10-Q 1 ten_q.txt 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended: June 30, 2003 ------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from:______to Commission file number: 0-26366 ------- ROYAL BANCSHARES OF PENNSYLVANIA, INC. -------------------------------------- (Exact name of the registrant as specified in its charter) PENNSYLVANIA 23-2812193 ------------------------ ---------- (State or other jurisdiction (IRS Employer of incorporated or organization) identification No.) 732 Montgomery Avenue, Narberth, PA 19072 ----------------------------------------- (Address of principal Executive Offices) (610) 668-4700 -------------- (Registrant's telephone number, including area code) N/A --- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the bank (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the bank was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class A Common Stock Outstanding at June 30, 2003 -------------------- ---------------------------- $2.00 par value 9,898,794 Class B Common Stock Outstanding at June 30, 2003 -------------------- ---------------------------- $.10 par value 1,911,087 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (in thousands, except per share data)
June 30, 2003 (Unaudited) Dec 31, 2002 ------------- --------------- ASSETS Cash and due from banks $ 118,937 $ 27,081 Federal funds sold 15,050 13,490 ---------- ---------- Total cash and cash equivalents 133,987 40,571 ---------- ---------- Investment securities held to maturity (fair value of $31,389 at June 30, 2003 and $32,745 at December 31, 2002) 29,427 30,614 Investment securities available for sale - at fair value 464,576 418,316 Loans held for sale 8,358 8,119 Total loans 539,252 568,615 Less allowance for loan losses 12,654 12,470 ---------- ---------- Net loans 534,956 564,264 Premises and equipment, net 7,844 8,002 Accrued interest and other assets 25,039 26,717 ---------- ---------- Total assets $1,195,829 $1,088,484 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits Non-interest bearing $ 60,819 $ 55,575 Interest bearing (includes certificates of deposit in excess of $100 of $124,336 at June 30, 2003 and $180,978 at December 31, 2002) 778,378 765,265 ---------- ---------- Total deposits 839,197 820,840 Accrued interest payable 10,755 11,406 Borrowings 207,500 127,500 Other liabilities 6,673 6,682 ---------- ---------- Total liabilities 1,064,125 966,428 ---------- ---------- MINORITY INTEREST 730 726 Stockholders' equity Common stock Class A, par value $2 per share; authorized, 18,000,000 shares; issued, 9,898,794 at June 30, 2003 and 9,595,191 at December 31, 2002 19,798 19,190 Class B, par value $.10 per share; authorized, 2,000,000 shares; issued, 1,911,087 at June 30, 2003 and 1,860,668 at December 31, 2002 191 186 Additional paid in capital 83,587 76,984 Retained earnings 20,528 24,819 Accumulated other comprehensive income 9,135 2,416 ---------- ---------- 133,239 123,595 Treasury stock - at cost, shares of Class A, 215,388 at June 30, 2003, and December 31, 2002. (2,265) (2,265) ---------- ---------- Total stockholders' equity 130,974 121,330 ---------- ---------- Total liabilities and stockholders' equity $1,195,829 $1,088,484 ========== ========== The accompanying notes are an integral part of these statements.
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three months ended June 30, ----------------------------- (in thousands, except per share data) 2003 2002 ------------ ------------ Interest income Loans, including fees $11,503 $12,919 Investment securities held to maturity 578 1,022 Investment securities available for sale 5,427 4,651 Deposits in banks 199 179 Federal funds sold 46 62 ------- ------- TOTAL INTEREST INCOME 17,753 18,833 ------- ------- Interest expense Deposits 5,731 7,385 Borrowings 1,899 1,843 ------- ------- TOTAL INTEREST EXPENSE 7,630 9,228 ------- ------- NET INTEREST INCOME 10,123 9,605 Provision for loan losses 167 50 ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,956 9,555 ------- ------- Other income Service charges and fees 301 259 Net gains on sales of investment securities -- (14) Gains on sales of other real estate 109 94 Gains on sales of loans 153 175 Other income 42 20 ------- ------- 605 534 ------- ------- Other expenses Salaries & wages 1,995 1,881 Employee benefits 508 459 Occupancy and equipment 329 319 Other operating expenses 1,850 2,002 ------- ------- 4,682 4,661 ------- ------- INCOME BEFORE INCOME TAXES 5,879 5,428 Income taxes 1,899 1,531 ------- ------- NET INCOME $ 3,980 $ 3,897 ======= ======= Per share data Net income - basic $ .34 $ .33 ======= ======= Net income - diluted $ .33 $ .32 ======= ======= The accompanying notes are an integral part of these statements. Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Six months ended June 30, ----------------------------- (in thousands, except per share data) 2003 2002 ------------ ------------ Interest income Loans, including fees $23,690 $27,133 Investment securities held to maturity 1,171 2,540 Investment securities available for sale 10,950 7,720 Deposits in banks 284 451 Federal funds sold 90 132 ------- ------- TOTAL INTEREST INCOME 36,185 37,976 ------- ------- Interest expense Deposits 12,163 15,028 Borrowings 3,495 3,417 ------- ------- TOTAL INTEREST EXPENSE 15,658 18,445 ------- ------- NET INTEREST INCOME 20,527 19,531 Provision for loan losses 317 250 ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 20,210 19,281 ------- ------- Other income Service charges and fees 555 545 Net gains(losses) on sales of investment securities 144 (14) Gains on sales of other real estate 189 259 Gains on sales of loans 284 377 Other income 57 34 ------- ------- 1,229 1,201 ------- ------- Other expenses Salaries & wages 3,983 3,809 Employee benefits 892 897 Occupancy and equipment 665 555 Other operating expenses 3,686 3,817 ------- ------- 9,226 9,078 ------- ------- INCOME BEFORE INCOME TAXES 12,213 11,404 Income taxes 3,833 3,292 ------- ------- NET INCOME $ 8,380 $ 8,112 ======= ======= Per share data Net income - basic $ .71 $ .69 ======= ======= Net income - diluted $ .70 $ .67 ======= ======= The accompanying notes are an integral part of these statements. Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME Six Months ended June 30, 2003 (UNAUDITED)
Class A Common Stock Class B Common Stock Additional --------------------- --------------------- Paid in Retained (in thousands) Shares Amount Shares Amount Capital Earnings --------- ---------- --------- ---------- --------- ---------- Balance, January 1, 2003 9,595 $19,190 1,861 $186 $76,984 $24,819 Net income for the three months ended - - - - - 8,380 Jun. 30, Conversion of Class B common stock to Class A Common stock 6 12 (5) (1) - (12) Purchase of treasury stock - - - - - - 3% stock dividend declared 281 563 55 6 6,443 (7,011) Cash dividends on common stock - - - - - (5,640) Cash in lieu of fractional shares - - - - - (8) Stock options exercised 17 33 - - 160 - Other comprehensive income, net of Reclassifications and taxes - - - - - - ----- ------- ----- ---- ------- ------- Comprehensive income Balance, June 30, 2003 9,899 $19,798 1,911 $191 $83,587 $20,528 ===== ======= ===== ==== ======= =======
Accumulated Other Treasury Comprehensive Comprehensive (in thousands) Stock Income (loss) Income ------------ ---------------- -------------- Balance, January 1, 2003 $ (2,265) $2,415 Net income for the three months ended - - $ 8,380 Jun. 30, Conversion of Class B common stock to Class A Common stock - - - Purchase of treasury stock - - - 3% stock dividend declared - - Cash dividends on common stock - - - Cash in lieu of fractional shares - - - Stock options exercised - - - Other comprehensive income, net of Reclassifications and taxes - 6,720 6,720 -------- ------ ------- Comprehensive income $15,100 ======= Balance, June 30, 2003 $ (2,265) $9,135 ======== ======
The accompanying notes are an integral part of the financial statement. Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six months ended June 30, (in thousands)
2003 2002 ------------ ------------ Cash flows from operating activities Net income $ 8,380 $ 8,112 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation 517 626 Provision for loan loss 317 250 Net accretion of discounts on loans, mortgage-backed securities and investments 101 357 Provision for deferred income taxes 269 1,248 Gains on other real estate (189) (259) Gains on sales of loans (284) (377) Net (gain) loss on sales of investment securities (144) 14 Changes in assets and liabilities: Increase in accrued interest receivable (1,255) (1,513) (Increase) in other assets (1,651) (2,815) (Decrease) in accrued interest payable (651) (562) (Decrease) in other liabilities (9) (2,952) -------- ------- Net cash provided by (used in) operating activities 5,401 2,129 Cash flows from investing activities Proceeds from calls/maturities of HTM investment securities 2,000 38,063 Proceeds from calls/maturities of AFS investment securities 131,522 87,433 Proceeds from sales of AFS investment securities 19,078 2,000 Purchase of AFS investment securities (182,766) (210,412) Purchase of FHLB Stock (3,654) (3,000) Net decrease in loans 29,323 36,416 Purchase of premises and equipment (359) (598) -------- ------- Net cash provided by (used in) investing activities (4,856) (50,098) Cash flows from financing activities: Net increase in non-interest bearing and interest bearing demand deposits and savings accounts 83,078 143,758 Net decrease in certificates of deposit (64,722) (113,101) Mortgage payments (30) (20) Net increase in borrowings 80,000 57,275 Cash dividends (5,640) (5,290) Cash in lieu of fractional shares (8) (7) Issuance of common stock under stock option plans 193 611 -------- ------- Net cash provided by (used in) financing activities 92,871 83,226 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 93,416 35,257 Cash and cash equivalents at beginning of year 40,571 40,018 -------- ------- Cash and cash equivalents at end of year $133,987 $75,275 ======== =======
The accompanying notes are an integral part of these statements. ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The accompanying unaudited consolidated financial statements include the accounts of Royal Bancshares of Pennsylvania, Inc. (the Company) and its wholly-owned subsidiaries: Royal Equity Partners, Inc. and Royal Bank of Pennsylvania (the Bank), Royal Real Estate of Pennsylvania, Inc. and its 60% ownership interest in Crusader Servicing Corporation. These financial statements reflect the historical information of the Company. All significant inter-company transactions and balances have been eliminated. 1. The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information. The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in opinion of management, necessary to present a fair statement of the results for the interim periods. These interim financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2002. The results of operations for the three-month period ended June 30, 2003, are not necessarily indicative of the results, to be expected for the full year. 2. Segment Information The Company's community banking segment consists of commercial and retail banking. The community banking business segment is managed as a single strategic unit which generates revenue from a variety of products and services provided by the Bank. 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. The same is also true for consumer and residential mortgage lending. The Company's tax lien operation does not meet the quantitative thresholds for requiring disclosure, but has different characteristics to the community banking operation. The Company's tax lien operation consists of purchasing delinquent tax certificates from local municipalities at auction. The tax lien operation is managed as a single strategic unit which generates revenue from a nominal interest rate achieved at the individual auction along with periodic penalties imposed. The accounting policies used in this disclosure of business segments are the same as those described in the summary of significant accountings policies. The consolidating adjustments reflect certain eliminations of inter-segment revenues, cash and investments in subsidiaries.
Six months ended June 30 2003, ------------------------------- (in thousands) Community Tax Lien Banking Operation Consolidated ------------- ----------------- -------------- Total assets $1,147,104 $48,725 $1,195,829 Total deposits 839,197 -- 839,197 Net interest income 18,803 1,724 20,527 Provision for loan losses 300 17 317 Other income 1,051 178 1,229 Other expense 8,217 1,009 9,226 Income tax expense 3,614 219 3,833 ---------- ------- ---------- Net income $ 7,723 $ 657 $ 8,380 ========== ======= ==========
Six months ended June 30 2003, ------------------------------- (in thousands) Community Tax Lien Banking Operation Consolidated ------------- ----------------- -------------- Total assets $968,032 $52,922 $1,020,954 Total deposits 732,517 -- 732,517 Net interest income 18,112 1,419 19,531 Provision for loan losses 250 -- 250 Other income 1,001 200 1,201 Other expense 8,233 845 9,078 Income tax expense 3,106 186 3,292 -------- ------- ---------- Net income $ 7,524 $ 588 $ 8,112 ======== ======= ==========
Interest paid to the Community Bank segment by the Tax Lien Operation was approximately $974 thousand and $910 thousand for the six months period ending June 30, 2003, and 2002, respectively. 3. Per Share Information --------------------- The Company follows the provisions of SFAS No. 128, "Earnings Per Share. 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. In January 2003 the Company declared a 3% stock dividend. All share and per share information has been restated to reflect this dividend. Basic and diluted EPS are calculated as follows (In thousands, except per share data):
Three months ended June 30, 2003 Income Average shares Per share ------ -------------- --------- (numerator) (denominator) Amount ----------- ------------- ------ Basic EPS Income available to common shareholders $3,980 11,875 $0.34 Effect of dilutive securities Stock options 58 (.01) ------------------------------------------ Diluted EPS Income available to common shareholders Plus assumed exercise of options $3,980 11,933 $0.33
Three months ended June 30, 2002 Income Average shares Per share ------ -------------- --------- (numerator) (denominator) Amount ----------- ------------- ------ Basic EPS Income available to common shareholders $3,897 11,856 $0.33 Effect of dilutive securities Stock options 325 (.01) ------------------------------------------ Diluted EPS Income available to common shareholders Plus assumed exercise of options $3,897 12,181 $0.32
Six months ended June 30, 2003 Income Average shares Per share ------ -------------- --------- (numerator) (denominator) Amount ----------- ------------- ------ Basic EPS Income available to common shareholders $8,380 11,876 $0.71 Effect of dilutive securities Stock options 56 (.01) ------------------------------------------ Diluted EPS Income available to common shareholders Plus assumed exercise of options $8,379 11,932 $0.70
Six months ended June 30, 2002 Income Average shares Per share ------ -------------- --------- (numerator) (denominator) Amount ----------- ------------- ------ Basic EPS Income available to common shareholders $8,112 11,824 $0.69 Effect of dilutive securities Stock options 308 (.01) ------------------------------------------ Diluted EPS Income available to common shareholders Plus assumed exercise of options $8,112 12,132 $0.32
4. Investment Securities: ---------------------- The carrying value and approximate market value of investment securities at June 30, 2003 are as follows:
Amortized Gross Gross Approximate Purchased Unrealized Unrealized Fair Carrying (in thousands) Cost Gains Losses Value Value -------------- ---------- ---------- ------------- ------------- Held to maturity: ----------------- Mortgage Backed $ 411 $ -- $ -- $ 411 $ 411 Other Securities 29,016 1,987 -- 30,978 29,016 -------- ------- -------- -------- -------- $ 29,427 $ 1,987 $ -- $ 31,389 $ 29,427 ======== ======= ======== ======== ======== Available for sale: ------------------- Federal Home Loan Bank Stock - at cost $ 11,529 $ -- $ -- $ 11,529 $ 11,529 Mortgage Backed 96,224 169 (7) 96,386 96,386 CMO's 104,120 558 -- 104,678 104,678 US Agencies 17,807 50 -- 17,857 17,857 Other securities 221,055 15,051 (1,980) 234,126 234,126 -------- ------- -------- -------- -------- $450,735 $15,828 ($1,987) $464,576 $464,576 ======== ======= ======== ======== ========
5. Allowance for Credit Losses: Changes in the allowance for credit losses --------------------------- were as follows:
Three months ended June 30, --------------------------- 2003 2002 ---------- ---------- (in thousands) Balance at beginning of period, $12,602 $12,105 Loans charged-off (142) (167) Recoveries 27 170 ------- ------- Net charge-offs and recoveries (115) 3 Provision for loan losses 167 50 ------- ------- Balance at end of period $12,654 $12,158 ======= ======= Six months ended June 30, --------------------------- 2003 2002 ---------- ---------- (in thousands) Balance at beginning of period, $12,470 $11,888 Loans charged-off (201) (294) Recoveries 68 314 ------- ------- Net charge-offs and recoveries (133) 20 Provision for loan losses 317 250 ------- ------- Balance at end of period $12,654 $12,158 ======= =======
6. Non-performing loans -------------------- Loans on which the accrual of interest has been discontinued or reduced amounted to approximately $13.9 million and $10.4 million at June 30, 2003 and 2002, respectively. Although the Company has non-performing loans of approximately $13.9 million at June 30, 2003, management believes it has adequate collateral to limit its' credit risks. The balance of impaired loans which included the loans on which the accrual of interest has been discontinued, was approximately $13.9 million and $10.5 million at June 30, 2003 and 2002, respectively. The Company identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreements. Although the company recognizes the balances of impaired loans when analyzing its' loan loss reserve, the allowance for loan loss associated with impaired loans was $2.8 million at June 30, 2003. The income that was recognized on impaired loans during the three-month period ended June 30, 2003 was $-0-. The cash collected on impaired loans during the same period was $287 thousand of which $287 thousand was credited to the principal balance outstanding on such loans. 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. 7. Stock-based Compensation ------------------------ At June 30, 2003, the Company had both a director and employee stock-based compensation plan. The Company accounts for the plan under the recognition and measurement principals of APB No. 25, "Accounting for Stock Issued to Employee, and related interpretations. Stock-based employee compensation cost are not reflected in net income, as all options granted under the plan had an exercise price equal to the market value under the underlying common stock of the date of the grant. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148 "Accounting for Stock- Based Compensation--Transition and Disclosure" ("SFAS No. 148") in December 2002. SFAS No. 148 amends the disclosure and certain transition provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation". The new disclosure provisions are effective for financial statements for fiscal years ending after December 15, 2002 and financial reports containing condensed financial statement for interim periods beginning after December 15, 2002. The following table provides the disclosure required by SFAS No. 148 and illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation. (in thousands, except per share data) 2003 2002 ---- ---- Net income(loss), as reported $8,380 $8,112 Less: Stock-based compensation costs under Fair value based method for all awards. (218) (48) ------ ------- Pro forma net income (loss) $8,162 $8,064 Earnings per share - Basic As reported $0.71 $0.69 Pro forma $0.69 $0.68 Earnings per share - Diluted As reported $0.70 $0.67 Pro forma $0.68 $0.66 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS The following discussion and analysis is intended to assist in understanding and evaluating the changes in the financial condition and earnings performance of the Company and its' subsidiaries for the six-month period ended June 30, 2003. From time to time, the Company may include forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters in this and other filings with the Securities Exchange Commission. The Private Securities Litigation Reform Act of 1995 provides safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance development and results of the Company's business include the following: general economic conditions, including their impact on capital expenditures, 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. CRITICAL ACCOUNTING POLICIES, JUDGEMENTS AND ESTIMATES ------------------------------------------------------ The accounting and reporting policies of the company conform with accounting principals generally accepted in the United States of America and general practices within the financial services industry. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. Allowance for Credit Losses --------------------------- The company considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The balance in the allowance for loan losses is determined based on management's review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors, including management's assumptions as to future delinquencies, recoveries and losses. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from managements estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods. Income Taxes ------------ Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities. Deferred tax assets are subject to managements' judgment based upon available evidence that future realization is more likely than not. If management determines that the company may be unable to realize all or part of the net deferred tax assets in the future, a direct charge to income tax expense may be required to reduce the recorded value of net deferred tax assets to the expected realizable amount. FINANCIAL CONDITION ------------------- Total consolidated assets as of June 30, 2003 were $1,196 million, an increase of $107.3 million from the $1,088 million reported at year-end, December 31, 2002. This increase is primarily due to new deposits generated during the year, along with the utilization of low interest rates offered on advances at the F.H.L.B. of Pittsburgh. Total loans decreased $29.1 million from the $576.7 million level at December 31, 2002 to $547.6 million at June 30, 2003. This decrease is attributed to the slow pace of the economic recovery and stiff loan competition that is occurring throughout the industry. The year-to-date average balance of loans was $570.9 million at June 30, 2003. The allowance for loan loss increased $184 thousand to $12.7 million at June 30, 2003 from $12.5 million at December 31, 2002. The level of allowance for loan loss reserve represents approximately 2.3% of total loans at June 30, 2003 versus 2.2% at December 31, 2002. While management believes that, based on information currently available, the allowance for loan loss is sufficient to cover losses inherent in the Company's loan portfolio at this time, no assurances can be given that the level of allowance will be sufficient to cover future loan losses or that future adjustments to the allowance will be sufficient to cover future loan losses or that future adjustments to the allowance will not be necessary if economic and/or other conditions differ substantially from the economic and other conditions considered by management in evaluating the adequacy of the current level of the allowance. The $45.1 million increase in total investment securities is primarily attributable to the redeployment of excess cash on hand to achieve a higher rate of return. Total cash and cash equivalents increased $93.4 million from the $40.6 million level at December 31, 2002 to $134.0 million at June 30, 2003. This increase is primarily due to investments purchased and loan commitments that have not settled as of June 30, 2003. Total deposits, the primary source of funds, increased $18.4 million to $839.2 million at June 30, 2003, from $820.8 million at December 31, 2002. This increase in deposits is primarily due to the competitive rates of our Royal Treasury money market. The balance of brokered deposits was $73.9 million, representing approximately 9% of total deposits at June 30, 2003. Generally, these brokered deposits cannot be redeemed prior to the stated maturity, except in the event of the death or adjudication of incompetence of the deposit holder. Consolidated stockholder's equity increased $9.7 million to $131.0 million at June 30, 2003 from $121.3 million at December 31, 2002. This increase is primarily due to net income of $8.4 million, partially offset by quarterly cash dividends totaling $5.6 million. Additionally, stockholder's equity increased by $6.7 million due to an adjustment in the market value of available-for-sale investment securities during the first six months of 2003. RESULTS OF OPERATIONS --------------------- Results of operations depend primarily on net interest income, which is the difference between interest income on interest earning assets and interest expense on interest bearing liabilities. Interest earning assets consist principally of loans and investment securities, while interest bearing liabilities consist primarily of deposits. Net income is also effected by the provision for loan losses and the level of non-interest income as well as by non-interest expenses, including salary and employee benefits, occupancy expenses and other operating expenses. Consolidated net income for the three months ended, June 30, 2003 was $4.0 million or $.34 basic earnings per share, as compared to net income of $3.9 million or $.33 basic earnings per share for the same three month period in 2002. Consolidated net income for the six months ended, June 30, 2003 was $8.4 million or $0.71 basic earnings per share, as compared to net income of $8.1 million or $0.69 basic earnings per share for the same six month period in 2002. For the second quarter 2003, net interest income was $10.1 million as compared to $9.6 million for the same quarter in 2002, an increase of $500 thousand, or 5%. This increase is primarily due to an increase in the average balance of earning assets in the second quarter period of 2003 versus the same period in 2002. Interest income on loans decreased $1.4 million for the second quarter of 2003 versus 2002 primarily due to a decrease in the average balance of loans during the same period. Interest income on investment securities increased $332 thousand, a 6% increase over the same three-month period in 2002, which is primarily due to the increase in the average balance in investment securities. Total interest expense on deposits and borrowings decreased $1.6 million to $7.6 million as compared to $9.2 million for the same three-month period in 2002. This decrease in interest expense is primarily due the reduction of interest rates on deposits and borrowings. Provision for loan losses was $167 thousand for the second quarter of 2003 and $50 for the same three-month period in 2002. Charge-offs and recoveries were $184 thousand and $69 thousand respectively, for the three-month period ended June 30, 2003 versus $167 thousand and $170 thousand, respectively, for the same three-month period in 2002. Overall, management considers the current level of allowance for loan loss to be adequate at June 30, 2003. Total non-interest income for the three-month period ended June 30, 2003 was $605 thousand as compared to $534 thousand for the same three-month period in 2002. The $71 thousand increase in 2003 is primarily due to service charge and fee income collect on our deposit and loan customers. Total non-interest expense for the three months ended June 30, 2003 was $4.7 million, an increase of $21 thousand, or 0.5%, as compared to $4.7 million for the same period in 2002. CAPITAL ADEQUACY ---------------- The company is required to maintain minimum amounts of capital to total "risk weighted" assets and a minimum Tier 1 leverage ratio, as defined by the banking regulators. At June 30, 2003, the Company was required to have a minimum Tier 1 and total capital ratios of 4% and 8%, respectively, and a minimum Tier 1 leverage ratio of 3% plus an additional 100 to 200 basis points. The table below provides a comparison of Royal Bancshares of Pennsylvania's risk-based capital ratios and leverage ratios: June 30, 2003 December 31, 2002 ------------- ----------------- Capital Levels Tier 1 leverage ratio 10.9% 11.4% Tier 1 risk-based ratio 14.5% 14.6% Total risk-based ratio 15.8% 15.9% Capital Performance Return on average assets 1.4% (1) 1.7% (1) Return on average equity 12.3% (1) 15.2% (1) (1) annualized The Company's ratios compare favorably to the minimum required amounts of Tier 1 and total capital to "risk weighted" assets and the minimum Tier 1 leverage ratio, as defined by banking regulators. The Company currently meets the criteria for a well-capitalized institution, and management believes that the Company will continue to meet its' minimum capital requirements. At present, the Company has no commitments for significant capital expenditures. The Company is not under any agreement with regulatory authorities nor is the Company aware of any current recommendations by the regulatory authorities that, if such recommendations were implemented, would have a material effect on liquidity, capital resources or operations of the Company. LIQUIDITY & INTEREST RATE SENSITIVITY ------------------------------------- Liquidity is the ability to ensure that adequate funds will be available to meet its' financial commitments as they become due. In managing its' liquidity position, all sources of funds are evaluated, the largest of which is deposits. Also taken into consideration is the repayment of loans. These sources provide alternatives to meet its' short-term liquidity needs. Longer liquidity needs may be met by issuing longer-term deposits and by raising additional capital. The liquidity ratio is generally maintained equal to or greater than 25% of deposits and short-term liabilities. The liquidity ratio of the Company remains strong at approximately 71% and exceeds the Company's peer group levels and target ratio set forth in the Asset/Liability Policy. The Company's level of liquidity is provided by funds invested primarily in corporate bonds, capital trust securities, US Treasuries and agencies, and to a lesser extent, federal funds sold. The overall liquidity position is monitored on a monthly basis. Interest rate sensitivity is a function of the repricing characteristics of the Company's assets and liabilities. These include the volume of assets and liabilities repricing, the timing of the repricing, and the interest rate sensitivity gaps is a continual challenge in a changing rate environment. The following table shows separately the interest sensitivity of each category of interest earning assets and interest bearing liabilities as of June 30, 2003:
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 $108.3 $ -- $ -- $ -- $ 10.6 $ 118.9 Federal funds sold 15.1 -- -- -- -- 15.1 Investment securities: Available for sale 15.0 5.6 175.1 268.9 -- 464.6 Held to maturity 2.0 6.0 21.1 0.3 -- 29.4 ---------------------------------------------------------------------------- Total investment securities 17.0 11.6 196.2 269.2 -- 494.0 Loans: (2) Fixed rate 18.3 44.9 165.1 69.7 -- 298.0 Variable rate 203.2 21.0 26.6 0.7 -- 251.5 ---------------------------------------------------------------------------- Total loans 221.5 65.9 191.7 70.4 -- 549.5 Other assets (3) -- -- -- -- 18.3 18.3 ---------------------------------------------------------------------------- Total Assets $361.9 $ 77.5 $387.9 $339.6 $ 28.9 $1,195.8 ============================================================================ Liabilities & Capital --------------------- Deposits: Non interest bearing deposits $ -- $ -- $ -- $ -- $ 60.8 $ 60.8 Interest bearing deposits (4) 456.8 56.1 -- -- -- 512.9 Certificate of deposits 23.8 87.7 145.6 8.4 -- 265.5 ---------------------------------------------------------------------------- Total deposits 480.6 143.8 145.6 8.4 60.8 839.2 Borrowings 3.0 30.0 60.0 114.5 -- 207.5 Other liabilities -- -- .3 -- 17.8 18.1 Capital -- -- -- -- 131.0 131.0 ---------------------------------------------------------------------------- Total liabilities & capital $483.6 $173.8 $205.9 $122.9 $ 209.6 $1,195.8 ============================================================================ Net interest rate GAP ($121.7) ($ 96.3) $182.0 $216.7 ($ 180.7) ============================================================== Cumulative interest rate GAP ($121.7) ($218.0) ($ 36.0) $180.7 -- ============================================================== AP to total assets (10%) (8%) ==================== GAP to total equity (93%) (74%) ==================== Cumulative GAP to total assets (10%) (18%) ==================== Cumulative GAP to total equity (93%) (166%) ====================
(1) Interest earning assets are included in the period in which the balances are expected to be repaid and/or repriced as a result of anticipated prepayments, scheduled rate adjustments, and contractual maturities. (2) Reflects principal maturing within the specified periods for fixed and variable rate loans and includes nonperforming loans. (3) For purposes of gap analysis, other assets include the allowance for possible loan loss, unamortized discount on purchased loans and deferred fees on loans. (4) Based on historical analysis, Money market are assumed to have rate sensitivity of 1 month; NOW account and savings deposits are assumed to have a rate sensitivity of 4 months. The Company's exposure to interest rate risk is mitigated somewhat by a portion of the Company's loan portfolio consisting of floating rate loans, which are tied to the prime lending rate but which have interest rate floors and no interest rate ceilings. Although the Company is originating fixed rate loans, a portion of the loan portfolio continues to be comprised of floating rate loans with interest rate floors. ITEM 4 - CONTROLS AND PROCEDURE ------------------------------- We maintain a system of controls and procedures designed to provide reasonable assurance to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, within 90 days prior to the filing date of this report. Based upon that evaluation, our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic Securities and Exchange Commission filings. No significant changes were made to our internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation. RECENT ACCOUNTING PRONOUNCEMENTS -------------------------------- In December 2002, the FASB issued SFAS 148, "Accounting for Stock-based Compensation-Transition and Disclosure". SFAS 148 amends SFAS 123 "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary charge to the fair value based method of accounting for stock-based employees compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the methods of accounting for stock-based employee compensation and the effect of method used on reports results. SFAS 148 is effective for fiscal beginning after December 15, 2002. The expanded annual disclosure provisions are effective for financial reports containing financial statement for interim periods beginning after December 15, 2002. Management does not expect the adoption of SFAS 148 to have a material effect on the company's financial position, results of operations, or cash flows. The Company adopted FIN 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others" on January 1, 2003. FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company has financial and performance letters of credit. Financial letters of credit require the company to make a payment if the customer's condition deteriorates, as defined in the agreements. Performance letters of credit require the company to make payments if the customer fails to perform certain non-financial contractual obligation. The Company previously did not record a liability when guaranteeing obligations unless it became probable that the company would have to perform under the guarantee. FIN 45 applies prospectively to guarantees the company issues or modifies subsequent to December 31, 2002. The maximum potential undiscounted amount of future payments of the letters of credit as of June 30, 2003 are $5.3 million and they expire through June 2004. Amounts due under these letters of credit would be reduced by any proceeds that the company would be able to obtain in liquidating the collateral for the loans, which varies depending on the customer. In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), "Consolidation of Variable Interest Entities." FIN 46 clarifies the application of Accounting Research Bulletin 51, "Consolidated Financial Statements", for certain entities that do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of controlling financial interest ("variable interest entities"). Variable interest entities within the scope of FIN 46 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest is determined to be he party that absorbs a majority of the entity's expected losses, receives a majority of its expected returns, or both. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains and interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The company is in the process of determining what impact, if any, the adoption of the provisions of FIN 46 will have upon its financial condition or results of operations. The company does not anticipate FIN 46 to have a material impact on the consolidated financial position or results of operations. The Company adopted Statement of Financial Accounting Standard 149 (SFAS No. 149), Amendment of Statement 133 on Derivative Instruments and Hedging Activities, on July 1, 2003. SFAS No. 149 clarifies and amends SFAS No. 133 for implementation issues raised by constituents or includes the conclusions reached by the FASB on certain FASB Staff Implementation Issues. Statement 149 also amends SFAS No. 133 to require a lender to account for loan commitments related to mortgage loans that will be held for sale as derivatives. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The Company periodically enters into commitments with its customers, which it intends to sell in the future. Management does not anticipate the adoption of SFAS No. 149 to have a material impact on the Company's financial position or results of operations. The FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, on May 15, 2003. SFAS No. 150 changes the classification in the statement of financial position of certain common financial instruments from either equity or mezzanine presentation to liabilities and requires an issuer of those financial statements to recognize changes in fair value or redemption amount, as applicable, in earnings. SFAS No. 150 is effective for public companies for financial instruments entered into or modified after May 31, 2003 and is effective at the beginning of the first interim period beginning after June 15, 2003. Management has not entered into any financial instruments that would qualify under SFAS No. 150. As a result, management does not anticipate the adoption of SFAS No. 150 to have a material impact on the Company's financial position or results of operations. PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings ------------------------- None Item 2. Changes in Securities and use of Proceeds ------------------------------------------------- None Item 3. Default and Upon Senior Securities ------------------------------------------ None Item 4. Submission of Matters to Vote Security Holders ------------------------------------------------------ On Wednesday, May 21, 2003, the Annual Meeting of Shareholders of Royal Bancshares of Pennsylvania was convened in Philadelphia, PA at 6:30 P.M. The following nominees were elected as Class I Directors of the Registrant to serve for a three year term: For Withhold --- -------- Joseph P. Campbell 24,838,632 108,843 Daniel M. Tabas 24,838,858 108,617 James J. McSwiggan 24,838,961 108,514 Murray Stempel, III 24,837,483 109,992 Howard Wurzak 24,837,483 109,992 Item 5. Other Information ------------------------- None Item 6. Exhibits and Reports on Form 8-K ---------------------------------------- (a) Exhibits 31 Section 302 Certification Pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 signed by Joseph P. Campbell, Chief Executive Officer of Royal Bancshares of Pennsylvania on August 13, 2003 31 Section 302 Certification Pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 signed by Jeffrey T. Hanuscin, Chief Executive Officer of Royal Bancshares of Pennsylvania on August 13, 2003 32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Joseph P. Campbell, Chief Executive Officer of Royal Bancshares of Pennsylvania on August 13, 2003. 32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Jeffrey T. Hanuscin, Chief Financial Officer of Royal Bancshares of Pennsylvania on August 13, 2003. (b) The company filed the following report on Form 8-K during the quarter ended June 30, 2003. July 17, 2003, Royal Bancshares of Pennsylvania, Inc. filed a Form 8-K reporting the release of earnings and declaration of stock dividend on both classes of common stocks. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ROYAL BANCSHARES OF PENNSYLVANIA, INC. (Registrant) Dated: August 13th, 2003 /s/ Jeffrey T. Hanuscin ----------------------- Jeffrey T. Hanuscin Chief Financial Officer