-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VjDMYC3lcIZdFlpDE2HXFi2hno7Zxig4XmVLgaXNsFCIkON3vVAXu9QoB6rwSqBG o1M66Pjnbd7SN7GssKSWjQ== 0000893220-99-001300.txt : 19991117 0000893220-99-001300.hdr.sgml : 19991117 ACCESSION NUMBER: 0000893220-99-001300 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROYAL BANCSHARES OF PENNSYLVANIA INC CENTRAL INDEX KEY: 0000922487 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 231627866 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26366 FILM NUMBER: 99756880 BUSINESS ADDRESS: STREET 1: 732 MONTGOMERY AVE CITY: NARBERTH STATE: PA ZIP: 19072 BUSINESS PHONE: 6106684700 MAIL ADDRESS: STREET 1: 732 MONGTOMERY AVENUE CITY: NARBERTH STATE: PA ZIP: 19072 10-Q 1 FORM 10-Q ROYAL BANCSHARES OF PENNSYLVANIA, INC. 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended: SEPTEMBER 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: _____to_____ Commission file number: 0-26366 ROYAL BANCSHARES OF PENNSYLVANIA, INC. (Exact name of the bank as specified in its charter) PENNSYLVANIA 23-2812193 (State or other jurisdiction of (IRS Employer incorporated or organization) identification No.) 732 MONTGOMERY AVENUE, NARBERTH, PA 19072 (Address of principal Executive Offices) (610) 668-4700 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the bank (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the bank was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class A Common Stock Outstanding at September 30, 1999 $2.00 PAR VALUE 7,654,354 Class B Common Stock Outstanding at September 30, 1999 $.10 PAR VALUE 1,691,589 2 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS SEPT. 30, 1999 DEC 31, 1998 -------------- ------------ Cash and due from banks $ 9,581,356 $ 5,692,654 Federal funds sold 16,460,000 13,550,000 ------------- ------------- Total cash and cash equivalents 26,041,356 19,242,654 ------------- ------------- Investment securities held to maturity (market value of $80,842,732 at September 30, 1999 and $62,159,860 at December 31, 1998) 81,489,626 61,894,538 Investment securities available for sale - at market value 61,193,828 36,951,162 Total loans 313,610,958 304,475,629 Less allowance for loan losses 12,456,932 11,919,545 ------------- ------------- Net loans 301,154,026 292,556,084 Other real estate -- 707,397 Premises and equipment, net 5,829,119 5,452,765 Accrued interest and other assets 14,101,991 10,817,184 ------------- ------------- $ 489,809,946 $ 427,621,784 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits Non-interest bearing $ 42,188,348 $ 41,150,730 Interest bearing (includes certificates of deposit in excess Of $100,000 of $108,537,732 at September 30, 1999 and $48,754,354 at December 31, 1998) 305,379,215 249,238,955 ------------- ------------- Total deposits 347,567,563 290,389,685 Federal funds purchased -- -- Accrued interest and other liabilities 15,424,000 12,271,111 Long-term borrowings 30,365,000 30,365,000 Mortgage payable 491,469 526,720 ------------- ------------- Total liabilities 393,848,032 333,552,516 ------------- ------------- Stockholders' equity Common stock Class A, par value $2 per share; authorized, 18,000,000 shares; issued, 7,869,147 at September 30, 1999 and 7,429,689 at December 31, 1998 15,738,294 14,859,378 Class B, par value $.10 per share; authorized, 2,000,000 shares; issued, 1,691,589 at September 30, 1999 and 1,630,544 at December 31, 1998 169,158 163,054 Capital surplus 50,863,907 45,392,659 Retained earnings 32,311,909 34,556,343 Accumulated other comprehensive income or (loss) (865,298) 1,242,919 ------------- ------------- 98,217,970 96,214,353 Treasury stock - at cost, shares of Class A, 214,793 at September 30, 1999, and 207,516 at December 31, 1998 (2,256,056) (2,145,085) ------------- ------------- 95,961,914 94,069,268 ------------- ------------- $ 489,809,946 $ 427,621,784 ============= =============
The accompanying notes are an integral part of these statements. 2 3 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, ----------------------------- 1999 1998 ----------- ----------- Interest income Loans, including fees $ 8,275,430 $ 8,888,125 Investment securities held to maturity Taxable 1,600,493 623,039 Tax-exempt 11,115 57,616 Investment securities available for sale Taxable 1,352,376 675,691 Tax-exempt -- -- Deposits in banks 2,205 3,535 Federal funds sold 106,044 454,110 ----------- ----------- TOTAL INTEREST INCOME 11,347,663 10,702,116 ----------- ----------- Interest expense Deposits 3,548,922 2,900,536 Mortgage payable and other 470,490 501,322 Federal funds purchased -- -- ----------- ----------- TOTAL INTEREST EXPENSE 4,019,412 3,401,858 ----------- ----------- NET INTEREST INCOME 7,328,251 7,300,258 Increase in provision for loan losses -- -- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,328,251 7,300,258 ----------- ----------- Other income (expense) Service charges and fees 253,437 188,077 Realized gains on sale of investment securities available for sale -- -- Gain on sale of other real estate 193,883 -- Gain on sale of loans -- -- Other income 567,331 77,869 ----------- ----------- 1,014,651 265,946 ----------- ----------- Other expenses Salaries & wages 1,280,949 1,334,789 Employee benefits 496,723 556,744 Occupancy and equipment 164,024 179,360 Other operating expenses 1,225,390 1,724,489 ----------- ----------- 3,167,086 3,795,382 ----------- ----------- INCOME BEFORE INCOME TAXES 5,175,816 3,770,822 Income taxes 1,682,263 705,654 ----------- ----------- NET INCOME $ 3,493,553 $ 3,065,168 =========== =========== Per share data Net income - basic $ .37 $ .33 =========== =========== Net income - diluted $ .35 $ .31 =========== ===========
The accompanying notes are an integral part of these statements. 3 4 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- 1999 1998 ----------- ----------- Interest income Loans, including fees $24,500,636 $25,170,358 Investment securities held to maturity Taxable 4,212,007 2,292,780 Tax-exempt 33,345 165,766 Investment securities available for sale Taxable 3,122,803 1,571,875 Tax-exempt -- -- Deposits in banks 13,551 19,211 Federal funds sold 316,614 1,060,192 ----------- ----------- TOTAL INTEREST INCOME 32,198,956 30,280,182 ----------- ----------- Interest expense Deposits 9,746,755 8,479,894 Mortgage payable and other 1,416,405 1,492,724 Federal funds purchased 3,001 4,094 ----------- ----------- TOTAL INTEREST EXPENSE 11,166,161 9,976,712 ----------- ----------- NET INTEREST INCOME 21,032,795 20,303,470 Increase in provision for loan losses -- 2,400,000 ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 21,032,795 17,903,470 ----------- ----------- Other income (expense) Service charges and fees 641,991 606,892 Realized gains on sale of investment securities available for sale -- -- Gain on sale of other real estate 344,531 -- Gain on sale of loans 27,879 3,831 Other income 726,241 2,663,096 ----------- ----------- 1,740,642 3,273,819 ----------- ----------- Other expenses Salaries & wages 4,049,893 4,014,468 Employee benefits 1,056,855 1,570,102 Occupancy and equipment 481,919 529,249 Other operating expenses 3,833,155 3,717,798 ----------- ----------- 9,421,822 9,831,617 ----------- ----------- INCOME BEFORE INCOME TAXES 13,351,615 11,345,672 Income taxes 4,298,519 3,047,657 ----------- ----------- NET INCOME $ 9,053,096 $ 8,298,015 =========== =========== Per share data Net income - basic $ .95 $ .89 =========== =========== Net income - diluted $ .92 $ .86 =========== ===========
The accompanying notes are an integral part of these statements. 4 5 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
CLASS A COMMON STOCK CLASS B COMMON STOCK CAPITAL SHARES AMOUNT SHARES AMOUNT SURPLUS ------------ ------------ ------------ ------------ ------------ Balance, January 1, 1999 7,429,689 $ 14,859,378 1,630,544 $ 163,054 $ 45,392,659 Net income for the nine months ended Sept. 30, -- -- -- -- Conversion of Class B common stock to Class A Common stock 4,886 9,772 (4,251) (426) -- Purchase of treasury stock -- -- -- -- -- 4% stock dividend declared 288,728 577,456 65,296 6,530 4,867,469 Cash dividends on common stock -- -- -- -- -- Cash in lieu of fractional shares -- -- -- -- -- Stock options exercised 145,844 291,688 -- -- 603,779 Other comprehensive income (loss), net of Reclassifications and taxes -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Comprehensive income Balance, September 30, 1999 7,869,147 $ 15,738,294 1,691,589 $ 169,158 $ 50,863,907 ============ ============ ============ ============ ============
ACCUMULATED OTHER RETAINED TREASURY COMPREHENSIVE COMPREHENSIVE EARNINGS STOCK INCOME (LOSS) INCOME ------------ ------------ ------------ ------------ Balance, January 1, 1999 $ 34,556,343 $ (2,145,085) $ 1,242,919 Net income for the nine months ended Sept. 30, 9,053,096 -- -- $ 9,053,096 Conversion of Class B common stock to Class A Common stock (9,347) -- -- -- Purchase of treasury stock -- (110,971) -- -- 4% stock dividend declared (5,451,455) Cash dividends on common stock (5,833,483) -- -- -- Cash in lieu of fractional shares (3,245) -- -- -- Stock options exercised -- -- -- Other comprehensive income (loss), net of Reclassifications and taxes -- -- (2,108,217) (2,108,217) ------------ ------------ ------------ ------------ Comprehensive income Balance, September 30, 1999 $ 32,311,909 $ (2,256,056) $ (865,298) $ 6,944,879 ============ ============ ============ ============
The accompanying notes are an integral part of the financial statement. 6 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
CLASS A COMMON STOCK CLASS B COMMON STOCK CAPITAL SHARES AMOUNT SHARES AMOUNT SURPLUS ------------ ------------ ------------ ------------ ------------ Balance, January 1, 1998 7,015,721 $ 14,031,442 1,592,859 $ 159,286 $ 38,797,618 Net income for the nine months ended Sept. 30, -- -- -- -- Conversion of Class B common stock to Class A Common stock 28,211 56,422 (24,744) (2,475) -- Purchase of treasury stock -- -- -- -- -- 4% stock dividend declared 272,313 544,626 63,595 6,360 6,466,084 Cash dividends on common stock -- -- -- -- -- Cash in lieu of fractional shares -- -- -- -- -- Stock options exercised 68,630 137,260 -- -- 58,373 Other comprehensive income (loss), net of reclassifications and taxes -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Comprehensive income Balance, September 30, 1998 7,384,875 $ 14,769,750 1,631,710 $ 163,171 $ 45,322,075 ============ ============ ============ ============ ============
ACCUMULATED OTHER RETAINED TREASURY COMPREHENSIVE COMPREHENSIVE EARNINGS STOCK INCOME (LOSS) INCOME ------------ ------------ ------------ ------------ Balance, January 1, 1998 $ 38,023,359 $ (2,145,085) $ 638,142 Net income for the nine months ended Sept. 30, 8,298,012 -- -- $ 8,298,012 Conversion of Class B common stock to Class A Common stock (53,949) -- -- Purchase of treasury stock -- -- -- 4% stock dividend declared (7,017,070) Cash dividends on common stock (5,265,426) -- -- Cash in lieu of fractional shares (3,829) Stock options exercised Other comprehensive income (loss), net of reclassifications and taxes -- -- 884,474 884,474 ------------ ------------ ------------ ------------ Comprehensive income Balance, September 30, 1998 $ 33,981,097 $ (2,145,085) $ 1,522,616 $ 9,182,486 ============ ============ ============ ============
The accompanying notes are an integral part of this statement. 7 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30,
Cash flows from operating activities 1999 1998 ------------ ------------ Net income $ 9,053,096 $ 8,298,014 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 310,509 260,912 Provision (recovery) of loan loss reserve (credit) -- 2,400,000 Accretion of investment securities discount (176,356) (41,242) Amortization of investment securities premium 339,819 210,769 Amortization of deferred loan fees (304,044) (174,160) Accretion of discount on loans purchased (1,246,188) (2,351,778) (Benefit) provision for deferred income taxes (1,244,237) 149,215 (Gain) loss on other real estate (344,531) -- (Gain) on sale of loans (27,879) (3,831) (Gain) on sale of investment securities -- -- Changes in assets and liabilities: (Increase) decrease in accrued interest receivable (395,052) 286,065 (Increase) decrease in other assets 214,594 2,745,555 Increase (decrease) in accrued interest payable 823,407 1,448,420 Increase in unearned income on loans 200,707 296,923 Increase (decrease) in other liabilities 2,329,482 (2,509,058) ------------ ------------ Net cash provided by operating activities 9,533,327 11,015,804 Cash flows from investing activities Net (decrease) in interest bearing balances in banks -- 200,000 Proceeds from calls/maturities of HTM invest. Securities 12,296,074 38,140,723 Purchase of HTM investment securities (32,054,625) (10,728,818) Purchase of AFS investment securities (26,350,883) (15,582,319) Purchase of loans (20,576,158) -- Net (increase) decrease in loans 12,547,436 5,811,347 Purchase of premises and equipment (686,862) (699,931) ------------ ------------ Net cash (used in) provided by investing activities (54,825,018) 17,141,002 Cash flows from financing activities: Net (decrease) in non-interest bearing and interest bearing demand deposits and savings accounts 183,459 2,604,560 Net increase (decrease) in certificates of deposit 56,994,419 2,238,684 Mortgage payments (35,252) (32,760) Net (decrease) increase in short term borrowings -- (15,000,000) Cash dividends (5,833,483) (5,265,426) Cash in lieu of fractional shares (3,245) (3,829) Issuance of common stock under stock option plans 895,467 195,632 Purchase of treasury stock (110,972) -- ------------ ------------ Net cash provided by (used in) financing activities 52,090,393 (15,263,139) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 6,798,702 12,893,667 Cash and cash equivalents at beginning of year 19,242,654 30,416,242 ------------ ------------ Cash and cash equivalents at end of period $ 26,041,356 $ 43,309,909 ============ ============
The accompanying notes are an integral part of these statements. 7 8 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The accompanying unaudited consolidated financial statements include the accounts of Royal Bancshares of Pennsylvania, Inc. (the Company) and its wholly-owned subsidiaries: Royal Bank of Pennsylvania (the Bank), Royal Real Estate of Pennsylvania, Inc. and Royal Investments of Delaware, Inc. These financial statements reflect the historical information of the Company. All significant inter-company transactions and balances have been eliminated. 1. The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in opinion of management, necessary to present a fair statement of the results for the interim periods. Further information is included in the Annual Report on Form 10-K for the year ended December 31, 1998. 2. The results of operations for the nine and three month period ended September 30, 1999 are not necessarily indicative of the results to be expected for the full year. 3. Per Share Information In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings Per Share," which eliminates primary and fully diluted EPS and requires presentation of basic and diluted EPS in conjunction with the disclosure of the methodology used in computing such EPS. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted EPS takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Prior period EPS calculations have been restated to reflect the adoption of SFAS No. 128. Basic and diluted EPS are calculated as follows:
Nine months ended September 30, 1999 ----------------------------------------- Income Average shares Per share (numerator) (denominator) amount ----------- -------------- --------- Basic EPS Income available to common shareholders $9,053,096 9,500,366 $0.95 Effect of dilutive securities Stock options 296,182 ---------- ---------- ----- Diluted EPS Income available to common shareholders plus assumed exercise of options $9,053,096 9,796,548 $0.92 ========== ========== =====
(continued) 8 9 Per Share Information - continued
Nine months ended September 30, 1998 ------------------------------------------ Income Average shares Per share (numerator) (denominator) amount ----------- -------------- --------- Basic EPS Income available to common shareholders $8,298,015 9,337,377 $0.89 Effect of dilutive securities Stock options 347,320 ---------- ---------- ----- Diluted EPS Income available to common shareholders plus assumed exercise of options $8,298,015 9,684,697 $0.86 ========== ========== =====
EPS is calculated on the basis of the weighted average number of shares outstanding of 9,500,366 and 9,337,337 for the nine months ended September 30, 1999 and 1998, respectively. Per share information and weighted average shares outstanding have been restated to reflect the 4% stock dividend of May 1999.
Three months ended September 30, 1999 ------------------------------------------ Income Average shares Per share (numerator) (denominator) amount ----------- -------------- --------- Basic EPS Income available to common shareholders $3,493,553 9,555,987 $0.37 Effect of dilutive securities Stock options 291,741 ---------- ---------- ----- Diluted EPS Income available to common shareholders plus assumed exercise of options $3,493,553 9,847,728 $0.35 ========== ========== =====
Three months ended September 30, 1998 ------------------------------------------ Income Average shares Per share (numerator) (denominator) amount ----------- -------------- --------- Basic EPS Income available to common shareholders $3,065,168 9,415,978 $0.33 Effect of dilutive securities Stock options 348,932 ---------- ---------- ----- Diluted EPS Income available to common shareholders plus assumed exercise of options $3,065,168 9,764,910 $0.31 ========== ========== =====
EPS is calculated on the basis of the weighted average number of shares outstanding of 9,555,987 and 9,415,978 for the three months ended September 30, 1999 and 1998, respectively. Per share information and weighted average shares outstanding have been restated to reflect the 4% stock dividend of May 1999. 9 10 4. Investment Securities: The carrying value and approximate market value of investment securities at September 30, 1999 are as follows:
AMORTIZED OR GROSS GROSS APPROXIMATE PURCHASED UNREALIZED UNREALIZED MARKET CARRYING COST GAINS LOSSES VALUE VALUE ----------- ----------- ----------- ----------- ----------- AVAILABLE FOR SALE: Common stock securities $ 4,120,681 $ 14,956 $ 109,563 $ 4,026,074 $ 4,026,074 Preferred stock securities 2,775,691 -- 3,816 2,771,875 2,771,875 Other securities 55,608,512 923,693 2,136,326 54,395,879 54,395,879 ----------- ----------- ----------- ----------- ----------- $62,504,884 $ 938,649 $ 2,249,705 $61,193,828 $61,193,828 =========== =========== =========== =========== =========== HELD TO MATURITY: US agencies $ 3,415,688 $ 37,502 $ 26,512 $ 3,426,678 $ 3,415,688 Tax exempt securities 398,465 5,358 -- 403,823 398,465 Taxable debt securities 77,675,473 330,758 994,000 77,012,231 77,675,473 ----------- ----------- ----------- ----------- ----------- $81,489,626 $ 373,618 $ 1,020,512 $80,842,732 $81,489,626 =========== =========== =========== =========== ===========
5. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activity." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments imbedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge. The accounting for changes in the fair value of a derivative (gains and losses) depends on the intended use of the derivative and resulting designation. SFAS No. 133 is effective for all fiscal years beginning after June 15, 1999. Earlier application is permitted only as of the beginning of any fiscal quarter. The Company is currently reviewing the provisions of SFAS No. 133. Subsequent to SFAS No. 133, the FASB issued SFAS #137 which amended the effective date of SFAS No. 133 to be all fiscal quarters of all fiscal years beginning after June 15, 2000. To date the Company and its subsidiaries have not participated in derivative instruments or hedging activity. 6. Allowance for Credit Losses: Changes in the allowance for credit losses were as follows:
THREE MONTHS ENDED SEPT 30, 1999 1998 --------------- --------------- BALANCE AT JULY 1, $12,029,155 $10,380,370. Loans charged-off -- -- Recoveries 427,777 442,929 --------------- --------------- Net charge-offs and recoveries 427,777 442,929 Provision for loan losses -- -- --------------- --------------- BALANCE AT END OF PERIOD $12,456,932 $10,823,299 =============== ===============
(continued.....) 10 11 Allowance for Credit Losses (continued)
NINE MONTHS ENDED SEPT 30, 1999 1998 --------------- --------------- BALANCE AT JANUARY 1, $11,919,545 $8,186,237 Loans charged-off (270,798) (339,753) Recoveries 808,185 576,815 --------------- --------------- Net charge-offs and recoveries 537,387 237,062 Provision for loan losses -- 2,400,000 --------------- --------------- BALANCE AT END OF PERIOD $12,456,932 $10,823,299 =============== ===============
7. Nonperforming loans Loans on which the accrual of interest has been discontinued or reduced amounted to approximately $2,202,800 and $6,024,582 at September 30, 1999 and 1998, respectively. Although the Company has non-performing loans of approximately $2,202,800 at September 30, 1999, management believes it has adequate collateral to limit its credit risks. The balance of impaired loans was $914,663 at September 30, 1999. The Company identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreements. The allowance for credit loss associated with impaired loans was $ -0- at September 30, 1999. The income that was recognized on impaired loans during the nine-month period ended September 30, 1999 was $1,353. The cash collected on impaired loans during the period was $29,372, of which $28,020 was credited to the principal balance outstanding on such loans. Interest that would have been accrued on impaired loans during this period in 1999 was $14,885. The Company's policy for interest income recognition on impaired loans is to recognize income on currently performing restructured loans under the accrual method. The Company recognizes income on non-accrual loans under the cash basis when the principal payments on the loans become current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company. If these factors do not exist, the Company does not recognize income. 11 12 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS The following discussion and analysis is intended to assist in understanding and evaluating the major changes in the financial condition and earnings performance of the Company and its wholly owned subsidiaries for the nine month period ended September 30, 1999. From time to time, the Company may include forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters in this and other filings with the Securities Exchange Commission. The Private Securities Litigation Reform Act of 1995 provides safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance development and results of the Company's business include the following: general economic conditions, including their impact on capital expenditures, the Year 2000 problem, business conditions in the banking industry; the regulatory environment; rapidly changing technology and evolving banking industry standards; competitive factors, including increased competition with community, regional and national financial institutions; new service and product offerings by competitors and price pressures and similar items. FINANCIAL CONDITION Total consolidated assets as of September 30, 1999 were $489.8 million, an increase of $62.2 million from the $427.6 million reported at year-end, December 31, 1998. This increase is primarily due to a $46.8 million increase in total investment securities. Liabilities increased $60.3 million primarily due to an increase in deposits from December 31, 1998. This $62.2 million increase in total investment securities is comprised of an increase in held to maturity ("HTM") investment securities of $19.6 million and a $24.2 million increase in available for sale ("AFS") investment securities. This increase in HTM investment securities is primarily due to purchases of approximately $32.1 million in corporate bonds partially offset by scheduled maturities of approximately $12.3 million in 1999. HTM investment securities are primarily comprised of taxable corporate debt securities, which are rated "BBB" or better by Moody and/or Standard & Poor at the time of purchase, with maturities primarily in the three to five year range. The $24.2 million increase in AFS investment securities is primarily due to the purchase in 1999 of $20.6 million of dollar denominated, non-US corporate securities. These corporate securities are rated "BBB" or better by Moody and/or Standard & Poor at the time of purchase, with maturities primarily in the three to five year ranges. Additionally, $6 million of capital trust securities were purchased during 1999. 12 13 Net loans increased $9.1 million from the $292.6 million level at December 31, 1998 to $301.2 million at September 30, 1999. Average net loans were $299.9 million for the nine-month period of 1999. The allowance for loan loss increased $.5 million to $12.5 million at September 30, 1999 from $11.9 million. The level of allowance for loan loss reserve represents 4% of total loans at September 30, 1999 versus 3.9% at December 31, 1998. While management believes that, based on information currently available, the allowance for loan loss is sufficient to cover losses inherent in the Company's loan portfolio at this time, no assurances can be given that the level of allowance will be sufficient to cover future loan losses or that future adjustments to the allowance will be sufficient to cover future loan losses or that future adjustments to the allowance will not be necessary if economic and/or other conditions differ substantially from the economic and other conditions considered by management in evaluating the adequacy of the current level of the allowance. Total deposits, the primary source of funds, increased $57.1 million to $347.6 million at September 30, 1999, from $290.4 million at December 31, 1998. Average deposits were $357.1 million for the nine-month period of 1999. This increase in deposits is primarily due to an increase in certificates of deposits of $36.7 million, in addition to a $3.7 million increase in NOW and money market deposits. The $36.7 million increase in certificates of deposits was primarily due to a $38.5 million increase in brokered deposits in 1999. The balance of brokered deposits was $88.6 million, representing approximately 25% of total deposits at September 30, 1999. Consolidated stockholder's equity increased $2 million to $96 million at September 30, 1999 from $94.1 million at December 31, 1998. This increase is primarily due to net income of $9.1 million, partially offset by three quarterly cash dividends totaling $5.8 million. Additionally, stockholder's equity was reduced $2.1 million due to a downward adjustment in the market value of available for sale investment securities during 1999. RESULTS OF OPERATIONS Results of operations depend primarily on net interest income, which is the difference between interest income on interest earning assets and interest expense on interest bearing liabilities. Interest earning assets consist principally of loans and investment securities, while interest bearing liabilities consist primarily of deposits. Net income is also effected by the provision for loan losses and the level of non-interest income as well as by non-interest expenses, including salary and employee benefits, occupancy expenses and other operating expenses. Consolidated net income for the three months ended, September 30, 1999 was $3,493,553 or $.37 basic earnings per share, as compared to net income of $3,065,168 or $.33 basic earnings per share for the same three month period in 1998. Consolidated net income for the nine months ended, September 30, 1999 was $9,053,096 or $.95 basic earnings per share as compared to net income of $8,298,015 or $.89 basic earnings per share. These increases are primarily due to an increase in interest income relating to the investment portfolio, in addition to changes in non-interest income and provision for loan losses in 1999. 13 14 For the third quarter 1999, net interest income was $7.3 million as compared to $7.3 million for the same quarter in 1998. While total net interest income did not change, interest on investment securities increased $1.2 million for the third quarter of 1999 primarily due to increase in the average balance of investment securities in 1999 versus 1998. The balance of average investment securities for the third quarter of 1999 was $145.3 million, as compared to $71.9 million for the same quarter in 1998. Interest income on loans decreased $.6 million from $8.3 million for third quarter of 1999 versus $8.9 million for the same three-month period in 1998. Total interest expense on deposits and borrowings increased $.6 million to $4 million as compared to $3.4 million for the same three-month period in 1998. This increase in interest expense is primarily due to an increase in the average balance of certificates of deposits in 1999. For the comparative nine-month period, net interest income increased $.7 million to $21 million for the period ended September 30, 1999 as compared to $20.3 million for the same nine-month period in 1998. This increase is primarily due to an increase in the average balance of investment securities in 1999 as compared to the same nine-month period in 1998. The balance of average investment securities for the nine-month period was $126.7 million versus $73.8 million for the same nine-month period in 1998. Provision for loan loss was $0 for the third quarter of 1999 and 1998. Charge-offs and recoveries were $0 and $.4 million, respectively, for the three month period ended September 30, 1999 versus $0 and $.4 million, respectively, for the same period in 1998. For the comparative nine-month period, provision for loan loss was $0 for the period September 30, 1999 as compared to $2.4 million for the same nine-month period in 1998. Overall, Management considers the current level of allowance for loan loss to be adequate at September 30, 1999. Total non-interest income for the three month period ended September 30, 1999 was $1 million, as compared to $.3 million for the same period in 1998. The $.7 million increase is primarily due to a $.5 million payment by the Commonwealth of Pennsylvania to Royal Bank as refund of Pennsylvania Shares tax, in addition an increase in gains on sale of other real estate and loans of $.2 million in the third quarter of 1999. For the comparative nine-period income period, total non-interest income was $1.7 million for the period ended September 30, 1999 versus $3.3 million for the same nine-month period in 1998. This decrease is the result of a reversal of a legal accrual of $2.4 million relating to the conclusion of litigation in the Company's favor in January of 1998. Total non-interest expense for the three months ended September 30, 1999 was $3.2 million, a decrease of $.5 million, as compared to $3.8 million for the same period in 1998. This decrease in non-interest expense is primarily due to decrease in other operating expenses of $.5 million. For the comparative nine-month period total non-interest expense decreased $.4 million to $9.4 million for the nine months ended September 30, 1999 as compared to $9.8 million for the nine months ended September 30, 1998. This decrease is primarily due to a $.5 million increase in employee benefits, partially offset by a $.1 million increase in other operating expenses. 14 15 YEAR 2000 Through the efforts of its Year 2000 Committee, the Company has remediated or replaced its computer systems and applications so that company-wide these systems and applications are now Year 2000 ("Y2K") compliant. In addition, the Year 2000 Committee has monitored the Y2K compliance efforts of its mission critical third party vendors to ensure sure that their systems and applications are also Y2K compliant. All of the computer systems and applications of the company have been fully tested and the testing of mission critical third party vendors have been diligently monitored. Management believes that all mission critical systems and applications, and the systems and applications of mission critical third party vendors are Y2K compliant and fully tested. The Company has developed a contingency plan as well as a plan to address the expected liquidity demands resulting from Y2K concerns of customers toward the end of 1999. Given that much of the Company's data processing is serviced by third party vendors, the Company has not incurred material costs associated with Y2K compliance. The amount expensed in 1999 is not material. LIQUIDITY & INTEREST RATE SENSITIVITY Liquidity is the ability to ensure that adequate funds will be available to meet its financial commitments as they become due. In managing its liquidity position, all sources of funds are evaluated, the largest of which is deposits. Also taken into consideration is the repayment of loans. These sources provide alternatives to meet its short-term liquidity needs. Longer liquidity needs may be met by issuing longer-term deposits and by raising additional capital. The liquidity ratio is generally maintained equal to or greater than 25% of deposits and short-term liabilities. The liquidity ratio of the Company remains strong at approximately 43% and exceeds the Company's peer group levels and target ratio set forth in the Asset/Liability Policy. The Company's level of liquidity is provided by funds invested primarily in corporate bonds, US Treasuries and agencies, and to a lesser extent, obligations of state and political subdivisions and federal funds sold. The overall liquidity position is monitored on a monthly basis. 15 16 Interest rate sensitivity is a function of the repricing characteristics of the Company's assets and liabilities. These include the volume of assets and liabilities repricing, the timing of the repricing, and the interest rate sensitivity gaps is a continual challenge in a changing rate environment. The following table shows separately the interest sensitivity of each category of interest earning assets and interest bearing liabilities as of September 30, 1999:
INTEREST RATE SENSITIVITY (IN MILLIONS) DAYS 1 TO 5 OVER 5 NON-RATE ---------------------- ASSETS (1) 0 - 90 91 - 365 YEARS YEARS SENSITIVE TOTAL - ---------- ------------------------------------------------------------------------- Interest-bearing deposits in banks $ 0.6 $ -- $ -- $ -- $ -- $ 0.6 Federal funds sold 16.5 -- -- -- 16.5 Investment securities: Available for sale 6.8 -- 11.8 42.6 -- 61.2 Held to maturity 4.6 11.7 45.2 19.9 -- 81.4 ------ ------ ------ ------ ------ ------ Total investment securities 11.4 11.7 57.0 62.5 -- 142.6 Loans: (2) Fixed rate (3) 14.0 9.6 126.2 28.0 -- 177.8 Variable rate 41.8 26.1 54.4 20.4 -- 142.7 ------ ------ ------ ------ ------ ------ Total loans 55.8 35.7 180.6 48.4 -- 320.5 Other assets (4) -- -- -- -- 9.6 9.6 ------ ------ ------ ------ ------ ------ Total Assets $ 84.3 $ 47.4 $237.6 $110.9 $ 9.6 $489.8 ====== ====== ====== ====== ====== ====== LIABILITIES & CAPITAL Deposits: Non interest bearing deposits $ -- $ -- $ -- $-- $ 42.4 $ 42.4 Interest bearing deposits (5) 64.4 -- 29.8 -- -- 94.2 Certificate of deposits 22.7 40.7 148.0 -- -- 211.4 ------ ------ ------ ------ ------ ------ Total deposits 87.1 40.7 177.8 -- 42.4 348.0 Short term borrowings 0.4 -- -- -- -- 0.4 Mortgage and long term borrowings -- -- 30.5 -- -- 30.5 Other liabilities -- -- -- -- 16.1 16.1 Capital -- -- -- -- 94.8 94.8 ------ ------ ------ ------ ------ ------ Total liabilities & capital $ 87.5 $ 40.7 $208.3 $ -- $153.3 $489.8 ====== ====== ====== ====== ====== ====== Net interest rate GAP $ (3.2) $ 6.7 $ 29.3 $110.9 $(144.0) ====== ====== ====== ====== ====== Cumulative interest rate GAP $ (3.2) $ 3.5 $ 32.8 $144.0 -- ====== ====== ====== ====== ====== GAP to total assets -1% 1% ====== ====== GAP to total equity -3% 7% ====== ====== Cumulative GAP to total assets -1% 1% ====== ====== Cumulative GAP to total equity -3% 4% ====== ======
(1) Interest earning assets are included in the period in which the balances are expected to be repaid and/or repriced as a result of anticipated prepayments, scheduled rate adjustments, and contractual maturities. (2) Reflects principal maturing within the specified periods for fixed and variable rate loans and includes nonperforming loans. (3) Fixed rate loans include a portion of variable rate loans whose floors are in effect at September 30, 1999. (4) For purposes of gap analysis, other assets include the allowance for possible loan loss, unamortized discount on purchased loans and deferred fees on loans. (5) Based on historical analysis, Money market and Savings deposits are assumed to have rate sensitivity of 1 month; NOW account deposits are assumed to have a rate sensitivity of 4 months. The Company's exposure to interest rate risk is mitigated somewhat by a portion of the Company's loan portfolio consisting of floating rate loans, which are tied to the prime lending rate but which have interest rate floors and no interest rate ceilings. Although the Company is originating fixed rate loans, a portion of the loan portfolio continues to be comprised of floating rate loans with interest rate floors. 16 17 CAPITAL ADEQUACY The company is required to maintain minimum amounts of capital to total "risk weighted" assets and a minimum Tier 1 leverage ratio, as defined by the banking regulators. At September 30, 1999, the Company was required to have a minimum Tier 1 and total capital ratios of 4% and 8%, respectively, and a minimum Tier 1 leverage ratio of 3% plus an additional cushion of 100 to 200 basis points. The table below provides a comparison of Royal Bancshares of Pennsylvania's risk-based capital ratios and leverage ratios:
SEPT. 30, 1999 DECEMBER 31, 1998 -------------- ----------------- CAPITAL LEVELS Tier 1 leverage ratio 20.3% 22.1% Tier 1 risk-based ratio 22.2% 24.1% Total risk-based ratio 23.5% 25.4% CAPITAL PERFORMANCE Return on average assets 2.7% (1) 2.6% Return on average equity 12.8% (1) 11.8% (1) annualized
The Company's ratios compare favorably to the minimum required amounts of Tier 1 and total capital to "risk weighted" assets and the minimum Tier 1 leverage ratio, as defined by banking regulators. The Company currently meets the criteria for a well-capitalized institution, and management believes that the Company will continue to meet its minimum capital requirements. At present, the Company has no commitments for significant capital expenditures. The Company is not under any agreement with regulatory authorities nor is the Company aware of any current recommendations by the regulatory authorities that, if such recommendations were implemented, would have a material effect on liquidity, capital resources or operations of the Company. 17 18 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO VOTE SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibit 27. Financial Data Schedule 18 19 SIGNATURES Pursuant to the requirements of the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ROYAL BANCSHARES OF PENNSYLVANIA, INC. (Registrant) Dated: November 12th, 1999 /s/ James J. McSwiggan James J. McSwiggan, CFO & Treasurer Dated: November 12th, 1999 /s/ David J. Greenfield David J. Greenfield, Controller & VP 19 EX-27 2 FINANCIAL DATA SCHEDULE
9 9-MOS DEC-31-1999 SEP-30-1999 9,581,356 555,000 16,460,000 0 61,193,828 81,489,626 80,842,732 313,610,958 12,456,932 489,809,946 347,567,563 365,000 15,424,000 30,491,468 0 0 15,907,452 80,054,462 489,809,946 24,500,636 7,368,155 330,165 32,198,956 9,746,755 11,166,161 21,032,795 0 0 9,421,822 13,351,615 0 0 0 9,053,096 .95 .92 5.93 2,202,800 0 531,036 531,036 11,919,545 270,798 808,185 12,456,932 12,456,932 0 0
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