FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the quarterly period ended: September 30, 2001
-------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: to
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Commission file number: 0-26366
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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
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(Address of principal Executive Offices)
(610) 668-4700
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the bank (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that
the bank was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class A Common Stock Outstanding at September 30, 2001
-------------------- ---------------------------------
$2.00 par value 8,844,269
Class B Common Stock Outstanding at September 30, 2001
-------------------- ---------------------------------
$.10 par value 1,804,693
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS Sept. 30, 2001 Dec 31, 2000
(Unaudited)
------------ ------------
Cash and due from banks $ 62,407,603 $ 15,772,422
Federal funds sold 6,950,000 27,450,000
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Total cash and cash equivalents 69,357,603 43,222,422
----------- ------------
Investment securities held to maturity (fair value of $104,434,768 at
September 30, 2001 and $86,348,525 at December 31, 2000) 102,780,870 86,109,704
Investment securities available for sale - at fair value 86,026,137 70,143,717
Total loans 676,828,459 423,945,784
Less allowance for loan losses 11,821,378 11,972,839
----------- ------------
Net loans 665,007,081 411,972,945
Premises and equipment, net 8,398,835 6,615,153
Accrued interest and other assets 19,351,975 12,016,957
----------- ------------
$950,922,501 $630,080,898
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 50,944,565 $ 47,608,128
Interest bearing (includes certificates of deposit in excess
of $100,000 of $332,382,016 at September 30, 2001 and
$166,760,323 at December 31, 2000) 672,402,062 424,973,825
----------- ------------
Total deposits 723,346,627 472,581,953
Accrued interest and other liabilities 20,428,980 20,566,038
Borrowings 100,225,000 33,000,000
Mortgage payable 396,411 431,386
----------- ------------
Total liabilities 844,675,119 526,579,377
----------- ------------
MINORITY INTEREST 278,101 --
Stockholders' equity
Common stock
Class A, par value $2 per share; authorized, 18,000,000 shares; issued,
8,844,269 at September 30, 2001 and 8,387,711 at December 31, 2000 17,688,538 16,775,422
Class B, par value $.10 per share; authorized, 2,000,000 shares; issued,
1,804,693 at September 30, 2001 and 1,730,715 at December 31, 2000 180,469 173,072
Additional paid in capital 64,962,850 57,767,946
Retained earnings 28,255,546 31,640,205
Accumulated other comprehensive (loss) (2,574,814) (589,917)
------------ ------------
108,512,589 105,766,728
Treasury stock - at cost, shares of Class A, 215,388 at September 30, 2001,
and December 31, 2000. (2,265,207) (2,265,207)
------------ ------------
106,247,382 103,501,521
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$950,922,501 $630,080,898
============ ============
The accompanying notes are an integral part of these statements.
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months ended
September 30,
----------------------------
2001 2000
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Interest income
Loans, including fees $15,180,605 $11,729,273
Investment securities held to maturity 2,409,326 1,192,987
Investment securities available for sale 2,005,936 1,605,980
Deposits in banks 148,470 2,572
Federal funds sold 156,520 473,799
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TOTAL INTEREST INCOME 19,900,857 15,004,611
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Interest expense
Deposits 8,296,330 5,380,403
Mortgage payable and other 1,573,334 465,083
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TOTAL INTEREST EXPENSE 9,869,664 5,845,486
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NET INTEREST INCOME 10,031,193 9,159,125
Provision for loan losses - --
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,031,193 9,159,125
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Other income
Service charges and fees 243,348 235,686
Gains on sales of investment securities available for sale 59,999 --
Gains on sales of other real estate 32,182 --
Gains on sales of loans 164,531 --
Other income 72,221 88,185
---------- ----------
572,281 323,871
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Other expenses
Salaries & wages 2,299,555 1,634,365
Employee benefits 915,641 689,796
Occupancy and equipment 479,646 184,058
Other operating expenses 1,485,920 1,318,447
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5,180,762 3,826,666
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INCOME BEFORE INCOME TAXES 5,422,712 5,656,330
Income taxes 1,850,779 2,028,626
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NET INCOME $3,571,933 $3,627,704
========== ==========
Per share data
Net income - basic $.33 $.34
========== ==========
Net income - diluted $.33 $.34
========== ==========
The accompanying notes are an integral part of these statements.
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine months ended
September 30,
----------------------------
2001 2000
----------- -----------
Interest income
Loans, including fees $38,033,076 $33,462,721
Investment securities held to maturity 5,488,828 3,827,323
Investment securities available for sale 5,120,513 4,559,059
Deposits in banks 253,926 12.484
Federal funds sold 682,993 934,392
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TOTAL INTEREST INCOME 49,579,336 42,795,979
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Interest expense
Deposits 19,780,917 14,872,062
Mortgage payable and other 2,581,384 1,426,550
Federal funds purchased -- 17,238
----------- -----------
TOTAL INTEREST EXPENSE 22,362,301 16,315,850
----------- -----------
NET INTEREST INCOME 27,217,035 26,480,129
Provision for loan losses -- 250,000
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 27,217,035 26,230,129
----------- -----------
Other income
Service charges and fees 737,770 664,948
Gains on sale of investment securities available for sale 59,999 --
Gains on sales of other real estate 136,460 53,407
Gains on sales of loans 189,113 --
Other income 100,699 240,072
----------- -----------
1,224,041 958,427
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Other expenses
Salaries & wages 5,793,940 4,698,603
Employee benefits 2,361,306 2,041,304
Occupancy and equipment 857,209 468,031
Other operating expenses 4,326,696 3,776,919
----------- -----------
13,339,151 10,984,857
----------- -----------
INCOME BEFORE INCOME TAXES 15,101,925 16,203,699
Income taxes 3,804,354 5,509,258
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NET INCOME $11,297,571 $10,694,441
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Per share data
Net income - basic $1.07 $1.01
=========== ===========
Net income - diluted $1.05 $1.00
=========== ===========
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
Nine Months ended September 30, 2001
(UNAUDITED)
Accumulated
Additional
Class A Common Stock Class B Common Stock Paid in
------------------------ ----------------------- ------- Retained
Shares Amount Shares Amount Capital Earnings
--------- ----------- --------- -------- ----------- -----------
Balance, January 1, 2001 8,387,711 $16,775,422 1,730,715 $173,072 $57,767,946 $31,640,205
Net income for the six months ended
June 30, - - - - 11,297,571
Conversion of Class B common stock to
Class A Common stock 14,531 29,062 (12,636) (1,264) - (27,798)
Purchase of treasury stock - - - - - -
5% stock dividend declared 408,197 816,394 86,614 8,661 7,093,499 (7,918,555)
Cash dividends on common stock - - - - - (6,729,589)
Cash in lieu of fractional shares - - - - - (6,288)
Stock options exercised 33,830 67,660 - - 101,405 -
Other comprehensive income (loss), net
of Reclassifications and taxes - - - - - -
--------- ----------- --------- -------- ----------- -----------
Comprehensive income
Balance, September 30, 2001 8,844,269 $17,688,538 1,804,693 $180,469 $64,962,850 $28,255,546
========= =========== ========= ======== =========== ===========
(RESTUBBED TABLE)
Other
Treasury Comprehensive Comprehensive
Stock Income (loss) Income
----------- ------------- -------------
Balance, January 1, 2001 $(2,265,207) $(589,917)
Net income for the six months ended
June 30, - - $11,297,571
Conversion of Class B common stock to
Class A common stock - - -
Purchase of treasury stock - -
5% stock dividend declared
Cash dividends on common stock - - -
Cash in lieu of fractional shares - - -
Stock options exercised - - -
Other comprehensive income (loss), net
of Reclassifications and taxes - (1,984,897) (1,984,897)
----------- ----------- ----------
Comprehensive income $9,312,674
==========
Balance, September 30, 2001 $(2,265,207) $(2,574,814)
=========== ===========
The accompanying notes are an integral part of the financial statement.
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30,
2001 2002
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Cash flows from operating activities
Net income $11,297,571 $10,694,441
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 555,415 186,022
Provision for loan loss -0- 250,000
Amortization of premiums and discounts on loans,
mortgage-backed securities and investments (1,115,016) (1,956,649)
(Benefit) provision for deferred income taxes (263,735) (458,543)
(Gains) loss on other real estate (136,460) (53,407)
(Gains) on sales of loans (189,113) --
(Gains) on sales of investment securities (59,999) --
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (1,004,213) (850,932)
(Increase) decrease in other assets (1,521,633) 2,089,500
Increase (decrease) in accrued interest payable 1,007,809 2,794,861
Increase in unearned income on loans (269,380) (34,972)
Increase (decrease) in other liabilities (2,099,776) 1,860,662
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Net cash provided by operating activities 6,201,470 14,520,983
Cash flows from investing activities
Net (decrease) in interest bearing balances in banks (26,135,181) --
Proceeds from calls/maturities of HTM investment securities 62,753,000 15,125,259
Proceeds from calls/maturities of AFS investment securities 7,350,000 1,650,000
Purchase of HTM investment securities (45,000,000) --
Purchase of AFS investment securities -- (2,261,471)
Purchase of loans -- (32,299,245)
Cash paid for asset acquisition (15,238,720) --
Cash from entity acquired 26,547,903 --
Net (increase) decrease in loans 14,399,692 (18,767,789)
Purchase of premises and equipment (1,870,193) (730,083)
----------- -----------
Net cash (used in) provided by investing activities 22,806,501 (37,283,329)
Cash flows from financing activities:
Net increase (decrease) in non-interest bearing and
interest bearing demand deposits and savings accounts 21,315,355 29,443,233
Net increase (decrease) in certificates of deposit (21,586,358) 37,647,709
Mortgage payments (34,975) (45,972)
Net (decrease) increase in long term borrowings 4,000,000 --
Cash dividends (6,729,589) (6,378,558)
Cash in lieu of fractional shares (6,288) --
Issuance of common stock under stock option plans 169,065 404,335
Purchase of treasury stock -- --
----------- -----------
Net cash provided by (used in) financing activities (2,872,790) 61,070,747
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS 26,135,181 38,308,401
Cash and cash equivalents at beginning of year 43,222,422 17,725,462
----------- -----------
Cash and cash equivalents at end of period $69,357,603 $56,033,863
=========== ===========
The accompanying notes are an integral part of these statements.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying un-audited consolidated financial statements include the
accounts of Royal Bancshares of Pennsylvania, Inc. (the Company) and its
wholly-owned subsidiaries: Royal Bank of Pennsylvania (the Bank), Royal Real
Estate of Pennsylvania, Inc. and Royal Investments of Delaware, Inc. These
financial statements reflect the historical information of the Company. All
significant inter-company transactions and balances have been eliminated.
1. The accompanying un-audited condensed financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States of America (US GAAP) for interim financial information. The financial
information included herein is un-audited; however, such information reflects
all adjustments (consisting solely of normal recurring adjustments) that are,
in opinion of management, necessary to present a fair statement of the
results for the interim periods. Further information is included in the
Annual Report on Form 10-K for the year ended December 31, 2000.
2. Acquisitions
As of June 22, 2001, Royal Bancshares of Pennsylvania completed its
acquisition of the assets of Crusader Holding Corporation (Crusader). Under
the terms of the acquisition certain assets and liabilities were purchased
for $41.8 million, which represented the approximate fair value of the assets
acquired. The purchase price was paid in cash with $15.2 million of Royal
cash on hand being utilized. This transaction was accounted for under the
purchase method of accounting.
The following represents the un-audited results of operations of the Company
as the acquisition has occurred the first date of the period indicated. This
pro forma information should be read in conjunction with the related
historical information and is not necessarily indicative of the results that
would have been attained had the acquisition actually been consummated on the
dates indicated, nor are they necessarily indicative of our future operating
results.
Nine Months Ended Sept. 30,
2001 2000
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Interest Income $65,255,000 $66,560,000
Interest Expense 31,252,000 30,911,000
----------- -----------
Net interest income 34,003,000 35,649,000
Provision (recoveries) loan losses (11,000) 3,023,000
Non-interest income 1,998,000 2,787,000
Non-interest expense 18,528,000 17,439,000
----------- -----------
Net income $17,484,000 $17,974,000
3. Per Share Information
In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings Per
Share," which eliminates primary and fully diluted EPS and requires
presentation of basic and diluted EPS in conjunction with the disclosure of
the methodology used in computing such EPS. Basic EPS excludes dilution and
is computed by dividing income available to common shareholders by the
weighted average common shares outstanding during the period. Diluted EPS
takes into account the potential dilution that could occur if securities or
other contracts to issue common stock were exercised and converted into
common stock. Basic and diluted EPS are calculated as follows:
Nine months ended September 30, 2001
---------------------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- -------------- ----------
Basic EPS
Income available to common shareholders $11,297,571 10,606,651 $ 1.07
Effect of dilutive securities
Stock options 138,901
----------- ---------- ---------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $11,297,571 10,745,552 $ 1.05
=========== ========== =========
(continued)
Per Share Information - continued
Nine months ended September 30, 2000
---------------------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- -------------- ----------
Basic EPS
Income available to common shareholders $10,694,441 10,629,235 $ 1.01
Effect of dilutive securities
Stock options
Diluted EPS 111,834 (.01)
----------- ---------- ---------
Income available to common shareholders
plus assumed exercise of options $10,694,441 10,741,069 $ 1.00
=========== ========== =========
EPS is calculated on the basis of the weighted average number of shares
outstanding of 10,606,651 and 10,629,235 for the nine months ended September 30,
2001 and 2000, respectively. Per share information and weighted average shares
outstanding have been restated to reflect the 5% stock dividend of January 2001.
Three months ended September 30, 2001
---------------------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- -------------- ----------
Basic EPS
Income available to common shareholders $3,571,933 10,695,623 $ 0.33
Effect of dilutive securities
Stock options 162,769
---------- ---------- ---------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $3,571,933 10,858,392 $ 0.33
========== ========== =========
Three months ended September 30, 2000
---------------------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- -------------- ----------
Basic EPS
Income available to common shareholders $3,627,704 10,657,303 $ 0.34
Effect of dilutive securities
Stock options 133,493
---------- ---------- ---------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $3,627,704 10,790,796 $ 0.34
========== ========== =========
EPS is calculated on the basis of the weighted average number of shares
outstanding of 10,695,623 and 10,657,303 for the three months ended September
30, 2001 and 2000, respectively. Per share information and weighted average
shares outstanding have been restated to reflect the 5% stock dividend of
January 2001.
4. Investment Securities:
The carrying value and approximate market value of investment securities at
September 30, 2001 are as follows:
Amortized Gross Gross Approximate
Purchased Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
------------ ---------- --------- ------------ ------------
Held to maturity:
- -----------------
US agencies $46,417,570 $368,800 $ - $46,786,370 $46,417,570
Corporate debt securities 56,363,300 1,722,108 (437,010) 57,648,398 56,363,300
------------ ---------- --------- ------------ ------------
$102,780,870 $2,090,908 ($437,010) $104,434,768 $102,780,870
============ ========== ========= ============ ============
Available for sale:
- -------------------
Federal Home Loan
Bank Stock - at cost $4,875,000 $ - $ - $ 4,875,000 $ 4,875,000
Preferred and common stock 31,273 1,149 - 32,422 32,422
Other securities 85,081,117 1,912,170 (5,874,572) 81,118,715 81,118,715
------------ ---------- --------- ------------ ------------
$89,987,390 $1,913,319 (5,874,572) $86,026,137 $86,026,137
============ ========== ========= ============ ============
5. In June 1998, the Financial Accounting Standard Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activity." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all value. If certain conditions are met, a
derivative may be specifically designated as a hedge. The accounting for
changes in the fair value of derivatives (gains and losses) depends on the
intended use of the derivative and resulting designation. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Earlier applications are permitted only as of the beginning of any
fiscal quarter.
6. Allowance for Credit Losses: Changes in the allowance for credit losses were
as follows:
Three months ended Sept 30,
------------------------------
2001 2000
----------- -----------
Balance at beginning of period, $12,248,143 $12,023,798
Loans charged-off (497,174) --
Recoveries 70,409 188,768
----------- -----------
Net charge-offs and recoveries (426,765) 188,768
Provision for loan losses -- --
----------- -----------
Balance at end of period $11,821,378 $12,212,566
=========== ===========
Continued....
Nine months ended Sept 30,
------------------------------
2001 2000
----------- -----------
Balance at beginning of period, $11,972,839 $11,737,337
Loans charged-off (518,885) (201,339)
Recoveries 367,424 426,568
----------- -----------
Net charge-offs and recoveries (151,461) 225,229
Provision for loan losses -- 250,000
----------- -----------
Balance at end of period $11,821,378 $12,212,566
=========== ===========
7. Nonperforming loans
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $7,416,598 and $4,714,937 at September 30, 2001 and
2000, respectively. This increase is primarily due to the $5,918,402 of
non-performing loans acquired through the purchase of certain assets and
liabilities of Crusader Holding Corporation. Although the Company has
non-performing loans of approximately $7,416,598 at September 30, 2001,
management believes it has adequate collateral to limit its credit risks.
The balance of impaired loans was $121,645 at September 30, 2001. The Company
identifies a loan as impaired when it is probable that interest and principal
will not be collected according to the contractual terms of the loan
agreements. The allowance for credit loss associated with impaired loans was
$ -0- at September 30, 2001. The income that was recognized on impaired loans
during the nine-month period ended September 30, 2001 was $1,741. The cash
collected on impaired loans during the same period was $264,414 of which
$262,672 was credited to the principal balance outstanding on such loans.
Interest that would have been accrued on impaired loans during this period in
2001 was $13,743. 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.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULT OF OPERATIONS
The following discussion and analysis is intended to assist in
understanding and evaluating the major changes in the financial condition and
earnings performance of the Company and it's wholly owned subsidiaries for the
nine month period ended September 30, 2001.
From time to time, the Company may include forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters in this and other filings with the Securities
Exchange Commission. The Private Securities Litigation Reform Act of 1995
provides safe harbor for forward-looking statements. In order to comply with the
terms of the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance development and results of the Company's business
include the following: general economic conditions, including their impact on
capital expenditures, business conditions in the banking industry; the
regulatory environment; rapidly changing technology and evolving banking
industry standards; competitive factors, including increased competition with
community, regional and national financial institutions; new service and product
offerings by competitors and price pressures and similar items.
FINANCIAL CONDITION
- -------------------
Total consolidated assets as of September 30, 2001 were $950.9 million,
an increase of $320.8 million from the $630.1 million reported at year-end,
December 31, 2000. This increase is primarily due to the $331.3 million of
assets acquired through the purchase of certain assets and liabilities from
Crusader Holding Corporation which was completed on June 22, 2001.
Total loans increased $252.9 million from the $423.9 million level at
December 31, 2000 to $676.8 million at September 30, 2001, of which $236.5
million was related to the assumption of Crusader loan portfolio. Additionally,
approximately $16.4 million of the increase in loans is attributable to
internally generated loan growth in the first nine months of 2001. The
year-to-date average balance of loans was $506.7 million at September 30, 2001.
The allowance for loan loss decreased $151,461 to $11.8 million at
September 30, 2001 from $12.0 million at December 31, 2000. The level of
allowance for loan loss reserve represents approximately 1.8% of total loans at
September 30, 2001 versus 2.8% at December 31, 2000. While management believes
that, based on information currently available, the allowance for loan loss is
sufficient to cover losses inherent in the Company's loan portfolio at this
time, no assurances can be given that the level of allowance will be sufficient
to cover future loan losses or that future adjustments to the allowance will be
sufficient to cover future loan losses or that future adjustments to the
allowance will not be necessary if economic and/or other conditions differ
substantially from the economic and other conditions considered by management in
evaluating the adequacy of the current level of the allowance.
The $32.6 million increase in total investment securities is primarily
attributable to the purchase of Crusader's investment portfolio.
Total cash and cash equivalents increased to $26.2 million from $42.2
million level at December 31, 2000 to $69.4 million at September 30, 2001, of
which $48.0 million was held in a money market fund due to a higher rate of
return.
Total deposits, the primary source of funds, increased $250.7 million
to $723.3 million at September 30, 2001, from $472.6 million at December 31,
2000. This increase in deposits is primarily due to the assumption of deposits
from Crusader Holding Corporation in the amount of $251.0 million, partially
offset by deposit runoff. The balance of brokered deposits was $289.1 million,
representing approximately 40% of total deposits at September 30, 2001.
Consolidated stockholder's equity increased $2.7 million to $106.2
million at September 30, 2001 from $103.5 million at December 31, 2000. This
increase is primarily due to net income of $11.3 million, partially offset by a
quarterly cash dividend of $6.7 million. Additionally, stockholder's equity was
decreased $2.0 million due to an adjustment in the market value of
available-for-sale investment securities during the first nine months of 2001.
RESULTS OF OPERATIONS
- ---------------------
Results of operations depend primarily on net interest income, which is
the difference between interest income on interest earning assets and interest
expense on interest bearing liabilities. Interest earning assets consist
principally of loans and investment securities, while interest bearing
liabilities consist primarily of deposits. Net income is also effected by the
provision for loan losses and the level of non-interest income as well as by
non-interest expenses, including salary and employee benefits, occupancy
expenses and other operating expenses.
Consolidated net income for the three months ended, September 30, 2001
was $3.6 million or $.33 basic earnings per share, as compared to net income of
$3.6 million or $.36 basic earnings per share for the same three month period in
2000. This decrease is primarily due to falling interest rates within our loan
portfolio. Consolidated net income for the nine months ended, September 30, 2001
was $11.3 million or $1.07 basic earnings per share, as compared to net income
of $10.7 million or $1.06 basic earnings per share for the same nine month
period in 2000. This increase is primarily due to the growth in average earning
assets versus interest bearing liabilities over the nine month period ending,
September 30, 2001.
For the third quarter 2001, net interest income was $10.0 million as
compared to $9.2 million for the same quarter in 2000, an increase of $0.8
million or 8.7%. This increase is primarily due to an increase in the average
balance in loans in the third quarter period of 2001 versus the same period in
2000. The balance of average loans for the third quarter of 2001 was $672.8
million, as compared to $407.7 million for the same quarter in 2000. This $265.1
million increase in the average balance of loans represents a 65% increase.
Interest income on investment securities increased $1.6 million, a 57.8%
increase over the same three-month period in 2000, which is primarily due to the
increase in the average balance in investment securities. Total interest expense
on deposits and borrowings increased $4.0 million to $9.9 million as compared to
$5.9 million for the same three-month period in 2000. This increase in interest
expense is primarily due to an increase in the average interest bearing
liabilities balance in the third quarter of 2001. For the comparative nine-month
period, net interest income increased $.7 million to $27.2 million for the nine
months ended September 30, 2001 as compared to $26.5 million for same nine-month
period in 2000. This increase in net income is primarily due to an increase in
the average balance of loans in 2001 as compared to 2000.
Provision for loan losses was $0 for the third quarter of 2001 and $0
for the same three-month period in 2000, respectively. Charge-offs and
recoveries were $497 thousand and $70 thousand, respectively, for the
three-month period ended September 30, 2001 versus $0 and $189 thousand,
respectively, for the same three-month period in 2000. For the comparative
nine-month period, provision for loan loss was $-0- thousand for the nine months
ended, September 30, 2001 as compared to $250 thousand for the same nine-month
period in 2000. Charge-offs and recoveries were $519 thousand and $367 thousand,
respectively, for the nine-months ended September 30, 2001 as compared to $201
thousand and $427 thousand respectively for the same nine-month period in 2000.
Overall, Management considers the current level of allowance for loan loss to be
adequate at September 30, 2001.
Total non-interest income for the three-month period ended September
30, 2001 was $572 thousand as compared to $324 thousand for the same three-month
period in 2000. The $248 thousand increase in 2001 is primarily due to an
increase in gains on sale of loans. For the comparative nine-month period,
non-interest income was $1.2 million for the nine-months ended September 30,
2001 as compared to $958 thousand for the same nine-month period in 2000. This
increase is again primarily due to a increase in gains on sale of loans.
Total non-interest expense for the nine months ended September 30, 2001
was $5.2 million, an increase of $1.4 million, or 37%, as compared to $3.8
million for the same period in 2000. This increase in non-interest expense is
primarily due to an increase in personnel costs resulting from the retention of
the former employees of Crusader Savings Bank. For the comparative nine-month
period, non-interest expense was $13.3 million for the nine months ended
September 30, 2001 as compared to $11.0 million for the same nine-month period
in 2000.
CAPITAL ADEQUACY
- ----------------
The company is required to maintain minimum amounts of capital to total
"risk weighted" assets and a minimum Tier 1 leverage ratio, as defined by the
banking regulators. At September 30, 2001, the Company was required to have a
minimum Tier 1 and total capital ratios of 4% and 8%, respectively, and a
minimum Tier 1 leverage ratio of 3% plus an additional 100 to 200 basis points.
The table below provides a comparison of Royal Bancshares of
Pennsylvania's risk-based capital ratios and leverage ratios:
Sept. 30, 2001 December 31, 2000
-------------- -----------------
Capital Levels
Tier 1 leverage ratio 11.71% 17.0%
Tier 1 risk-based ratio 13.91% 18.1%
Total risk-based ratio 15.14% 19.4%
Capital Performance
Return on average assets 2.1% (1) 2.5% (1)
Return on average equity 14.4% (1) 14.3% (1)
(1) annualized
The Company's ratios compare favorably to the minimum required amounts
of Tier 1 and total capital to "risk weighted" assets and the minimum Tier 1
leverage ratio, as defined by banking regulators. The Company currently meets
the criteria for a well-capitalized institution, and management believes that
the Company will continue to meet its minimum capital requirements. At present,
the Company has no commitments for significant capital expenditures.
The Company is not under any agreement with regulatory authorities nor
is the Company aware of any current recommendations by the regulatory
authorities that, if such recommendations were implemented, would have a
material effect on liquidity, capital resources or operations of the Company.
LIQUIDITY & INTEREST RATE SENSITIVITY
- -------------------------------------
Liquidity is the ability to ensure that adequate funds will be
available to meet its financial commitments as they become due. In managing its
liquidity position, all sources of funds are evaluated, the largest of which is
deposits. Also taken into consideration is the repayment of loans. These sources
provide alternatives to meet its short-term liquidity needs. Longer liquidity
needs may be met by issuing longer-term deposits and by raising additional
capital. The liquidity ratio is generally maintained equal to or greater than
25% of deposits and short-term liabilities.
The liquidity ratio of the Company remains strong at approximately 34%
and exceeds the Company's peer group levels and target ratio set forth in the
Asset/Liability Policy. The Company's level of liquidity is provided by funds
invested primarily in corporate bonds, capital trust securities, US Treasuries
and agencies, and to a lesser extent, federal funds sold. The overall liquidity
position is monitored on a monthly basis.
Interest rate sensitivity is a function of the repricing
characteristics of the Company's assets and liabilities. These include the
volume of assets and liabilities repricing, the timing of the repricing, and the
interest rate sensitivity gaps is a continual challenge in a changing rate
environment. The following table shows separately the interest sensitivity of
each category of interest earning assets and interest bearing liabilities as of
September 30, 2001:
Interest Rate Sensitivity
(in millions) Days
-------------------------- 1 to 5 Over 5 Non-rate
Assets (1) 0 - 90 91 - 365 Years Years Sensitive Total
- ------- -----------------------------------------------------------------------------------
Interest-bearing deposits in banks $ 60.1 $ -- $ -- $ -- $ -- $60.1
Federal funds sold 6.5 -- -- -- 6.5
Investment securities:
Available for sale 7.2 3.2 22.4 53.2 -- 86.0
Held to maturity - 19.2 36.3 47.3 -- 102.8
-----------------------------------------------------------------------------------
Total investment securities 7.2 22.4 58.7 100.5 -- 188.8
Loans: (2)
Fixed rate (3) 24.2 10.9 110.3 62.4 -- 207.8
Variable rate 276.5 33.2 148.2 15.9 -- 473.8
-----------------------------------------------------------------------------------
Total loans 300.7 44.1 258.5 78.3 -- 681.6
Other assets (4) -- -- -- -- 13.9 13.9
-----------------------------------------------------------------------------------
Total Assets $374.5 $66.5 $317.2 $178.8 $13.9 $950.9
===================================================================================
Liabilities & Capital
- ---------------------
Deposits:
Non interest bearing deposits $ -- $ -- $ -- $ -- $ 50.9 $50.9
Interest bearing deposits (5) 162.5 -- -- -- -- 162.5
Certificate of deposits 69.0 228.6 212.3 -- -- 509.9
-----------------------------------------------------------------------------------
Total deposits 231.5 228.6 212.3 -- 50.9 723.3
Mortgage and long term borrowings 40.5 -- 59.7 -- -- 100.6
Other liabilities -- -- -- -- 20.8 20.8
Capital -- -- -- -- 106.2 106.2
-----------------------------------------------------------------------------------
Total liabilities & capital $272.0 $228.6 $272.0 $ -- $178.3 $950.9
===================================================================================
Net interest rate GAP $102.2 $(162.1) $45.2 $178.8 ($164.0)
=====================================================================
Cumulative interest rate GAP $102.5 $(59.6) $(14.4) $164.0 --
=====================================================================
GAP to total assets 11% (17%)
===========================
GAP to total equity 97% (153%)
===========================
Cumulative GAP to total assets 11% (6%)
===========================
Cumulative GAP to total equity 97% (56%)
===========================
(1) Interest earning assets are included in the period in which the balances are
expected to be repaid and/or repriced as a result of anticipated prepayments,
scheduled rate adjustments, and contractual maturities.
(2) Reflects principal maturing within the specified periods for fixed and
variable rate loans and includes nonperforming loans.
(3) Fixed rate loans include a portion of variable rate loans whose floors are
in effect at September 30, 2001.
(4) For purposes of gap analysis, other assets include the allowance for
possible loan loss, unamortized discount on purchased loans and deferred fees on
loans.
(5) Based on historical analysis, Money market and Savings deposits are assumed
to have rate sensitivity of 1 month; NOW account deposits are assumed to have a
rate sensitivity of 4 months.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
On June 29, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Intangible Assets. These statements
are expected to result in significant modifications relative to Company's
accounting for goodwill and other intangible assets. SFAS No. 141 requires that
all business combinations initiated after June 30, 2001 must be accounted for
under the purchase method of accounting. SFAS No. 141 was effective upon
issuance. SFAS No. 142 modifies the accounting for all purchased goodwill and
intangible assets. SFAS No. 142 includes requirements to test goodwill and
indefinite lived intangibles assets for impairment rather than amortize them.
SFAS No. 142 will be effective for fiscal years beginning after December 31,
2001 and early adoption is not permitted except for business combinations
entered into after June 30, 2001. The Company is currently evaluating the
provisions of SFAS No. 142, but its preliminary assessment is that these
Statements will not have a material impact on the Company's financial position
or results of operations.
On July 6, 2001, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 102, Selected Loan Loss Allowance Methodology and
Documentation Issues. SAB No. 102 provides guidance on the development,
documentation, and application of a systematic methodology for determining the
allowance for loans and leases in accordance with US GAAP. The adoption of SAB
No. 102 did not have a material impact on the Company's consolidated financial
position or results of operations.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
- -------------------------
None
Item 2. Changes in Securities and use of Proceeds
- -------------------------------------------------
None
Item 3. Default and Upon Senior Securities
- ------------------------------------------
None
Item 4. Submission of Matters to Vote Security Holders
- ------------------------------------------------------
On Wednesday May 16, 2001, the Annual Meeting of Shareholders of Royal
Bancshares of Pennsylvania was convened in Philadelphia, PA at 6:30 PM. The
following nominees were elected as Class III Directors of the Registrant to
serve for a three-year term:
For Withhold Authority
--- ------------------
Albert Ominsky 23,518,184 82,918
Robert R. Tabas 23,519,037 82,918
Anthony Micale 23,519,037 82,918
Gregory T. Reardon 23,519,037 82,918
Jack R. Loew 23,518,184 82,918
Item 5. Other Information
- -------------------------
None
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
None
SIGNATURES
----------
Pursuant to the requirements of the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ROYAL BANCSHARES OF PENNSYLVANIA, INC.
(Registrant)
Dated: November 14th, 2001 /s/ James J. McSwiggan
---------------------------------------------
James J. McSwiggan, CFO & Treasurer
Dated: November 14th, 2001 /s/ Jeffrey T. Hanuscin
---------------------------------------------
Jeffrey T. Hanuscin, VP of Finance