The following table presents the activity related to Employee Stock Option Plan for the nine months ended September 30, 2006.
As of September 30, 2006, there was approximately $2,235,000 of total unrecognized compensation cost related to nonvested options under the plans.
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 against various fluctuations in interest rates. Such interest rate swaps are used as part of the asset/liability management process and are linked to specific liabilities which 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 in the funding of loans and investments to convert their future interest payments to mirror the characteristics of a corresponding liability The notional amount ($60.6 million) on which interest payments are based is not exchanged. During the quarter ended September 30, 2005, the Company recorded an expense in the amount of $676 thousand in other operating expenses which reflects the fair value of the interest rate swaps resulting from the Company not meeting the upfront documentation and the effectiveness assessment requirements of SFAS No. 133. As of October 1, 2005, December 31, 2005, and September 30, 2006, the Company has completed documentation determining the effectiveness of each hedge using the Volatility Reduction Measure (“VRM”). It was determined that these swaps are effective and are treated as fair value hedges, therefore, there is no need to record the changes in the fair value of the existing interest rate swaps.
At September 30, 2006 and December 31, 2005, the information pertaining to outstanding interest rate swap agreement used to hedge fixed rate loans and investments is as follows:
As of September 30, 2006, the company has one VIE which is consolidated into the Company’s financial statements. Royal Scully 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 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.
In September 2005, the Company, together with a real estate development company, formed Royal Scully Associates, L.P. (“Royal Scully”). Royal Scully was formed to convert an apartment complex into condominiums in Blue Bell, Pennsylvania. The development company is the general partner of Royal Scully. The Company invested 66% of the initial capital contribution, or $2.5 million, with the development company holding the remaining equity interest. In addition, the Company holds two notes totaling $9.2 million with a competitive term and interest rate. Upon the repayment of the initial capital contributions and preferred return, distributions will convert to 50% for the Company and 50% for the development company. Royal Scully had total assets of $47.2 million and total borrowings of $41.6 million of which $9.2 million was lent by the Company and not included in the financial statements through an eliminating entry. The net borrowings in the amount of $32.4 million are not guaranteed by the Company. The Company’s potential exposure to loss due to its investment is $11.9 million at September 30, 2006, which consists of the $2.5 million capital contribution, $9.2 million in loans and $200 thousand in a receivable.
The Company, together with a real estate investment company, formed 212 C Associates, L.P. (“212 C”) in May 2002. 212 C was formed to acquire, hold, improve, and operate office space located in Lansdale, Pennsylvania. The investment company is the general partner of the project. The Company invested 90% of initial capital contributions with the investment company holding the remaining equity interest. Upon the repayment of the initial capital contributions and a preferred return, distributions converted to 50% for the Company and 50% for the investment company. On June 7, 2005, 212 C made a distribution to the Company of approximately $4.0 million which paid back the Company’s original investment and accrued preferred return. In addition, the Company recorded a profit of $1.8 million as result of this distribution during the second quarter of 2005. As a result of the transaction the Company no longer qualifies as the primary beneficiary and discontinued consolidating this VIE into the Company’s financial statement beginning with the second quarter of 2005.
The Company, together with a real estate development company, formed Brook View Investors, L.L.C. (“Brook View”) in May 2001. Brook View was formed to construct 13 apartment buildings with a total of 116 units in a gated apartment community. On October 19, 2005, the Company sold its ownership interest in Brook View which resulted in an after tax gain of approximately $3.3 million. As a result of the sale, the Company discontinued consolidating the financial statements of Brook View during the fourth quarter of 2005.
The Company, together with a real estate development company, formed Burrough’s Mill Apartment, L.L.C. (“Burrough’s Mill”) in December 2001. Burrough’s Mill was formed to construct 32 apartment buildings with a total of 308 units in a gated apartment community. On October 19, 2005, the Company sold its ownership interest in Burrough’s Mill which resulted in an after tax gain of approximately $7.6 million. As a result of the sale the Company discontinued consolidating the financial statements of Burrough’s Mill during the fourth quarter of 2005.
The Company, together with a real estate development company, formed Main Street West Associates, L.P. (“Main Street”) in February 2002. Main Street was formed to acquire, maintain, improve, and operate office space located in Norristown, Pennsylvania. On June 30, 2005, Main Street sold the property and paid back the Company’s original investment plus the accrued preferred return in full. As a result of the sale the Company discontinued consolidating the financial statements of Main Street during the second quarter of 2005.
Trust Preferred Securities
The Company raised $25 million from a private placement of trust preferred securities to engage in lending at the holding company and to capitalize Royal Asian Bank.
Management has determined that The company Capital Trust I/II (“the Trusts”) qualify as VIE’s under FASB Interpretation 46 (FIN 46), “Consolidation of Variable Interest Entities,” as revised. The Trusts have previously issued mandatory redeemable trust preferred securities to investors and loaned the proceeds to the Company.
The Company adopted the provision under the revised interpretation, FIN 46(R), in the first quarter of 2004. Accordingly, The Company does not consolidate the Trust. FIN 46(R) precludes consideration of the call option embedded in the preferred securities when determining if the Company has the right to a majority of the Trusts’ expected residual returns. The deconsolidation resulted in the investment in the common stock of the Trusts to be included in other assets as of September 30, 2006 and the corresponding increase in outstanding debt of $774 thousand. In addition, income received on the Company’s stock investment is included in other income.
Total income tax expense for the three months ended September 30, 2006 was $3.1 million, as compared to $1.8 million for the same period in 2005. The effective tax rate for the three months ended September 30, 2006, was 32.3% compared to the 26.4% for the same period in 2005. For the nine months ended September 30, 2006, the income tax expense was $7.6 million with an effective tax rate of 31.5% as compared to $4.2 million with an effective tax rate of 20.4% for the same period in 2005. During the second quarter of 2005, the Company recorded an approximate $1.7 million decrease in tax expense resulting from the completion of an Internal Revenue Service audit with respect to a valuation allowance against the deferred tax asset derived from net operating loss carryovers.
11. | Commitments, Contingencies and Concentrations |
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of risk in excess of the amount recognized in consolidated balance sheet.
A summary of the Company’s commitments is as follows:
(in thousands) | | September 30, 2006 | | December 31,
2005 | |
| |
| |
| |
Open-end lines of credit | | $ | 2,630 | | $ | 2,954 | |
Loan commitments | | | 153,837 | | | 176,415 | |
Letters of credit | | | 5,502 | | | 3,228 | |
| |
|
| |
|
| |
Total | | $ | 161,969 | | $ | 179,643 | |
| |
|
| |
|
| |
12. | Reclassifications and Restatement for 2% Stock Dividend |
Certain items in the consolidated financial statements and accompanying notes have been reclassified to conform with to 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 consolidate financial statements (including stock options and earnings per share information) have been restated for a 2% stock dividend paid January 17, 2006.
13. | Recent accounting pronouncements |
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements, which defines fair value, establishes a framework 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. We are currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 157 on our consolidated financial position, results of operations and cash flows.
On September 29, 2006, the Financial Accounting Standards Board “FASB” issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (“SFAS 158”), which amends SFAS 87 and SFAS 106 to require recognition of the over funded or under funded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost. The measurement date — the date at which the benefit obligation and plan assets are measured — is required to be the company’s fiscal year end. SFAS 158 is effective for publicly-held companies for fiscal years ending after December 15, 2006, except for the measurement date provisions, which are effective for fiscal years ending after December 15, 2008. The Company is currently evaluating the impact of adopting SFAS 158 on our financial statements.
On September 13, 2006, the Securities and Exchange Commission “SEC” issued Staff Accounting Bulleting No. 108 (“SAB 108”). SAB 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 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 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 108 and determined that upon adoption it will not have a significant impact on the reported results of operations or financial conditions.
In September 2006, the FASB Emerging Issues Task Force issued EITF 06-4 “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”. EITF 06-4 is limited to the recognition of a liability and related compensation costs for endorsement split-dollar insurance arrangements that provide a benefit to an employee that extends to postretirement periods. Therefore, EITF 06-4 would not apply to a spilt-dollar life insurance arrangement that provides a specified benefit to an employee that is limited to the employee’s active service period with an employer. EITF 06-4 will be effective for fiscal years beginning after December 15, 2006. Management is currently evaluating the impact of adopting the provisions of EITF 06-4 on our financial statements
In September 2006, the FASB issued FASB Staff Position AUG AIR-1, “Accounting for Planned Major Maintenance Activities” which is effective for fiscal years beginning after December 15, 2006. This position statement eliminates the accrue-in-advance method of accounting for planned major maintenance activities. We do not expect this pronouncement to have a significant impact on the determination or reporting of our financial results.
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB No. 109” (FIN 48), which clarifies the accounting for uncertainty tax positions. This Interpretation requires that companies recognize in their financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principal recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our financial statements.
In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156 Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140 (FAS 140 and FAS 156). FAS 140 established, among other things, the accounting for all separately recognized servicing assets and servicing liabilities. This Statement amends FAS 140 to require that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. This Statement permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. Under this Statement, an entity can elect subsequent fair value measurement to account for its separately recognized servicing assets and servicing liabilities. Adoption of this Statement is required as of the beginning of the first fiscal year that begins after September 15, 2006. Upon adoption, the company will apply the requirements for recognition and initial measurement of servicing assets and servicing liabilities prospectively to all transactions. The Company will adopt FAS 156 for the fiscal year beginning January 1, 2007 and currently has not determined if it will adopt FAS 156 using the fair value election.
In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140 (FAS 155). FAS 155 permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends Statement 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. FAS 155 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 does not expect the adoption of FAS 155 to have a material effect on the results of operations or the statement of condition.
In February 2006, the FASB issued FASB Staff Position No. FAS 123(R)-4, “Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event.” This position amends SFAS 123R to incorporate that a cash settlement feature that can be exercised only upon the occurrence of a contingent event that is outside the employee’s control does not meet certain conditions in SFAS 123R until it becomes probable that the event will occur. The guidance in this FASB Staff Position are incorporated.
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS
The following discussion and analysis is intended to assist in understanding and evaluating the changes in the financial condition and earnings performance of the Company and its subsidiaries for the three-month and nine-month periods ended September 30, 2006 and September 30, 2005. 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, 2005 included in the Company’s 2005 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, credit quality, credit risk, reserve adequacy, liquidity, new products, and similar matter in this and other filings with the Securities and Exchange Commission. These forward-looking statements may involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company to material different from the future results, performance or achievement expressed or implied by such forward-looking statements. When the Company uses words such as “expect,” “believe,” “anticipate,” “should,” “estimate,” or similar expressions, the Company is making a forward-looking statement. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for such forward-looking statements. In order to comply with the terms of the “safe harbor,” the Company provides the following cautionary statement which identifies certain factors that could cause the Company’s actual results and experience to differ materially from the anticipated results or other expectations expressed in the forward-looking statements.
Certain risks and uncertainties could affect the future financial results of the Company including the following:
| • | The effect of general economic conditions, including their impact on capital expenditures, credit risk, consumer confidence and savings rates. |
| • | Changes in interest rates and their impact on the level of deposits, loan demand and the value of loan collateral. |
| • | Business conditions in the banking industry. |
| • | The bank regulatory environment. |
| • | The accuracy of management’s assumptions. |
| • | The ability of the Company to adapt to rapidly changing technology and evolving banking industry standards. |
| • | Competitive factors, including increased competition with community, regional and national financial institutions. |
| • | The risk that anticipated demand for the Company’s new service and product offerings will not occur. |
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, 2005) 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 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
Core earnings (defined as consolidated net income less non-recurring items) for the three months ended September 30, 2006 were $4.8 million or $0.38 basic earnings per share, compared to $4.2 million or $0.33 basic earnings per share for the same period in 2005. Core earnings for the nine months ended September 30, 2006 were $13.7 million or $1.07 basic earnings per share, compared to $12.2 million or $0.95 basic earnings per share. For the third quarter of quarter of 2006, non-recurring items include: a $1.5 million prepayment fee, $643 thousand in exit fees collected on two mezzanine loans and $480 thousand from the sale of other real estate owned. For the third quarter of 2005, non recurring items include $275 thousand in exit fees collected and $798 thousand from the sale of other real estate owned. For the nine months ended September 30, 2006, non-recurring items include: a $1.5 million prepayment fee, $643 thousand in exit fees collected on two mezzanine loans and $2.1 million from the sale of other real estate owned. For the nine months ended September 30, 2005, there were $1.6 million in exit fees collected, a $1.8 million equity distribution from a variable interest entity, $1.5 million from the sale of other real estate owned and a $1.7 million reduction in tax expense resulting from a reduction in deferred tax valuation allowance. In addition, a $930 thousand expense related to the company’s pension plan was recorded for the nine months ended September 30, 2005.
Consolidated net income (including non-recurring items) for the three months ended September 30, 2006 was $6.5 million or $0.51 basis earnings per share, compared to $4.9 million or $0.38 basic earnings per share for the same period in 2005. Consolidated net income (including non-recurring items) for the nine months ended September 30, 2006 was $16.4 million or $1.28 basic earnings per share, compared to $16.5 million or $1.29 basic earnings per share.
Non-GAAP Measure of Net Income
Management uses the non-GAAP measure of net income from core operations or operating earnings from its analysis of the Company’s performance. This measure, as used by the Company, adjusts net income determined in accordance with GAAP to exclude the effects of certain non-recurring, special items including significant gains or losses that are unusual in nature. Certain of these items and their impact on the Company are difficult to predict, management believes that presentation of financial measures excluding the impact of such items provides useful supplemental information in evaluating operating results of the Company’s core businesses. These disclosures should not be viewed as a substitute for net income determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.
The following table reconciles our GAAP earnings to core or operating earnings for the periods presented:
| | For the Three
Months Ended
September 30th | | For the Nine
Months Ended
September 30th | |
| |
| |
| |
(amounts in thousands, except for per share data) | | 2006 | | 2005 | | 2006 | | 2005 | |
| |
| |
| |
| |
| |
GAAP Net Income | | $ | 6,515 | | $ | 4,903 | | $ | 16,447 | | $ | 16,466 | |
Changes | | | | | | | | | | | | | |
Loan exit fee | | | (643 | ) | | (275 | ) | | (643 | ) | | (1,568 | ) |
Prepayment fee | | | (1,500 | ) | | — | | | (1,500 | ) | | — | |
Gains from variable interest entities | | | — | | | — | | | — | | | (1,792 | ) |
Pension plan expense | | | — | | | — | | | — | | | 930 | |
Gains on other real estate owned | | | (480 | ) | | (798 | ) | | (2,054 | ) | | (1,491 | ) |
| |
|
| |
|
| |
|
| |
|
| |
Total Changes | | | (2,623 | ) | | (1,073 | ) | | (4,197 | ) | | (3,921 | ) |
Tax effect | | | 918 | | | 376 | | | 1,469 | | | 1,372 | |
Reduction in tax expense | | | — | | | — | | | — | | | (1,700 | ) |
| |
|
| |
|
| |
|
| |
|
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Net impact of changes | | | (1,705 | ) | | (697 | ) | | (2,728 | ) | | (4,249 | ) |
| |
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Net income from core operations | | $ | 4,810 | | $ | 4,206 | | $ | 13,719 | | $ | 12,217 | |
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Basic earnings per share | | $ | 0.51 | | $ | 0.38 | | $ | 1.28 | | $ | 1.29 | |
Adjusted basic earnings per share | | $ | 0.38 | | $ | 0.33 | | $ | 1.07 | | $ | 0.95 | |
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Interest Income
For the third quarter of 2006, interest income was $25.4 million compared to $19.6 million for the same quarter in 2005, an increase of $5.8 million. This represents an increase of 30%. This increase is primarily due to growth in the average loan balances along with higher interest earned on our variable rate portfolio during the third quarter of 2006, as compared to the same period in 2005. In addition there was a $1.5 million prepayment fee and $643 thousand in exit fees resulting from two mezzanine loans collected during the third quarter of 2006. The amount of the increase attributable to loan growth was $4.8 million and the amount attributable to interest rates on loans was $1.2 million. These increases were partially offset by a $268 thousand decline in interest income from investment securities of which a reduction of $505 thousand was attributable to volume and an increase of $237 thousand was attributable interest rates..For the nine month period ended September 30, 2006, interest income increased $13.3 million to $69.5 million compared to $56.2 for the same period in 2005. This increase is primarily due to growth in the average loan balance along with higher interest earned on the variable rate portfolio. In addition there was a $1.5 million prepayment fee and $643 thousand in exit fees resulting from two mezzanine loans collected during the period. The amount of the increase attributable to loan growth was $8.9 million and the amount attributable to interest rates on loans was $4.5 million. In addition, interest income from investment securities increased by $22 thousand of which a reduction of $761 thousand was attributed to volume and an increase of $783 thousand was attributable interest rates. Net loans increased 10% or $56.1 million from December 31, 2005 to $595.5 million at September 30, 2006. This increase is primarily due to an increased demand for commercial and construction loan products that are being offered at competitive rates coupled with an increase in volume from Royal Asian Bank and the Equity/Mezzanine division.
Interest Expense
Interest expense increased $3.6 million to $12.4 million for the quarter ended September 30, 2006 compared to the same period in 2005. For the nine-month period ended September 30, 2006, interest expense increased $10.3 million to $34.1 million compared to the same period in 2005. The increase in interest expense was due to an increase in the average balance of deposits along with higher interest rates paid on deposits and borrowings. Total deposits increased 12% at September 30, 2006 from December 31, 2005, primarily as a result of attractive certificate of deposit rates being offered and a increase of $19.3 million of brokered deposits. These funds were utilized to fund a portion of loan growth.
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Net Interest Margin
The following table represents the average daily balances of assets, liabilities and shareholders’ equity and the respective on interest bearing assets and interest bearing liabilities, as well as average rates for the periods indicated:
| | For the three months ended
September 30, 2006 | | For the three months ended
September 30, 2005 | |
| |
| |
| |
(amounts in thousands) | | Average
Balance | | Interest | | Yield | | Average
Balance | | Interest | | Yield | |
| |
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| |
| |
Cash equivalents | | $ | 1,201 | | $ | 18 | | 5.95 | % | $ | 2,948 | | $ | 28 | | 3.77 | % |
Investments securities | | | 580,343 | | | 7,325 | | 5.01 | % | | 611,562 | | | 7,594 | | 4.93 | % |
Loans | | | 623,985 | | | 18,087 | | 11.50 | % | | 514,177 | | | 12,023 | | 9.28 | % |
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Earning assets | | | 1,205,529 | | | 25,430 | | 8.37 | % | | 1,128,687 | | | 19,645 | | 6.91 | % |
Non earning assets | | | 116,501 | | | | | | | | 138,633 | | | | | | |
| |
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| | | | | | |
|
| | | | | | |
Total assets | | $ | 1,322,030 | | | | | | | $ | 1,267,320 | | | | | | |
| |
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| | | | | | |
|
| | | | | | |
Deposits | | $ | 772,129 | | | 7,357 | | 3.78 | % | $ | 707,053 | | | 4,571 | | 2.56 | % |
Borrowings | | | 371,087 | | | 5,028 | | 5.38 | % | | 393,027 | | | 4,180 | | 4.22 | % |
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Total interest bearing liabilities | | | 1,143,216 | | | 12,385 | | 4.30 | % | | 1,100,080 | | | 8,751 | | 3.16 | % |
Non-interest bearing liabilities and equity | | | 178,814 | | | | | | | | 167,240 | | | | | | |
| |
|
| | | | | | |
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Total liabilities and equity | | $ | 1,322,030 | | | | | | | $ | 1,267,320 | | | | | | |
| | |
|
| | | | | | |
|
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Net interest margin | | | | | $ | 13,045 | | 3.91 | % | | | | $ | 10,894 | | 3.41 | % |
| | | | |
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Note: Interest earned on loans for the three-month period ended September 30, 2006, includes a $1.5 million prepayment and $643 thousand in loan exit fees. Interest earned on loans for the same period in 2005 includes $275 thousand in loan exit fees.
| | For the nine months ended
September 30, 2006 | | For the nine months ended
September 30, 2005 | |
| |
| |
| |
(amounts in thousands) | | Average
Balance | | Interest | | Yield | | Average
Balance | | Interest | | Yield | |
| |
| |
| |
| |
| |
| |
| |
Cash equivalents | | $ | 1,750 | | $ | 67 | | 5.12 | % | $ | 4,395 | | $ | 98 | | 2.98 | % |
Investments securities | | | 581,887 | | | 21,788 | | 5.01 | % | | 596,183 | | | 21,766 | | 4.88 | % |
Loans | | | 604,235 | | | 47,676 | | 10.55 | % | | 500,212 | | | 34,315 | | 9.17 | % |
| |
|
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|
| |
| |
|
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Earning assets | | | 1,187,872 | | | 69,531 | | 7.83 | % | | 1,100,790 | | | 56,179 | | 6.82 | % |
Non earning assets | | | 128,141 | | | | | | | | 148,529 | | | | | | |
| |
|
| | | | | | |
|
| | | | | | |
Total assets | | $ | 1,316,013 | | | | | | | $ | 1,249,319 | | | | | | |
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|
| | | | | | |
|
| | | | | | |
Deposits | | $ | 740,766 | | | 19,206 | | 3.47 | % | | 700,536 | | | 12,650 | | 2.41 | % |
Borrowings | | | 395,522 | | | 14,887 | | 5.03 | % | | 379,346 | | | 11,162 | | 3.93 | % |
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Total interest bearing liabilities | | | 1,136,288 | | | 34,093 | | 4.01 | % | | 1,079,882 | | | 23,812 | | 2.95 | % |
Non-interest bearing liabilities and equity | | | 179,725 | | | | | | | | 169,437 | | | | | | |
| |
|
| | | | | | |
|
| | | | | | |
Total liabilities and equity | | $ | 1,316,013 | | | | | | | $ | 1,249,319 | | | | | | |
| | |
|
| | | | | | |
|
| | | | | | |
Net interest margin | | | | | $ | 35,438 | | 3.60 | % | | | | $ | 32,367 | | 3.46 | % |
| | | | |
|
| |
| | | | |
|
| |
| |
Note: Interest earned on loans for the nine-month period ended September 30, 2006, includes a $1.5 million prepayment and $643 thousand in loan exit fees. Interest earned on loans for the same period in 2005 includes $1.6 million in loan exit fees.
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 for the three and nine month periods ended September 30, 2006.
| | For the three months ended
September 30,
2006 vs. 2005
Increase (decrease) | | For the nine months ended
September 30,
2006 vs. 2005
Increase (decrease) | |
| |
| |
| |
| | | | | | | | | | | | | |
INTEREST INCOME | | Volume | | Rate | | Total | | Volume | | Rate | | Total | |
| |
| |
| |
| |
| |
| |
| |
Interest-bearing deposits | | ($7 | ) | $ | 9 | | $ | 2 | | ($48 | ) | $ | 37 | | ($11 | ) |
Federal funds sold | | (17 | ) | | 7 | | | (10 | ) | (53 | ) | | 39 | | (14 | ) |
Investments securities | | | | | | | | | | | | | | | | |
Held to maturity | | (36 | ) | | 227 | | | 191 | | 841 | | | 674 | | 1,515 | |
Available for sale | | (469 | ) | | 10 | | | (459 | ) | (1,602 | ) | | 109 | | (1,493 | ) |
| |
| |
|
| |
|
| |
| |
|
| |
| |
Total Investments securities | | (505 | ) | | 237 | | | (268 | ) | (761 | ) | | 783 | | 22 | |
Loans | | | | | | | | | | | | | | | | |
Commercial demand loans | | 2,785 | | | 1,105 | | | 3,890 | | 7,481 | | | 3,270 | | 10,751 | |
Mortgages | | (86 | ) | | 64 | | | (22 | ) | (446 | ) | | 1,096 | | 650 | |
Residential and home equity | | (175 | ) | | 80 | | | (95 | ) | (509 | ) | | 180 | | (329 | ) |
Leases receivables | | 288 | | | — | | | 288 | | 610 | | | — | | 610 | |
Tax certificates | | (50 | ) | | (25 | ) | | (75 | ) | (60 | ) | | (133 | ) | (193 | ) |
Other loans | | (9 | ) | | 15 | | | 6 | | (73 | ) | | 54 | | (19 | ) |
Loan fees | | 2,071 | | | — | | | 2,071 | | 1,892 | | | — | | 1,892 | |
| |
| |
|
| |
|
| |
| |
|
| |
| |
Total loans | | 4,824 | | | 1,239 | | | 6,063 | | 8,895 | | | 4,467 | | 13,362 | |
| |
| |
|
| |
|
| |
| |
|
| |
| |
Total increase in interest income | | 4,295 | | | 1,492 | | | 5,787 | | 8,033 | | | 5,326 | | 13,359 | |
| | | | | | | | | | | | | | | | | |
INTEREST EXPENSE | | | | | | | | | | | | | | | | |
Deposits | | | | | | | | | | | | | | | | |
NOW and money market | | (194 | ) | | 841 | | | 647 | | (1,346 | ) | | 2,090 | | 744 | |
Savings | | (4 | ) | | (2 | ) | | (6 | ) | (13 | ) | | (10 | ) | (23 | ) |
Time deposits | | 1,336 | | | 810 | | | 2,146 | | 4,348 | | | 1,489 | | 5,837 | |
| |
| |
|
| |
|
| |
| |
|
| |
| |
Total deposits | | 1,138 | | | 1,649 | | | 2,787 | | 2,989 | | | 3,569 | | 6,558 | |
Trust preferred | | — | | | 63 | | | 63 | | — | | | 190 | | 190 | |
Borrowings | | (189 | ) | | 590 | | | 401 | | 686 | | | 1,784 | | 2,470 | |
| |
| |
|
| |
|
| |
| |
|
| |
| |
Total increase in interest expense | | 949 | | | 2,302 | | | 3,251 | | 3,675 | | | 5,543 | | 9,218 | |
Total increase (decrease) in net interest income | | $ | 3,346 | | | ($810 | ) | $ | 2,536 | | $ | 4,358 | | | ($217 | ) | 4,141 | |
| |
| |
|
| |
|
| |
| |
|
| |
| |
Note: This table excludes $447 thousand for the three-month period and $1.3 million for the nine-month period ended September 30, 2006 of interest expense relating to the equity investments.
Provision for Loan Losses
During the third quarter of 2006, $303 thousand was recorded to increase the allowance for loan losses. This additional provision reflects $472 thousand related to specific loans which were partially offset by a reduction to the reserve resulting from $11.5 million in mezzanine loans payoffs, that had specific reserves. In addition there was a reduction in loan balances of $17.7 million at quarter ended September 30, 2006 compared to June 30, 2006. For the nine-month period ended September 30, 2006, $1.6 million was recorded to increase the allowance, of which $1.0 million was related to specific loans and the remainder was attributed to loan growth during 2006. Included in the reserves are mezzanine loans, which generally provide higher yields but which management has determined to have a higher level of risk compared to the remainder of loan portfolio.
Non-interest Income
Non-interest income totaled $3.9 million for the three-month period ended September 30, 2006 as compared to $3.3 million for the same period in 2005, an increase of $600 thousand. This increase is primarily due to $1 million relating to income earned from variable interest entities partially offset by a decline in the gains relating to the sales of other real estate during to the third quarter of 2006 compared to the same period of 2005. Non-interest income totaled $9.8 million for the nine-month period ended September 30, 2006, as compared to $9.8 million for the nine-month period ended September 30, 2005. During the first nine months of 2006, the Company earned $5.3 million from variable interest entities compared $6.1 million for the same period of 2005. Also during the nine months of 2006, the Company earned $2.1 million from the sale of other real estate owned compared $1.5 million for the same period of 2005.
Non-interest Expense
Non-interest expense totaled $7.1 million for the three-month period ended September 30, 2006 as compared to $7.5 million for the three-month period ended September 30, 2005, a decrease of $400 thousand. This decrease is primarily attributed a $675 thousand expense related to a decline in the fair value of interest rate swap during the third quarter of 2005 partially offset by $188 thousand of expense during the third quarter of 2006 relating to stock options as a result of the adoption of SFAS 123R. Non-interest expense totaled $19.7 million for the nine-month period ended September 30, 2006 as compared to $21.5 million for the nine-month period ended September 30, 2005, a decrease of $1.8 million. This decrease was primarily attributed to additional expenses during 2005, including $930 thousand relating to the pension plan, $675 thousand expense related to a decline in the fair value of interest rate swap and an additional $1.6 million of expenses related to variable interest entities, partially offset by $545 thousand of expense during 2006 relating to stock options as a result of SFAS 123R.
Income tax expense
Total income tax expense for the three-months ended September 30, 2006 was $3.1 million as compared to $1.8 million for the same period in 2005. The effective tax rate for the three months ended September 30, 2006, was 32.3% compared to the 26.4% for the same period in 2005. For the nine-month period ended September 30, 2006, income tax expense was $7.6 million with an effective tax rate of 31.5%, as compared to $4.2 million with an effective tax rate of 20.4% for same period in 2005. The $3.4 million decrease was primarily due to the $1.7 million dollar tax benefit resulting from the completion of an Internal Revenue Service audit with respect to a valuation allowance against the deferred tax asset derived from net operating loss carryovers.
FINANCIAL CONDITION
Consolidated Assets
Total consolidated assets as of September 30, 2006 and December 31, 2005 were $1.30 billion. Return on assets for the nine-month period ended September 30, 2006 was 1.7%. Return on equity for the nine-month period ended September 30, 2006 was 14.0%.
Loans
Total loans increased $57.6 million from the $549.6 million level at December 31, 2005 to $607.2 million at September 30, 2006. This increase is primarily due to an increased demand for commercial and construction loan products that are being offered at competitive rates coupled with an increase in volume from the Royal Asian Bank division and the Mezzanine/Equity division. The year-to-date average balance of loans was $617.7 million at September 30, 2006 compared to $512.2 million for the same nine-month period in 2005.
The following table represents loan balances by type:
(amounts in thousands) | | Sept. 30, 2006 | | Dec. 31, 2005 | |
| |
| |
| |
Commercial and industrial loans | | $ | 36,689 | | $ | 30,075 | |
Construction and land development | | | 192,055 | | | 173,757 | |
Mezzanine loans | | | 18,358 | | | 13,468 | |
Single family residential | | | 39,152 | | | 41,900 | |
Other real estate secured | | | 280,927 | | | 250,380 | |
Tax certificates | | | 31,078 | | | 35,548 | |
Leases | | | 11,911 | | | 2,623 | |
Other loan | | | 1,268 | | | 3,868 | |
| |
|
| |
|
| |
Total gross loans | | | 611,438 | | | 551,619 | |
Deferred fees | | | (4,191 | ) | | (1,983 | ) |
| |
|
| |
|
| |
Total loans | | $ | 607,247 | | $ | 549,636 | |
| |
|
| |
|
| |
Non-performing loans
Loans on which the accrual of interest has been discontinued amounted to approximately $6.9 million at September 30, 2006, as compared to $4.4 million at December 31, 2005, an increase of $2.5 million. This increase is primarily attributed to a construction loan in Texas with a principal balance of $4.4 million and $184 thousand of residential loans that went into non-accrual status partially offset by the payoff of a participation loan secured by a pool of golf courses which had a balance of $1.0 million, $420 thousand related to other payoffs, $411 thousand from loans coming off of non-accrual status due to payments received and $211 thousand of loans being transferred to other real estate owned. Although the Company has non-performing loans of approximately $6.9 million at September 30, 2006, management believes it has adequate collateral to limit its credit risk on these loans.
The balance of impaired loans and loans on which the accrual of interest has been discontinued was approximately $15.4 million and $10.0 million at September 30, 2006 and December 31, 2005, respectively. The Company identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreements or where there is a significant reduction in collateral associated with the loan. As of September 30, 2006, the Company had nine loans, three leases and residential loans in the amount of $14.2 million that are considered to be potential problem loans with a specific reserve of $2.2 million. The $2.2 million associated with impaired loans consist of: $1.0 million related to a golf course in New Jersey, $249 thousand related to a construction loan for a hotel in New Orleans, $398 thousand related to construction loan in Texas, $400 thousand related to several residential loans, and $50 thousand for a non-residential property with fire damage. During the first quarter of 2006, a loan to a hospital in Louisiana was restructured to modify the payment terms. The income that was recognized on impaired loans during the three-month period ended September 30, 2006 was $197 thousand and for the nine-month period ended September 30, 2006, was $550 thousand. The cash collected on impaired loans during the three-month period ended September 30, 2006 was $434 thousand, of which $250 thousand was credited to the principal balance outstanding on such loans. For the nine-month period ended September 30, 2006 the cash collected on impaired loans was $2.3 million, of which $1.7 million was credited to principal balance. The Company’s policy for interest income recognition on impaired loans is to recognize income on currently performing restructured loans under the accrual method. The Company recognizes income on non-accrual loans under the cash basis when the principal payments on the loans become current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company. If these factors do not exist, the Company does not recognize income.
Allowance for Loan Losses
The allowance for loan losses increased $1.5 million to $11.8 million at September 30, 2006 from $10.3 million at December 31, 2005. The $1.5 million increase was attributed to recording a provision of $1.6 million offset by net charge offs of $108 thousand. The amount of the allowance for loan losses represents approximately 1.9% of total loans at September 30, 2006 versus 1.9% at December 31, 2005. While management believes that, based on information currently available, the allowance for loan loss is sufficient to cover losses inherent in the Company’s loan portfolio at this time, no assurances can be given that the level of allowance will be sufficient to cover future loan losses or that future adjustments to the allowance will be sufficient to cover future loan losses or that future adjustments to the allowance will not be necessary if economic and/or other conditions differ substantially from the economic and other conditions considered by management in evaluating the adequacy of the current level of the allowance.
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An analysis of the Allowance for Loan losses by loan type is set forth below:
| | September 30, 2006 | | December 31, 2005 | |
| |
| |
| |
| | Amount
(in
thousands) | | Percent of
loans
in each
category to
total loans | | Amount
(in
thousands) | | Percent of
loans
in each
category to
total loans | |
| |
| |
| |
| |
| |
Domestic | | | | | | | | | | | |
Commerical and industrial | | $ | 492 | | 6.00 | % | $ | 494 | | 5.45 | % |
Construction and land development | | $ | 3,948 | | 31.41 | % | $ | 3,004 | | 31.50 | % |
Mezzanine loans | | $ | 1,378 | | 2.94 | % | $ | 1,133 | | 2,44 | % |
Single family residential | | $ | 1,166 | | 6.40 | % | $ | 925 | | 7.60 | % |
Other real estate secured | | $ | 4,471 | | 45.95 | % | $ | 4,669 | | 45.39 | % |
Tax certificates | | $ | — | | 5.08 | % | $ | — | | 6.44 | % |
Leases | | $ | 304 | | 1.95 | % | $ | 75 | | .48 | % |
Other | | $ | 12 | | 0.21 | % | $ | 41 | | .70 | % |
Foreign | | | — | | 00 | % | | — | | 00 | % |
Unallocated | | $ | 1 | | N/A | | | ($65 | ) | N/A | |
| |
|
| |
| |
|
| |
| |
| | $ | 11,772 | | 100.00 | % | $ | 10,276 | | 100.00 | % |
| |
|
| |
| |
|
| |
| |
Investment Securities
Total investment securities decreased $18.6 million to $563.1 million at September 30, 2006, from $581.7 million at December 31, 2005. This decrease is primarily due to maturities and calls of investments along with principal repayments from mortgage backed securities during the first nine months of 2006 that were not replaced due to the funds being utilized to fund loan growth.
Cash and Cash Equivalents
Total cash and cash equivalents decreased $16.7 million from the $30.9 million level at December 31, 2005 to $14.2 million at September 30, 2006. In order to minimize overnight borrowings, the Company only maintains a balance to cover the daily reserve requirement with the Federal Reserve Bank along with cash needed for branch purposes.
Deposits
Total deposits, the primary source of funds, increased $85.3 million to $782.7 million at September 30, 2006, from $697.4 million at December 31, 2005. This increase is related to attractive certificate of deposit rates being offered during the first nine months of 2006. During the nine-month period ended September 30, 2006, brokered deposits increased $17.6 million to $170.3 million representing approximately 21.8% of total deposits. Generally, these brokered deposits cannot be redeemed prior to the stated maturity, except in the event of the death or adjudication of incompetence of the deposit holder.
The following table represents ending deposit balances by type.
(amounts in thousands) | | Sept. 30, 2006 | | Dec. 31, 2005 | |
| |
| |
| |
Demand (non-interest bearing) | | $ | 59,921 | | $ | 75,754 | |
NOW and Money Markets | | | 282,343 | | | 279,602 | |
Savings | | | 17,094 | | | 20,109 | |
Time deposits (over $100) | | | 261,236 | | | 203,611 | |
Other time deposits | | | 162,114 | | | 118,333 | |
| |
|
| |
|
| |
Total deposits | | $ | 782,708 | | $ | 697,409 | |
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|
| |
|
| |
Borrowings
Total borrowings decreased $95.4 million to $306.0 million at September 30, 2006, from $401.4 million at December 31, 2005. This reduction is attributed to an $86.0 million decrease in overnight borrowings with the Federal Home Loan Bank resulting from increased deposits which have a lower cost and a $15.0 million decrease in borrowings related to variable interest entities. During the third quarter of 2006, the Company entered into a borrowing relationship with PNC Financial in the amount of $5.6 million, of which the full amount was outstanding as September 30, 2006.
Stockholders’ Equity
Consolidated stockholders’ equity increased $7.2 million to $162.7 million at September 30, 2006 from $155.5 million at December 31, 2005. This increase is primarily due to increased earnings in excess of dividends paid during the nine month period and a decrease in unrealized losses in the available for sale portfolio of approximately $545 thousand. Return on equity for the nine-month period ended September 30, 2006 was 14.0%.
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 September 30, 2006, 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 remainder of this page was intentionally left blank)
The table below provides a comparison of The Company and Royal Bank’s risk-based capital ratios and leverage ratios for September 30, 2006 and the year ended December 31, 2005:
| | Royal Bancshares | | Royal Bank | |
| |
| |
| |
| | Sept. 30,
2006 | | Dec 31,
2005 | | Sept. 30,
2006 | | Dec 31,
2005 | |
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| |
| |
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| |
Capital Levels | | | | | | | | | |
Tier 1 leverage ratio | | 14.4 | % | 14.2 | % | 11.0 | % | 10.4 | % |
Tier 1 risk-based ratio | | 19.0 | % | 18.8 | % | 15.0 | % | 13.8 | % |
Total risk-based ratio | | 20.2 | % | 19.8 | % | 16.2 | % | 14.9 | % |
Capital Performance | | | | | | | | | |
Return on average assets | | 2.0 | % (1) | 2.5 | % | 1.7 | %(1) | 2.6 | % |
Return on average equity | | 16.2 | % (1) | 22.0 | % | 14.0 | %(1) | 27.0 | % |
(1) annualized
The Company’s ratios compare favorably to the minimum required amounts of Tier 1 and total capital to “risk weighted” assets and the minimum Tier 1 leverage ratio, as defined by banking 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 35% 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 September 30, 2006:
Interest Rate Sensitivity
(in millions) | | Days | | | | | | | | | |
| |
| | 1 to 5 Years | | Over 5 Years | | Non-rate Sensitive | | | |
| | 0 – 90 | | 91 – 365 | | | | | Total | |
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| |
| |
| |
| |
| |
| |
Assets | | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits in banks | | $ | 6.6 | | $ | 0.0 | | $ | 0.0 | | $ | 0.0 | | $ | 7.6 | | $ | 14.2 | |
Federal funds sold | | | 0.0 | | | 0.0 | | | 0.0 | | | 0.0 | | | 0.0 | | | 0.0 | |
Investment securities: | | | | | | | | | | | | | | | | | | | |
Available for sale | | | 26.7 | | | 42.5 | | | 160.3 | | | 79.0 | | | (0.8 | ) | | 307.7 | |
Held to maturity | | | 25.0 | | | 115.0 | | | 115.4 | | | 0.0 | | | 0.0 | | | 255.4 | |
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|
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|
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|
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|
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|
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|
| |
Total investment securities | | | 51.7 | | | 157.5 | | | 275.7 | | | 79.0 | | | (0.8 | ) | | 563.1 | |
Loans: | | | | | | | | | | | | | | | | | | | |
Fixed rate | | | 21.0 | | | 15.8 | | | 124.9 | | | 33.8 | | | 0.0 | | | 195.5 | |
Variable rate | | | 304.6 | | | 66.6 | | | 41.6 | | | 0.0 | | | (11.8 | ) | | 401.0 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total loans | | | 325.6 | | | 82.4 | | | 166.5 | | | 33.8 | | | (11.8 | ) | | 596.5 | |
Other assets | | | 35.9 | | | 0.0 | | | 0.0 | | | 0.0 | | | 92.0 | | | 127.9 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total Assets | | $ | 419.8 | | $ | 239.9 | | $ | 442.2 | | $ | 112.8 | | $ | 87.0 | | $ | 1,301.7 | |
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|
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|
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|
| |
Liabilities & Capital | | | | | | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | | | | | |
Non interest bearing deposits | | $ | 0.0 | | $ | 0.0 | | $ | 0.0 | | $ | 0.0 | | $ | 59.9 | | $ | 59.9 | |
Interest bearing deposits | | | 32.7 | | | 98.1 | | | 168.8 | | | 0.0 | | | 0.0 | | | 299.6 | |
Certificate of deposits | | | 33.1 | | | 135.8 | | | 251.2 | | | 3.1 | | | 0.0 | | | 423.2 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total deposits | | | 65.8 | | | 233.9 | | | 420.0 | | | 3.1 | | | 59.9 | | | 782.7 | |
Borrowings (1) | | | 129.1 | | | — | | | 100.0 | | | 70.3 | | | 32.4 | | | 331.8 | |
Other liabilities | | | 0.0 | | | 0.0 | | | 0.1 | | | 0.0 | | | 24.4 | | | 24.5 | |
Capital | | | 0.0 | | | 0.0 | | | 0.0 | | | 0.0 | | | 162.7 | | | 162.7 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total liabilities & capital | | $ | 194.9 | | $ | 233.9 | | $ | 520.1 | | $ | 73.4 | | $ | 279.4 | | $ | 1,301.7 | |
| |
|
| |
|
| |
|
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|
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|
| |
|
| |
Net interest rate GAP | | $ | 224.9 | | $ | 6.0 | | | ($77.9 | ) | $ | 39.4 | | | ($192.4 | ) | | | |
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|
| |
|
| |
|
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|
| |
|
| | | | |
Cumulative interest rate GAP | | $ | 224.9 | | $ | 230.9 | | $ | 153.0 | | $ | 192.4 | | | | | | | |
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|
| |
|
| |
|
| |
|
| | | | | | | |
GAP to total assets | | | 17 | % | | 0 | % | | | | | | | | | | | | |
| |
|
| |
|
| | | | | | | | | | | | | |
GAP to total equity | | | 138 | % | | 4 | % | | | | | | | | | | | | |
| |
|
| |
|
| | | | | | | | | | | | | |
Cumulative GAP to total assets | | | 17 | % | | 18 | % | | | | | | | | | | | | |
| |
|
| |
|
| | | | | | | | | | | | | |
Cumulative GAP to total equity | | | 138 | % | | 142 | % | | | | | | | | | | | | |
| |
|
| |
|
| | | | | | | | | | | | | |
(1) | The $32.4 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 September 30, 2006, 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 September 30, 2006 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, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to Vote Security Holders
None
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 |
| 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) |
| 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, Chief Executive Officer of Royal Bancshares of Pennsylvania on November 8, 2006. |
| 31.2 | Section 302 Certification Pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 signed by Jeffrey T. Hanuscin, Chief Financial Officer of Royal Bancshares of Pennsylvania on November 8, 2006. |
| 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, Chief Executive Officer of Royal Bancshares of Pennsylvania on November 8, 2006. |
| 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 Jeffrey T. Hanuscin, Chief Financial Officer of Royal Bancshares of Pennsylvania on November 87, 2006. |
| 99.1 | Royal Bancshares of Pennsylvania, Inc. announced net income for three months ended September 30, 2006 and declaration of cash dividend on October 19, 2006. |
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: November 8, 2006
| | |
/s/ Jeffrey T. Hanuscin
|
| | |
|
| | | Jeffrey T. Hanuscin
Chief Financial Officer |
