.0 million, with
approximately $100.0 million outstanding. Royal Banks participation rate in the loan
is 4.24%. The loan entered default status in October 2010 due to non-payment of a loan
fee; the appropriate lien waivers have not been received; and an appraisal not having
been delivered, with a value that does not exceed 70% loan to value. The current
carrying value of the loan is $4.2 million. The most recent appraisal did not indicate
impairment in accordance with ASC Topic 310. |
Fourth Quarter 2010 new non-accrual loans:
|
|
|
A $1.9 million condominium development project in Philadelphia, Pennsylvania, in
which the Company is a participant, became non-accrual during the fourth quarter of
2010. The project consists of 48 residential units and one commercial unit. The lead
bank renegotiated the loan and as a result the Company has classified the loan as a
troubled debt restructuring (TDR). The Company recorded a $120,000 charge-off through
the allowance for loan and lease losses. |
58
|
|
|
A $5.8 million participation in an $11.6 million loan became non-accrual in the
fourth quarter of 2010. The loan is for a 207 acre site that consists of a golf course
and club house in Montgomery County, Pennsylvania. The lead bank has begun collection
proceedings. A current appraisal indicated impairment in accordance with ASC Topic
310. Consequently, the Company established a specific reserve of $1.4 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 terms 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 held for
investment:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Impaired loans and leases with a valuation allowance |
|
$ |
9,620 |
|
|
$ |
46,670 |
|
Impaired loans and leases without a valuation allowance |
|
|
32,805 |
|
|
|
27,009 |
|
|
|
|
|
|
|
|
Total impaired loans and leases |
|
$ |
42,425 |
|
|
$ |
73,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance related to impaired loans and leases |
|
$ |
1,907 |
|
|
$ |
10,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
(In thousands) |
|
2010 |
|
2009 |
|
2008 |
Average investment in impaired loans and leases |
|
$ |
78,225 |
|
|
$ |
79,754 |
|
|
$ |
55,134 |
|
Interest income recognized on impaired loans and leases |
|
$ |
335 |
|
|
$ |
242 |
|
|
$ |
302 |
|
Interest income recognized on a cash basis on impaired loans and leases |
|
$ |
335 |
|
|
$ |
242 |
|
|
$ |
302 |
|
Total cash collected on impaired loans and leases during 2010, 2009, and 2008 was $21.7 million,
$21.6 million, and $7.6 million, respectively, of which $21.4 million, $21.3 million, and $7.3
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 $20.5 million at December 31, 2010. 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 $3.9 million and $4.8 million at December 31, 2010
and 2009. During 2010 no new related party loans were approved. Total payments received on
related party loans in 2010 were $444,000.
The Company classifies its leases as finance 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 troubled debt restructurings (TDRs) is to
recognize income on currently performing TDRs under the accrual method. As of December 31, 2010,
the Company had one TDR classified as a multi-family real estate non-accrual loan in the amount of
$1.8 million.
59
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, 2010. 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 slightly decreased from $30.3 million at December 31, 2009
to $29.2 million at December 31, 2010. Set forth below is a table which details the changes in
OREO from December 31, 2009 to December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
(In thousands) |
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
Beginning balance |
|
$ |
30,317 |
|
|
$ |
25,781 |
|
|
$ |
30,795 |
|
|
$ |
27,525 |
|
Capital improvements |
|
|
|
|
|
|
697 |
|
|
|
545 |
|
|
|
|
|
Net proceeds from sales |
|
|
(4,391 |
) |
|
|
(3,403 |
) |
|
|
(5,021 |
) |
|
|
(504 |
) |
Net gain on sales |
|
|
157 |
|
|
|
174 |
|
|
|
404 |
|
|
|
284 |
|
Assets acquired on non-accrual loans |
|
|
|
|
|
|
8,421 |
|
|
|
2,873 |
|
|
|
5,490 |
|
Other |
|
|
500 |
|
|
|
85 |
|
|
|
(10 |
) |
|
|
|
|
Impairment charge |
|
|
(802 |
) |
|
|
(960 |
) |
|
|
(2,061 |
) |
|
|
(3,551 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
25,781 |
|
|
$ |
30,795 |
|
|
$ |
27,525 |
|
|
$ |
29,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the fourth quarter of 2010, the Company had five collateral acquisitions. The first
foreclosure was on 87 improved residential lots which were collateral for a $3.9 million
construction loan for an age-restricted community in Bucks County, Pennsylvania. The second
foreclosure was on a two-story 13,000 square foot commercial building in Camden County, New Jersey.
The third foreclosure was on seven single-family rental properties in Philadelphia, Pennsylvania
that were collateral for a residential loan. The fourth foreclosure was on 18 single-family
residential properties in Philadelphia, Pennsylvania that were collateral for a residential
participation loan. The Company is entitled to 50% of the collateral. The Company recorded total
charge-offs of $402,000 to the allowance for loan and lease losses when the collateral for these
four lending relationships was transferred to OREO. The fifth foreclosure was on a 14.5 acre
parcel, of which the developable area is 1.6 acres, in Burlington County, New Jersey. The parcel
was collateral for a land development loan. A recent appraisal indicated an as-is value of
$600,000. Consequently the Company recorded a gain of $271,000 when the collateral was transferred
to OREO. During the fourth quarter, the Company recorded an impairment charge of $2.8 million on
six properties included in the asset pool sale. Additionally the Company recorded a total
impairment charge of $776,000 related to three previously foreclosed properties.
Also in the fourth quarter the Company sold portions of collateral associated with four separate
OREO properties. The Company received proceeds of $477,000 and recorded a net gain of $11,000 as a
result of these sales. Additionally the Company sold two properties acquired through the tax lien
portfolio. The Company received proceeds of $27,000 and recorded gains of $2,000 as a result of
these sales.
During the third quarter of 2010, the Company had two significant collateral acquisitions related
to two different lending relationships. The first foreclosure was on two commercial building lots
which were collateral for a $1.6 million construction loan in Maryland. The second foreclosure was
on a three-story commercial building in Florida that was collateral for a $1.0 million commercial
real estate loan. The Company is entitled to 95% of the collateral value. The Company recorded
total charge-offs of $96,000 to the allowance for loan and lease losses when the collateral for
these two lending relationships was transferred to OREO. During the third quarter the Company sold
collateral associated with two notable projects. The first sale was related to a condominium
project in Wildwood, New Jersey described below. The Company sold 25 units and received net
proceeds of $3.0 million while recording a gain of $338,000 as a result of the sale of these units.
The second sale was related to collateral acquired in the fourth quarter of 2009. The Company
received proceeds of $1.4 million and recorded a gain of $59,000. During the third quarter of 2010,
the Company recorded impairment charges of $2.1 million related to three separate projects
60
and tax
liens. In addition to the sales mentioned above the Company sold four properties acquired through
the tax lien portfolio. The Company received proceeds of $240,000 and recorded gains of $45,000 as
a result of these sales.
During the second quarter of 2010, the Company received a deed in lieu of foreclosure for a rental
community consisting of 182 dwelling units which was collateral for a $16.1 million participation
loan. The Company is entitled to 52% of the collateral value. The Company recorded a charge-off of
$457,000 to the allowance for loan and lease losses when the collateral was transferred to OREO.
Also during the second quarter, the Company sold collateral associated with four different
projects. The first sale was related to a condominium project in Raleigh, North Carolina that the
Company foreclosed on during the fourth quarter of 2008. The Company sold three units during the
second quarter of 2010. The second sale was related to a condominium project in Wildwood, New
Jersey that the Company foreclosed on during the fourth quarter of 2009. During the second quarter
of 2010, the Company completed the renovations to the project and held an auction of 28 units. At
June 30, 2010, the Company had settled on ten of the condominium units. The third sale was related
to a commercial building that was the collateral for a loan transferred to OREO during the second
quarter of 2009. The last sale was related to 3 homes and 14 residential lots located in North
Carolina and South Carolina that the Company foreclosed on during the second quarter of 2010.
During the second quarter the Company sold one home and one lot. As a result of these sales, the
Company received net proceeds of $2.9 million and recorded a loss of $15,000. In addition to the
sales mentioned above the Company sold five properties acquired through the tax lien portfolio.
The Company received proceeds of $427,000 and recorded gains of $189,000 as a result of these
sales.
During the second quarter of 2010, the Company recorded impairment charges of $960,000 which were
primarily related to an apartment building in Luzerne County, Pennsylvania foreclosed on in the
second quarter of 2009 and also the tax lien portfolio.
During the first quarter of 2010, the Company sold collateral related to three loans. The Company
sold 19 condominium units in Raleigh, North Carolina. The second sale was a commercial building in
Gloucester County, New Jersey that was collateral for a loan transferred to OREO in the third
quarter of 2009. The third sale was a residential building in Philadelphia, Pennsylvania that was
collateral for a loan transferred to OREO in the fourth quarter of 2009. As a result of these
sales, the Company received net proceeds of $4.3 million and recorded an $87,000 gain. In addition
to the sales mentioned above the Company sold one property acquired through the tax lien portfolio.
The Company received proceeds of $139,000 and recorded gains of $70,000 as a result of these
sales. During the first quarter of 2010, the Company recorded an impairment charge of $802,000
related to three lots in Ocean City, Maryland which were transferred to OREO in the first 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.
Loans and Lease Financing Receivables
The following table summarizes the loan portfolio by loan category and amount that corresponds to
the appropriate regulatory definitions.
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Loans secured by real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development |
|
$ |
29,044 |
|
|
$ |
52,196 |
|
|
$ |
167,204 |
|
Construction and land development mezzanine |
|
|
|
|
|
|
|
|
|
|
2,421 |
|
Land development |
|
|
50,594 |
|
|
|
66,878 |
|
|
|
74,168 |
|
Secured by 1-4 family residential properties: |
|
|
|
|
|
|
|
|
|
|
|
|
Revolving, open-end loans secured by 1-4 family residential properties and extended under lines of credit |
|
|
1,252 |
|
|
|
1,272 |
|
|
|
1,322 |
|
All other loans secured by 1-4 family residential properties: |
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first liens |
|
|
26,166 |
|
|
|
44,053 |
|
|
|
21,607 |
|
Secured by junior liens |
|
|
1,881 |
|
|
|
3,173 |
|
|
|
4,551 |
|
Secured by junior liens mezzaninie |
|
|
|
|
|
|
2,480 |
|
|
|
|
|
Secured by multi family (5 or more) residential properties |
|
|
10,277 |
|
|
|
22,017 |
|
|
|
14,059 |
|
Secured by multi family (5 or more) res. Properties mezzanine |
|
|
|
|
|
|
|
|
|
|
335 |
|
Secured by non-farm nonresidential properties |
|
|
194,203 |
|
|
|
277,234 |
|
|
|
234,573 |
|
Secured by non-farm nonresidential properties mezzanine |
|
|
|
|
|
|
|
|
|
|
4,111 |
|
Tax certificates |
|
|
70,443 |
|
|
|
73,106 |
|
|
|
64,168 |
|
Commercial and industrial loans |
|
|
74,027 |
|
|
|
104,063 |
|
|
|
86,278 |
|
Loans to individuals for household, family, and other personal expenditures |
|
|
768 |
|
|
|
1,514 |
|
|
|
1,031 |
|
Obligations of state and political subdivisions in the U.S. |
|
|
|
|
|
|
|
|
|
|
47 |
|
Lease financing receivables (net of unearned income) |
|
|
38,725 |
|
|
|
39,097 |
|
|
|
26,123 |
|
All other loans |
|
|
25 |
|
|
|
659 |
|
|
|
165 |
|
Less: Net deferred loan fees |
|
|
(551 |
) |
|
|
(878 |
) |
|
|
(1,441 |
) |
|
|
|
|
|
|
|
|
|
|
Total loans and leases, net of unearned income |
|
$ |
496,854 |
|
|
$ |
686,864 |
|
|
$ |
700,722 |
|
|
|
|
|
|
|
|
|
|
|
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 first four classifications are rated Pass.
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:
|
|
|
100% of construction loans regardless of loan size; |
|
|
|
|
100% of loans/relationships with balances of $1 million or greater; |
|
|
|
|
50% of loans with balances from $500,000 up to $1 million; |
|
|
|
|
25% of loans with balances from $250,000 to $499,999; |
|
|
|
|
5% of loans with balances up to $250,000; and |
|
|
|
|
Loans requested specifically by the Companys management |
62
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.
A watch list is maintained and reviewed at each meeting of the Loan Review Committee. Loans are
added to the watch list, even though the loans may be 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. The Committee, which is comprised of the President, Vice Chairman, Chief Financial Officer, 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, 2010, 2009 and 2008, respectively, for each major category of the Companys AFS investment
securities portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Accumulated Other |
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (AOCI) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized losses |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Non-credit |
|
|
|
|
As of December 31, 2010 |
|
|
|
|
|
unrealized |
|
|
Non-OTTI |
|
|
related OTTI |
|
|
|
|
(In thousands) |
|
Amortized cost |
|
|
gains |
|
|
in AOCI |
|
|
in AOCI |
|
|
Fair value |
|
Investment securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential |
|
$ |
8,492 |
|
|
$ |
348 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8,840 |
|
U.S. government agencies |
|
|
30,492 |
|
|
|
|
|
|
|
(755 |
) |
|
|
|
|
|
|
29,737 |
|
Common stocks |
|
|
381 |
|
|
|
152 |
|
|
|
(50 |
) |
|
|
|
|
|
|
483 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies |
|
|
231,717 |
|
|
|
3,640 |
|
|
|
(704 |
) |
|
|
|
|
|
|
234,653 |
|
Non-agency |
|
|
7,026 |
|
|
|
114 |
|
|
|
(3 |
) |
|
|
|
|
|
|
7,137 |
|
Corporate bonds |
|
|
9,483 |
|
|
|
|
|
|
|
(197 |
) |
|
|
|
|
|
|
9,286 |
|
Trust preferred securities |
|
|
16,566 |
|
|
|
2,135 |
|
|
|
|
|
|
|
(87 |
) |
|
|
18,614 |
|
Other securities |
|
|
7,974 |
|
|
|
431 |
|
|
|
|
|
|
|
|
|
|
|
8,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investment securities |
|
$ |
312,131 |
|
|
$ |
6,820 |
|
|
$ |
(1,709 |
) |
|
$ |
(87 |
) |
|
$ |
317,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Accumulated Other |
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss (AOCL) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized Losses |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Non-credit |
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
unrealized |
|
|
Non-OTTI |
|
|
related OTTI |
|
|
|
|
(In thousands) |
|
Amortized cost |
|
|
gains |
|
|
in AOCL |
|
|
in AOCL |
|
|
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 investment securities |
|
$ |
438,899 |
|
|
$ |
5,405 |
|
|
$ |
(3,195 |
) |
|
$ |
(2,390 |
) |
|
$ |
438,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Accumulated Other |
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss (AOCL) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized Losses |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Non-credit |
|
|
|
|
As of December 31, 2008 |
|
|
|
|
|
unrealized |
|
|
Non-OTTI |
|
|
related OTTI |
|
|
|
|
(In thousands) |
|
Amortized cost |
|
|
gains |
|
|
in AOCL |
|
|
in AOCL |
|
|
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 investment securities |
|
$ |
383,838 |
|
|
$ |
4,230 |
|
|
$ |
(37,766 |
) |
|
$ |
|
|
|
$ |
350,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The contractual maturity distribution and weighted average rate of the Companys AFS debt
securities at December 31, 2010 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
|
|
|
|
|
|
|
$ |
8,840 |
|
|
|
4.97 |
% |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
8,840 |
|
|
|
4.97 |
% |
U.S. government agencies |
|
|
|
|
|
|
|
|
|
|
10,376 |
|
|
|
1.80 |
% |
|
|
7,713 |
|
|
|
1.87 |
% |
|
|
11,648 |
|
|
|
2.00 |
% |
|
|
29,737 |
|
|
|
1.90 |
% |
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies |
|
|
17,664 |
|
|
|
4.78 |
% |
|
|
216,989 |
|
|
|
4.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234,653 |
|
|
|
4.57 |
% |
Non-agency |
|
|
554 |
|
|
|
5.25 |
% |
|
|
6,583 |
|
|
|
4.46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,137 |
|
|
|
4.52 |
% |
Corporate bonds |
|
|
100 |
|
|
|
1.72 |
% |
|
|
6,183 |
|
|
|
2.51 |
% |
|
|
1,978 |
|
|
|
5.13 |
% |
|
|
1,025 |
|
|
|
3.10 |
% |
|
|
9,286 |
|
|
|
3.12 |
% |
Trust preferred securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,614 |
|
|
|
10.22 |
% |
|
|
18,614 |
|
|
|
10.22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AFS debt securities |
|
$ |
18,318 |
|
|
|
4.24 |
% |
|
$ |
248,971 |
|
|
|
4.78 |
% |
|
$ |
9,691 |
|
|
|
4.13 |
% |
|
$ |
31,287 |
|
|
|
9.53 |
% |
|
$ |
308,267 |
|
|
|
5.02 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
The Company assesses whether other-than-temporary impairment (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. If the Company intends to sell a
security or will be required to sell a security, the OTTI is recognized in earnings equal to the
entire difference between the fair value and the amortized cost basis at the balance sheet date.
If the Company does not intend to sell a security and it is not more likely than not that the
entity will be required to sell a security before the recovery of its amortized cost basis, the
OTTI is 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.
At December 31, 2010 investment securities were $317.2 million with a net unrealized gain of $5.0
million compared to $438.7 million with a net unrealized loss of $180,000 at December 31, 2009.
The improvement in gross unrealized losses is related to the overall improvement in the fair values
of the securities in the Companys investment portfolio slightly offset by $479,000 in impairment
charges, including $193,000 on two trust preferred securities, $165,000 on a preferred stock and
$58,000 on one bond that the Company decided to sell before recovery of its cost basis. 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, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
(In thousands, except percentages) |
|
Balance |
|
|
Rate |
|
|
Balance |
|
|
Rate |
|
|
Balance |
|
|
Rate |
|
Demand deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest bearing |
|
$ |
62,474 |
|
|
|
|
|
|
$ |
62,546 |
|
|
|
|
|
|
$ |
57,211 |
|
|
|
|
|
Interest bearing (NOW) |
|
|
42,990 |
|
|
|
0.92 |
% |
|
|
46,046 |
|
|
|
1.04 |
% |
|
|
48,414 |
|
|
|
1.85 |
% |
Money market deposits |
|
|
166,386 |
|
|
|
1.05 |
% |
|
|
153,146 |
|
|
|
1.83 |
% |
|
|
168,972 |
|
|
|
2.93 |
% |
Savings deposits |
|
|
15,959 |
|
|
|
0.56 |
% |
|
|
14,802 |
|
|
|
0.56 |
% |
|
|
15,125 |
|
|
|
0.50 |
% |
Certificate of deposit |
|
|
503,217 |
|
|
|
2.92 |
% |
|
|
581,202 |
|
|
|
3.78 |
% |
|
|
434,662 |
|
|
|
4.49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
791,026 |
|
|
|
|
|
|
$ |
857,742 |
|
|
|
|
|
|
$ |
724,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining maturity of Certificates of Deposit of $100,000 or greater:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Three months or less |
|
$ |
9,483 |
|
|
$ |
19,960 |
|
Over three months through twelve months |
|
|
52,969 |
|
|
|
78,985 |
|
Over twelve months through five years |
|
|
38,265 |
|
|
|
40,790 |
|
Over five years |
|
|
5,071 |
|
|
|
1,917 |
|
|
|
|
|
|
|
|
Total |
|
$ |
105,788 |
|
|
$ |
141,652 |
|
|
|
|
|
|
|
|
65
Short and Long Term Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Short term borrowings |
|
$ |
22,000 |
|
|
$ |
114,500 |
|
|
$ |
37,000 |
|
|
$ |
102,000 |
|
|
$ |
53,000 |
|
Long term borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other borrowings |
|
|
44,230 |
|
|
|
44,674 |
|
|
|
45,112 |
|
|
|
5,411 |
|
|
|
5,587 |
|
Obligations through RE owned via equity invest(1) |
|
|
|
|
|
|
3,652 |
|
|
|
12,350 |
|
|
|
18,566 |
|
|
|
29,342 |
|
Subordinated debt |
|
|
25,774 |
|
|
|
25,774 |
|
|
|
25,774 |
|
|
|
25,774 |
|
|
|
25,774 |
|
FHLB advances |
|
|
88,719 |
|
|
|
95,001 |
|
|
|
193,569 |
|
|
|
187,500 |
|
|
|
187,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
$ |
180,723 |
|
|
$ |
283,601 |
|
|
$ |
313,805 |
|
|
$ |
339,251 |
|
|
$ |
301,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 for Royal Bank are as follows:
|
|
|
|
|
|
|
|
|
(In thousands, except percentages) |
|
As of December 31, 2010 |
|
|
Market Value of |
|
Percent of |
Changes in Rates |
|
Portfolio Equity |
|
Change |
+ 300 basis points |
|
$ |
52,466 |
|
|
|
(42.1 |
%) |
+ 200 basis points |
|
|
66,793 |
|
|
|
(26.2 |
%) |
+ 100 basis points |
|
|
79,662 |
|
|
|
(12.0 |
%) |
Flat rate |
|
|
90,541 |
|
|
|
0.0 |
% |
- 100 basis points |
|
|
86,989 |
|
|
|
(3.9 |
%) |
- 200 basis points |
|
|
82,396 |
|
|
|
(9.0 |
%) |
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.
66
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 2010 and 2009, 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, 2010. These financial statements are the
responsibility of Royal Bancshares of Pennsylvania, Inc.s management. 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. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for purpose of expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we express no such opinion. An audit
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, 2010 and 2009, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2010 in conformity with
accounting principles generally accepted in the United States of America.
/s/ ParenteBeard LLC
ParenteBeard LLC
Philadelphia, Pennsylvania
March 31, 2011
67
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands, except share data) |
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
26,811 |
|
|
$ |
25,289 |
|
Interest bearing deposits |
|
|
24,922 |
|
|
|
33,009 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
51,733 |
|
|
|
58,298 |
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale (AFS) at fair value |
|
|
317,155 |
|
|
|
438,719 |
|
Federal Home Loan Bank (FHLB) stock, at cost |
|
|
10,405 |
|
|
|
10,952 |
|
|
|
|
|
|
|
|
|
|
Loans held for sale, at lower of cost or fair market value |
|
|
29,621 |
|
|
|
2,254 |
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
|
496,854 |
|
|
|
686,864 |
|
Less allowance for loan and lease losses |
|
|
21,129 |
|
|
|
30,331 |
|
|
|
|
|
|
|
|
Net loans and leases |
|
|
475,725 |
|
|
|
656,533 |
|
|
|
|
|
|
|
|
|
|
Bank owned life insurance |
|
|
8,642 |
|
|
|
8,263 |
|
Real estate owned via equity investment |
|
|
6,794 |
|
|
|
12,492 |
|
Accrued interest receivable |
|
|
16,864 |
|
|
|
14,942 |
|
Other real estate owned (OREO), net |
|
|
29,244 |
|
|
|
30,317 |
|
Premises and equipment, net |
|
|
5,735 |
|
|
|
6,306 |
|
Investment in real estate joint ventures |
|
|
|
|
|
|
2,520 |
|
Other assets |
|
|
28,708 |
|
|
|
51,130 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
980,626 |
|
|
$ |
1,292,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
Non-interest bearing |
|
$ |
52,872 |
|
|
$ |
63,168 |
|
Interest bearing |
|
|
641,041 |
|
|
|
818,587 |
|
|
|
|
|
|
|
|
Total deposits |
|
|
693,913 |
|
|
|
881,755 |
|
Accrued interest payable |
|
|
3,983 |
|
|
|
6,150 |
|
Short-term borrowings |
|
|
22,000 |
|
|
|
114,500 |
|
Long-term borrowings |
|
|
132,949 |
|
|
|
139,675 |
|
Obligations related to real estate owned via equity investment |
|
|
|
|
|
|
3,652 |
|
Subordinated debentures |
|
|
25,774 |
|
|
|
25,774 |
|
Other liabilities |
|
|
17,914 |
|
|
|
16,906 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
896,533 |
|
|
|
1,188,412 |
|
|
|
|
|
|
|
|
|
|
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, 2010
and 2009 |
|
|
28,395 |
|
|
|
27,945 |
|
Common stock Class A, par value $2.00 per share, authorized 18,000,000 shares;
issued, 11,355,466 and 11,352,482 at December 31, 2010 and 2009, respectively |
|
|
22,711 |
|
|
|
22,705 |
|
Common stock Class B, par value $0.10 per share, authorized 3,000,0000 shares;
issued, 2,086,689 and 2,089,284 at December 31, 2010 and 2009, respectively |
|
|
209 |
|
|
|
209 |
|
Additional paid in capital |
|
|
126,152 |
|
|
|
126,117 |
|
Accumulated deficit |
|
|
(91,746 |
) |
|
|
(67,197 |
) |
Accumulated other comprehensive income (loss) |
|
|
1,942 |
|
|
|
(1,652 |
) |
Treasury stock at cost, shares of Class A, 498,488 at December 31, 2010 and 2009 |
|
|
(6,971 |
) |
|
|
(6,971 |
) |
|
|
|
|
|
|
|
Total Royal Bancshares of Pennsylvania, Inc. shareholders equity |
|
|
80,692 |
|
|
|
101,156 |
|
Noncontrolling interest |
|
|
3,401 |
|
|
|
3,158 |
|
Total shareholders equity |
|
|
84,093 |
|
|
|
104,314 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
980,626 |
|
|
$ |
1,292,726 |
|
|
|
|
|
|
|
|
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, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands, except per share data) |
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases, including fees |
|
$ |
42,643 |
|
|
$ |
45,757 |
|
|
$ |
49,863 |
|
Investment securities held to maturity, taxable |
|
|
|
|
|
|
|
|
|
|
3,241 |
|
Investment securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable interest |
|
|
14,464 |
|
|
|
20,102 |
|
|
|
19,066 |
|
Tax exempt interest |
|
|
|
|
|
|
19 |
|
|
|
75 |
|
Deposits in banks |
|
|
154 |
|
|
|
164 |
|
|
|
495 |
|
Federal funds sold |
|
|
1 |
|
|
|
1 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income |
|
|
57,262 |
|
|
|
66,043 |
|
|
|
72,764 |
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
16,922 |
|
|
|
25,342 |
|
|
|
25,414 |
|
Short-term borrowings |
|
|
3,835 |
|
|
|
169 |
|
|
|
674 |
|
Long-term borrowings |
|
|
5,215 |
|
|
|
11,685 |
|
|
|
11,770 |
|
Obligations related to real estate owned via equity investments |
|
|
22 |
|
|
|
243 |
|
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense |
|
|
25,994 |
|
|
|
37,439 |
|
|
|
38,109 |
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
|
31,268 |
|
|
|
28,604 |
|
|
|
34,655 |
|
Provision for loan and lease losses |
|
|
22,140 |
|
|
|
20,605 |
|
|
|
21,841 |
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income after Provision for Loan and Lease Losses |
|
|
9,128 |
|
|
|
7,999 |
|
|
|
12,814 |
|
|
|
|
|
|
|
|
|
|
|
Other income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Gains on sales of premises and equipment |
|
|
|
|
|
|
|
|
|
|
1,991 |
|
Gains on sale of premises and equipment related to real estate
owned via equity investments |
|
|
667 |
|
|
|
1,817 |
|
|
|
1,679 |
|
Income from bank owned life insurance |
|
|
379 |
|
|
|
1,099 |
|
|
|
1,233 |
|
Service charges and fees |
|
|
1,266 |
|
|
|
1,419 |
|
|
|
1,186 |
|
Gains on sales related to real estate joint ventures |
|
|
|
|
|
|
|
|
|
|
1,092 |
|
Income related to real estate owned via equity investments |
|
|
564 |
|
|
|
1,302 |
|
|
|
965 |
|
Gains on sales of other real estate owned |
|
|
1,019 |
|
|
|
294 |
|
|
|
429 |
|
Gains on sales of loans and leases |
|
|
666 |
|
|
|
914 |
|
|
|
190 |
|
Gain on sale of security claim |
|
|
1,656 |
|
|
|
|
|
|
|
|
|
Net gains (losses) on investment securities available for sale |
|
|
1,290 |
|
|
|
1,892 |
|
|
|
(1,313 |
) |
Other income |
|
|
737 |
|
|
|
578 |
|
|
|
148 |
|
|
|
|
|
|
|
|
|
|
|
Other income,excluding other than temporary impairment losses |
|
|
8,244 |
|
|
|
9,315 |
|
|
|
7,600 |
|
|
|
|
|
|
|
|
|
|
|
Total other than temporary impairment losses on investment securities |
|
|
(566 |
) |
|
|
(13,431 |
) |
|
|
(23,388 |
) |
Portion of loss recognized in other comprehensive loss |
|
|
87 |
|
|
|
2,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings |
|
|
(479 |
) |
|
|
(11,041 |
) |
|
|
(23,388 |
) |
|
|
|
|
|
|
|
|
|
|
Total Other Income (Loss) |
|
|
7,765 |
|
|
|
(1,726 |
) |
|
|
(15,788 |
) |
|
|
|
|
|
|
|
|
|
|
Other expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Employee salaries and benefits |
|
|
11,591 |
|
|
|
12,235 |
|
|
|
15,044 |
|
OREO impairment charge |
|
|
7,374 |
|
|
|
4,537 |
|
|
|
|
|
Professional and legal fees |
|
|
4,237 |
|
|
|
4,367 |
|
|
|
3,783 |
|
Occupancy and equipment |
|
|
3,216 |
|
|
|
3,381 |
|
|
|
2,860 |
|
FDIC and state assessments |
|
|
3,047 |
|
|
|
3,801 |
|
|
|
658 |
|
Impairment related to real estate owned via equity investments |
|
|
2,600 |
|
|
|
|
|
|
|
1,500 |
|
OREO and loan collection expenses |
|
|
2,536 |
|
|
|
3,218 |
|
|
|
188 |
|
Impairment of real estate joint ventures |
|
|
1,552 |
|
|
|
|
|
|
|
|
|
Pennsylvania shares tax |
|
|
1,320 |
|
|
|
1,299 |
|
|
|
1,369 |
|
Expenses related to real estate owned via equity investments |
|
|
529 |
|
|
|
907 |
|
|
|
966 |
|
Directors fees |
|
|
355 |
|
|
|
676 |
|
|
|
675 |
|
Stock option expense |
|
|
35 |
|
|
|
226 |
|
|
|
703 |
|
Other operating expenses |
|
|
2,351 |
|
|
|
3,009 |
|
|
|
4,787 |
|
|
|
|
|
|
|
|
|
|
|
Total Other Expenses |
|
|
40,743 |
|
|
|
37,656 |
|
|
|
32,533 |
|
|
|
|
|
|
|
|
|
|
|
Loss Before Income Tax |
|
|
(23,850 |
) |
|
|
(31,383 |
) |
|
|
(35,507 |
) |
Income tax expense |
|
|
|
|
|
|
474 |
|
|
|
2,643 |
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(23,850 |
) |
|
$ |
(31,857 |
) |
|
$ |
(38,150 |
) |
|
|
|
|
|
|
|
|
|
|
Less net income (loss) attributable to noncontrolling interest |
|
|
243 |
|
|
|
1,402 |
|
|
|
(68 |
) |
|
|
|
|
|
|
|
|
|
|
Net Loss Attributable to Royal Bancshares of Pennsylvania, Inc. |
|
$ |
(24,093 |
) |
|
$ |
(33,259 |
) |
|
$ |
(38,082 |
) |
|
|
|
|
|
|
|
|
|
|
Less Preferred stock Series A accumulated dividend and accretion |
|
$ |
1,970 |
|
|
$ |
1,672 |
|
|
$ |
|
|
Net Loss to Common Shareholders |
|
$ |
(26,063 |
) |
|
$ |
(34,931 |
) |
|
$ |
(38,082 |
) |
Per common share data |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss basic |
|
$ |
(1.97 |
) |
|
$ |
(2.64 |
) |
|
$ |
(2.86 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss diluted |
|
$ |
(1.97 |
) |
|
$ |
(2.64 |
) |
|
$ |
(2.86 |
) |
|
|
|
|
|
|
|
|
|
|
Cash dividends Class A shares |
|
$ |
|
|
|
$ |
|
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
Cash dividends Class B shares |
|
$ |
|
|
|
$ |
|
|
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
|
|
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, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
income |
|
|
stock |
|
|
Interest |
|
|
Equity |
|
|
|
|
Balance January 1, 2010 |
|
$ |
27,945 |
|
|
|
11,352 |
|
|
$ |
22,705 |
|
|
|
2,089 |
|
|
$ |
209 |
|
|
$ |
126,117 |
|
|
$ |
(67,197 |
) |
|
$ |
(1,652 |
) |
|
$ |
(6,971 |
) |
|
$ |
3,158 |
|
|
$ |
104,314 |
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,093 |
) |
|
|
|
|
|
|
|
|
|
|
243 |
|
|
|
(23,850 |
) |
Other comprehensive income, net of reclassifications and taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,594 |
|
|
|
|
|
|
|
|
|
|
|
3,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(20,256 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock conversion from Class B to Class A |
|
|
|
|
|
|
3 |
|
|
|
6 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of discount on preferred stock |
|
|
450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(450 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
|
Balance December 31, 2010 |
|
$ |
28,395 |
|
|
|
11,355 |
|
|
$ |
22,711 |
|
|
|
2,087 |
|
|
$ |
209 |
|
|
$ |
126,152 |
|
|
$ |
(91,746 |
) |
|
$ |
1,942 |
|
|
$ |
(6,971 |
) |
|
$ |
3,401 |
|
|
$ |
84,093 |
|
|
|
|
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, 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.
71
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.
72
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(24,093 |
) |
|
$ |
(33,259 |
) |
|
$ |
(38,082 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
686 |
|
|
|
907 |
|
|
|
1,059 |
|
Stock compensation expense |
|
|
35 |
|
|
|
226 |
|
|
|
703 |
|
Impairment charge for other real estate owned |
|
|
7,374 |
|
|
|
4,537 |
|
|
|
|
|
Provision for loan and lease losses |
|
|
22,140 |
|
|
|
20,605 |
|
|
|
21,841 |
|
Net amortization (accretion) of discounts and premiums on loans, mortgage-backed securities and investments |
|
|
2,444 |
|
|
|
518 |
|
|
|
(2,242 |
) |
(Benefit) provision for deferred income taxes |
|
|
|
|
|
|
(174 |
) |
|
|
10,462 |
|
Gains on sales of other real estate owned |
|
|
(1,019 |
) |
|
|
(294 |
) |
|
|
(429 |
) |
Gain on sales of real estate joint ventures |
|
|
|
|
|
|
|
|
|
|
(1,092 |
) |
Proceeds from sales of loans and leases |
|
|
4,145 |
|
|
|
10,844 |
|
|
|
2,613 |
|
Gains on sales of premises and equipment |
|
|
|
|
|
|
|
|
|
|
(1,991 |
) |
Gains on sales of loans and leases |
|
|
(666 |
) |
|
|
(914 |
) |
|
|
(190 |
) |
Gains on sales of security claim |
|
|
(1,656 |
) |
|
|
|
|
|
|
|
|
Net (gains) losses on sales of investment securities |
|
|
(1,290 |
) |
|
|
(1,892 |
) |
|
|
1,313 |
|
Distributions from investments in real estate |
|
|
(210 |
) |
|
|
(200 |
) |
|
|
(241 |
) |
Gain from sale of premises of real estate owned via equity investment |
|
|
(667 |
) |
|
|
(1,817 |
) |
|
|
(1,679 |
) |
Impairment of real estate owned via equity investments |
|
|
2,600 |
|
|
|
|
|
|
|
1,500 |
|
Impairment of available-for-sale investment securities |
|
|
479 |
|
|
|
11,041 |
|
|
|
23,388 |
|
Income from bank owned life insurance |
|
|
(379 |
) |
|
|
(1,099 |
) |
|
|
(1,233 |
) |
Impairment of real estate joint venture |
|
|
1,552 |
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in accrued interest receivable |
|
|
(1,922 |
) |
|
|
(1,362 |
) |
|
|
1,676 |
|
Decrease (increase) in other assets |
|
|
29,646 |
|
|
|
(5,225 |
) |
|
|
(10,766 |
) |
(Decrease) increase in accrued interest payable |
|
|
(2,167 |
) |
|
|
48 |
|
|
|
(2,498 |
) |
Increase in other liabilities |
|
|
1,669 |
|
|
|
5,292 |
|
|
|
3,364 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
38,701 |
|
|
|
7,782 |
|
|
|
7,476 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from calls/maturities of held-to-maturity investment securities |
|
|
|
|
|
|
|
|
|
|
105,265 |
|
Proceeds from calls/maturities of investment securities available-for-sale |
|
|
118,056 |
|
|
|
148,268 |
|
|
|
169,901 |
|
Proceeds from sales of investment securities available-for-sale |
|
|
181,334 |
|
|
|
184,226 |
|
|
|
15,775 |
|
Purchase of investment securities available-for-sale |
|
|
(174,167 |
) |
|
|
(398,312 |
) |
|
|
(179,257 |
) |
Redemption of Federal Home Loan Bank stock |
|
|
547 |
|
|
|
|
|
|
|
2,510 |
|
Net decrease (increase) in loans |
|
|
109,221 |
|
|
|
(49,260 |
) |
|
|
(81,207 |
) |
Capital improvements to foreclosed assets |
|
|
(1,242 |
) |
|
|
(2,431 |
) |
|
|
|
|
Proceeds from sale of foreclosed assets |
|
|
13,319 |
|
|
|
7,877 |
|
|
|
1,186 |
|
Net cash received in connection with the sale of Royal Asian Bank |
|
|
224 |
|
|
|
|
|
|
|
|
|
Proceeds from sale of premises and equipment |
|
|
|
|
|
|
|
|
|
|
2,065 |
|
Purchase of premises and equipment |
|
|
(115 |
) |
|
|
(287 |
) |
|
|
(692 |
) |
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 |
|
|
6,682 |
|
|
|
11,354 |
|
|
|
9,064 |
|
Distributions from real estate owned via equity investments |
|
|
210 |
|
|
|
200 |
|
|
|
241 |
|
Net decrease in real estate joint ventures |
|
|
|
|
|
|
|
|
|
|
5,219 |
|
Net decrease in real estate owned via equity investments |
|
|
(8,615 |
) |
|
|
(9,537 |
) |
|
|
(8,885 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
245,454 |
|
|
|
(85,274 |
) |
|
|
36,185 |
|
|
|
|
|
|
|
|
|
|
|
73
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in non-interest bearing and interest bearing demand deposits and savings accounts |
|
|
(2,105 |
) |
|
|
32,719 |
|
|
|
(65,443 |
) |
(Decrease) increase in certificates of deposit |
|
|
(185,737 |
) |
|
|
88,968 |
|
|
|
55,359 |
|
Net decrease in short-term borrowings |
|
|
(92,500 |
) |
|
|
|
|
|
|
(80,000 |
) |
Proceeds from long-term borrowings |
|
|
|
|
|
|
|
|
|
|
65,000 |
|
Repayments of long-term borrowings |
|
|
(6,726 |
) |
|
|
(21,506 |
) |
|
|
(4,230 |
) |
Repayment of mortgage debt of real estate owned via equity investments |
|
|
(3,652 |
) |
|
|
(8,698 |
) |
|
|
(6,216 |
) |
Proceeds from the issuance of preferred stock |
|
|
|
|
|
|
30,407 |
|
|
|
|
|
Cash dividends paid |
|
|
|
|
|
|
(359 |
) |
|
|
(4,005 |
) |
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
(946 |
) |
Issuance of common stock under stock option plans |
|
|
|
|
|
|
|
|
|
|
174 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(290,720 |
) |
|
|
121,531 |
|
|
|
(40,307 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(6,565 |
) |
|
|
44,039 |
|
|
|
3,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
58,298 |
|
|
|
14,259 |
|
|
|
10,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
51,733 |
|
|
$ |
58,298 |
|
|
$ |
14,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
28,161 |
|
|
$ |
37,391 |
|
|
$ |
40,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers to other real estate owned |
|
$ |
18,797 |
|
|
$ |
29,660 |
|
|
$ |
10,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value of loans included in the sale of Royal Asian Bank |
|
$ |
57,556 |
|
|
$ |
|
|
|
$ |
|
|
Carrying value of investments included in the sale of Royal Asian Bank |
|
|
13,999 |
|
|
|
|
|
|
|
|
|
Carrying value of other assets included in the sale of Royal Asian Bank |
|
|
2,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total carrying value of assets included in the sale of Royal Asian Bank |
|
$ |
74,101 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value of deposits included in the sale of Royal Asian Bank |
|
$ |
(73,374 |
) |
|
$ |
|
|
|
$ |
|
|
Carrying value of other liabilities included in the sale of Royal Asian Bank |
|
|
(503 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total carrying value of liabilities included in the sale of Royal Asian Bank |
|
$ |
(73,877 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
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) offers a full range of banking services to individual and corporate
customers primarily located in the Mid-Atlantic states. Royal Bank competes with other banking and
financial institutions in certain markets, including financial institutions with resources
substantially greater than its own. Commercial banks, savings banks, savings and loan
associations, credit unions and 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 Royal Bank 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, 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. In addition the following are owned 60% by Royal Bank: Royal Bank America
Leasing, LP, Crusader Servicing Corporation and Royal Tax Lien Services, LLC. During the fourth
quarter of 2010, Royal Captive Insurance was dissolved. The investments were sold for a gain of
approximately $8,000, $2.0 million was paid to the Company as a dividend, and the remaining funds,
in the approximate amount of $500,000, were transferred to the Company. On December 30, 2010 the
Company completed the sale of all of the outstanding common stock of Royal Asian Bank (Royal
Asian), a wholly-owned subsidiary, to an investor group led by Royal Asians President and Chief
Executive Officer. Royal Asians net loss of $953,000 through December 29, 2010 is consolidated
into the Companys consolidated financial statements. 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 U.S. generally accepted
accounting principles (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, loans held for sale, the valuation of other real
estate owned, 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.
75
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
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 86% of its
investment portfolio in securities issued by government sponsored entities. The Companys tax lien
portfolio has a geographic concentration in the State of New Jersey.
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 real estate, and commercial loans represent 46% 23%, and 14%, respectively,
of the $43.2 million in non-accrual loans held for investment at December 31, 2010.
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, 2010, 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. In June 2009, the FASB issued ASU No. 2009-17 Improvements to Financial
Reporting by Enterprises Involved with Variable Interest Entities (ASU 2009-17) which updates
ASC Topic 810. The purpose of ASU 2009-17 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. ASU 2009-17 became effective on January 1, 2010. Earlier application was
prohibited. The adoption of ASU 2009-17 had no impact on the Companys consolidated financial
statements.
76
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
Consolidation of this VIE 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. As shown on the consolidated balance
sheet of the Company as of December 31, 2010, the Partnership no longer has senior debt with
another bank. The remainder of the senior debt was paid off in June 2010. 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.
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 inter-creditor agreement between the Company and the Senior Lender on
October 23, 2009 which extended the loan until December 9, 2010. On October 25, 2009, the Senior
Lender filed for bankruptcy protection, which has not impacted the relationship between the
Partnership and the Senior Lender. As part of the agreement to extend the loan for 14 months, the
Senior Lender required the Partnership to provide additional funds to cover current and potential
future cash requirements for capital improvements, operating expenses and marketing costs. As
mentioned above the Senior Lender has been repaid in full. Through December 31, 2010, Royal Bank
has loaned $2.4 million to the Partnership and is obligated to fund up to $2.7 million if required
for the remaining costs associated with capital improvements, operating and marketing expenses.
This loan has begun to be repaid from the cash flows since the Senior Lender has now been paid in
full. The outstanding balance as of December 31, 2010 is $418,000. The outstanding balance along
with any additional advances to the Partnership will be repaid in full prior to any other payments
to partners.
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 $10.0 million in impairment
charges related to this asset through December 31, 2008. No further impairment of this asset
occurred in 2009. During 2010 an additional impairment of $2.6 million was recorded as a result of
a slow-down of unit sales following the end of the tax credit incentive that was being offered by
the government. The measurement and recognition of the impairment was based on estimated future
discounted operating cash flows.
At December 31, 2010, the Partnership had total assets of $9.0 million of which $6.8 million is
real estate as reflected on the consolidated balance sheet and total borrowings of $9.6 million, of
which $9.6 million relates to the Companys loans discussed above. The Company has made an
investment of $13.6 million in this Partnership ($2.5 million capital contribution and $11.6
million of loans). The impairments mentioned above along with the repayment of advances that
started in June 2010 have contributed to an overall reduction in the Companys investment. At
December 31, 2010, the remaining amount of the investment in and receivables due from the
Partnership totaled $6.6 million.
77
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
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 is effective on March 31, 2011 and will not have
a material impact on its capital ratios. Refer to Note 10 Borrowings and Subordinated
Debentures to the Consolidated Financial Statements for more information.
US GAAP RAP Difference
In connection with a recent bank regulatory examination, the FDIC concluded, based upon its
interpretation of the Consolidated Reports of Condition and Income (the Call Report) instructions
and under regulatory accounting principles (RAP), that income from Royal Banks tax lien business
should be recognized on a cash basis, not an accrual basis. Royal Banks current accrual method is
in accordance with US GAAP. Royal Bank disagrees with the FDICs conclusion and filed the Call
Report for September 30, 2010 and December 31, 2010 in accordance with US GAAP. However, the
change in the manner of revenue recognition for the tax lien business for regulatory accounting
purposes affects Royal Banks and the Companys capital ratios as disclosed in Note 2 Regulatory
Matters and Significant Risks And Uncertainties and Note 15 Regulatory Capital Requirements to
the Consolidated Financial Statements. Royal Bank is in discussions with the FDIC to resolve the
difference of opinion.
Reclassifications
Certain items in the 2009 and 2008 consolidated financial statements and accompanying notes have
been reclassified to conform to the current years presentation format. There was no effect on net
loss for the periods presented herein as a result of reclassification.
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, 2010 and 2009. 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.
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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 evaluates securities for other-than-temporary impairment (OTTI) at least on a
quarterly basis. 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.
Under ASC Topic 320, OTTI is considered to have occurred with respect to debt securities (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 noncredit-related loss. 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.
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 was not able to classify investment security purchases as HTM through 2010.
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, 2010 and 2009, FHLB stock totaled $10.4 million and $11.0 million, respectively.
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. In the fourth quarter of 2010 the FHLB began partially
repurchasing excess capital stock and repurchased $500,000 from the Company. The suspension of the
dividend remains in effect.
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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
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, 2011, the FHLB filed an 8-K to report their results for the
year ended December 31, 2010. For the year ended December 31, 2010, the FHLB had net income of
$8.3 million compared to a net loss of $37.4 million for the year ended December 31, 2009. The
improvement in their results was related to lower credit-related losses on their mortgage-backed
securities portfolio. At December 31, 2010, GAAP capital was $4.2 billion as compared to a $3.7
billion at December 31, 2009. The FHLB was in compliance with its risk-based, total and leverage
capital requirements at December 31, 2010. 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 (government-sponsored entities) 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, 2010. 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 Held for Sale
At December 31, 2010, the Companys loans held for sale (LHFS) were comprised of $22.6 million in
non-accrual and $7.0 million in classified construction and land development loans and commercial
and residential real estate loans totaling $29.6 million. These loans were transferred from loans
held for investment (LHFI) to LHFS at the lower of cost or fair market value using the bid price
on an asset pool sale which is expected to close in the second quarter of 2011. At the time of
transfer to LHFS credit losses of $11.4 million were charged against the allowance for loan and
lease losses. Generally any subsequent credit losses on LHFS are recorded as a component of
non-interest income. LHFS at December 31, 2009 were $2.3 million and included one land development
loan and one commercial real estate loan.
Loans and Leases
Loans and leases are classified as LHFI when management has the intent and ability to hold the loan
or lease for the foreseeable future or until maturity or payoff. LHFI are stated at their
outstanding unpaid principal balances, net of an allowance for loan and leases losses and any
deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred and recognized as an
adjustment of the yield (interest income) of the related loans. The Company is generally amortizing
these amounts over the contractual life of the loan. The Company grants commercial and real estate
loans, including construction and land development loans 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 our geographic area. The Company has a concentration of credit risk in
commercial real estate, construction and land development loans at December 31, 2010. A
substantial portion of its debtors ability to honor their contracts is dependent upon the housing
sector specifically and the economy in general.
The Company classifies its leases as finance 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.
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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
For all classes of loans receivable, the accrual of interest is discontinued on a loan when
management believes that the borrowers financial condition is such that collection of principal
and interest is doubtful or when a loan becomes 90 days past due. When a loan is placed on
non-accrual all unpaid interest is reversed from interest income. Interest payments received on
nonaccrual loans including impaired loans are normally applied against principal. Excess proceeds
received over the principal amounts due on impaired loans are recognized as income on a cash basis.
Generally, loans are restored to accrual status when the loan is brought current, has performed in
accordance with the contractual terms for a reasonable period of time (generally six months) and
the ultimate collectibility of the total contractual principal and interest is no longer in doubt.
The past due status of all classes of loans receivable is determined based on contractual due dates
for loan payments.
Troubled debt restructurings (TDRs) are loans in which the borrower is experiencing financial
difficulty and the Company has granted an economic concession to the borrower. As of December 31,
2010, the Company has one TDR. This TDR is a multi-family real estate non-accrual loan in the
amount of $1.8 million.
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.
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 as more information becomes available. 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) general reserves reflecting historical loss rates by loan type, (2)
specific reserves for risk-rated credits based on probable losses on an individual or portfolio
basis and (3) qualitative reserves based upon current economic conditions and other risk factors.
The loan portfolio is stratified into loan segments that have similar risk characteristics. The
general allowance is based upon historical loss rates using a three-year rolling average of the
historical loss experienced within each loan segment. The qualitative factors used to adjust the
historical loss experience address various risk characteristics of the Companys loan and lease
portfolio include evaluating: (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, (6) quality of loan review and board oversight, (7) changes in lending policies
and procedures, and (8) changes in lending staff. Each factor is assigned a value to reflect
improving, stable or declining conditions based on managements best judgment using relevant
information available at the time of the evaluation. Adjustments to the factors are supported
through documentation of changes in conditions in a report accompanying the allowance for loan loss
calculation.
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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 specific reserves are determined utilizing standards required under ASC Topic 310. 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. Non-accrual loans are evaluated for impairment on
an individual basis considering all known relevant factors that may affect loan collectability such
as the borrowers overall financial condition, resources and payment record, support available from
financial guarantors and the sufficiency of current collateral values (current appraisals or rent
rolls for income producing properties), and risks inherent in different kinds of lending (such as
source of repayment, quality of borrower and concentration of credit quality). Non-accrual loans
that experience insignificant payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrowers prior payment record
and the amount of the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and industrial loans, commercial real estate loans
and commercial construction loans by either the present value of expected future cash flows
discounted at the loans effective interest rate or the fair value of the collateral if the loan is
collateral dependent. An allowance for loan losses is established for an impaired loan if its
carrying value exceeds its estimated fair value. The estimated fair values of substantially all of
the Companys impaired loans are measured based on the estimated fair value of the loans
collateral. The Company obtains third-party appraisals on the fair value of real estate collateral.
Appraised values are discounted to arrive at the estimated selling price of the collateral, which
is considered to be the estimated fair value. The discounts also include estimated costs to sell
the property. For commercial and industrial loans secured by non-real estate collateral, such as
accounts receivable, inventory and equipment, estimated fair values are determined based on the
borrowers financial statements, inventory reports, accounts receivable agings or equipment
appraisals or invoices. Indications of value from these sources are generally discounted based on
the age of the financial information or the quality of the assets. Large groups of smaller balance
homogeneous loans are collectively evaluated for impairment. Once a loan is determined to be
impaired it will be deducted from the portfolio and the net remaining balance will be used in the
general and qualitative analysis.
The allowance calculation methodology includes further segregation of loan classes into risk rating
categories. The borrowers overall financial condition, repayment sources, guarantors and value of
collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies
arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk
ratings include regulatory classifications of special mention, substandard, doubtful and loss.
Loans classified as special mention have potential weaknesses that deserve managements close
attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment
prospects. Loans classified as substandard have a well-defined weakness or weaknesses that
jeopardize the liquidation of the debt. They include loans that are inadequately protected by the
current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.
Loans classified as doubtful have all the weaknesses inherent in loans classified substandard with
the added characteristic that collection or liquidation in full, on the basis of current conditions
and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are
charged to the allowance for loan losses. Loan not classified are rated pass.
In addition, Federal regulatory agencies, as an integral part of their examination process,
periodically review the Companys allowance for loan losses and may require the Company to
recognize additions to the allowance based on their judgments about information available to them
at the time of their examination, which may not be currently available to management. Based on
managements comprehensive analysis of the loan portfolio, management believes the current level of
the allowance for loan losses is adequate at December 31, 2010. 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 2010, there were changes in estimation methods or assumptions that
affected the allowance methodology. These changes included changes to the period used for the
historical loss calculation; increasing the qualitative risk factors as a result of deteriorating
economic conditions on both a local and national level and the risk factor associated with
classified assets.
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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
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 had used 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.
As a consequence of the 2008 Lehman Brothers Holdings, Inc. (Lehman) bankruptcy filing, the swap
agreements and cash flow hedge that existed at the time of the bankruptcy filing 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. Because of the
uncertainty surrounding the litigation and the Lehman bankruptcy, the Company classified the
collateral as other-than-temporarily impaired for the entire amount as of December 31, 2008. In
the fourth quarter of 2010, the Company sold its claim and recorded a gain of $1.7 million. The
Company did not have any interest rate swaps agreements at December 31, 2010 and 2009.
Investments in Real Estate Joint Ventures
The Company had 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 was an investment in an Ohio marina project in which
the Company had a subordinate debt position. During the second quarter of 2010, the Company fully
impaired the investment and recorded a $2.5 million charge to earnings. The impairment was the
result of a lower collateral value due to the significant reduction in the cash flows being
generated from the property. During the third quarter of 2010, the first mortgage lender foreclosed
on the property. Partially offsetting the $2.5 million impairment charge was a $968,000 recovery
on another investment in a real estate in joint venture which had been written down in 2007. The
Company no longer holds any investments in real estate joint ventures.
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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
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.
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
been 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 $109,000,
$184,000, and $206,000 for 2010, 2009, and 2008, 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.
Stock Compensation
FASB ASC Topic 718, Compensation-Stock Compensation (ASC Topic 718) 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 718 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 ASC Topic 718 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 718 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 $35,000, $226,000 and
$703,000 during 2010, 2009 and 2008, respectively.
At December 31, 2010, 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 17 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.
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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 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
Shares of common stock 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.
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 20 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, 2010 and 2009, these reserve balances amounted to $100,000.
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ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
2. Recent Accounting Pronouncements
In June 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-16 Accounting for
Transfers of Financial Assets (ASU 2009-16) which updates ASC Topic 860 Transfers and
Servicing. The purpose of ASU 2009-16 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. ASU 2009-16 became effective on January 1, 2010. Earlier application
was prohibited. ASU 2009-16 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
adoption of ASU 2009-16 did not have a significant impact on the Companys consolidated financial
statements.
In June 2009, the FASB issued ASU No. 2009-17 Improvements to Financial Reporting by
Enterprises Involved with Variable Interest Entities (ASU 2009-17) which updates ASC Topic 810
Consolidations. The purpose of ASU 2009-17 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. ASU 2009-17 became effective on January 1, 2010. Earlier application was
prohibited. The adoption of ASU 2009-17 did not have a significant impact on the Companys
consolidated financial statements.
In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value
Measurements (ASU 2010-06), which updates ASC Topic 820 Fair Value Measurements and
Disclosures. ASU 2010-06 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 adoption of ASU
2010-06 did not have a significant impact on the Companys consolidated financial statements.
In February 2010, the FASB issued ASU No. 2010-08, Technical Corrections to Various Topics (ASU
2010-08). ASU 2010-08 clarifies guidance on embedded derivatives and hedging. ASU 2010-08 is
effective for interim and annual periods beginning after December 15, 2009. The adoption of ASU
2010-08 did not have a significant impact on the Companys consolidated financial statements.
In February 2010, the FASB issued ASU No. 2010-09, Amendments to Certain Recognition and
Disclosure Requirements (ASU 2010-09), which updates ASC Topic 855 Subsequent Events. ASU
2010-09 states that an SEC filer must evaluate subsequent events through the date the financial
statements are issued but is no longer required to disclose the date through which subsequent
events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and
the SECs requirements. The adoption of ASU 2010-09 did not have a significant impact on the
Companys consolidated financial statements.
86
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
In February 2010, the FASB issued ASU No. 2010-10, Consolidation: Amendments for Certain
Investment Funds (ASU 2010-10), which defers, for certain investment funds, the consolidation
requirements resulting from the issuance of ASU 2009-17. Specifically, the deferral is applicable
for a reporting entitys interest in an entity (1) that has all the attributes of an investment
company or (2) for which it is industry practice to apply measurement principles for financial
reporting purposes that are consistent with those followed by investment companies. ASU 2010-10 is
effective for periods beginning after November 15, 2009. The Company adopted the provisions of ASU
2010-10 during the first quarter of 2010. The adoption of ASU 2010-10 did not have a significant
impact on the Companys consolidated financial statements.
In March 2010, the FASB issued ASU No. 2010-11, Derivatives and Hedging: Scope Exception Related
to Embedded Credit Derivatives (ASU 2010-11), which amends and clarifies the accounting for
credit derivatives embedded in interests in securitized financial assets. ASU 2010-11 is effective
for interim periods beginning after June 15, 2010. The adoption of ASU 2010-11 did not have an
impact on the Companys consolidated financial statements.
In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20), which
is intended to help investors assess the credit risk of a companys receivables portfolio and the
adequacy of its allowance for credit losses held against the portfolios by expanding credit risk
disclosures. (ASU 2010-20) requires more information about the credit quality of financing
receivables in the disclosures to financial statements, such as aging information and credit
quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment
or class. The disaggregation of information is based on how a company develops its allowance for
credit losses and how it manages its credit exposure. The disclosure requirements as of December
31, 2010 are included in Note 4 Loans and Leases and Note 5 Allowance for Loan and Lease
Losses to the Consolidated Financial Statements. Disclosures about activity that occurs during a
reporting period will be effective in the interim reporting period ending March 31, 2011. In
January 2011, the FASB issued ASU 2011-01, Deferral of the Effective Date of Disclosures about
Troubled Debt Restructurings in ASU 2010-20. The update defers the effective date of reporting
troubled debt restructuring (TDR) credit quality disclosures until after the FASB has clarified
the guidance for determining what constitutes a TDR.
87
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 2 REGULATORY MATTERS and SIGNIFICANT RISKS and UNCERTAINTIES
FDIC 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 materially restrict Royal Bank from transacting its normal banking business.
Royal Bank continues to serve its customers in all areas including making 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.
Royal Bank created a Regulatory Compliance Committee comprised of outside directors and management
in the third quarter of 2009. The purpose of the Committee is to monitor compliance with the
Orders. Royal Bank has submitted an internal assessment of senior managements qualifications
report to the FDIC and the Department. Additionally Royal Bank has submitted plans for reducing
classified assets, reducing delinquencies, reducing commercial real estate concentrations,
liquidity and funds management, and reducing non-core deposits and whole-sale funding sources.
Royal Bank had submitted a 2010 budget plan, a 2010 strategic plan and a compensation plan. All
plans have been approved by the FDIC and the Department where required. In the first quarter of
2011, Royal Bank submitted a strategic plan and a budget plan for 2011 to the FDIC and the
Department for their review.
Royal Bank has submitted all required quarterly reports to the FDIC and the Department detailing
the actions taken to maintain compliance with the Orders as of the date of this Report.
88
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 2 REGULATORY MATTERS and SIGNIFICANT RISKS and UNCERTAINTIES- Continued
Federal Reserve Agreement
On March 17, 2010, the Company agreed to enter into the Federal Reserve Agreement with the Reserve
Bank. The material terms of the Federal Reserve Agreement provide that: (i) 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; (ii) 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; (iii) 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; (iv) 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; (v) 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; (vi) the Company will not, directly or indirectly,
purchase or redeem any shares of its stock without the prior written approval of the Reserve Bank;
(vii) 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; (viii) 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; (ix) 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 (x) the Companys board of directors will, within 45 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 Bancshares has submitted all progress reports
and responses required under the Federal Reserve Agreement as of the date of this Report.
Our success as a Company 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 is limited. The
Companys 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.
89
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 2 REGULATORY MATTERS and SIGNIFICANT RISKS and UNCERTAINTIES Continued
Continued Losses
Over the past three years, the Company has recorded significant losses totaling $95.4 million which
were primarily related to charge-offs on the loan and lease portfolio, impairment charges on
investment securities, and the establishment of a deferred tax valuation allowance. The
year-over-year decrease in losses was mainly related to the reduction in other-than-temporary
impairment on investment securities. As a result of these losses, the Company has negative
retained earnings of $91.8 million at December 31, 2010. In addition to reducing the total
shareholders equity, the continued losses and negative retained earnings impacts the Companys
ability to pay cash dividends to its shareholders now and in future years.
The deterioration of the real estate market over the past few years has significantly impacted the
Companys loan portfolio which has a high concentration of real estate secured loans. Net loan
charge-offs were $30.4 million, $19.2 million, and $12.2 million in 2010, 2009, and 2008. The
level of charge-offs were the primary reason for the significant provision for loan and lease
losses of $22.1 million, $20.6 million, and $21.8 million that were recorded in 2010, 2009, and
2008, respectively. As a result of the pending bulk loan/asset sale the level of non-performing
loans held for investment total $43.2 million at December 31, 2010, compared to $73.7 million at
December 31, 2009 and $85.8 million at December 31, 2008. Total non-performing loans at December
31, 2010 were $65.8 million and include $22.6 million in LHFS.
The investment impairment charges totaled $479,000, $11.0 million, and $23.4 million in 2010, 2009,
and 2008, respectively. As evidenced by the significant reduction in impairment charges, the
Company has reduced the credit risk within its investment portfolio. This was accomplished by
taking advantage of opportunities to sell investments that had potential credit risk for minimal
losses as well as instituting new policy guidelines regarding types of investments, as well as
limits on the amount of each type of investment.
The establishment of a deferred tax valuation allowance resulted in a $15.5 million non-cash charge
to the consolidated statement of operations in 2008. This was a result of managements conclusion
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.
In addition to the losses mentioned above, the Company has experienced an increase in other
operating expenses over the past three years. These increased expenses include OREO impairment
charges, OREO expenses, and legal and other expenses related to credit quality. Impairment charges
related to real estate owned via equity investments totaled $2.6 million, $0, and $1.5 million in
2010, 2009, and 2008 respectively. Also included are FDIC and state assessments which totaled $3.0
million, $3.8 million, and $658,000 in 2010, 2009, and 2008, respectively. As a result of the
reduction of deposits in 2010, largely related to the redemption of brokered deposits, the FDIC
assessment decreased in 2010.
Credit Quality
The Companys 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 could reduce our growth rate, affect the ability of customers to repay their loans and
generally affect our financial condition and results of operations. Many industries have been
impacted by the effects of the current economic conditions over the past two and a half years, with
financial services and real estate being hit particularly hard. The Companys loan and investment
portfolios were directly affected. The Companys commercial real estate loans, including
construction and land development loans, have seen a decline in the collateral values, and a
reduction in the borrowers ability to meet the payment terms of their loans due to reduced cash
flow. Further declines in collateral values and borrowers liquidity with sustained unemployment
at current levels may lead to increases in foreclosures, delinquencies and customer bankruptcies.
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.
90
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 2 REGULATORY MATTERS and SIGNIFICANT RISKS and UNCERTAINTIES Continued
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.
The Company had non-performing loans and recorded charge-offs of $65.8 million ($43.2 million in
LHFI and $22.6 million in LHFS) and $31.7 million at December 31, 2010, $73.7 million and $19.8
million at December 31, 2009, and $85.8 million and $12.3 million at December 31, 2008,
respectively. OREO balances were $29.2 million, $30.3 million, and $10.3 million at December 31,
2010, 2009, and 2008, respectively.
The Company has signed a letter of intent to sell a pool of $54.1 million of classified assets in a
bulk sale, which includes $30.3 million of non-performing loans, $10.8 million of classified
accruing loans and $13.0 million of OREO properties. The pending sale is expected to close in the
second quarter. The asset pool sale resulted in an additional loss of $14.2 million during the
fourth quarter of 2010. The lower of cost or fair market value of the loans transferred to LHFS was
$29.6 million, which included $22.6 million in non-performing loans and $7.0 million in classified
loans, after recording credit losses of $11.4 million. In addition, the Company recorded an OREO
impairment charge of $2.8 million to reflect the projected sales price of the properties included
in the sale. If and when completed the asset pool sale will allow for a significant reduction in
classified assets and will improve the credit quality of the Companys loan portfolio and overall
balance sheet.
In accordance with the Orders, Royal Bank has eliminated from the balance sheet via charge-off all
assets classified as Loss. Royal Bank was successful in reducing classified loans, which includes
LHFS, and OREO from $149.6 million at June 30, 2009 to $109.9 million at December 31, 2010. Royal
Banks delinquent loans held for investment (30 to 90 days) amounted to $36.3 million at June 30,
2009 versus $12.2 million at December 31, 2010. No material advances were made on any classified or
delinquent loan unless approved by the board of directors and determined to be in Royal Banks best
interest. Royal Banks non-performing loans held for investment were $80.8 million and $43.2
million at June 30, 2009 and December 31, 2010, respectively. Total non-performing loans at
December 31, 2010 are $65.8 million and include $22.6 million in LHFS. The Company has
restructured the investment portfolio to reduce credit risk by selling corporate debt securities
and equity securities and replacing their maturities with US government issued or sponsored
securities. Year-over-year other-than-temporary-impairment losses have decreased from $23.4 million
at December 31, 2008 to $11.0 million at December 31, 2009 to $479,000 at December 31, 2010.
Commercial Real Estate Concentrations
As mentioned previously the adverse economic conditions have primarily impacted the real estate
secured loan portfolio. 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 the Company believes 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 non-performing assets and the 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. It is possible that Royal Bank 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.
91
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 2 REGULATORY MATTERS and SIGNIFICANT RISKS and UNCERTAINTIES Continued
Management has been working diligently to reduce the concentration in commercial real estate loans
(CRE loans). Our non-residential real estate and construction and land development loan portfolio
held for investment was $284.1 million at December 31, 2010 comprising 57% of total loans compared
to $418.3 million or 61% of total loans at December 31, 2009. Royal Bank was successful in
reducing the CRE concentration, which includes loans held for sale from $289.1 million at June 30,
2009 to $214.1 million at December 31, 2010, which amounted to 207.7% of total capital and 225.9%
of Tier 1 capital. At December 31, 2010, total construction/land loans (CL loans) including loans
held for sale amounted to $93.2 million, or 90.5%, of total capital and 98.4% of Tier 1 capital. CL
loans were approximately $20 million less than what was projected under the CRE concentration plan
at year end 2010. Based on capital levels calculated under US GAAP, Royal Bank no longer has a
concentration of commercial real estate loans as defined in the joint agency Guidance on
Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices issued on
December 12, 2006 (Guidance). Based on capital levels calculated under RAP (see discussions under
GAAP RAP Difference under Note 1 -Significant Accounting Policies and Note 15 Regulatory
Capital Requirements to the Consolidated Financial Statements), CRE loans and CL loans as a
percentage of total capital and Tier 1 capital, respectively, are 239.6%, 263.5%, 104.3% and
114.8%. Under RAP, Royal Bank would have a concentration in CL loans as defined in the Guidance.
Included in the figures above are loans held for sale as of December 31, 2010.
Balance Sheet Reduction (Deleveraging)
During the past 18 months, Royal Bank has continued to record losses in earnings, which have
negatively impacted its capital ratios. The Company implemented a strategy to mitigate this impact
to the capital ratios through the reduction of the balance sheet (deleveraging). The balance sheet
deleveraging was accomplished primarily through the redemption of brokered deposits and FHLB
borrowings as required under the Orders by reducing the balances of cash, investment securities and
loans. This strategy of reducing the size of the balance sheet has provided greater use of the
existing capital despite the continued losses of income by maintaining that capital ratio as a
percentage of the remaining reduced level of assets in order to achieve capital ratios at required
regulatory levels. The Company recognizes that deleveraging will also potentially have a negative
impact on future earnings, but will provide a short-term benefit to capital levels.
The deleveraging of the balance sheet over the past 18 months resulted from paying off FHLB
advances and redeeming brokered CDs totaling $266.8 million within Royal Bank. The Company plans
to redeem additional brokered CDs in 2011. As part of the restructuring of the investment
portfolio, the Company also reduced the investment portfolio by approximately $122 million during
2010, which is almost entirely within Royal Bank. In addition, at year end 2010, loans have
declined by approximately $116 million due to pay downs of principal, payoffs, charge-offs and
transfers to OREO.
Liquidity and Funds Management
Royal Bank can not accept new brokered deposits and has limited capacity to borrow additional funds
in the event it is needed for liquidity purposes. However, Royal Bank has continued to maintain
liquidity measures that are well in excess of the target levels. As discussed in Note 10
Borrowings and Subordinated Debentures to the Consolidated Financial Statement, Royal Bank has an
over collateralized delivery requirement of 105% with the Federal Home Loan Bank (FHLB) as a
result of the level of non-performing assets and the losses that have been experienced over the
past three years. The ability to borrow additional funds is based on the amount of collateral
that is available to be pledged. As of December 31, 2010, Royal Bank had approximately $45 million
of available borrowing capacity at the FHLB as a result of excess collateral that has been pledged.
In addition, Royal Bank has approximately $95 million of unpledged agency securities that are
available to be pledged as collateral if needed. Royal Bank also has limited availability to
borrow from the Federal Reserve Discount Window. The availability, which is approximately $7
million at December 31, 2010, is based on collateral pledged.
92
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 2 REGULATORY MATTERS and SIGNIFICANT RISKS and UNCERTAINTIES Continued
At December 31, 2010, Royal Bank had $51.7 million in cash on hand and $95.0 million in unpledged
agency securities. At December 31, 2010, the liquidity to deposits ratio was 31.4% compared to
Royal Banks 12% policy target and the liquidity to total liabilities ratio was 24.2% compared to
Royal Banks 10% policy target. 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 $137.8 million from $226.9 million at June 30, 2009 to $89.1
million at December 31, 2010. Borrowings declined $129.0 million from $283.9 million at June 30,
2009 to $154.9 million at December 31, 2010.
The Company also has unfunded pension plan obligations of $12.5 million as of December 31, 2010
which potentially could impact liquidity. The Company plans to fund the pension plan obligations
through existing Company owned life insurance policies.
Dividend and Interest Restrictions
Due to the Orders and the Federal Reserve Agreement, 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 impacted and thereby limit
liquidity alternatives. 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 and to suspend
interest payments on the $25.8 million in trust preferred securities. As of December 31, 2010, the
Series A Preferred stock dividend in arrears is $2.4 million, which has not been recognized in the
consolidated financial statements. As of December 31, 2010 the trust preferred interest payment in
arrears was $1.2 million and has been recorded in interest expense and accrued interest payable.
The Company believes the decision to suspend the preferred cash dividends and the trust preferred
interest payments will better support the capital position of Royal Bank. The Treasury has the
right to appoint two directors to our board of directors until all accrued but unpaid dividends
have been paid in the event the Company fails to pay dividends on the Series A Preferred Stock for
a total of at least six quarterly dividend periods (whether or not consecutive). The Company
missed the sixth dividend payment due on November 16, 2010.
At December 31, 2010, 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 Royal Bank must receive prior approval from the FDIC and the Department before
declaring and paying a dividend to the Company. Under the Federal Reserve Agreement the Company
may 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.
Capital Adequacy
In connection with a recent bank regulatory examination, the FDIC concluded, based upon its
interpretation of the Consolidated Reports of Condition and Income (the Call Report) instructions
and under regulatory accounting principles (RAP), that income from Royal Banks tax lien business
should be recognized on a cash basis, not an accrual basis. Royal Banks current accrual method is
in accordance with US GAAP. Royal Bank disagrees with the FDICs conclusion and filed the Call
Report for December 31, 2010 in accordance with US GAAP. However, the change in the manner of
revenue recognition for the tax lien business for regulatory accounting purposes affects Royal
Banks and the Companys capital ratios as disclosed in Note 15 Regulatory Capital Requirements
to the Consolidated Financial Statements. Royal Bank is in discussions with the FDIC to resolve
the difference of opinion.
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, 2010, based on capital levels
calculated under RAP, Royal Banks total risk-based capital and Tier 1 leverage ratios were 13.76%
and 8.03%, respectively.
93
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 2 REGULATORY MATTERS and SIGNIFICANT RISKS and UNCERTAINTIES Continued
Department of Justice Investigation (DOJ)
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 DOJ. The subpoena seeks
certain documents and information relating to an ongoing investigation being conducted by the DOJ.
It is possible that the outcome of the investigation could result in fines and penalties being
assessed against both CSC and RTL, which could also result in reputational risk due to negative
publicity. However Royal Bank has been advised that neither CSC nor RTL are targets of the DOJ
investigation, but they are subjects of the investigation and therefore the Company has concluded
that it is unlikely that a contingent liability exists. Royal Bank, CSC and RTL are cooperating in
the investigation.
Management Plans
The Company was successful during the past year in reducing the cost of funds, which improved the
net interest margin; in completing the sale of Royal Asian, which permitted the Company to
contribute additional capital of $10.3 million to Royal Bank, minimizing investment impairment,
which amounted to only $479,000 in 2010; recouping $1.7 million of the $5.0 million collateral loss
associated with the collapse of Lehman in 2008; and complying with the Orders, which included
maintaining required capital ratios and liquidity measures. During the first quarter of 2011 the
Company signed a letter of intent to sell approximately $54 million of classified assets in a bulk
sale that will significantly improve Royal Banks credit quality.
In addition to increased board oversight and the creation of a Regulatory Compliance Committee in
response to the Orders, the Company has enhanced the board through the addition of experienced
directors with diverse backgrounds. The new members are comprised of the following: the CEO of a
public company who has legal and consulting experience, a former regulator with consulting
experience, a former CEO of a much larger financial institution who has bank turnaround experience
and a former senior partner of a public accounting firm.
The board and management have developed a contingency plan to maintain capital ratios at required
levels under the Orders that expands the deleveraging beyond the redemption of brokered CDs and
FHLB advances, which includes the potential securitization of a significant portion of the tax lien
portfolio in 2011. The Company will also consider the following measures as part of the contingency
plan, if required, to insure that capital ratios continue to meet the requirements of the Orders.
These additional measures, if required, include the following: consider selling selected branches
with high concentrations of retail CDs, consider selling performing loans or specific segments of
the loan portfolio, consider a shareholder rights offering, and consider reducing the level of
investment securities by allowing maturing CDs to selectively runoff. It is extremely unlikely
that all of the above alternatives would be initiated. The Company recognizes that some of these
measures will also potentially have a negative impact on future earnings due to the loss of earning
assets, but they also can potentially provide a short-term benefit to capital levels. The board of
directors and management of the Company remain committed to meeting the capital level requirements
for Royal Bank as set forth in the Orders.
The Companys strategic plan includes compliance with the Orders and the Federal Reserve Agreement
discussed above, reducing the level of classified loans within the loan portfolio and improving the
overall level of credit quality, maintaining reduced credit risk within the investment portfolio
and returning to profitability. In concert with these efforts, the Company will transition more
toward a community bank focus within its geographic footprint and adjacent markets. This will be
achieved through the continued diversification of the loan portfolio, increased emphasis on the
growth of core deposits, the utilization of enterprise risk management for reviewing strategic
initiatives and maintenance of improved underwriting standards. The strategic plan provides a
framework for maintaining required capital ratios while also reducing the risk profile of the
Company and Royal Bank.
94
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
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 |
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (AOCI) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-credit |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
related |
|
|
|
|
As of December 31, 2010 |
|
Amortized |
|
|
unrealized |
|
|
Non-OTTI |
|
|
OTTI in |
|
|
|
|
(In thousands) |
|
cost |
|
|
gains |
|
|
in AOCI |
|
|
AOCI |
|
|
Fair value |
|
Investment securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential |
|
$ |
8,492 |
|
|
$ |
348 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8,840 |
|
U.S. government agencies |
|
|
30,492 |
|
|
|
|
|
|
|
(755 |
) |
|
|
|
|
|
|
29,737 |
|
Common stocks |
|
|
381 |
|
|
|
152 |
|
|
|
(50 |
) |
|
|
|
|
|
|
483 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies |
|
|
231,717 |
|
|
|
3,640 |
|
|
|
(704 |
) |
|
|
|
|
|
|
234,653 |
|
Non-agency |
|
|
7,026 |
|
|
|
114 |
|
|
|
(3 |
) |
|
|
|
|
|
|
7,137 |
|
Corporate bonds |
|
|
9,483 |
|
|
|
|
|
|
|
(197 |
) |
|
|
|
|
|
|
9,286 |
|
Trust preferred securities |
|
|
16,566 |
|
|
|
2,135 |
|
|
|
|
|
|
|
(87 |
) |
|
|
18,614 |
|
Other securities |
|
|
7,974 |
|
|
|
431 |
|
|
|
|
|
|
|
|
|
|
|
8,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale |
|
$ |
312,131 |
|
|
$ |
6,820 |
|
|
$ |
(1,709 |
) |
|
$ |
(87 |
) |
|
$ |
317,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Accumulated Other |
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss (AOCL) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-credit |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
related |
|
|
|
|
As of December 31, 2009 |
|
Amortized |
|
|
unrealized |
|
|
Non-OTTI |
|
|
OTTI in |
|
|
|
|
(In thousands) |
|
cost |
|
|
gains |
|
|
in AOCL |
|
|
AOCL |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 3 INVESTMENT SECURITIES Continued
The investment portfolio declined $121.5 million from $438.7 million at December 31, 2009 to $317.2
million at December 31, 2010. The decrease was primarily due to the sale of debt securities and
government agencies to reduce credit risk and extension risk within the investment portfolio and
provide funds for the redemption of maturing retail CDs, brokered CDs and FHLB advances.
The amortized cost and fair value of investment securities at December 31, 2010, 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, 2010 |
|
|
|
Amortized |
|
|
|
|
(In thousands) |
|
cost |
|
|
Fair value |
|
Within 1 year |
|
$ |
|
|
|
$ |
|
|
After 1 but within 5 years |
|
|
4,300 |
|
|
|
4,289 |
|
After 5 but within 10 years |
|
|
16,615 |
|
|
|
16,273 |
|
After 10 years |
|
|
35,626 |
|
|
|
37,075 |
|
Mortgage-backed securities-residential |
|
|
8,492 |
|
|
|
8,840 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies |
|
|
231,717 |
|
|
|
234,653 |
|
Non-agency |
|
|
7,026 |
|
|
|
7,137 |
|
|
|
|
|
|
|
|
Total available for sale debt securities |
|
|
303,776 |
|
|
|
308,267 |
|
|
|
|
|
|
|
|
|
|
No contractual maturity |
|
|
8,355 |
|
|
|
8,888 |
|
|
|
|
|
|
|
|
Total available for sale securities |
|
$ |
312,131 |
|
|
$ |
317,155 |
|
|
|
|
|
|
|
|
Proceeds from the sales of investments available for sale during 2010, 2009 and 2008 were
$181.3 million, $184.2 million, and $15.8 million, respectively. The following table summarizes
gross realized gains and losses realized on the sale of securities recognized in earnings in the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Gross realized gains |
|
$ |
1,938 |
|
|
$ |
4,077 |
|
|
$ |
176 |
|
Gross realized losses |
|
|
(648 |
) |
|
|
(2,185 |
) |
|
|
(1,489 |
) |
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) |
|
$ |
1,290 |
|
|
$ |
1,892 |
|
|
$ |
(1,313 |
) |
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, investment securities with a market value of $133.1 million were
pledged as collateral to secure advances with the FHLB.
96
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 3 INVESTMENT SECURITIES Continued
The Company evaluates securities for other-than-temporary impairment (OTTI) at least on a
quarterly basis. 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.
Under ASC Topic 320, OTTI is considered to have occurred with respect to debt securities (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 noncredit-related loss. 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.
The tables below indicate the length of time individual securities have been in a continuous
unrealized loss position at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
December 31, 2010 |
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies |
|
$ |
29,737 |
|
|
$ |
(755 |
) |
|
|
8 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
29,737 |
|
|
$ |
(755 |
) |
|
|
8 |
|
Common stocks |
|
|
96 |
|
|
|
(50 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96 |
|
|
|
(50 |
) |
|
|
2 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies |
|
|
73,169 |
|
|
|
(687 |
) |
|
|
19 |
|
|
|
4,429 |
|
|
|
(17 |
) |
|
|
1 |
|
|
|
77,598 |
|
|
|
(704 |
) |
|
|
20 |
|
Non-agency |
|
|
918 |
|
|
|
(3 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
918 |
|
|
|
(3 |
) |
|
|
1 |
|
Corporate bonds |
|
|
8,986 |
|
|
|
(197 |
) |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,986 |
|
|
|
(197 |
) |
|
|
9 |
|
Trust preferred securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,662 |
|
|
|
(87 |
) |
|
|
1 |
|
|
|
1,662 |
|
|
|
(87 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale |
|
$ |
112,906 |
|
|
$ |
(1,692 |
) |
|
|
39 |
|
|
$ |
6,091 |
|
|
$ |
(104 |
) |
|
|
2 |
|
|
$ |
118,997 |
|
|
$ |
(1,796 |
) |
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The AFS portfolio had gross unrealized losses of $1.8 million at December 31, 2010, which
recovered from gross unrealized losses of $5.6 million at December 31, 2009. The improvement in
gross unrealized losses is related to the overall improvement in the fair values of the securities
in the Companys investment portfolio slightly offset by $479,000 in impairment charges, including
$193,000 on two trust preferred securities, $165,000 on a preferred stock and $58,000 on one bond
that the Company decided to sell before recovery of its cost basis. 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.
97
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 3 INVESTMENT SECURITIES Continued
Common stocks: As of December 31, 2010, the Company had two common stocks of financial
institutions with a total fair value of $96,000 and an unrealized loss of $50,000, or 34.4% of its
aggregate cost. The Company recorded an OTTI charge to earnings of $220,000 related to one of
these two common stocks in 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, 2010.
Preferred stocks: During the second quarter of 2010 the Company decided to sell its one
preferred stock holding of a financial institution and recorded an impairment charge of $165,000.
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 was rated below
investment grade, and the stock price had seen a significant price recovery since the second
quarter of 2009, the price began to decline again during the second quarter. The Company decided
to sell the stock to minimize the loss. The sale was completed during the third quarter of 2010.
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.
U.S. government-sponsored agencies (US Agencies): As of December 31, 2010, the Company
had eight US Agencies with a fair value of $29.7 million and gross unrealized losses of $755,000,
or 2.5%, of their aggregate cost. All of these US Agencies have been in an unrealized loss
position for less than four months. Management believes that the unrealized losses on these debt
securities are a function of changes in investment spreads. 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, 2010.
U.S. government issued or sponsored collateralized mortgage obligations (Agency CMOs):
As of December 31, 2010, the Company had 20 Agency CMOs with a fair value of $77.6 million and
gross unrealized losses of $704,000, or 0.9% of their aggregate cost. One of the Agency CMOs had
been in an unrealized loss position for 13 months and the remaining 19 have been in an unrealized
loss position for less than six months. 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, 2010.
Non-agency collateralized mortgage obligations (Non-agency CMOs): As of December 31,
2010, the Company had one non-agency CMO with a fair value of $918,000 and gross unrealized losses
of $3,000, or 0.3% of the aggregate cost. The non-agency CMO bond has been in an unrealized loss
position for less than twelve months. The Company evaluated the impairment to determine if it could
expect to recover the entire amortized cost basis of the non-agency CMO bond by considering
numerous factors including credit default rates, conditional prepayment rates, current and expected
loss severities, delinquency rates, and geographic concentrations. The bond is rated AAA. The
Company does not intend to sell the non-agency CMO and it is not more likely than not that the
Company will be required to sell the investment before recovery of the amortized cost basis.
Therefore, the Company does not consider the bond to be other-thantemporarily impaired as of
December 31, 2010.
98
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 3 INVESTMENT SECURITIES Continued
Corporate bonds: As of December 31, 2010, the Company had nine corporate bonds with a fair
value of $9.0 million and gross unrealized losses of $197,000, or 2.2% of their aggregate cost.
All nine bonds have been in an unrealized loss position for two months and are above investment
grade. The Companys unrealized losses in investments in corporate bonds represent interest rate
risk and not credit risk of the underlying issuers. 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
credit-related loss on the nine bonds. 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 does not consider the
nine bonds to be other-than-temporarily impaired at December 31, 2010.
During the third quarter of 2010, the Company sold seven corporate bonds for a net gain of $7,000.
During the second quarter of 2010, the Company sold a corporate bond and recorded a loss of
$125,000. The Company decided to sell this corporate bond mainly due to the downgrade of the
credit rating of the bonds issuer, which is a finance company. An impairment charge of $58,000
was recorded in the first quarter of 2010. During the first quarter of 2010, the Company sold a
corporate bond that was deemed other-than-temporarily impaired during the second quarter of 2009.
The Company recorded an $87,000 loss when the bond was sold. The Company sold the bond because the
credit rating of the bond issuer had been previously downgraded and the price had recently
improved.
Trust preferred securities: At December 31, 2010, the Company had seven trust preferred
securities issued by five 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, 2010, the Company has one trust preferred security
with a fair value of $1.7 million and gross unrealized losses of $87,000, or 5.0% of their
aggregate cost. The trust preferred security has been in an unrealized loss position for longer
than twelve months and was deemed other-than-temporarily impaired at June 30, 2009. The security
is not rated.
The unrealized loss in the trust preferred security reflects the credit concerns related to the
financial institution that issued this long term financial obligation. 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 a lower value. Management applied a discounted cash
flow analysis based upon the 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 the bond. The total gross
unrealized loss of $87,000 recognized in comprehensive income is the noncredit-related loss on the
security.
During the third quarter of 2010, the Company decided to sell an OTTI security and recorded an
additional impairment charge of $138,000. The Company had previously recorded a credit-related
impairment charge of $1.6 million in 2009 on this security. During the second quarter of 2010, the
Company completed the sale of another trust preferred security that was deemed
other-than-temporarily impaired during the second quarter of 2009 and recorded a loss of $8,000.
The Company decided to sell this security during the first quarter of 2010 and recorded an
impairment charge of $55,000. During the first quarter of 2010 the Company completed the sale of
two other trust preferred securities deemed other-than-temporarily impaired at June 30, 2009 and
recorded total gains of $124,000.
99
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 3 INVESTMENT SECURITIES Continued
Other securities: As of December 31, 2010, the Company had eight investments in real
estate and SBA funds. As of December 31, 2010, one of the private equity real estate funds has a
fair value of $577,000. During the first quarter of 2010, after reviewing the funds recent
financials, asset values, and its near-term projections, management concluded that the fund was
other-than-temporarily impaired and recorded an impairment charge of $63,000. The Company has two
investments in private equity global commercial real estate investment funds with a total fair
value of $1.0 million at December 31, 2010. These funds were deemed other-than-temporarily
impaired during 2009. There was no additional impairment charge in 2010. These funds are not rated.
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.
The following table presents a roll-forward of the balance of credit-related impairment losses on
debt securities held at December 31, 2010 for which a portion of an other-than-temporary impairment
was recognized in other comprehensive income:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Balance at January 1, |
|
$ |
1,896 |
|
|
$ |
|
|
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) |
|
|
(859 |
) |
|
|
(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 |
|
|
(113 |
) |
|
|
(1,864 |
) |
|
|
|
|
|
|
|
Balance at December 31, |
|
$ |
924 |
|
|
$ |
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) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Mortgage-backed securities-residential |
|
$ |
|
|
|
$ |
|
|
|
$ |
4,953 |
|
Non-agency collateralized
mortgage obligations |
|
|
|
|
|
|
459 |
|
|
|
3,188 |
|
Corporate bonds |
|
|
58 |
|
|
|
1,353 |
|
|
|
11,497 |
|
Trust preferred securities |
|
|
193 |
|
|
|
3,009 |
|
|
|
|
|
Common stocks |
|
|
|
|
|
|
4,334 |
|
|
|
|
|
Preferred stocks |
|
|
165 |
|
|
|
1,117 |
|
|
|
3,750 |
|
Other securities |
|
|
63 |
|
|
|
769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
479 |
|
|
$ |
11,041 |
|
|
$ |
23,388 |
|
|
|
|
|
|
|
|
|
|
|
100
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 3 INVESTMENT SECURITIES Continued
The tables below indicate the length of time individual securities have been in a continuous
unrealized loss position at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
December 31, 2009 |
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2009, the Company recorded a total impairment charge to earnings of $11.0 million
related to common and preferred stocks, trust preferred securities, corporate bonds, collateralized
mortgage obligations (CMOs) and real estate investment funds. Management concluded that these
investments were OTTI.
NOTE 4 LOANS AND LEASES
Major classifications of LHFI are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Loans secured by real estate: |
|
|
|
|
|
|
|
|
Construction |
|
$ |
29,044 |
|
|
$ |
52,196 |
|
Land development |
|
|
50,594 |
|
|
|
66,878 |
|
Secured by 1-4 family residential real estate: |
|
|
|
|
|
|
|
|
Revolving, open-end loans secured by residential real
estate and extended under lines of credit |
|
|
1,252 |
|
|
|
1,272 |
|
All other loans secured by 1-4 family residential real estate: |
|
|
|
|
|
|
|
|
Secured by first liens |
|
|
26,166 |
|
|
|
44,053 |
|
Secured by junior liens |
|
|
1,881 |
|
|
|
3,173 |
|
Secured by multi family (5 or more) residential real estate |
|
|
10,277 |
|
|
|
22,017 |
|
Secured by residential real estate mezzanine |
|
|
|
|
|
|
2,480 |
|
Secured by non-farm nonresidential real estate |
|
|
194,203 |
|
|
|
277,234 |
|
Tax certificates |
|
|
70,443 |
|
|
|
73,106 |
|
Commercial and industrial loans |
|
|
74,027 |
|
|
|
104,063 |
|
Loans to individuals for household, family, and other personal
expenditures |
|
|
768 |
|
|
|
1,514 |
|
Lease financing receivables (net of unearned income) |
|
|
38,725 |
|
|
|
39,097 |
|
All other loans |
|
|
25 |
|
|
|
659 |
|
Less: Deferred loan fees |
|
|
(551 |
) |
|
|
(878 |
) |
|
|
|
|
|
|
|
Total loans and leases, net of unearned income |
|
$ |
496,854 |
|
|
$ |
686,864 |
|
|
|
|
|
|
|
|
101
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 4 LOANS AND LEASES Continued
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 and commitments was $3.9 million and $4.8 million at
December 31, 2010 and 2009. During 2010 no new related party loans were approved. Total payments
received on related party loans in 2010 were $444,000.
The Company classifies its leases as finance 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.
The Companys policy for income recognition on TDRs is to recognize income on currently performing
restructured loans under the accrual method. As of December 31, 2010, the Company had one TDR
which is classified as a multi-family real estate non-accrual loan in the amount of $1.8 million.
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, 2010. A substantial portion of its debtors ability to honor these contracts is
dependent upon the housing sector specifically and the economy in general.
In the fourth quarter of 2010, the Companys transferred to LHFS from LHFI $29.6 million in
non-accrual and classified loans. At the time of transfer to LHFS credit losses of $11.4 million
were charged against the allowance for loan and lease losses. These loans were transferred from
LHFI at the lower of cost or fair market value using the bid price on an asset pool sale which is
expected to close in the second quarter of 2011.
The Company uses a nine point grading risk classification system commonly used in the financial
services industry as the credit quality indicator. The first four classifications are rated Pass.
The riskier classifications include Watch, Special Mention, Substandard, Doubtful and Loss. The
risk rating is related to the underlying credit quality and probability of default. These risk
ratings are used to calculate the historical loss component of the ALLL.
|
|
|
Pass: includes credits that demonstrate a low probability of default; |
|
|
|
|
Watch: a warning classification which includes credits that are beginning to
demonstrate above average risk through declining earnings, strained cash flows,
increased leverage and/or weakening market fundamentals; |
|
|
|
|
Special mention: includes credits that have potential weaknesses that if left
uncorrected could weaken the credit or result in inadequate protection of the
Companys position at some future date. While potentially weak, credits in this
classification are marginally acceptable and loss of principal or interest is
not anticipated; |
|
|
|
|
Substandard accrualincludes credits that exhibit a well-defined weakness
which currently jeopardizes the repayment of debt and liquidation of collateral
even though they are currently performing. These credits are characterized by
the distinct possibility that the Company may incur a loss in the future if
these weaknesses are not corrected; |
|
|
|
|
Non-accrual (substandard non-accrual, doubtful, loss)-includes credits that
demonstrate serious problems to the point that it is probable that interest and
principal will not be collected according to the contractual terms of the loan
agreement. |
102
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 4 LOANS AND LEASES Continued
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.
The following table presents risk ratings for each loan portfolio segment at December 31, 2010,
excluding LHFS.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special |
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Pass |
|
|
Watch |
|
|
Mention |
|
|
Substandard |
|
|
Non-accrual |
|
|
Total |
|
Construction |
|
$ |
992 |
|
|
$ |
10,089 |
|
|
$ |
5,491 |
|
|
$ |
|
|
|
$ |
12,472 |
|
|
$ |
29,044 |
|
Land development |
|
|
6,921 |
|
|
|
13,967 |
|
|
|
22,420 |
|
|
|
|
|
|
|
7,286 |
|
|
|
50,594 |
|
Real Estate-non-residential |
|
|
97,142 |
|
|
|
49,278 |
|
|
|
37,723 |
|
|
|
|
|
|
|
10,060 |
|
|
|
194,203 |
|
Commercial & industrial |
|
|
27,864 |
|
|
|
6,488 |
|
|
|
25,400 |
|
|
|
8,317 |
|
|
|
5,958 |
|
|
|
74,027 |
|
Residential real estate |
|
|
19,272 |
|
|
|
7,430 |
|
|
|
198 |
|
|
|
|
|
|
|
2,399 |
|
|
|
29,299 |
|
Multi-family |
|
|
2,804 |
|
|
|
4,117 |
|
|
|
903 |
|
|
|
|
|
|
|
2,453 |
|
|
|
10,277 |
|
Leasing |
|
|
37,731 |
|
|
|
252 |
|
|
|
10 |
|
|
|
|
|
|
|
732 |
|
|
|
38,725 |
|
Consumer |
|
|
768 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
793 |
|
Tax certificates |
|
|
68,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,802 |
|
|
|
70,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal LHFI |
|
|
262,135 |
|
|
|
91,646 |
|
|
|
92,145 |
|
|
|
8,317 |
|
|
|
43,162 |
|
|
|
497,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Deferred loan fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(551 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total LHFI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
496,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table is an aging analysis of past due payments for each loan portfolio segment
at December 31, 2010, excluding LHFS.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 Days |
|
|
60-89 Days |
|
|
Accruing |
|
|
Total |
|
|
|
|
|
|
|
(In thousands) |
|
Past Due |
|
|
Past Due |
|
|
90+ Days |
|
|
Non-accrual |
|
|
Current |
|
|
Total |
|
Construction |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
12,472 |
|
|
$ |
16,572 |
|
|
$ |
29,044 |
|
Land development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,286 |
|
|
|
43,308 |
|
|
|
50,594 |
|
Real Estate-non-residential |
|
|
9,469 |
|
|
|
|
|
|
|
|
|
|
|
10,060 |
|
|
|
174,674 |
|
|
|
194,203 |
|
Commercial & industrial |
|
|
146 |
|
|
|
659 |
|
|
|
|
|
|
|
5,958 |
|
|
|
67,264 |
|
|
|
74,027 |
|
Residential real estate |
|
|
1,341 |
|
|
|
341 |
|
|
|
|
|
|
|
2,399 |
|
|
|
25,218 |
|
|
|
29,299 |
|
Multi-family |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,453 |
|
|
|
7,824 |
|
|
|
10,277 |
|
Leasing |
|
|
252 |
|
|
|
10 |
|
|
|
|
|
|
|
732 |
|
|
|
37,731 |
|
|
|
38,725 |
|
Consumer |
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
775 |
|
|
|
793 |
|
Tax certificates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,802 |
|
|
|
68,641 |
|
|
|
70,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal LHFI |
|
|
11,226 |
|
|
|
1,010 |
|
|
|
|
|
|
|
43,162 |
|
|
|
442,007 |
|
|
|
497,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Deferred loan fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(551 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total LHFI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
496,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 4 LOANS AND LEASES Continued
The following table details the composition of the non-accrual loans held for investment.
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Construction |
|
$ |
12,472 |
|
|
$ |
18,316 |
|
Land development |
|
|
7,286 |
|
|
|
5,908 |
|
Real Estate-non-residential |
|
|
10,060 |
|
|
|
19,584 |
|
Commercial & industrial |
|
|
5,958 |
|
|
|
11,779 |
|
Residential real estate |
|
|
2,399 |
|
|
|
12,445 |
|
Residential real estate mezzanine |
|
|
|
|
|
|
2,480 |
|
Multi-family |
|
|
2,453 |
|
|
|
|
|
Leasing |
|
|
732 |
|
|
|
627 |
|
Tax certificates |
|
|
1,802 |
|
|
|
2,540 |
|
|
|
|
|
|
|
|
Total |
|
$ |
43,162 |
|
|
$ |
73,679 |
|
|
|
|
|
|
|
|
Total non-accrual loans at December 31, 2010 were $65.8 million and were comprised of $43.2
million in LHFI and $22.6 million in LHFS. Non-accrual loans were $73.7 million at December 31,
2009. The $7.9 million decline in total non-accrual loans was the result of $19.9 million in
charge-offs related to impairment analysis and transfers to OREO, a $7.6 million charge to the allowance for loan and lease
losses on the $30.3 million carrying value of non-accrual loans transferred to LHFS, $20.0 million
reduction in existing non-accrual loan balances through payments or loans becoming current and
placed back on accrual, $16.3 million transferred to other real estate owned, and a $2.6 million
reduction related to the Royal Asian disposition which collectively were offset by $58.5 million in
additions. Construction and land loans, non-residential real estate and commercial loans represent
46%, 23% and 14%, respectively of the $43.2 million in non-accrual loans held for investment at
December 31, 2010. If interest had been accrued, such income would have been approximately $6.5
million, $6.2 million, and $5.1 million, for the years ended December 31, 2010, 2009, and 2008,
respectively. At December 31, 2010, the Company had one troubled debt restructured loan and no
loans past due 90 days or more on which interest continues to accrue. The $9.1 million decline in
the valuation allowance was primarily related to $11.0 million in charge-offs recorded in 2010 on
loans that were impaired at December 31, 2009 offset by a $1.8 million valuation allowance on loans
that became impaired in 2010.
Total cash collected on impaired loans and leases during 2010, 2009, and 2008 was $21.7 million,
$21.6 million, and $7.6 million, respectively, of which $21.1 million, $21.3 million, and $7.3
million was credited to the principal balance outstanding on such loans, respectively.
The Company identifies a loan as impaired when it is probable that interest and principal will not
be collected according to the contractual terms of the loan 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.
104
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 4 LOANS AND LEASES Continued
The following is a summary of information pertaining to impaired loans:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Impaired loans and leases with a valuation allowance |
|
$ |
9,620 |
|
|
$ |
46,670 |
|
Impaired loans and leases without a valuation allowance |
|
|
32,805 |
|
|
|
27,009 |
|
|
|
|
|
|
|
|
Total impaired loans and leases |
|
$ |
42,425 |
|
|
$ |
73,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance related to impaired loans and leases |
|
$ |
1,907 |
|
|
$ |
10,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
(In thousands) |
|
2010 |
|
2009 |
|
2008 |
Average investment in impaired loans and leases |
|
$ |
78,225 |
|
|
$ |
79,754 |
|
|
$ |
55,134 |
|
Interest income recognized on impaired loans and leases |
|
$ |
335 |
|
|
$ |
242 |
|
|
$ |
302 |
|
Interest income recognized on a cash basis
on impaired loans and leases |
|
$ |
335 |
|
|
$ |
242 |
|
|
$ |
302 |
|
NOTE 5 ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Balance at the beginning of the year |
|
$ |
30,331 |
|
|
$ |
28,908 |
|
|
$ |
19,282 |
|
Charge-offs |
|
|
(31,714 |
) |
|
|
(19,818 |
) |
|
|
(12,327 |
) |
Recoveries |
|
|
1,300 |
|
|
|
636 |
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(30,414 |
) |
|
|
(19,182 |
) |
|
|
(12,215 |
) |
Reduction due to Royal Asian sale |
|
|
(928 |
) |
|
|
|
|
|
|
|
|
Provision for loan losses and leases |
|
|
22,140 |
|
|
|
20,605 |
|
|
|
21,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of year |
|
$ |
21,129 |
|
|
$ |
30,331 |
|
|
$ |
28,908 |
|
|
|
|
|
|
|
|
|
|
|
105
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 5 ALLOWANCE FOR LOAN AND LEASE LOSSES Continued
The following table presents the detail of the ALLL and the loan portfolio disaggregated by loan
portfolio segment as of December 31, 2010.
Allowance for Loan and Leases Losses and Loans Held for Investment
For the year ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
and land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
|
(In thousands) |
|
real estate |
|
|
development |
|
|
Commercial |
|
|
Multi-family |
|
|
Residential |
|
|
Consumer |
|
|
Leasing |
|
|
certificates |
|
|
Unallocated |
|
|
Total |
|
Allowance for Loan and Leases Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
10,039 |
|
|
$ |
7,895 |
|
|
$ |
6,542 |
|
|
$ |
|
|
|
$ |
3,762 |
|
|
$ |
25 |
|
|
$ |
1,757 |
|
|
$ |
290 |
|
|
$ |
21 |
|
|
$ |
30,331 |
|
Charge-offs |
|
|
(7,352 |
) |
|
|
(13,413 |
) |
|
|
(5,930 |
) |
|
|
(787 |
) |
|
|
(3,211 |
) |
|
|
|
|
|
|
(972 |
) |
|
|
(49 |
) |
|
|
|
|
|
|
(31,714 |
) |
Recoveries |
|
|
684 |
|
|
|
116 |
|
|
|
81 |
|
|
|
18 |
|
|
|
313 |
|
|
|
37 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
1,300 |
|
Provision |
|
|
6,796 |
|
|
|
9,508 |
|
|
|
3,223 |
|
|
|
1,421 |
|
|
|
285 |
|
|
|
(47 |
) |
|
|
834 |
|
|
|
139 |
|
|
|
(19 |
) |
|
|
22,140 |
|
Reduction due to Royal Asian sale |
|
|
(633 |
) |
|
|
(130 |
) |
|
|
(119 |
) |
|
|
|
|
|
|
(43 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(928 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
9,534 |
|
|
$ |
3,976 |
|
|
$ |
3,797 |
|
|
$ |
652 |
|
|
$ |
1,106 |
|
|
$ |
12 |
|
|
$ |
1,670 |
|
|
$ |
380 |
|
|
$ |
2 |
|
|
$ |
21,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: related to loans
individually evaluated for impairment |
|
$ |
1,363 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
245 |
|
|
$ |
74 |
|
|
$ |
|
|
|
$ |
194 |
|
|
$ |
31 |
|
|
$ |
|
|
|
$ |
1,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: related to loans
collectively evaluated for impairment |
|
$ |
8,171 |
|
|
$ |
3,976 |
|
|
$ |
3,797 |
|
|
$ |
407 |
|
|
$ |
1,032 |
|
|
$ |
12 |
|
|
$ |
1,476 |
|
|
$ |
349 |
|
|
$ |
2 |
|
|
$ |
19,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LHFI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
194,203 |
|
|
$ |
79,638 |
|
|
$ |
74,027 |
|
|
$ |
10,277 |
|
|
$ |
29,299 |
|
|
$ |
793 |
|
|
$ |
38,725 |
|
|
$ |
70,443 |
|
|
$ |
(551 |
) |
|
$ |
496,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually
evaluated for impairment |
|
$ |
10,060 |
|
|
$ |
19,758 |
|
|
$ |
5,858 |
|
|
$ |
2,453 |
|
|
$ |
2,159 |
|
|
$ |
|
|
|
$ |
335 |
|
|
$ |
1,802 |
|
|
$ |
|
|
|
$ |
42,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively
evaluated for impairment |
|
$ |
184,143 |
|
|
$ |
59,880 |
|
|
$ |
68,169 |
|
|
$ |
7,824 |
|
|
$ |
27,140 |
|
|
$ |
793 |
|
|
$ |
38,390 |
|
|
$ |
68,641 |
|
|
$ |
(551 |
) |
|
$ |
454,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table details the loans that were evaluated for impairment by loan segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
|
Unpaid |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Interest |
|
|
|
principal |
|
|
Carrying |
|
|
Related |
|
|
recorded |
|
|
income |
|
(In thousands) |
|
balance |
|
|
value |
|
|
allowance |
|
|
investment |
|
|
recognized |
|
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
16,147 |
|
|
$ |
12,472 |
|
|
$ |
|
|
|
$ |
19,944 |
|
|
$ |
|
|
Land development |
|
|
9,165 |
|
|
|
7,286 |
|
|
|
|
|
|
|
8,161 |
|
|
|
202 |
|
Real Estate-non-residential |
|
|
4,511 |
|
|
|
4,255 |
|
|
|
|
|
|
|
13,650 |
|
|
|
42 |
|
Commercial & industrial |
|
|
10,217 |
|
|
|
5,858 |
|
|
|
|
|
|
|
5,236 |
|
|
|
2 |
|
Residential real estate |
|
|
1,172 |
|
|
|
1,119 |
|
|
|
|
|
|
|
3,243 |
|
|
|
76 |
|
Multi-family |
|
|
1,935 |
|
|
|
1,815 |
|
|
|
|
|
|
|
458 |
|
|
|
|
|
Tax certificates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total: |
|
$ |
43,147 |
|
|
$ |
32,805 |
|
|
$ |
|
|
|
$ |
51,688 |
|
|
$ |
322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7,340 |
|
|
$ |
|
|
Land development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,172 |
|
|
|
13 |
|
Real Estate-non-residential |
|
|
5,805 |
|
|
|
4,442 |
|
|
|
1,363 |
|
|
|
5,057 |
|
|
|
|
|
Commercial & industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,782 |
|
|
|
|
|
Residential real estate |
|
|
1,239 |
|
|
|
966 |
|
|
|
74 |
|
|
|
1,153 |
|
|
|
|
|
Multi-family |
|
|
638 |
|
|
|
393 |
|
|
|
245 |
|
|
|
3,469 |
|
|
|
|
|
Leasing |
|
|
335 |
|
|
|
141 |
|
|
|
194 |
|
|
|
538 |
|
|
|
|
|
Tax certificates |
|
|
4,850 |
|
|
|
1,771 |
|
|
|
31 |
|
|
|
1,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total: |
|
$ |
12,867 |
|
|
$ |
7,713 |
|
|
$ |
1,907 |
|
|
$ |
26,537 |
|
|
$ |
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 6 OTHER REAL ESTATE OWNED
OREO decreased $1.1 million from $30.3 million at December 31, 2009 to $29.2 million at December
31, 2010. Set forth below is a table which details the changes in OREO from December 31, 2009 to
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
(In thousands) |
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
Beginning balance |
|
$ |
30,317 |
|
|
$ |
25,781 |
|
|
$ |
30,795 |
|
|
$ |
27,525 |
|
Capital improvements |
|
|
|
|
|
|
697 |
|
|
|
545 |
|
|
|
|
|
Net proceeds from sales |
|
|
(4,391 |
) |
|
|
(3,403 |
) |
|
|
(5,021 |
) |
|
|
(504 |
) |
Net gain on sales |
|
|
157 |
|
|
|
174 |
|
|
|
404 |
|
|
|
284 |
|
Assets acquired on non-accrual loans |
|
|
|
|
|
|
8,421 |
|
|
|
2,873 |
|
|
|
5,490 |
|
Other |
|
|
500 |
|
|
|
85 |
|
|
|
(10 |
) |
|
|
|
|
Impairment charge |
|
|
(802 |
) |
|
|
(960 |
) |
|
|
(2,061 |
) |
|
|
(3,551 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
25,781 |
|
|
$ |
30,795 |
|
|
$ |
27,525 |
|
|
$ |
29,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the fourth quarter of 2010, the Company had five collateral acquisitions. The first
foreclosure was on 87 improved residential lots which were collateral for a $3.9 million
construction loan for an age-restricted community in Bucks County, Pennsylvania. The second
foreclosure was on a two-story 13,000 square foot commercial building in Camden County, New Jersey.
The third foreclosure was on seven single-family rental properties in Philadelphia, Pennsylvania
that were collateral for a residential loan. The fourth foreclosure was on 18 single-family
residential properties in Philadelphia, Pennsylvania that were collateral for a residential
participation loan. The Company is entitled to 50% of the collateral. The Company recorded total
charge-offs of $402,000 to the allowance for loan and lease losses when the collateral for these
four lending relationships was transferred to OREO. The fifth foreclosure was on a 14.5 acre
parcel, of which the developable area is 1.6 acres, in Burlington County, New Jersey. The parcel
was collateral for a land development loan. A recent appraisal indicated an as-is value of
$600,000. Consequently the Company recorded a gain of $271,000 when the collateral was transferred
to OREO. During the fourth quarter, the Company recorded an impairment charge of $2.8 million on
six properties included in the asset pool sale. Additionally the Company recorded a total
impairment charge of $776,000 related to three previously foreclosed properties.
Also in the fourth quarter the Company sold portions of collateral associated with four separate
OREO properties. The Company received proceeds of $477,000 and recorded a net gain of $11,000 as a
result of these sales. Additionally the Company sold two properties acquired through the tax lien
portfolio. The Company received proceeds of $27,000 and recorded gains of $2,000 as a result of
these sales.
During the third quarter of 2010, the Company had two significant collateral acquisitions related
to two different lending relationships. The first foreclosure was on two commercial building lots
which were collateral for a $1.6 million construction loan in Maryland. The second foreclosure was
on a three-story commercial building in Florida that was collateral for a $1.0 million commercial
real estate loan. The Company is entitled to 95% of the collateral value. The Company recorded
total charge-offs of $96,000 to the allowance for loan and lease losses when the collateral for
these two lending relationships was transferred to OREO. During the third quarter the Company sold
collateral associated with two notable projects. The first sale was related to a condominium
project in Wildwood, New Jersey described below. The Company sold 25 units and received net
proceeds of $3.0 million while recording a gain of $338,000 as a result of the sale of these units.
The second sale was related to collateral acquired in the fourth quarter of 2009. The Company
received proceeds of $1.4 million and recorded a gain of $59,000. During the third quarter of 2010,
the Company recorded impairment charges of $2.1 million related to three separate projects and tax
liens. In addition to the sales mentioned above the Company sold four properties acquired through
the tax lien portfolio. The Company received proceeds of $240,000 and recorded gains of $45,000 as
a result of these sales.
107
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 6 OTHER REAL ESTATE OWNED Continued
During the second quarter of 2010, the Company received a deed in lieu of foreclosure for a rental
community consisting of 182 dwelling units which was collateral for a $16.1 million participation
loan. The Company is entitled to 52% of the collateral value. The Company recorded a charge-off of
$457,000 to the allowance for loan and lease losses when the collateral was transferred to OREO.
Also during the second quarter, the Company sold collateral associated with four different
projects. The first sale was related to a condominium project in Raleigh, North Carolina that the
Company foreclosed on during the fourth quarter of 2008. The Company sold three units during the
second quarter of 2010. The second sale was related to a condominium project in Wildwood, New
Jersey that the Company foreclosed on during the fourth quarter of 2009. During the second quarter
of 2010, the Company completed the renovations to the project and held an auction of 28 units. At
June 30, 2010, the Company had settled on ten of the condominium units. The third sale was related
to a commercial building that was the collateral for a loan transferred to OREO during the second
quarter of 2009. The last sale was related to 3 homes and 14 residential lots located in North
Carolina and South Carolina that the Company foreclosed on during the second quarter of 2010.
During the second quarter the Company sold one home and one lot. As a result of these sales, the
Company received net proceeds of $2.9 million and recorded a loss of $15,000. In addition to the
sales mentioned above the Company sold five properties acquired through the tax lien portfolio.
The Company received proceeds of $427,000 and recorded gains of $189,000 as a result of these
sales.
During the second quarter of 2010, the Company recorded impairment charges of $960,000 which were
primarily related to an apartment building in Luzerne County, Pennsylvania foreclosed on in the
second quarter of 2009 and also the tax lien portfolio.
During the first quarter of 2010, the Company sold collateral related to three loans. The Company
sold 19 condominium units in Raleigh, North Carolina. The second sale was a commercial building in
Gloucester County, New Jersey that was collateral for a loan transferred to OREO in the third
quarter of 2009. The third sale was a residential building in Philadelphia, Pennsylvania that was
collateral for a loan transferred to OREO in the fourth quarter of 2009. As a result of these
sales, the Company received net proceeds of $4.3 million and recorded an $87,000 gain. In addition
to the sales mentioned above the Company sold one property acquired through the tax lien portfolio.
The Company received proceeds of $139,000 and recorded gains of $70,000 as a result of this sale.
During the first quarter of 2010, the Company recorded an impairment charge of $802,000 related to
three lots in Ocean City, Maryland which were transferred to OREO in the first 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 7 PREMISES AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
Estimated |
|
|
|
|
|
|
(In thousands) |
|
Useful Lives |
|
2010 |
|
|
2009 |
|
Land |
|
|
|
$ |
2,396 |
|
|
$ |
2,396 |
|
Buildings and leasehold improvements |
|
5 - 39 years |
|
|
8,071 |
|
|
|
8,082 |
|
Furniture, fixtures and equipment |
|
3 - 7 years |
|
|
7,048 |
|
|
|
6,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,515 |
|
|
|
17,400 |
|
Less accumulated depreciation and amortization |
|
|
|
|
(11,780 |
) |
|
|
(11,094 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,735 |
|
|
$ |
6,306 |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense, related to premises and equipment, was approximately
$686,000, $907,000, and $1.1 million, for the years ended 2010, 2009, and 2008, respectively.
Depreciation and amortization related to real estate owned via equity investments is not included
in the above table.
108
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 8 LEASE COMMITMENTS
The Company leases various premises under non-cancelable operating lease agreements, which expire
through 2021 and require minimum annual rentals. The approximate minimum rental commitments under
the leases are as follows for the year ended December 31, 2010:
|
|
|
|
|
|
|
As of |
|
(In thousands) |
|
December 31, 2010 |
|
2011 |
|
$ |
771 |
|
2012 |
|
|
682 |
|
2013 |
|
|
604 |
|
2014 |
|
|
296 |
|
2015 |
|
|
199 |
|
Thereafter |
|
|
583 |
|
|
|
|
|
Total lease commitments |
|
$ |
3,135 |
|
|
|
|
|
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 $1.3 million, $1.2 million, and $1.3 million for the years ended December 31, 2010,
2009 and 2008, respectively.
NOTE 9 DEPOSITS
Deposits are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Demand |
|
$ |
52,872 |
|
|
$ |
63,168 |
|
NOW |
|
|
40,884 |
|
|
|
45,248 |
|
Money Market |
|
|
180,862 |
|
|
|
168,893 |
|
Savings |
|
|
15,922 |
|
|
|
15,336 |
|
Time deposits (over $100) |
|
|
105,788 |
|
|
|
141,652 |
|
Time deposits (under $100) |
|
|
208,534 |
|
|
|
240,557 |
|
Brokered deposits |
|
|
89,051 |
|
|
|
206,901 |
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
693,913 |
|
|
$ |
881,755 |
|
|
|
|
|
|
|
|
Maturities of time deposits for the next five years and thereafter are as follows:
|
|
|
|
|
|
|
As of |
|
(In thousands) |
|
December 31, 2010 |
|
2011 |
|
$ |
273,414 |
|
2012 |
|
|
72,749 |
|
2013 |
|
|
35,867 |
|
2014 |
|
|
4,998 |
|
2015 |
|
|
4,928 |
|
Thereafter |
|
|
11,417 |
|
|
|
|
|
Total certificates of deposit |
|
$ |
403,373 |
|
|
|
|
|
109
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 10 BORROWINGS AND SUBORDINATED 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, 2010. At December 31, 2010, advances from the FHLB totaling $110.7 million,
which includes the $22.0 million mentioned above, will mature within one day to three years. The
FHLB advances had a weighted average interest rate of 2.78%. 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, 2010, investment securities with a
market value of $133.1 million were pledged as collateral to the FHLB. The average balance of
advances with the FHLB during 2010 was $185.1 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, 2009, advances from FHLB totaled $209.5 million with maturities within one day to
four years. These advances had a weighted average interest rate of 3.91%. The average balance of
advances with the FHLB during 2009 was $226.9 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, |
|
|
|
2010 |
|
|
2009 |
|
(Dollars in thousands) |
|
Amount |
|
|
Rate |
|
|
Amount |
|
|
Rate |
|
Advances maturing in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
$ |
|
|
|
|
|
|
|
$ |
114,500 |
|
|
|
4.41 |
% |
2011 |
|
|
22,000 |
|
|
|
0.72 |
% |
|
|
|
|
|
|
|
|
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 |
|
|
8,719 |
|
|
|
3.46 |
% |
|
|
15,001 |
|
|
|
3.46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FHLB borrowings |
|
$ |
110,719 |
|
|
|
|
|
|
$ |
209,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. Other borrowings
The Company has a note payable with PNC Bank (PNC) at December 31, 2010 in the amount of $4.2
million with a maturity date of August 25, 2016. The note payable balance at December 31, 2009 was
$4.7 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, 2010 and 2009 was 0.40% and 0.38%,
respectively.
At December 31, 2010 and 2009, 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, 2010, investment securities with a market value of $53.2 million were pledged as
collateral to secure all borrowings with PNC.
110
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 10 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 2.45% at December 31, 2010, 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, 2010 was 2.45%.
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.
As of December 31, 2010 the trust preferred interest payment in arrears was $1.2 million and has
been recorded in interest expense and accrued interest payable.
NOTE 11 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) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Income tax expense (benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
|
|
|
$ |
648 |
|
|
$ |
(7,819 |
) |
Deferred |
|
|
|
|
|
|
(174 |
) |
|
|
10,462 |
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
$ |
|
|
|
$ |
474 |
|
|
$ |
2,643 |
|
|
|
|
|
|
|
|
|
|
|
111
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 11 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 2010, 2009, and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Computed tax benefit at statutory rate |
|
$ |
(8,432 |
) |
|
$ |
(11,474 |
) |
|
$ |
(12,404 |
) |
Tax-exempt income |
|
|
(28 |
) |
|
|
(120 |
) |
|
|
(170 |
) |
Nondeductible expense |
|
|
29 |
|
|
|
58 |
|
|
|
69 |
|
Bank owned life insurance |
|
|
(133 |
) |
|
|
1,306 |
|
|
|
(432 |
) |
Bank owned life insurance excise penalty |
|
|
|
|
|
|
474 |
|
|
|
|
|
Other non-taxable income |
|
|
|
|
|
|
|
|
|
|
(413 |
) |
Other, net |
|
|
|
|
|
|
|
|
|
|
496 |
|
Increase in valuation allowance |
|
|
8,564 |
|
|
|
10,230 |
|
|
|
15,497 |
|
|
|
|
|
|
|
|
|
|
|
Applicable income tax expense (benefit) |
|
$ |
|
|
|
$ |
474 |
|
|
$ |
2,643 |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Allowance for loan and lease losses |
|
$ |
7,395 |
|
|
$ |
10,616 |
|
Tax net loss carryforward |
|
|
9,984 |
|
|
|
3,164 |
|
Asset valuation reserves |
|
|
431 |
|
|
|
431 |
|
Security writedowns |
|
|
1,943 |
|
|
|
1,780 |
|
OREO writedowns |
|
|
5,564 |
|
|
|
1,395 |
|
Investment in partnerships |
|
|
2,398 |
|
|
|
3,732 |
|
Accrued pension liability |
|
|
4,588 |
|
|
|
4,191 |
|
Accrued stock-based compensation |
|
|
780 |
|
|
|
767 |
|
Net operating loss carryovers from Knoblauch State Bank |
|
|
1,232 |
|
|
|
1,232 |
|
Non-accrual interest |
|
|
2,029 |
|
|
|
|
|
Unrealized losses on investment securities available for sale |
|
|
|
|
|
|
61 |
|
Other |
|
|
8 |
|
|
|
5 |
|
|
|
|
|
|
|
|
Deferred tax assets before valuation allowance |
|
|
36,352 |
|
|
|
27,374 |
|
|
|
|
|
|
|
|
Less valuation allowance |
|
|
(33,479 |
) |
|
|
(25,727 |
) |
Less valuation allowance for equity securities |
|
|
|
|
|
|
(97 |
) |
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
2,873 |
|
|
|
1,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Penalties on delinquent tax certificates |
|
|
596 |
|
|
|
559 |
|
Unrealized gains on investment securities available for sale |
|
|
1,228 |
|
|
|
|
|
Accretion on investments |
|
|
127 |
|
|
|
395 |
|
Prepaid deductions |
|
|
545 |
|
|
|
212 |
|
Other |
|
|
(37 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
2,459 |
|
|
|
1,136 |
|
|
|
|
|
|
|
|
Net deferred tax assets, included in other assets |
|
$ |
414 |
|
|
$ |
414 |
|
|
|
|
|
|
|
|
112
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 11 INCOME TAXES Continued
As of December 31, 2010 the Company had net operating income tax loss carryforwards of
approximately $24.1 million which are available to be carried forward to future tax years. These
loss carryforwards will expire in 2030 if not utilized.
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, 2010. 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 at December 31, 2010 and 2009. 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, 2010, the Company was in a cumulative book taxable loss position for the
three-year period ended December 31, 2010. 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 three
years. These conditions deteriorated dramatically during the three month period ended December 31,
2008 and continued throughout 2009 and 2010, 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, 2010, 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 2010 and 2009, the Company established
additional valuation allowances of $7.7 million and $10.2 million, respectively, which was a result
of the net operating loss for each 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 2010 or 2009.
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, Royal 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.
113
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 11 INCOME TAXES Continued
The Company is subject to income taxes in the U. S. and various state and local jurisdictions. As
of December 31, 2010, tax years 2005 through 2010 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 12 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) |
|
2010 |
|
2009 |
Financial instruments whose contract amounts represent credit risk |
|
|
|
|
|
|
|
|
Open-end lines of credit |
|
$ |
30,560 |
|
|
$ |
44,829 |
|
Commitments to extend credit |
|
|
|
|
|
|
1,630 |
|
Standby letters of credit and financial guarantees written |
|
|
2,755 |
|
|
|
3,477 |
|
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
fourth 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%.
114
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 13 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. It is possible that the outcome of the investigation could result in fines and penalties being
assessed against both CSC and RTL, which could also result in reputation risk due to negative publicity.
However, 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 14 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.
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 Royal Bank. 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 FDIC. In addition, dividends paid by Royal Bank to the Company would be
prohibited if the effect thereof would cause the Royal Banks capital to be reduced below
applicable minimum capital requirements.
115
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 14 SHAREHOLDERS EQUITY
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 regulatory
policy guidance. The Company currently has sufficient capital and liquidity to pay the scheduled
dividends on the Series A Preferred Stock; however, the Company believes this decision will better
support the capital position of Royal Bank. As of December 31, 2010, the Series A Preferred stock
dividend in arrears is $2.4 million, which have not been recognized in the consolidated financial
statements. The Treasury has the right to appoint two directors to our board of directors until
all accrued but unpaid dividends have been paid in the event the Company fails to pay dividends on
the Series A Preferred Stock for a total of at least six quarterly dividend periods (whether or not
consecutive). The Company missed the sixth dividend payment due on November 16, 2010.
At December 31, 2010, 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 Matters and Significant Risks And
Uncertainties 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. Under the
Federal Reserve Agreement as described in Note 2 Regulatory Matters and Significant Risks And
Uncertainties to the Consolidated Financial Statements, the Company may 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.
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 prior to October 14, 2008
and any repurchases of Company common stock. These restrictions on the payment of dividends and the
repurchases of common stock by the Company became effective immediately upon closing 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 15 REGULATORY CAPITAL REQUIREMENTS
The Company and Royal Bank are subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possible additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on 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 Royal 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
Royal Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier
I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). As of December 31, 2010, management believes
that Royal Bank met all capital adequacy requirements to which it is subject.
Under the Orders as described in Note 2 Regulatory Matters and Significant Risks And
Uncertainties 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. Royal Bank met these requirements as of December 31, 2010. 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. As of December 31, 2010, while Royal Bank met the
criteria for a well capitalized institution under the regulatory framework for prompt corrective
action, Royal Bank, as a party to the Orders, must classify itself as adequately capitalized.
116
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 15 REGULATORY CAPITAL REQUIREMENTS Continued
In connection with a recent bank regulatory examination, the FDIC concluded, based upon its
interpretation of the Consolidated Reports of Condition and Income (the Call Report) instructions
and under regulatory accounting principles (RAP), that income from Royal Banks tax lien business
should be recognized on a cash basis, not an accrual basis. Royal Banks current accrual method is
in accordance with US GAAP. Royal Bank disagrees with the FDICs conclusion and filed the Call
Report for September 30, 2010 and December 31, 2010 in accordance with US GAAP. However, a change
in the manner of revenue recognition for the tax lien business for regulatory accounting purposes
affects Royal Banks and the Companys capital ratios as shown below. Royal Bank is in discussions
with the FDIC to resolve the difference of opinion.
The table below sets forth Royal Banks capital ratios under RAP based on the FDICs interpretation
of the Call Report instructions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royal Bank |
|
$ |
89,547 |
|
|
|
13.76 |
% |
|
$ |
52,057 |
|
|
|
8.00 |
% |
|
$ |
65,071 |
|
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital
(to risk-weighted
assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royal Bank |
|
$ |
81,253 |
|
|
|
12.49 |
% |
|
$ |
26,029 |
|
|
|
4.00 |
% |
|
$ |
39,043 |
|
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
(to average assets,
leverage) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royal Bank |
|
$ |
81,253 |
|
|
|
8.03 |
% |
|
$ |
40,493 |
|
|
|
4.00 |
% |
|
$ |
50,616 |
|
|
|
5.00 |
% |
The tables below reflect the adjustments to the net loss as well as the capital ratios for
Royal Bank under US GAAP:
|
|
|
|
|
|
|
For the year ended |
|
(In thousands) |
|
December 31, 2010 |
|
RAP net loss |
|
$ |
(30,011 |
) |
Tax lien adjustment, net of noncontrolling interest |
|
|
8,126 |
|
|
|
|
|
US GAAP net loss |
|
$ |
(21,885 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
As adjusted |
|
|
under RAP |
|
for US GAAP |
Total capital (to risk-weighted assets) |
|
|
13.76 |
% |
|
|
15.54 |
% |
Tier I capital (to risk-weighted assets) |
|
|
12.49 |
% |
|
|
14.27 |
% |
Tier I capital (to average assets, leverage) |
|
|
8.03 |
% |
|
|
9.24 |
% |
117
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 15 REGULATORY CAPITAL REQUIREMENTS Continued
The tables below reflect the Companys capital ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
$ |
115,227 |
|
|
|
17.21 |
% |
|
$ |
53,570 |
|
|
|
8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company (consolidated) |
|
$ |
106,699 |
|
|
|
15.93 |
% |
|
$ |
26,785 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital (to average assets, leverage) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company (consolidated) |
|
$ |
106,699 |
|
|
|
9.68 |
% |
|
$ |
44,075 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
The Company has filed the Consolidated Financial Statements for Bank Holding Companies-FR Y-9C
(FR Y-9C) as of December 31, 2010 consistent with GAAP and the FR Y-9C instructions. In the
event that a similar adjustment for RAP purposes would be required by the Federal Reserve on the
holding company level, the adjusted ratios are shown in the table below.
|
|
|
|
|
|
|
For the year ended |
|
(In thousands) |
|
December 31, 2010 |
|
US GAAP net loss |
|
$ |
(24,093 |
) |
Tax lien adjustment, net of noncontrolling interest |
|
|
(8,126 |
) |
|
|
|
|
RAP net loss |
|
$ |
(32,219 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
As adjusted |
|
|
under US GAAP |
|
for RAP |
Total capital (to risk-weighted assets)
|
|
|
17.21 |
% |
|
|
15.48 |
% |
Tier I capital (to risk-weighted assets)
|
|
|
15.93 |
% |
|
|
14.20 |
% |
Tier I capital (to average assets, leverage)
|
|
|
9.68 |
% |
|
|
8.56 |
% |
118
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 15 REGULATORY CAPITAL REQUIREMENTS Continued
The Companys and Royal Banks actual capital amounts and ratios are also presented in the table
below as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
% |
NOTE 16 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.
119
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 16 PENSION PLANS Continued
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) |
|
2010 |
|
|
2009 |
|
Change in benefit obligation |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
11,549 |
|
|
$ |
10,233 |
|
Service cost |
|
|
301 |
|
|
|
505 |
|
Interest cost |
|
|
622 |
|
|
|
563 |
|
Benefits paid |
|
|
(484 |
) |
|
|
(69 |
) |
Actuarial loss |
|
|
538 |
|
|
|
317 |
|
|
|
|
|
|
|
|
Benefits obligation at end of year |
|
$ |
12,526 |
|
|
$ |
11,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized prior service cost |
|
|
449 |
|
|
|
538 |
|
Unrecognized actuarial loss |
|
|
1,962 |
|
|
|
1,478 |
|
|
|
|
|
|
|
|
|
|
$ |
2,411 |
|
|
$ |
2,016 |
|
|
|
|
|
|
|
|
The accumulated benefit obligation at December 31, 2010 and 2009 was $12.7 million and $11.0
million, respectively.
Weighted-average assumptions used to determine benefit obligations and net periodic pension cost,
as of the end of the applicable year are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2010 |
|
2009 |
Discount rate |
|
|
5.00 |
% |
|
|
5.50 |
% |
Rate of compensation increase |
|
|
4.00 |
% |
|
|
4.00 |
% |
Net pension cost included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Service cost |
|
$ |
301 |
|
|
$ |
505 |
|
|
$ |
472 |
|
Interest cost |
|
|
622 |
|
|
|
563 |
|
|
|
526 |
|
Amortization prior service cost |
|
|
90 |
|
|
|
90 |
|
|
|
94 |
|
Amortization net actuarial loss |
|
|
54 |
|
|
|
27 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
1,067 |
|
|
$ |
1,185 |
|
|
$ |
1,115 |
|
|
|
|
|
|
|
|
|
|
|
120
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 16 PENSION PLANS Continued
Benefit payments to be made from the Non-qualified Pension Plan are as follows:
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
Non-Qualified |
(In thousands) |
|
Pension Plans |
2011 |
|
$ |
583 |
|
2012 |
|
|
639 |
|
2013 |
|
|
668 |
|
2014 |
|
|
668 |
|
2015 |
|
|
992 |
|
Next five years thereafter |
|
|
5,796 |
|
Benefit payments are expected to be made from insurance policies owned by the Company. The cash
surrender value for these policies was approximately $2.4 million and $1.9 million as of December
31, 2010 and 2009, 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 2010 and
2009, no matching contribution was made as a result of a management decision to reduce costs.
Matching contributions to the plan were approximately $0, $0, and $248,000 for the years ended
December 31, 2010, 2009, and 2008, respectively.
NOTE 17 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 $35,000, $226,000 and
$703,000 for December 31, 2010, 2009 and 2008, respectively. The Company did not grant any
options to purchase common stock in 2010.
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) |
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
Expected life |
|
7.5 years |
|
5.5 years |
Expected volatility |
|
|
49.90 |
% |
|
|
45.18 |
% |
Risk-free interest rate |
|
|
3.51 |
% |
|
|
3.51 |
% |
|
|
|
(1) |
|
Amounts represent weighted average assumption for options granted during 2008 to employees
under the Long Term Incentive Plan. |
|
(2) |
|
Amounts represent weighted average assumption for options granted during 2008 to directors
under the Long Term Incentive Plan. |
121
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 17 STOCK COMPENSATION PLANS Continued
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
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 |
|
|
90,197 |
|
|
$ |
19.15 |
|
|
|
3.6 |
|
|
|
|
|
|
|
95,950 |
|
|
$ |
18.82 |
|
|
|
100,294 |
|
|
$ |
18.62 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(5,742 |
) |
|
|
11.72 |
|
|
|
|
|
|
|
|
|
|
|
(1,575 |
) |
|
|
21.78 |
|
|
|
(4,344 |
) |
|
|
13.75 |
|
Expired |
|
|
(10,369 |
) |
|
|
17.09 |
|
|
|
|
|
|
|
|
|
|
|
(4,178 |
) |
|
|
10.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at the end of the year |
|
|
74,086 |
|
|
$ |
20.02 |
|
|
|
2.8 |
|
|
$ |
|
|
|
|
90,197 |
|
|
$ |
19.15 |
|
|
|
95,950 |
|
|
$ |
18.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at the end of the year |
|
|
74,086 |
|
|
$ |
20.02 |
|
|
|
2.8 |
|
|
$ |
|
|
|
|
90,197 |
|
|
$ |
19.15 |
|
|
|
95,950 |
|
|
$ |
18.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2010. 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, 2010. |
Information pertaining to options outstanding at December 31, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
Average |
|
Range of |
|
Number |
|
|
Exercise |
|
|
Remaining |
|
exercise prices |
|
Outstanding |
|
|
Price |
|
|
Term (yrs) |
|
$11.00 - $12.00 |
|
|
5,466 |
|
|
$ |
11.90 |
|
|
|
0.9 |
|
$17.00 - $20.00 |
|
|
23,674 |
|
|
|
18.11 |
|
|
|
2.0 |
|
$21.00 - $23.00 |
|
|
44,946 |
|
|
|
22.01 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,086 |
|
|
$ |
20.02 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 all outstanding shares are fully vested (exercisable). The ability to
grant new options under this plan has expired.
122
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 17 STOCK COMPENSATION PLANS Continued
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
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 |
|
|
401,626 |
|
|
$ |
20.09 |
|
|
|
4.2 |
|
|
|
|
|
|
|
685,873 |
|
|
$ |
19.72 |
|
|
|
799,831 |
|
|
$ |
19.64 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,588 |
) |
|
|
11.89 |
|
Forfeited |
|
|
(16,621 |
) |
|
|
15.10 |
|
|
|
|
|
|
|
|
|
|
|
(263,866 |
) |
|
|
19.44 |
|
|
|
(99,370 |
) |
|
|
20.23 |
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,381 |
) |
|
|
16.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at the end of the year |
|
|
385,005 |
|
|
$ |
20.30 |
|
|
|
3.3 |
|
|
$ |
|
|
|
|
401,626 |
|
|
$ |
20.09 |
|
|
|
685,873 |
|
|
$ |
19.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at the end of the year |
|
|
369,448 |
|
|
$ |
20.24 |
|
|
|
3.2 |
|
|
$ |
|
|
|
|
357,737 |
|
|
$ |
19.88 |
|
|
|
525,789 |
|
|
$ |
19.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2010. 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, 2010. |
Information pertaining to options outstanding at December 31, 2010 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 |
|
|
30,918 |
|
|
$ |
11.90 |
|
|
|
0.3 |
|
|
|
30,918 |
|
|
$ |
11.90 |
|
$17.00 - $20.00 |
|
|
93,036 |
|
|
|
18.09 |
|
|
|
1.8 |
|
|
|
93,036 |
|
|
|
18.09 |
|
$21.00 - $23.00 |
|
|
261,051 |
|
|
|
22.09 |
|
|
|
4.2 |
|
|
|
245,494 |
|
|
|
22.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
385,005 |
|
|
$ |
20.30 |
|
|
|
3.3 |
|
|
|
369,448 |
|
|
$ |
20.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 17 STOCK COMPENSATION PLANS Continued
The following table provides detail for non-vested shares under the Employees Plan as of December
31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Exercise |
|
|
|
of shares |
|
|
Price |
|
Non-vested options December 31, 2009 |
|
|
43,889 |
|
|
$ |
21.81 |
|
Forfeited |
|
|
(1,514 |
) |
|
|
21.80 |
|
Vested |
|
|
(26,818 |
) |
|
|
21.82 |
|
|
|
|
|
|
|
|
Non-vested options December 31, 2010 |
|
|
15,557 |
|
|
$ |
21.78 |
|
|
|
|
|
|
|
|
There were a total of 15,557 unvested options at December 31, 2010 with a $73,000 fair value and
approximately $37,000 remained to be recognized in expense over a weighted-average period of 1
year. The net total intrinsic value for options that were exercised during 2008 was $31,000.
There were no options exercised in 2010 and 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, 2010, 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.
124
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 17 STOCK COMPENSATION PLANS Continued
A summary of the status of the unrestricted portion of the Plan is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
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 |
|
|
135,312 |
|
|
$ |
10.19 |
|
|
|
8.2 |
|
|
|
|
|
|
|
161,901 |
|
|
$ |
10.89 |
|
|
|
76,940 |
|
|
$ |
20.08 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,450 |
|
|
|
4.50 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(13,450 |
) |
|
|
12.33 |
|
|
|
|
|
|
|
|
|
|
|
(26,102 |
) |
|
|
14.38 |
|
|
|
(10,489 |
) |
|
|
20.08 |
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(487 |
) |
|
|
20.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at the end of the year |
|
|
121,862 |
|
|
$ |
9.76 |
|
|
|
7.3 |
|
|
$ |
|
|
|
|
135,312 |
|
|
$ |
10.19 |
|
|
|
161,901 |
|
|
$ |
10.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at the end of the year |
|
|
68,877 |
|
|
$ |
11.35 |
|
|
|
7.1 |
|
|
$ |
|
|
|
|
62,295 |
|
|
$ |
12.78 |
|
|
|
28,340 |
|
|
$ |
20.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of options
granted during the year |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
2.38 |
|
|
|
|
(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, 2010. 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, 2010. |
Information pertaining to options outstanding at December 31, 2010 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 |
|
|
80,700 |
|
|
$ |
4.50 |
|
|
|
7.8 |
|
|
|
38,580 |
|
|
$ |
4.50 |
|
$20.08 |
|
|
41,162 |
|
|
|
20.08 |
|
|
|
6.3 |
|
|
|
30,297 |
|
|
|
20.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,862 |
|
|
$ |
9.76 |
|
|
|
7.3 |
|
|
|
68,877 |
|
|
$ |
11.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides detail for non-vested shares under the Long-Term Incentive Plan
as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Exercise |
|
|
|
of shares |
|
|
Price |
|
Non-vested options December 31, 2009 |
|
|
73,017 |
|
|
$ |
7.98 |
|
Granted |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(700 |
) |
|
|
4.50 |
|
Vested |
|
|
(19,332 |
) |
|
|
8.88 |
|
|
|
|
|
|
|
|
Non-vested options December 31, 2010 |
|
|
52,985 |
|
|
$ |
7.69 |
|
|
|
|
|
|
|
|
125
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 17 STOCK COMPENSATION PLANS Continued
There were a total of 52,985 unvested options at December 31, 2010, with a $148,000 fair value and
approximately $122,000 remained to be recognized in expense over a weighted-averaged period of 2
years.
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. 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. 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. All shares of restricted stock were forfeited
in the first quarter of 2010 due to the Companys losses in 2009 and 2008.
NOTE 18 EARNINGS PER COMMON SHARE
Basic and diluted EPS are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2010 |
|
|
|
Loss |
|
|
Average shares |
|
|
Per share |
|
(In thousands, except for per share data) |
|
(numerator) |
|
|
(denominator) |
|
|
Amount |
|
Basic and Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common shareholders |
|
$ |
(26,063 |
) |
|
|
13,256 |
|
|
$ |
(1.97 |
) |
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, 594,939 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
126
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 18 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.
NOTE 19 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.
The components of other comprehensive income (loss) and the related tax effects are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2010 |
|
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
Before tax |
|
|
expense |
|
|
Net of tax |
|
(In thousands) |
|
amount |
|
|
(benefit) |
|
|
amount |
|
Unrealized gains on investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains arising during period |
|
$ |
6,102 |
|
|
$ |
1,764 |
|
|
$ |
4,338 |
|
Reduction in deferred tax valuation allowance
related to preferred and common stock |
|
|
|
|
|
|
(97 |
) |
|
|
97 |
|
Non-credit loss portion of other-than-temporary
impairments |
|
|
(87 |
) |
|
|
(30 |
) |
|
|
(57 |
) |
Less adjustment for impaired investments |
|
|
(479 |
) |
|
|
(168 |
) |
|
|
(311 |
) |
Less reclassification adjustment for gains
realized in net loss |
|
|
1,290 |
|
|
|
452 |
|
|
|
838 |
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on investment securities |
|
|
5,204 |
|
|
|
1,547 |
|
|
|
3,851 |
|
Unrecognized benefit obligation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
|
(538 |
) |
|
|
(188 |
) |
|
|
(350 |
) |
Less reclassification adjustment for amortization |
|
|
(143 |
) |
|
|
(50 |
) |
|
|
(93 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(395 |
) |
|
|
(138 |
) |
|
|
(257 |
) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net |
|
$ |
4,809 |
|
|
$ |
1,409 |
|
|
$ |
3,594 |
|
|
|
|
|
|
|
|
|
|
|
127
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 19 COMPREHENSIVE INCOME (LOSS) Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
128
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 19 COMPREHENSIVE INCOME (LOSS) Continued
The other components of accumulated other comprehensive loss included in shareholders equity at
December 31, 2010, 2009, and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Unrecognized benefit obligation |
|
$ |
(1,567 |
) |
|
$ |
(1,478 |
) |
|
$ |
(1,189 |
) |
Unrealized gains (losses) on AFS investments |
|
|
3,509 |
|
|
|
(174 |
) |
|
|
(24,917 |
) |
Adjustment to net periodic pension cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
$ |
1,942 |
|
|
$ |
(1,652 |
) |
|
$ |
(26,106 |
) |
|
|
|
|
|
|
|
|
|
|
Refer to Note 16 Pension Plans to the Consolidated Financial Statements for more information.
NOTE 20 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. |
|
|
|
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. Level 2 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.
129
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 20
FAIR VALUE OF FINANCIAL INSTRUMENTS Continued
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 preferred and common stocks, and one
trust preferred security which is actively traded.
Level 2 securities include obligations of U.S. government-sponsored agencies, 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.
Level 3 securities include seven trust preferred securities and in prior periods one collateralized
debt obligation (CDO). The fair values 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. In 2009, the Company engaged third parties to assist in
valuing the CDO. The CDO valuation was 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 value received.
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, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2010 |
|
Fair Value Measurements Using |
|
|
|
|
(In thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Fair Value |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential |
|
$ |
|
|
|
$ |
8,840 |
|
|
$ |
|
|
|
$ |
8,840 |
|
U.S. government agencies |
|
|
|
|
|
|
29,737 |
|
|
|
|
|
|
|
29,737 |
|
Common stocks |
|
|
483 |
|
|
|
|
|
|
|
|
|
|
|
483 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies |
|
|
|
|
|
|
234,653 |
|
|
|
|
|
|
|
234,653 |
|
Non-agency |
|
|
|
|
|
|
7,137 |
|
|
|
|
|
|
|
7,137 |
|
Corporate bonds |
|
|
|
|
|
|
9,286 |
|
|
|
|
|
|
|
9,286 |
|
Trust preferred securities |
|
|
3,594 |
|
|
|
|
|
|
|
15,020 |
|
|
|
18,614 |
|
Other securities |
|
|
|
|
|
|
|
|
|
|
8,405 |
|
|
|
8,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale |
|
$ |
4,077 |
|
|
$ |
289,653 |
|
|
$ |
23,425 |
|
|
$ |
317,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 20 FAIR VALUE OF FINANCIAL INSTRUMENTS Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
14,569 |
|
|
$ |
369,318 |
|
|
$ |
54,832 |
|
|
$ |
438,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
2010 |
|
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
Balance at the beginning of the period |
|
$ |
54,832 |
|
|
$ |
78,257 |
|
Total gains/(losses) (realized/unrealized): |
|
|
|
|
|
|
|
|
Included in earnings |
|
|
(169 |
) |
|
|
(3,246 |
) |
Included in other comprehensive income |
|
|
648 |
|
|
|
11,611 |
|
Purchases, issuances, and settlements, net |
|
|
(31,886 |
) |
|
|
(8,971 |
) |
Transfers in and/or out of Level 3 |
|
|
|
|
|
|
(22,819 |
) |
|
|
|
|
|
|
|
Balance at the end of the period |
|
$ |
23,425 |
|
|
$ |
54,832 |
|
|
|
|
|
|
|
|
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 fourth quarter the Company transferred $29.6 million in
loans included in a pending asset pool sale to loans held for sale at the bid price and recorded an
$11.4 million charge against the allowance for loan and lease losses. 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.
131
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 20 FAIR VALUE OF FINANCIAL INSTRUMENTS Continued
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, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2010 |
|
Fair Value Measurements Using |
|
|
(In thousands) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Fair Value |
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
7,713 |
|
|
$ |
7,713 |
|
Other real estate owned |
|
|
|
|
|
|
|
|
|
|
15,226 |
|
|
|
15,226 |
|
Loans and leases held for sale |
|
|
|
|
|
|
|
|
|
|
29,621 |
|
|
|
29,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and leases held for sale |
|
|
|
|
|
|
|
|
|
|
2,254 |
|
|
|
2,254 |
|
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, 2010 and 2009.
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 re-price
frequently and with no significant change in credit risk, fair values are based on carrying values.
132
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 20 FAIR VALUE OF FINANCIAL INSTRUMENTS Continued
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.
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.
133
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 20 FAIR VALUE OF FINANCIAL INSTRUMENTS Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2010 |
|
2009 |
|
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
(In thousands) |
|
amount |
|
fair value |
|
amount |
|
fair value |
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
51,733 |
|
|
$ |
51,733 |
|
|
$ |
58,298 |
|
|
$ |
58,298 |
|
Investment securities available-for-sale |
|
|
317,155 |
|
|
|
317,155 |
|
|
|
438,719 |
|
|
|
438,719 |
|
Loans, net |
|
|
475,725 |
|
|
|
473,349 |
|
|
|
656,533 |
|
|
|
652,716 |
|
Federal Home Loan Bank stock |
|
|
10,405 |
|
|
|
10,405 |
|
|
|
10,952 |
|
|
|
10,952 |
|
Accrued interest receivable |
|
|
16,864 |
|
|
|
16,864 |
|
|
|
14,942 |
|
|
|
14,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
52,872 |
|
|
|
52,872 |
|
|
|
63,168 |
|
|
|
63,168 |
|
NOW and money markets |
|
|
221,746 |
|
|
|
221,746 |
|
|
|
214,141 |
|
|
|
214,141 |
|
Savings |
|
|
15,922 |
|
|
|
15,922 |
|
|
|
15,336 |
|
|
|
15,336 |
|
Time deposits |
|
|
403,373 |
|
|
|
398,696 |
|
|
|
589,110 |
|
|
|
578,824 |
|
Short-term borrowings |
|
|
22,000 |
|
|
|
22,000 |
|
|
|
114,500 |
|
|
|
114,500 |
|
Long-term borrowings |
|
|
132,949 |
|
|
|
128,787 |
|
|
|
139,675 |
|
|
|
131,093 |
|
Subordinated debt |
|
|
25,774 |
|
|
|
15,136 |
|
|
|
25,774 |
|
|
|
12,617 |
|
Obligations from equity investments |
|
|
|
|
|
|
|
|
|
|
3,652 |
|
|
|
3,652 |
|
Accrued interest payable |
|
|
3,983 |
|
|
|
3,983 |
|
|
|
6,150 |
|
|
|
6,150 |
|
NOTE 21 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 one operating segment that does not meet the quantitative thresholds
for requiring disclosure, but has different characteristics than the Community Banking, Tax Liens
and Equity Investments segments, RBA Leasing. 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, 2010 and 2009, 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. For additional discussion on the VIE, please refer to Note 1- Summary of
Significant Accounting Policies to the Consolidated Financial Statements.
134
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 21 SEGMENT INFORMATION Continued
Community banking
The Companys Community Banking segment which includes Royal Bank and Royal Asian (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.
The Company completed the sale of Royal Asian on December 30, 2010 to an investor group led by
Royal Asians, President and CEO, through the purchase of all of the outstanding common stock of
Royal Asian owned by the Company. The sale was completed under an agreement signed in August 2010.
Under the terms of the agreement, the purchase price for the stock was equal to the total
shareholders equity of Royal Asian, determined in accordance with generally accepted accounting
principles as of November 30, 2010, which amounted to $12.3 million. Originally launched in 2004,
Royal Asian provided banking products and services to businesses and consumers in the
Korean-American communities of Southeastern Pennsylvania, Northern New Jersey and Flushing, New
York. As a result of the sale of Royal Asian, the Companys consolidated assets declined by $86.6
million, loans declined by $63.5 million and deposits declined by $73.4 million.
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. Through December 31, 2010, Royal Bank has loaned $2.4 million to the Partnership and is
obligated to fund up to $2.7 million if required for the remaining costs associated with capital
improvements, operating and marketing expenses. This loan has begun to be repaid from the cash
flows since the Senior Lender has now been paid in full. The outstanding balance as of December
31, 2010 is $418,000. The outstanding balance along with any additional advances to the
Partnership will be repaid in full prior to any other payments to partners.
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 $10.0 million in impairment
charges related to this asset through December 31, 2008. No further impairment of this asset
occurred in 2009. During 2010 an additional impairment of $2.6 million was recorded as a result of
a slow-down of unit sales following the end of the tax credit incentive that was being offered by
the government. 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.
135
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 21 SEGMENT INFORMATION Continued
Leasing
RBA Leasing is a small ticket leasing company. It originates small ticket leases through its
internal sales staff and through independent brokers located throughout its business area. In
general, RBA 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.
Selected segment information and reconciliations to consolidated financial information are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Community |
|
|
Tax Lien |
|
|
Equity |
|
|
|
|
|
|
|
December 31, 2010 |
|
Banking |
|
|
Operation |
|
|
Investment |
|
|
Leasing |
|
|
Consolidated |
|
Total assets |
|
$ |
836,353 |
|
|
$ |
100,601 |
|
|
$ |
5,640 |
|
|
$ |
38,033 |
|
|
$ |
980,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
693,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
693,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
43,286 |
|
|
$ |
10,262 |
|
|
$ |
|
|
|
$ |
3,714 |
|
|
$ |
57,262 |
|
Interest expense |
|
|
20,968 |
|
|
|
3,764 |
|
|
|
22 |
|
|
|
1,240 |
|
|
|
25,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) |
|
|
22,318 |
|
|
|
6,498 |
|
|
|
(22 |
) |
|
|
2,474 |
|
|
|
31,268 |
|
Provision for loan and lease losses |
|
|
21,177 |
|
|
|
129 |
|
|
|
|
|
|
|
834 |
|
|
|
22,140 |
|
Total other income |
|
|
6,232 |
|
|
|
389 |
|
|
|
780 |
|
|
|
364 |
|
|
|
7,765 |
|
Total other expenses |
|
|
33,592 |
|
|
|
1,667 |
|
|
|
529 |
|
|
|
803 |
|
|
|
36,591 |
|
Impairment -real estate joint venture |
|
|
1,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,552 |
|
Impairment -real estate owned via equity investment |
|
|
|
|
|
|
|
|
|
|
2,600 |
|
|
|
|
|
|
|
2,600 |
|
Income tax expense (benefit) |
|
|
(2,722 |
) |
|
|
2,068 |
|
|
|
|
|
|
|
654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(25,049 |
) |
|
$ |
3,024 |
|
|
$ |
(2,372 |
) |
|
$ |
547 |
|
|
$ |
(23,850 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest |
|
|
1 |
|
|
|
1,210 |
|
|
|
(1,186 |
) |
|
|
219 |
|
|
|
243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Royal Bancshares |
|
$ |
(25,050 |
) |
|
$ |
1,814 |
|
|
$ |
(1,186 |
) |
|
$ |
328 |
|
|
$ |
(24,093 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Community |
|
|
Tax Lien |
|
|
Equity |
|
|
|
|
|
|
|
December 31, 2009 |
|
Banking |
|
|
Operation |
|
|
Investment |
|
|
Leasing |
|
|
Consolidated |
|
Total assets |
|
$ |
1,141,256 |
|
|
$ |
105,020 |
|
|
$ |
8,689 |
|
|
$ |
37,762 |
|
|
$ |
1,292,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
881,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
881,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
52,608 |
|
|
$ |
10,424 |
|
|
$ |
|
|
|
$ |
3,011 |
|
|
$ |
66,043 |
|
Interest expense |
|
|
31,507 |
|
|
|
4,462 |
|
|
|
243 |
|
|
|
1,227 |
|
|
|
37,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) |
|
|
21,101 |
|
|
|
5,962 |
|
|
|
(243 |
) |
|
|
1,784 |
|
|
|
28,604 |
|
Provision for loan and lease losses |
|
|
18,730 |
|
|
|
624 |
|
|
|
|
|
|
|
1,251 |
|
|
|
20,605 |
|
Total other (loss) income |
|
|
(4,772 |
) |
|
|
313 |
|
|
|
2,343 |
|
|
|
390 |
|
|
|
(1,726 |
) |
Total other expenses |
|
|
33,545 |
|
|
|
2,870 |
|
|
|
907 |
|
|
|
335 |
|
|
|
37,656 |
|
Income tax expense (benefit) |
|
|
(1,230 |
) |
|
|
1,081 |
|
|
|
417 |
|
|
|
206 |
|
|
|
474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(34,715 |
) |
|
$ |
1,701 |
|
|
$ |
775 |
|
|
$ |
382 |
|
|
$ |
(31,857 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest |
|
|
(28 |
) |
|
|
680 |
|
|
|
596 |
|
|
|
153 |
|
|
|
1,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Royal Bancshares |
|
$ |
(34,688 |
) |
|
$ |
1,021 |
|
|
$ |
179 |
|
|
$ |
229 |
|
|
$ |
(33,259 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 21 SEGMENT INFORMATION Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Community |
|
|
Tax Lien |
|
|
Equity |
|
|
|
|
|
|
|
December 31, 2008 |
|
Banking |
|
|
Operation |
|
|
Investment |
|
|
Leasing |
|
|
Consolidated |
|
Total assets |
|
$ |
1,047,536 |
|
|
$ |
84,965 |
|
|
$ |
17,405 |
|
|
$ |
25,680 |
|
|
$ |
1,175,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
760,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
760,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
62,071 |
|
|
$ |
8,289 |
|
|
$ |
|
|
|
$ |
2,404 |
|
|
$ |
72,764 |
|
Interest expense |
|
|
33,235 |
|
|
|
3,499 |
|
|
|
251 |
|
|
|
1,124 |
|
|
|
38,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) |
|
|
28,836 |
|
|
|
4,790 |
|
|
|
(251 |
) |
|
|
1,280 |
|
|
|
34,655 |
|
Provision for loan and lease losses |
|
|
18,172 |
|
|
|
2,607 |
|
|
|
|
|
|
|
1,062 |
|
|
|
21,841 |
|
Total other income |
|
|
(18,928 |
) |
|
|
560 |
|
|
|
2,177 |
|
|
|
403 |
|
|
|
(15,788 |
) |
Total other expenses |
|
|
24,021 |
|
|
|
2,656 |
|
|
|
966 |
|
|
|
661 |
|
|
|
28,304 |
|
Impairment -real estate joint venture |
|
|
1,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,369 |
|
Impairment -real estate owned via equity investment |
|
|
1,360 |
|
|
|
|
|
|
|
1,500 |
|
|
|
|
|
|
|
2,860 |
|
Income tax expense (benefit) |
|
|
2,901 |
|
|
|
(55 |
) |
|
|
(189 |
) |
|
|
(14 |
) |
|
|
2,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(37,915 |
) |
|
$ |
142 |
|
|
$ |
(351 |
) |
|
$ |
(26 |
) |
|
$ |
(38,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest |
|
|
(115 |
) |
|
|
57 |
|
|
|
|
|
|
|
(10 |
) |
|
|
(68 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Royal Bancshares |
|
$ |
(37,800 |
) |
|
$ |
85 |
|
|
$ |
(351 |
) |
|
$ |
(16 |
) |
|
$ |
(38,082 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income earned by the Community Banking segment related to the Tax Lien Operation was
approximately $3.8 million, $4.5 million, and $3.5 million for the years ended December 31, 2010,
2009, and 2008, respectively.
Interest income earned by the Community Banking segment related to the Leasing was approximately
$1.2 million, $1.2 million, and $1.1 million for the three years ended December 31, 2010, 2009, and
2008, respectively.
NOTE 22 CONDENSED FINANCIAL INFORMATION PARENT COMPANY ONLY
Condensed financial information for the parent company only follows.
CONDENSED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
Cash |
|
$ |
2,756 |
|
|
$ |
2,783 |
|
Investment in non-bank subsidiaries |
|
|
26,712 |
|
|
|
30,722 |
|
Investment in Royal Bank |
|
|
72,017 |
|
|
|
75,865 |
|
Investment in Royal Asian |
|
|
|
|
|
|
13,036 |
|
Loans, net |
|
|
4,207 |
|
|
|
3,750 |
|
Other assets |
|
|
774 |
|
|
|
774 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
106,466 |
|
|
$ |
126,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debentures |
|
$ |
25,774 |
|
|
$ |
25,774 |
|
Stockholders equity |
|
|
80,692 |
|
|
|
101,156 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
106,466 |
|
|
$ |
126,930 |
|
|
|
|
|
|
|
|
137
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 22 CONDENSED FINANCIAL INFORMATION PARENT COMPANY ONLY Continued
CONDENSED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Income |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiary banks |
|
$ |
|
|
|
$ |
|
|
|
$ |
4,005 |
|
Other income |
|
|
19 |
|
|
|
51 |
|
|
|
222 |
|
|
|
|
|
|
|
|
|
|
|
Total Income |
|
|
19 |
|
|
|
51 |
|
|
|
4,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses |
|
|
776 |
|
|
|
880 |
|
|
|
1,172 |
|
Provision for loan losses |
|
|
750 |
|
|
|
809 |
|
|
|
701 |
|
Interest on subordinated debentures |
|
|
647 |
|
|
|
1,136 |
|
|
|
1,436 |
|
|
|
|
|
|
|
|
|
|
|
Total Expenses |
|
|
2,173 |
|
|
|
2,825 |
|
|
|
3,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and equity in undistributed
net loss |
|
|
(2,041 |
) |
|
|
(2,774 |
) |
|
|
918 |
|
Income tax expense (benefit) |
|
|
|
|
|
|
109 |
|
|
|
(578 |
) |
Equity in undistributed net losses |
|
|
(21,539 |
) |
|
|
(30,376 |
) |
|
|
(39,578 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(24,093 |
) |
|
$ |
(33,259 |
) |
|
$ |
(38,082 |
) |
|
|
|
|
|
|
|
|
|
|
138
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 22 CONDENSED FINANCIAL INFORMATION PARENT COMPANY ONLY Continued
CONDENSED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(24,093 |
) |
|
$ |
(33,259 |
) |
|
$ |
(38,082 |
) |
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed losses from subsidiaries |
|
|
22,586 |
|
|
|
31,461 |
|
|
|
41,014 |
|
Provision for loan losses |
|
|
750 |
|
|
|
809 |
|
|
|
701 |
|
Non-cash income tax expense (benefit) |
|
|
|
|
|
|
109 |
|
|
|
(578 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating |
|
|
(757 |
) |
|
|
(880 |
) |
|
|
3,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Royal Bank |
|
|
(15,260 |
) |
|
|
(39,907 |
) |
|
|
|
|
Sale of Royal Asian Bank |
|
|
12,365 |
|
|
|
|
|
|
|
|
|
Dividend proceeds from non-banking subsidiaries |
|
|
5,000 |
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing |
|
|
2,105 |
|
|
|
(29,907 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Loan payoffs (fundings) |
|
|
(1,207 |
) |
|
|
|
|
|
|
1,229 |
|
Cash dividends paid |
|
|
|
|
|
|
(359 |
) |
|
|
(4,005 |
) |
Issuance of common stock under stock option plans |
|
|
|
|
|
|
|
|
|
|
174 |
|
Issuance of preferred stock |
|
|
|
|
|
|
30,407 |
|
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
(946 |
) |
Other, net |
|
|
(168 |
) |
|
|
494 |
|
|
|
(700 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(1,375 |
) |
|
|
30,542 |
|
|
|
(4,248 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(27 |
) |
|
|
(245 |
) |
|
|
(1,193 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
2,783 |
|
|
|
3,028 |
|
|
|
4,221 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
2,756 |
|
|
$ |
2,783 |
|
|
$ |
3,028 |
|
|
|
|
|
|
|
|
|
|
|
139
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 23 SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summarizes the consolidated results of operations during 2010 and 2009, on a
quarterly basis, for the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2010 |
|
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
First |
|
(In thousands, except per share data) |
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
Interest income |
|
$ |
12,747 |
|
|
$ |
13,719 |
|
|
$ |
15,173 |
|
|
$ |
15,623 |
|
Net interest income |
|
|
7,352 |
|
|
|
7,562 |
|
|
|
8,334 |
|
|
|
8,020 |
|
Provision for loan and lease losses |
|
|
13,753 |
|
|
|
2,194 |
|
|
|
4,290 |
|
|
|
1,903 |
|
Net interest income (loss) after provision |
|
|
(6,401 |
) |
|
|
5,368 |
|
|
|
4,044 |
|
|
|
6,117 |
|
Other income |
|
|
2,919 |
|
|
|
1,823 |
|
|
|
1,718 |
|
|
|
1,305 |
|
Other expenses |
|
|
12,316 |
|
|
|
10,333 |
|
|
|
10,041 |
|
|
|
8,053 |
|
Loss before income tax |
|
|
(15,798 |
) |
|
|
(3,142 |
) |
|
|
(4,279 |
) |
|
|
(631 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(15,798 |
) |
|
$ |
(3,142 |
) |
|
$ |
(4,279 |
) |
|
$ |
(631 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less net (loss) income attributable to noncontrolling interest |
|
|
(111 |
) |
|
|
(347 |
) |
|
|
259 |
|
|
|
442 |
|
Net loss attributable to Royal Bancshares
of Pennsylavania, Inc. |
|
$ |
(15,687 |
) |
|
$ |
(2,795 |
) |
|
$ |
(4,538 |
) |
|
$ |
(1,073 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders |
|
$ |
(16,182 |
) |
|
$ |
(3,289 |
) |
|
$ |
(5,029 |
) |
|
$ |
(1,563 |
) |
Net loss per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(1.22 |
) |
|
$ |
(0.25 |
) |
|
$ |
(0.38 |
) |
|
$ |
(0.12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(1.22 |
) |
|
$ |
(0.25 |
) |
|
$ |
(0.38 |
) |
|
$ |
(0.12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating results for the fourth quarter of 2010 amounted to a loss of $15.7 million, which
resulted in an increased loss of $5.6 million from the fourth quarter of 2009. The year over year
decline was primarily related to a pending asset pool sale, which is expected to close during the
second quarter of 2011 once the agreement is finalized with the investor. The Company has signed a
letter of intent to sell a pool of $54.1 million of classified assets in a bulk sale, which
includes $30.7 million of non-performing loans, $10.2 million of classified accruing loans and
$13.0 million of OREO properties. The asset pool sale results in an additional loss of $14.2
million during the fourth quarter of 2010 since GAAP requires that they be marked to market at the
fair market value (projected sale price) which results in an increase to the provision of $11.4
million. In addition, the reduced value of the OREO properties requires the Company to record a
valuation allowance of $2.8 million to reflect their fair market value based upon the projected
sale price. If the operating results were adjusted for the loss of $14.2 million associated with
the pending asset sale, the fourth quarter loss for 2010 would have been $1.5 million and would
have amounted to an improvement of $8.6 million above the 2009 results.
The change in the fourth quarter operating results was mainly comprised of an increased loan loss
provision of $6.6 million, which was partially offset by an increase in other income of $363,000
above the previous years comparable quarter and a reduction to the elimination of non-controlling
interest of $752,000. The increased provision is mainly related to the pending asset pool sale
which required an increase of $11.4 million in the fourth quarter of 2010. The improvement in other
income was mainly due to the gain on the sale of the Companys LBSF claim in a pending lawsuit for
$1.7 million related to the collateral for an interest rate swap with LBSF, which had previously
been written off in 2008 in the amount of $5.0 million shortly after Lehman Brothers Holdings, Inc.
declared bankruptcy. Also contributing to the year over year favorable change were increased gains
on the sale of investment securities ($1.7 million in 2010 versus $318,000 in 2009) and a reduction
of investment impairment ($0 in 2010 versus $674,000 in 2009). This was partially offset by reduced
income of $1.1 million related to real estate owned via equity investments which was attributed to
lower projected operating cash flows resulting from a significant decline in unit sales for a condo
conversion project after the expiration of the new home buyers tax credit at the end of the second
quarter. The reduced net income attributable to non-controlling interest was principally due to the
partners 50% share of the impairment related to real estate owned via equity investments of
$450,000 being included in the Companys other expense and then eliminated through a credit to
noncontrolling interest in the Companys consolidated statement of operations in the current year.
140
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE 23 SUMMARY OF QUARTERLY RESULTS (UNAUDITED) Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (loss) income after provision |
|
|
281 |
|
|
|
3,513 |
|
|
|
(67 |
) |
|
|
4,272 |
|
Other (loss) income |
|
|
2,556 |
|
|
|
2,705 |
|
|
|
(3,404 |
) |
|
|
(3,583 |
) |
Other expenses |
|
|
12,282 |
|
|
|
9,829 |
|
|
|
8,319 |
|
|
|
7,226 |
|
(Loss) income before income tax |
|
|
(9,445 |
) |
|
|
(3,611 |
) |
|
|
(11,790 |
) |
|
|
(6,537 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(9,445 |
) |
|
$ |
(4,085 |
) |
|
$ |
(11,790 |
) |
|
$ |
(6,537 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less net (loss) income attributable to noncontrolling interest |
|
|
641 |
|
|
|
281 |
|
|
|
264 |
|
|
|
216 |
|
Net (loss) income attributable to Royal Bancshares
of Pennsylavania, Inc. |
|
$ |
(10,086 |
) |
|
$ |
(4,366 |
) |
|
$ |
(12,054 |
) |
|
$ |
(6,753 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholders |
|
$ |
(10,573 |
) |
|
$ |
(4,852 |
) |
|
$ |
(12,538 |
) |
|
$ |
(6,968 |
) |
Net (loss) income per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.79 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.95 |
) |
|
$ |
(0.53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.79 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.95 |
) |
|
$ |
(0.53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
141
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. 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,
2010.
Changes in Internal Control over Financial Reporting
There have been no changes in the Companys internal control over financial reporting during the
fourth quarter of 2010 that have materially affected, or are reasonably likely to materially
affect, the Companys 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, 2010.
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 the Dodd-Frank Act,
which permits smaller reporting companies, such as the Company, to provide only managements report
in this annual report.
|
|
|
|
|
By: /s/ Robert R. Tabas
Robert R. Tabas
|
|
By: /s/ Robert A. Kuehl
Robert A. Kuehl
|
|
|
Principal Executive Officer
|
|
Principal Financial Officer and Principal Accounting Officer |
|
|
March 31, 2011
|
|
March 31, 2011 |
|
|
142
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 2011 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 2011 Annual Meeting of Shareholders,
under the captions Summary Compensation Table, Grants of Plan-Based Awards 2010,
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 2011 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.
143
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, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Outside Director Stock Option Plan |
|
warrants and rights |
|
|
warrants and rights |
|
|
first column) |
|
Equity compensation plan approved by security holders |
|
|
74,086 |
|
|
$ |
20.02 |
|
|
|
|
|
Equity compensation plan not approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
74,086 |
|
|
$ |
20.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Employee Stock Option Plan |
|
warrants and rights |
|
|
warrants and rights |
|
|
first column) |
|
Equity compensation plan approved by security holders |
|
|
385,005 |
|
|
$ |
20.33 |
|
|
|
|
|
Equity compensation plan not approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
385,005 |
|
|
$ |
20.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Long Term Incentive Plan |
|
warrants and rights |
|
|
warrants and rights |
|
|
first column) |
|
Equity compensation plan approved by security holders |
|
|
121,862 |
|
|
$ |
9.76 |
|
|
|
808,928 |
|
Equity compensation plan not approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
121,862 |
|
|
$ |
9.76 |
|
|
|
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 2011 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 2011 Annual Meeting of Shareholders, which pages
are incorporated herein by reference.
144
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. |
|
|
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.) |
145
|
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 |
|
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.)* |
|
|
10.5 |
|
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).* |
|
|
10.6 |
|
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.) |
|
|
10.7 |
|
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.) |
|
|
10.8 |
|
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).* |
|
|
10.9 |
|
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. (Incorporated by reference to Exhibit 10.14 to the
Companys Annual Report on Form 10-K for the year ended December
31, 2008 filed on March 30, 2009.)* |
|
|
10.10 |
|
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.) |
|
|
10.11 |
|
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.) |
|
|
10.12 |
|
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.) |
|
|
10.13 |
|
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.) |
|
|
10.14 |
|
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.) |
|
|
10.15 |
|
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
filed with the Commission on July 16, 2009). |
146
|
10.16 |
|
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). |
|
|
10.17 |
|
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). |
|
|
10.18 |
|
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). |
|
|
10.19 |
|
Stock Repurchase Agreement, dated as of August 26, 2010, between Royal
Bancshares of Pennsylvania, Inc. and Edward E. Shin, individually and on behalf of a
group of Korean-American investors. (Incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed with the Commission on August 27, 2010.) |
|
|
11. |
|
Statement re: Computation of Earnings Per Share. (Included at Item 8, hereof,
Note 18, Earnings Per Common Share.) |
|
|
12. |
|
Statement re: Computation of Ratios. (Included at Item 8 here of, Note 15,
Regulatory Capital Requirements.) |
|
|
21. |
|
Subsidiaries of Registrant. |
|
|
23. |
|
Consent of Independent Registered Public Accounting Firm. |
|
|
31.1 |
|
Rule 13a-14(a)/15-d-14(a) Certification of Principal Executive Officer |
|
|
31.2 |
|
Rule 13a-14(a)/15-d-14(a) Certification of Principal Financial Officer |
|
|
32.1 |
|
Section 1350 Certification of Principal Executive Officer. |
|
|
32.2 |
|
Section 1350 Certification of Principal Financial Officer. |
|
|
99.1 |
|
Certification of Principal Executive Officer pursuant to the Emergency Economic
Stabilization Act of 2008. |
|
|
99.2 |
|
Certification of Principal Financial Officer pursuant to the Emergency Economic
Stabilization Act of 2008. |
|
|
|
* |
|
Denotes compensation plan or arrangement. |
147
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. |
|
|
|
|
|
|
|
By: /s/ Robert R. Tabas
Robert R. Tabas
|
|
By: /s/ Robert A. Kuehl
Robert A. Kuehl
|
|
|
Chief Executive Officer
|
|
Chief Financial Officer |
|
|
(Principal Executive Officer)
|
|
(Principal Financial Officer |
|
|
|
|
and Principal Accounting Officer) |
|
|
March 31, 2011
|
|
March 31, 2011 |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
SIGNATURES
|
|
|
|
|
By: /s/ Robert R. Tabas
Robert R. Tabas
|
|
By: /s/ James J. McSwiggan
James J. McSwiggan
|
|
|
Chief Executive Officer/Chairman of the Board
|
|
President/Chief Operating Officer/Director |
|
|
March 31, 2011
|
|
March 31, 2011 |
|
|
|
|
|
|
|
By: /s/ Edward F. Bradley
Edward F. Bradley
|
|
By: /s/ William Hartman
William Hartman
|
|
|
Director
|
|
Director |
|
|
March 31, 2011
|
|
March 31, 2011 |
|
|
|
|
|
|
|
By: /s/ Samuel Goldstein
Samuel Goldstein
|
|
By: /s/ Anthony Micale
Anthony Micale
|
|
|
Director
|
|
Director |
|
|
March 31, 2011
|
|
March 31, 2011 |
|
|
|
|
|
|
|
By: /s/ Michael Piracci
Michael Piracci
|
|
By: /s/ Jay Shah
Jay Shah
|
|
|
Director
|
|
Director |
|
|
March 31, 2011
|
|
March 31, 2011 |
|
|
|
|
|
|
|
By: /s/ Linda Tabas Stempel
|
|
By: /s/ Murray Stempel, III |
|
|
|
|
|
|
|
Linda Tabas Stempel
|
|
Murray Stempel, III |
|
|
Director
|
|
Vice Chairman of the Board |
|
|
March 31, 2011
|
|
March 31, 2011 |
|
|
|
|
|
|
|
By: /s/ Edward B. Tepper
|
|
By: /s/ Howard Wurzak |
|
|
|
|
|
|
|
Edward B. Tepper
|
|
Howard Wurzak |
|
|
|
|
|
|
|
Director
|
|
Director |
|
|
March 31, 2011
|
|
March 31, 2011 |
|
|
148