-----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, WG6ZcBH/Ar02jB4C6WiyixxGZMB2c2CG+lZBCscjday2r44pZmxNKoQwOJWMaAqv zoSExh85ZhUuiQ++DGTnvg== 0000950116-02-000552.txt : 20020415 0000950116-02-000552.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950116-02-000552 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-26366 FILM NUMBER: 02595897 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-K405 1 tenk405.txt TENK405.TXT FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 2001 ------------------ [ ] 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) Pennsylvania 23-2812193 - --------------------------------- --------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 732 Montgomery Avenue, Narberth, Pennsylvania 19072 ----------------------- ---------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code (610) 668-4700 -------------- Securities registered pursuant to Section 12(b) of the Act: None ---------- Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock ($2.00 par value) Class B Common Stock ($.10 par value) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contended, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of common shares of the Registrant held by non-affiliates, based on the closing sale price as of February 28, 2002 was $107,805,249. As of February 28, 2002, the Registrant had 9,503,924 and 1,913,053 shares outstanding of Class A and Class B common stock, respectively. Item 1. BUSINESS. The Company Royal Bancshares of Pennsylvania, Inc. ("Royal Bancshares") is a Pennsylvania business corporation and a bank holding company registered under the Federal Bank Holding Company Act of 1956, as amended (the "Holding Company Act"), and is supervised by the Board of Governors of the Federal Reserve System (Federal Reserve Board). Its legal headquarters is located at 732 Montgomery Avenue, Narberth, PA. On June 29, 1995, pursuant to the plan of reorganization approved by the shareholders of Royal Bank of Pennsylvania ("Royal Bank"), all of the outstanding shares of common stock of Royal Bank were acquired by the Royal Bancshares and were exchanged on a one-for-one basis for common stock of Royal Bancshares. The principal activities of Royal Bancshares are owning and supervising Royal Bank, which engages in a general banking business in Montgomery County, Pennsylvania. Royal Bancshares also has a wholly owned nonbank subsidiary, Royal Investments of Delaware, Inc., which is engaged in investment activities. At December 31, 2001, Royal Bancshares had consolidated total assets of approximately $931.0 million, total deposits of approximately $701.9 million and stockholders' equity of approximately $108.4 million. From time to time, Royal Bancshares may include forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters in this and other filings with the Securities Exchange Commission. The Private Securities Litigation Reform Act of 1995 provides safe harbor for forward-looking statements. When we use words such as "believes", or "expects," "anticipates" or similar expressions, we are making forward-looking statements. In order to comply with the terms of the safe harbor, Royal Bancshares notes that a variety of factors could cause Royal Bancshares actual results and experience to differ materially from the anticipated results or other expectations expressed in Royal Bancshares forward-looking statements. The risks and uncertainties that may affect the operations, performance development and results of Royal Bancshares business include the following: general economic conditions, including their impact on capital expenditures; interest rate fluctuations: business conditions in 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. Royal Bank 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 Daniel M. Tabas in 1980. Royal Bank of Pennsylvania is an insured bank under the Federal Deposit Insurance Corporation (the "FDIC"). As of June 22, 2001, the bank completed its acquisition of substantially all the assets of Crusader Holding Corporation. Under the terms of the acquisition certain assets and liabilities were purchased for $41.5 million, which represented the approximate fair value of the assets acquired. The purchase price was paid in cash with $15.2 million of Royal Bank's cash on hand being utilized. This transaction was accounted for under the purchase method of account. 2 Royal Bank derives its income principally from interest charged on loans and interest on investment securities and fees received in connection with the origination of loans and other services. Royal Bank's principal expenses are interest expense on deposits and operating expenses. Principally operating revenues, deposit growth and the repayment of outstanding loans provide funds for activities. Service Area. Royal Bank's primary service area includes Montgomery, Chester, Bucks, Delaware, Berks and Philadelphia counties, southern New Jersey and Delaware in the vicinity of Wilmington. 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 offices located throughout Montgomery, Philadelphia and Berks counties. The Bank also considers the states of Pennsylvania, New Jersey, New York and Delaware to constitute its service area for certain services. On occasion, Royal Bank will do business with clients located outside of its service area. Royal Bank's legal headquarters are located at 732 Montgomery Avenue, Narberth, PA. Royal Bank conducts business operations as a commercial bank offering checking accounts, savings and time deposits, and loans, including residential mortgages, home equity and SBA loans. Royal Bank also offers safe deposit boxes, collections, internet banking and bill payment along with other customary bank services (excluding trust) to its customers. Drive-up, ATM, and night depository facilities are available. Services may be added or deleted from time to time. The services offered and the business of Royal Bank is not subject to significant seasonal fluctuations. Royal Bank is a member of the Federal Reserve Fedline Wire Transfer System. Royal Bank became 16.5% partner in Bankers Settlement Services of Eastern Pennsylvania, L.L.C., a title company ("Bankers"). The Bank, together with five other banks in the area, formed this title company on August 16, 2000. Royal Bank's ownership decreased to 15% with the addition of a new bank partner in 2001. Competition. Royal Bank is subject to intense competition from commercial banks, thrifts and other financial institutions. Royal Bank actively competes with such banks and institutions for local deposits and local retail and commercial accounts, and is also subject to competition from banks from areas outside its service area for certain segments of its business. For a number of years, competition has been increasing in Royal Bank's basic banking business because of the growing number of financial service entities that have entered our local market. This trend was accelerated by the passage of federal laws in the early 1980's, which sharply expanded the powers of thrifts and credit unions, giving them most of the powers that were formerly reserved for commercial banks. While attempting to equalize the competition among the depository institutions, these statutes have little effect on less regulated entities such as money market mutual funds and investment banking firms. Many of these competitors have substantially greater financial resources and more extensive branch systems. To be successful, smaller banks must find a competitive edge. Royal Bank prides itself on giving its customers personalized service. Royal Bank has continued at modest levels its research activities relating to the development of new services and the improvement of existing bank services. Marketing activities have continued that have allowed Royal Bank to remain competitive. These activities include the review of existing services and the solicitation of new users of banking services. Royal Bank is not dependent upon a single customer or a small number of customers, the loss of which should have a material adverse effect on Royal Bank or Royal Bancshares. Employees. Royal Bancshares employed approximately 158 persons on a full-time equivalent basis as of December 31, 2001. Deposits. At December 31, 2001, total deposits of Royal Bank were distributed among demand deposits (8%), money market deposit accounts, savings and Super Now (26%) and time deposits (66%). At year-end 2001, deposits increased $229.3 million from year-end 2000, or 49%, primarily due to purchase of deposits from Crusader Holding Corporation on June 22, 2001. 3 Lending. At December 31, 2001, Royal Bank had a total loan portfolio of $646.2 million, representing 69% of total assets. The loan portfolio is categorized into commercial, commercial mortgages, residential mortgages (including home equity lines of credit), construction, real estate tax liens and installment loans. Current market and regulatory trends in banking are changing the basic nature of the banking industry. Royal Bank intends to keep pace with the banking industry by being competitive with respect to interest rates and new types or classes of deposits insofar as it is practical to do so consistent with Royal Bank's size, objective of profit maintenance and stable capital structure. Non-Bank Subsidiary On June 30, 1995, Royal Bancshares established a special purpose Delaware investment company, Royal Investments of Delaware, Inc., ("RID") as a wholly owned subsidiary. Its legal headquarters is at 103 Springer Building, 3411 Silverside Road, Wilmington, DE. RID buys, holds and sells investment securities. At December 31, 2001, total assets of RID were $32.4 million, of which $20.3 million was held in cash and cash equivalents, $10.4 million in real estate development and loans and $1.5 million was held in investment securities. On June 22, 2001, Royal Bancshares through it's wholly owned subsidiary Royal Bank of Pennsylvania, purchased 60% ownership in Crusader Servicing Corporation ("CSC") from Crusader Holding Corporation. Its legal headquarters is at 6526 Castor Avenue, Philadelphia, PA. CSC acquires, through auction, delinquent property tax liens in various jurisdictions, assuming a lien position that is generally superior to any mortgage liens on the property, and obtaining certain foreclosure rights as defined by local statute. At December 31, 2001, total assets of CSC were $41.9 million. Supervision and Regulation Holding Company. Royal Bancshares, as a Pennsylvania business corporation, is subject to the jurisdiction of the Securities and Exchange Commission (the "SEC") and of state securities commissions for matters relating to the offering and sale of its securities. Accordingly, if Royal Bancshares wishes to issue additional shares of its Common Stock, in order, for example, to raise capital or to grant stock options, Royal Bancshares will have to comply with the registration requirements of the Securities Act of 1933 as amended, or find an applicable exemption from registration. Royal Bancshares is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and to supervision by the Federal Reserve Board. The BHC Act requires Royal Bancshares to secure the prior approval of the Federal Reserve Board before it owns or controls, directly or indirectly, more than 5% of the voting shares of any corporation, including another bank. In addition, the BHC Act prohibits Royal Bancshares from acquiring more than 5 % of the voting shares of, or interest in, or all or substantially all of the assets of, any bank located outside Pennsylvania, unless such an acquisition is specifically authorized by laws of the state in which such bank is located. A bank holding company also is prohibited from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any such company engaged in non-banking activities unless the Federal Reserve Board, by order or regulation, has found such activities to be closely related to banking or managing or controlling banks as to be a proper incident thereto. In making this determination, the Federal Reserve Board considers whether the performance of these activities by a bank holding company would offer benefits to the public that outweigh possible adverse effects. 4 As a bank holding company, Royal Bancshares is required to file an annual report with the Federal Reserve Board and any additional information that the Federal Reserve Board may require pursuant to the BHC Act. The Federal Reserve Board may also make examinations of the holding company and any or all of subsidiaries. Further, under Section 106 of the 1970 amendments to the BHC Act and the Federal Reserve Board's regulation, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit or provision of credit of any property or services. The so called "anti-tying" provisions state generally that a bank may not extend credit, lease, sell property or furnish any service to a customer on the condition that the customer obtain additional credit or service from the bank, its bank holding company or any other subsidiary of its bank holding company, or on the condition that the customer not obtain other credit or services from a competitor of the bank, its bank holding company or any subsidiary of its bank holding company. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act and by state banking laws on any extensions of credit to the bank holding company or any of its 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 Pennsylvania law, Royal Bancshares is permitted to control an unlimited number of banks. However, Royal Bancshares would be required under the BHC Act to obtain the prior approval of the Federal Reserve Board before acquiring all or substantially all of the assets of any bank, or acquiring ownership or control of any voting shares of any other than the Bank, if, after such acquisition, would control more than 5% of the voting shares of such bank. Royal Bank. The deposits of Royal Bank are insured by the FDIC. Royal Bank is subject to supervision, regulation and examination by the Pennsylvania Department of Banking and by the FDIC. In addition, Royal Bank is subject to a variety of local, state and federal laws that affect its operation. Under the Pennsylvania Banking Code of 1965, as amended, the ("Code"), Royal Bancshares is permitted to control an unlimited number of banks. This rule has been in effect since March 4, 1990. However, Royal Bancshares would be required under the Bank Holding Company Act to obtain the prior approval of the Federal Reserve Board before it could acquire all or substantially all of the assets of any bank, or acquiring ownership or control of any voting shares of any bank other than Royal Bank, if, after such acquisition, the registrant would own or control more than 5% of the voting shares of such bank. The Bank Holding Company Act has been amended by the Riegle-Neal Interstate Banking and Branching Act of 1994 which authorizes bank holding companies subject to certain limitations and restrictions to acquire banks located in any state. In 1995, the Code was amended to harmonize Pennsylvania law with the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 to enable Pennsylvania institutions to participate fully in interstate banking and to remove obstacles to the choice by banks from other states engaged in interstate banking to select Pennsylvania as a head office location. Some of the more salient features of the amendment are described below. 5 A bank holding company located in Pennsylvania, another state, the District of Columbia or a territory or possession of the United States may control one or more banks, bank and trust companies, national banks, interstate banks and, with the prior written approval of the Pennsylvania Department of Banking, may acquire control of a bank and trust company or a national bank located in Pennsylvania. A Pennsylvania-chartered institution may maintain branches in any other state, the District of Columbia, or a territory or possession of the United States upon the written approval of the Pennsylvania Department of Banking. Finally, a banking institution existing under the laws of another jurisdiction may establish a branch in Pennsylvania if the laws of the jurisdiction in which it is located permit a Pennsylvania-chartered institution or a national bank located in Pennsylvania to establish and maintain a branch in such jurisdiction on substantially the same terms and conditions. In 1995, the Pennsylvania General Assembly enacted the Economic Development Agency, Fiduciary and Lender Environmental Liability Protection Act which, among other things, provides protection to lenders from environmental liability and remediation costs under the environmental laws for releases and contamination caused by others. A lender who engages in activities involved in the routine practices of commercial lending, including, but not limited to, the providing of financial services, holding of security interests, workout practices, foreclosure or the recovery of funds from the sale of property shall not be liable under the environmental acts or common law equivalents to the Pennsylvania Department of Environmental resources or to any other person by virtue of the fact that the lender engages in such commercial lending practices. A lender, however, will be liable if it, its employees or agents, directly cause an immediate release or directly exacerbate a release of regulated substances on or from the property, or knowingly and willfully compelled the borrower to commit an action, which caused such release or violation of an environmental act. The Economic Development Agency, Fiduciary and Lender Environmental Liability Protection Act, however, does not limit federal liability which still exists under certain circumstances. 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. 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 the bank or bank holding company or to vote 25% or more of any class of voting securities of the bank holding company. From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restrictions on, the business of the Bank. It cannot be predicted whether any such legislation will be adopted or how such legislation would affect the business of the Bank. As a consequence of the extensive regulation of commercial banking activities in the United States, the Bank's business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business. 6 Under the Federal Deposit Insurance Act ("FDIC Act"), the FDIC possesses the power to prohibit institutions regulated by it (such as the 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 the 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 the Bank to its executive officers, directors, principal shareholders or related interests thereof; (iv) restricts management personnel of a bank from serving as directors or in other management positions with certain depository institutions whose assets exceed a specified amount or which have an office within a specified geographic area. Additionally, the FDIC Act provides that no person may acquire control of the 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. In April 1995, regulators revised the Community Reinvestment Act ("CRA") with an emphasis on performance over process and documentation. Under the revised rules, the five-point rating scale is still utilized by examiners to assign a numerical score for a bank's performance in each of three areas: lending, service and investment. Under the CRA, the FDIC is required to: (i) assess the records of all financial institutions regulated by it to determine if these institutions are meeting the credit needs of the community (including low-and moderate-income neighborhoods) which they serve, and (ii) take this record into account in its evaluation of any application made by any such institutions for, among other things, approval of a branch or other deposit facility, office relocation, a merger or an acquisition of bank shares. The CRA also requires the federal banking agencies to make public disclosures of their evaluation of each bank's record of meeting the credit needs of its entire community, including low-and moderate-income neighborhoods. This evaluation will include a descriptive rate ("outstanding," "satisfactory," "needs to improve" or "substantial noncompliance") and a statement describing the basis for the rating. After its most recent examination of the Bank under CRA, the FDIC gave the Bank a CRA rating of satisfactory. Under the Bank Secrecy Act ("BSA"), banks and other financial institutions are required to report to the Internal Revenue Service currency transactions of more than $10,000 or multiple transactions in any one day of which the Bank is aware that exceed $10,000 in the aggregate. Civil and criminal penalties are provided under the BSA for failure to file a required report, for failure to supply information required by the BSA or for filing a false or fraudulent report. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Royal Bank believes that further merger activity within Pennsylvania is likely to occur in the future, resulting in increased concentration levels in banking markets within Pennsylvania and other significant changes in the competitive environment. The Riegle-Neal allows adequately capitalized and managed bank holding companies to acquire banks in any state starting one year after enactment (September 29, 1995). Another provision of the Riegle-Neal Act allows interstate merger transactions beginning June 1, 1997. States are permitted, however, to pass legislation providing for either earlier approval of mergers with out-of-state banks, or "opting-out" of interstate mergers entirely. Through interstate merger transactions, banks will be able to acquire branches of out-of-state banks by converting their offices into branches of the resulting bank. The Riegle-Neal Act provides that it will be the exclusive means for bank holding companies to obtain interstate branches. Under the Riegle-Neal Act, banks may establish and operate a "de novo branch" in any State that "opts-in" to de novo branching. Foreign banks are allowed to operate branches, either de novo or by merger. These branches can operate to the same extent that the establishment and operation of such branches would be permitted if the foreign bank were a national bank or state bank. All these changes are expected to intensify competition in local, regional and national banking markets. The Pennsylvania Banking Code has been amended to enable Pennsylvania institutions to participate fully in interstate banking (see discussion above). 7 Management cannot anticipate what changes Congress may enact, or, if enacted, their impact on Royal Bancshares' financial position and reported results of operation. As a consequence of the extensive regulation of commercial banking activities in the United States, Royal Bancshares and Royal Bank's business is particularly susceptible to being affected by federal and state legislation and regulations that may increase the costs of doing business. 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 the 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 more 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 new capital measures is to impose more 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 would be one that has at least a 10% total risk-based capital ratio, a 6% Tier 1 risk-based capital ratio, a 5% Tier 1 Leverage Ratio, and is not subject to any written order or final directive by the FDIC to meet and maintain a specific capital level. Royal Bank is presently categorized as a "well-capitalized" institution. An "adequately capitalized" institution would be 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 to be in the form of Tier 1 capital, this also will mean that a bank would need to maintain at least 4% Tier 1 risk-based capital ratio. An institution must meet each of the required minimum capital levels in order to be deemed "adequately capitalized." An "undercapitalized" institution is one that fails to meet one or more of the required minimum capital levels for an "adequately capitalized" institution. Under the FDIC Improvement Act, an "undercapitalized" institution must file a capital restoration plan and is automatically subject to restrictions on dividends, management fees and asset growth. In addition, the institution is prohibited from making acquisitions, opening new branches or engaging in new lines of business without the prior approval of its primary federal regulator. A number of other restrictions may be imposed. A "critically undercapitalized" institution is one that has a tangible equity (Tier 1 capital) ratio of 2% or less. In addition to the same restrictions and prohibitions that apply to "undercapitalized" and "significantly undercapitalized" institutions, any institution that becomes "critically undercapitalized" is prohibited from taking the following actions without the prior written approval of its primary federal supervisory agency: engaging in any material transactions other than in the usual course of business; extending credit for highly leveraged transactions; amending its charter or bylaws; making any material changes in accounting methods; engaging in certain transactions with affiliates; paying excessive compensation or bonuses; and paying interest on liabilities exceeding the prevailing rates in the institution's market area. In addition, a "critically undercapitalized" institution is prohibited from paying interest or principal on its subordinated debt and is subject to being placed in conservatorship or receivership if its tangible equity capital level is not increased within certain mandated time frames. 8 Real Estate Lending Guidelines. Pursuant to the FDIC Improvement Act, the FDIC has issued real estate lending guidelines that establish loan-to-value ("LTV") ratios for different types of real estate loans. A LTV ratio is generally defined as the total loan amount divided by the appraised value of the property at the time the loan is originated. If a bank does not hold a first lien position, the total loan amount would be combined with the amount of all senior liens when calculating the ratio. In addition to establishing the LTV ratios, the FDIC's real estate guidelines require all real estate loans to be based upon proper loan documentation and a recent independent appraisal of the property. The FDIC's guidelines establish the following limits for LTV ratios: LTV Loan Category Limit ------------- ----- Raw Land 65% Land Development Construction: Commercial, Multifamily (includes condos and co-ops), and other Nonresidential 80% Improved Property 85% Owner occupied 1-4 Family and Home Equity (without credit enhancements) 90% The guidelines provide exceptions to the LTV ratios for government-backed loans; loans facilitating the sale of real estate acquired by the lending institution in the normal course of business; loans where the Bank's decision to lend is not based on the offer of real estate as collateral and such collateral is taken only out of an abundance of caution; and loans renewed, refinanced, or restructured by the original lender to the same borrower, without the advancement of new money. The regulation also allows institutions to make a limited amount of real estate loans that do not conform with the proposed LTV ratios. Under this exception, the Bank would be allowed to make real estate loans that do not conform with the LTV ratio limits, up to an amount not to exceed 100% of the Bank's total capital. Truth in Savings Act. The FDIC Improvement Act also contains the Truth in Savings Act. The purpose of this Act is to require the clear and uniform disclosure of the rates of interest that are payable on deposit accounts by the 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 the 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 fee and charges imposed and (4) the number of days in the reporting period. This Act allows for civil lawsuits to be initiated by customers if the Bank violates any provision or regulation under this Act. 9 Gramm-Leach-Bliley Act. On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act of 1999, the Financial services Modernization Act. The Financial Services Modernization Act repeals the two affiliation provisions of the Glass-Steagall Act: o Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms "engaged principally" in specified securities activities; and o Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person "primarily engaged" in specified securities activities. In addition, the Financial Services Modernization Act contains provisions that expressly preempt any state insurance law. The law establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers. It revises and expands the framework of the Bank Holding Company Act framework to permit a holding company system 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, 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 general, the Financial Services Modernization Act: o Repeals historical restrictions on, and eliminates many federal and state law barriers to, affiliations among banks, securities firms, insurance companies, and other financial service providers; o Provides a uniform framework for the functional regulation of the activities of banks, savings institutions and their holding companies; o Broadens the activities that may be conducted by national banks, banking subsidiaries of bank holding companies, and their financial subsidiaries; o Provides an enhanced framework for protecting the privacy of consumer information; o Adopts a number of provisions related to the capitalization, membership, corporate governance, and the other measures designed to modernize the Federal Home Loan Bank system; o Modifies the laws governing the implementation of the Community Reinvestment Act; and o Addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. 10 In order for the Royal Bancshares to take advantage of the ability to affiliate with other financial service providers, Royal Bancshares must become a "Financial Holding Company" as permitted under an amendment to the Bank Holding Company Act. To become a Financial holding Company, a company must file a declaration with the Federal Reserve, electing to engage in activities permissible for Financial Holding Companies and certifying that it is eligible to do so because all of its insured depository institution subsidiaries are well-capitalized and well-managed. In addition, the Federal Reserve must determine that each insured depository institution subsidiary of the company has at least a satisfactory "CRA rating. Royal Bancshares currently meets the requirements to make an election to become a Financial Holding Company. The Royal Bancshares management has not determined at this time whether it will seek an election to become a Financial Holding Company. Royal Bancshares is examining its strategic business plan to determine whether, based on market conditions, the relative financial conditions of Royal Bancshares and its subsidiaries, regulatory capital requirements, general economic conditions, and other factors, Royal Bancshares desires to utilize any of its expanded powers provided in the Financial Service Modernization Act. The Financial Services Modernization Act also includes a new section of the Federal Deposit Insurance Act governing subsidiaries of state banks that engage in "activities as principal that would only be permissible" for a national bank to conduct in a financial subsidiary. It expressly preserves the ability of a state bank to retain all existing subsidiaries. Because Pennsylvania permits commercial banks chartered by the state to engage in any activity permissible for national banks, Royal Bank will be permitted to form subsidiaries to engage in the activities authorized by the Financial Services Modernization Act, to the same extent as a national bank. In order to form a financial subsidiary, Royal Bank must be well-capitalized, and Royal Bank would be subject to the same capital deduction, risk management and affiliate transaction rules as applicable to national banks. Royal Bancshares and Royal Bank do not believe that the Financial Services Modernization Act will have a material adverse effect on our operations in the near-term. However, to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result of increasing the amount of competition that Royal Bancshares and Royal Bank face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than Royal Bancshares and Royal Bank. Monetary Policy The earnings of Royal Bank are affected by the policies of regulatory authorities including the Federal Reserve Board. An important function of the Federal Reserve System is to influence the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities, changes in reserve requirements against member bank deposits and limitations on interest rates that member banks may pay on time and savings deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may also affect rates charged on loans or paid for deposits. 11 The policies and regulations of the Federal Reserve Board have had and will probably continue to have a significant effect on its reserve requirements, deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect Royal Bank's operations in the future. The effect of such policies and regulations upon the future business and earnings of Royal Bank cannot be predicted. Effects of Inflation Inflation has some impact on Royal Bancshares' operating costs. Unlike many industrial companies, however, substantially all of Royal Bancshares' assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on Royal Bancshares' performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as prices of goods and services. ITEM 2. PROPERTIES Royal Bank has seventeen banking offices, which are located in Pennsylvania.
Narberth Office (1) Villanova Office King of Prussia Office (1) - ------------------- ---------------- -------------------------- 732 Montgomery Ave 801 East Lancaster Avenue Rt. 202 at Wilson Road Narberth, Pa. 19072 Villanova, Pa. 19085 King of Prussia, Pa. 19406 Philadelphia Offices Shillington Office Bridgeport Office (1) - --------------------- ------------------ --------------------- - - One Penn Square West 516 East Lancaster Avenue 105 W. 4th Street 30 South 15th Street Shillington. Pa 19607 Bridgeport, Pa. 19406 Philadelphia, Pa 19102 Trooper Office(1) Upper Merion Office ----------------- ------------------- - - 1340 Walnut Street Trooper & Egypt Roads Beidler & Henderson Roads Philadelphia, Pa. 19107 Trooper, Pa. 19401 King of Prussia, Pa. 19406 - - 401 Fairmount Avenue (1) Reading Office Phoenixville Office (1) Philadelphia, Pa. 19123 -------------- ---------------------- 501 Washington Street 808 Valley Forge Road - - 6526 Castor Avenue Reading, Pa. 19601 Phoenixville, Pa. 19460 Philadelphia, PA 19149 Philadelphia Loan Office (2) ---------------------------- - - 1650 Grant Avenue (1) 2 Penn Center Philadelphia, PA 19115 Philadelphia, PA 19102 Jenkintown Office (1) Narberth Training Ctr. (1) (3) - --------------------- 814 Montgomery Ave 600 Old York Road Narberth, PA 19072 Jenkintown, Pa 19046
---------------------------------- (1) owned (2) Residential Loan Office-Not a branch (3) Used for employee training Royal Bank owns nine of the above properties. One property is subject to a mortgage. The remaining eight properties are leased with expiration dates between 2002 and 2004. Royal Bank also leases storage warehouse space in Bridgeport, Pa. at an annual rate of 11 thousand dollars. During 2001, Royal Bank made aggregate lease payments of approximately 501 thousand dollars. Royal Bank believes that all of its properties are attractive, adequately insured, and well maintained and are adequate for Royal Bank's purposes. Royal Bank also owns a property located at 144 Narberth Avenue, Narberth, PA, which may serve as a site for future expansion. 12 ITEM 3. LEGAL PROCEEDINGS Management, after consulting with Royal Bancshares's legal counsel, is not aware of any litigation that would have a material adverse effect on the consolidated financial position of Royal Bancshares. There are no proceedings pending other than routine litigation incident to the business of Royal Bancshares. In addition, no material proceedings are known to be contemplated by governmental authorities against Royal Bancshares. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. MARKET FOR THE BANK'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS On September 6, 1988 the Royal Bancshares' Class A Common Stock commenced trading on the NASDAQ National Market System (NASDAQ/NMS). Royal Bancshares' NASDAQ Symbol is Royal Bancshares and is included in the NASDAQ National Market Stock Table, which is published in most major newspapers. There is no market for Royal Bancshares' Class B Common Stock, as such is prohibited by the terms of the Class B Common Stock. The following table shows the range of high, low-end and closing bid prices for Royal Bancshares' stock as reported by NASDAQ Bid Prices 2001 High Low Close ---------------------- ------- ------- ------- First Quarter ........ $ 15.756 $ 11.817 $ 12.929 Second Quarter ....... 17.037 12.412 16.033 Third Quarter ....... 20.694 15.085 16.546 Fourth Quarter ....... 19.009 15.567 19.009 2000 High Low Close ---------------------- ------- ------- ------- First Quarter ....... $ 14.229 $ 11.792 $ 12.024 Second Quarter ....... 15.854 14.250 14.603 Third Quarter ....... 17.167 15.792 16.012 Fourth Quarter ....... 16.209 14.750 14.246 (Source: This summary reflects information supplied by NASDAQ.) The bid information shown above is derived from statistical reports of the NASDAQ Stock Market and reflects inter-dealer prices without retail mark-up, mark-down or commissions and may not necessarily represent actual transaction. The bid prices do not reflect the 6% stock dividend that was declared on January 16, 2002. The NASDAQ Stock Market, Inc., is a wholly-owned subsidiary of National Association of Securities Dealers, Inc. 13 The approximate number of recorded holders of Royal Bancshares' Class A and Class B Common Stock, as of February 28, 2002, is shown below: Title of Class Number of Record Holders -------------------- ------------------------ Class A Common Stock 390 Class B Common Stock 160 Because substantially all of the holders of Class B Common Stock are also holders of Class A Common stock the number of record holders of the two classes on a combined basis was approximately 451 as of February 28, 2002. Dividends Subject to certain limitations imposed by law, the Board of Directors of Royal Bancshares may declare a dividend on shares of common stock. Stock dividends. On April 21, 1999, the Board of Directors of Royal Bancshares declared a 4% stock dividend on both its Class A Common Stock and Class B Common Stock shares payable May 14, 1999, to Shareholders of record on May 3, 1999. The stock dividend resulted in the issuance of 288,728 additional shares of Class A Common Stock and 65,296 additional shares of Class B Common Stock. On October 20, 1999, the Board of Directors of Royal Bancshares declared a 5% stock dividend on both its Class A Common Stock and Class B Common Stock shares payable on January 17, 2000, to shareholders of record on January 3, 2000. The stock dividend resulted in the issuance of 382,857 additional shares of Class A Common Stock and 84,234 additional shares of Class B Common Stock. On January 17, 2001, the Board of Directors of Royal Bancshares declared a 5% stock dividend on both its Class A Common Stock and Class B Common Stock shares payable on February 12, 2001, to shareholders of record on January 29, 2001. The stock dividend resulted in the issuance of 408,197 additional shares of Class A Common Stock and 86,614 additional shares of Class B Common Stock. On January 16, 2002, the Board of Directors of Royal Bancshares declared a 6% stock dividend on both its Class A Common Stock and Class B Common Stock shares payable on February 8, 2002, to shareholders of record on January 28, 2002. The stock dividend resulted in the issuance of 517,635 additional shares of Class A common stock and 108,282 additional shares of Class B common stock. 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. 14 Cash Dividends. Royal Bancshares paid cash dividends in each quarter of 2001 and 2000 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 $9.0 million and $8.5 million for 2001 and 2000, respectively. The following table sets forth on a quarterly basis the dividend paid to holders of each Class A and Class B Common Stock for 2001 and 2000, adjusted to give effect to the stock dividends paid. Cash Dividends Per Share ------------------------ 2001 Class A Class B ---- ------- ------- First Quarter $.21 $.2415 Second Quarter $.21 $.2415 Third Quarter $.21 $.2415 Fourth Quarter $.23 $.2645 Cash Dividends Per Share ------------------------ 2000 Class A Class B ---- ------- ------- First Quarter $.21 $.2415 Second Quarter $.21 $.2415 Third Quarter $.21 $.2415 Fourth Quarter $.21 $.2415 Future dividends must necessarily depend upon net income, capital requirements, appropriate legal restrictions and other factors relevant at the time the Board of Directors of Royal Bancshares considers dividend policy cash necessary to fund dividends available for dividend distributions to the shareholders of Royal Bancshares must initially come from dividends paid by the Royal Bank to Royal Bancshares. Therefore, the restrictions on the Royal Bank's dividend payments are directly applicable to Royal Bancshares. Under the Pennsylvania Banking Code of 1965, as amended, Royal Bank places a restriction on the availability of capital surplus for payment of dividends. Under the Pennsylvania Business Corporation Law of 1988, as amended, Royal Bancshares may pay dividends only if after payment the Registrant would be able to pay its debts as they become due in the usual course of business and the total assets are greater than the sum of its total liabilities plus the amount that would be needed if Royal Bancshares were to be dissolved at the time of the dividend to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the dividend. See Regulatory Matters Note to the Consolidated Financial Statements in Item 8 of this report. 15 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial and operating information for Royal Bancshares should be read in conjunction with ITEM 7, Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and accompanying notes in ITEM 8:
Years ended December 31, (in thousands, except per share data) ------------------------------------------------------------------------------ Income Statement Data 2001 2000 1999 1998 1997 - --------------------- ------------ ------------ ----------- ----------- ------------ Interest income $69,224 $58,875 $44,682 $40,640 $33,372 Interest expense 31,808 22,549 15,922 13,163 10,048 ------------ ------------ ----------- ----------- ------------ Net interest income 37,416 36,326 28,760 27,477 23,324 Increase (Decrease) Provision for loan - 250 - 4,770 (2,118) losses ------------ ------------ ----------- ----------- ------------ Net interest income after loan loss 37,416 36,076 28,760 22,707 25,442 provision Gains on sale of loans 372 - 45 4 29 Gains on sale of real estate 188 53 350 - 1,204 (Losses) on AFS investment securities 60 (1,302) - - - Other income 1,118 1,206 1,644 3,570 1,392 ------------ ------------ ----------- ----------- ------------ Total other income 1,738 (43) 2,039 3,574 2,625 Income before other expenses & income taxes 39,154 36,033 30,799 26,281 28,067 Non-interest expenses: Salaries and benefits 10,479 7,979 7,265 5,028 9,546 Other 7,124 5,812 5,865 5,845 5,088 ------------ ------------ ----------- ----------- ------------ Total other expenses 17,603 13,791 13,130 10,873 14,634 ------------ ------------ ----------- ----------- ------------ Income before taxes 21,551 22,242 17,669 15,408 13,433 Income taxes 5,797 7,982 5,564 4,624 4,074 ------------ ------------ ----------- ----------- ------------ Net income $15,754 $14,260 $12,105 $10,784 $9,359 ============ ============ =========== =========== ============ Basic earnings per share (1) $1.39 $1.26 $1.09 $0.98 $0.85 ----- ----- ----- ----- ----- Diluted earnings per share (1) $1.37 $1.24 $1.07 $0.97 $0.83 ----- ----- ----- ----- -----
- ------------- (1) Earnings per share has the weighted average number of shares used in the calculation adjusted to reflect a 6% stock dividend in January 2002, a 5% stock dividend in 2001, a 5% stock dividend in 2000, a 4% stock dividend in 1999, a 4% stock dividend in 1998, and a 4% stock dividend in 1997.
As of December 31, ---------------------------------------------------------------------------------- Balance Sheet Data 2001 2000 1999 1998 1997 - ------------------ ------------- ------------- ------------- ------------- ---------- (in thousands, except for percentages) Total assets $930,980 $630,081 $522,536 $427,622 $416,598 Total average assets 788,419 573,780 469,193 407,623 342,361 Loans, net 634,347 411,973 343,081 292,556 282,711 Total deposits 701,860 472,582 381,286 290,390 265,363 Total long term debt 70,225 30,000 30,000 30,000 30.000 Total stockholders' equity 108,449 103,502 95,835 94,069 89,505 Total average stockholders' equity 105,072 99,746 94,824 91,374 86,572 Return on average assets 2.0% 2.5% 2.6% 2.6% 2.7% Return on average equity 15.0% 14.3% 12.8% 11.8% 10.8% Average equity to average assets 13.3% 17.4% 20.2% 22.4% 25.3% Cash dividend payout ratio 57.0% 55.0% 70.3% 66.5% 83.9%
16 Average Balances The following table presents the average daily balances of assets, liabilities and stockholders' equity and the respective interest paid on interest bearing assets and interest bearing liabilities, as well as average rates for the periods indicated:
2001 2000 --------------------------------- ------------------------------- Average Yield/ Average Yield/ Assets (In thousands) Balance Interest Rate Balance Interest Rate - --------------------- ------- -------- ---- ------- -------- ---- Interest bearing deposits in banks $18,230 $533 2.92% $559 $23 4.11% Federal funds 18,468 752 4.07% 24,117 1,531 6.35% Investment securities: Held to maturity: Taxable 97,055 7,610 7.84% 67,050 5,115 7.63% Nontaxable (1) -- -- -- -- -- -- --------------------------------- ------------------------------- Total held to maturity 97,055 7,610 7.84% 67,050 5,115 7.63% Available for sale Taxable 76,338 6,945 9.10% 67,185 6,177 9.19% --------------------------------- ------------------------------- Total investment securities 173,392 14,555 8.39% 134,235 11,292 8.41% Loans: (2) Commercial & industrial 202,327 20,012 9.89% 182,359 19,580 10.74% Commercial mortgages 337,410 32,936 9.76% 213,281 25,326 11.87% Other loans (1) 4,116 436 10.59% 9,154 1,123 12.27% --------------------------------- ------------------------------- Total loans 543,854 53,384 9.82% 404,794 46,029 11.37% --------------------------------- ------------------------------- Total interest earning assets $753,944 $69,224 9.18% $563,705 $58,875 10.44% Non interest earning assets Cash & due from banks 5,432 9,648 Other assets 46,113 18,810 Allowance for loan loss (12,264) (12,034) Def income/unearned disc (4,806) (6,349) ----------- ---------- Total non interest Earning assets 34,475 10,075 ----------- ---------- Total assets $788,419 $573,780 =========== ========== Liabilities & Stockholders' Equity Deposits: Savings $26,312 637 2.42% $19,942 541 2.71% NOW 38,353 869 2.27% 35,714 870 2.44% Money market 108,792 4,031 3.71% 56,514 2,278 4.03% CDs & other time deposits 369,680 22,237 6.02% 269,430 16,939 6.29% --------------------------------- ------------------------------- Total interest bearing deposits $543,137 27,774 5.11% $381,600 20,628 5.41% Federal funds 334 15 4.49% 295 17 5.76% Borrowings 68,129 4,019 5.90% 30,613 1,904 6.22% --------------------------------- ------------------------------- Total interest bearing liabilities $611,600 31,808 5.20% $412,508 22,549 5.47% --------------------------------- ------------------------------- Non interest bearing deposits 49,904 45,501 Other liabilities 16,025 16,025 ----------- ---------- Total liabilities 683,347 474,034 Stockholders' equity 105,072 99,746 ----------- ---------- Total liabilities and Stockholders' equity $788,419 $573,780 =========== ========== Net interest income $37,416 $36,326 =========== =========== Net yield on Interest-earning assets 4.96% 6.44% =========== ==========
[TABLE RESTUBBED]
1999 -------------------------------- Average Yield/ Assets (In thousands) Balance Interest Rate - --------------------- ------- -------- ---- Interest bearing deposits in banks $430 $16 3.72% Federal funds 11,345 558 4.92% Investment securities: Held to maturity: Taxable 78,251 5,726 7.32% Nontaxable (1) 694 82 11.82% -------------------------------- Total held to maturity 78,945 5,808 7.36% Available for sale Taxable 51,617 4,512 8.74% -------------------------------- Total investment securities 130,562 10,320 7.90% Loans: (2) Commercial & industrial 139,639 15,374 11.01% Commercial mortgages 170,282 17,131 10.06% Other loans (1) 10,623 1,311 12.34% -------------------------------- Total loans 320,544 33,816 10.55% -------------------------------- Total interest earning assets $462,881 $44,710 9.66% Non interest earning assets Cash & due from banks 8,775 Other assets 17,159 Allowance for loan loss (12,186) Def income/unearned disc (7,436) ---------- Total non interest Earning assets 6,312 ---------- Total assets $469,193 ========== Liabilities & Stockholders' Equity Deposits: Savings $19,932 $538 2.70% NOW 31,480 699 2.22% Money market 43,809 1,424 3.25% CDs & other time deposits 192,545 11,356 5.90% -------------------------------- Total interest bearing deposits $287,766 $14,017 4.87% Federal funds 61 3 4.92% Borrowings 30,869 1,902 6.16% -------------------------------- Total interest bearing liabilities $318,696 $15,922 5.00% -------------------------------- Non interest bearing deposits 42,829 Other liabilities 12,844 ---------- Total liabilities 374,369 Stockholders' equity 94,824 ---------- Total liabilities and Stockholders' equity $469,193 ========== Net interest income $28,788 =========== Net yield on Interest-earning assets 6.22% ===========
- ---------------- (1) The indicated income and annual rate are presented in a taxable equivalent basis using the federal tax rate of 34% for all periods. (2) Nonaccruing loans have been included in the appropriate average loan balance category, but interest on these loans has not been included. 17 Rate Volume The following table sets forth a rate/volume analysis, which segregates in detail the major factors contributing to the change in net interest income for the years ended, December 31, 2001 and 2000, as compared to respective previous periods, into amounts attributable to both rate and volume variances.
2001 Vs 2000 2000 Vs 1999 (in thousands) (in thousands) ------------------------------- --------------------------------- Changes due to: Changes due to: ------------------------------- -------------------------------- Interest income Volume Rate Total Volume Rate Total -------- -------- -------- -------- -------- -------- Interest bearing deposits in banks $ 518 $ (8) $ 510 $ 9 $ (4) $ 5 Federal funds sold (308) (471) (779) 1,105 (130) 975 Investment securities: Held to maturity: Taxable 2,349 146 2,495 (896) 285 (611) Nontaxable -- -- -- (54) -- (54) Available for sale Taxable 833 (65) 768 1,421 244 1,665 -------- -------- -------- -------- -------- -------- Total investment securities 3,182 81 3,263 471 529 1,000 Loans: Commercial & industrial 2,046 (1,614) 432 4,596 (390) 4,206 Commercial mortgages 12,730 (5,120) 7,610 4,781 3,414 8,195 Other loans (550) (137) (687) (180) (8) (188) -------- -------- -------- -------- -------- -------- Total loans 14,226 (6,871) 7,355 9,197 3,016 12,213 -------- -------- -------- -------- -------- -------- Total increase (decrease) in interest income $ 17,618 $ (7,269) $ 10,349 $ 10,782 $ 3,411 $ 14,193 Interest expense Deposits: Savings $ 171 $ (75) $ 96 $ (14) $ 17 $ 3 NOW & Money Market 1,831 (79) 1,752 530 495 1,025 CDs & other time deposits 6,063 (766) 5,297 4,791 792 5,583 -------- -------- -------- -------- -------- -------- Total interest bearing deposits 8,065 (920) 7,145 5,307 1,304 6,611 Federal funds purchased 2 (4) (2) 14 -- 14 Mortgage payable and long term borrowings 2,218 (103) 2,115 (16) 18 2 -------- -------- -------- -------- -------- -------- Total increase (decrease) in interest expense 10,285 (1,027) 9,258 5,305 1,322 6,627 -------- -------- -------- -------- -------- -------- Total increase (decrease) in net interest income $ 7,333 $ (6,242) $ 1,091 $ 5,477 $ 2,089 $ 7,566 ======== ======== ======== ======== ======== ========
18 Loans The following table reflects the composition of the loan portfolio of Royal Bank of Pennsylvania and the percent of gross outstandings represented by each category at the dates indicated.
As of December 31, (in thousands) -------------------------------------------------------------------------------------------------------- Loans 2001 2000 1999 1998 1997 - ----- -------------------- -------------------- -------------------- -------------------- -------------------- Comm'l & industrial $218,498 34% $193,398 45% $168,329 46% $127,972 42% $123,800 41% Real estate 428,223 65% 233,111 54% 191,312 53% 182,595 57% 176,315 58% Consumer 2,714 1% 2,449 1% 2,653 1% 2,033 1% 1,523 1% ----------- ---- ----------- ---- ------------ ---- ------------ ---- ------------ ---- Total gross loans 649,435 100% 428,958 100% 362,294 100% 312,600 100% 301,638 100% Unearned income (1,056) (1,991) (2,154) (1,833) (1,498) Disc on loans purchased (2,144) (3,020) (5,322) (6,291) (9,243) ----------- ----------- ------------ ------------ ------------ 646,235 423,947 354,818 304,476 290,897 Allowance for loan loss (11,888) (11,973) (11,737) (11,920) (8,186) ----------- ----------- ------------ ------------ ------------ Total loans, net $634,347 $411,974 $343,081 $292,556 $282,711 =========== =========== ============ ============ ============
19 Analysis of Allowance for Loan Loss
Year ending December 31, (in thousands) ------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------ ------------- ------------- ------------- ------------- Total Loans $646,235 $423,947 $354,818 $304,476 $290,897 ============= ============= ============= ============= ============= Daily average loan balance $543,854 $404,794 $320,544 $299,916 $213,368 ============= ============= ============= ============= ============= Allowance for loan loss: Balance at the beginning of the year $11,973 $11,737 $11,920 $8,186 $9,084 Charge offs by loan type: Commercial 82 523 1,062 1,501 762 Real estate 435 105 13 135 -- ------------- ------------- ------------- ------------- ------------- Total charge offs 517 628 1,075 1,636 762 Recoveries by loan type: Commercial 212 596 850 540 1,934 Individual 32 4 35 -- -- Real estate 188 14 7 60 48 ------------- ------------- ------------- ------------- ------------- Total recoveries 432 614 892 600 1,982 ------------- ------------- ------------- ------------- ------------- Net loan charge offs (85) (14) (183) (1,036) 1,220 Increase (decrease) in Provision for loan loss -- 250 -- 4,770 (2,118) ------------- ------------- ------------- ------------- ------------- Balance at end of year $11,888 $11,973 $11,737 $11,920 $8,186 ============= ============= ============= ============= ============= Net charge offs to average loans .02% -- .06% .35% (0.57%) ============= ============= ============= ============= ============= Allowance to total loans at year end 1.84% 2.82% 3.31% 3.91% 2.81% ============= ============= ============= ============= =============
20 The allowance for loan losses is established through provisions for loan losses based on management's on-going evaluation of the risks inherent in Royal Bank's loan portfolio. Factors considered in the evaluation process include growth of the loan portfolio, risk characteristics of the types of loans in the portfolio, geographic and large borrower concentrations, current regional economic and real estate market conditions that could affect the ability of borrowers to pay, the value of underlying collateral, and trends in loan delinquencies and charge-offs. Royal Bank utilizes an internal rating system to monitor and evaluate the credit risk inherent in its loan portfolio. All loans approved by the loan committee, executive board committee and the Board of Directors are initially assigned a rating of pass. The loan review officer, Vice President of Special Assets and the loan review committee are expected to recommend changes in loan ratings when facts come to their attention that warrant an upgrade or downgrade in a loan rating. Problem and potential problem assets are assigned the three lowest ratings. Such ratings coincide with the "Substandard", "Doubtful" and "Loss" classifications used by federal regulators in their examination of financial institutions. Generally, an asset is considered Substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. Substandard assets have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Assets classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristics that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. Assets classified as Loss are those considered uncollectable and of such little value that there continuance as assets is not warranted. On a regular basis, the Loan Review Officer and senior management review the status of each loan. While Royal Bank believes that it has established an adequate allowance for loan losses, there can be no assurance that the regulators, in reviewing Royal Bank's loan portfolio, will not request the company to materially increase its allowances for loan losses. Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependant upon future events and, as such, further additions to the level of specific and general loss allowances could become necessary. 21 Loans and Lease Financing Receivables The following table summarizes the loan portfolio by loan category and amount that corresponds to the appropriate regulatory definitions.\
As of December 31, (in thousands) -------------- --------------- -------------- 2001 2000 1999 -------------- --------------- -------------- Loans secured by real estate Construction and land development $64,551 $75,038 $50,210 Secured by 1-4 family residential properties: Revolving, open-end loans secured by 1-4 family residential properties and extended under lines of credit 35,367 7,825 8,341 All other loans secured by 1-4 family residential properties: Secured by first liens 110,351 5,621 15,458 Secured by junior liens 5,302 4,130 6,010 Secured by multi family (5 or more) residential properties 35,718 19,832 19,021 Secured by nonfarm nonresidential properties 375,501 291,450 237,247 Commercial and industrial loans to US addresses 8,544 20,245 21,090 Loans to individuals for household, family, and other personal expenditures 13,909 4,503 4,252 Obligations of state and political subdivisions in the US 192 256 411 All other loans -- 58 254 Less: Any unearned income on loans listed above 3,200 5,011 7,476 --------------- --------------- --------------- Total loans and leases, net of unearned income $646,235 $423,947 $354,818 =============== =============== ===============
22 Credit Quality The following table presents the principal amounts of nonaccruing loans and other real estate.
As of December 31, (in thousands) ------------------------------------------------------------------------ 2001 2000 1999 1998 1997 ------------ ------------ ------------ ------------ ----------- Non-accruing loans (1)(2) $10,794 $3,548 $1,209 $3,419 $4,317 Other real estate 884 -- 19 707 -- ------------ ------------ ------------ ------------ ----------- Total nonperforming assets $11,678 $3,548 $1,228 $4,126 $4,317 ============ ============ ============ ============ =========== Nonperforming assets to total assets 1.25% 0.56% 0.24% 0.96% 1.04% ============ ============ ============ ============ =========== Nonperforming loans to total loans 1.67% 0.84% 0.34% 1.12% 1.48% ============ ============ ============ ============ =========== Allowance for loan loss to nonperforming loans 110.14% 337.46% 970.80% 348.64% 189.62% ============ ============ ============ ============ ===========
(1) Generally a loan is placed on nonaccruing status when it has been delinquent for a period of 90 days or more unless the loan is both well secured and in the process of collection. (2) If interest had been accrued on these nonaccruing loans, such income would have approximated $526,000 for 2001, $319,000 for 2000, $109,000 for 1999, $308,000 for 1998, and $389,000 for 1997, 23 Investments Securities The contractual maturity distribution and weighted average rate of Royal Bancshares' investments held to maturity portfolio at December 31, 2001 are presented in the following table. Weighted average rate on tax-exempt obligations have been computed on a fully taxable equivalent basis assuming a tax rate of 34%.
As of December 31, 2001 (in thousands) -------------------------------------------------------------------------------------------------------------- After 1 year but After 5 years, but Within 1 year Within 5 years within 10 years After 10 years Total Securities held ---------------------- ---------------------- -------------------- ---------------------- -------------------- to maturity Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate - ------------ ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- US Treasuries & gov agencies -- % -- % $5,000 6.4% $30,000 6.5% $35,000 6.5% Other securities 19,218 7.9% 37,899 7.8% 161 7.0% 625 6.8% 57,903 7.8% ---------- ---------- ----------- ---------- ----------- -------- ----------- ---------- ----------- --------- Total $19,218 7.9% $37,899 7.8% $6,161 6.4% $30,625 6.5% $92,903 7.3% ========== ========== =========== ========== =========== ======== =========== ========== =========== ========= As of December 31, 2001 (in thousands) ---------------------- ---------------------- -------------------- ---------------------- --------------------- After 1 year but After 5 years, but Within 1 year Within 5 years within 10 years After 10 years Total Available for ---------------------- ---------------------- -------------------- ---------------------- --------------------- sale Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate - -------- ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- Gov't agencies -- % -- % $31,735 6.2% $20,006 6.6% $51,741 6.4% M.B.S. -- % 209 7.5% 213 7.5% 11,528 6.6% 11,950 6.6% Foreign -- % 16,744 7.4% -- % -- % 16,744 7.4% Trust Preferred 1,602 9.0% -- % -- % 33,305 9.5% 34,907 9.5% Other securities 8,230 6.3% 3,810 8.3% -- % 2,373 6.8% 14,413 6.9% ---------- ---------- ----------- ---------- ----------- -------- ----------- ---------- ----------- --------- Total $9,832 6.7% $20,763 7.6% $31,948 6.2% $67,212 8.0% $129,755 7.4% ========== ========== =========== ========== =========== ======== =========== ========== =========== =========
24 The following tables presents the consolidated book values and approximate fair value at December 31, 2001, 2000, and 1999, respectively, for each major category of Royal Bancshares' investment securities portfolio for held to maturity securities and available for sale securities.
As of December 31, (in thousands) ------------------------- ----- ------------------------- ---- ------------------------- 2001 2000 1999 ------------------------- ------------------------- ------------------------- Amortized Fair Amortized Fair Amortized Fair Securities held to maturity Cost Value Cost Value Cost Value - --------------------------- ---- ----- ---- ----- ---- ----- State & political subdivisions $ -- $ -- $ -- $ -- $ -- $ -- US Treasuries & agencies 35,000 34,679 23,071 23,070 6,614 6,623 Other securities 57,903 59,946 63,039 63,279 76,451 74,871 ------------- ----------- ------------- ----------- ------------- ------------ Total $92,903 $94,625 $86,110 $86,349 $83,065 $81,494 ============= =========== ============= =========== ============= ============ As of December 31, (in thousands) ------------------------- ----- ------------------------- ---- -------------------------- 2001 2000 1999 ------------------------- ------------------------- -------------------------- Amortized Fair Amortized Fair Amortized Fair Securities available for sale Cost Value Cost value Cost Value - -------------------------------- ---- ----- ---- ----- ---- ----- Federal Home Loan Bank stock $ 4,875 $ 4,875 $ 3,170 $ 3,170 $ 3,170 $ 3,170 Preferred and common stock 39 54 1,040 1,043 3,727 3,537 Other securities 128,888 124,826 66,828 65,931 55,652 52,778 ------------- ----------- ------------- ----------- ------------- ------------ Total $133,802 $129,755 $71,038 $70,144 $62,549 $59,485 ============= =========== ============= =========== ============= ============
25 Deposits The average balance of Royal Bank's deposits by major classifications for each of the last three years is presented in the following table.
As of December 31, (in thousands) ----------------------- ---- ------------------------ ---- ------------------------ 2001 2000 1999 ----------------------- ------------------------ ------------------------ Average Average Average Balance Rate Balance Rate Balance Rate ------- ---- ------- ---- ------- ---- Demand deposits: Non interest bearing $49,904 -- $45,501 -- $42,829 - - Interest bearing (NOW) 38,353 2.27% 35,714 2.44% 31,480 2.22% Money market deposits 108,792 3.71% 56,514 4.03% 43,809 3.25% Savings deposits 26,312 2.42% 19,942 2.71% 19,932 2.70% Certificate of deposit 369,680 6.02% 269,430 6.29% 192,545 5.90% ----------- -------- ----------- --------- ----------- -------- Total deposits $593,041 $427,101 $330,595 =========== =========== ===========
26 The remaining maturity of Certificates of Deposit of $100,000 or greater: As of December 31, (in thousands) ------------------------------- Maturity 2001 2000 ----------- ------------ Three months or less $ 39,216 $ 19,509 Over three months through twelve months 131,691 25,562 Over twelve months through five years 116,273 109,846 Over five years 16,613 12,143 ---------- ------------ Total $303,793 $166,760 ========== ============ Short and Long Term Borrowings
Year ending December 31, (in thousands) ----------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- Short term borrowings $ 30,000 $ 3,000 $ -- $ -- $ 15,000 Long term borrowings: Other borrowings 2,725 -- -- -- -- FHLB advances 67,500 30,000 30,000 30,365 31,063 -------- -------- -------- -------- -------- Total borrowings $100,225 $ 33,000 $ 30,000 $ 30,365 $ 46,063 ======== ======== ======== ======== ========
(1) The mortgage payable is payable to a bank at 65% of prime rate (4.75% at December 31, 2001) and was issued through by an industrial development authority. 27 ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements of Royal Bancshares (see Item 8) and related notes included herein. Financial Condition Total assets increased $300.9 million, or 48%, to $931.0 million at December 31, 2001 from $630.1 million at year-end 2000, primarily due to the acquisition of substantially all of the assets and liabilities of Crusader Savings Bank and it's parent Crusader Holding Corporation on June 22, 2001. Cash and Cash Equivalents. Cash and cash equivalents are comprised of cash on hand, and cash in interest bearing and non-interest bearing accounts in banks, in addition to federal funds sold. Cash and cash equivalents decreased $3.2 million, to $40.0 million at December 31, 2001. The average balance of cash and cash equivalents was approximately $42.1 million for 2001 versus $34.3 million for 2000. The majority of this average balance is held in interest-bearing accounts or invested daily in overnight fed funds. The average balance of these funds that earn interest was $36.7 million in 2001. This decrease in the balance of cash and cash equivalents is reflective of utilization of cash in other earning assets. Investment Securities Held to Maturity. Held to maturity ("HTM") investment securities represents approximately 13% of average earning assets during 2001 and are comprised of primarily corporate debt securities of investment grade quality, at the time of purchase. During 2001, HTM investment securities increased by $6.8 million to $92.9 million at December 31, 2001, from $86.1 million at December 31, 2000. Investment Securities Available for Sale. AFS investment securities represent 10% of average earning assets during 2001 and are primarily comprised of capital trust security issues of regional banks, domestic corporate debt, U.S. denominated foreign corporate debt and government secured mortgaged-back securities. At December 31, 2001, AFS investment securities were $129.8 million while they were $70.1 million at December 31, 2000, an increase of $59.7 million primarily due to the purchase of Crusader Holding Corporation's investment portfolio on June 22, 2001, and a change in investment philosophy in classifying most new security investments as AFS. Loans. Royal Bancshares' primary earning assets are loans, representing approximately 72% of average earning assets during 2001. The loan portfolio has historically been comprised primarily of business demand loans and commercial mortgages in roughly equal amounts, and to a significantly lesser extent, consumer loans comprised of one to four family residential and home equity loans. During 2001, total loans increased $222.3 million from $423.9 million at December 31, 2000 to $646.2 million at December 31, 2001 primarily due to the acquisition of a substantial amount of the Crusader Holding Corporation's loan portfolio. Included in the portfolio purchased was $146.3 million single family first mortgages. 28 Deposits. Royal Bancshares' primary source of funding, deposits, increased $229.3 million, or 49%, from $472.6 million at December 31, 2000 to $701.9 million at December 31, 2001. This increase in deposits is primarily due to an increase of $170.7 million in certificates of deposits, or 58% from December 31, 2000. At December 31, 2001, brokered deposits were $254.1 million as compared to $143.2 million at December 31, 2000. Money market deposit accounts increased $29.2 million, or 29% from $99.2 million at December 31, 2000 to $128.4 million at December 31, 2001. Other deposit categories comprised of demand, NOW, and savings deposits increased $29.4 million during 2001 over their levels at December 31, 2000. The increase in all savings categories is primarily due to the acquisition of deposits of Crusader Savings Bank. Borrowings. Borrowings are comprised of long-term borrowings (advances) and short-term borrowings (overnight borrowings, advances). Long-term borrowings increased $40.2 million to $70.2 million at December 31, 2001 from $30.0 million at December 31, 2000. Short-term borrowings increased from $3 million at December 31, 2000 to $30 million at December 31, 2001, primarily due to the remaining maturity on one advance being reduced to less than one year. The average balance of borrowings and mortgages during 2001 was $68.1 million versus $30.6 million for 2000. Stockholders' Equity. Stockholders' equity increased $4.9 million or 5% in 2001 to $108.4 million primarily due to net income of $15.8 million partially offset by $9.0 million in cash dividends paid in 2001. Additionally, stockholders equity was affected by the decrease in market value of AFS investment securities during 2001, which resulted in a downward adjustment of $2.0 million. Results of Operations General. Royal Bancshares' results of operations depend primarily on net interest income, which is the difference between interest income on interest earning assets and interest expense on interest bearing liabilities. Interest earning assets consist principally of loans and investment securities, while interest bearing liabilities consist primarily of deposits. Net income is also affected by the provision for loan losses and the level of non-interest income as well as by non-interest expenses, including salary and employee benefits, occupancy expenses and other operating expenses. Net Income. Net income in 2001 was $15.8 million as compared to $14.3 million in 2000 and, $12.1 million in 1999. Basic earnings per share were $1.39, $1.26 and $1.09 for 2001, 2000, and 1999, respectively. The $1.5 million increase in net income for 2001 represents a 11% increase over 2000, and is primarily attributable to the increase in interest income relating to loans and the investment security portfolio, and to a lesser extent, non-recurring fee and accretion income on loans. The increase in net income of $2.2 million for 2000 represents an 18% increase over 1999 and is primarily attributable to the increase in interest income relating to the investment security portfolio. Net Interest Income. Net interest income is Royal Bancshares' primary source of income. Its level is a function of the average balance of interest-earning assets, the average balance of interest-bearing liabilities, and the spread between the yield on assets and liabilities. In turn, these factors are influenced by the pricing and mix of Royal Bancshares' interest-earning assets and funding sources. Additionally, net interest income is affected by market and economic conditions, which influence rates on loan and deposit growth. 29 Net interest income was $37.4 million in 2001 as compared to $36.3 million in 2000. The increase in 2001 of net interest income of $1.1 million is primarily due to an increase in the average earning assets in 2001 to $753.9 million. This is an increase of $190.2 million, or 34% over the level for 2000. This increase in average interest earning assets contributed to a $10.3 million increase in interest income to $69.2 million in 2001, as compared to $58.9 million in 2000. Interest expense on interest bearing liabilities increased $9.3, to $31.8 million in 2001, from $22.5 million in 2000. This increase is primarily due to an increase in the average balance of interest-bearing liabilities, primarily deposits in 2001 to $611.6 million from $412.5 million in 2000. Net interest income was $36.3 million in 2000 compared with $28.8 million in 1999. The increase in net interest income in 2000 was primarily due to the increase in interest income relating to the increase in loans and investment securities during 2000, while the yield on interest earning assets increased 78 basis points to 10.44% from 9.66% for 1999. In 2000, average interest earning assets increased $100.8 million to $563.7 million from the 1999 level. This increase in average interest earning assets in 2000 was due to growth in average investment securities and loans of $3.7 million and $84.3 million, respectively. In 2000 rates on interest bearing liabilities increased to 5.5% from 5.0% level in 1999 as overall rates increased during the year. Average interest bearing liabilities increased to $412.5 million in 2000 from $318.7 million in 1999. Loans and Mortgages
2001 2000 1999 ---- ---- Average loan outstandings $543,854,000 $404,794,000 $320,544,000 Interest and fees on loans $ 53,384,000 $46,029,00 $33,816,000 Average Yield 9.82% 11.37% 10,55%
Royal Bancshares continues to originate both fixed rate and variable rate loans. At December 31, 2001 variable rate loans represented 56% of total loans. Together with some matching funding of fixed rate deposits to fixed rate loans, variable rate loans have helped Royal Bank manage interest rate risk. However, the unprecedented 11 interest rate cuts during 2001 caused the variable rate loan portfolio to reprice faster than most deposits, resulting in compression of the bank interest rate margin versus prior years. 30 In 2001, the average balance of loans increased $139.1 million to $543.9 million primarily due to the loans purchased via the Crusader Holding Corporation acquisition. The average yield on loans decreased 155 basis points to 9.82% in 2001 from 11.37% in 2000 primarily due to decreases in prime rate during 2001. Royal Bancshares' average prime rate decreased 210 basis points to approximately 7.09% in 2001 from 9.19% average prime rate for 2000. In 2000, the average balance of loans increased $84.3 million to $404.8 million primarily due to purchase of two loan pools, in addition to internally generated loan growth. The average yield on loans increased 82 basis points in 2000 primarily due to new loans generally repricing upwards as Royal Bank's average prime rate for 2000 increased 121 basis points to 9.19% from the 7.98% average prime rate for 1999. HTM Investment Securities
2001 2000 1999 ---- ---- ---- Average HTM investment securities $97,055,000 $67,050,000 $78,945,000 Interest income $7,610,000 $5,115,000 $5,808,000 Average yield 7.84% 7.63% 7.36%
HTM investment securities are comprised primarily of taxable corporate debt issues and to a lesser extent, US Treasuries and agencies. The corporate debt issues are investment grade at the time of purchase, with maturities in the three to six year range. It is Royal Bancshares' expressed intention to hold these securities to maturity. In 2001 the yield in HTM investment securities increased 21 basis points to 7.84% from 7.63% in 2000. This increase is partially attributable to an increase in yield on taxable investment securities in 2001, primarily due to the purchase of higher yielding corporate debt securities. The average balance of HTM investment securities increased $30 million to $97.1 million in 2001 primarily due to the purchase of government agency bonds during 2001. In 2000, the yield on HTM investment securities increased 27 basis points to 7.63% from 7.36% for 1999. This increase was primarily due to the purchase of higher yielding corporate debt securities. 31 AFS Investment Securities
2001 2000 1999 ---- ---- ---- Average AFS investment securities $76,338,000 $67,185,000 $51,617,000 Interest and dividend income $6,945,000 $6,177,000 $4,512,000 Average yield 9.10% 9.19% 8.74%
AFS investment securities are comprised primarily of non-rated capital trust security issues of regional banks, rated domestic and US denominated foreign corporate debt securities and government secured mortgage-backed securities, and to a lesser extent preferred and common stock. In 2001, the average balance of AFS investment securities increased $9.2 million to $76.3 million primarily due the acquisition of Crusader Holding Corporation's AFS portfolio and the decision by Royal Bank's investment committee to classify most new investments as AFS. The 9 basis point decrease in the average yield is primarily due a decline in rate of investments purchased during 2001. In 2000, the average balance of AFS investment securities increased $15.6 million to $67.2 million primarily due to the reclass of $12.2 million of HTM investment securities to AFS investments securities on April 2000. This 45 basis point increase in the average yield is primarily due to the effect of a full year of this level of average AFS investment securities in 2000 versus 1999. 32 Interest Expense on NOW and Money Market Deposits
2001 2000 1999 ---- ---- ---- Average NOW & Money Market deposits $147,145,000 $92,228,000 $75,289,000 Interest expense $4,900,000 $3,448,000 $2,123,000 Average cost of funds 3.33% 3.73% 2.82%
In 2001 the average cost of funds on NOW and money market deposits decreased 40 basis points to 3.33% from 3.73% in 2000 primarily due to a decline in the interest rate paid on these deposits. In 2000 the average cost of funds on NOW and money market deposits increased 91 basis points to 3.73% from 2.82%, as 2000 primarily due to the introduction of the Royal Treasury account in March 2000. Interest Expense on Time Deposits
2001 2000 1999 ---- ---- ---- Average time deposits $369,680,000 $269,430,000 $192,545,000 Interest expense $22,237,000 $16,939,000 $11,356,000 Average cost of funds 6.02% 6.29% 5.90%
In 2001 the average balance of time deposits increased $100.3 million to $369.7 million. This increase in time deposits is primarily due to the acquisition of Crusader Holding Corporation's time deposits. In 2000, the average balance of time deposits increased $76.9 million to $269.4 million. This growth in time deposits was due to the increase in the use of higher costing brokered deposits in 2000. Although rates in general continued to move downward in 2001, the reaction of deposits to rate changes (both increases and decreases) is slower than the change in the prime rate because these time deposits must mature before a rate adjustment would become effective. In 2001, 43% of time deposits were comprised of certificates of deposits accounts with balances of $100,000 or more, while in 2000, 35% of time deposits were comprised of certificates of deposit accounts with balances of $100,000 or more. These types of deposit have traditionally been considered more rate volatile than other types of deposits, however Royal Bank's penalty for early redemption somewhat mitigates this volatility. 33 Provision for Possible Loan Losses The provision for loan losses is an amount charged to expense to provide for future losses on existing loans. In order to determine the amount of the provision for loan loss, Royal Bank conducts a quarterly review of the loan portfolio to evaluate overall credit quality. This evaluation consists of an analysis of individual loans and overall risk characteristics and size of the loan, and takes into consideration current economic and market conditions, changes in non-performing loans, the capability of specific borrowers to repay loan obligations as well as current collateral values. In 2001, no provision for loan losses was recorded as compared to $0.3 million in 2000 due to senior management assessment that the level of loan loss reserve was adequate. Net charge-offs were $85 thousand in 2001as compared to a credit of $14 thousand for 2000, an increase of $99 thousand. In 2000, a provision for loan losses of $.3 million was recorded while in 1999, no provision for loan losses was recorded. Net charge-offs in 2000 was $14 thousand as compared to $.2 million for 1999. The allowance for possible loan loss at December 31, 2001 was $11.9 million, or 1.8% of net loans as compared to $12.0 million at December 31, 2000 or 2.9% of net loans, and $11.7 million at December 31, 1999, or 3.4% of net loans. Non-Interest Income Non-interest income includes service charges on depositors' accounts, safe deposit rentals and various services such as cashing checks, issuing money orders and travelers checks, and redeeming US savings bonds and similar activities. As a result of the acquisition Crusader Holding Corporation, Royal Bank retained the residential origination department to originate residential mortgages for resale in the secondary market. Most components of non-interest income are a modest and stable source of income, with exceptions of one-time gains and losses from the sale of other real estate owned, from period to period these sources of income may vary considerably. Service charges on depositors' accounts, safe deposit rentals and other fees are periodically reviewed by Management to remain competitive with other local banks. In 2001, total non-interest income increased $1.7 million primarily due to a decrease prior year losses associated with AFS investment securities experienced in the fourth quarter of 2000. Gains on the sales of real estate increased $135 thousand in 2001 as Royal Bank sold its only foreclosed property. Also gains on the sale of residential loans through the secondary market were $372 thousand. 34 In 2000, total non-interest income decreased $2 million primarily due to losses associated with AFS investment securities experienced in the fourth quarter of 2000. A $1 million charge to income was recorded in December 2000 relating to the capital trust preferred portion of AFS investment securities. A $.3 million loss was recorded on the sale of common stock in October 2000. Other income declined $.5 million primarily to the one time receipt of nonrecurring income in 1999. Gain on sale of real estate declined $.3 million in 2000 as Royal Bancshares sold its only foreclosed property. These decreases in non-interest income are partially offset by a $37 thousand increase in service charges and fees in 2000. Non-Interest Expense Non-interest expense includes compensation and employee benefits, occupancy, advertising, FDIC insurance, state taxes, depreciation, and other expenses such as auditing, automatic teller machines (ATMs), data processing, legal, outside service charges, postage, printing, and other expenses relating to other real estate owned. Non-interest expense increased $3.8 million to $17.6 million in 2001, from $13.8 million in 2000. This increase is primarily due to a $2.5 million increase in salaries and employee benefits in 2001 primarily due normal merit increases in salaries, in addition to an increase in the stock appreciation rights reserve and bonus accrual of $1.3 million. Occupancy expense increased $447 thousand to $1.1 million in 2001. These increases were in addition to an increase of $0.9 million of other operating expenses, as management continues to manage and attempt to control expenses. Non-interest expense increased $0.7 million to $13.8 million in 2000, from $13.1 million in 1999. This increase is primarily due to a $0.7 million increase in salaries and employee benefits in 2000 primarily due normal merit increases in salaries, in addition to an increase in the bonus accrual of $.2 million. Occupancy expense increased $34 thousand to $.7 million in 2000. These increases were partially offset by a $.1 million decrease in other operating expenses, as management continues to manage and attempt to control expenses. Accounting for Income Taxes The provision for federal income taxes was $5.8 million in 2001 as compared to $8 million for 2000, and $5.6 million for 1999 representing an effective tax rate of 27%, 36%, and 31%, respectively. The $2.2 million decrease in the tax provision for 2001 was primarily due the use of tax goodwill related to the acquisition of Knoblauch State Bank in 1995 and historical tax credits received in the Crusader asset acquisition. 35 Accounting for Debt and Equity Securities The Company accounts for investment securities in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This standard requires investments in securities to be classified in one of three categories; held to maturity, trading or available for sale. Debt securities that Royal Bank has the positive intent and ability to hold to maturity are classified as held to maturity and are reported at amortized cost. As Royal Bank does not engage in security trading, the balance of its debt securities and any equity securities are classified as available for sale. Net unrealized gains and losses for such securities, net of tax effect, are required to be recognized as a separate component of stockholders' equity and excluded from the determination of net income. Asset Liability Management The primary functions of asset-liability management are to assure adequate liquidity and maintain an appropriate balance between interest earning assets and interest bearing liabilities. This process is overseen by the Asset-Liability Committee ("ALCO") which monitors and controls, among other variables, the liquidity, balance sheet structure and interest rate risk of the consolidated company within policy parameters established and outlined in the Funds, Cash Flow and Liquidity Policies and Procedures which are reviewed by the Board of Directors at least annually. Additionally, the ALCO committee meets periodically and reports on liquidity, interest rate sensitivity and projects financial performance in various interest rate scenarios. Liquidity. Liquidity is the ability of the financial institution to ensure that adequate funds will be available to meet its financial commitments as they become due. In managing its liquidity position, the financial institution evaluates all sources of funds, the largest of which is deposits. Also taken into consideration is the repayment of loans. These sources provide the financial institution with alternatives to meet its short-term liquidity needs. Longer-term liquidity needs may be met by issuing longer-term deposits and by raising additional capital. Royal Bancshares generally maintains a liquidity ratio equal to or greater than 25% of total deposits and short-term liabilities. Liquidity is specifically defined as the ratio of net cash, short term and marketable assets to net deposits and short-term liabilities. The liquidity ratio for the years ended December 31, 2001, 2000 and 1999 was 33%, 53%, and 41%, respectively. Management believes that Royal Bancshares' liquidity position continues to be adequate, continues to be in excess of its peer group level and meets or exceeds the liquidity target set forth in the Funds, Cash Flow and Liquidity Policies and Procedures. 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. Interest-Rate Sensitivity. Interest rate sensitivity is a function of the repricing characteristics of the financial institution's assets and liabilities. These include the volume of assets and liabilities repricing, the timing of repricing, and the relative levels of repricing. Attempting to minimize the interest rate sensitivity gaps is a continual challenge in a changing rate environment. The interest sensitivity report examines the positioning of the interest rate risk exposure in a changing interest rate environment. Ideally the rate sensitive assets and liabilities will be maintained in a matched position to minimize interest rate risk. 36 The interest rate sensitivity analysis is an important management tool, however, it does have some inherent shortcomings. It is a "static" analysis. Although certain assets and liabilities may have similar maturities or repricing, they may react in different degrees to changes in market interest rates. Additionally, repricing characteristics of certain assets and liabilities may vary substantially within a given period. The following table summarizes repricing intervals for interest earning assets and interest bearing liabilities as of December 31, 2001, 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, 2001, Royal Bancshares is in an asset sensitive negative of $107.2 million, which indicates liabilities will reprice somewhat faster than assets within one year. 37 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 $ 24.5 $ -- $ -- $ -- $ -- $24.5 Federal funds sold 7.1 -- -- -- 7.1 Investment securities: Available for sale 1.6 3.3 20.8 104.1 -- 129.8 Held to maturity 12.3 6.9 37.9 35..8 -- 92.9 ------------ ------------ ------------ ------------ ------------ ------------ Total investment securities 13.9 10.2 58.7 139.9 -- 222.7 Loans:(2) Fixed rate (3) 6.5 20.4 175.1 79.9 -- 281.9 Variable rate 91.5 70.6 119.6 71.8 -- 353.5 ------------ ------------ ------------ ------------ ------------ ------------ Total loans 98.0 91.0 294.7 151.7 -- 635.4 Other assets(4) -- -- -- -- 41.3 41.3 ------------ ------------ ------------ ------------ ------------ ------------ Total Assets $143.5 $101.2 $353.4 $291.6 $41.3 $931.0 ============ ============ ============ ============ ============ ============ Liabilities & Capital Deposits: Non interest bearing deposits $ -- $ -- $ -- $ -- $52.0 $52.0 Interest bearing deposits (5) 50.8 -- 134.3 -- -- 182.1 Certificate of deposits 75.4 195.7 163.3 30.4 -- 464.8 ------------ ------------ ------------ ------------ ------------ ------------ Total deposits 126.2 195.7 297.6 30.4 52.0 701.9 Short term borrowings 30.0 -- -- -- 30.0 Mortgage and long term borrowings -- -- 5.7 64.5 -- 70.2 Other liabilities -- -- -- .4 20.1 20.5 Capital -- -- -- -- 108.4 108.4 ------------ ------------ ------------ ------------ ------------ ------------ Total liabilities & capital $126.2 $225.7 $303.3 $ 95.3 $180.5 $931.0 ============ ============ ============ ============ ============ ============ Net interest rate GAP $ 17.3 ($124.5) $50.1 $196.3 ($139.0) ============ ============ ============ ============ ============ Cumulative interest rate GAP $ 17.3 ($107.2) ($57.1) $139.0 -- ============ ============ ============ ============ ============ GAP to total assets 2% -13% ============ ============ GAP to total equity 16% -115% ============ ============ Cumulative GAP to total assets 2% -12% ============ ============ Cumulative GAP to total equity 16% -99% ============ ============
(1) Interest earning assets are included in the period in which the balances is expected to be repaid and/or repriced as a result of anticipated prepayments, scheduled rate adjustments, and contractual maturities. (2) Reflects principal maturing within the specified periods for fixed and repricing for variable rate loans; includes nonperforming loans. (3) Fixed rate loans include a portion of variable rate loans whose floors are in effect at December 31, 2001. (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. 38 The method of analysis of interest rate sensitivity in the table above has a number of limitations. Certain assets and liabilities may react differently to changes in interest rates even though they reprice or mature in the same time periods. The interest rates on certain assets and liabilities may change at different times than changes in market interest rates, with some changing in advance of changes in market rates and some lagging behind changes in market rates. Also, certain assets have provisions, which limit changes in interest rates each time the interest rate changes and for the entire term of the loan. Additionally, prepayments and withdrawals experienced in the event of a change in interest rates may deviate significantly from those assumed in the interest rate sensitivity table. Additionally, the ability of some borrowers to service their debt may decrease in the event of an interest rate increase. Capital Adequacy The table shown below sets forth Royal Bancshares' consolidated capital level and performance ratios: Regulatory 2001 2000 1999 Minimum --------- --------- --------- ---------- Capital Level Leverage ratio 14.1% 17.0% 18.8% 3% Risk based capital ratio: Tier 1 14.4% 18.1% 20.4% 4% Total 15.9% 19.4% 21.6% 8% Capital Performance Return on average assets 2.0% 2.5% 2.6% -- Return on average equity 15.0% 14.3% 12.8% -- Royal Bancshares' sources of capital have been derived from the issuance of stock as well as retained earnings. While Royal Bancshares has not had a stock offering since 1986, total stockholder's equity has increased primarily due to steady increases in retained earnings. At December 31, 2001, Royal Bancshares had an average equity to average asset ratio of 13.3%. Royal Bancshares has no current plans to raise capital through new stock offerings and indeed, seeks ways to leverage its existing capital. 39 In early 1989, each of the federal bank regulatory agencies issued risk-based capital standards, which were phased in December 31, 1992. The new standards place assets in various categories of risk with varying weights assigned, and consider certain off-balance sheet activities, such as letters of credit and loan commitments in the base for purposes of determining capital adequacy. The principal objective of establishing the risk-based capital framework is to achieve greater convergence in the measurement and assessment of capital adequacy due to the divergence of asset mixes maintained from one depository institution to the next. At December 31, 2001, Royal Bancshares' ratio using these standards was 14.6%. Management Options to Purchase Securities In May 2001, the directors of the Royal Bancshares approved the amended Royal Bancshares of Pennsylvania Non-qualified Stock Option and Appreciation Right Plan (the Plan). The shareholders in connection with the formation of the holding company reapproved the Plan. The Plan is an incentive program under which Bank officers and other key employees may be awarded additional compensation in the form of options to purchase up to 1,500,000 shares of the Registrant's Class A common stock (but not in excess of 15% of outstanding shares). The option price is equal to the fair market value at the date of the grant. At December 31, 2000, 532,504 options have been granted which are exercisable at 20% per year. At December 31, 2001, options covering 532,504 shares were exercisable by 66 employees. In May 2001, the directors of the Royal Bancshares approved an amended non-qualified Outside Directors Stock Option Plan. The shareholders in connection with the formation of the holding company reapproved the Plan. Under the terms of the plan, 250,000 shares of Class A stock are authorized for grants. Each director is entitled to 1,500 shares of stock annually, which is exercisable after one year of service. The options were granted at the fair market value at the date of the grant. At December 31, 2001, 78,249 options were outstanding and options covering 64,766 shares were exercisable. 40 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK A simulation model is therefore used to estimate the impact of various changes, both upward and downward, in market interest rates and volumes of assets and liabilities on the net income. This model produces an interest rate exposure report that forecast changes in the market value of portfolio equity under alternative interest rate environment. The market value of portfolio is defined as the present value of existing assets and liabilities. The calculated estimates of changes in the market value of portfolio value are as follows: As of December 31, 2001 (Dollars in Thousands) Market Value of Percent of Changes in Rates Portfolio Equity Change ---------------- ---------------- ------ + 300 basis points $ 54,662 -43.7% + 200 basis points 68,523 -29.4% + 100 basis points 82,528 -15.0% Flat rate 97,074 0 - 100 basis points 111,039 14.4% - 200 basis points 123,990 27.7% - 300 basis points 137,097 41.2% The assumptions used in evaluating the vulnerability of earnings and capital to changes in interest rates are based on management's considerations of past experience, current position and anticipated future economic conditions. The interest rate sensitivity of assets and liabilities as well as the estimated effect of changes in interest rates on the market value of portfolio equity could vary substantially if different assumptions are used or actual experience differs from what the calculations may be based. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 41 Report of Independent Certified Public Accountants Board of Directors Royal Bancshares of Pennsylvania, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Royal Bancshares of Pennsylvania, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Royal Bancshares of Pennsylvania, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Philadelphia, Pennsylvania January 25, 2002 42 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Consolidated Balance Sheets
December 31, ---------------------------- ASSETS 2001 2000 ----------- ----------- (In thousands, except share data) Cash and due from banks $ 32,918 $ 15,772 Federal funds sold 7,100 27,450 --------- --------- Total cash and cash equivalents 40,018 43,222 --------- --------- Investment securities held to maturity (fair value of $94,625 and $86,348 in 2001 and 2000, respectively) 92,903 86,110 Investment securities available for sale - at fair value 129,755 70,144 Total loans 646,235 423,946 Less allowance for loan losses 11,888 11,973 --------- --------- Net loans 634,347 411,973 Premises and equipment, net 8,512 6,615 Accrued interest receivable 11,696 5,504 Other assets 13,749 6,513 --------- --------- Total assets $ 930,980 $ 630,081 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits Non-interest bearing $ 51,991 $ 47,608 Interest bearing 649,869 424,974 --------- --------- Total deposits 701,860 472,582 Accrued interest payable 11,634 11,238 Other liabilities 8,175 9,760 Borrowings 100,225 33,000 --------- --------- Total liabilities 821,894 526,580 --------- --------- Minority interest 637 -- Stockholders' equity Common stock Class A, par value $2.00 per share; authorized, 18,000,000 shares; issued, 8,848,867 and 8,387,711 shares in 2001 and 2000, respectively 17,698 16,775 Class B, par value $0.10 per share; authorized, 2,000,000 shares; issued, 1,804,693 and 1,730,715 shares in 2001 and 2000, respectively 180 173 Additional paid in capital 65,011 57,768 Retained earnings 30,457 31,640 Accumulated other comprehensive loss (2,632) (590) --------- --------- 110,714 105,766 Treasury stock - at cost, 215,388 Class A shares in 2001 and 2000 (2,265) (2,265) --------- --------- Total stockholders' equity 108,449 103,501 --------- --------- Total liabilities and stockholders' equity $ 930,980 $ 630,081 ========= =========
The accompanying notes are an integral part of these statements. 43 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Consolidated Statements of Income
Year ended December 31, -------------------------------- 2001 2000 1999 -------- -------- -------- (In thousands, except per share data) Interest income Loans, including fees $ 53,384 $ 46,029 $ 33,816 Investment securities held to maturity Taxable 7,610 5,115 5,726 Tax-exempt -- -- 54 Investment securities available for sale Taxable 6,945 6,177 4,268 Tax-exempt -- -- 244 Deposits in banks 533 23 16 Federal funds sold 752 1,531 558 -------- -------- -------- TOTAL INTEREST INCOME 69,224 58,875 44,682 -------- -------- -------- Interest expense Deposits 27,774 20,628 14,017 Borrowings and mortgage payable 4,019 1,904 1,902 Federal funds purchased 15 17 3 -------- -------- -------- TOTAL INTEREST EXPENSE 31,808 22,549 15,922 -------- -------- -------- NET INTEREST INCOME 37,416 36,326 28,760 Provision for loan losses -- 250 -- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 37,416 36,076 28,760 -------- -------- -------- Other income Service charges and fees 966 894 856 Gain (losses) on sale of investment securities available for sale 60 (302) -- Impairment loss on investment securities available for sale -- (1,000) -- Gains on other real estate 188 53 349 Gains on sale of loans 372 -- 45 Other income 152 313 788 -------- -------- -------- 1,738 (42) 2,038 -------- -------- -------- Other expenses Salaries and employee benefits 10,479 7,979 7,265 Occupancy and equipment 1,119 672 638 Advertising 442 424 356 Pennsylvania bank shares tax 759 758 744 Professional fees 875 429 502 Losses on investment partnership 267 620 623 Travel 297 441 513 Other operating expenses 3,365 2,469 2,489 -------- -------- -------- 17,603 13,792 13,130 -------- -------- -------- INCOME BEFORE INCOME TAXES 21,551 22,242 17,668 Income taxes 5,797 7,982 5,564 -------- -------- -------- NET INCOME $ 15,754 $ 14,260 $ 12,104 ======== ======== ======== Per share data Net income - basic $ 1.39 $ 1.26 $ 1.09 ======== ======== ======== Net income - diluted $ 1.37 $ 1.24 $ 1.07 ======== ======== ========
The accompanying notes are an integral part of these statements. 44 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Stockholders' Equity Years ended December 31, 2001, 2000 and 1999 (In thousands, except per share data)
Class A common stock Class B common stock Additional -------------------- -------------------- paid in Shares Amount Shares Amount capital ------ ------ ------ ------ ------- Balance, January 1, 1999 7,430 $ 14,859 1,631 $ 163 $ 45,393 Net income for the year ended December 31, 1999 - - - - - Conversion of Class B common stock to Class A common stock 14 29 (13) (1) - 4% stock dividends declared 289 578 65 6 4,867 Cash in lieu of fractional shares - - - - - Purchase of treasury stock - - - - - Stock options exercised 146 293 - - 605 Cash dividends on common stock - - - - - Other comprehensive income, net of reclassifications and taxes - - - - - ----- -------- ----- --------- -------- Comprehensive income Balance, December 31, 1999 7,879 15,759 1,683 168 50,865 Net income for the year ended December 31, 2000 - - - - - Conversion of Class B common stock to Class A common stock 43 84 (36) (3) - 5% stock dividends declared 382 765 84 8 6,582 Cash in lieu of fractional shares - - - - - Stock options exercised 84 167 - - 321 Cash dividends on common stock - - - - - Other comprehensive income, net of reclassifications and taxes - - - - - ----- -------- ----- --------- -------- Comprehensive income Balance, December 31, 2000 8,388 $ 16,775 1,731 $ 173 $ 57,768
Accumulated other Retained comprehensive Treasury Comprehensive earnings income (loss) stock income -------- ------------- ----- ------ Balance, January 1, 1999 $ 34,556 $ 1,243 $ (2,145) Net income for the year ended December 31, 1999 12,104 - - $ 12,104 Conversion of Class B common stock to Class A common stock (28) - - - 4% stock dividends declared (5,451) - - - Cash in lieu of fractional shares (3) - - - Purchase of treasury stock - - (120) - Stock options exercised - - - - Cash dividends on common stock (7,849) - - - Other comprehensive income, net of reclassifications and taxes - (3,265) - (3,265) --------- -------- --------- --------- Comprehensive income $ 8,839 ========= Balance, December 31, 1999 33,329 (2,022) (2,265) Net income for the year ended December 31, 2000 14,260 - - $ 14,260 Conversion of Class B common stock to Class A common stock (80) - - - 5% stock dividends declared (7,356) - - - Cash in lieu of fractional shares (3) - - - Stock options exercised - - - - Cash dividends on common stock (8,510) - - - Other comprehensive income, net of reclassifications and taxes - 1,432 - 1,432 --------- -------- --------- --------- Comprehensive income $ 15,692 ========= Balance, December 31, 2000 $ 31,640 $ (590) $ (2,265)
45 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Stockholders' Equity - Continued Years ended December 31, 2001, 2000 and 1999 (In thousands, except per share data)
Class A common stock Class B common stock Additional -------------------- -------------------- paid in Shares Amount Shares Amount capital ------ ------ ------ ------ ------- Balance, January 1, 2001 8,388 $ 16,775 1,731 $ 173 $ 57,768 Net income for the year ended December 31, 2001 - - - - - Conversion of Class B common stock to Class A common stock 15 29 (13) (1) - 5% stock dividends declared 408 817 87 8 7,094 Cash in lieu of fractional shares - - - - - Stock options exercised 38 77 - - 149 Cash dividends on common stock - - - - - Other comprehensive loss, net of reclassifications and taxes - - - - - ----- -------- ----- --------- -------- Comprehensive income Balance, December 31, 2001 8,849 $ 17,698 1,805 $ 180 $ 65,011 ===== ======== ===== ========= ========
Accumulated other Retained comprehensive Treasury Comprehensive earnings income (loss) stock income -------- ------------- ----- ------ Balance, January 1, 2001 $ 31,640 $ (590) $ (2,265) Net income for the year ended December 31, 2001 15,754 - - $ 15,754 Conversion of Class B common stock to Class A common stock (28) - - - 5% stock dividends declared (7,919) - - - Cash in lieu of fractional shares (6) - - - Stock options exercised - - - - Cash dividends on common stock (8,984) - - - Other comprehensive loss, net of reclassifications and taxes - (2,042) - (2,042) --------- -------- --------- --------- Comprehensive income $ 13,712 ========= Balance, December 31, 2001 $ 30,457 $ (2,632) $ (2,265) ========== ======== =========
The accompanying notes are an integral part of this statement. 46 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Year ended December 31,
2001 2000 1999 ----------- ----------- ----------- (In thousands, except per share data) Cash flows from operating activities Net income $ 15,754 $ 14,260 $ 12,104 Adjustments to reconcile net income to net cash (used in) provided by operating activities Depreciation and amortization 865 414 414 Provision for loan losses - 250 - Amortizations of premiums and discounts on loans, mortgage-backed securities and investments (3,527) (5,470) (1,680) Provision (benefit) for deferred income taxes (2,779) 588 (1,257) Gains on other real estate (188) (53) (349) Gains on sale of loans (372) - (45) Gains (losses) on sales of investment securities available for sale (60) 302 - Impairment loss on investment securities available for sale - 1,000 - Decrease (increase) in accrued interest receivable (4,667) (769) 62 Decrease (increase) in other assets (3,421) 2,153 (466) Increase in accrued interest payable 364 3,238 570 Increase (decrease) in other liabilities (2,418) 2,392 2,095 --------- --------- --------- Net cash (used in) provided by operating activities (449) 18,305 11,448 --------- --------- --------- Cash flows from investing activities Proceeds from calls and maturities of investment securities held to maturity 78,194 14,613 13,798 Purchases of investment securities held to maturity (85,000) (30,001) (35,555) Proceeds from calls, maturities and sale of investment securities available for sale 21,169 1,076 - Proceeds from sales of investment securities available for sale 4,850 610 - Redemption of Federal Home Loan Bank stock 1,420 - - Cash paid for asset acquisition (15,239) - - Cash borrowed for asset acquisition 26,548 - - Purchases of investment securities available for sale (53,125) - (25,770) Net decrease (increase) in loans 46,703 (31,964) (49,135) Purchase of loan portfolio - (32,194) - Purchase of premises and equipment (1,706) (1,244) (746) Proceeds from sale and payments on other real estate - 73 1,033 --------- --------- --------- Net cash provided by (used in) investing activities 23,814 (79,031) (96,375) --------- ----------- -----------
(Continued) 47 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows - Continued Year ended December 31,
2001 2000 1999 -------- -------- -------- (In thousands, except per share data) Cash flows from financing activities Net increase in non-interest bearing and interest bearing demand deposits and savings accounts $ 44,974 $ 37,773 $ 4,813 Net (decrease) increase in certificates of deposit (66,731) 53,523 86,083 Principal payments on mortgage (49) (48) (47) Cash dividends in lieu of fractional shares (6) (3) (3) Purchase of treasury stock -- -- (120) Proceeds from (repayment of) borrowings 4,000 3,000 (365) Issuance of common stock under stock option plans 227 488 898 Cash dividends paid (8,984) (8,510) (7,849) -------- -------- -------- Net cash (used in) provided by financing activities (26,569) 86,223 83,410 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (3,204) 25,497 (1,517) Cash and cash equivalents at beginning of year 43,222 17,725 19,242 -------- -------- -------- Cash and cash equivalents at end of year $ 40,018 $ 43,222 $ 17,725 ======== ======== ======== Supplemental disclosure of cash flow information Cash paid during the year for Interest $ 31,412 $ 19,311 $ 15,352 ======== ======== ======== Income taxes $ 6,800 $ 5,650 $ 4,044 ======== ======== ========
The accompanying notes are an integral part of these statements. 48 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements December 31, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Royal Bancshares of Pennsylvania, Inc. (the Company), through its subsidiary Royal Bank of Pennsylvania (the Bank), offers a full range of banking services to individual and corporate customers located in eastern Pennsylvania. The Bank competes with other banking and financial institutions in certain markets, including financial institutions with resources substantially greater than its own. Commercial banks, savings banks, savings and loan associations, credit unions and money market funds actively compete for savings and time deposits and for various types of loans. Such institutions, as well as consumer finance and insurance companies, may be considered competitors of the Bank with respect to one or more of the services it renders. 1. Basis of Financial Statement Presentation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: Royal Investments of Delaware, Inc. and the Bank, including the Bank's subsidiaries, Royal Real Estate, Inc. and Crusader Servicing Corporation. On June 22, 2001, the Bank purchased a 60% ownership in Crusader Servicing Corporation from Crusader Holding Corporation. All significant intercompany transactions and balances have been eliminated. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenditures for the period. Therefore, actual results could differ significantly from those estimates. The principal estimate that is particularly susceptible to significant change in the near term relates to the allowance for loan losses. In connection with this 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 Company's allowance for loan losses. In addition to being subject to competition from other financial institutions, the Company is subject to regulations of certain federal agencies and, accordingly, it is periodically examined by those regulatory authorities. Statement of Financial Accounting Standards (SFAS) No. 131, "Segment Reporting" establishes standards for the way public business enterprises report information about operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The statement also requires that public enterprises report a measure of segment profit of loss, certain specific revenue and expense items and segment assets. The Company has one reportable segment, "Community Banking." All of the Company's activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, commercial lending is dependent upon the ability of the Bank to fund itself with retail deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer and residential mortgage lending. Accordingly, all significant operating decisions are based upon analysis of the Company as one operating segment or unit. (Continued) 49 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 2. Investment Securities Investment securities are classified in one of three categories: held to maturity, available for sale or trading. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and are reported at amortized cost. As the Company does not engage in security trading, the balance of its debt securities and any equity securities are classified as available for sale. Net unrealized gains and losses for such investment securities available for sale, net of tax effect, are required to be recognized as a separate component of stockholders' equity and excluded from the determination of net income. Gains or losses on disposition are computed by the specific identification method. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was amended in June 1999 by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" and in June 2000, SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," (collectively SFAS No. 133) was issued. SFAS No. 133 requires that entities recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Under SFAS No. 133, an entity may designate a derivative as a hedge of exposure to either changes in: (a) fair value of a recognized assets or liability or firm commitment, (b) cash flows of a recognized or forecasted transaction, or (c) foreign currencies of a net investment in foreign operations, firm commitments, available for sale securities or a forecasted transaction. Depending upon the effectiveness of the hedge and/or the transaction being hedged, any changes in the fair value of the derivative instrument is either recognized in earnings in the current year, deferred to future periods, or recognized in other comprehensive income. Changes in the fair value of all derivative instruments not recognized as hedge accounting are recognized in current year earnings. The Company adopted SFAS No. 133 effective April 1, 2000. SFAS No. 133 allowed a reclassification of investment securities without calling into question the intent of the Company to hold other investment securities to maturity in the future. On April 1, 2000, the Company reclassified investment securities from held to maturity to available for sale with a fair market value of $11,135,000 resulting in an increase of accumulated other comprehensive income of $302,000. SFAS No. 119 "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments," requires disclosures about financial instruments, which are defined as futures, forwards, swap and option contracts and other financial instruments with similar characteristics. On-balance-sheet receivables and payables are excluded from this definition. The Company did not hold any derivative financial instruments as defined by SFAS No. 119 at December 31, 2001 or 2000. 3. Loans and Allowance for Loan Losses Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan and lease losses. (Continued) 50 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 3. Loans and Allowance for Loan Losses - continued The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses in the loan portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loan loss experience, current economic conditions, volume, growth, and composition of the loan portfolio, and other relevant factors. The allowance is increased by provisions for loan losses charged against income. Decreases in the allowance result from management's determination that the allowance for loan losses exceeds their estimates of potential loan loss. The Company accounts for its impaired loans in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", was amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure", which requires that a creditor measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral-dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. Interest on loans is accrued and credited to operations based upon the principal amount outstanding. Accretion of unearned discounts on loans has been added to the related interest income. Accrual of interest is discontinued on a loan when management believes that the borrower's financial condition is such that collection of interest is doubtful and generally when a loan becomes 90 days past due as to principal or interest. When interest accruals are discontinued, interest credited to income in the current year is reversed and interest accrued in the prior year is charged to the allowance for loan losses. In September 2000, SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," replaced SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," and revised the standards for accounting for the securitizations and other transfers of financial assets and collateral. This new standard also requires certain disclosures, but carries over most of the provisions of SFAS No. 125. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The adoption of this statement is not expected to have a material impact on the Company's consolidated financial statements. On July 6, 2001, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 102 "Selected Loan Loss Allowance Methodology and Documentation Issues". SAB No. 102 provides guidance on the development, documentation, and application of a systematic methodology for determining the allowance for loans and leases in accordance with US GAAP and is effective upon issuance. The adoption of SAB No. 102 did not have a material impact on the Company's financial position or results of operations. (Continued) 51 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 4. Other Real Estate Other real estate is recorded at the lower of the customer's loan balance or the adjusted fair market value of the real estate securing the loan. The adjusted fair market value is determined by reducing the fair market value by estimated costs for the disposition of the property. Costs relating to holding the property are expensed when incurred. Other real estate owned of approximately $884,000 and $-0- at December 31, 2001 and 2000, respectively, is included in other assets on the consolidated balance sheets. 5. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation, which is computed principally on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on the straight-line method over the shorter of the estimated useful lives of the improvements or the terms of the related leases. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 retains the existing requirements to recognize and measure the impairment of long-lived assets to be held and used or to be disposed of by sale. However, SFAS No. 144 makes changes to the scope and certain measurement requirements of existing accounting guidance. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. The adoption of this statement is not expected to have a significant impact on the financial condition or results of operations of the Company. 6. Income Taxes Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. The principal types of differences between assets and liabilities for financial statement and tax return purposes are the allowance for loan losses, asset valuation reserves and net operating loss carryovers. 7. Per Share Information 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. (Continued) 52 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 8. Stock Option Plans The Company follows SFAS No. 123, which allows an entity to use a fair value-based method for valuing stock-based compensation, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the standard permits entities to continue accounting for employee stock options and similar instruments under Accounting Principles Board (APB) Opinion No. 25, and its related Interpretations. Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net income and earnings per share (EPS), as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. The Company's stock option plans are accounted for under APB Opinion No. 25. 9. Benefit Plans The Company has a noncontributory nonqualified, defined benefit pension plan covering certain eligible employees. Net pension expense consists of service costs, interest costs, return on pension assets and amortization of unrecognized initial net assets. The Company accrues pension costs as incurred. 10. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, short-term investments and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. 11. Financial Instruments SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires all entities to disclose the estimated fair value of their assets and liabilities considered to be financial instruments. Financial instruments consist primarily of investment securities, loans and deposits. 12. Advertising Costs The Company and the Bank expense advertising costs as incurred. 13. Comprehensive Income The Company reports comprehensive income which includes net income as well as certain other items, which result in a change to equity during the period. (Continued) 53 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 13. Comprehensive Income - continued The income tax effects allocated to comprehensive income is as follows (in thousands):
December 31, 2001 --------------------------------------------- Tax Net of Before tax (benefit) tax amount expense amount ----------- ----------- ----------- Unrealized losses on securities Unrealized holding losses arising during period $ (3,213) $ (1,131) $ (2,082) Less reclassification adjustment for gains realized in net income 60 (20) 40 ---------- ---------- --------- Other comprehensive loss, net $ (3,153) $ (1,111) $ (2,042) =========== ========== ========== December 31, 2000 --------------------------------------------- Tax Net of Before tax (benefit) tax amount expense amount ----------- ----------- ----------- Unrealized gains on securities Unrealized holding gains arising during period $ 2,472 $ 840 $ 1,632 Less reclassification adjustment for losses realized in net income (302) (102) (200) ---------- --------- --------- Other comprehensive income, net $ 2,170 $ 738 $ 1,432 =========== ========== ========== December 31, 1999 --------------------------------------------- Tax Net of Before tax (benefit) tax amount expense amount ----------- ----------- ----------- Unrealized losses on securities Unrealized holding losses arising during period $ (4,951) $ (1,686) $ (3,265) Less reclassification adjustment for losses realized in net income - - - ---------- --------- --------- Other comprehensive loss, net $ (4,951) $ (1,686) $ (3,265) =========== ========== ==========
14. Reclassifications Certain reclassifications of prior year amounts have been made to conform to the current year presentation. 54 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE B - ACQUISITIONS As of June 22, 2001, Royal Bancshares of Pennsylvania completed its acquisition of the assets of Crusader Holding Corporation (Crusader). Under the terms of the acquisition, certain assets and liabilities were purchased for approximately $41,500,000, which represented the approximate fair value of the net assets acquired. Included in this purchase was approximately $331,300,000 of assets, of which $236,500,000 was related to the loan portfolio. The purchase also included the assumption of deposits in the approximate amount of $251,000,000. The purchase price was paid in cash. This transaction was accounted for under the purchase method of accounting. There was no goodwill recorded in connection with this transaction. The following represents the unaudited results of operations of the Company as if the acquisition has occurred the first date of the period indicated. This pro forma information should be read in conjunction with the related historical information and is not necessarily indicative of the results that would have been attained had the acquisition actually been consummated on the dates indicated, nor are they necessarily indicative of our future operating results. Year ended December 31, 2001 2000 -------- -------- (in thousands) Interest income 84,205 $ 88,642 Interest expense 40,332 42,478 -------- -------- Net interest income 43,873 46,164 Provision for loan losses 250 1,500 Non-interest income 2,478 1,923 Non-interest expense 20,926 19,605 Income tax expense 7,234 10,379 -------- -------- Net income $ 17,941 $ 16,603 ======== ======== NOTE C - INVESTMENT SECURITIES The amortized cost, gross unrealized gains and losses, and fair value of the Company's investment securities held to maturity and available for sale are summarized as follows (in thousands): (Continued) 55 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE C - INVESTMENT SECURITIES - Continued
2001 -------------------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value ----------- ----------- ------------ ----------- Investment securities held to maturity Corporate securities $ 56,826 $ 2,042 $ - $ 58,868 U.S. government agencies 35,000 64 (385) 34,679 Mortgage backed securities 1,077 1 - 1,078 ----------- ---------- ---------- ------------ $ 92,903 $ 2,107 $ (385) $ 94,625 ============ =========== =========== ============= 2001 -------------------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value ----------- ----------- ------------ ----------- Investment securities available for sale Federal Home Loan Bank stock $ 4,875 $ - $ - $ 4,875 Preferred and common stock 39 15 - 54 Corporate bonds 60,899 268 (323) 60,844 Trust preferred securities 39,294 896 (5,283) 34,907 Foreign bonds 16,403 470 (99) 16,774 Mortgage backed securities 11,942 109 (100) 11,951 Other securities 350 - - 350 ----------- ---------- ---------- ------------ $ 133,802 $ 1,758 $ (5,805) $ 129,755 ============ =========== =========== ============= 2000 -------------------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value ----------- ----------- ------------ ----------- Investment securities held to maturity Corporate securities $ 63,039 $ 835 $ (595) $ 63,279 U.S. agencies 23,071 - (1) 23,070 ----------- ---------- ---------- ------------ $ 86,110 $ 835 $ (596) $ 86,349 ============ =========== =========== =============
(Continued) 56 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE C - INVESTMENT SECURITIES - Continued
2000 -------------------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value ----------- ----------- ------------ ----------- Investment securities available for sale Federal Home Loan Bank stock $ 3,170 $ - $ - $ 3,170 Preferred and common stock 1,040 4 - 1,044 Corporate bonds 33,934 1,107 (1,157) 33,884 Trust preferred securities 12,287 - (874) 11,413 Foreign bonds 20,607 324 (298) 20,633 ----------- ---------- ---------- ------------ $ 71,038 $ 1,435 $ (2,329) $ 70,144 ============ =========== =========== =============
The amortized cost and estimated fair value of investment securities at December 31, 2001, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
2001 -------------------------------------------------------------- Held to maturity Available for sale ---------------------------- --------------------------- Amortized Fair Amortized Fair cost value cost value ----------- ------------ ----------- ----------- Within 1 year $ 19,218 $ 19,388 $ 5,007 $ 4,903 After 1 but within 5 years 37,899 39,772 20,587 20,763 After 5 but within 10 years 5,161 5,194 31,721 31,948 After 10 years 30,625 30,271 71,573 67,212 Federal Home Loan Bank stock - - 4,875 4,875 Preferred and common stocks - - 39 54 ---------- ---------- ---------- ------------ $ 92,903 $ 94,625 $ 133,802 $ 129,755 =========== =========== =========== =============
Proceeds from the sale of investment securities available for sale during 2001, 2000 and 1999 were $6,270,000, $610,000 and $-0-, respectively, resulting in gross realized gain (loss) of $60,000, $(302,000) and $-0- during 2001, 2000 and 1999, respectively. Additionally, the Company recorded an impairment loss of $-0- and $1,000,000 in 2001 and 2000, respectively, on certain trust preferred investment securities available for sale that were issued by a related party. As of December 31, 2001 and 2000, investment securities with a book value of $32,878,000 and $26,455,000 respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law. 57 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE D - LOANS Major classifications of loans are as follows (in thousands): 2001 2000 ---------- ---------- Real estate $ 428,223 $ 233,110 Commercial and industrial 218,498 193,398 Consumer 2,714 2,450 --------- ---------- Total gross loans 649,435 428,958 Less Unearned income (1,056) (1,992) Unamortized discount on purchased loans (2,144) (3,020) --------- ---------- Total loans $ 646,235 $ 423,946 ========= ========== Loans on which the accrual of interest has been discontinued or reduced amounted to approximately $10,794,000 and $3,548,000 at December 31, 2001 and 2000, respectively. If interest had been accrued, such income would have been approximately $526,000, $319,000 and $109,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Management believes it has adequate collateral to limit its credit risk with these loans. The Company granted loans to the officers and directors of the Company and to their associates. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility. The aggregate dollar amount of these loans was $8,383,000 and $13,826,000 at December 31, 2001 and 2000, respectively. During 2001, no new loans were made and repayments totaled $5,443,000. The balance of impaired loans, which include the loans on which the accrual of interest has been discontinued, was approximately $10,852,000 and $3,615,000 at December 31, 2001 and 2000, respectively. The Company has identified a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreements. The income recognized on impaired loans during 2001 was $2,000. Total cash collected on impaired loans during 2001 was $264,000, of which $262,000 was credited to the principal balance outstanding on such loans. Interest that would have been accrued on impaired loans during 2001 was $541,000. 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. The Company primarily grants commercial and real estate loans in the greater Philadelphia metropolitan area. The Company has concentrations of credit risk in real estate development loans at December 31, 2001. A substantial portion of its debtors' ability to honor these contracts is dependent upon the economic sector. (Continued) 58 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE D - LOANS - Continued Changes in the allowance for loan losses were as follows (in thousands):
2001 2000 1999 -------- -------- -------- Balance at beginning of year $ 11,973 $ 11,737 $ 11,919 Charge-offs (517) (628) (1,075) Recoveries 432 614 893 -------- -------- -------- Net charge-offs (85) (14) (182) Provision for loan losses -- 250 -- -------- -------- -------- Balance at end of year $ 11,888 $ 11,973 $ 11,737 ======== ======== ========
NOTE E - PREMISES AND EQUIPMENT Premises and equipment are summarized as follows (in thousands):
Estimated useful lives 2001 2000 --------------- ------------- ------------- Land - $ 2,396 $ 1,973 Buildings and leasehold improvements 15 - 31.5 years 6,217 5,992 Furniture and fixtures 5 - 7 years 5,132 2,720 ----------- ----------- 13,745 10,685 Less accumulated depreciation and amortization 5,233 4,070 ----------- ----------- $ 8,512 $ 6,615 =========== ===========
Depreciation and amortization in expense was approximately $865,000, $414,000 and $414,000 for the years ended 2001, 2000 and 1999, respectively. 59 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE F - DEPOSITS Deposits are summarized as follows (in thousands): 2001 2000 ------------- ------------- Demand $ 51,991 $ 47,608 NOW and money market 158,784 110,935 Savings 26,312 19,948 Time, $100,000 and over 303,793 166,760 Other time 160,980 127,331 ----------- ----------- $ 701,860 $ 472,582 =========== =========== Maturities of certificates of deposit for the next five years and thereafter are as follows (in thousands): 2002 $ 271,042 2003 72,738 2004 58,319 2005 26,913 2006 5,376 Thereafter 30,385 ------------ $ 464,773 ============ NOTE G - BORROWINGS 1. Advances from the Federal Home Loan Bank At December 31, 2001, advances from the Federal Home Loan Bank (FHLB) totaling $97,500,000 will mature within one to ten years. The advances are collateralized by FHLB stock and certain first mortgage loans and mortgage-backed securities. These advances had a weighted average interest rate of 5.92%. Outstanding borrowings mature as follows (in thousands): 2002 $ 30,000 2003 3,000 2004 - 2005 - 2006 - Thereafter 64,500 -------- $ 97,500 ======== (Continued) 60 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE G - BORROWINGS - Continued 2. Other Borrowings The Company has a borrowing arrangement with a financial institution for $2,725,000, interest equal to the prime rate minus 50 basis points (4.25% at December 31, 2001). The note matures in June, 2003 and requires monthly interest payments. The balance is $2,725,000 at December 31, 2001. There was no outstanding balance as of December 31, 2000. NOTE H - LEASE COMMITMENTS The Company leases various premises under non-cancellable agreements, which expire through 2004 and require minimum annual rentals. The approximate minimum rental commitments under the leases are as follows for the year ended December 31, (in thousands): 2002 $ 563 2003 493 2004 186 ---------- $ 1,242 ========== Rental expense for all leases was approximately $501,000, $388,000 and $304,000 for the years ended December 31, 2001, 2000 and 1999, respectively. NOTE I - COMMON STOCK Each holder of Class A and Class B common stock is entitled to one vote for each Class A share and ten votes for each Class B share held. Holders of either class of common stock are entitled to equal per share dividends when declared. The Class B shares may not be transferred in any manner except to the holder's immediate family. Class B shares have been converted to Class A shares at the average rate of 1.15 to 1. Per share information and weighted average shares outstanding have been restated to reflect the 6% stock dividend of January 2002, the 5% stock dividend of February 2001, the 5% stock dividend of January 2000, and the 4% stock dividend of May 1999. 61 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE J - INCOME TAXES The components of the income tax expense (benefit) included in the consolidated statements of income are as follows (in thousands): 2001 2000 1999 -------- -------- -------- Income tax expense (benefit) Current $ 6,485 $ 8,266 $ 5,127 Deferred federal tax (1,560) (543) 178 Benefit applied to reduce goodwill 872 259 259 -------- -------- -------- $ 5,797 $ 7,982 $ 5,564 ======== ======== ======== The difference between the applicable income tax expense and the amount computed by applying the statutory federal income tax rate of 35% in 2001, 2000 and 1999 is as follows (in thousands): 2001 2000 1999 -------- -------- -------- Computed tax expense at statutory rate $ 7,543 $ 7,785 $ 6,184 Tax-exempt income (130) (84) (98) Low-income housing tax credit (650) (545) (545) Other, net (966) 826 123 Effect of 34% rate bracket - - (100) -------- -------- -------- Applicable income tax expense $ 5,797 $ 7,982 $ 5,564 ======== ======== ======== Deferred tax assets and liabilities consist of the following (in thousands):
2001 2000 ------------- ------------- Deferred tax assets Allowance for loan losses $ 2,137 $ 1,348 Unrealized losses on investment securities available for sale 1,415 304 Accrued stock-based compensation 855 521 Asset valuation reserves 812 974 Other 1,324 435 Net operating loss carryovers from Knoblauch State Bank 7,449 7,620 ---------- ----------- 13,992 11,202 Less valuation allowance (7,449) (7,620) ---------- ----------- 6,543 3,582 ---------- ----------- Deferred tax liabilities Other 576 286 ---------- ----------- 576 286 ---------- ----------- Net deferred tax asset, included in other assets $ 5,967 $ 3,296 ========== ===========
(Continued) 62 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE J - INCOME TAXES - Continued The Company has approximately $22,000,000 of net operating loss carryovers from the acquisition of Knoblauch State Bank (KSB). These losses will fully expire in 2015. The utilization of these losses is subject to limitation under Section 382 of the Internal Revenue Code. As a result, a valuation allowance has been established to eliminate the deferred tax asset attributable to these net operating losses. During 2001, 2000 and 1999, the Company realized a tax benefit related to the net operating loss carryovers from the acquisition of KSB. The deferred tax asset associated with those loss carryovers is fully offset by a valuation allowance. Accordingly, the realized tax benefit is reflected as a reduction of the goodwill associated with the acquisition and a corresponding reduction of deferred income tax benefit for the year. In addition, the Company has approximately $15,700,000 of tax goodwill from the acquisition of KSB. The ability to deduct this goodwill for tax purposes will expire in 2015. The utilization of this goodwill for tax purposes was subject to the limitations under Section 382 of the Internal Revenue Code. For 2001, approximately $1,353,000 has been deducted for tax purposes. For 2001, the Company has taken a recovery of $600,000 from income tax payable and reduced its federal income tax expense accordingly in order to recapture a provision established for issues that arose concerning the low income housing tax credits acquired from the Kearsley limited partnership in 1994. All issues regarding this tax credit were resolved favorably and as a result there is no need to maintain this tax reserve. NOTE K- EARNINGS PER SHARE Basic and diluted EPS are calculated as follows (in thousands, except per share data):
2001 ----------------------------------------- Income Average shares Per share (numerator) (denominator) amount ----------------------------------------- Basic EPS Income available to common shareholders $ 15,754 11,331 $ 1.39 Effect of dilutive securities Stock options - 166 (0.02) ---------- ---------- ------- Diluted EPS Income available to common shareholders plus assumed exercise of options $ 15,754 11,497 $ 1.37 ========== ========== =======
All options to purchase shares of common stock were included in the computation of 2001 diluted EPS because the exercise price was less than the average market price of the common stock. (Continued) 63 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE K - EARNINGS PER SHARE - Continued
2000 ----------------------------------------- Income Average shares Per share (numerator) (denominator) amount ------------------------------------------ Basic EPS Income available to common shareholders $ 14,260 11,310 $ 1.26 Effect of dilutive securities Stock options - 147 (0.02) --------- ---------- ------- Diluted EPS Income available to common shareholders plus assumed exercise of options $ 14,260 11,457 $ 1.24 ========= ========== =======
Options to purchase 48,744 shares of common stock with an exercise price of $15.79 per share were not included in the computation of 2000 diluted EPS because the exercise price was greater than the average market price of the common stock.
1999 ------------------------------------------- Income Average shares Per share (numerator) (denominator) amount ------------------------------------------- Basic EPS Income available to common shareholders $ 12,105 11,148 $ 1.09 Effect of dilutive securities Stock options - 140 (0.02) --------- ---------- ------- Diluted EPS Income available to common shareholders plus assumed exercise of options $ 12,105 11,288 $ 1.07 ========= ========== =======
Options to purchase 48,744 shares of common stock with an exercise price of $15.79 per share were not included in the computation of 1999 diluted EPS because the exercise price was greater than the average market price of the common stock. NOTE L - STOCK OPTION PLANS The Company has two stock-based compensation plans, which are described below. The Company accounts for these plans under APB Opinion No. 25. (Continued) 64 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE L - STOCK OPTION PLANS - Continued 1. Outside Directors' Stock Option Plan The Company adopted a non-qualified outside Directors' Stock Option Plan (the Director's Plan). Under the terms of the Director's Plan, 250,000 shares of Class A stock are authorized for grants. Each director is entitled to 1,500 shares of stock annually, which are exercisable after one year of service. The options were granted at the fair market value at the date of the grant. Stock option transactions consist of the following:
2001 2000 1999 ----------------------- ----------------------- ---------------------- Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price --------- ----------- --------- ----------- --------- ----------- Outstanding at beginning of year 66,349 $ 11.15 74,293 $ 10.57 73,453 $ 10.07 Granted 17,137 12.89 13,356 13.45 12,755 12.14 Exercised (5,237) 9.52 (21,300) 7.25 (11,915) 7.16 Cancelled - - - - - - ------- ------- ------ Outstanding at end of year 78,249 $ 11.04 66,349 $ 11.15 74,293 $ 10.57 ======= ======= ====== Weighted average fair value of options granted during the year $ 3.17 $ 2.31 $ 1.89
The following table summarizes information about options outstanding and exercisable at December 31, 2001:
Options outstanding Options exercisable ------------------------------------------------- -------------------------- Weighted average Weighted Weighted remaining average average Range of Number contractual exercise Number exercise exercise prices outstanding life (years) price exercisable price --------------- ----------- ------------ ----- ----------- ----- $3.67 - 5.48 12,123 2.6 $ 5.19 12,123 $ 5.19 $7.19 - 9.89 14,610 4.8 8.73 14,610 8.73 $11.45 - 14.90 51,516 7.7 13.07 38,033 13.13 ------ ------ 78,249 64,766 ====== ======
(Continued) 65 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE L - STOCK OPTION 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 1,500,000 shares of the Company's Class A common stock (but not in excess of 15% of outstanding shares). At the time a stock option is issued, a stock appreciation right for an identical number of shares may also be granted. The option price is equal to the fair market value at the date of the grant. The options are exercisable at 20% per year beginning one year after the date of grant and must be exercised within ten years of the grant. Stock option transactions consist of the following:
2001 2000 1999 ----------------------- ----------------------- ---------------------- Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price --------- ----------- --------- ----------- --------- ----------- Outstanding at beginning of year 398,325 $ 8.81 399,882 $ 6.42 492,458 $ 7.67 Granted 185,051 12.89 71,780 12.23 95,005 12.75 Exercised (35,497) 5.00 (67,078) 4.47 (143,129) 5.60 Cancelled (15,375) 12.47 (6,259) 12.91 (44,452) 11.91 --------- --------- --------- Outstanding at end of year 532,504 $ 9.85 398,325 $ 8.81 399,882 $ 6.42 ========= ========= ========= Weighted average fair value of options granted during the year $ 3.17 $ 2.31 $ 1.89
The following table summarizes information about options outstanding and exercisable at December 31, 2001:
Options outstanding Options exercisable ------------------------------------------------- -------------------------- Weighted average Weighted Weighted remaining average average Range of Number contractual exercise Number exercise exercise prices outstanding life (years) price exercisable price --------------- ----------- ------------ ----- ----------- ----- $2.01 8,453 0.3 $ 2.01 8,453 $ 2.01 $3.66 - 5.46 139,954 2.5 5.00 139,954 5.00 $7.20 - 9.79 89,327 4.7 8.25 82,384 8.10 $11.46 - 14.92 294,770 8.4 12.87 51,017 13.17 -------- --------- 532,504 281,808 ======== =========
(Continued) 66 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE L - STOCK OPTION PLANS - Continued Had compensation cost for both plans been determined based on the fair value of the options at the grant dates consistent with the method required by SFAS No. 123, the Company's net income and EPS would have been reduced to the pro forma amounts indicated below (in thousands, except share data). 2001 2000 1999 ---------- --------- ---------- Net income As reported $15,754 $14,260 $12,104 Pro forma 15,658 14,196 12,059 Earnings per share As reported - basic 1.39 $ 1.26 $ 1.09 As reported - diluted 1.37 1.24 1.07 Pro forma - basic 1.38 1.26 1.08 Pro forma - diluted 1.36 1.24 1.07 The fair value of each option grant is estimated on the date of the grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in 2001, 2000 and 1999: dividend yield of 4.84%, 5.95% and 5.33% for 2001, 2000 and 1999, respectively; expected volatility of 30.7% for 2001, 2000 and 1999, and risk-free interest rate of 4.94% in 2001, 5.11% in 2000 and 6.4% in 1999. Expected lives are 10 years for 2001, 2000 and 1999. NOTE M - PENSION PLAN The Company has a noncontributory nonqualified defined benefit pension plan covering certain eligible employees. The Company-sponsored pension plan provides retirement benefits under pension trust agreements and under contracts with insurance companies. The benefits are based on years of service and the employee's compensation during the highest five consecutive years during the last 10 years of employment. The Company's policy is to fund pension costs allowable for income tax purposes. The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheets (in thousands): 2001 2000 ------- ------- Change in benefit obligation Benefit obligation at beginning of year $ 1,782 $ 2,210 Service cost 488 (632) Interest cost 124 86 Other changes (17) 118 ------- ------- Benefits obligation at end of year $ 2,377 $ 1,782 ======= ======= (Continued) 67 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE M - PENSION PLAN - Continued Net pension cost included the following components (in thousands): 2001 2000 1999 ---- ---- ---- Service cost $553 $341 $320 Interest cost 124 86 132 ---- ---- ---- Net periodic benefit cost $677 $427 $452 ==== ==== ==== The assumed discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7% for 2001 and 2000 and 4% for 1999. The expected long-term rate of return on assets was 4% for 2001, 2000 and 1999. 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 from 1% to a maximum of 15% of their annual salary, with the Company matching 100% of any contribution between 1% and 5% subject to a $2,550 per employee annual limit. Matching contributions to the plan were approximately $167,000, $141,000 and $131,000 for the years ended December 31, 2001, 2000 and 1999, respectively. NOTE N - 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 Company's 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. (Continued) 68 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE N - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK - Continued The contract amounts are as follows (in thousands):
December 31, ------------------------------ 2001 2000 ------------- ------------- Financial instruments whose contract amounts represent credit risk Commitments to extend credit $ 111,643 $ 74,073 Standby letters of credit and financial guarantees written 4,782 1,853
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 customer's 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 management's credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment. Standby letters of credit are conditional commitments issued by 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 2002. 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 and equipment as collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held for those commitments is 80%. 69 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107 requires disclosure of the estimated fair value of an entity's assets and liabilities considered to be financial instruments. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in SFAS No. 107. However, many of such instruments lack an available trading market, as characterized by a willing buyer and seller engaging in an exchange transaction. Also, it is the Company's general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities. Therefore, the Company had to use significant estimations and present value calculations to prepare this disclosure. Changes in the assumptions or methodologies used to estimate fair value may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair value. Fair values have been estimated using data which management considered the best available and estimation methodologies deemed suitable for the pertinent category of financial instrument. The estimation methodologies, resulting fair values and recorded carrying amounts at December 31, 2001 and 2000 were as follows: Fair values of loans and deposits with floating interest rates are generally presumed to approximate the recorded carrying amounts. Fair value of financial instruments actively traded in a secondary market has been estimated using quoted market prices as follows (in thousands):
2001 2000 ------------------------------ ------------------------------ Estimated Estimated fair Carrying fair Carrying value amount value amount ------------- -------------- ------------- -------------- Cash and cash equivalents $ 40,018 $ 40,018 $ 43,222 $ 43,222 Investment securities held to maturity 94,625 92,903 86,349 86,110 Investment securities available for sale 129,755 129,755 70,144 70,144
Fair value of financial instruments with stated maturities has been estimated using present value cash flow, discounted at a rate approximating current market for similar assets and liabilities, as follows (in thousands):
2001 2000 ------------------------------ ------------------------------ Estimated Estimated fair Carrying fair Carrying value amount value amount ------------- -------------- ------------- -------------- Deposits with stated maturities $ 454,191 $ 464,773 $ 316,245 $ 294,090 Long-term borrowings 67,574 70,225 35,877 33,000
(Continued) 70 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued Fair value of financial instrument liabilities with no stated maturities has been estimated to equal the carrying amount (the amount payable on demand), totaling approximately $237,087,000 and $178,492,000 at December 31, 2001 and 2000, respectively. Fair value of the net loan portfolio has been estimated using present value cash flow, discounted at the treasury rate adjusted for non-interest operating costs and giving consideration to estimated prepayment risk and credit loss factors, as follows (in thousands):
2001 2000 ------------------------------ ------------------------------ Estimated Estimated fair Carrying fair Carrying value amount value amount ------------- -------------- ------------- -------------- Net loans $ 668,693 $ 634,347 $ 443,368 $ 411,973
The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit is based on the amount of unearned fees plus the estimated cost to terminate the letters of credit. Fair values of unrecognized financial instruments including commitments to extend credit and the fair value of letters of credit are considered immaterial. The Company's remaining assets and liabilities are not considered financial instruments. No disclosure of the relationship value of the Company's deposits is required by SFAS No. 107. NOTE P - REGULATORY MATTERS 1. 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 Banking Code) and in the Federal Deposit Insurance Act (FDIA) concerning the payment of dividends by the Company. Under the Banking Code, no dividends may be paid except from "accumulated net earnings" (generally undivided profits). Under the FDIA, no dividend may be paid if a bank is in arrears in the payment of any insurance assessment due to the Federal Deposit Insurance Corporation (FDIC). 2. Capital Ratios The Bank is 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 Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective (Continued) 71 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE P - REGULATORY MATTERS - Continued action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulations to ensure capital adequacy require the Company and the 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, 2001, management believes that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2001, the Bank met all regulatory requirements for classification as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The Bank's actual capital amounts and ratios are also presented in the table (in thousands).
2001 ----------------------------------------------------------------------- To be well capitalized under For capital prompt corrective Actual adequacy purposes action provisions ---------------------- ---------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio ----------- --------- ----------- -------- ----------- --------- Total capital (to risk-weighted assets) Company (consolidated) $ 121,237 15.92% $ 60,920 8.00% N/A N/A Bank 87,432 11.58 60,408 8.00 $ 75,510 10.00% Tier I capital (to risk-weighted assets) Company (consolidated) 111,718 14.42 30,993 4.00 N/A N/A Bank 77,993 10.33 30,204 4.00 45,306 6.00 Tier I capital (to average assets, leverage) Company (consolidated) 111,718 14.17 23,653 3.00 N/A N/A Bank 77,993 10.08 23,214 3.00 38,690 5.00
(Continued) 72 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE P - REGULATORY MATTERS - Continued
2000 To be well capitalized under For capital prompt corrective Actual adequacy purposes action provisions ---------------------- ---------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio ----------- --------- ----------- -------- ----------- --------- Total capital (to risk-weighted assets) Company (consolidated) $ 110,403 19.40% $ 45,516 > 8.00% N/A N/A Bank - 78,052 13.92 44,846 > 8.00 $ 56,057 >10.00% - - Tier I capital (to risk-weighted assets) Company (consolidated) 103,219 18.14 22,758 > 4.00 N/A N/A Bank - 70,984 12.66 22,423 > 4.00 33,634 > 6.00 - - Tier I capital (to average assets, leverage) Company (consolidated) 103,219 16.98 18,234 > 3.00 N/A N/A Bank - 70,984 11.85 17,972 > 3.00 29,953 > 5.00 - -
NOTE Q - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY Condensed financial information for the parent company only follows (in thousands). CONDENSED BALANCE SHEETS
December 31, ------------------------------ 2001 2000 ------------- ------------- Assets Cash $ 1,444 $ 1,396 Investment in Royal Investments of Delaware, Inc. - at equity 31,887 30,583 Investment in Royal Bank of Pennsylvania - at equity 74,716 71,265 Other assets 402 257 ----------- ----------- $ 108,449 $ 103,501 ============ ============ Stockholders' equity 108,449 103,501 ----------- ----------- $ 108,449 $ 103,501 ============ ============
(Continued) 73 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE Q - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued CONDENSED STATEMENTS OF INCOME
Year ended December 31, -------------------------------- 2001 2000 1999 -------- -------- -------- Income Equity in undistributed net earnings of subsidiaries $ 6,796 $ 5,763 $ 4,305 Dividends from subsidiary bank 8,984 8,513 7,849 Other income 35 50 44 -------- -------- -------- Total income 15,815 14,326 12,198 -------- -------- -------- Expenses Other expenses 75 68 120 Income tax benefit (14) (2) (26) -------- -------- -------- Total expenses 61 66 94 -------- -------- -------- Net income $ 15,754 $ 14,260 $ 12,104 ======== ======== ========
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31, -------------------------------- 2001 2000 1999 -------- -------- -------- Cash flows from operating activities Net income $ 15,754 $ 14,260 $ 12,104 Adjustments to reconcile net income to net cash provided by operating activities Undistributed earnings from subsidiaries (6,796) (4,647) (4,305) Operating expenses 75 68 120 Rental income (35) (50) (44) Non-cash income tax benefit (14) (2) (26) -------- -------- -------- Net cash provided by operating activities 8,984 9,629 7,849 -------- -------- -------- Cash flows from financing activities Cash dividends paid (8,984) (8,510) (7,849) Other, net 48 (655) 739 -------- -------- -------- Net cash used in financing activities (8,936) (9,165) (7,110) -------- -------- -------- Net increase in cash 48 464 739 Cash at beginning of year 1,396 932 193 -------- -------- -------- Cash at end of year $ 1,444 $ 1,396 $ 932 ======== ======== ========
74 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements - Continued December 31, 2001 and 2000 NOTE R - SUMMARY OF QUARTERLY RESULTS (UNAUDITED) The following summarizes the consolidated results of operations during 2001 and 2000, on a quarterly basis, for the Company (in thousands except per share data):
2001 ------------------------------------------------------ Fourth Third Second First Quarter Quarter Quarter Quarter ---------- ---------- ----------- ---------- Interest income $ 19,645 $ 19,901 $ 14,971 $ 14,708 Net interest income 10,199 10,031 8,597 8,589 Provision for loan losses - - - - Income before income taxes 6,449 5,423 4,108 5,572 Net income 4,456 3,572 3,811 3,914 Net income per share Basic $ 0.39 $ 0.32 $ 0.34 $ 0.34 Diluted $ 0.39 $ 0.31 $ 0.33 $ 0.34 2000 ------------------------------------------------------ Fourth Third Second First Quarter Quarter Quarter Quarter ---------- ---------- ----------- ---------- Interest income $ 16,079 $ 15,005 $ 14,864 $ 12,927 Net interest income 9,846 9,159 9,288 8,033 Provision for loan losses - - - 250 Income before income taxes 6,038 5,656 5,615 4,932 Net income 3,566 3,628 3,740 3,326 Net income per share Basic $ 0.34 $ 0.32 $ 0.31 $ 0.29 Diluted $ 0.33 $ 0.32 $ 0.30 $ 0.29
75 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information required in this Item, relating to directors, executive officers, control persons is set forth in Royal Bancshares' Proxy Statement to be used in connection with the 2002 Annual Meeting of Shareholders under the heading "Remuneration of directors and Officers and Other Transactions", which pages are incorporated herein by reference. Beneficial Ownership - Compliance. Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Corporation's officers and directors, and persons who own more than 10 percent of the registered class of the Corporation's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Officers, directors and greater than 10 percent shareholders are required by SEC regulation to furnish the Corporation copies of all Section 16(a) forms they file. Based solely on its review of forms that were received from certain reporting persons, the Corporation believes that during the period January 1, 2001 through December 31, 2001, its officers and directors were in compliance with all filing requirements applicable to them. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item, relating to executive compensation, is set forth in the Registrant's Proxy Statement to be used in connection with the 2002 Annual Meeting of Shareholders, under the heading "Remuneration of Directors and Officers and Other Transactions", which pages are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item, relating to beneficial ownership of the Registrant's Common Stock, is set forth in Royal Bancshares' Proxy Statement to be used in connection with the 2002 Annual Meeting of Shareholders, under the heading "Information About Nominees, Continuing Directors and Executive Officers", which pages are incorporated herein by reference. 76 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item, relating to transactions with management and others, certain business relationships and indebtedness of management, is set forth in Royal Bancshares' Proxy Statement to be used in connection with the 2002 Annual Meeting of Shareholders, under the heading "Interest of Management and Others in Certain Transactions", which page are incorporated herein by reference. ITEM 14. 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 Certified Public Accountants. Consolidated Balance Sheets. Consolidated Statements of Income. Consolidated Statements of Changes in Stockholders' Equity. Consolidated Statement of Cash Flows. Notes To Consolidated Financial Statements. 2. Financial Statement Schedules Financial Statement Schedules are omitted because the required information is either not applicable, not required or is shown in the respective financial statements or in the notes thereto. 3. The following Exhibits are files herewith or incorporated by reference as a part of this Annual Report. 2 Purchase and Assumption Agreement, dated as of March 12, 2001, among Royal Bank of Pennsylvania, Crusader Holding Corporation, Crusader Savings Bank, F.S.B. and Asset Investment Corporation. (Incorporated by reference to Exhibit 2 to Registrant's Report on Form 8-K, filed with the Commission on March 15, 2001.) 3(i) Articles of Incorporation. (Incorporated by reference to Exhibit 3(i) to Registrant's Registration Statement No. 0-26366 on Form S-4.) 3(ii) By-laws. (Incorporated by reference to Exhibit 99 to Registrant's Current Report on Form 8-K, filed with the Commission on March 13, 2001.) 10.1 Stock Option and Appreciation Right Plan. (Incorporated by reference to the Registrant's Registration Statement N0. 333-25855, on form S-8 filed with the Commission on April 5, 1997). 10.2 Outside Directors' Stock Option Plan. (Incorporated by reference to the Registrant's Registration Statement N0. 333-25855, on form S-8 filed with the Commission on April 5, 1997). 11. Statement Re: Computation of Earnings Per Share. Included at Item 8, hereof, Note A, "Per Share Information". 12. Statement re: Computation of Ratios. (Included at Item 8 here of, Note Q, "Regulatory Matters.") 21. Subsidiaries of Registrant. 23. Consent of Independent Accountants. (b) No Current Report on Form 8-K was filed by the Registrant during the fourth quarter of the fiscal year December 31, 2001. (c) The exhibits required to be filed by this Item are listed under Item 14(a)3 above. (d) Not applicable. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of l934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 77 ROYAL BANCSHARES OF PENNSYLVANIA, INC. --------------------------------------
DATE TITLE SIGNATURE ---- ----- --------- March 20, 2002 Chairman /s/ Daniel M. Tabas - ------------------------------ ------------------------------------- Daniel M. Tabas March 20, 2002 President/CEO /s/ Joseph P. Campbell - ------------------------------ ------------------------------------- Director Joseph P. Campbell March 20, 2002 Treasurer/CFO /s/ James J. McSwiggan - ------------------------------ ------------------------------------- James J. McSwiggan March 20, 2002 Director /s/ Albert Ominsky - ------------------------------ ------------------------------------- Albert Ominsky March 20, 2002 Director /s/ Anthony J. Micale - ------------------------------ ------------------------------------- Anthony J. Micale Vice Chairman/ March 20, 2002 Senior Vice President/ /s/ Robert R. Tabas - ------------------------------ Director -------------------------------------- Robert R. Tabas March 20, 2002 Director /s/ Gregory T. Reardon - ------------------------------ ------------------------------------- Gregory T. Reardon March 20, 2002 Director /s/ Carl M. Cousins - ------------------------------ ------------------------------------- Carl M. Cousins March 20, 2002 Director /s/ Lee E. Tabas - ------------------------------ ------------------------------------- Lee E. Tabas March 20, 2002 Director /s/ Howard Wurzak - ------------------------------ ------------------------------------- Howard Wurzak March 20, 2002 Senior Vice President/ /s/ John M. Decker - ------------------------------ Director ------------------------------------- John M. Decker March 20, 2002 Senior Vice President/ /s/ Murray Stempel - ------------------------------ Director ------------------------------------- Murray Stempel March 20, 2002 Director /s/ Jack R. Loew - ------------------------------ ------------------------------------- Jack R. Loew March 20, 2002 Director /s/ Edward B. Tepper - ------------------------------ ------------------------------------- Edward B. Tepper March 20, 2002 Director /s/ Evelyn Rome Tabas - ------------------------------ ------------------------------------- Evelyn Rome Tabas
78 ROYAL BANCSHARES OF PENNSYLVANIA, INC. ANNUAL REPORT ON FORM 10-K EXHIBIT INDEX 2 Purchase and Assumption Agreement, dated as of March 12, 2001, among Royal Bank of Pennsylvania, Crusader Holding Corporation, Crusader Savings Bank, F.S.B. and Asset Investment Corporation. (Incorporated by reference to Exhibit 2 to Registrant's Report on Form 8-K, filed with the Commission on March 15, 2001.) 3(i) Articles of Incorporation. (Incorporated by reference to Exhibit 3(i) to Registrant's Registration Statement No. 0-26366 on Form S-4.) 3(ii) By-laws. (Incorporated by reference to Exhibit 99 to Registrant's Current Report on Form 8-K, filed with the Commission on March 13, 2001.) 10.1 Stock Option and Appreciation Right Plan. (Incorporated by reference to the Registrant's Registration Statement N0. 333-25855, on form S-8 filed with the Commission on April 5, 1997). 10.2 Outside Directors' Stock Option Plan. (Incorporated by reference to the Registrant's Registration Statement N0. 333-25855, on form S-8 filed with the Commission on April 5, 1997). 11. Statement Re: Computation of Earnings Per Share. (Included at Item 8, hereof, Note A, "Per Share Information".) 12. Statements re: Computation of Ratios. (Included at Item 8 here of, Note Q, "Regulatory Matters.") 21. Subsidiaries of Registrant. 23. Consent of Independent Accountants. EX-21 3 exh21.txt EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT Company State - ------- ----- Royal Bank of Pennsylvania, Inc. Pennsylvania Royal Investment of Delaware, Inc. Delaware Royal Real Estate of Pennsylvania, Inc. Pennsylvania Crusader Servicing Corporations Pennsylvania Quest Holding Corporation Pennsylvania EX-23 4 exh23.txt EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We issued our report dated January 25, 2002, accompanying the consolidated financial statements incorporated by reference in the Annual Report of Royal Bancshares of Pennsylvania, Inc. and Subsidiaries on Form 10-K for the year ended December 31, 2001. We hereby consent to the incorporation by reference of said report in the Company's Registration Statements on Form S-8 (File No. 333-25855), effective April 25, 1997, as amended on August 18, 1997. /s/ Grant Thornton, LLP - ----------------------- Philadelphia, Pennsylvania March 29, 2002 -----END PRIVACY-ENHANCED MESSAGE-----