FORM 10-Q/A
Amendment No. 1
WASHINGTON, DC 20549
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the quarterly period ended:June 30, 2007
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 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 of | (IRS Employer | |
incorporated or organization) | identification No.) |
732 Montgomery Avenue, Narberth, PA 19072
(Address of principal Executive Offices)
(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 registrant (1) has filed all reports required to be filed by Section 13 or 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.
Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer:o | Accelerated filer:þ | Non-accelerated filer:o | Smaller reporting company:o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso No.þ
Applicable only to corporate issuers:
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 July 31, 2007 | |
$2.00 par value | 11,000,067 | |
Class B Common Stock | Outstanding at July 31, 2007 | |
$.10 par value | 2,108,538 |
Explanatory Note
As discussed in Note 1, Note 13 and Note 15 to the notes to consolidated financial statements included herein, Royal Bancshares of Pennsylvania, Inc. (the “Company”) is amending its financial statements, notes to consolidated financial statements and management’s discussion and analysis of financial condition and results of operations included in the Company’s Form 10-Q for the quarter end June 30, 2007. As further described in a current report on Form 8-K filed on January 29, 2008, the restatement is the result of accounting errors related to investments in real estate joint ventures, the consolidation of an investment in real estate owned via an equity investment and the accounting for deferred loan costs (see notes 1, 13 and 15).
The Form 10-Q as amended hereby continues to speak as of the date of the originally filed Form 10-Q, and the disclosures have not been updated to speak as of any later date. Information not affected by the restatement of financial statements or information as of and for the three and six months ended June 30, 2007 is unchanged and reflects the disclosures made at the time of the filing of the original Form 10-Q.
For convenience, the entire Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 has been refiled in this Form 10-Q/A. Pursuant to SEC Rule 12b-15, in connection with this filing, the Company is filing updated Exhibits 3.1, 3.2, 32.1 and 32.2.
Royal Bancshares of Pennsyvania Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
(unaudited)
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
(unaudited)
June 30, 2007 | December 31, 2006 | |||||||
Assets | ||||||||
Cash and due from banks | $ | 13,844 | $ | 13,426 | ||||
Interest bearing deposits | 67,130 | 66,810 | ||||||
Federal funds sold | 1,000 | 2,200 | ||||||
Total cash and cash equivalents | 81,974 | 82,436 | ||||||
Investment securities held to maturity (fair value of $197,621 at June 30, 2007 and $254,249 at December 31, 2006 | 197,418 | 255,429 | ||||||
Investment securities available for sale (“AFS”) at fair value | 316,224 | 302,036 | ||||||
FHLB Stock, at cost | 8,718 | 11,276 | ||||||
Total investments securities and FHLB stock | 522,360 | 568,741 | ||||||
Loans | 618,725 | 592,214 | ||||||
Less allowance for loan losses | 11,739 | 11,455 | ||||||
Net Loans | 606,986 | 580,759 | ||||||
Premises and equipment, net | 7,709 | 7,766 | ||||||
Accrued interest receivable | 14,968 | 16,494 | ||||||
Real estate owned via equity investments | 35,542 | 42,514 | ||||||
Investment in real estate joint ventures | 10,889 | 10,744 | ||||||
Bank owned life insurance | 23,354 | 22,906 | ||||||
Other assets | 24,376 | 23,951 | ||||||
Total Assets | $ | 1,328,158 | $ | 1,356,311 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Liabilities | ||||||||
Deposits | ||||||||
Non-interest bearing | $ | 71,482 | $ | 61,002 | ||||
Interest bearing | 820,133 | 798,455 | ||||||
Total deposits | 891,615 | 859,457 | ||||||
Accrued interest payable | 14,714 | 10,654 | ||||||
Other liabilities | 14,386 | 18,593 | ||||||
Borrowings | 192,996 | 246,087 | ||||||
Obligations related to equity investments in real estate | 22,809 | 29,342 | ||||||
Subordinated debentures | 25,774 | 25,774 | ||||||
Total liabilities | 1,162,294 | 1,189,907 | ||||||
Minority interests | 3,767 | 3,150 | ||||||
Stockholders’ equity | ||||||||
Common stock | ||||||||
Class A, par value $2 per share, authorized 18,000,000 shares; issued, 11,305,372 at June 30, 2007 and 11,287,462 at December 31, 2006 | 22,611 | 22,575 | ||||||
Class B, par value $0.10 per share; authorized, 3,000,000 shares; issued, 2,108,827 at June 30, 2007 and 2,108,827 at December 31, 2006 | 211 | 211 | ||||||
Additional paid in capital | 121,908 | 121,542 | ||||||
Retained earnings | 21,969 | 23,464 | ||||||
Accumulated other comprehensive loss | (790 | ) | (2,273 | ) | ||||
165,909 | 165,519 | |||||||
Treasury stock — at cost, shares of Class A, 288,588 at June 30, 2007 and 215,388 at December 31, 2006 | (3,812 | ) | (2,265 | ) | ||||
Total stockholders’ equity | 162,097 | 163,254 | ||||||
Total liabilities and stockholders’ equity | $ | 1,328,158 | $ | 1,356,311 | ||||
The accompanying notes are an integral part of these statements.
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(in thousands, except per share data) | ||||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Interest income | ||||||||||||||||
Loans and leases, including fees | $ | 14,892 | $ | 15,494 | $ | 26,784 | $ | 29,590 | ||||||||
Investment securities held to maturity | 2,882 | 2,944 | 5,835 | 5,800 | ||||||||||||
Investment securities available for sale: | ||||||||||||||||
Taxable interest | 3,940 | 4,215 | 7,952 | 8,626 | ||||||||||||
Tax exempt interest | 19 | 19 | 37 | 37 | ||||||||||||
Deposits in banks | 824 | 11 | 1,365 | 23 | ||||||||||||
Federal funds sold | 44 | 5 | 88 | 25 | ||||||||||||
TOTAL INTEREST INCOME | 22,601 | 22,688 | 42,061 | 44,101 | ||||||||||||
Interest expense | ||||||||||||||||
Deposits | 9,816 | 6,385 | 18,914 | 11,848 | ||||||||||||
Borrowings | 2,615 | 4,355 | 5,291 | 8,358 | ||||||||||||
Obligations related to real estate owned via equity investsments | 151 | 889 | 335 | 1,501 | ||||||||||||
TOTAL INTEREST EXPENSE | 12,582 | 11,629 | 24,540 | 21,707 | ||||||||||||
NET INTEREST INCOME | 10,019 | 11,059 | 17,521 | 22,394 | ||||||||||||
Provision for loan losses | 159 | 963 | 371 | 1,299 | ||||||||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES | 9,860 | 10,096 | 17,150 | 21,095 | ||||||||||||
Other income | ||||||||||||||||
Service charges and fees | 386 | 354 | 686 | 708 | ||||||||||||
Net gains on investment securities available for sale | 733 | 161 | 733 | 244 | ||||||||||||
Income related to real estate owned via equity investments | 860 | 1,331 | 2,135 | 2,109 | ||||||||||||
Gains on sales related to real estate joint ventures | — | — | 350 | — | ||||||||||||
Gains on sales of other real estate | 450 | 81 | 686 | 1,574 | ||||||||||||
Gains on sales of loans and leases | 22 | 174 | 189 | 217 | ||||||||||||
Income from bank owned life insurance | 233 | 214 | 448 | 425 | ||||||||||||
Other income | 30 | 585 | 40 | 621 | ||||||||||||
TOTAL OTHER INCOME | 2,714 | 2,900 | 5,267 | 5,898 | ||||||||||||
Other expenses | �� | |||||||||||||||
Salaries and wages | 2,695 | 2,541 | 4,875 | 4,986 | ||||||||||||
Employee benefits | 850 | 641 | 1,568 | 1,276 | ||||||||||||
Stock Option Expense | 15 | 178 | 177 | 357 | ||||||||||||
Occupancy and equipment | 449 | 400 | 896 | 804 | ||||||||||||
Expenses related to real estate owned via equity investments | 393 | 490 | 825 | 609 | ||||||||||||
Other operating expenses | 2,203 | 2,144 | 4,354 | 4,632 | ||||||||||||
TOTAL OTHER EXPENSE | 6,605 | 6,394 | 12,695 | 12,664 | ||||||||||||
Minority interest | 224 | 14 | 709 | (68 | ) | |||||||||||
INCOME BEFORE INCOME TAXES | 5,745 | 6,588 | 9,013 | 14,397 | ||||||||||||
Income taxes | 1,787 | 2,002 | 2,728 | 4,465 | ||||||||||||
NET INCOME | $ | 3,958 | $ | 4,586 | $ | 6,285 | $ | 9,932 | ||||||||
Per share data | ||||||||||||||||
Net income – basic | $ | 0.29 | $ | 0.34 | $ | 0.47 | $ | 0.74 | ||||||||
Net income – diluted | $ | 0.29 | $ | 0.34 | $ | 0.46 | $ | 0.73 | ||||||||
Cash dividends– Class A shares | $ | 0.287500 | $ | 0.261900 | $ | 0.575000 | $ | 0.523800 | ||||||||
Cash dividends– Class B shares | $ | 0.330625 | $ | 0.301190 | $ | 0.661250 | $ | 0.602380 | ||||||||
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, 2007
(UNAUDITED)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
Six Months ended June 30, 2007
(UNAUDITED)
Accumulated | ||||||||||||||||||||||||||||||||||||
Additional | other | |||||||||||||||||||||||||||||||||||
Class A common stock | Class B common stock | Paid in | Retained | comprehensive | Treasury | Comprehensive | ||||||||||||||||||||||||||||||
(in thousands, except per share data) | Shares | Amount | Shares | Amount | Capital | earnings | (loss) | stock | Income | |||||||||||||||||||||||||||
Balance, January 1, 2007 | 11,287 | $ | 22,575 | 2,108 | $ | 211 | $ | 121,542 | $ | 23,464 | $ | (2,273 | ) | $ | (2,265 | ) | ||||||||||||||||||||
Adjustment related to adoption of FASB No. 158, net of taxes | — | — | — | — | — | — | 1,006 | — | ||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 6,285 | — | — | $ | 6,285 | ||||||||||||||||||||||||||
Cash in lieu of fractional shares | — | — | — | — | — | (14 | ) | — | — | — | ||||||||||||||||||||||||||
Stock dividend adjustment | — | — | — | — | (13 | ) | 13 | — | — | — | ||||||||||||||||||||||||||
Cash dividends on common stock (Class A $0.5750 Class B $0.66125) | — | — | — | — | — | (7,779 | ) | — | — | — | ||||||||||||||||||||||||||
Purchase of treasury stock | (1,547 | ) | ||||||||||||||||||||||||||||||||||
Adjustment to net periodic pension cost | — | — | — | — | — | — | 57 | — | 57 | |||||||||||||||||||||||||||
Stock options exercised | 18 | 36 | — | — | 140 | |||||||||||||||||||||||||||||||
Stock option expense | — | — | — | — | 177 | — | — | — | — | |||||||||||||||||||||||||||
Tax benefit stock options | — | — | — | — | 62 | — | — | — | — | |||||||||||||||||||||||||||
Other comprehensive income, net of reclassifications and taxes | — | — | — | — | — | — | 420 | — | 420 | |||||||||||||||||||||||||||
Comprehensive income | $ | 7,768 | ||||||||||||||||||||||||||||||||||
Balance, March 31, 2007 | 11,305 | $ | 22,611 | 2,108 | $ | 211 | $ | 121,908 | $ | 21,969 | $ | (790 | ) | $ | (3,812 | ) | ||||||||||||||||||||
Royal Bancshares of Pennsylvania,Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
Six Months ended June 30, 2006
(UNAUDITED)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
Six Months ended June 30, 2006
(UNAUDITED)
Accumulated | ||||||||||||||||||||||||||||||||||||||||
Un- | Additional | other | ||||||||||||||||||||||||||||||||||||||
Class A common stock | Class B common stock | Distributed | Paid in | Retained | comprehensive | Treasury | Comprehensive | |||||||||||||||||||||||||||||||||
(in thousands, except per share data) | Shares | Amount | Shares | Amount | B-Shares | Capital | earnings | (loss) | stock | Income | ||||||||||||||||||||||||||||||
Balance, January 1, 2006 | 10,700 | $ | 21,400 | 1,993 | $ | 199 | $ | 2 | $ | 104,285 | $ | 32,827 | $ | (940 | ) | $ | (2,265 | ) | ||||||||||||||||||||||
Net income | — | — | — | — | — | 9,932 | — | — | $ | 9,932 | ||||||||||||||||||||||||||||||
5% Stock dividend | 527 | 1,054 | 100 | 11 | — | 15,575 | (16,640 | ) | — | — | — | |||||||||||||||||||||||||||||
Conversion of Class B common stock to Class A Common stock Class A Common stock | 4 | 7 | (3 | ) | — | — | — | (8 | ) | — | — | — | ||||||||||||||||||||||||||||
Cash in lieu of fractional shares | — | — | — | — | — | (11 | ) | — | — | — | ||||||||||||||||||||||||||||||
Issuance of undistributed shares | — | — | 20 | 2 | (2 | ) | — | — | — | — | — | |||||||||||||||||||||||||||||
Cash dividends on common stock (Class A $0.52380 Class B $0.60238) | — | — | — | — | — | — | (7,037 | ) | — | — | — | |||||||||||||||||||||||||||||
Stock options exercised | 4 | 8 | — | — | — | 51 | — | — | — | — | ||||||||||||||||||||||||||||||
Other comprehensive loss, net of reclassifications and taxes | — | — | — | — | — | — | — | (2,532 | ) | — | (2,532 | ) | ||||||||||||||||||||||||||||
Comprehensive income | $ | 7,400 | ||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2006 | 11,235 | $ | 22,469 | 2,110 | $ | 212 | $ | — | $ | 119,911 | $ | 19,063 | $ | (3,472 | ) | $ | (2,265 | ) | ||||||||||||||||||||||
The accompanying notes are an integral part of the financial statement.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30,
(in thousands)
Six months ended June 30,
(in thousands)
2007 | 2006 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 6,285 | $ | 9,932 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 572 | 749 | ||||||
Stock compensation expense | 177 | 357 | ||||||
Provision for loan losses | 371 | 1,299 | ||||||
Net accretion of discounts and premiums on loans, mortage-backed securities and investments | (1,190 | ) | 6,359 | |||||
Benefit for deferred income taxes | (106 | ) | (3,451 | ) | ||||
Gains on sales of other real estate | (686 | ) | (1,574 | ) | ||||
Gains on sales of real estates joint ventures | (350 | ) | — | |||||
Gains on sales of loans | (189 | ) | (217 | ) | ||||
Net gains on sales of investment securities | (733 | ) | (244 | ) | ||||
Gains form sale of premise of real estate owned via equity investment | (1,339 | ) | — | |||||
Income from equity investments | (86 | ) | — | |||||
Income from bank owned life insurance | (448 | ) | — | |||||
Changes in assets and liabilities: | ||||||||
Decrease (increase) in accrued interest receivable | 1,526 | (668 | ) | |||||
Decrease in other assets | 126 | 1,788 | ||||||
Increase in accrued interest payable | 4,060 | 973 | ||||||
Increase in minority interest | 617 | — | ||||||
Decrease in other liabilities | (2,496 | ) | (1,203 | ) | ||||
Net cash provided by operating activities | 6,111 | 14,100 | ||||||
Cash flows from investing activities | ||||||||
Proceeds from calls/maturities of HTM investment securities | 60,011 | — | ||||||
Proceeds from calls/maturities of AFS investment securities | 37,577 | 25,552 | ||||||
Proceeds from sales of AFS investment securities | 1,050 | 4,230 | ||||||
Purchase of AFS investment securities | (51,652 | ) | (18,375 | ) | ||||
Purchase of HTM investment securities | (2,000 | ) | — | |||||
Redemption of FHLB Stock | 2,558 | 658 | ||||||
Net increase in loans | (25,558 | ) | (87,885 | ) | ||||
Purchase of premises and equipment | (405 | ) | (299 | ) | ||||
Net investment in real estate | 205 | — | ||||||
Proceeds from sale of premises and equipment relateing to real estated owned via equity investment | 11,510 | — | ||||||
Distributions from equity investments | 86 | — | ||||||
Net (increase)decrease in premises and equipment relateing to real estate owned via equity investment | (3,308 | ) | 3,586 | |||||
Net cash provided by (used in) investing activities | 30,074 | (72,533 | ) | |||||
Cash flows from financing activities: | ||||||||
Decrease in non-interset bearing and interest bearing demand deposits and savings accounts | (16,516 | ) | (15,172 | ) | ||||
Increase in certificates of deposit | 48,674 | 76,208 | ||||||
Mortgage payments | (79 | ) | (37 | ) | ||||
Repayments from short term borrowings | (53,000 | ) | — | |||||
Repayments from long term borrowings | (91 | ) | (1,500 | ) | ||||
Repayment of mortgage debt related to real estate owned via equity investment | (6,533 | ) | (1,703 | ) | ||||
Income tax benefit on stock options | 62 | — | ||||||
Cash dividends | (7,779 | ) | (7,037 | ) | ||||
Cash in lieu of fractional shares | (14 | ) | (11 | ) | ||||
Purchase of treasury stock | (1,547 | ) | — | |||||
Issuance of common stock under stock option plans | 176 | 59 | ||||||
Net cash (used in) provided by financing activities | (36,647 | ) | 50,807 | |||||
Net decrease in cash and cash equivalents | (462 | ) | (7,626 | ) | ||||
Cash and cash equivalents at beginning of period | 82,436 | 30,895 | ||||||
Cash and cash equivalents at end of period | $ | 81,974 | $ | 23,269 | ||||
Supplemental Disclosure | ||||||||
Taxes paid | $ | 2,736 | $ | 1,500 | ||||
Interest paid | $ | 20,145 | $ | 20,734 | ||||
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying unaudited consolidated financial statements include the accounts of Royal Bancshares of Pennsylvania, Inc. (“Company”) and its wholly-owned subsidiaries, Royal Investments of Delaware, Inc., Royal Asian Bank (effective July 17, 2006, prior thereto, a division of Royal Bank America) and Royal Bank America (“Royal Bank”), including Royal Bank’s subsidiaries, Royal Real Estate of Pennsylvania, Inc., Royal Investments America, LLC, and its five 60% ownership interests in Crusader Servicing Corporation, Royal Tax Lien Services, LLC, Royal Bank America Leasing, LP, RBA ABL Group, LP and RBA Capital, LP. The two Delaware trusts, Royal Bancshares Capital Trust I and Royal Bancshares Capital Trust II are not consolidated per requirements under FASB Interpretation (“FIN”) No. 46(R). These financial statements reflect the historical information of the Company. All significant inter-company transactions and balances have been eliminated.
1. | The accompanying unaudited 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 interim financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the 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, 2006. The results of operations for the three-month and six-month periods ended June 30, 2007, are not necessarily indicative of the results to be expected for the full year. | |
The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America and general practices within the financial services industry. Applications of the principles in the Company’s 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. These estimates and assumptions are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates. |
Included in the operating results for the three months ended June 30, 2007 is a $1.6 million reduction to net income related to the following accounting errors: a $1.1 million reduction in net income resulting from an accounting error related to investments in real estate joint ventures (see note 13 for a discussion of the investment in real estate joint ventures), a $900,000 reduction in net income associated with an accounting error related to the consolidation of an investment in real estate owned via an equity investment and an increase in net income of $400,000 related to an error in the accounting for deferred loan costs per Statement of Financial Accounting Standards (SFAS ) No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” Of the $1.6 million total adjustment to net income relating to these accounting errors, approximately $1.0 million relates to 2006 and prior periods. In our opinion, the adjustments to 2006 and prior years operating results are immaterial, and no restatements for 2006 and prior years were made. Reported net income for the first quarter of 2007 of $3.6 million has been reduced by $1.3 million for a restated first quarter 2007 net income of $2.3 million. The first quarter of 2007 adjustment includes the $1.0 million related to 2006 and prior years. Reported net income for the second quarter of 2007 of $4.3 million has been reduced by $300,000 for a restated second quarter 2007 net income of $4.0 million.
2. | Segment Information |
Community Banking | ||
The Company’s Community Banking segment which includes Royal Bank and Royal Asian Bank (“the Banks”) consists of commercial and retail banking. The Community Banking business segment is managed as a single strategic unit which generates revenue from a variety of products and services provided by the |
Banks. For example, commercial lending is dependent upon the ability of the Banks to fund them with retail deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer lending. |
Tax lien operation |
The Company’s Tax Lien Operation, which includes Crusader Servicing Corporation and Royal Tax Lien Services, LLC does not meet the quantitative thresholds for requiring disclosure, but has different characteristics than the Community Banking segment. The Company’s Tax Lien Operation consists of purchasing delinquent tax certificates from local municipalities at auction. The tax lien segment is in the business of purchasing delinquent tax liens from municipalities and then processing those liens to either encourage the property holder to pay off the lien, or to foreclose and sell the property. The tax lien operation earns income based on interest rates (determined at auction) and penalties assigned by the municipality along with gains on sale of foreclosed properties.
Equity investments | ||
As of June 30, 2007 and 2006, the Company is reporting on a consolidated basis its interest in one equity investment in real estate as a Variable Interest Entity (“VIE”) which has different characteristics than the Community Banking segment. The Company has an equity investment in an apartment complex that is being converted into condominiums. | ||
The Company’s investments in VIE’s is further discussed in Note 10. | ||
The following table presents selected financial information for reportable business segments for the three month periods ended June 30, 2007 and 2006. |
Three months ended June 30, 2007 | ||||||||||||||||
Community | Tax Lien | Equity | ||||||||||||||
(in thousands) | Banking | Operation | Investments | Consolidated | ||||||||||||
Total assets | $ | 1,231,708 | $ | 57,048 | $ | 39,402 | $ | 1,328,158 | ||||||||
Total deposits | 891,615 | — | — | 891,615 | ||||||||||||
Interest income | $ | 21,375 | $ | 1,226 | $ | — | $ | 22,601 | ||||||||
Interest expense | 11,528 | 902 | 152 | 12,582 | ||||||||||||
Net interest income (loss) | 9,847 | 324 | (152 | ) | 10,019 | |||||||||||
Provision for loan losses | 159 | — | — | 159 | ||||||||||||
Total non-interest income | 1,463 | 431 | 820 | 2,714 | ||||||||||||
Total non-interest expense | 6,196 | 17 | 392 | 6,605 | ||||||||||||
Minority interest | 65 | 43 | 116 | 224 | ||||||||||||
Income tax expense | 1,244 | 187 | 356 | 1,787 | ||||||||||||
Net income (loss) | $ | 3,646 | $ | 508 | $ | (196 | ) | $ | 3,958 | |||||||
Three months ended June 30, 2006 | ||||||||||||||||
Community | Tax Lien | Equity | ||||||||||||||
(in thousands) | Banking | Operation | Investments | Consolidated | ||||||||||||
Total assets | $ | 1,266,871 | $ | 44,886 | $ | 47,452 | $ | 1,359,209 | ||||||||
Total deposits | 758,445 | — | — | 758,445 | ||||||||||||
Interest income | $ | 21,601 | $ | 1,087 | $ | — | $ | 22,688 | ||||||||
Interest expense | 9,907 | 832 | 890 | 11,629 | ||||||||||||
Net interest income | 11,694 | 255 | (890 | ) | 11,059 | |||||||||||
Provision for loan losses | 962 | 1 | — | 963 | ||||||||||||
Total non-interest income | 1,356 | 213 | 1,331 | 2,900 | ||||||||||||
Total non-interest expense | 5,714 | 247 | 433 | 6,394 | ||||||||||||
Minority interest | (29 | ) | 15 | 28 | 14 | |||||||||||
Income tax expense | 1,970 | 29 | 3 | 2,002 | ||||||||||||
Net income (loss) | $ | 4,433 | $ | 176 | $ | (23 | ) | $ | 4,586 | |||||||
Interest paid to the Community Banking segment by the Tax Lien Operation was approximately $902,000 and $832,000 for the three-month periods ended June 30, 2007 and 2006.
The following table presents selected financial information for reportable business segments for the six month periods ended June 30, 2007 and 2006.
Six months ended June 30, 2007 | ||||||||||||||||
Community | Tax Lien | Equity | ||||||||||||||
(in thousands) | Banking | Operation | Investments | Consolidated | ||||||||||||
Total assets | $ | 1,231,708 | $ | 57,048 | $ | 39,402 | $ | 1,328,158 | ||||||||
Total deposits | 891,615 | — | — | 891,615 | ||||||||||||
Interest income | $ | 39,537 | $ | 2,524 | $ | — | $ | 42,061 | ||||||||
Interest expense | 22,403 | 1,802 | 335 | 24,540 | ||||||||||||
Net interest income | 17,134 | 722 | (335 | ) | 17,521 | |||||||||||
Provision for loan losses | 371 | — | — | 371 | ||||||||||||
Total non-interest income | 2,724 | 645 | 1,898 | 5,267 | ||||||||||||
Total non-interest expense | 11,347 | 523 | 825 | 12,695 | ||||||||||||
Minority interest | 40 | 68 | 601 | 709 | ||||||||||||
Income tax expense | 1,505 | 224 | 999 | 2,728 | ||||||||||||
Net income (loss) | $ | 6,595 | $ | 552 | $ | (862 | ) | $ | 6,285 | |||||||
Six months ended June 30, 2006 | ||||||||||||||||
Community | Tax Lien | Equity | ||||||||||||||
(in thousands) | Banking | Operation | Investments | Consolidated | ||||||||||||
Total assets | $ | 1,266,871 | $ | 44,886 | $ | 47,452 | $ | 1,359,209 | ||||||||
Total deposits | 758,445 | — | — | 758,445 | ||||||||||||
Interest income | $ | 41,796 | $ | 2,305 | $ | — | $ | 44,101 | ||||||||
Interest expense | 18,537 | 1,670 | 1,501 | 21,708 | ||||||||||||
Net interest income | 23,259 | 635 | (1,501 | ) | 22,393 | |||||||||||
Provision for loan losses | 1,295 | 3 | — | 1,298 | ||||||||||||
Total non-interest income | 2,994 | 795 | 2,109 | 5,898 | ||||||||||||
Total non-interest expense | 11,233 | 722 | 709 | 12,664 | ||||||||||||
Minority interest | (75 | ) | 57 | (50 | ) | (68 | ) | |||||||||
Income tax expense | 4,376 | 124 | (35 | ) | 4,465 | |||||||||||
Net income (loss) | $ | 9,424 | $ | 524 | $ | (16 | ) | $ | 9,932 | |||||||
Interest paid to the Community Banking segment by the Tax Lien Operation was approximately $1,802,000 and $1,670,000 for the six-month periods ended June 30, 2007 and 2006.
3. | Per Share Information | |
The Company follows the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings Per Share”. The Company has two classes of common stock currently outstanding. The classes are A and B, of which a share of Class B is convertible into 1.15 shares of Class A. 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 using the treasury stock method. On December 20, 2006 the Board of Directors of the Company declared a 5% stock dividend on both its Class A common stock and Class B common stock shares payable on January 17, 2007. On December 22, 2005, the Board of Directors of the Company declared a 2% stock dividend on both its Class A common stock and Class B common Stock shares payable on January 17, 2006. 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, 2007 | ||||||||||||
Income | Average shares | Per share | ||||||||||
(dollars in thousands, except for per share data) | (numerator) | (denominator) | Amount | |||||||||
Basic EPS | ||||||||||||
Income available to common shareholders | $ | 3,958 | 13,495 | $ | 0.29 | |||||||
Effect of dilutive securities: | ||||||||||||
Stock options | — | 67 | — | |||||||||
Diluted EPS | ||||||||||||
Income available to common shareholders plus assumed exercise of options | $ | 3,958 | 13,562 | $ | 0.29 | |||||||
Three months ended June 30, 2006 | ||||||||||||
Income | Average shares | Per share | ||||||||||
(dollars in thousands, except for per share data) | (numerator) | (denominator) | Amount | |||||||||
Basic EPS | ||||||||||||
Income available to common shareholders | $ | 4,586 | 13,441 | $ | 0.34 | |||||||
Effect of dilutive securities: | ||||||||||||
Stock options | — | 107 | — | |||||||||
Diluted EPS | ||||||||||||
Income available to common shareholders plus assumed exercise of options | $ | 4,586 | 13,548 | $ | 0.34 | |||||||
Six months ended June 30, 2007 | ||||||||||||
Income | Average shares | Per share | ||||||||||
(dollars in thousands, except for per share data) | (numerator) | (denominator) | Amount | |||||||||
Basic EPS | ||||||||||||
Income available to common shareholders | $ | 6,285 | 13,497 | $ | 0.47 | |||||||
Effect of dilutive securities: | ||||||||||||
Stock options | — | 80 | (0.01 | ) | ||||||||
Diluted EPS | ||||||||||||
Income available to common shareholders plus assumed exercise of options | $ | 6,285 | 13,577 | $ | 0.46 | |||||||
Six months ended June 30, 2006 | ||||||||||||
Income | Average shares | Per share | ||||||||||
(dollars in thousands, except for per share data) | (numerator) | (denominator) | Amount | |||||||||
Basic EPS | ||||||||||||
Income available to common shareholders | $ | 9,932 | 13,439 | $ | 0.74 | |||||||
Effect of dilutive securities: | ||||||||||||
Stock options | — | 111 | (0.01 | ) | ||||||||
Diluted EPS | ||||||||||||
Income available to common shareholders plus assumed exercise of options | $ | 9,932 | 13,550 | $ | 0.73 | |||||||
Note: | The stock dividend declared on December 20, 2006 and paid on January 17, 2007 resulted in the issuance of 526,825 additional shares of Class A common stock and 100,345 additional shares of Class B common stock. |
4. | Comprehensive Income |
SFAS No. 130, Reporting Comprehensive Income, requires the reporting of other comprehensive income, which includes net income as well as certain other items, which results in changes to equity during the period.
Before | Tax | Net of | ||||||||||
Tax | (expense) | Tax | ||||||||||
(in thousands) | Amount | Benefit | Amount | |||||||||
June 30, 2007 | ||||||||||||
Unrealized gains on securities: | ||||||||||||
Unrealized holding gains arising during period | $ | 1,379 | $ | 483 | $ | 896 | ||||||
Less reclassification adjustment for gains realized in net income | 733 | 257 | 476 | |||||||||
Unrealized gains on investment securities | $ | 646 | $ | 226 | $ | 420 | ||||||
Adjustment to net periodic pension cost | 87 | 30 | 57 | |||||||||
Other comprehensive income | $ | 733 | $ | 256 | $ | 477 | ||||||
Before | Tax | Net of | ||||||||||
Tax | (expense) | Tax | ||||||||||
(in thousands) | Amount | Benefit | Amount | |||||||||
June 30, 2006 | ||||||||||||
Unrealized gains on securities: | ||||||||||||
Unrealized holding losses arising during period | $ | (4,140 | ) | $ | (1,449 | ) | $ | (2,691 | ) | |||
Less reclassification adjustment for gains realized in net income | 244 | 85 | 159 | |||||||||
Other comprehensive income | $ | (3,896 | ) | $ | (1,364 | ) | $ | (2,532 | ) | |||
The accumulated other comprehensive income unrecognized pension obligation was reduced from $2.5 million to $1.4 million during the second quarter of 2007, to reflect the Company’s projected benefit obligation. |
5. | Investment Securities: |
The carrying value and approximate market value of investment securities at June 30, 2007 are as follows:
Amortized | Gross | Gross | Approximate | |||||||||||||||||
Purchased | Unrealized | Unrealized | Fair | Carrying | ||||||||||||||||
(in thousands) | Cost | Gains | Losses | Value | Value | |||||||||||||||
Held to maturity: | ||||||||||||||||||||
Mortgage Backed | $ | 118 | $ | — | $ | — | $ | 118 | $ | 118 | ||||||||||
US Agencies | 135,000 | — | (1,802 | ) | 133,198 | 135,000 | ||||||||||||||
Other Securities | 62,300 | 2,005 | — | 64,305 | 62,300 | |||||||||||||||
Total Held to Maturity | $ | 197,418 | $ | 2,005 | $ | (1,802 | ) | $ | 197,621 | $ | 197,418 | |||||||||
Available for sale: | ||||||||||||||||||||
Mortgage Backed | $ | 34,662 | $ | 43 | $ | (1,010 | ) | $ | 33,695 | $ | 33,695 | |||||||||
CMO’s | 33,234 | 140 | (458 | ) | 32,916 | 32,916 | ||||||||||||||
US Agencies | 124,981 | — | (3,576 | ) | 121,405 | 121,405 | ||||||||||||||
Other securities | 122,343 | 6,213 | (348 | ) | 128,208 | 128,208 | ||||||||||||||
Total Available for Sale | $ | 315,220 | $ | 6,396 | $ | (5,392 | ) | $ | 316,224 | $ | 316,224 | |||||||||
6. | Allowance for Loan Losses: | |
Changes in the allowance for loan losses were as follows: |
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(in thousands) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Balance at beginning period | $ | 11,648 | $ | 10,550 | $ | 11,455 | $ | 10,276 | ||||||||
Charge-offs | ||||||||||||||||
Single family residential | (50 | ) | (50 | ) | (51 | ) | (173 | ) | ||||||||
Non-residential | — | — | — | (2 | ) | |||||||||||
Tax certificates | — | (1 | ) | — | (1 | ) | ||||||||||
Commercial and Industrial | (44 | ) | — | (69 | ) | — | ||||||||||
Total charge-offs | (94 | ) | (51 | ) | (120 | ) | (176 | ) | ||||||||
Recoveries | ||||||||||||||||
Single family residential | 19 | 2 | 23 | 57 | ||||||||||||
Non-residential | 1 | 1 | 4 | 4 | ||||||||||||
Commercial and Industrial | 6 | 1 | 6 | 1 | ||||||||||||
Other loans | — | — | — | 5 | ||||||||||||
Total recoveries | 26 | 4 | 33 | 67 | ||||||||||||
Net Loan (charge offs) recoveries | (68 | ) | (47 | ) | (87 | ) | (109 | ) | ||||||||
Provision for loan losses | 159 | 963 | 371 | 1,299 | ||||||||||||
Balance at the end of period | $ | 11,739 | $ | 11,466 | $ | 11,739 | $ | 11,466 | ||||||||
7. | Pension Plan | |
The Company has a noncontributory nonqualified defined benefit pension plan (“Pension Plan”) covering certain eligible employees. The Company’s 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 three consecutive years during the last 10 years of employment. | ||
Net periodic defined benefit pension expense for the three-months and six-month periods ended June 30, 2007 and 2006 included the following components: |
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(in thousands) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Service cost | $ | 154 | $ | 70 | $ | 257 | $ | 140 | ||||||||
Interest cost | 148 | 85 | 246 | 170 | ||||||||||||
Amortization of prior service cost | 30 | 23 | 47 | 47 | ||||||||||||
Amortization of actuarial loss | 23 | — | 39 | — | ||||||||||||
Net periodic benefit cost | $ | 355 | $ | 178 | $ | 589 | $ | 357 | ||||||||
The total projected benefit obligation under the plan including adjustments is estimated to be $9.0 million at June 30, 2007. This projected benefit obligation is the present value of the amounts potentially payable under the plan as computed by actuary calculations made by our third party plan administrator. |
8. | Stock Option Plans | |
Outside Directors’ Stock option Plan | ||
The Company has 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 a grant of an option to purchase 1,500 shares of stock annually, which are exercisable one year after the grant date. The options were granted at the fair market value at the date of the grant. The ability to issue new grants under this plan has expired. See the discussion below concerning the 2007 Long- Term Incentive Plan. |
The following table presents the activity related to the Director Plan for the six months ended June 30, 2007.
Weighted | Weighted | |||||||||||||||
Average | Average | Average | ||||||||||||||
Exercise | Remaining | Intrinsic | ||||||||||||||
Options | Price | Term (yrs) | Value | |||||||||||||
Options outstanding at December 31, 2006 | 102,552 | $ | 18.41 | |||||||||||||
Granted | — | — | ||||||||||||||
Exercised | (2,258 | ) | 9.13 | |||||||||||||
Forfeited | — | — | ||||||||||||||
Options outstanding at June 30, 2007 | 100,294 | $ | 18.62 | 5.8 | $ | 109,437 | ||||||||||
Options exercisable at June 30, 2007 | 100,294 | $ | 18.62 | 5.8 | $ | 109,437 | ||||||||||
As of June 30, 2007, there were no non-vested shares under the Director’s Plan.
Employee Stock Option Plan and Appreciation Right Plan
The Company has adopted a Stock Option and Appreciation Right Plan (the “Employee Plan”). The Employee 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 1,800,000 shares of Royal Bancshares’ Class A common stock (but not in excess of 19% of outstanding shares). The option price is equal to the fair market value at the date of the grant. The options are exercisable at 20% per year beginning one year after the date of grant and must be exercised within ten years of the grant. The ability to issue new grants under the plan has expired. See the discussion below concerning the 2007 Long-Term Incentive Plan. |
The following table presents the activity related to the Employee Plan for the three six ended June 30, 2007.
Weighted | Weighted | |||||||||||||||
Average | Average | Average | ||||||||||||||
Exercise | Remaining | Intrinsic | ||||||||||||||
Options | Price | Term (yrs) | Value | |||||||||||||
Options outstanding at December 31, 2006 | 853,804 | $ | 19.47 | |||||||||||||
Granted | — | — | ||||||||||||||
Exercised | (14,334 | ) | 9.21 | |||||||||||||
Forfeited | — | — | ||||||||||||||
- | ||||||||||||||||
Options outstanding at June 30, 2007 | 839,470 | $ | 19.65 | 6.3 | $ | 54,461 | ||||||||||
Options exercisable at June 30, 2007 | 519,080 | $ | 17.72 | 5.7 | $ | 1,032,969 | ||||||||||
The following table provides detail for non-vested shares under the Employee Plan at June 30, 2007.
Weighted | ||||||||
Average | ||||||||
Exercise | ||||||||
Options | Price | |||||||
Non-vested options – December 31, 2006 | 462,985 | $ | 21.35 | |||||
Granted | — | — | ||||||
Vested | (142,595 | ) | 20.40 | |||||
Forfeited/expired | — | — | ||||||
Non-vested options — June 30, 2007 | 320,390 | $ | 21.21 | |||||
As of June 30, 2007, there was approximately $1.5 million of total unrecognized compensation cost related to non-vested options under the Director Plan and the Employee Plan.
The 2007 Long-Term Incentive Plan was approved at the May 16, 2007 Annual Meeting. All employees and non-employee directors of the Company and its designated subsidiaries are eligible participants. The plan includes 1,000,000 shares of Class A common stock, subject to customary anti-dilution adjustments, or approximately 9.0% of total outstanding shares of the Class A common stock. As of June 30, 2007, no shares from this plan have been granted.
9.Interest Rate Swaps
For asset/liability management purposes, the Company uses interest rate swaps which are agreements between the Company and another party (known as a counterparty) where one stream of future interest payments is exchanged for another based on a specified principal amount (known as notional amount). The Company will use interest rate swaps to hedge various exposures or to modify interest rate characteristics of various balance sheet accounts. Such derivatives are used as part of the asset/liability management process, are linked to specific liabilities, and have a high correlation between the contract and the underlying item being hedged, both at inception and throughout the hedge period. | ||
The Company currently utilizes interest rate swap agreements to convert a portion of its fixed rate time deposits to a variable rate (fair value hedge) to fund variable rate loans and investments as well as convert a portion of variable rate borrowings (cash flow hedge) to fund fixed rate loans. Interest rate swap contracts in which a series of interest flows are exchanged over a prescribed period. Effective October 1, 2005, the Company has completed documentation determining the effectiveness of each hedge using the Volatility Reduction Measure (“VRM”) on a quarterly basis. | ||
At June 30, 2007 and December 31, 2006, the information pertaining to outstanding interest rate swap agreements used to hedge fixed rate loans and investments is as follows: |
June 30, | Dec. 31, | |||||||
(in thousands) | 2007 | 2006 | ||||||
Notional Amount | $ | 60,539 | $ | 60,588 | ||||
Weighted average pay rate | 5.57 | % | 5.52 | % | ||||
Weighted average receive rate | 4.76 | % | 4.58 | % | ||||
Weighted average maturity (years) | 4.1 | 4.6 | ||||||
Fair value relating to interest rate swaps | $ | (849 | ) | $ | (1,074 | ) |
The fair value on the interest rate swaps included above is estimated by a third party using characteristics such as the current interest environment in conjunction with the remaining term.
10.Real Estate Owned via Equity Investments
In July 2003, Royal Bank (through its wholly owned subsidiary Royal Investments America, LLC) received regulatory approval to acquire ownership interest in real estate projects. With the adoption of FIN 46(R) the Company is required to perform an analysis to determine whether such investments meet the criteria for consolidation into the Company’s financial statements. As of June 30, 2007, the company has one VIE which is consolidated into the Company’s financial statements. Royal Scully Associates, L.P. (“the Partnership”) met the requirements for consolidation under FIN 46(R) based on Royal Investments America being the primary financial beneficiary. This was determined based on the amount invested by Royal Investments America compared to our partners.
In September 2005, the Company, together with a real estate development company, formed the Partnership. The Partnership was formed to convert an apartment complex into condominiums. The development company is the general partner of the Partnership. The Company invested 66% of the initial capital contribution, or $2.5 million, with the development company holding the remaining equity of $1.3 million. The Company is entitled to earn a preferred return on the $2.5 million capital contribution. In addition, the Company made two mezzanine loans totaling $9.2 million at market terms and interest rates. As of June 30, 2007, the Partnership also had a $22.8 million outstanding of senior debt with another bank. Upon the repayment of the mezzanine loan interest and principal and the initial capital contributions and preferred return, the Company and the development company will both receive 50% of the remaining distribution, if any. The Company utilizes the period of December 2006 to May 2007 in consolidating the financial statements of Royal Scully. | ||
At June 30, 2007, Royal Scully had total assets of $39.4 million of which $35.5 million is real estate as reflected on the consolidated balanced sheet and total borrowings of $32.0 million, of which $9.2 million relates to notes discussed above. None of the third party borrowings are guaranteed by the Company. The Company’s has made an investment of $11.7 million in Royal Scully. |
11. Trust Preferred Securities
Management previously determined that Royal Bancshares Trust I/II (“Trusts”) utilized for the Company’s $25.8 million of pooled trust preferred securities issuance, qualifies as a variable interest entities under FIN 46. The Trusts issued mandatory redeemable preferred stock to investors and loaned the proceeds to the Company. The Trusts hold, as their sole asset, subordinated debentures issued by the Company in 2006.
The Company does not consolidate the Trusts as FIN 46(R) precludes consideration of the call option embedded in the preferred stock when determining if the Company has the right to a majority of the Trusts expected returns. The non-consolidation results in the investment in common stock of the Trusts to be included in other assets with a corresponding increase in outstanding debt of $774,000. In addition, the income received on the common stock investments is included in other income. The
Federal Reserve Bank has issued final guidance on the regulatory treatment for the trust-preferred securities issued by the Trusts as a result of the adoption of FIN 46(R). The final rule would retain the current maximum percentage of total capital permitted for trust preferred securities at 25%, but would enact other changes to the rules governing trust preferred securities that affect their use as a part of the collection of entities known as “restricted core capital elements.” The rule would take effect March 31, 2009; however, a five-year transition period starting March 31, 2004 and leading up to that date would allow bank holding companies to continue to count trust preferred securities as Tier 1 Capital after applying FIN-46(R). Management has evaluated the effects of the final rule and does not anticipate a material impact on its capital ratios.
12.Change in Accounting Principle
The Company adopted the provisions of the Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN48), Accounting for Uncertainty in Income Taxes – an interpretation of FASB No. 109, on January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the implementation of FIN 48, the Company did not identify any uncertain tax positions that it believes should be recognized in the financial statements.
13.Investment in Real Estate Joint Ventures
As discussed in Note 1, the restatement of the Company’s Form 10-Q for the quarter end June 30, 2007 includes amending its financial statements for an accounting error related to investments in real estate joint ventures. The Company determined two (ADC) loans should have been accounted for as investments in real estate joint ventures in accordance with AICPA Practice Bulletin 1 and Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate. The Company has reclassified these ADC loans in the amount of $10.7 million to investments in real estate joint ventures as of December 31, 2006. As of December 31, 2006, one investment in the amount of $4.7 million was to fund the purchase of property for construction of an office and residential building and the other investment for $6.0 million was to fund the construction of a 55 unit condominium building. As of June 30, 2007 the investment in the construction of an office and residential building was $5.0 million. The balance of the investment in the construction of a 55 unit condominium building was $5.9 million.
14.Commitments, Contingencies and Concentrations
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.
The contract amounts are as follows (in thousands):
June 30, 2007 | Dec. 31, 2006 | |||||||
Financial instruments whose contract amounts represent credit risk: | ||||||||
Open-end lines of credit | $ | 104,171 | $ | 103,169 | ||||
Commitment to extend credit | 17,232 | 28,543 | ||||||
Standby letters of credit and financial guarantees written | 8,465 | 4,862 | ||||||
Financial instruments whose notional amount exceed the amount of credit risk: | ||||||||
Interest rate swap agreements | 60,496 | 60,588 |
================================================================================
15.Reclassifications and Restatement
Certain items in the consolidated financial statements and accompanying notes have been reclassified to conform with the current year’s presentation format. There was no effect on net income for the periods presented herein as a result of reclassification. All applicable amounts in these consolidated financial statements (including stock options and earnings per share information) have been restated for a 5% stock dividend paid January 17, 2007.
As discussed in Note 1 and Note 13 to consolidated financial statements included herein, the Company is amending its financial statements, notes to consolidated financial statements and management’s discussion and analysis of financial condition and results of operations included in the Company’s Form 10-Q for the quarter end June 30, 2007. The following information describes the changes made to the Company’s financial statements:
Royal Bancshares of Pennsyvania Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
As | As | As | As | |||||||||||||
Reported | Restated | Reported | Restated | |||||||||||||
In June 30 | For June 30 | In June 30 | For June 30 | |||||||||||||
2007 | 2007 | 2007 | 2007 | |||||||||||||
Form 10-Q | Form 10-Q | Form 10-Q | Form 10-Q | |||||||||||||
June 30, 2007 | June 30, 2007 | December 31, 2006 | December 31, 2006 | |||||||||||||
Assets | ||||||||||||||||
Loans | $ | 629,166 | $ | 618,725 | $ | 602,958 | $ | 592,214 | ||||||||
Net Loans | 617,427 | 606,986 | 591,503 | 580,759 | ||||||||||||
Accrued interest receivable | 16,972 | 14,968 | 16,494 | 16,494 | ||||||||||||
Investment in real estate joint ventures | — | 10,889 | — | 10,744 | ||||||||||||
Total Assets | 1,330,980 | 1,328,158 | 1,356,311 | 1,356,311 | ||||||||||||
Liabilities | ||||||||||||||||
Other liabilities | 15,909 | 14,386 | 18,593 | 18,593 | ||||||||||||
Total liabilities | 1,163,817 | 1,162,294 | 1,189,907 | 1,189,907 | ||||||||||||
Minority interests | 3,442 | 3,767 | 3,150 | 3,150 | ||||||||||||
Stockholders’ equity | ||||||||||||||||
Retained earnings | 23,593 | 21,969 | 23,464 | 23,464 | ||||||||||||
Total stockholders’ equity | 163,721 | 162,097 | 163,254 | 163,254 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 1,330,980 | $ | 1,328,158 | $ | 1,356,311 | $ | 1,356,311 |
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
As | As | As | As | |||||||||||||
Reported | Restated | Reported | Restated | |||||||||||||
In June 30 | For June 30 | In June 30 | For June 30 | |||||||||||||
2007 | 2007 | 2007 | 2007 | |||||||||||||
(in thousands, except per share data) | Form 10-Q | Form 10-Q | Form 10-Q | Form 10-Q | ||||||||||||
Interest income | ||||||||||||||||
Loans and leases, including fees | $ | 15,359 | $ | 14,892 | $ | 29,756 | $ | 26,784 | ||||||||
TOTAL INTEREST INCOME | 23,068 | 22,601 | 45,033 | 42,061 | ||||||||||||
Interest expense | ||||||||||||||||
Obligations related to real estate owned via equity investsments | 264 | 151 | 519 | 335 | ||||||||||||
TOTAL INTEREST EXPENSE | 12,695 | 12,582 | 24,724 | 24,540 | ||||||||||||
NET INTEREST INCOME | 10,373 | 10,019 | 20,309 | 17,521 | ||||||||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES | 10,214 | 9,860 | 19,938 | 17,150 | ||||||||||||
Other income | ||||||||||||||||
Revenue related to real estate owned via equity investments | 1,052 | 860 | 2,360 | 2,135 | ||||||||||||
Gains on sales related to real estate joint ventures | — | — | — | 350 | ||||||||||||
Other income | 29 | 30 | 126 | 40 | ||||||||||||
TOTAL OTHER INCOME | 2,906 | 2,714 | 5,229 | 5,267 | ||||||||||||
Other expenses | ||||||||||||||||
Salaries and wages | 2,695 | 2,695 | 5,371 | 4,875 | ||||||||||||
Expenses related to real estate owned via equity investments | 556 | 393 | 1,379 | 825 | ||||||||||||
Other operating expenses | 2,122 | 2,203 | 3,882 | 4,354 | ||||||||||||
TOTAL OTHER EXPENSE | 6,687 | 6,605 | 13,273 | 12,695 | ||||||||||||
Minority interest | 189 | 224 | 385 | 709 | ||||||||||||
INCOME BEFORE INCOME TAXES | 6,244 | 5,745 | 11,509 | 9,013 | ||||||||||||
Income taxes | 1,961 | 1,787 | 3,601 | 2,728 | ||||||||||||
NET INCOME | $ | 4,283 | $ | 3,958 | $ | 7,908 | $ | 6,285 | ||||||||
Per share data | ||||||||||||||||
Net income – basic | $ | 0.32 | $ | 0.29 | $ | 0.59 | $ | 0.47 | ||||||||
Net income – diluted | $ | 0.32 | $ | 0.29 | $ | 0.58 | $ | 0.46 |
Royal Bancshares of Pennsylvania,Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
Six Months ended June 30, 2007
(UNAUDITED)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
Six Months ended June 30, 2007
(UNAUDITED)
Six Months Ended | ||||||||
June 30, | ||||||||
(in thousands) | ||||||||
As | As | |||||||
Reported | Restated | |||||||
In June 30 | For June 30 | |||||||
2007 | 2007 | |||||||
Form 10-Q | Form 10-Q | |||||||
Retained Earnings | $ | 23,593 | $ | 21,969 | ||||
Net Income | $ | 7,908 | $ | 6,285 |
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30,
(in thousands)
Six months ended June 30,
(in thousands)
As | As | |||||||
Reported | Restated | |||||||
In June 30 | For June 30 | |||||||
2007 | 2007 | |||||||
Form 10-Q | Form 10-Q | |||||||
June 30, 2007 | June 30, 2007 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 7,908 | $ | 6,285 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Gains on sales of real estates joint ventures | — | (350 | ) | |||||
Gains form sale of premise of real estate owned via equity investment | — | (1,339 | ) | |||||
Changes in assets and liabilities: | ||||||||
(Increase) decrease in accrued interest receivable | (478 | ) | 1,526 | |||||
Decrease in other assets | 4,171 | 126 | ||||||
Increase in minority interest | — | 617 | ||||||
Decrease in other liabilities | (720 | ) | (2,496 | ) | ||||
Net cash provided by operating activities | 12,836 | 6,111 | ||||||
Cash flows from investing activities | ||||||||
Net increase in loans | (25,255 | ) | (25,558 | ) | ||||
Purchase of premises and equipment | (405 | ) | (405 | ) | ||||
Net investment in real estate | — | 205 | ||||||
Proceeds from sale of premises and equipment of real estate owned via equity investment | 1,339 | 11,510 | ||||||
Net increase in premises and equipment relateing to real estate owned via equity invest. | — | (3,308 | ) | |||||
Net cash provided (used) in investing activities | 23,308 | 30,074 | ||||||
Cash flows from financing activities: | ||||||||
Mortgage payments | (39 | ) | (79 | ) | ||||
Net cash used by financing activities | (36,606 | ) | (36,647 | ) | ||||
Supplemental Disclosure | ||||||||
Interest paid | $ | 20,665 | $ | 20,145 |
16.Recent accounting pronouncements
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments. This statement amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement resolves issues addressed in Statement 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interest in Securitized Financial Assets. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company adopted this guidance on January 1, 2007. The adoption did not have any effect on Royal Bancshares’ financial position or results of operations.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Asset- An Amendment of FASB Statement No. 140. This statement amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. It also permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. The Company adopted this statement effective January 1, 2007. The adoption did not have a material effect on the Company’s financial position or results of operations.
In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) in Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life insurance Arrangements. EITF 06-4 applies to life insurance arrangements that provide an employee with a specific benefit that is not limited to the employee’s active service period, including certain bank-owned life insurance (“BOLI”) policies. EITF 06-4 requires an employer to recognize a liability and related compensation costs for future benefits that extend to postretirement periods. EITF 06-4 is effective for fiscal years beginning after December 15, 2007, with earlier application permitted. The Company is continuing to evaluate the impact of this consensus, which may require the Company to recognize an additional liability and compensation expense related to its BOLI policies.
In September 2006, the FASB ratified the consensus reached by the EITF in Issue 06-5, Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance. Technical Bulletin No. 85-4 states that an entity should report as an asset in the statement of financial position the amount that could be realized under insurance contract. EITF 06-5 clarifies certain factors that should be considered in the determination of the amount that could be realized. EITF 06-5 is effective for fiscal years beginning after December 15, 2006, with earlier application permitted under certain circumstances. The Company does not expect it to have a material impact on the Company’s consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a frame work for measuring fair value under GAAP, and expands disclosures about fair value measurements. FASB Statement No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal years. The Company is currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 157 on our consolidated financial position or results of operations.
In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB 108, companies might evaluate the materiality of financial-statement misstatements using either the income statement or the balance sheet approach, with the income statement approach focusing on new misstatements added in the current year, and the balance sheet approach focusing on the cumulative amount of misstatement present in a company’s balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected. SAB No. 108 now requires that companies view financial statement misstatements as material if they are material according to either the income statement or balance sheet approach. The Company has analyzed SAB No. 108 and determined that adoption of it did not impact on the reported financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value of Option for Financial Assets and Financial Liabilities. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each
subsequent reporting date. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157. The Company did not elect to early adopt SFAS No. 157. We are currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 159 on our consolidated financial position or results of operations.
In March 2007, the FASB ratified EITF Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.” EITF 06-11 requires companies to recognize the income tax benefit realized from dividends or dividend equivalents that are charged to retained earnings and paid to employees for nonvested equity-classified employee share-based payment awards as an increase to additional paid-in capital. EITF 06-11 is effective for fiscal years beginning after September 15, 2007. The Company does not expect EITF 06-11 will have a material impact on its financial position, results of operations or cash flows.
In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 “Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements” (EITF 06-10). EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The Company is currently assessing the impact of EITF 06-10 on its consolidated financial position and results of operations.
In June 2007, the AICPA issued Statement of Position (“SOP”) No. 07-1, “Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies” (“SOP 07-1”). SOP 07-1 addresses when the accounting principles of the AICPA Audit and Accounting GuideInvestment Companiesmust be applied by an entity and whether those accounting principles must be retained by a parent company in consolidation or by an investor in the application of the equity method of accounting. The SOP is effective for fiscal years beginning on or after December 15, 2007, with earlier application encouraged. We are evaluating the effect of adopting SOP 07-1 on our Consolidated Financial Statements.
In April 2007, the FASB directed the FASB Staff to issue FSP No. FIN 39-1, “Amendment of FASB Interpretation No. 39” (“FSP FIN 39-1”). FSP FIN 39-1 modifies FIN No. 39, “Offsetting of Amounts Related to Certain Contracts,” and permits companies to offset cash collateral receivables or payables with net derivative positions under certain circumstances. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. We are evaluating the effect of adopting FSP FIN 39-1 on our Consolidated Financial Statements.
In May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 “Definition of Settlement in FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. The implementation of this standard did not have a material impact on our consolidated financial position or results of operations.
In February 2007, the FASB issued FASB Staff Position (FSP) FAS 158-1, “Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88, and No 106 and to the Related Staff Implementation Guides.” This FSP makes conforming amendments to other FASB statements and staff implementation guides and provides technical corrections to SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” The conforming amendments in this FSP will not have a material impact on our consolidated financial statements or disclosures.
ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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 three-month and six-month periods ended June 30, 2007 and June 30, 2006. This discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2006 included in the Company’s 2006 Form 10-K.
FORWARD-LOOKING STATEMENTS
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 and Exchange Commission. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. When we use words such as “believes”, “expects,” “anticipates” or similar expressions, we are making forward-looking statements. In order to comply with the terms of the safe harbor, Royal Bancshares 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 Royal Bancshares 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; 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.
All forward-looking statements contained in this report are based on information available as of the date of this report. The Company expressly disclaims any obligation to update any forward-looking statement to reflect future statements to reflect future events or developments.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America and general practices within the financial services industry. Applications of the principles in the Company’s 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. These estimates and assumptions are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates.
Note A to the Company’s consolidated financial statements (included in Item 8 of the Form 10-K for the year ended December 31, 2006) lists significant accounting policies used in the development and presentation of the Company’s financial statements. The following discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other quantitative and qualitative factors that are necessary for an understanding and evaluation of the Company and its results of operations. The Company is an investor in a variable interest entity and is required to report its investment in the variable interest entity on a consolidated basis under FIN 46(R). The variable interest entity is responsible for providing its financial information to the Company. We complete an internal review of this financial information. This review requires substantive judgment and estimation. The Company has identified accounting for allowance for loan losses, deferred tax assets and derivative securities as among the most critical accounting policies and estimates in that they are important to the presentation of the Company’s financial condition and results of operations, and they require difficult, subjective or complex judgments as a result of the need to make estimates.
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 and borrowings. Interest income is recognized according to the effective interest yield method. 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.
Consolidated Net Income
The second quarter of 2007 net income of $4.0 million was $628,000 or 13.7% lower than the second quarter of 2006 net income of $4.6 million. The lower net income earned during the second quarter of 2007 was primarily the result of the continued pressures on funding costs and the reduction in interest income related to an increase in non-accruing loans during 2007. Non-accruing loans increased from $6.7 million at December 31, 2006 to
$29.1 million at June 30, 2007. Management is closely monitoring these loans. Basic earnings per share and diluted earnings per share were both $.29 for the second quarter of 2007. Basic earnings per share and diluted earnings per share were both $.34 for the second quarter of 2006.
Net income for the year to date period ending June 30, 2007 of $6.3 million was $3.6 million lower than the same period in 2006. The lower net income earned during the second quarter of 2007 was the result of $1.0 million reduction to net income related to accounting errors in 2006 and prior years, a decrease in interest income related to transferring loans to non-accrual status during the first six months of 2007 and the continued pressures on funding costs. The six months ended June 30, 2007 basic earnings per share and diluted earnings per share were $.47 and $.46, respectively. The six months ended June 30, 2006 basic earnings per share was $.74 and diluted earnings per share was $.73.
Interest Income
The second quarter of 2007 interest income decreased $87,000, compared to the second quarter of 2006. A $602,000 decrease in loan interest income and a $337,000 reduction in investment interest income were partially offset by a $852,000 increase in cash and cash equivalent interest income. The $602,000 lower loan interest income earned in the second quarter of 2007, was primarily due to the $728,000 reduction related to non-accruing loans, partially offset by interest income related to the $13.4 million increase in earnings assets in the second quarter of 2007 compared to the same period in 2006. During 2007, six loans in excess of $1.0 million each were added to non-accruing status.
Year to date June 30, 2007 total interest income decreased $2.0 million. Included in interest income were $1.9 million of reductions related to the following accounting errors in 2006: a $1.2 accounting error related to investments in real estate joint ventures (see footnote 13 for a discussion of the investment in real estate joint ventures), a $781,000 reduction in interest income associated with an accounting error related to the consolidation of an investment in real estate owned via an equity investment and an increase in interest income of $92,000 related to an error in the accounting for deferred loan cost per statement of Financial Accounting Standards (SFAS no. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” Also contributing to this decrease was a $2.0 million reduction related to the non-accruing loans mentioned above. Partially offsetting these reductions was the increase in interest income related to the $32.2 million increase in average earning assets in the first six months of 2007, compared to the same period in 2006.
Interest Expense
Interest expense increased $953,000 to $12.6 million for the quarter ended June 30, 2007 compared to the same period in 2006. The increase in interest expense was the result of an increase in average deposits along with higher interest rates paid on deposits. The increase was partially offset by a $738,000 reduction in interest expense related to an equity investment in real estate. Excluding interest expense related to the variable interest entity, interest expense grew $1.7 million or 15.7%. Average deposits grew 20.7% in the second quarter of 2007, compared to the second quarter of 2006. This increase was primarily a result of the growth average certificates of deposits through promotions featuring attractive rates. Higher rates in NOW and money market accounts also contributed to the higher interest expense in the second quarter of 2007. The increase in deposits was used to offset maturing Federal Home Loan Bank borrowings. Year to date June 30, 2007 interest expense increased $2.8 million compared to the same period in 2006. Interest expense related to an equity investment in real estate decreased $1.2 million. Excluding the interest expense related to the variable interest entity, interest expense grew $4.0 million or 19.8%. This increase was primarily due to the increase in overall funding cost and the increase in the mix of higher costing certificates of deposits during 2007.
Net Interest Margin
The second quarter 2007 net interest margin of 3.36% was lower than the second quarter 2006 net interest margin of 3.99%, though it was higher than the first quarter of 2007 net interest margin of 2.58. The year-to- date 2007 net interest margin of 2.97% was below the 4.09% experienced in the same period in 2006. The year-to-date 2007 net interest margin was impacted by the 2006 accounting errors recorded in the first quarter.
The following table represents the average daily balances of assets, liabilities and shareholders’ equity and the respective interest bearing assets and interest bearing liabilities, as well as average rates for the periods indicated, exclusive of interest on obligations related to the variable interest entity. The loans outstanding include non-accruing loans. The yield on earning assets and the net interest margin are presented on a fully tax-equivalent (FTE) and annualized basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt investments and loans using the federal statutory tax rate of 35% for each period presented.
For the three months ended | For the three months ended | |||||||||||||||||||||||
June 30, 2007 | June 30, 2006 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
(in thousands) | Balance | Interest | Yield | Balance | Interest | Yield | ||||||||||||||||||
Cash equivalents | $ | 65,596 | $ | 868 | 5.31 | % | $ | 1,339 | $ | 16 | 4.79 | % | ||||||||||||
Investments securities | 537,032 | 6,841 | 5.11 | % | 573,973 | 7,177 | 5.02 | % | ||||||||||||||||
Loans | 612,541 | 14,892 | 9.75 | % | 626,463 | 15,495 | 9.92 | % | ||||||||||||||||
Earning assets | 1,215,169 | 22,601 | 7.46 | % | 1,201,775 | 22,688 | 7.57 | % | ||||||||||||||||
Non earning assets | 96,932 | 82,621 | ||||||||||||||||||||||
Total average assets | $ | 1,312,101 | $ | 1,284,396 | ||||||||||||||||||||
Deposits | $ | 896,814 | 9,816 | 4.39 | % | $ | 743,310 | 6,385 | 3.45 | % | ||||||||||||||
Borrowings | 218,843 | 2,615 | 4.79 | % | 363,110 | 4,355 | 4.81 | % | ||||||||||||||||
Total interest bearing liabilities | 1,115,657 | 12,431 | 4.47 | % | 1,106,420 | 10,740 | 3.89 | % | ||||||||||||||||
Non-interest bearing liabilities and equity | 196,444 | 177,976 | ||||||||||||||||||||||
Total average liabilities and equity | $ | 1,312,101 | $ | 1,284,396 | ||||||||||||||||||||
Net interest margin | $ | 10,170 | 3.36 | % | $ | 11,948 | 3.99 | % | ||||||||||||||||
For the six months ended | For the six months ended | |||||||||||||||||||||||
June 30, 2007 | June 30, 2006 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
(in thousands) | Balance | Interest | Yield | Balance | Interest | Yield | ||||||||||||||||||
Cash equivalents | $ | 54,492 | $ | 1,453 | 5.38 | % | $ | 2,029 | $ | 49 | 4.87 | % | ||||||||||||
Investments securities | 551,794 | 13,824 | 5.05 | % | 580,399 | 14,462 | 5.03 | % | ||||||||||||||||
Loans | 604,796 | 26,784 | 8.93 | % | 596,470 | 29,590 | 10.00 | % | ||||||||||||||||
Earning assets | 1,211,082 | 42,061 | 7.00 | % | 1,178,898 | 44,101 | 7.54 | % | ||||||||||||||||
Non earning assets | 96,683 | 86,766 | ||||||||||||||||||||||
Total average assets | $ | 1,307,765 | $ | 1,265,664 | ||||||||||||||||||||
Deposits | $ | 892,166 | 18,914 | 4.28 | % | $ | 724,048 | 11,848 | 3.30 | % | ||||||||||||||
Borrowings | 222,028 | 5,291 | 4.81 | % | 363,385 | 8,358 | 4.64 | % | ||||||||||||||||
Total interest bearing liabilities | 1,114,194 | 24,205 | 4.38 | % | 1,087,433 | 20,206 | 3.75 | % | ||||||||||||||||
Non-interest bearing liabilities and equity | 193,571 | 178,231 | ||||||||||||||||||||||
Total average liabilities and equity | $ | 1,307,765 | $ | 1,265,664 | ||||||||||||||||||||
Net interest margin | $ | 17,856 | 2.97 | % | $ | 23,895 | 4.09 | % | ||||||||||||||||
Rate Volume Analysis
The following table sets forth a rate/volume analysis, which segregates in detail the major factors contributing to the change in net interest income exclusive of interest on obligation through VIE, for the three-month and six-month periods ended June 30, 2007, as compared to the respective period in 2006, into amounts attributable to both rates and volume variances.
For the three months ended | For the six months ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
2007 vs. 2006 | 2007 vs. 2006 | |||||||||||||||||||||||
Increase (decrease) | Increase (decrease) | |||||||||||||||||||||||
(in thousands) | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
INTEREST INCOME | ||||||||||||||||||||||||
Interest-bearing deposits | $ | 812 | $ | 1 | $ | 813 | $ | 1,333 | $ | 9 | $ | 1,342 | ||||||||||||
Federal funds sold | 39 | — | 39 | 62 | 1 | 63 | ||||||||||||||||||
Investments securities | ||||||||||||||||||||||||
Held to maturity | (152 | ) | 90 | (62 | ) | (92 | ) | 127 | 35 | |||||||||||||||
Available for sale | (496 | ) | 221 | (275 | ) | (642 | ) | (32 | ) | (674 | ) | |||||||||||||
Total Investments securities | 203 | 312 | 515 | 661 | 105 | 766 | ||||||||||||||||||
Loans | ||||||||||||||||||||||||
Commercial demand loans | (196 | ) | (664 | ) | (860 | ) | 560 | (3,743 | ) | (3,183 | ) | |||||||||||||
Commercial mortgages | (25 | ) | (258 | ) | (283 | ) | (116 | ) | (146 | ) | (262 | ) | ||||||||||||
Residential and home equity | (288 | ) | 69 | (219 | ) | (244 | ) | 85 | (159 | ) | ||||||||||||||
Leases receivables | 353 | (19 | ) | 334 | 673 | (31 | ) | 642 | ||||||||||||||||
Tax certificates | 47 | 92 | 139 | 45 | 174 | 219 | ||||||||||||||||||
Other loans | (14 | ) | 4 | (10 | ) | (29 | ) | 10 | (19 | ) | ||||||||||||||
Loan fees | 297 | — | 297 | (44 | ) | — | (44 | ) | ||||||||||||||||
Total loans | 174 | (776 | ) | (602 | ) | 845 | (3,651 | ) | (2,806 | ) | ||||||||||||||
Total increase in interest income | 377 | (464 | ) | (87 | ) | 1,506 | (3,546 | ) | (2,040 | ) | ||||||||||||||
INTEREST EXPENSE | ||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||
NOW and money market | (298 | ) | 646 | 348 | (489 | ) | 1,294 | 805 | ||||||||||||||||
Savings | (3 | ) | (1 | ) | (4 | ) | (6 | ) | (2 | ) | (8 | ) | ||||||||||||
Time deposits | 2,457 | 630 | 3,087 | 4,856 | 1,413 | 6,269 | ||||||||||||||||||
Total deposits | 2,156 | 1,275 | 3,431 | 4,361 | 2,705 | 7,066 | ||||||||||||||||||
Trust preferred | — | 15 | 15 | — | 28 | 28 | ||||||||||||||||||
Borrowings | (1,602 | ) | (153 | ) | (1,755 | ) | (3,195 | ) | 100 | (3,095 | ) | |||||||||||||
Total increase in interest expense | 554 | 1,137 | 1,691 | 1,166 | 2,833 | 3,999 | ||||||||||||||||||
Total increase (decrease) in net interest income | $ | (177 | ) | $ | (1,601 | ) | $ | (1,778 | ) | $ | 340 | $ | (6,379 | ) | $ | (6,039 | ) | |||||||
Provision for Loan Losses
The provision for loan losses was $159,000 during the second quarter of 2007 and $371,000 year to date as of June 30, 2007, compared to $963,000 and $1,299,000 during the respective periods in 2006. The allowance for loan losses to total loans ratio was 1.90% at June 30, 2007, compared to from 1.93% at December 31, 2006. During the first quarter of 2007, the bank reduced the specific reserve allocation for an impaired loan by $1.0 million. It was determined the principal and interest for this loan would be collected in full, as a result of a planned settlement during April of 2007. The customer was making regular interest payments on this loan. The principal and interest related to this loan were paid in full on April 6, 2007. The $1.0 million reduction in the specific reserve allocation for the impaired loan and the $371,000 allowance for loan losses funded the formula allowance reflecting historical losses, as adjusted by credit category for the $26.5 million increase in loans during the first quarter of 2007.
Non-interest Income
The second quarter 2007 non-interest income of $2.7 million was $186,000 lower than the second quarter of 2006. Lower income related to real estate owned via equity investments and other income were partially offset by increases in net gains on investments securities available for sale and gains on sales of other real estate. The year to date June 30, 2007 non-interest income was $631,000 lower than the $5.9 million recorded in 2006. This decrease was the result of both lower gains on sales of other real estate and other income, partially offset by higher net gains on investment securities available for sale.
Non-interest Expense
The second quarter of 2007 non-interest expense of $6.6 million increased $211,000, or 3.3% from the second quarter of 2006. These increases were associated with the opening of a new Royal Asian Bank branch in the first quarter of 2007, the addition of two specialty lending subsidiaries, Royal Bank America Asset Based Lending and RBA Capital during the second half of 2006 and higher expenses related to real estate owned via equity investments. Year to date June 30, 2007 non-interest expenses of $12.7 million was even with the same period in 2006.
Income Tax Expense
Total income tax expense for the second quarters of 2007 was $1.8 million compared to $2.0 million in the same period in 2006. The effective tax rate for the second quarter of 2007 was 31.1% compared to the 30.4% for the same period in 2006. The year to date June 30, 2007 effective tax rate of 30.3%, compared to 31.0% effective tax rate for the same period in 2006.
FINANCIAL CONDITION
Consolidated Assets
Total consolidated assets as of June 30, 2007 decreased $28.2 million from December 31, 2006. A $46.4 million decrease in investment securities and FHLB stock was partially offset by a $26.5 increase in higher yielding loans. Also contributing to this decrease was a $7.0 million reduction in real estate associated with the equity investment in real estate. The lower level of assets was related to the lower funding sources due to the planned decrease in Federal Home Loan Bank borrowings during the first half of 2007.
Loans
Total loans increased $26.5 million from the $592.2 million level at December 31, 2006 to $618.7 million at June 30, 2007. This increase is primarily due to an increase in secured other real estate loans, commercial and industrial loans and leases, which was partially offset by a decrease in construction and land development loans.
The following table represents loan balances by type:
(amounts in thousands) | June 30, 2007 | Dec. 31, 2006 | ||||||
Commercial and industrial loans | $ | 63,967 | $ | 43,019 | ||||
Construction and land development | 154,151 | 177,627 | ||||||
Single family residential | 45,536 | 43,338 | ||||||
Other real estate secured | 335,173 | 315,057 | ||||||
Leases | 19,840 | 13,404 | ||||||
Other loans | 1,581 | 1,333 | ||||||
Total gross loans | 620,248 | 593,778 | ||||||
Deferred fees | (1,523 | ) | (1,564 | ) | ||||
Total loans | $ | 618,725 | $ | 592,214 | ||||
Non-performing loans
(in thousands) | 30-Jun-07 | Dec. 31, 2006 | ||||||
Non-accruing loans (1) | $ | 29,089 | $ | 6,748 | ||||
Other real estate owned | 971 | 924 | ||||||
Total nonperforming assets | $ | 30,060 | $ | 7,672 | ||||
Nonperforming assets to total assets | 2.26 | % | 0.57 | % | ||||
Nonperforming loans to total loans | 4.70 | % | 1.14 | % | ||||
Allowance for loan loss to non-accruing loans | 40.36 | % | 169.75 | % |
(1) | Generally, a loan is placed on non-accruing 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. |
Loans on which the accrual of interest has been discontinued was $29.1 million at June 30, 2007, as compared to $6.7 million at December 31, 2006, an increase of $22.4 million. The following is a detail listing of the significant additions to non-accruing loans during the first six months of 2007:
First Quarter 2007 new non-accruing loans:
• | Two loans (one construction and one construction mezzanine loan) representing $8.2 million were related to one customer for a condominium building. These loans became 90 days past due during the first quarter of 2007 and were classified as impaired during the first quarter of 2007. An appraisal received during the first quarter of 2007 provided a gross retail sellout value of this property which supported its value, therefore the loan did not require a specific reserve allocation. | ||
• | Two loans (one construction and one construction mezzanine loan) in the amount of $6.9 million were added to non-accruing status during the first quarter of 2007. These loans are secured by a 36 unit condominium building. These loans became 90 days past due during the first quarter of 2007 and were classified as impaired during the first quarter of 2007. The Company measured the fair value of this loan based on the observable market price of the condominium building based on the fact there were agreements of sale on 19% of the 36 condominium units, therefore the loan did not require a specific reserve allocation. The customer was waiting for a Certificate of Occupancy and had seven agreements of sale on the condominiums as of March 31, 2007. |
Second Quarter 2007 new non-accruing loans:
• | A commercial loan in the amount of $3.1 million was added to non-accruing status in June 2007. This loan was classified as an impaired loan during the second quarter of 2007. The borrower is continuing to make payments on this loan. | ||
• | A $4.8 million construction loan for a 9 unit condominium building was added to non-accruing loans and impaired loans during the second quarter of 2007. |
The Company identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual term of the loan agreement. The total of impaired loans at June 30, 2007 was $28.0 million, a $14.5 million increase over the $13.5 million balance of impaired loans at December 31, 2006. The average year to date June 30, 2007 impaired loans was $23.7 million. The $14.5 million increase is a result of the addition of the 6 loans in the amount of $23.0 million mentioned above, partially offset by $8.1 million of impaired loans paid off during the second quarter of 2007. The allowance for loan losses related to impaired loans was $796,000 at June 30, 2007. 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 accrual basis when the principal payments on the loans become current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company. If these factors do not exist, the Company does not recognize income. The income recognized on impaired loans was $303,000 for the first six months of 2007.
The balance of impaired loans at December 31, 2006 was $13.5 million. The allowance for loan losses related to these impaired loans was $3.6 million. The average balance of impaired loans was $13.8 million during 2006 and the income recognized on impaired loans during 2006 was $641,000.
As part of a review of the reported impaired loans at December 31, 2006, the Company discovered $1.1 million of loans were not included in the reported impaired loans in error. The adjusted impaired loans at December 31, 2006 were $13.5 million. Also as part of the review, the Company discovered $180,000 of loans should have been included in non-accrual loans. The adjusted non-accrual loans at December 31, 2006 were $6.7 million.
Allowance for Loan 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. Management determines the allowance for loan losses with the objective of maintaining a reserve level sufficient to absorb estimated probable credit losses. Management has determined the Company’s balance in the allowance for loan losses based on management’s detailed analysis and review of loan portfolio. Management considers all known relevant internal and external factors that may affect loan collectability. The periodic analysis and review includes an evaluation of the loan portfolio in relation to historical 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. Management’s evaluation is inherently subjective and all of these factors may be susceptible to significant change. To the extent actual outcomes differ from management’s assessments, the Company may be required to make additional provisions for loan losses that could adversely impact earnings in future periods.
The allowance for loan losses increased $284,000 to $11.7 million at June 30, 2007 from $11.5 million at December 31, 2006. The $284,000 increase was attributed to recording a provision of $371,000 offset by net charge offs of $87,000. The amount of the allowance for loan losses represents 1.90% of total loans at June 30, 2007 versus 1.93% at December 31, 2006. During the first quarter of 2007, the Company reduced the specific reserve allocation for an impaired loan by $1.0 million. It was determined the principal and interest for this loan would be collected in full, as a result of a planned settlement during April of 2007. The customer was making regular interest payments on this loan. The principle and interest related to this loan were paid in full on April 6, 2007. As described above, there were six loans which contributed to the $14.5 million increase in impaired loans at June 30, 2007, compared to December 31, 2006. These loans required specific reserve allocations of $307,000. This net $693,000 reduction in a specific reserve allocation for impaired loans and the $212,000 net growth in the allowance for loan losses funded the formula allowance reflecting historical losses, as adjusted by credit category for the $26.5 million increase in loans during the first half of 2007.
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. As noted in the review of the non-performing loans section of this report, the Company has experienced a significant increase in non-accruing loans during the first six months of 2007. Management is aggressively managing these loans in an effort to reduce the level of non-accrual loans. Management has allocated specific loan loss reserves to the loans when they believe the loans are not adequately collateralized. 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.
An analysis of the Allowance for Loan losses by loan type is set forth below:
June 30, 2007 | December 31, 2006 | |||||||||||||||
Percent of | Percent of | |||||||||||||||
loans | loans | |||||||||||||||
Amount | in each | Amount | in each | |||||||||||||
in | category to | in | category to | |||||||||||||
thousands | total loans | thousands | total loans | |||||||||||||
Domestic | ||||||||||||||||
Commercial and industrial loans | $ | 1,202 | 10.31 | % | $ | 559 | 6.70 | % | ||||||||
Construction and land development | 3,662 | 24.85 | % | 4,526 | 29.93 | % | ||||||||||
Single family residential | 1,320 | 7.34 | % | 845 | 6.71 | % | ||||||||||
Real estate -non residential | 4,935 | 45.47 | % | 5,165 | 48.14 | % | ||||||||||
Real estate -multi-family | 102 | 1.61 | % | 56 | 0.99 | % | ||||||||||
Tax certificates | — | 6.97 | % | — | 5.18 | % | ||||||||||
Leases | 503 | 3.20 | % | 293 | 2.17 | % | ||||||||||
Installment loans to individual | 15 | 0.25 | % | 11 | 0.18 | % | ||||||||||
Total | $ | 11,739 | 100.00 | % | $ | 11,455 | 100.00 | % | ||||||||
Investment Securities
Total investment securities and FHLB stock decreased $46.4 million to $522.4 million at June 30, 2007, from the level at December 31, 2006. This decrease is primarily due to maturities and calls of investments along with principal repayments from mortgage backed securities during the first six months of 2007. These proceeds were primarily used to fund loan growth.
Cash and Cash Equivalents
Total cash and cash equivalents decreased $462,000 from the $82.4 million level at December 31, 2006 to $82.0 million at June 30, 2007 due to a reduction in federal funds sold.
Investment in Real Estate Joint Ventures
As discussed in Note 1, the restatement of the Company’s Form 10-Q for the quarter end June 30, 2007 includes amending its financial statements for an accounting error related to investments in real estate joint ventures. The
Company determined two (ADC) loans should have been accounted for as investments in real estate joint ventures in accordance with AICPA Practice Bulletin 1 and Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate. The Company has reclassified these ADC loans in the amount of $10.7 million to investments in real estate joint ventures as of December 31, 2006. As of December 31, 2006, one investment in the amount of $4.7 million was to fund the purchase of property for construction of an office and residential building and the other investment for $6.0 million was to fund the construction of a 55 unit condominium building. As of June 30, 2007 the investment in the construction of an office and residential building was $5.0 million. The balance of the investment in the construction of a 55 unit condominium building was $5.9 million.
Deposits
Total deposits, the primary source of funds, increased $32.2 million to $891.6 million at June 30, 2007, from the level at December 31, 2006. This growth was primarily related to the planned increase in time deposits through promotions featuring attractive rates. Time deposits under $100,000 grew $28.2 million, time deposits over $100,000 increased $20.4 million and non-interest bearing demand deposits grew $10.5 million. Partially offsetting these increases was a decrease to NOW and money market accounts of $26.2 million and a $749,000 reduction in savings accounts.
The following table represents ending deposit balances by type:
(in thousands) | June 30, 2007 | Dec. 31, 2006 | ||||||
Demand (non-interest bearing) | $ | 71,482 | $ | 61,002 | ||||
NOW and Money Markets | 249,944 | 276,190 | ||||||
Savings | 16,436 | 17,185 | ||||||
Time deposits (over $100) | 305,959 | 285,485 | ||||||
Time deposits (under $100) | 247,794 | 219,595 | ||||||
Total deposits | $ | 891,615 | $ | 859,457 | ||||
Borrowings
Total borrowings decreased $53.1 million to $193.0 million at June 30, 2007, from $246.1 million at December 31, 2006. This reduction is attributed to a $53.0 million decrease in overnight borrowings with the Federal Home Loan Bank resulting from increased deposit funding. The Company’s investment in VIE’s is further discussed in Note 10.
Obligations Related to Equity Investments in Real Estate
As a result of the adoption of FIN 46(R) the Company consolidated into its statement of condition $22.8 million of debt at June 30, 2007 and $29.3 million of debt at December 31, 2006 related to real estate equity investment of which none is guaranteed by the Company.
Stockholders’ Equity
Consolidated stockholders’ equity decreased $1.2 to $162.1 million at June 30, 2007 from $163.3 million at December 31, 2006. This decrease is primarily related to the $7.8 million year-to-date dividend payments exceeding the year-to-date net income of $6.3 million. A $1.5 million increase in treasury stock also contributed to the decrease in stockholders’ equity. Accumulated other comprehensive income grew $1.5 million related to an increase in gains in the available for sale portfolio of approximately $421,000 and an adjustment related to the adoption of FASB No. 158 of $1.1 million. Additional paid in capital grew $366,000 as a result of stock option activity.
CAPITAL ADEQUACY
The Company and its banking subsidiaries are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines involve quantitative measure of assets and liabilities calculated under regulatory accounting practices. Quantitative measures established by banking regulations, designed to ensure capital adequacy, required the maintenance of minimum amounts of capital to total “risk weighted” assets and a minimum Tier 1 leverage ratio, as defined by the banking regulations. At June 30, 2007, 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 The Company and Royal Bank’s risk-based capital ratios and leverage ratios for June 30, 2007 and the year ended December 31, 2006:
To be well | ||||||||||||||||||||||||
capitalized under | ||||||||||||||||||||||||
For capital | prompt corrective | |||||||||||||||||||||||
Actual | Actual | adequacy purposes | action provision | |||||||||||||||||||||
June 30, 2007 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Total capital (to risk- weighted assets) | ||||||||||||||||||||||||
Company (consolidated) | $ | 202,308 | 20.44 | % | $ | 79,179 | 8.00 | % | N/A | N/A | ||||||||||||||
Royal Bank | 150,494 | 16.42 | % | 73,317 | 8.00 | % | $ | 91,647 | 10.00 | % | ||||||||||||||
Royal Asian | 15,673 | 21.86 | % | 5,735 | 8.00 | % | 7,168 | 10.00 | % | |||||||||||||||
Tier I Capital (to risk- weighted assets) | ||||||||||||||||||||||||
Company (consolidated) | $ | 190,569 | 19.25 | % | $ | 39,590 | 4.00 | % | N/A | N/A | ||||||||||||||
Royal Bank | 139,492 | 15.22 | % | 36,659 | 4.00 | % | $ | 54,988 | 6.00 | % | ||||||||||||||
Royal Asian | 14,936 | 20.84 | % | 2,867 | 4.00 | % | 4,301 | 6.00 | % | |||||||||||||||
Tier I Capital (to average assets, leverage) | ||||||||||||||||||||||||
Company (consolidated) | $ | 190,569 | 14.22 | % | $ | 40,210 | 3.00 | % | N/A | N/A | ||||||||||||||
Royal Bank | 139,492 | 11.06 | % | 37,828 | 3.00 | % | $ | 63,047 | 5.00 | % | ||||||||||||||
Royal Asian | 14,936 | 14.05 | % | 3,189 | 3.00 | % | 5,315 | 5.00 | % |
To be well | ||||||||||||||||||||||||
capitalized under | ||||||||||||||||||||||||
For capital | prompt corrective | |||||||||||||||||||||||
Actual | Actual | adequacy purposes | action provision | |||||||||||||||||||||
December 31, 2006 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Total capital (to risk- weighted assets) | ||||||||||||||||||||||||
Company (consolidated) | $ | 203,190 | 20.38 | % | $ | 79,757 | 8.00 | % | N/A | N/A | ||||||||||||||
Royal Bank | 150,274 | 16.44 | % | 73,112 | 8.00 | % | $ | 91,390 | 10.00 | % | ||||||||||||||
Royal Asian | 15,493 | 25.29 | % | 4,901 | 8.00 | % | 6,126 | 10.00 | % | |||||||||||||||
Tier I Capital (to risk- weighted assets) | ||||||||||||||||||||||||
Company (consolidated) | $ | 191,735 | 19.23 | % | $ | 39,879 | 4.00 | % | N/A | N/A | ||||||||||||||
Royal Bank | 139,599 | 15.28 | % | 36,556 | 4.00 | % | $ | 54,834 | 6.00 | % | ||||||||||||||
Royal Asian | 14,727 | 24.04 | % | 2,450 | 4.00 | % | 3,676 | 6.00 | % | |||||||||||||||
Tier I Capital (to average assets, leverage) | ||||||||||||||||||||||||
Company (consolidated) | $ | 191,735 | 14.92 | % | $ | 38,547 | 3.00 | % | N/A | N/A | ||||||||||||||
Royal Bank | 139,599 | 11.23 | % | 37,286 | 3.00 | % | $ | 62,143 | 5.00 | % | ||||||||||||||
Royal Asian | 14,727 | 23.03 | % | 1,918 | 3.00 | % | 3,197 | 5.00 | % |
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 regulations. 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 the Company’s 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 are securities maturing in one year or less, other short-term investment and the repayment of loans. These sources provide alternatives to meet its short-term liquidity needs. In addition, the FHLB is available to provide short-term liquidity when other sources are unavailable. Longer liquidity needs may be met by issuing longer-term deposits and by raising additional capital. The liquidity ratio is calculated by adding total cash and investments less reserve requirements divided by deposits and short-term liabilities which is generally maintained at a level equal to or greater than 25%.
The liquidity ratio of the Company remains adequate at approximately 43% and exceeds the Company’s 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.
In managing its interest rate sensitivity positions, the Company seeks to develop and implement strategies to control exposure of net interest income to risks associated with interest rate movements 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, 2007:
Interest Rate Sensitivity
Days | 1 to 5 | Over 5 | Non-rate | |||||||||||||||||||||
(in millions) | 0 – 90 | 91 – 365 | Years | Years | Sensitive | Total | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest-bearing deposits in banks | $ | 67.2 | $ | — | $ | — | $ | — | $ | 13.8 | $ | 81.0 | ||||||||||||
Federal funds sold | 1.0 | — | — | — | — | 1.0 | ||||||||||||||||||
Investment securities: | ||||||||||||||||||||||||
Available for sale | 31.1 | 45.7 | 144.8 | 93.6 | 1.0 | 316.2 | ||||||||||||||||||
Held to maturity | 30.1 | 100.3 | 67.0 | — | — | 197.4 | ||||||||||||||||||
Total investment securities | 61.2 | 146.0 | 211.8 | 93.6 | 1.0 | 513.6 | ||||||||||||||||||
Loans: | ||||||||||||||||||||||||
Fixed rate | 20.1 | 43.1 | 178.8 | 35.1 | — | 277.1 | ||||||||||||||||||
Variable rate | 291.1 | 37.7 | 12.7 | 0.1 | (11.7 | ) | 329.9 | |||||||||||||||||
Total loans | 311.2 | 80.8 | 191.5 | 35.2 | (11.7 | ) | 607.0 | |||||||||||||||||
Other assets | 8.7 | 23.4 | — | — | 93.5 | 125.6 | ||||||||||||||||||
Total Assets | $ | 449.3 | $ | 250.2 | $ | 403.3 | $ | 128.8 | $ | 96.6 | $ | 1,328.2 | ||||||||||||
` | ||||||||||||||||||||||||
Liabilities & Capital | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Non interest bearing deposits | $ | — | $ | — | $ | — | $ | — | $ | 71.5 | $ | 71.5 | ||||||||||||
Interest bearing deposits | 29.6 | 88.7 | 148.1 | — | — | 266.4 | ||||||||||||||||||
Certificate of deposits | 56.6 | 286.4 | 207.7 | 3.0 | — | 553.7 | ||||||||||||||||||
Total deposits | 86.2 | 375.1 | 355.8 | 3.0 | 71.5 | 891.6 | ||||||||||||||||||
Borrowings (1) | 48.4 | 50.0 | 120.4 | — | 22.8 | 241.6 | ||||||||||||||||||
Other liabilities | 0.1 | — | — | — | 32.8 | 32.9 | ||||||||||||||||||
Capital | — | — | — | — | 162.1 | 162.1 | ||||||||||||||||||
Total liabilities & capital | $ | 134.7 | $ | 425.1 | $ | 476.2 | $ | 3.0 | $ | 289.2 | $ | 1,328.2 | ||||||||||||
Net interest rate GAP | $ | 314.6 | $ | (174.9 | ) | $ | (72.9 | ) | $ | 125.8 | $ | (192.6 | ) | |||||||||||
Cumulative interest rate GAP | $ | 314.6 | $ | 139.7 | $ | 66.8 | $ | 192.6 | ||||||||||||||||
GAP to total assets | 24 | % | -13 | % | ||||||||||||||||||||
GAP to total equity | 194 | % | -108 | % | ||||||||||||||||||||
Cumulative GAP to total assets | 24 | % | 11 | % | ||||||||||||||||||||
Cumulative GAP to total equity | 194 | % | 86 | % | ||||||||||||||||||||
(1) | The $22.8 in borrowings classified as non-rate sensitive are related to variable interest entities and are not obligations of the Company. |
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 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information presented in the Liquidity and Interest Rate Sensitivity section of the Management’s Discussion and Analysis of Financial Condition and Results Operations of this Report is incorporated herein by reference.
ITEM 4 – CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company maintains a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities
Exchange Commission’s rules and forms. As of the end of the period covered by this report, the Company evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, our CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as June 30, 2007, in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s Exchange Act filings.
There are inherent limitations to the effectiveness of any controls system. A controls system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that its objectives are met. Further, the design of a control system must reflect the fact that there are limits on resources, and the benefits of controls must be considered relative to their costs and their impact on the business model. We intend to continue to improve and refine our internal control over financial reporting.
(b) Changes in internal controls.
There has not been any change in the Company’s internal control over financial reporting during the quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
There have been no material changes from risk factors as previously disclosed in our Form 10-K for the year ended December 31, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Stock Repurchases
The following table provides information on repurchases by the Company of its common stock in each month of the quarter ended June 30, 2007:
Total Number | Maximum | |||||||||||||||
of Shares | Number of | |||||||||||||||
Purchased | Shares that | |||||||||||||||
as Part of | may yet be | |||||||||||||||
Total | Average | Publicly | Purchased | |||||||||||||
Number of | Price | Announced | Under the | |||||||||||||
Shares | Paid per | Plans or | Plans or | |||||||||||||
Period | Repurchased | Share | Programs | Programs | ||||||||||||
April 1, 2007 through April 30, 2007 | — | $ | — | — | — | |||||||||||
May 1, 2007 through May 31, 2007 | 17,900 | $ | 20.46 | 17,900 | 652,100 | |||||||||||
June 1, 2007 through June 30, 2007 | 55,300 | $ | 21.34 | 55,300 | 596,800 | |||||||||||
73,200 | $ | 21.12 | 73,200 | |||||||||||||
1. | Transactions are reported as of settlement dates. | |
2. | The Company’s current stock repurchase program was approved by its Board of Directors and announced on May 16, 2007. | |
3. | The number of shares approved for repurchase under the Company’s current stock repurchase program is 670,000. | |
4. | The Company’s current stock repurchase program has no expiration date. | |
5. | The Company did not have a stock repurchase plan or program expire during the period covered by the table. | |
6. | The Company did not have a stock repurchase plan or program that is has determined to terminate prior to expiration or under which it does not intend to make further purchases. |
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to Vote Security Holders
On Wednesday, May 16, 2007, the Annual Meeting of Shareholders’ of the Company was convened in Philadelphia, PA at 6:30 P.M. to consider the following matters.
1. | The following nominees were elected as Class II Directors of the Registrant to serve for a three year term. There was no solicitation in opposition to the nominees of the Board of Directors. The votes cast with respect to each individual nominees were as follows: |
Name | For | Withhold | ||||||
Anthony Micale | 27,711,491 | 400,723 | ||||||
Mitchell Morgan | 27,731,691 | 380,523 | ||||||
Albert Ominsky | 27,727,721 | 384,493 | ||||||
Gregory Reardon | 27,731,473 | 380,741 | ||||||
Robert Tabas | 27,160,358 | 951,856 |
2. | Approval of the 2007 Long-Term Incentive Plans. The votes cast in this matter were as follows: |
For | 23,724,812 | |||
Against | 2,046,732 | |||
Abstain | 80,952 |
Item 5. Other Information
On September 8, 2006 the Company’s wholly owned subsidiary Royal Bank America formed a subsidiary called RBA ABL Group LP to originate asset based loans. The Bank owns 60% of the subsidiary.
On October 2, 2006 the Company’s wholly owned subsidiary Royal Bank America formed a subsidiary called RBA Capital LP to originate structured financing. The Bank owns 60% of the subsidiary.
On October 20, 2006 the Company changed The Transfer and Dividend and Paying Agent from Registrar and Transfer Company to StockTrans Inc. located in Ardmore, Pennsylvania.
Item 6. Exhibits
(a) |
3.1 | Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3(i) of the Company’s registration Statement on Form S-4 No. 0-26366.) | ||
3.2 | Bylaws of the Company (Incorporated by reference to Exhibit 99 to the Company’s current report on Form 8-K filed with the Commission on March 13, 2001, amended April 19, 2006. | ||
10.1 | Employment Agreement dated September 11, 2006 by and among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Bank America (“Bank”) and Joseph P. Campbell, President and Chief Executive Officer of the Corporation and the Bank. (Incorporated by reference to Exhibit 10.1 to the Company’s report on Form 10-Q dated March 31, 2007, as filed on May 15, 2007.) |
10.2 | Employment Agreement dated September 22, 2006 by and among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Bank America (“Bank”) and James J. McSwiggan, Jr, Chief Operating Officer of the Corporation and the Bank. (Incorporated by reference to Exhibit 10.2 to the Company’s report on Form 10-Q dated March 31, 2007, as filed on May 15, 2007.) | ||
10.3 | Employment Agreement dated February 22, 2007 by and among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Bank America (“Bank”) and Murray Stempel, III, Executive Vice President and Chief Lending Officer of the Corporation and the Bank. (Incorporated by reference to Exhibit 10.3 to the Company’s report on Form 10-Q dated March 31, 2007, as filed on May 15, 2007.) | ||
10.4 | Employment Agreement dated February 23, 2007 by and among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Bank America (“Bank”) and John Decker, Executive Vice President Mezzanine/Equity Lending of the Corporation and the Bank. (Incorporated by reference to Exhibit 10.4 to the Company’s report on Form 10-Q dated March 31, 2007, as filed on May 15, 2007.) | ||
10.5 | Employment Agreement dated February 23, 2007 by and among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Bank America (“Bank”) and Robert R. Tabas, Executive Vice President the Corporation and the Bank. (Incorporated by reference to Exhibit 10.5 to the Company’s report on Form 10-Q dated March 31, 2007, as filed on May 15, 2007.) | ||
10.6 | Employment Agreement dated February 22, 2007 by and among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Asian Bank (“Bank”) and Edward Shin, President of Royal Asian Bank. (Incorporated by reference to Exhibit 10.6 to the Company’s report on Form 10-Q dated March 31, 2007, as filed on May 15, 2007.) | ||
10.7 | Royal Bancshares of Pennsylvania, Inc. 2007 Long-Term Incentive Plan. (Incorporated by reference to Exhibit A to the Company’s definitive Proxy Statement dated April 6, 2007.) | ||
31.1 | Section 302 Certification Pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 signed by Joseph P. Campbell, Principal Executive Officer of Royal Bancshares of Pennsylvania on March 17, 2008. | ||
31.2 | Section 302 Certification Pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 signed by James McSwiggan, Principal Financial Officer of Royal Bancshares of Pennsylvania on March 17, 2008. | ||
32.1 | 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, Principal Executive Officer of Royal Bancshares of Pennsylvania on March 17, 2008. | ||
32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by James McSwiggan, Principal Financial Officer of Royal Bancshares of Pennsylvania on March 17, 2008. |
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: March 17, 2008 | /s/ James McSwiggan | |||
James McSwiggan | ||||
Principal Financial Officer | ||||