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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10 - K
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2002 or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-26366
ROYAL BANCSHARES OF PENNSYLVANIA, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2812193
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(State of other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
732 Montgomery Avenue,
Narberth, Pennsylvania 19072
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(Address of principal executive offices) (Zip Code)
(610) 668-4700
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(Issuer's telephone number, including area code)
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(Former name, former address and former year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock ($2.00 par value)
Class B Common Stock ($.10 par value)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contended, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes |X| No |_|
The aggregate market value of common shares of the Registrant held by non-
affiliates, based on the closing sale price as of February 28, 2003 was
$82,318,520.
As of February 28, 2003, the Registrant had 9,887,447 and 1,913,875 shares
outstanding of Class A and Class B common stock, respectively.
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Item 1. BUSINESS
The Company
Royal Bancshares of Pennsylvania, Inc. ("Royal Bancshares") is a
Pennsylvania business corporation and a bank holding company registered under
the Federal Bank Holding Company Act of 1956, as amended (the "Holding Company
Act"). Royal Bancshares is supervised by the Board of Governors of the Federal
Reserve System (Federal Reserve Board). Its legal headquarters is located at
732 Montgomery Avenue, Narberth, PA. On June 29, 1995, pursuant to the plan of
reorganization approved by the shareholders of Royal Bank of Pennsylvania
("Royal Bank"), all of the outstanding shares of common stock of Royal Bank
were acquired by the Royal Bancshares and were exchanged on a one-for-one
basis for common stock of Royal Bancshares. The principal activities of Royal
Bancshares are owning and supervising Royal Bank, which engages in a general
banking business in Montgomery County, Pennsylvania. Royal Bank operates one
Branch in New Jersey under the registered fictitious name of Royal Bank of
America. Royal Bancshares also has a wholly owned non-bank subsidiary, Royal
Equity Partners, Inc., which is engaged in investment activities. At December
31, 2002, Royal Bancshares had consolidated total assets of approximately
$1.09 billion, total deposits of approximately $820 million and stockholders'
equity of approximately $121 million.
From time to time, Royal Bancshares may include forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters in this and other filings with the Securities
Exchange Commission. The Private Securities Litigation Reform Act of 1995
provides safe harbor for forward-looking statements. When we use words such as
"believes", or "expects", "anticipates" or similar expressions, we are making
forward-looking statements. In order to comply with the terms of the safe
harbor, Royal Bancshares notes that a variety of factors could cause Royal
Bancshares actual results and experience to differ materially from the
anticipated results or other expectations expressed in Royal Bancshares
forward-looking statements. The risks and uncertainties that may affect the
operations, performance development and results of Royal Bancshares business
include the following: general economic conditions, including their impact on
capital expenditures; interest rate fluctuations: business conditions in the
banking industry; the regulatory environment; rapidly changing technology and
evolving banking industry standards; competitive factors, including increased
competition with community, regional and national financial institutions; new
service and product offerings by competitors and price pressures and similar
items.
The company has one reportable operating segment, Community Banking, as
described in Note C of the Notes to Consolidated Financial Statements included
in this Report. The segment reporting information in Note C is incorporated by
reference into this Item 1.
Royal Bank
Royal Bank was incorporated in the Commonwealth of Pennsylvania on July
30, 1963, was chartered by the Commonwealth of Pennsylvania Department of
Banking and commenced operation as a Pennsylvania state-chartered bank on
October 22, 1963. Royal Bank is the successor of the Bank of King of Prussia,
the principal ownership of which was acquired by Daniel M. Tabas in 1980.
Royal Bank of Pennsylvania is an insured bank under the Federal Deposit
Insurance Corporation (the "FDIC").
As of June 22, 2001, the bank completed its acquisition of substantially
all the assets of Crusader Holding Corporation. Under the terms of the
acquisition certain assets and liabilities were purchased for $41.5 million,
which represented the approximate fair value of the assets acquired. The
purchase price was paid in cash with $15.2 million of Royal Bank's cash on
hand being utilized. This transaction was accounted for under the purchase
method of accounting.
Royal Bank derives its income principally from interest charged on loans
and interest on investment securities and fees received in connection with the
origination of loans and other services. Royal Bank's principal expenses are
interest expense on deposits and operating expenses. Principally operating
revenues, deposit growth and the repayment of outstanding loans provide funds
for activities.
Service Area. Royal Bank's primary service area includes Montgomery,
Chester, Bucks, Delaware, Berks and Philadelphia counties, southern New Jersey
and Delaware in the vicinity of Wilmington. This area includes residential
areas and industrial and commercial businesses of the type usually found
within a major metropolitan area. Royal Bank serves this area from fifteen
branches located throughout Montgomery, Philadelphia and Berks counties along
with our newest branch in New Jersey. The Bank also considers the states of
Pennsylvania, New Jersey, New York and Delaware as a part of its service area
for certain products and services. On occasion, Royal
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Bank will do business with clients located outside of its service area. Royal
Bank's legal headquarters are located at 732 Montgomery Avenue, Narberth, PA.
Royal Bank conducts business operations as a commercial bank offering
checking accounts, savings and time deposits, and loans, including residential
mortgages, home equity and SBA loans. Royal Bank also offers safe deposit
boxes, collections, internet banking and bill payment along with other
customary bank services (excluding trust) to its customers. Drive-up, ATM, and
night depository facilities are available. Services may be added or deleted
from time to time. The services offered and the business of Royal Bank is not
subject to significant seasonal fluctuations. Royal Bank is a member of the
Federal Reserve Fedline Wire Transfer System. Royal Bank became 16.5% partner
in Bankers Settlement Services of Eastern Pennsylvania, L.L.C., a title
company ("Bankers"). The Bank, together with five other banks in the area,
formed this title company on August 16, 2000. Royal Bank's ownership decreased
to 15% with the addition of a new bank partner in 2001.
Competition. The financial services industry in the company's service area
is extremely competitive. The company's competitors within its service area
include banks and bank holding companies with greater resources. Many
competitors have substantially higher legal lending limits.
In addition, savings banks, savings and loan associations, credit unions,
money market and other mutual funds, mortgage companies, leasing companies,
finance companies and other financial services companies offer products and
services similar to those offered by the bank, on competitive terms.
Many bank holding companies have elected to become financial holding
companies under the Gramm-Leach-Bliley Act, which give a broader range of
products with which the bank must compete. Although the long-range effects of
this development cannot be predicted, most probably it will further narrow the
differences and intensify competition among commercial banks, investment
banks, insurance firms and other financial services companies.
Employees. Royal Bancshares employed approximately 159 persons on a full-
time equivalent basis as of December 31, 2002.
Deposits. At December 31, 2002, total deposits of Royal Bank were
distributed among demand deposits (7%), money market deposit accounts, savings
and Super Now (53%) and time deposits (40%). At year-end 2002, deposits
increased $117 million from year-end 2001, or 17%, primarily due to
competitive rates and the addition of a new branch in Northeast Philadelphia.
Lending. At December 31, 2002, Royal Bank had a total loan portfolio of
$577 million, representing 53% of total assets. The loan portfolio is
categorized into commercial, commercial mortgages, residential mortgages
(including home equity lines of credit), construction, real estate tax liens
and installment loans.
Current market and regulatory trends in banking are changing the basic
nature of the banking industry. Royal Bank intends to keep pace with the
banking industry by being competitive with respect to interest rates and new
types or classes of deposits insofar as it is practical to do so consistent
with Royal Bank's size, objective of profit maintenance and stable capital
structure.
Non-Bank Subsidiary
On June 30, 1995, Royal Bancshares established a special purpose Delaware
investment company, Royal Equity Partners, ("REP") as a wholly owned
subsidiary. Its legal headquarters is at 103 Springer Building, 3411
Silverside Road, Wilmington, DE. REP buys, holds and sells investment
securities and is seeking regulatory approval to invest in loans. At December
31, 2002, total assets of REP were $34 million, of which $16 million was held
in cash and cash equivalents, $17 million in real estate development and loans
and $24 thousand was held in investment securities.
On June 22, 2001, Royal Bancshares through its wholly owned subsidiary
Royal Bank of Pennsylvania, purchased 60% ownership in Crusader Servicing
Corporation ("CSC") from Crusader Holding Corporation. Its legal headquarters
is at 732 Montgomery Avenue, Narberth, PA. CSC acquires, through auction,
delinquent property tax liens in various jurisdictions, assuming a lien
position that is generally superior to any mortgage liens on the property, and
obtaining certain foreclosure rights as defined by local statute. At December
31, 2002, total assets of CSC were $48 million.
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Products and Services with Reputation Risk
Royal Bancshares offers a diverse range of financial and banking products
and services. In the event one or more customers and/or governmental agencies
become dissatisfied or object to any product or service offered by Royal
Bancshares or any of its subsidiaries, whether legally justified or not,
negative publicity with respect to any such product or service could have a
negative impact on the company's reputation. The discontinuance of any product
or service, whether or not any customer or governmental agency has challenged
any such product or service, could have a negative impact on Royal Bancshares
reputation.
Future Acquisitions
Royal Bancshares's acquisition strategy consists of identifying financial
institutions with business philosophies that are similar to the company's,
which operate in strong markets that geographically compatible with our
operations, and which can be acquired at an acceptable cost. In evaluating
acquisitions opportunities, the company generally considers potential revenue
enhancements and operating efficiencies, asset quality, interest rate risk,
and management capabilities. Royal Bancshares currently has no formal
commitments with respect to future acquisitions although discussions with
acquisition candidates take place occasionally.
Concentrations, Seasonality
Royal Bancshares does not have any portion of its business dependent on a
single or limited number of customers, the loss of which would have a material
adverse effect on its business. No substantial portion of loans or investments
is concentrated within a single industry or group of related industries,
although a significant majority of loans are secured by real estate located in
southeastern Pennsylvania. The business of Royal Bancshares and its
subsidiaries is not seasonal in nature.
Environment Compliance
Royal Bancshares and its subsidiaries' compliance with federal, state and
local environment protection laws had no material effect on capital
expenditures, earnings or their competitive position in 2002, and is not
expected to have a material effect on such expenditures, earnings or
competitive position in 2003.
Supervision and Regulation
Bank holding companies and banks operate in a highly regulated environment
and are regularly examined by federal and state regulatory authorities.
The following discussion concerns various federal and state laws and
regulations and the potential impact of such laws and regulation on Royal
Bancshares and its subsidiaries.
To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to the
particular statutory or regulatory provisions themselves. Proposals to change
laws and regulations are frequently introduced in Congress, the state
legislatures, and before the various bank regulatory agencies. The company
cannot determine the likelihood or timing of any such proposals or
legislations or the impact they may have on Royal Bancshares and its
subsidiaries. A change in law, regulations or regulatory policy may have a
material effect on the company's business.
Holding Company. Royal Bancshares, as a Pennsylvania business corporation,
is subject to the jurisdiction of the Securities and Exchange Commission (the
"SEC") and of state securities commissions for matters relating to the
offering and sale of its securities. Accordingly, if Royal Bancshares wishes
to issue additional shares of its Common Stock, in order, for example, to
raise capital or to grant stock options, Royal Bancshares will have to comply
with the registration requirements of the Securities Act of 1933 as amended,
or find an applicable exemption from registration.
Royal Bancshares is subject to the provisions of the Bank Holding Company
Act of 1956, as amended (the "BHC Act"), and to supervision by the Federal
Reserve Board. The BHC Act requires Royal Bancshares to secure the prior
approval of the Federal Reserve Board before it owns or controls, directly or
indirectly, more than 5% of the voting shares of any corporation, including
another bank. In addition, the BHC Act prohibits Royal Bancshares from
acquiring more than 5% of the voting shares of, or interest in, or all or
substantially all of the assets of, any bank located outside Pennsylvania,
unless such an acquisition is specifically authorized by laws of the state in
which such bank is located.
A bank holding company also is prohibited from engaging in or acquiring
direct or indirect control of more than 5% of the voting shares of any such
company engaged in non-banking activities unless the Federal
4
Reserve Board, by order or regulation, has found such activities to be closely
related to banking or managing or controlling banks as to be a proper incident
thereto. In making this determination, the Federal Reserve Board considers
whether the performance of these activities by a bank holding company would
offer benefits to the public that outweigh possible adverse effects.
As a bank holding company, Royal Bancshares is required to file an annual
report with the Federal Reserve Board and any additional information that the
Federal Reserve Board may require pursuant to the BHC Act. The Federal Reserve
Board may also make examinations of the holding company and any or all of
subsidiaries. Further, under Section 106 of the 1970 amendments to the BHC Act
and the Federal Reserve Board's regulation, a bank holding company and its
subsidiaries are prohibited from engaging in certain tying arrangements in
connection with any extension of credit or provision of credit of any property
or services. The so called "anti-tying" provisions state generally that a bank
may not extend credit, lease, sell property or furnish any service to a
customer on the condition that the customer obtain additional credit or
service from the bank, its bank holding company or any other subsidiary of its
bank holding company, or on the condition that the customer not obtain other
credit or services from a competitor of the bank, its bank holding company or
any subsidiary of its bank holding company.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act and by state banking laws on
any extensions of credit to the bank holding company or any of its
subsidiaries, on investments in the stock or other securities of the bank
holding company and on taking of such stock or securities as collateral for
loans to any borrower.
Under Pennsylvania law, Royal Bancshares is permitted to control an
unlimited number of banks. However, Royal Bancshares would be required under
the BHC Act to obtain the prior approval of the Federal Reserve Board before
acquiring all or substantially all of the assets of any bank, or acquiring
ownership or control of any voting shares of any other than the Bank, if,
after such acquisition, would control more than 5% of the voting shares of
such bank.
Royal Bank. The deposits of Royal Bank are insured by the FDIC. Royal Bank
is subject to supervision, regulation and examination by the Pennsylvania
Department of Banking and by the FDIC. In addition, Royal Bank is subject to a
variety of local, state and federal laws that affect its operation.
Under the Pennsylvania Banking Code of 1965, as amended, the ("Code"),
Royal Bancshares is permitted to control an unlimited number of banks. This
rule has been in effect since March 4, 1990. However, Royal Bancshares would
be required under the Bank Holding Company Act to obtain the prior approval of
the Federal Reserve Board before it could acquire all or substantially all of
the assets of any bank, or acquiring ownership or control of any voting shares
of any bank other than Royal Bank, if, after such acquisition, the registrant
would own or control more than 5% of the voting shares of such bank. The Bank
Holding Company Act has been amended by the Riegle-Neal Interstate Banking and
Branching Act of 1994 which authorizes bank holding companies subject to
certain limitations and restrictions to acquire banks located in any state.
In 1995, the Code was amended to harmonize Pennsylvania law with the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 to enable
Pennsylvania institutions to participate fully in interstate banking and to
remove obstacles to the choice by banks from other states engaged in
interstate banking to select Pennsylvania as a head office location. Some of
the more salient features of the amendment are described below.
A bank holding company located in Pennsylvania, another state, the
District of Columbia or a territory or possession of the United States may
control one or more banks, bank and trust companies, national banks,
interstate banks and, with the prior written approval of the Pennsylvania
Department of Banking, may acquire control of a bank and trust company or a
national bank located in Pennsylvania. A Pennsylvania-chartered institution
may maintain branches in any other state, the District of Columbia, or a
territory or possession of the United States upon the written approval of the
Pennsylvania Department of Banking.
Finally, a banking institution existing under the laws of another
jurisdiction may establish a branch in Pennsylvania if the laws of the
jurisdiction in which it is located permit a Pennsylvania-chartered
institution or a national bank located in Pennsylvania to establish and
maintain a branch in such jurisdiction on substantially the same terms and
conditions.
5
In 1995, the Pennsylvania General Assembly enacted the Economic
Development Agency, Fiduciary and Lender Environmental Liability Protection
Act which, among other things, provides protection to lenders from
environmental liability and remediation costs under the environmental laws for
releases and contamination caused by others. A lender who engages in
activities involved in the routine practices of commercial lending, including,
but not limited to, the providing of financial services, holding of security
interests, workout practices, foreclosure or the recovery of funds from the
sale of property shall not be liable under the environmental acts or common
law equivalents to the Pennsylvania Department of Environmental resources or
to any other person by virtue of the fact that the lender engages in such
commercial lending practices. A lender, however, will be liable if it, its
employees or agents, directly cause an immediate release or directly
exacerbate a release of regulated substances on or from the property, or
knowingly and willfully compelled the borrower to commit an action, which
caused such release or violation of an environmental act. The Economic
Development Agency, Fiduciary and Lender Environmental Liability Protection
Act, however, does not limit federal liability which still exists under
certain circumstances.
A subsidiary bank of a holding company is subject to certain restrictions
imposed by the Federal Reserve Act, as amended, on any extensions of credit to
the bank holding company or its subsidiaries, on investments in the stock or
other securities of the bank holding company or its subsidiaries, and on
taking such stock or securities as collateral for loans. The Federal Reserve
Act, as amended, and Federal Reserve Board regulations also place certain
limitations and reporting requirements on extensions of credit by a bank to
principal shareholders of its parent holding company, among others, and to
related interests of such principal shareholders. In addition, such
legislation and regulations may affect the terms upon which any person who
becomes a principal shareholder of a holding company may obtain credit from
banks with which the subsidiary bank maintains a correspondent relationship.
Federal law also prohibits the acquisition of control of a bank holding
company without prior notice to certain federal bank regulators. Control is
defined for this purpose as the power, directly or indirectly, to direct the
management or policies of the bank or bank holding company or to vote 25% or
more of any class of voting securities of the bank holding company.
From time to time, various types of federal and state legislation have
been proposed that could result in additional regulation of, and restrictions
on, the business of the Bank. It cannot be predicted whether any such
legislation will be adopted or how such legislation would affect the business
of the Bank. As a consequence of the extensive regulation of commercial
banking activities in the United States, the Bank's business is particularly
susceptible to being affected by federal legislation and regulations that may
increase the costs of doing business.
Under the Federal Deposit Insurance Act ("FDIC Act"), the FDIC possesses
the power to prohibit institutions regulated by it (such as the Bank) from
engaging in any activity that would be an unsafe and unsound banking practice
or in violation of applicable law. Moreover, the FDIC Act: (i) empowers the
FDIC to issue cease-and-desist or civil money penalty orders against the Bank
or its executive officers, directors and/or principal shareholders based on
violations of law or unsafe and unsound banking practices; (ii) authorizes the
FDIC to remove executive officers who have participated in such violations or
unsound practices; (iii) restricts lending by the Bank to its executive
officers, directors, principal shareholders or related interests thereof;
(iv) restricts management personnel of a bank from serving as directors or in
other management positions with certain depository institutions whose assets
exceed a specified amount or which have an office within a specified
geographic area. Additionally, the FDIC Act provides that no person may
acquire control of the Bank unless the FDIC has been given 60-days prior
written notice and within that time has not disapproved the acquisition or
extended the period for disapproval. In April 1995, regulators revised the
Community Reinvestment Act ("CRA") with an emphasis on performance over
process and documentation. Under the revised rules, the five-point rating
scale is still utilized by examiners to assign a numerical score for a bank's
performance in each of three areas: lending, service and investment.
Under the CRA, the FDIC is required to: (i) assess the records of all
financial institutions regulated by it to determine if these institutions are
meeting the credit needs of the community (including low-and moderate-income
neighborhoods) which they serve, and (ii) take this record into account in its
evaluation of any application made by any such institutions for, among other
things, approval of a branch or other deposit facility, office relocation, a
merger or an acquisition of bank shares. The CRA also requires the federal
banking agencies to make public disclosures of their evaluation of each bank's
record of meeting the credit needs of its entire community, including low-and
moderate-income neighborhoods. This evaluation will include a descriptive rate
("outstanding", "satisfactory", "needs to improve" or "substantial
noncompliance") and a statement describing
6
the basis for the rating. After its most recent examination of the Bank under
CRA, the FDIC gave the Bank a CRA rating of satisfactory.
Under the Bank Secrecy Act ("BSA"), banks and other financial institutions
are required to report to the Internal Revenue Service currency transactions
of more than $10,000 or multiple transactions in any one day of which the Bank
is aware that exceed $10,000 in the aggregate. Civil and criminal penalties
are provided under the BSA for failure to file a required report, for failure
to supply information required by the BSA or for filing a false or fraudulent
report.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Royal
Bank believes that further merger activity within Pennsylvania is likely to
occur in the future, resulting in increased concentration levels in banking
markets within Pennsylvania and other significant changes in the competitive
environment. The Riegle-Neal allows adequately capitalized and managed bank
holding companies to acquire banks in any state starting one year after
enactment (September 29, 1995). Another provision of the Riegle-Neal Act
allows interstate merger transactions beginning June 1, 1997. States are
permitted, however, to pass legislation providing for either earlier approval
of mergers with out-of-state banks, or "opting-out" of interstate mergers
entirely. Through interstate merger transactions, banks will be able to
acquire branches of out-of-state banks by converting their offices into
branches of the resulting bank. The Riegle-Neal Act provides that it will be
the exclusive means for bank holding companies to obtain interstate branches.
Under the Riegle-Neal Act, banks may establish and operate a "de novo branch"
in any State that "opts-in" to de novo branching. Foreign banks are allowed to
operate branches, either de novo or by merger. These branches can operate to
the same extent that the establishment and operation of such branches would be
permitted if the foreign bank were a national bank or state bank. All these
changes are expected to intensify competition in local, regional and national
banking markets. The Pennsylvania Banking Code has been amended to enable
Pennsylvania institutions to participate fully in interstate banking (see
discussion above).
Management cannot anticipate what changes Congress may enact, or, if
enacted, their impact on Royal Bancshares' financial position and reported
results of operation. As a consequence of the extensive regulation of
commercial banking activities in the United States, Royal Bancshares and Royal
Bank's business is particularly susceptible to being affected by federal and
state legislation and regulations that may increase the costs of doing
business.
Federal Deposit Insurance Corporation Improvement Act of 1991
General. The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDIC Improvement Act") includes several provisions that have a direct impact
on the Bank. The most significant of these provisions are discussed below.
The FDIC is required to conduct periodic full-scope, on-site examinations
of Royal Bank. In order to minimize losses to the deposit insurance funds, the
FDIC Improvement Act establishes a format to more monitor FDIC-insured
institutions and to enable prompt corrective action by the appropriate federal
supervisory agency if an institution begins to experience any difficulty. The
FDIC Improvement Act establishes five "capital" categories. They are: (1) well
capitalized, (2) adequately capitalized, (3) undercapitalized, (4)
significantly undercapitalized, and (5) critically undercapitalized. The
overall goal of these new capital measures is to impose more scrutiny and
operational restrictions on banks as they descend the capital categories from
well capitalized to critically undercapitalized.
Under Current regulations, a "well-capitalized" institution would be one
that has at least a 10% total risk-based capital ratio, a 6% Tier 1 risk-based
capital ratio, a 5% Tier 1 Leverage Ratio, and is not subject to any written
order or final directive by the FDIC to meet and maintain a specific capital
level. Royal Bank is presently categorized as a "well-capitalized"
institution.
An "adequately capitalized" institution would be one that meets the
required minimum capital levels, but does not meet the definition of a "well-
capitalized" institution. The existing capital rules generally require banks
to maintain a Tier 1 Leverage Ratio of at least 4% and an 8% total risk-based
capital ratio. Since the risk-based capital requirement to be in the form of
Tier 1 capital, this also will mean that a bank would need to maintain at
least 4% Tier 1 risk-based capital ratio. An institution must meet each of the
required minimum capital levels in order to be deemed "adequately
capitalized."
An "undercapitalized" institution is one that fails to meet one or more of
the required minimum capital levels for an "adequately capitalized"
institution. Under the FDIC Improvement Act, an "undercapitalized" institution
must file a capital restoration plan and is automatically subject to
restrictions on dividends,
7
management fees and asset growth. In addition, the institution is prohibited
from making acquisitions, opening new branches or engaging in new lines of
business without the prior approval of its primary federal regulator. A number
of other restrictions may be imposed.
A "critically undercapitalized" institution is one that has a tangible
equity (Tier 1 capital) ratio of 2% or less. In addition to the same
restrictions and prohibitions that apply to "undercapitalized" and
"significantly undercapitalized" institutions, any institution that becomes
"critically undercapitalized" is prohibited from taking the following actions
without the prior written approval of its primary federal supervisory agency:
engaging in any material transactions other than in the usual course of
business; extending credit for highly leveraged transactions; amending its
charter or bylaws; making any material changes in accounting methods; engaging
in certain transactions with affiliates; paying excessive compensation or
bonuses; and paying interest on liabilities exceeding the prevailing rates in
the institution's market area. In addition, a "critically undercapitalized"
institution is prohibited from paying interest or principal on its
subordinated debt and is subject to being placed in conservatorship or
receivership if its tangible equity capital level is not increased within
certain mandated time frames.
Real Estate Lending Guidelines. Pursuant to the FDIC Improvement Act, the
FDIC has issued real estate lending guidelines that establish loan-to-value
("LTV") ratios for different types of real estate loans. A LTV ratio is
generally defined as the total loan amount divided by the appraised value of
the property at the time the loan is originated. If a bank does not hold a
first lien position, the total loan amount would be combined with the amount
of all senior liens when calculating the ratio. In addition to establishing
the LTV ratios, the FDIC's real estate guidelines require all real estate
loans to be based upon proper loan documentation and a recent independent
appraisal of the property.
The FDIC's guidelines establish the following limits for LTV ratios:
Loan Category LTV Limit
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Raw Land 65%
Land Development
Construction:
Commercial, Multifamily (includes condos and co-ops), and other
Nonresidential 80%
Improved Property 85%
Owner occupied 1-4 Family and Home Equity (without credit
enhancements) 90%
The guidelines provide exceptions to the LTV ratios for government-backed
loans; loans facilitating the sale of real estate acquired by the lending
institution in the normal course of business; loans where the Bank's decision
to lend is not based on the offer of real estate as collateral and such
collateral is taken only out of an abundance of caution; and loans renewed,
refinanced, or restructured by the original lender to the same borrower,
without the advancement of new money. The regulation also allows institutions
to make a limited amount of real estate loans that do not conform to the
proposed LTV ratios. Under this exception, the Bank would be allowed to make
real estate loans that do not conform to the LTV ratio limits, up to an amount
not to exceed 100% of the Bank's total capital.
Truth in Savings Act. The FDIC Improvement Act also contains the Truth in
Savings Act. The purpose of this Act is to require the clear and uniform
disclosure of the rates of interest that are payable on deposit accounts by
the Bank and the fees that are assessable against deposit accounts, so that
consumers can make a meaningful comparison between the competing claims of
banks with regard to deposit accounts and products. This Act requires the Bank
to include, in a clear and conspicuous manner, the following information with
each periodic statement of a deposit account: (1) the annual percentage yield
earned, (2) the amount of interest earned, (3) the amount of any fee and
charges imposed and (4) the number of days in the reporting period. This Act
allows for civil lawsuits to be initiated by customers if the Bank violates
any provision or regulation under this Act.
Gramm-Leach-Bliley Act. On November 12, 1999, President Clinton signed the
Gramm-Leach-Bliley Act of 1999, the Financial services Modernization Act. The
Financial Services Modernization Act repeals the two affiliation provisions of
the Glass-Steagall Act:
o Section 20, which restricted the affiliation of Federal Reserve Member
Banks with firms "engaged principally" in specified securities
activities; and
8
o Section 32, which restricts officer, director, or employee interlocks
between a member bank and any company or person "primarily engaged" in
specified securities activities.
In addition, the Financial Services Modernization Act contains provisions
that expressly preempt any state insurance law. The law establishes a
comprehensive framework to permit affiliations among commercial banks,
insurance companies, securities firms, and other financial service providers.
It revises and expands the framework of the Bank Holding Company Act framework
to permit a holding company system to engage in a full range of financial
activities through a new entity known as a Financial Holding Company.
"Financial activities" is broadly defined to include not only banking,
insurance and securities activities, but also merchant banking and additional
activities that the Federal Reserve, in consultation with the Secretary of the
Treasury, determines to be financial in nature, incidental to such financial
activities, or complementary activities that do not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally.
In general, the Financial Services Modernization Act:
o Repeals historical restrictions on, and eliminates many federal and state
law barriers to, affiliations among banks, securities firms, insurance
companies, and other financial service providers;
o Provides a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding companies;
o Broadens the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies, and their financial subsidiaries;
o Provides an enhanced framework for protecting the privacy of consumer
information;
o Adopts a number of provisions related to the capitalization, membership,
corporate governance, and the other measures designed to modernize the
Federal Home Loan Bank system;
o Modifies the laws governing the implementation of the Community
Reinvestment Act; and
o Addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.
In order for the Royal Bancshares to take advantage of the ability to
affiliate with other financial service providers, Royal Bancshares must become
a "Financial Holding Company" as permitted under an amendment to the Bank
Holding Company Act. To become a Financial holding Company, a company must
file a declaration with the Federal Reserve, electing to engage in activities
permissible for Financial Holding Companies and certifying that it is eligible
to do so because all of its insured depository institution subsidiaries are
well-capitalized and well-managed. In addition, the Federal Reserve must
determine that each insured depository institution subsidiary of the company
has at least a satisfactory "CRA rating. Royal Bancshares currently meets the
requirements to make an election to become a Financial Holding Company. The
Royal Bancshares management has not determined at this time whether it will
seek an election to become a Financial Holding Company. Royal Bancshares is
examining its strategic business plan to determine whether, based on market
conditions, the relative financial conditions of Royal Bancshares and its
subsidiaries, regulatory capital requirements, general economic conditions,
and other factors, Royal Bancshares desires to utilize any of its expanded
powers provided in the Financial Service Modernization Act.
The Financial Services Modernization Act also includes a new section of
the Federal Deposit Insurance Act governing subsidiaries of state banks that
engage in "activities as principal that would only be permissible" for a
national bank to conduct in a financial subsidiary. It expressly preserves the
ability of a state bank to retain all existing subsidiaries. Because
Pennsylvania permits commercial banks chartered by the state to engage in any
activity permissible for national banks, Royal Bank will be permitted to form
subsidiaries to engage in the activities authorized by the Financial Services
Modernization Act, to the same extent as a national bank. In order to form a
financial subsidiary, Royal Bank must be well-capitalized, and Royal Bank
would be subject to the same capital deduction, risk management and affiliate
transaction rules as applicable to national banks.
9
Royal Bancshares and Royal Bank do not believe that the Financial Services
Modernization Act will have a material adverse effect on its operations in the
near-term. However, to the extent that it permits banks, securities firms, and
insurance companies to affiliate, the financial services industry may
experience further consolidation. The Financial Services Modernization Act is
intended to grant to community banks certain powers as a matter of right that
larger institutions have accumulated on an ad hoc basis. Nevertheless, this
act may have the result of increasing the amount of competition that Royal
Bancshares and Royal Bank face from larger institutions and other types of
companies offering financial products, many of which may have substantially
more financial resources than Royal Bancshares and Royal Bank.
Recent Legislation
USA Patriot Act of 2001 In October 2001, the USA Patriot Act of 2001 was
enacted in response to the terrorist attacks in New York, Pennsylvania and
Washington D.C., which occurred on September 11, 2001. The Patriot Act is
intended to strengthen U.S. law enforcements' and the intelligence
communities' abilities to work cohesively to combat terrorism on a variety of
fronts. The potential impact of the Patriot Act on financial institutions of
all kinds is significant and wide ranging. The Patriot Act contains sweeping
anti-money laundering and financial transparency laws and imposes various
regulations, including standards for verifying client identification at
account opening, and rules to promote cooperation among financial
institutions, regulators and law enforcement entities in identifying parties
that may be involved in terrorism or money laundering.
Sarbanes-Oxley Act of 2002 On July 30, 2002, President Bush signed in law the
Sarbanes-Oxley Act of 2002, or the SOA. The stated goals of the SOA are to
increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws.
The SOA is the most far-reaching U.S. securities legislation enacted in
some time. The SOA generally applies to all companies, both U.S. and non-U.S.,
that file or are required to file periodic reports with the Securities and
Exchange Commission (the "SEC") under the Securities Exchange Act of 1934, or
the Exchange Act. Given the extensive SEC role in implementing rules relating
to many of the SOA's new requirements, the final scope of the requirements
remains to be determined.
The SOA addressed, among other matters:
- Audit committees for all reporting companies;
- Certification of financial statements by the chief executive
officer and chief financial officer;
- The forfeiture of bonuses or other incentive-based compensation
and profits from the sale of an issuer's securities by
directors and senior officers in the twelve month period
following initial publication of any financial statements that
later require restatement;
- A prohibition on insider trading during pension plan black out
periods;
- Disclosure of off-balance sheet transactions;
- A prohibition on personal loans to directors and officers;
expedited filings requirements for Form S-4;
- Disclosure of a code of ethics and filing a Form 8-K for a
change or waiver of such code;
- "Real time" filing of periodic reports;
- The formation of a public accounting oversight board;
- Auditor independence; and
- Various increased criminal penalties for violations of
securities laws.
10
The SOA contains provisions which became effective upon enactment on July
30, 2002 and provisions which will become effective from within 30 days to one
year from enactment. The SEC has been delegated the task of enacting rules to
implement various provisions with the respect to, among other matters,
disclosure in periodic filings pursuant to the Exchange Act.
Regulation W Transactions between a bank and its "affiliates" are
quantitatively and qualitatively restricted under the Federal Reserve Act. The
Federal Deposit Insurance Act applies Section 23A and 23B to insured nonmember
banks in the same manner and to the same extent as if they were members of the
Federal Reserve System. The Federal Reserve Board has also recently issued
Regulation W, which codifies prior regulations under Section 23A and 23B of
the Federal Reserve Act and interpretative guidance with respect to affiliate
transactions. Regulation W incorporates the exemption from the affiliate
transaction rules but expands the exemption to cover the purchase of any type
of loan or extension of credit from an affiliate. Affiliates of a bank
include, among other entities, the bank's holding company and companies that
are under common control with the bank. The Company is considered to be an
affiliate of the Bank. In general, subject to certain specified exemptions, a
bank or its subsidiaries are limited in their ability to engage in "covered
transactions" with affiliates:
- To an amount equal to 10% of the bank's capital and surplus, in
the case of covered transactions with any one affiliate; and
- To an amount equal to 20% of the bank's capital and surplus, in
the case of covered transactions with all affiliates.
In addition, a bank and its subsidiaries may engage in covered
transactions and other specified transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
bank or its subsidiary, as those prevailing at the time for comparable
transactions with nonaffiliated companies. A "covered transaction" includes:
- A loan or extension of credit to an affiliate;
- A purchase of, or an investment in, securities issued by an
affiliate;
- A purchase of assets from an affiliate, with some exceptions;
- The acceptance of securities issued by an affiliate as
collateral for a loan or extension of credit to any party; and
- This issuance of a guarantee, acceptance or letter of credit on
behalf of an affiliate.
In addition, under Regulation W:
- A bank and its subsidiaries may not purchase a low-quality
asset from an affiliate;
- Covered transactions and other specified transactions between a
bank or its subsidiaries and an affiliate must be on terms and
conditions that are consistent with safe and sound bank
practices; and
- With some exceptions, each loan or extension of credit by a
bank to an affiliate must be secured by collateral with a
market value ranging from 100% to 130%, depending on the type
of collateral, of the amount of the loan or extension of
credit.
Regulation W generally excludes all non-bank and non-savings association
subsidiaries of banks from treatment as affiliates, except to the extent that
the Federal Reserve Board decides to treat these subsidiaries as affiliates.
Concurrently with the adoptions of Regulation W, the Federal Reserve Board
has proposed a regulation which would further limit the amount of loans that
could be purchased by a bank from an affiliate to not more than 100% of the
bank's capital and surplus.
11
Monetary Policy
The earnings of Royal Bank are affected by the policies of regulatory
authorities including the Federal Reserve Board. An important function of the
Federal Reserve System is to influence the money supply and interest rates.
Among the instruments used to implement those objectives are open market
operations in United States government securities, changes in reserve
requirements against member bank deposits and limitations on interest rates
that member banks may pay on time and savings deposits. These instruments are
used in varying combinations to influence overall growth and distribution of
bank loans, investments and deposits, and their use may also affect rates
charged on loans or paid for deposits.
The policies and regulations of the Federal Reserve Board have had and
will probably continue to have a significant effect on its reserve
requirements, deposits, loans and investment growth, as well as the rate of
interest earned and paid, and are expected to affect Royal Bank's operations
in the future. The effect of such policies and regulations upon the future
business and earnings of Royal Bank cannot be predicted.
Effects of Inflation
Inflation has some impact on Royal Bancshares' operating costs. Unlike
many industrial companies, however, substantially all of Royal Bancshares'
assets and liabilities are monetary in nature. As a result, interest rates
have a more significant impact on Royal Bancshares' performance than the
general level of inflation. Over short periods of time, interest rates may not
necessarily move in the same direction or in the same magnitude as prices of
goods and services.
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. The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and the accompanying notes. Actual results could differ from those estimates.
The company considers that the determination of the allowance for loan
losses involves a higher degree of judgment and complexity than its other
significant accounting policies. The allowance for loan losses is calculated
with the objective of maintaining a reserve level believed by management to be
sufficient to absorb estimated credit losses. Management's determination of
the adequacy of the allowance is based on periodic evaluations of the loan
portfolio and other relevant factors. However, this evaluation is inherently
subjective as it requires material estimates, including, among others,
expected default probabilities, loss given default, expected commitment usage,
the amounts of timing of expected future cash flows on impaired loans,
mortgages, and general amounts for historical loss experience. The process
also considers economic conditions, uncertainties in estimating losses and
inherent risks in the loan portfolio. All of these factors may be susceptible
to significant change. To the extent actual outcomes differ from management
estimates, additional provisions for loan losses may be required that would
adversely impact earnings in future periods.
Royal Bancshares recognizes deferred tax assets and liabilities for the
future tax effects of temporary differences, net operating loss carry forwards
and tax credits. Deferred tax assets are subject to management's judgment
based upon available evidence that future realization is more likely than not.
If management determines that the company may be unable to realize all or part
of net deferred tax assets in the future, a direct charge to income tax
expense may be required to reduce the recorded value of the net deferred tax
asset to the expected realizable amount.
The accounting and reporting policies of Royal Bancshares conform to
accounting principles generally accepted in the United States of America and
general practices within the financial services industry. Critical accounting
policies, judgments and estimates relate to loans, the allowance for loan
losses and deferred tax assets. These policies which significantly affect the
determination of the company's financial position, results of operations and
cash flows, are summarized in Note A "Summary of Significant Accounting
Polices" of the Notes to Consolidated Financial Statements and are discussed
in the section captioned "Recent Accounting Pronouncements" of Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in Items 7 and 8 of this Report, each of which is incorporated herein
by reference.
12
Available Information
Upon a shareholder's written request, a copy of the company's Annual
Report on 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-
K, as required to be filed with the SEC pursuant to Securities Exchange Act
Rule 13a-1, may be obtained, without charge, on our website: RoyalBankPA.com
or from Jeffrey T. Hanuscin, Chief Financial Officer, Royal Bank 732
Montgomery Avenue, Narberth, Pennsylvania 19072.
ITEM 2. PROPERTIES
Royal Bank has sixteen banking offices, which are located in Pennsylvania
and one in Southern NJ.
Narberth Office (1) Villanova Office King of Prussia Office (1)
732 Montgomery Ave 801 East Lancaster Avenue Rt. 202 at Wilson Road
Narberth, Pa. 19072 Villanova, Pa. 19085 King of Prussia, Pa. 19406
Philadelphia Offices Shillington Office Bridgeport Office (1)
- - One Penn Square West 516 East Lancaster Avenue 105 W. 4th Street
30 South 15th Street Shillington. Pa 19607 Bridgeport, Pa. 19406
Philadelphia, Pa 19102
Trooper Office(1) Upper Merion Office
- - 1340 Walnut Street Trooper & Egypt Roads Beidler & Henderson Roads
Philadelphia, Pa. 19107 Trooper, Pa. 19401 King of Prussia, Pa. 19406
- - 401 Fairmount Avenue (1) Reading Office Phoenixville Office (1)
Philadelphia, Pa. 19123 501 Washington Street 808 Valley Forge Road
Reading, Pa. 19601 Phoenixville, Pa. 19460
- - 6526 Castor Avenue
Philadelphia, PA 19149 Philadelphia Loan Office (2) Royal Bank of America
2 Penn Center 3501 Black Horse Pike
- - 1650 Grant Avenue (1) Philadelphia, PA 19102 Turnersville, NJ 08012
Philadelphia, PA 19115
Narberth Training Ctr. (1) (3)
Jenkintown Office (1) 814 Montgomery Ave
600 Old York Road Narberth, PA 19072
Jenkintown, Pa 19046
- ---------------
(1) Owned
(2) Residential Loan Office--Not a branch
(3) Used for employee training
Royal Bank owns nine of the above properties. One property is subject to a
mortgage. The remaining nine properties are leased with expiration dates
between 2002 and 2012. Royal Bank also leases storage warehouse space in
Bridgeport, Pa. at an annual rate of eleven thousand dollars. During 2002,
Royal Bank made aggregate lease payments of approximately $614,000. Royal Bank
believes that all of its properties are attractive, adequately insured, and
well maintained and are adequate for Royal Bank's purposes. Royal Bank also
owns a property located at 144 Narberth Avenue, Narberth, PA, which may serve
as a site for future expansion.
ITEM 3. LEGAL PROCEEDINGS
Management, after consulting with Royal Bancshares's legal counsel, is not
aware of any litigation that would have a material adverse effect on the
consolidated financial position of Royal Bancshares. There are no proceedings
pending other than routine litigation incident to the business of Royal
Bancshares. In addition, no material proceedings are known to be contemplated
by governmental authorities against Royal Bancshares.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR THE BANK'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
On September 6, 1988 the Royal Bancshares' Class A Common Stock commenced
trading on the NASDAQ National Market System (NASDAQ/NMS). Royal Bancshares'
NASDAQ Symbol is RBPAA and is included in the NASDAQ National Market Stock
Table, which is published in most major newspapers. There is no market for
Royal Bancshares' Class B Common Stock, as such is prohibited by the terms of
the Class B Common Stock. The following table shows the range of high, low-end
and closing bid prices for Royal Bancshares' stock as reported by NASDAQ.
Bid Prices
2002 High Low Close
- ---- ---- --- -----
First Quarter...................................................................................... $21.010 $18.495 $19.417
Second Quarter..................................................................................... 20.631 18.932 20.786
Third Quarter...................................................................................... 21.165 16.505 17.767
Fourth Quarter..................................................................................... 21.311 17.165 20.777
2001 High Low Close
- ---- ---- --- -----
First Quarter...................................................................................... $15.297 $11.473 $12.552
Second Quarter..................................................................................... 16.541 12.050 15.566
Third Quarter...................................................................................... 20.091 14.646 16.063
Fourth Quarter..................................................................................... 18.455 15.114 18.455
(Source: This summary reflects information supplied by NASDAQ.)
The bid information shown above is derived from statistical reports of the
NASDAQ Stock Market and reflects inter-dealer prices without retail mark-up,
mark-down or commissions and may not necessarily represent actual transaction.
The bid prices reflect the 3% stock dividend that was declared on January 15,
2003. The NASDAQ Stock Market, Inc., is a wholly-owned subsidiary of National
Association of Securities Dealers, Inc.
The approximate number of recorded holders of Royal Bancshares' Class A
and Class B Common Stock, as of February 28, 2003, is shown below:
Title of Class Number of Record Holders
------------------ ------------------------
Class A Common Stock 379
Class B Common Stock 153
Because substantially all of the holders of Class B Common Stock are also
holders of Class A Common stock the number of record holders of the two
classes on a combined basis was approximately 429 as of February 28, 2003.
14
Securities Authorized for Issuance Under Equity Compensation Plans
The following two tables discloses the number of outstanding options,
warrants and rights granted by the Company to participants in equity
compensation plans, as well as the number of securities remaining available
for future issuance under the plans. The tables provides this information
separately for equity compensation plans that have and have not been approved
by security holders.
(c)
Number of securities
(a) remaining available for
Number of securities to (b) future issuance under
be issued upon Weighted-average equity compensation
exercise of outstanding exercise price of plans (excluding
options, warrants and outstanding options, securities reflected in
rights warrants and rights column (a))
----------------------- -------------------- -----------------------
Outside Directors Stock Option Plan
Equity compensation plan approved by stockholders..... 78,717 $13.18 101,293
Equity compensation plan not approved by stockholders. -- -- --
------ ------ -------
Total................................................. 78,717 $13.18 101,293
(c)
Number of securities
(a) remaining available for
Number of securities to (b) future issuance under
be issued upon Weighted-average equity compensation
exercise of outstanding exercise price of plans (excluding
options, warrants and outstanding options, securities reflected in
rights warrants and rights column (a))
----------------------- -------------------- -----------------------
Employees Stock Option Plan
Equity compensation plan approved by stockholders..... 489,022 $14.40 301,332
Equity compensation plan not approved by stockholders. -- -- --
------- ------ -------
Total................................................. 489,022 $14.40 301,332
Dividends
Subject to certain limitations imposed by law, the Board of Directors of
Royal Bancshares may declare a dividend on shares of common stock.
Stock dividends. On April 21, 1999, the Board of Directors of Royal
Bancshares declared a 4% stock dividend on both its Class A Common Stock and
Class B Common Stock shares payable May 14, 1999, to Shareholders of record on
May 3, 1999. The stock dividend resulted in the issuance of 288,728 additional
shares of Class A Common Stock and 65,296 additional shares of Class B Common
Stock.
On October 20, 1999, the Board of Directors of Royal Bancshares declared a
5% stock dividend on both its Class A Common Stock and Class B Common Stock
shares payable on January 17, 2000, to shareholders of record on January 3,
2000. The stock dividend resulted in the issuance of 382,857 additional shares
of Class A Common Stock and 84,234 additional shares of Class B Common Stock.
15
On January 17, 2001, the Board of Directors of Royal Bancshares declared a
5% stock dividend on both its Class A Common Stock and Class B Common Stock
shares payable on February 12, 2001, to shareholders of record on January 29,
2001. The stock dividend resulted in the issuance of 408,197 additional shares
of Class A Common Stock and 86,614 additional shares of Class B Common Stock.
On January 16, 2002, the Board of Directors of Royal Bancshares declared a
6% stock dividend on both its Class A Common Stock and Class B Common Stock
shares payable on February 8, 2002, to shareholders of record on January 28,
2002. The stock dividend resulted in the issuance of 517,635 additional shares
of Class A common stock and 108,282 additional shares of Class B common stock.
On January 15, 2003, the Board of Directors of Royal Bancshares declared a
3% stock dividend on both its Class A Common Stock and Class B Common Stock
shares payable on February 12, 2003, to shareholders of record on January 29,
2003. The stock dividend resulted in the issuance of 281,196 additional shares
of Class A common stock and 55,820 additional shares of Class B common stock.
Future stock dividends, if any, will be at the discretion of the Board of
Directors and will be dependent on the level of earnings and compliance with
regulatory requirements.
Cash Dividends. Royal Bancshares paid cash dividends in each quarter of
2002 and 2001 for holders of Class A Common Stock and for holders of Class B
Common Stock. This resulted in a charge to retained earnings of approximately
$11 million and $9.0 million for 2002 and 2001, respectively. The following
table sets forth on a quarterly basis the dividend paid to holders of each
Class A and Class B Common Stock for 2002 and 2001, adjusted to give effect to
the stock dividends paid.
Cash Dividends
Per Share
-----------------
2002 Class A Class B
---- ------- -------
First Quarter ............................................. $.2300 $.2645
Second Quarter ........................................... $.2300 $.2645
Third Quarter ............................................ $.2300 $.2645
Fourth Quarter ........................................... $.2375 $.2731
Cash Dividends
Per Share
-----------------
2002 Class A Class B
---- ------- -------
First Quarter ............................................. $.21 $.2415
Second Quarter ............................................ $.21 $.2415
Third Quarter ............................................. $.21 $.2415
Fourth Quarter ............................................ $.23 $.2645
Future dividends must necessarily depend upon net income, capital
requirements, appropriate legal restrictions and other factors relevant at the
time the Board of Directors of Royal Bancshares considers dividend policy.
Cash necessary to fund dividends available for dividend distributions to the
shareholders of Royal Bancshares must initially come from dividends paid by
the Royal Bank to Royal Bancshares. Therefore, the restrictions on the Royal
Bank's dividend payments are directly applicable to Royal Bancshares. Under
the Pennsylvania Banking Code of 1965, as amended, Royal Bank places a
restriction on the availability of capital surplus for payment of dividends.
Under the Pennsylvania Business Corporation Law of 1988, as amended, Royal
Bancshares may pay dividends only if after payment the Registrant would be
able to pay its debts as they become due in the usual course of business and
the total assets are greater than the sum of its total liabilities plus the
amount that would be needed if Royal Bancshares were to be dissolved at the
time of the dividend to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
dividend. See Regulatory Matters Note to the Consolidated Financial Statements
in Item 8 of this report.
16
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial and operating information
for Royal Bancshares should be read in conjunction with ITEM 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and accompanying notes in ITEM 8:
Years ended December 31,
-------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(in thousands, except per share data)
Income Statement Data (in thousands)
Interest income............................................................... $77,104 $69,224 $58,875 $44,682 $40,640
Interest expense.............................................................. 36,491 31,808 22,549 15,922 13,163
------- ------- ------- ------- -------
Net interest income........................................................... 40,613 37,416 36,326 28,760 27,477
Provision for loan losses..................................................... 250 -- 250 -- 4,770
------- ------- ------- ------- -------
Net interest income after loan losses......................................... 40,363 37,416 36,076 28,760 22,707
Gains on sale of loans....................................................... 767 372 -- 45 4
Gains on sale of real estate................................................. 455 188 53 350 --
Gains(losses) on investments................................................. 790 60 (1,302) -- --
Other income................................................................. 1,188 1,118 1,207 1,644 3,570
------- ------- ------- ------- -------
Total other income............................................................ 3,200 1,738 (42) 2,039 3,574
Income before other expenses & income taxes................................... 43,563 39,154 36,034 30,799 26,281
Non-interest expense
Salaries and benefits........................................................ 9,440 10,479 7,979 7,265 5,028
Other........................................................................ 9,481 7,124 5,813 5,865 5,845
------- ------- ------- ------- -------
Total operating expenses...................................................... 18,921 17,603 13,792 13,130 10,873
------- ------- ------- ------- -------
Income before taxes........................................................... 24,642 21,551 22,242 17,669 15,408
Incomes taxes................................................................. 7,237 5,797 7,982 5,564 4,624
------- ------- ------- ------- -------
Net income.................................................................... $17,405 $15,754 $14,260 $12,105 $10,784
======= ======= ======= ======= =======
Basic earnings per share (1).................................................. $ 1.47 $ 1.35 $ 1.22 $ 1.05 $ 0.95
Diluted earnings per share (1)................................................ $ 1.44 $ 1.33 $ 1.21 $ 1.04 $ 0.94
(1) Earnings per share has the weighted average number of shares used in the
calculation adjusted to reflect a 3% stock dividend in 2003, a 6% stock
dividend in January 2002, a 5% stock dividend in 2001, a 5% stock dividend
in 2000, a 4% stock dividend in 1999, and a 4% stock dividend in 1998.
As of December 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Balance Sheet Data (in thousands)
Total assets........................................................... $1,088,484 $930,980 $630,081 $522,536 $427,622
Total average assets................................................... 1,048,875 788,419 573,780 469,193 407,623
Loans, net............................................................. 564,264 634,347 411,973 343,081 292,556
Total deposits......................................................... 820,840 701,860 472,582 381,286 290,390
Total long term debt................................................... 124,500 70,225 30,000 30,000 30,000
Total stockholders equity.............................................. 121,331 108,449 103,502 95,835 94,069
Total average stockholders equity...................................... 114,655 105,072 99,746 94,824 91,374
Return on average assets............................................... 1.7% 2.0% 2.5% 2.6% 2.6%
Return on average equity............................................... 15.2% 15.0% 14.3% 12.8% 11.8%
Average equity to average assets....................................... 10.9% 13.3% 17.4% 20.2% 22.4%
Cash dividend payout ratio............................................. 60.8% 56.9% 55.0% 70.3% 66.5%
17
Average Balances
The following table represents the average daily balances of assets,
liabilities and stockholders' equity and the respective interest paid on
interest bearing assets and interest bearing liabilities, as well as average
rates for the periods indicated:
2002 2001 2000
------------------------------- ----------------------------- -----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Assets (In thousands) ------- -------- ---- ------- -------- ---- ------- -------- ----
Interest bearing deposits...... $ 32,760 $ 682 2.08% $ 18,230 $ 533 2.92% $ 559 $ 23 4.11%
Federal funds.................. 16,780 272 1.62% 18,468 752 4.07% 24,117 1,531 6.35%
Investment securities
Held to maturity.............. 53,226 4,019 7.55% 97,055 7,610 7.84% 67,050 5,115 7.63%
Available for sale............ 297,457 18,817 6.33% 76,338 6,945 9.10% 67,185 6,177 9.19%
---------- ------- ---- -------- ------- ----- -------- ------- -----
Total investment securities.... 350,683 22,836 6.51% 173,392 14,555 8.39% 134,235 11,292 8.41%
Loans
Commercial and Industrial..... 230,556 17,020 7.38% 202,327 20,012 9.89% 182,359 19,580 10.74%
Real estate secured........... 383,816 36,070 9.40% 337,410 32,936 9.76% 213,281 25,326 11.87%
Other loans................... 2,784 224 8.05% 4,116 436 10.59% 9,154 1,123 12.27%
---------- ------- ---- -------- ------- ----- -------- ------- -----
Total loans................. 617,156 53,314 8.64% 543,854 53,384 9.82% 404,794 46,029 11.37%
---------- ------- ---- -------- ------- ----- -------- ------- -----
Total interest earnings assets. 1,017,379 77,104 7.58% 753,944 69,224 9.18% 563,705 58,875 10.44%
Non interest earnings assets
Cash & due from banks......... 8,597 5,432 9,648
Other assets.................. 38,039 46,113 18,809
Allowance for loan loss....... (12,108) (12,264) (12,034)
Unearned discount............. (3,032) (4,806) (6,349)
---------- -------- --------
Total non-interest earning
assets....................... 31,496 34,475 10,075
---------- -------- --------
Total assets................... $1,048,875 $788,419 $573,780
========== ======== ========
Liabilities & Stockholders' Equity
Deposits:
Savings....................... $ 25,658 $ 370 1.44% $ 26,312 $ 637 2.42% $ 19,942 $ 541 2.71%
Now........................... 34,866 697 2.00% 38,353 869 2.27% 35,714 870 2.44%
Money market.................. 270,454 8,491 3.14% 108,792 4,031 3.71% 56,514 2,278 4.03%
Time deposits................. 385,370 19,358 5.02% 369,680 22,237 6.02% 269,430 16,939 6.29%
---------- ------- ---- -------- ------- ----- -------- ------- -----
Total interest bearing deposits 716,348 28,916 4.04% 543,137 27,774 5.11% 381,600 20,628 5.415
Federal funds.................. -- -- -- 334 15 4.49% 295 17 5.76%
Borrowings..................... 137,460 7,575 5.51% 68,129 4,019 5.90% 30,613 1,904 6.22%
---------- ------- ---- -------- ------- ----- -------- ------- -----
Total interest bearing
liabilities.................. 853,808 36,491 4.27% 611,600 31,808 5.20% 412,508 22,549 5.47%
---------- ------- ---- -------- ------- ----- -------- ------- -----
Non interest bearing deposits. 53,800 49,903 45,501
Other liabilities............. 26,612 21,844 16,025
---------- ------- ---- -------- ------- ----- -------- ------- -----
Total liabilities.............. 934,220 683,347 474,034
Stockholders' equity.......... 114,665 105,072 99,746
---------- ------- ---- -------- ------- ----- -------- ------- -----
Total liabilities and
Stockholders' equity.......... $1,048,875 $788,419 $573,780
========== ======== ========
Net interest income............ $40,613 $37,416 $36,326
======= ======= =======
3.99% 4.96% 6.44%
==== ===== =====
(1) The indicated income and annual rate are presented in a taxable equivalent
basis using the federal tax rate of 34% for all periods.
(2) Nonaccruing loans have been included in the appropriate average loan
balance category, but interest on these loans has not been included.
18
Rate Volume
The following table sets forth a rate/volume analysis, which segregates in
detail the major factors contributing to the change in net interest income for
the years ended, December 31, 2002 and 2001, as compared to respective
previous periods, into amounts attributable to both rate and volume variances.
2002 Vs 2001 2001 Vs 2000
Changes due to: Changes due to:
---------------------------- ----------------------------
Interest income Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
Interest bearing deposits in banks ................................. $ 335 ($186) $ 149 $ 518 ($8) $ 510
Federal funds sold ................................................. (63) (417) (480) (308) (471) (779)
Investments securities
Held to maturity .................................................. (3,319) (272) (3,591) 2,349 146 2,495
Available for sale ................................................ 14,579 (2,707) 11,872 833 (65) 768
------- ------- ------- ------- ------- -------
Total investment securities ........................................ 11,260 (2,979) 8,281 3,182 81 3,263
Loans
Commercial and industrial ......................................... 2,541 (5,533) (2,992) 2,046 (1,614) 432
Mortgages secured by real estate .................................. 4,397 (1,262) 3,135 12,730 (5,120) 7,610
Other loans ....................................................... (122) (90) (212) (550) (137) (687)
------- ------- ------- ------- ------- -------
Total loans ........................................................ 6,816 (6,885) (69) 14,226 (6,871) 7,355
------- ------- ------- ------- ------- -------
Total increase (decrease) in interest income ....................... 18,348 (10,467) 7,881 17,618 (7,269) 10,349
Interest expense
Deposits
Savings ........................................................... ($15) ($252) ($267) $ 171 ($75) ($96)
Now and Money Market .............................................. 4,789 (501) 4,288 1,831 (79) 1,752
Time deposits ..................................................... 913 (3,792) (2,879) 6,063 (766) 5,297
------- ------- ------- ------- ------- -------
Total deposits................................................... 5,687 (4,545) 1,142 8,065 (920) 7,145
Federal funds purchase ............................................ (7) (8) (15) 2 (4) (2)
Borrowings ........................................................ 3,837 (281) 3,556 2,218 (103) 2,115
------- ------- ------- ------- ------- -------
Total increase(decrease) in interest expense ....................... 9,517 (4,834) 4,683 10,285 (1,027) 9,258
Total increase(decrease) in net interest income .................... $ 8,831 ($5,633) $ 3,198 $ 7,333 ($6,242) $ 1,091
======= ======= ======= ======= ======= =======
19
Loans
The following table reflects the composition of the loan portfolio of
Royal Bank of Pennsylvania and the percent of gross outstandings represented
by each category at the dates indicated.
As of December 31,
--------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------- -------------- -------------- -------------- --------------
(in thousands)
Loans
Comm'l and Industrial ................... $241,373 42% $218,498 34% $193,398 45% $168,329 47% $127,972 41%
Real Estate Secured ..................... 333,972 57% 417,028 64% 230,999 54% 189,459 52% 183,335 58%
Other ................................... 3,509 1% 13,909 2% 4,561 1% 4,506 1% 1,293 1%
-------- --- -------- --- -------- --- -------- --- -------- ---
Total gross loans ...................... 578,854 100% 649,435 100% 428,958 100% 362,294 100% 312,600 100%
Unearned income ......................... (1,082) (1,056) (1,992) (2,154) (1,833)
Discount on loans purchased ............. (1,038) (2,144) (3,020) (5,322) (6,291)
-------- -------- -------- -------- --------
576,734 646,235 423,946 354,818 304,476
Allowance for loan loss ................. (12,470) (11,888) (11,973) (11,737) (11,920)
-------- -------- -------- -------- --------
Total net loans ........................ $564,264 $634,347 $411,973 $343,081 $292,556
======== ======== ======== ======== ========
Analysis of Allowance for Loan Loss
Year ending December 31,
------------------------------------------------------
(in thousands)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Total Loans.............................................................. $576,734 $646,235 $423,947 $354,818 $304,476
======== ======== ======== ======== ========
Daily average loan balance............................................... $617,156 $543,854 $404,794 $320,544 $299,916
======== ======== ======== ======== ========
Allowance for loan loss:
Balance at the beginning of the year.................................... $ 11,888 $ 11,973 $ 11,737 $ 11,919 $ 8,186
Charge offs by loan type:
Commercial............................................................ 47 82 523 1,062 1,501
Real estate........................................................... 878 435 105 13 135
-------- -------- -------- -------- --------
Total charge offs....................................................... 925 517 628 1,075 1,636
Recoveries by loan type:
Commercial............................................................ 19 212 596 850 539
Individual............................................................ 32 32 4 35 --
Real estate........................................................... 1,206 188 14 7 60
-------- -------- -------- -------- --------
Total recoveries........................................................ 1,257 432 614 893 599
-------- -------- -------- -------- --------
Net loan charge offs.................................................... 332 (85) (14) (182) (1,035)
Increase (decrease) in Provision for
loan loss............................................................ 250 -- 250 -- 4,770
-------- -------- -------- -------- --------
Balance at end of year................................................... $ 12,470 $ 11,888 $ 11,973 $ 11,737 $ 11,919
======== ======== ======== ======== ========
Net charge offs to average loans......................................... 0.05% 0.02% -- 0.06% 0.35%
======== ======== ======== ======== ========
Allowance to total loans at year end..................................... 2.16% 1.84% 2.82% 3.31% 3.91%
======== ======== ======== ======== ========
The allowance for loan losses is established through provisions for loan
losses based on management's on-going evaluation of the risks inherent in
Royal Bank's loan portfolio. Factors considered in the evaluation process
include growth of the loan portfolio, risk characteristics of the types of
loans in the portfolio, geographic and large borrower concentrations, current
regional economic and real estate market conditions that could affect the
ability of borrowers to pay, the value of underlying collateral, and trends in
loan delinquencies and charge-offs.
Royal Bank utilizes an internal rating system to monitor and evaluate the
credit risk inherent in its loan portfolio. All loans approved by the loan
committee, executive board committee and the Board of Directors are initially
assigned a rating of pass. The loan review officer, Vice President of Special
Assets and the loan review
20
committee are expected to recommend changes in loan ratings when facts come to
their attention that warrant an upgrade or downgrade in a loan rating. Problem
and potential problem assets are assigned the three lowest ratings. Such
ratings coincide with the "Substandard", "Doubtful" and "Loss" classifications
used by federal regulators in their examination of financial institutions.
Generally, an asset is considered Substandard if it is inadequately protected
by the current net worth and paying capacity of the obligors and/or the
collateral pledged. Substandard assets have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt. Assets classified as
Doubtful have all the weaknesses inherent in those classified Substandard with
the added characteristics that the weaknesses present make collection or
liquidation in full, on the basis of currently existing facts, highly
questionable and improbable. Assets classified as Loss are those considered
uncollectable and of such little value that their continuance as assets is not
warranted. On a regular basis, the Loan Review Officer and senior management
review the status of each loan.
While Royal Bank believes that it has established an adequate allowance
for loan losses, there can be no assurance that the regulators, in reviewing
Royal Bank's loan portfolio, will not request the company to materially
increase its allowances for loan losses. Although management believes that
adequate specific and general loan loss allowances have been established,
actual losses are dependant upon future events and, as such, further additions
to the level of specific and general loss allowances could become necessary.
Loans and Lease Financing Receivables
The following table summarizes the loan portfolio by loan category and
amount that corresponds to the appropriate regulatory definitions.
As of December 31,
-------------------------------
2002 2001 2000
---- ---- ----
(in thousands)
Loans secured by real estate
Construction and land development.............................................................. $ 82,736 $ 64,551 $ 75,038
Secured by 1-4 family residential properties:
Revolving, open-end loans secured by 1-4 family residential
properties and extended under lines of credit................................................ 7,564 35,367 7,825
All other loans secured by 1-4 family residential properties:
Secured by first liens....................................................................... 116,248 110,351 5,621
Secured by junior liens...................................................................... 3,418 5,302 4,130
Secured by multi family (5 or more) residential properties..................................... 33,017 35,718 19,832
Secured by nonfarm nonresidential properties................................................... 87,448 165,547 118,297
Commercial and industrial loans to US addresses................................................ 241,373 218,498 193,398
Loans to individuals for household, family, and other personal expenditures..................... 3,146 13,909 4,503
Obligations of state and political subdivisions in the US....................................... 3,541 192 256
All other loans................................................................................. 363 -- 58
Less: Any unearned income on loans listed above................................................. 2,120 3,200 5,011
-------- -------- --------
Total loans and leases, net of unearned income................................................. $576,734 $646,235 $423,947
======== ======== ========
21
Credit Quality
The following table presents the principal amounts of nonaccruing loans
and other real estate.
As of December 31,
------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(in thousands)
Non-accruing loans (1)(2)................................................ $ 11,908 $ 10,794 $ 3,548 $ 1,209 $ 3,419
Other real estate........................................................ 1,444 884 -- 19 707
-------- -------- -------- -------- --------
Total nonperforming assets.............................................. $ 13,352 $ 11,678 $ 3,548 $ 1,228 $ 4,126
-------- -------- -------- -------- --------
Nonperforming assets to total assets..................................... 1.23% 1.25% 0.56% 0.24% 0.96%
-------- -------- -------- -------- --------
Nonperforming loans to total loans....................................... 2.06% 1.67% 0.84% 0.34% 1.12%
-------- -------- -------- -------- --------
Allowance for loan loss to nonperforming loans........................... 104.72% 110.14% 337.46% 970.80% 348.64%
-------- -------- -------- -------- --------
(1) Generally a loan is placed on nonaccruing status when it has been
delinquent for a period of 90 days or more unless the loan is both well
secured and in the process of collection.
(2) If interest had been accrued on these nonaccruing loans, such income would
have approximated $473,000 for 2002, $526,000 for 2001, $319,000 for 2000,
$109,000 for 1999, $308,000 for 1998.
Investments Securities
The contractual maturity distribution and weighted average rate of Royal
Bancshares' investments held to maturity and available for sale portfolios at
December 31, 2002 are presented in the following table. Weighted average rate
on tax-exempt obligations have been computed on a fully taxable equivalent
basis assuming a tax rate of 34%.
As of December 31, 2002
------------------------------------------------------------------------------------------
After 1 year After 5 years,
but but
Within 1 year within 5 years within 10 years After 10 years Total
-------------- --------------- --------------- --------------- ---------------
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(in thousands)
Securities held to maturity
M.B.S. .............................. $ 15 7.0% $ 128 7.4% $ 75 10.4% $ 319 5.8% $ 537 6.9%
Other securities .................... 7,227 7.2% 22,850 8.0% -- --% -- --% 30,077 7.8%
------- ---- -------- ---- ------- ----- -------- ---- -------- ----
Total .............................. $ 7,242 7.2% $ 22,978 8.0% $ 75 10.4% $ 319 5.8% $ 30,614 7.8%
======= ==== ======== ==== ======= ===== ======== ==== ======== ====
Available for sale
M.B.S. .............................. $ -- --% $ 95 7.9% $41,702 5.2% $ 59,477 5.6% $101,274 5.5%
CMO'S ............................... -- --% -- --% 6,254 6.3% 128,754 5.8% 135,008 5.8%
Foreign ............................. 4,339 7.3% 12,024 7.4% -- --% -- --% 16,363 7.4%
Trust Preferred ..................... -- --% -- --% -- --% 37,329 9.4% 37,329 9.4%
Other securities .................... 11,005 4.4% 97,436 6.6% 18,653 6.4% 1,248 6.0% 128,342 6.4%
------- ---- -------- ---- ------- ----- -------- ---- -------- ----
Total .............................. $15,344 5.3% $109,555 6.7% $66.609 5.6% $226,808 6.3% $418,316 6.3%
======= ==== ======== ==== ======= ===== ======== ==== ======== ====
The following tables presents the consolidated book values and approximate
fair value at December 31, 2002 and 2001, respectively, for each major
category of Royal Bancshares' investment securities portfolio for held to
maturity securities and available for sale securities.
22
As of December 31,
-------------------------------------------------------------------
2002 2001 2000
-------------------- -------------------- -------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(in thousands)
Securities held to maturity
State & political subdivisions ............................. $ -- $ -- $ -- $ -- $ --
US Treasuries & agencies ................................... -- -- 35,000 34,679 23,071 23,070
Other securities .......................................... 30,614 32,745 57,903 59,946 63,039 63,279
-------- -------- -------- -------- ------- -------
Total ..................................................... $ 30,614 $ 32,745 $ 92,903 $ 94,625 $86,110 $86,349
======== ======== ======== ======== ======= =======
Securities available for sale
Federal Home Loan Bank stock ............................... $ 8,949 $ 8,949 $ 4,875 $ 4,875 $ 3,170 $ 3,170
Preferred and common stock ................................. 56 56 39 54 1,040 1,043
Other securities ........................................... 405,667 409,311 128,888 124,826 66,828 65,931
-------- -------- -------- -------- ------- -------
Total ..................................................... $414,672 $418,316 $133,802 $129,755 $71,038 $70,144
======== ======== ======== ======== ======= =======
Deposits
The average balance of Royal Bank's deposits by major classifications for
each of the last three years is presented in the following table.
As of December 31,
--------------------------------------------------------
2002 2001 2000
---------------- ---------------- ----------------
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(in thousands)
Demand deposits:
Non interest bearing ................................................. $ 53,800 $ 49,903 -- $ 45,501 --
Interest bearing (NOW) ............................................... 34,866 2.00% 38,353 2.27% 35,714 2.44%
Money market deposits ................................................. 270,454 3.14% 108,792 3.71% 56,514 4.03%
Savings deposits ...................................................... 25,658 1.44% 26,312 2.42% 19,942 2.71%
Certificate of deposit ................................................ 385,370 5.02% 369,680 6.02% 269,430 6.29%
-------- -------- --------
Total deposits ....................................................... $770,148 $593,040 $427,101
======== ======== ========
The remaining maturity of Certificates of Deposit of $100,000 or greater:
As of December 31,
-------------------
2002 2001
---- ----
(in thousands)
Maturity
Three months or less .................................... $ 57,804 $ 39,216
Over three months through twelve months ................. 28,694 131,691
Over twelve months through five years ................... 77,244 116,273
Over five years ........................................ 17,236 16,613
-------- --------
Total .................................................. $180,978 $303,793
======== ========
23
Short and Long Term Borrowings
Year ending December 31,
---------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(in thousands)
Short term borrowings....................................................... $ 3,000 $ 30,000 $ 3,000 $ -- $ --
Long term borrowings:
Other borrowings........................................................... -- 2,725 -- -- --
FHLB advances.............................................................. 124,500 67,500 30,000 30,000 30,365
-------- -------- ------- ------- -------
Total borrowings......................................................... $127,500 $100,225 $33,000 $30,000 $30,365
======== ======== ======= ======= =======
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results
of operations should be read in conjunction with the Consolidated Financial
Statements of Royal Bancshares (see Item 8) and related notes included herein.
Financial Condition
Total assets increased $159 million, or 17%, to $ 1.09 billion at December
31, 2002 from $931million at year-end 2001.
Cash and Cash Equivalents. Cash and cash equivalents are comprised of cash
on hand, and cash in interest bearing and non-interest bearing accounts in
banks, in addition to federal funds sold. Cash and cash equivalents increased
$0.6 million, to $40.6 million at December 31, 2002. The average balance of
cash and cash equivalents was approximately $58.1 million for 2002 versus
$42.1 million for 2001. The majority of this average balance is held in
interest-bearing accounts or invested daily in overnight fed funds. The
average balance of these funds that earn interest was $49.5 million in 2002.
The increase in the balance of cash and cash equivalents at year end was held
for anticipated funding needs.
Investment Securities Held to Maturity. Held to maturity ("HTM")
investment securities represents approximately 5% of average earning assets
during 2002 and are comprised of primarily corporate debt securities of
investment grade quality, at the time of purchase. During 2002, HTM investment
securities decreased by $62.3 million to $30.6 million at December 31, 2002,
from $92.9 million at December 31, 2001.
Investment Securities Available for Sale. AFS investment securities
represent 29% of average earning assets during 2002 and are primarily
comprised of government secured mortgaged-backed securities, capital trust
security issues of regional banks, domestic corporate debt and U.S.
denominated foreign corporate debt. At December 31, 2002, AFS investment
securities were $418.3 million while they were $129.8 million at December 31,
2001, an increase of $288.5 million primarily due to the redeployment of
excess cash on hand to achieve a higher rate of return and a change in
investment philosophy in classifying most new security investments as AFS.
Loans. Royal Bancshares' primary earning assets are loans, representing
approximately 61% of average earning assets during 2002. The loan portfolio
has historically been comprised primarily of business demand loans and
commercial mortgages in roughly equal amounts, and to a significantly lesser
extent, consumer loans comprised of one to four family residential and home
equity loans. During 2002, total loans decreased $69.5 million from $646.2
million at December 31, 2001 to $576.7 million at December 31, 2002 primarily
due to an increased number of loans being paid in full as compared to new
originations.
Deposits. Royal Bancshares' primary source of funding, deposits, increased
$118.2 million, or 17%, from $701.9 million at December 31, 2001 to $820.1
million at December 31, 2002. This increase in deposits is primarily due to an
increase of $250 million in money market accounts, or 194% from December 31,
2001. At December 31, 2002, brokered deposits were $127 million as compared to
$254.1 million at December 31, 2001. Certificate of deposit accounts decreased
$134.6 million, or 29% from $464.8 million at December 31, 2001 to $330.2
million at December 31, 2002. Other deposit categories comprised of demand,
NOW, and savings deposits increased $4 million during 2002 over their levels
at December 31, 2001. The increase in all savings categories is primarily due
to competitive rates offered and the opening of our new Branch in Northeast
Philadelphia.
24
Borrowings. Borrowings are comprised of long-term borrowings (advances)
and short-term borrowings (overnight borrowings, advances). Long-term
borrowings increased $60.0 million to $127.5 million at December 31, 2002 from
$70.2 million at December 31, 2001. At December 31, 2002 there was no short
term advances. The average balance of borrowings during 2002 was $137.5
million versus $68.1 million for 2001.
Stockholders' Equity. Stockholders' equity increased $12.9 million or 12%
in 2002 to $121.3 million primarily due to net income of $17.4 million
partially offset by $10.6 million in cash dividends paid in 2002.
Additionally, stockholders equity was affected by the increase in market value
of AFS investment securities during 2002, which resulted in a upward
adjustment of $5 million.
Results of Operations
General. Royal Bancshares' results of operations depend primarily on net
interest income, which is the difference between interest income on interest
earning assets and interest expense on interest bearing liabilities. Interest
earning assets consist principally of loans and investment securities, while
interest bearing liabilities consist primarily of deposits. Net income is also
affected by the provision for loan losses and the level of non-interest income
as well as by non-interest expenses, including salary and employee benefits,
occupancy expenses and other operating expenses.
Net Income. Net income in 2002 was $17.4 million as compared to $15.8
million in 2001 and $14.3 million in 2000. Basic earnings per share were
$1.47, $1.35 and $1.22 for 2002, 2001, and 2000, respectively. The $1.6
million increase in net income for 2002 represents a 10% increase over 2001,
and is primarily attributable to the increase in interest income relating to
loans and the investment security portfolio, and to a lesser extent, non-
recurring fee and accretion income on loans. The increase in net income of
$1.5 million for 2001 represents an 11% increase over 2000 and is primarily
attributable to the increase in interest income relating to loans and the
investment security portfolio.
Net Interest Income. Net interest income is Royal Bancshares' primary
source of income. Its level is a function of the average balance of interest-
earning assets, the average balance of interest-bearing liabilities, and the
spread between the yield on assets and liabilities. In turn, these factors are
influenced by the pricing and mix of Royal Bancshares' interest-earning assets
and funding sources. Additionally, net interest income is affected by market
and economic conditions, which influence rates on loan and deposit growth.
Net interest income was $40.6 million in 2002 as compared to $37.4 million
in 2001. The increase in 2002 of net interest income of $3.2 million is
primarily due to an increase in the average earning assets in 2002 to $1.02
billion. This is an increase of $263 million, or 35% over the level for 2001.
This increase in average interest earning assets contributed to a $7.9 million
increase in interest income to $77.1 million in 2002, as compared to $69.2
million in 2001. Interest expense on interest bearing liabilities increased
$4.7 million, to $36.5 million in 2002, from $31.8 million in 2001. This
increase is primarily due to an increase in the average balance of
interest-bearing liabilities, primarily deposits in 2002 to $853.8 million
from $611.6 million in 2001.
Net interest income was $37.4 million in 2001 compared with $36.3 million
in 2000. The increase in net interest income in 2001 was primarily due to the
increase in interest income relating to the increase in loans and investment
securities during 2001, while the yield on interest earning assets decreased
126 basis points to 9.18% from 10.44% for 2000. In 2001, average interest
earning assets increased $190 million to $754 million from the 2000 level.
This increase in average interest earning assets in 2001 was due to the
purchase of specific investments and loans from Crusader Holding Corporation
on June 22, 2001. In 2001 rates on interest bearing liabilities decreased to
5.2% from 5.5% level in 2000 as overall rates increased during the year.
Average interest bearing liabilities increased to $199.1 million in 2001 from
$412.5 million in 2000.
25
Loans and Mortgages
2002 2001 2000
---- ---- ----
Average loan outstandings........................................................... $617,156,000 $543,854,000 $404,794,000
Interest and fees on loans.......................................................... $ 53,314,000 $ 53,384,000 $ 46,029,000
Average Yield....................................................................... 8.64% 9.82% 11.37%
Royal Bancshares continues to originate both fixed rate and variable rate
loans. At December 31, 2002 variable rate loans represented 58% of total
loans. Together with some matching funding of fixed rate deposits to fixed
rate loans, variable rate loans have helped Royal Bank manage interest rate
risk. However, the unprecedented 12 interest rate cuts during 2002 and 2001
caused the variable rate loan portfolio to reprice faster than most deposits,
resulting in compression of the bank interest rate margin versus prior years.
In 2002, the average balance of loans increased $73.3 million to $617.2
million primarily due to retaining a large amount of loans purchased from
Crusader Holding Corporation on June 22, 2001. The average yield on loans
decreased 118 basis points in 2002 primarily due to the continued decline of
interest rates during the year.
In 2001, the average balance of loans increased $139.1 million to $543.9
million primarily due to the loans purchased via the Crusader Holding
Corporation acquisition. The average yield on loans decreased 155 basis points
to 9.82% in 2001 from 11.37% in 2000 primarily due to decreases in prime rate
during 2001. Royal Bancshares' average prime rate decreased 210 basis points
to approximately 7.09% in 2001 from 9.19% average prime rate for 2000.
HTM Investment Securities
2002 2001 2000
---- ---- ----
Average HTM investment securities...................................................... $53,226,000 $97,055,000 $67,050,000
Interest income........................................................................ $ 4,019,000 $ 7,610,000 $ 5,115,000
Average yield.......................................................................... 7.55% 7.84% 7.63%
HTM investment securities are comprised primarily of taxable corporate
debt issues and to a lesser extent, US Treasuries and agencies. The corporate
debt issues are investment grade at the time of purchase, with maturities in
the three to six year range. It is Royal Bancshares' expressed intention to
hold these securities to maturity.
In 2002, the yield on HTM investment securities decreased 29 basis points
to 7.55% from 7.84% in 2001. This decrease was primarily due to higher
yielding investments that have matured.
In 2001 the yield in HTM investment securities increased 21 basis points
to 7.84% from 7.63% in 2000. This increase is partially attributable to an
increase in yield on taxable investment securities in 2001, primarily due to
the purchase of higher yielding corporate debt securities. The average balance
of HTM investment securities increased $30 million to $97.1 million in 2001
primarily due to the purchase of government agency bonds during 2001.
AFS Investment Securities
2002 2001 2000
---- ---- ----
Average AFS investment securities..................................................... $297,457,000 $76,338,000 $67,185,000
Interest and dividend income.......................................................... $ 18,817,000 $ 6,945,000 $ 6,177,000
Average yield......................................................................... 6.33% 9.10% 9.19%
26
AFS investment securities are comprised primarily of government secured
mortgage-backed securities non-rated capital trust security issues of regional
banks, rated domestic and US denominated foreign corporate debt securities and
to a lesser extent preferred and common stock.
In 2002, the average balance of AFS investment securities increased $221.2
million to $297.5 million primarily due to the redeployment of excess cash on
hand to achieve a higher rate of return and a change in investment philosophy
in classifying most new security investments as AFS. The 277 basis point
decrease in average yield is primarily due to the declining interest rate
environment.
In 2001, the average balance of AFS investment securities increased $9.2
million to $76.3 million primarily due the acquisition of Crusader Holding
Corporation's AFS portfolio and the decision by Royal Bank's investment
committee to classify most new investments as AFS. The 9 basis point decrease
in the average yield is primarily due a decline in rate of investments
purchased during 2001.
Interest Expense on NOW and Money Market Deposits
2002 2001 2000
---- ---- ----
Average NOW & Money Market deposits.................................................. $305,320,000 $147,145,000 $92,228,000
Interest expense..................................................................... $ 9,188,000 $ 4,900,000 $ 3,148,000
Average cost of funds................................................................ 3.01% 3.33% 3.41%
In 2002 the average cost of funds on NOW and money market deposits
decreased 32 basis points to 3.01% from 3.33% in 2001 primarily due to a
decline in the interest rate paid on these deposits. In 2001 the average cost
of funds on NOW and money market deposits decreased 8 basis points to 3.41%
from 3.41% for 2000, primarily due to a decline in interest rate paid on these
deposits.
Interest Expense on Time Deposits
2002 2001 2000
---- ---- ----
Average time deposits............................................................... $385,370,000 $369,680,000 $269,430,000
Interest expense.................................................................... $ 19,358,000 $ 22,237,000 $ 16,939,000
Average cost of funds............................................................... 5.02% 6.02% 6.29%
In 2002, the average balance of time deposits increased $15.7 million to
$385.4 million. This increase in average time deposits is primary due to
having the time deposits acquired from Crusader Holding Corporation on June
22, 2001, being reflected on the records of Royal Bank for a full twelve
months during 2002. In 2001 the average balance of time deposits increased
$100.3 million to $369.7 million. This increase in time deposits is primarily
due to the acquisition of Crusader Holding Corporation's time deposits.
Although rates in general continued to move downward in 2002, the reaction
of deposits to rate changes (both increases and decreases) is slower than the
change in the prime rate because these time deposits must mature before a rate
adjustment would become effective. On December 31, 2002, 22% of time deposits
were comprised of certificates of deposits accounts with balances of $100,000
or more, while in 2001, 43% of time deposits were comprised of certificates of
deposit accounts with balances of $100,000 or more. These types of deposit
have traditionally been considered more rate volatile than other types of
deposits, however Royal Bank's penalty for early redemption somewhat mitigates
this volatility.
Provision for Possible Loan Losses
The provision for loan losses is an amount charged to expense to provide
for future losses on existing loans. In order to determine the amount of the
provision for loan loss, Royal Bank conducts a quarterly review of the loan
portfolio to evaluate overall credit quality. This evaluation consists of an
analysis of individual loans and overall risk characteristics and size of the
loan, and takes into consideration current economic and market conditions,
changes in non-performing loans, the capability of specific borrowers to repay
loan obligations as well as current collateral values.
In 2002, a provision for loan losses was recorded at $0.3 million, as
compared to $0.0 million in 2001 due to senior management assessment that the
level of loan loss reserve was adequate. Net recoveries were $325 thousand in
2002 as compared to net charge-offs of $85 thousand for 2001, an increase of
$410 thousand.
In 2001, no provision for loan losses was recorded as compared $0.3
million in 2000. Net charge-offs in 2001 was $85 thousand as compared to $14
thousand for 2000.
27
The allowance for possible loan loss at December 31, 2002 was $12.5
million, or 2.16% of net loans as compared to $11.9 million at December 31,
2001 or 1.84% of net loans, and $12.0 million at December 31, 2000, or 2.82%
of net loans.
Non-Interest Income
Non-interest income includes service charges on depositors' accounts, safe
deposit rentals and various services such as cashing checks, issuing money
orders and travelers checks, and redeeming US savings bonds and similar
activities. As a result of the acquisition of Crusader Holding Corporation,
Royal Bank retained the residential origination department to originate
residential mortgages for resale in the secondary market. Most components of
non-interest income are a modest and stable source of income, with exceptions
of one-time gains and losses from the sale of other real estate owned, from
period to period these sources of income may vary considerably. Service
charges on depositors' accounts, safe deposit rentals and other fees are
periodically reviewed by Management to remain competitive with other local
banks.
In 2002, total non-interest income increased $1.5 million primarily due to
gains on investment securities sold and the addition of residential mortgage
division. The residential mortgage division's primary function is to originate
residential mortgages for resale in the secondary market.
In 2001, total non-interest income increased $1.7 million primarily due to
decreased prior of year losses associated with AFS investment securities
experienced in the fourth quarter of 2000. Gains on the sales of real estate
increased $135 thousand in 2001 as Royal Bank sold its only foreclosed
property. Also gains on the sale of residential loans through the secondary
market were $372 thousand.
Non-Interest Expense
Non-interest expense includes compensation and employee benefits,
occupancy, advertising, FDIC insurance, state taxes, depreciation, and other
expenses such as auditing, automatic teller machines (ATMs), data processing,
legal, outside service charges, postage, printing and other expenses relating
to other real estate owned.
Non-interest expense increased $1.3 million to $18.9 million in 2002, from
$17.6 million in 2001. This increase was off set by a $1.0 million decrease in
salaries and employee benefits in 2002 primarily due to a reduced required
obligation to companies stock appreciation rights program. Occupancy expense
increased $61 thousand to $1.2 million in 2002. Other operating expenses
increased $2.3 million to $8.3 million in 2002.
Non-interest expense increased $3.8 million to $17.6 million in 2001, from
$13.8 million in 2000. This increase is primarily due to a $2.5 million
increase in salaries and employee benefits in 2001 primarily due normal merit
increases in salaries. Occupancy expense increased $500 thousand to $1.1
million in 2001. Other operating expenses increased by $865 thousand to $6
million in 2001
Accounting for Income Taxes
The provision for federal income taxes was $7.2 million in 2002 as
compared to $5.8 million for 2001, and $8 million for 2000 representing an
effective tax rate of 29%, 27% and 36%, respectively. The $1.4 million
increase in the tax provision for 2002 was primarily due increase level of
earnings offset by the use of tax goodwill related to the acquisition of
Knoblauch State Bank in 1995.
Accounting for Debt and Equity Securities
The Company accounts for investment securities in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities." This
standard requires investments in securities to be classified in one of three
categories; held to maturity, trading or available for sale. Debt securities
that Royal Bank has the positive intent and ability to hold to maturity are
classified as held to maturity and are reported at amortized cost. As Royal
Bank does not engage in security trading, the balance of its debt securities
and any equity securities are classified as available for sale. Net unrealized
gains and losses for such securities, net of tax effect, are required to be
recognized as a separate component of stockholders' equity and excluded from
the determination of net income.
Asset Liability Management
The primary functions of asset-liability management are to assure adequate
liquidity and maintain an appropriate balance between interest earning assets
and interest bearing liabilities. This process is overseen by the Asset-
Liability Committee ("ALCO") which monitors and controls, among other
variables, the liquidity, balance
28
sheet structure and interest rate risk of the consolidated company within
policy parameters established and outlined in the Funds, Cash Flow and
Liquidity Policies and Procedures which are reviewed by the Board of Directors
at least annually. Additionally, the ALCO committee meets periodically and
reports on liquidity, interest rate sensitivity and projects financial
performance in various interest rate scenarios.
Liquidity. Liquidity is the ability of the financial institution to ensure
that adequate funds will be available to meet its financial commitments as
they become due. In managing its liquidity position, the financial institution
evaluates all sources of funds, the largest of which is deposits. Also taken
into consideration is the repayment of loans. These sources provide the
financial institution with alternatives to meet its short-term liquidity
needs. Longer-term liquidity needs may be met by issuing longer-term deposits
and by raising additional capital.
Royal Bancshares generally maintains a liquidity ratio equal to or greater
than 25% of total deposits and short-term liabilities. Liquidity is
specifically defined as the ratio of net cash, short term and marketable
assets to net deposits and short-term liabilities. The liquidity ratio for the
years ended December 31, 2002, 2001 and 2000 was 42%, 33% and 53%,
respectively. Management believes that Royal Bancshares' liquidity position
continues to be adequate, continues to be in excess of its peer group level
and meets or exceeds the liquidity target set forth in the Asset/Liability
Management Policy. Management believes that due to its financial position, it
will be able to raise deposits as needed to meet liquidity demands. However,
any financial institution could have unmet liquidity demands at any time.
Interest-Rate Sensitivity. Interest rate sensitivity is a function of the
repricing characteristics of the financial institution's assets and
liabilities. These include the volume of assets and liabilities repricing, the
timing of repricing, and the relative levels of repricing. Attempting to
minimize the interest rate sensitivity gaps is a continual challenge in a
changing rate environment. The interest sensitivity report examines the
positioning of the interest rate risk exposure in a changing interest rate
environment. Ideally the rate sensitive assets and liabilities will be
maintained in a matched position to minimize interest rate risk.
The interest rate sensitivity analysis is an important management tool,
however, it does have some inherent shortcomings. It is a "static" analysis.
Although certain assets and liabilities may have similar maturities or
repricing, they may react in different degrees to changes in market interest
rates. Additionally, repricing characteristics of certain assets and
liabilities may vary substantially within a given period.
29
The following table summarizes repricing intervals for interest earning
assets and interest bearing liabilities as of December 31, 2002, and the
difference or "gap" between them on an actual and cumulative basis for the
periods indicated. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. During a period of falling interest rates, a positive gap would
tend to adversely affect net interest income, while a negative gap would tend
to result in an increase in net interest income. During a period of rising
interest rates, a positive gap would tend to result in an increase in net
interest income while a negative gap would tend to affect net interest income
adversely. At December 31, 2002, Royal Bancshares is in an asset sensitive
positive of $179.2 million, which indicates liabilities will reprice somewhat
faster than assets within one year.
Interest Rate Sensitivity
Days
----------------- 1 to 5 Over 5 Non-rate
Assets(1) 0 - 90 91 - 365 Years Years Sensitive Total
------------------------------------------------------------
(in millions)
Interest-bearing deposits in banks ................................ $ 18.2 $ -- $ -- $ -- $ 8.9 $ 27.1
Federal funds sold ................................................ 13.5 -- -- -- -- 13.5
Investment securities:
Available for sale ............................................... 51.9 48.5 179.0 138.9 -- 418.3
Held to maturity ................................................. -- 7.2 23.0 .4 -- 30.6
------ ------ ------ ------ ------- --------
Total investment securities..................................... 51.9 55.7 202.0 139.3 -- 448.9
Loans:(2)
Fixed rate ...................................................... 27.3 62.1 127.4 21.8 -- 238.6
Variable rate .................................................... 209.8 73.1 41.8 1.0 -- 325.7
------ ------ ------ ------ ------- --------
Total loans..................................................... 237.1 135.2 169.2 22.8 -- 564.3
Other assets(3) .................................................. -- -- -- -- 34.7 34.7
------ ------ ------ ------ ------- --------
Total Assets ..................................................... $320.7 $190.9 $371.2 $162.1 $ 43.6 $1,088.5
====== ====== ====== ====== ======= ========
Liabilities & Capital
Deposits:
Non interest bearing deposits .................................... $ -- $ -- $ -- $ -- $ 55.6 $ 55.6
Interest bearing deposits ........................................ 35.7 107.8 113.1 178.4 -- 435.0
Certificate of deposits .......................................... 128.2 50.7 125.6 25.7 -- 330.2
------ ------ ------ ------ ------- --------
Total deposits.................................................. 163.9 158.5 238.7 204.1 55.6 820.8
Borrowings ........................................................ 7.0 3.0 60.0 57.5 -- 127.5
Other liabilities ................................................. -- -- -- .4 18.5 18.9
Capital ........................................................... -- -- -- -- 121.3 121.3
------ ------ ------ ------ ------- --------
Total liabilities & capital..................................... $170.9 $161.5 $298.7 $262.0 $ 195.4 $1,088.5
====== ====== ====== ====== ======= ========
Net interest rate GAP ............................................. $149.8 $ 29.4 $ 72.5 $(99.9) $(151.8)
====== ====== ====== ====== =======
Cumulative interest rate GAP ...................................... $149.8 $179.2 $251.7 $151.8 $ --
====== ====== ====== ====== =======
GAP to total assets ............................................... 14% 3%
====== ======
GAP to total equity ............................................... 123% 24%
====== ======
Cumulative GAP to total assets .................................... 14% 16%
====== ======
Cumulative GAP to total equity .................................... 123% 148%
====== ======
(1) Interest earning assets are included in the period in which the balances
is expected to be repaid and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments, and contractual maturities.
(2) Reflects principal maturing within the specified periods for fixed and
repricing for variable rate loans; includes nonperforming loans.
(3) For purposes of gap analysis, other assets include the allowance for
possible loan loss; unamortized discount on purchased loans and deferred
fees on loans.
30
The method of analysis of interest rate sensitivity in the table above has
a number of limitations. Certain assets and liabilities may react differently
to changes in interest rates even though they reprice or mature in the same
time periods. The interest rates on certain assets and liabilities may change
at different times than changes in market interest rates, with some changing
in advance of changes in market rates and some lagging behind changes in
market rates. Also, certain assets have provisions, which limit changes in
interest rates each time the interest rate changes and for the entire term of
the loan. Additionally, prepayments and withdrawals experienced in the event
of a change in interest rates may deviate significantly from those assumed in
the interest rate sensitivity table. Additionally, the ability of some
borrowers to service their debt may decrease in the event of an interest rate
increase.
Capital Adequacy
The table shown below sets forth Royal Bancshares' consolidated capital
level and performance ratios:
Regulatory
2002 2001 2000 Minimum
----- ----- ----- ----------
Capital Level
Leverage ratio ............................................................................ 11.4% 14.1% 17.0% 3.0%
Risk based capital ratio:
Tier 1................................................................................... 14.6% 14.4% 18.1% 4.0%
Total.................................................................................... 15.9% 15.9% 19.4% 8.0%
Capital Performance
Return on average assets .................................................................. 1.7% 2.0% 2.5% --
Return on average equity .................................................................. 15.2% 15.0% 14.3% --
Royal Bancshares' sources of capital have been derived from the issuance
of stock as well as retained earnings. While Royal Bancshares has not had a
stock offering since 1986, total stockholder's equity has increased primarily
due to steady increases in retained earnings. At December 31, 2002, Royal
Bancshares had an average equity to average asset ratio of 11%. Royal
Bancshares has no current plans to raise capital through new stock offerings
and indeed, seeks ways to leverage its existing capital.
In early 1989, each of the federal bank regulatory agencies issued risk-
based capital standards, which were phased in December 31, 1992. The new
standards place assets in various categories of risk with varying weights
assigned, and consider certain off-balance sheet activities, such as letters
of credit and loan commitments in the base for purposes of determining capital
adequacy. The principal objective of establishing the risk-based capital
framework is to achieve greater convergence in the measurement and assessment
of capital adequacy due to the divergence of asset mixes maintained from one
depository institution to the next. At December 31, 2002, Royal Bancshares'
ratio using these standards was 15.9%.
Management Options to Purchase Securities
In May 2001, the directors of the Royal Bancshares approved the amended
Royal Bancshares of Pennsylvania Non-qualified Stock Option and Appreciation
Right Plan (the Plan). The shareholders in connection with the formation of
the holding company reapproved the Plan. The Plan is an incentive program
under which Bank officers and other key employees may be awarded additional
compensation in the form of options to purchase up to 1,500,000 shares of the
Royal Bancshares' Class A common stock (but not in excess of 15% of
outstanding shares). The option price is equal to the fair market value at the
date of the grant. At December 31, 2002, 489,022 options have been granted
which are exercisable at 20% per year. At December 31, 2002, options covering
175,688 shares were exercisable by 98 employees.
In May 2001, the directors of the Royal Bancshares approved an amended
non-qualified Outside Directors Stock Option Plan. The shareholders in
connection with the formation of the holding company reapproved the Plan.
Under the terms of the plan, 250,000 shares of Class A stock are authorized
for grants. Each director is entitled to 1,500 shares of stock annually, which
is exercisable after one year of service. The options were granted at the fair
market value at the date of the grant. At December 31, 2002, 78,717 options
were outstanding and options covering 64,812 shares were exercisable.
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
A simulation model is used to estimate the impact of various changes, both
upward and downward, in market interest rates and volumes of assets and
liabilities on the net income. This model produces an interest rate exposure
report that forecast changes in the market value of portfolio equity under
alternative interest rate environment. The market value of portfolio is
defined as the present value of existing assets and liabilities. The
calculated estimates of changes in the market value of portfolio value are as
follows:
As of December 31, 2002 (Dollars in Thousands)
Market Value of Percent of
Changes in Rates Portfolio Equity Change
---------------- ---------------- ------
+ 200 basis points ............................ 122,263 (6.0)%
+ 100 basis points ............................ 125,372 (3.6)%
Flat rate ..................................... 130,114 0%
- - 100 basis points ............................ 130,423 0.2%
- - 200 basis points ............................ 124,220 (4.5)%
The assumptions used in evaluating the vulnerability of earnings and
capital to changes in interest rates are based on management's considerations
of past experience, current position and anticipated future economic
conditions. The interest rate sensitivity of assets and liabilities as well as
the estimated effect of changes in interest rates on the market value of
portfolio equity could vary substantially if different assumptions are used or
actual experience differs from what the calculations may be based.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS 146, "Accounting for Cost Associated
with Exit or Disposal Activities". SFAS 146 requires recording costs
associated with exit or disposal activities at their fair values when
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon managements' commitment to an exit plan, which is generally
before an actual liability has been incurred. The requirements of SFAS 146 are
effective prospectively for exit or disposal activities initiated after
December 31, 2002; however, early application is encouraged. Management does
not expect the adoption of SFAS 146 to have a material effect on the Company's
financial position, results of operations, or cash flows.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation -Transition and Disclosure". SFAS 148 amends SFAS 123 "Accounting
for Stock-Based Compensation", to provide alternative methods of transition
for a voluntary charge to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the methods of accounting for stock-based
employee compensation and the effect of method used on reports results. SFAS
148 is effective for fiscal years beginning after December 15, 2002. The
expanded annual disclosure provisions are effective for financial reports
containing financial statement for interim periods beginning after December
15, 2002. Management does not expect the adoption of SFAS 148 to have a
material effect on the Company's financial position, results of operations, or
cash flows.
In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns, or both. FIN 46 also
requires disclosures about variable interest entities that a company is not
required to consolidate, but in which it has a significant variable interest.
The consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
existing entities in the first fiscal year or interim period beginning after
June 15, 2003. The company is in the process of determining what impact, if any,
the adoption of the provisions of FIN 46 will have upon its financial condition
or results of operation.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
December 31, 2002 and 2001
33
Report of Independent Certified Public Accountants
Board of Directors
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Royal
Bancshares of Pennsylvania, Inc. and Subsidiaries as of December 31, 2002 and
2001, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Royal
Bancshares of Pennsylvania, Inc. and Subsidiaries as of December 31, 2002 and
2001, and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31, 2002
in conformity with accounting principles generally accepted in the United
States of America.
Philadelphia, Pennsylvania
January 17, 2003
34
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
---------------------
2002 2001
ASSETS ---- ----
(In thousands, except
share data)
Cash and due from banks ............................... $ 27,081 $ 32,918
Federal funds sold .................................... 13,490 7,100
---------- --------
Total cash and cash equivalents ........... 40,571 40,018
---------- --------
Investment securities held to maturity (fair value of
$32,745 and $94,625 in 2002 and 2001, respectively) . 30,614 92,903
Investment securities available for sale - at fair
value................................................ 418,316 129,755
Total loans ........................................... 576,734 646,235
Less allowance for loan losses ................... 12,470 11,888
---------- --------
Net loans ................................. 564,264 634,347
Premises and equipment, net ........................... 8,002 8,512
Accrued interest receivable ........................... 13,778 11,696
Other assets .......................................... 12,939 13,749
---------- --------
Total assets .............................. $1,088,484 $930,980
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing .......................... $ 55,575 $ 51,991
Interest bearing .............................. 765,265 649,869
---------- --------
Total deposits ............................ 820,840 701,860
Accrued interest payable .......................... 11,406 11,634
Other liabilities ................................. 6,682 8,175
Borrowings ........................................ 127,500 100,225
---------- --------
Total liabilities ......................... 966,428 821,894
---------- --------
Minority interest ..................................... 726 637
Stockholders' equity
Common stock
Class A, par value $2.00 per share;
authorized, 18,000,000 shares; issued,
9,595,191 and 8,848,867 shares in 2002 and
2001, respectively .......................... 19,190 17,698
Class B, par value $0.10 per share;
authorized, 2,000,000 shares; issued,
1,860,668 and 1,804,693 shares in 2002 and
2001, respectively .......................... 186 180
Additional paid in capital ........................ 76,984 65,011
Retained earnings ................................. 24,819 30,457
Accumulated other comprehensive income (loss) ..... 2,416 (2,632)
---------- --------
123,595 110,714
Treasury stock - at cost, 215,388 Class A shares
in 2002 and 2001 ...................................... (2,265) (2,265)
---------- --------
Total stockholders' equity ................ 121,330 108,449
---------- --------
Total liabilities and stockholders' equity $1,088,484 $930,980
========== ========
The accompanying notes are an integral part of these statements.
35
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Year ended December 31,
----------------------------
2002 2001 2000
---- ---- ----
(In thousands, except per
share data)
Interest income
Loans, including fees.......................................................................... $53,314 $53,384 $46,029
Investment securities held to maturity......................................................... 4,019 7,610 5,115
Investment securities available for sale....................................................... 18,817 6,945 6,177
Deposits in banks.............................................................................. 682 533 23
Federal funds sold............................................................................. 272 752 1,531
------- ------- -------
TOTAL INTEREST INCOME.................................................................. 77,104 69,224 58,875
------- ------- -------
Interest expense
Deposits....................................................................................... 28,916 27,774 20,628
Borrowings and mortgage payable ............................................................... 7,575 4,019 1,904
Federal funds purchased........................................................................ -- 15 17
------- ------- -------
TOTAL INTEREST EXPENSE................................................................. 36,491 31,808 22,549
------- ------- -------
NET INTEREST INCOME.................................................................... 40,613 37,416 36,326
Provision for loan losses.......................................................................... 250 -- 250
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.................................... 40,363 37,416 36,076
------- ------- -------
Other income
Service charges and fees....................................................................... 1,124 966 894
Gain (losses) on sale of investment securities available for sale ............................. 790 60 (302)
Impairment loss on investment securities available for sale.................................... -- -- (1,000)
Gains on other real estate..................................................................... 457 188 53
Gains on sale of loans......................................................................... 767 372 --
Other income................................................................................... 62 152 313
------- ------- -------
3,200 1,738 (42)
------- ------- -------
Other expenses
Salaries and employee benefits................................................................. 9,440 10,479 7,979
Occupancy and equipment........................................................................ 1,180 1,119 672
Advertising.................................................................................... 520 442 424
Pennsylvania bank shares tax................................................................... 764 759 758
Professional fees.............................................................................. 448 875 429
Losses on investment partnership............................................................... 461 267 620
Travel............................................................................................. 449 297 441
Other operating expenses....................................................................... 5,659 3,365 2,469
------- ------- -------
18,921 17,603 13,792
------- ------- -------
INCOME BEFORE INCOME TAXES............................................................. 24,642 21,551 22,242
Income taxes ...................................................................................... 7,237 5,797 7,982
------- ------- -------
NET INCOME............................................................................. $17,405 $15,754 $14,260
======= ======= =======
Per share data
Net income - basic............................................................................. $ 1.47 $ 1.35 $ 1.22
======= ======= =======
Net income - diluted........................................................................... $ 1.44 $ 1.33 $ 1.21
======= ======= =======
The accompanying notes are an integral part of these statements.
36
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
Years ended December 31, 2002, 2001 and 2000
(In thousands, except per share data)
Class A common Class B common Accumulated
stock stock Additional other
---------------- --------------- paid in Retained comprehensive Treasury Comprehensive
Shares Amount Shares Amount capital earnings income (loss) stock income
------ ------- ------ ------ ---------- -------- ------------- -------- -------------
Balance, January 1,
2000................ 7,879 $15,759 1,683 $168 $50,865 $ 33,329 $(2,022) $(2,265)
Net income for the
year ended December
31, 2000............ -- -- -- -- -- 14,260 -- -- $14,260
Conversion of Class B
common stock to
Class A common stock 43 84 (36) (3) -- (80) -- -- --
5% stock dividends
declared............ 382 765 84 8 6,582 (7,356) -- -- --
Cash in lieu of
fractional shares... -- -- -- -- -- (3) -- -- --
Stock options
exercised........... 84 167 -- -- 321 -- -- -- --
Cash dividends on
common stock ....... -- -- -- -- -- (8,510) -- -- --
Other comprehensive
income, net of
reclassifications
and taxes........... -- -- -- -- -- -- 1,432 -- 1,432
----- ------- ----- ---- ------- -------- ------- ------- -------
Comprehensive income. $15,692
-------
Balance, December 31,
2000................ 8,388 16,775 1,731 173 57,768 31,640 (590) (2,265)
Net income for the
year ended December
31, 2001............ -- -- -- -- -- 15,754 -- -- $15,754
Conversion of Class B
common stock to
Class A common stock 15 29 (13) (1) -- (28) -- -- --
5% stock dividends
declared............ 408 817 87 8 7,094 (7,919) -- -- --
Cash in lieu of
fractional shares... -- -- -- -- -- (6) -- -- --
Stock options
exercised........... 38 77 -- -- 149 -- -- -- --
Cash dividends on
common stock ....... -- -- -- -- -- (8,984) -- -- --
Other comprehensive
loss, net of
reclassifications
and taxes........... -- -- -- -- -- -- (2,042) -- (2,042)
----- ------- ----- ---- ------- -------- ------- ------- -------
Comprehensive income. $13,712
-------
Balance, December 31,
2001................ 8,849 17,698 1,805 180 65,011 30,457 (2,632) (2,265)
Balance, January 1,
2002................ 8,849 $17,698 1,805 $180 $65,011 $ 30,457 $(2,632) $(2,265)
Net income for the
year ended December
31, 2002............ -- -- -- -- -- 17,405 -- -- $17,405
Conversion of Class B
common stock to
Class A common stock 60 120 (52) (5) -- (115) -- -- --
6% stock dividends
declared............ 518 1,036 108 11 11,285 (12,331) -- -- --
Cash in lieu of
fractional shares... -- -- -- -- -- (7) -- -- --
Purchase of treasury
stock............... -- -- -- -- -- -- -- -- --
Stock options
exercised........... 168 336 -- -- 688 -- -- -- --
Cash dividends on
common stock........ -- -- -- -- -- (10,590) -- -- --
Other comprehensive
income, net of
reclassifications
and taxes........... -- -- -- -- -- -- 5,047 -- 5,047
----- ------- ----- ---- ------- -------- ------- ------- -------
Comprehensive income. $22,452
-------
Balance, December 31,
2002................ 9,595 $19,190 1,861 $186 $76,984 $ 24,819 $ 2,415 $(2,265)
===== ======= ===== ==== ======= ======== ======= =======
The accompanying notes are an integral part of this statement.
37
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended December 31,
2002 2001 2000
---- ---- ----
(In thousands, except per share
data)
Cash flows from operating activities
Net income.................................................................................... $ 17,405 $ 15,754 $ 14,260
Adjustments to reconcile net income to net cash (used in) provided by operating activities
Depreciation and amortization............................................................... 1,297 865 414
Provision for loan losses................................................................... 250 -- 250
Amortizations of premiums and discounts on loans, mortgage-backed securities and investments (1,495) (3,527) (5,470)
Provision (benefit) for deferred income taxes............................................... (32) (2,779) 588
Gains on other real estate ................................................................. (457) (188) (53)
Gains on sale of loans...................................................................... (767) (372) --
Gains (losses) on sales of investment securities available for sale......................... (790) (60) 302
Impairment loss on investment securities available for sale................................. -- 1,000
(Increase) in accrued interest receivable................................................... (2,082) (4,667) (769)
Decrease (increase) in other assets......................................................... 842 (3,421) 2,153
Increase (decrease) in accrued interest payable............................................. (228) 364 3,238
Increase (decrease) in other liabilities.................................................... (1,452) (2,418) 2,392
--------- -------- --------
Net cash (used in) provided by operating activities........................................ 12,491 (449) 18,305
--------- -------- --------
Cash flows from investing activities
Proceeds from calls and maturities of investment securities held to maturity.................. 60,563 78,194 14,613
Purchases of investment securities held to maturity........................................... -- (85,000) (30,001)
Proceeds from calls, maturities and sale of investment securities available for sale.......... 309,710 21,169 1,076
Proceeds from sales of investment securities available for sale .............................. 115,250 4,850 610
Redemption (purchase) of Federal Home Loan Bank stock......................................... (4,074) 1,420 --
Cash paid for asset acquisition............................................................... -- (15,239) --
Cash borrowed for asset acquisition........................................................... -- 26,548 --
Purchases of investment securities available for sale......................................... (699,480) (53,125) --
Net decrease (increase) in loans.............................................................. 70,581 46,703 (31,964)
Purchase of loan portfolio.................................................................... -- (32,194)
Purchase of premises and equipment............................................................ (787) (1,706) (1,244)
Proceeds from sale and payments on other real estate.......................................... -- -- 73
--------- -------- --------
Net cash provided by (used in) investing activities......................................... (148,237) 23,814 (79,031)
--------- -------- --------
(Continued)
38
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows - Continued
Year ended December 31,
-------------------------------
2002 2001 2000
---- ---- ----
(In thousands, except per share
data)
Cash flows from financing activities
Net increase in non-interest bearing and interest bearing demand deposits and savings accounts. $ 253,560 $ 44,974 $37,773
Net (decrease) increase in certificates of deposit (134,579) (66,731) 53,523
Principal payments on mortgage ................................................................ (49) (49) (48)
Cash dividends in lieu of fractional shares.................................................... (7) (6) (3)
Proceeds from borrowings, net of repayments.................................................... 27,275 4,000 3,000
Issuance of common stock under stock option plans.............................................. 688 227 488
Cash dividends paid............................................................................ (10,589) (8,984) (8,510)
--------- -------- -------
Net cash (used in) provided by financing activities.......................................... 136,299 (26,569) 86,223
--------- -------- -------
Net increase (decrease) in cash and cash equivalents......................................... 553 (3,204) 25,497
Cash and cash equivalents at beginning of year.................................................. 40,018 43,222 17,725
--------- -------- -------
Cash and cash equivalents at end of year........................................................ $ 40,571 $ 40,018 $43,222
========= ======== =======
Supplemental disclosure of cash flow information
Cash paid during the year for Interest.......................................................... $ 36,719 $ 31,412 $19,311
========= ======== =======
Income taxes................................................................................... $ 5,650 $ 6,800 $ 5,650
========= ======== =======
The accompanying notes are an integral part of these statements.
39
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
December 31, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Royal Bancshares of Pennsylvania, Inc. (the Company), through its
subsidiary Royal Bank of Pennsylvania (the Bank), offers a full range of
banking services to individual and corporate customers located in eastern
Pennsylvania. The Bank competes with other banking and financial institutions
in certain markets, including financial institutions with resources
substantially greater than its own. Commercial banks, savings banks, savings
and loan associations, credit unions and money market funds actively compete
for savings and time deposits and for various types of loans. Such
institutions, as well as consumer finance and insurance companies, may be
considered competitors of the Bank with respect to one or more of the services
it renders.
1. Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries: Royal Equity Partners, Inc. and
the Bank, including the Bank's subsidiaries, Royal Real Estate, Inc. and
Crusader Servicing Corporation. On June 22, 2001, the Bank purchased a 60%
ownership in Crusader Servicing Corporation from Crusader Holding Corporation.
All significant intercompany transactions and balances have been eliminated.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the balance sheet and revenues and
expenditures for the period. Therefore, actual results could differ
significantly from those estimates.
The principal estimate that is particularly susceptible to significant
change in the near term relates to the allowance for loan losses. In
connection with this estimate, when circumstances warrant, management obtains
independent appraisals for significant properties. However, future changes in
real estate market conditions and the economy could affect the Company's
allowance for loan losses.
In addition to being subject to competition from other financial
institutions, the Company is subject to regulations of certain federal
agencies and, accordingly, it is periodically examined by those regulatory
authorities.
Statement of Financial Accounting Standards (SFAS) No. 131, "Segment
Reporting" establishes standards for the way public business enterprises
report information about operating segments. Operating segments are components
of an enterprise about which separate financial information is available that
is evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and assess performance. The statement also requires that
public enterprises report a measure of segment profit of loss, certain
specific revenue and expense items and segment assets. The Company has one
reportable segment, "Community Banking." All of the Company's activities are
interrelated, and each activity is dependent and assessed based on how each of
the activities of the Company supports the others. For example, commercial
lending is dependent upon the ability of the Bank to fund itself with retail
deposits and other borrowings and to manage interest rate and credit risk.
This situation is also similar for consumer and residential mortgage lending.
Accordingly, all significant operating decisions are based upon analysis of
the Company as one operating segment or unit.
(Continued)
40
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
2. Investment Securities
Investment securities are classified in one of three categories: held to
maturity, available for sale or trading. Debt securities that the Company has
the positive intent and ability to hold to maturity are classified as held to
maturity and are reported at amortized cost. As the Company does not engage in
security trading, the balance of its debt securities and any equity securities
are classified as available for sale. Net unrealized gains and losses for such
investment securities available for sale, net of tax effect, are required to
be recognized as a separate component of stockholders' equity and excluded
from the determination of net income. Gains or losses on disposition are
computed by the specific identification method.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was amended in June 1999 by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133" and in June 2000, SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities", (collectively
SFAS No. 133) was issued. SFAS No. 133 requires that entities recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Under SFAS No. 133, an
entity may designate a derivative as a hedge of exposure to either changes in:
(a) fair value of a recognized assets or liability or firm commitment, (b)
cash flows of a recognized or forecasted transaction, or (c) foreign
currencies of a net investment in foreign operations, firm commitments,
available for sale securities or a forecasted transaction. Depending upon the
effectiveness of the hedge and/or the transaction being hedged, any changes in
the fair value of the derivative instrument is either recognized in earnings
in the current year, deferred to future periods, or recognized in other
comprehensive income. Changes in the fair value of all derivative instruments
not recognized as hedge accounting are recognized in current year earnings.
The Company adopted SFAS No. 133 effective April 1, 2000.
SFAS No. 133 allowed a reclassification of investment securities without
calling into question the intent of the Company to hold other investment
securities to maturity in the future. On April 1, 2000, the Company
reclassified investment securities from held to maturity to available for sale
with a fair market value of $11,135,000 resulting in an increase of
accumulated other comprehensive income of $302,000.
SFAS No. 119 "Disclosure About Derivative Financial Instruments and Fair
Value of Financial Instruments", requires disclosures about financial
instruments, which are defined as futures, forwards, swap and option contracts
and other financial instruments with similar characteristics. On-balance-sheet
receivables and payables are excluded from this definition. The Company did
not hold any derivative financial instruments as defined by SFAS No. 119 at
December 31, 2002 or 2001.
3. Loans and Allowance for Loan Losses
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at the amount of
unpaid principal, reduced by unearned income and an allowance for loan and
lease losses.
(Continued)
41
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
3. Loans and Allowance for Loan Losses - continued
The allowance for loan losses is maintained at a level believed adequate
by management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of
the portfolio, past loan loss experience, current economic conditions, volume,
growth, and composition of the loan portfolio, and other relevant factors. The
allowance is increased by provisions for loan losses charged against income.
Decreases in the allowance result from management's determination that the
allowance for loan losses exceeds their estimates of potential loan loss.
The Company accounts for its impaired loans in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan", was amended by SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosure", which requires that a creditor measure impairment
based on the present value of expected future cash flows discounted at the
loan's effective interest rate, except that as a practical expedient, a
creditor may measure impairment based on a loan's observable market price, or
the fair value of the collateral if the loan is collateral-dependent.
Regardless of the measurement method, a creditor must measure impairment based
on the fair value of the collateral when the creditor determines that
foreclosure is probable.
Interest on loans is accrued and credited to operations based upon the
principal amount outstanding. Accretion of unearned discounts on loans has
been added to the related interest income. Accrual of interest is discontinued
on a loan when management believes that the borrower's financial condition is
such that collection of interest is doubtful and generally when a loan becomes
90 days past due as to principal or interest. When interest accruals are
discontinued, interest credited to income in the current year is reversed and
interest accrued in the prior year is charged to the allowance for loan
losses.
In September 2000, SFAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities", replaced SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", and revised the standards for accounting for
the securitizations and other transfers of financial assets and collateral.
This new standard also requires certain disclosures, but carries over most of
the provisions of SFAS No. 125. SFAS No. 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. The adoption of this statement is not expected to have a
material impact on the Company's consolidated financial statements.
On July 6, 2001, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 102 "Selected Loan Loss Allowance Methodology
and Documentation Issues". SAB No. 102 provides guidance on the development,
documentation, and application of a systematic methodology for determining the
allowance for loans and leases in accordance with US GAAP and is effective
upon issuance. The adoption of SAB No. 102 did not have a material impact on
the Company's financial position or results of operations.
4. Other Real Estate
Other real estate is recorded at the lower of the customer's loan balance
or the adjusted fair market value of the real estate securing the loan. The
adjusted fair market value is determined by reducing the fair market value by
estimated costs for the disposition of the property. Costs relating to holding
the property are expensed when incurred. Other real estate owned of
approximately $1,444,000 and $884,000 at December 31, 2002 and 2001,
respectively, is included in other assets on the consolidated balance sheets.
(Continued)
42
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
5. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation,
which is computed principally on the MACRS method over the estimated useful
lives of the assets. Leasehold improvements are amortized on the MACRS method
over the shorter of the estimated useful lives of the improvements or the
terms of the related leases.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 retains the
existing requirements to recognize and measure the impairment of long-lived
assets to be held and used or to be disposed of by sale. However, SFAS No. 144
makes changes to the scope and certain measurement requirements of existing
accounting guidance. SFAS No. 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001. The adoption of this
statement is not expected to have a significant impact on the financial
condition or results of operations of the Company.
6. Income Taxes
Under the liability method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities as measured by the enacted tax rates which
will be in effect when these differences reverse. Deferred tax expense is the
result of changes in deferred tax assets and liabilities. The principal types
of differences between assets and liabilities for financial statement and tax
return purposes are the allowance for loan losses, asset valuation reserves
and net operating loss carryovers.
7. Per Share Information
Basic EPS excludes dilution and is computed by dividing income available
to common shareholders by the weighted average common shares outstanding
during the period. Diluted EPS takes into account the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised and converted into common stock.
8. Stock Option Plans
The Company accounts for stock options under SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No.148, which contains a fair
value-based method for valuing stock-based compensation that entities may use,
which measures compensation cost at the grant date based on fair value of the
award. Compensation is recognized over service period, which is usually the
vesting period. Alternatively, SFAS No. 123 permits entities to continue
accounting for employee stock options and similar equity instruments under
Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to
Employees. Entities that continue to account for stock options using APB
Opinion 25 are required to make a proforma disclosures of net income and
earnings per share, as if the fair value-based method of accounting defined in
SFAS No. 123 had been applied.
(Continued)
43
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
At December 31, 2002, the Company had both a director and employee stock-
based compensation plan, which is more fully described in Note L. The Company
accounts for that plan under the recognition and measurement principles of APB
No. 25, "Accounting for Stock Issued to Employees, and related
interpretations. Stock-based employee compensation cost are not reflected in
net income, as all options granted under the plan had an exercise price equal
to the market value under the underlying common stock of the date of the grant
The following table illustrates the effect on net loss and loss per share if
the Company had applied the fair value recognition provisions of FASB No. 123,
"Accounting for Stock-Based Compensation", to stock-based employee
compensation.
2002 2001 2000
---- ---- ----
Net income(loss), as reported...................................................................... $17,405 $15,754 $14,260
Less: Stock-based compensation costs under
Fair value based method for all awards......................................................... (435) (96) (64)
------- ------- -------
Pro forma net income (loss)........................................................................ 16,970 15,658 14,196
Earnings per share-Basis As Reported............................................................. $ 1.47 $ 1.35 $ 1.22
Pro-forma............................................................... 1.43 1.34 1.22
Earnings per share-Diluted As Reported............................................................ 1.44 1.33 1.21
Pro-forma.............................................................. 1.40 1.32 1.20
9. Benefit Plans
The Company has a noncontributory nonqualified, defined benefit pension
plan covering certain eligible employees. Net pension expense consists of
service costs, interest costs, return on pension assets and amortization of
unrecognized initial net assets. The Company accrues pension costs as
incurred.
10. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, short-term investments and federal funds
sold. Generally, federal funds are purchased and sold for one-day periods.
11. Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
requires all entities to disclose the estimated fair value of their assets and
liabilities considered to be financial instruments. Financial instruments
consist primarily of investment securities, loans and deposits.
12. Advertising Costs
The Company and the Bank expense advertising costs as incurred.
(Continued)
44
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
13. Comprehensive Income
The Company reports comprehensive income which includes net income as well
as certain other items, which result in a change to equity during the period.
The income tax effects allocated to comprehensive income is as follows (in
thousands):
December 31, 2002
--------------------------------
Tax Net of
Before tax (benefit) tax
amount expense amount
---------- --------- ------
Unrealized losses on securities
Unrealized holding gains arising during period................................................ $8,481 $2,883 $5,598
Less reclassification adjustment for gains realized in net income............................. 790 (269) 521
------ ------ ------
Other comprehensive loss, net................................................................. $7,691 $2,614 $5,077
====== ====== ======
December 31, 2001
---------------------------------
Tax Net of
Before tax (benefit) tax
amount expense amount
---------- --------- -------
Unrealized losses on securities
Unrealized holding losses arising during period.............................................. $(3,213) $(1,131) $(2,082)
Less reclassification adjustment for gains realized in net income............................ 60 (20) 40
------- ------- -------
Other comprehensive loss, net................................................................ $(3,153) $(1,111) $(2,042)
======= ======= =======
December 31, 2000
--------------------------------
Tax Net of
Before tax (benefit) tax
amount expense amount
---------- --------- ------
Unrealized gains on securities
Unrealized holding gains arising during period................................................ $2,472 $ 840 $1,632
Less reclassification adjustment for losses realized in net income............................ (302) (102) (200)
------ ----- ------
Other comprehensive income, net............................................................... $2,170 $ 738 $1,432
====== ===== ======
(Continued)
45
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
14. Reclassifications
Certain reclassifications of prior year amounts have been made to conform
to the current year presentation.
15. Summary of accounting policies
In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns, or both. FIN 46 also
requires disclosures about variable interest entities that a company is not
required to consolidate, but in which it has a significant variable interest.
The consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
existing entities in the first fiscal year or interim period beginning after
June 15, 2003. The company is in the process of determining what impact, if any,
the adoption of the provisions of FIN 46 will have upon its financial condition
or results of operation.
NOTE B - ACQUISITIONS
As of June 22, 2001, Royal Bancshares of Pennsylvania completed its
acquisition of the assets of Crusader Holding Corporation (Crusader). Under
the terms of the acquisition, certain assets and liabilities were purchased
for approximately $41,500,000, which represented the approximate fair value of
the net assets acquired. Included in this purchase was approximately
$331,300,000 of assets, of which $236,500,000 was related to the loan
portfolio. The purchase also included the assumption of deposits in the
approximate amount of $251,000,000. The purchase price was paid in cash. This
transaction was accounted for under the purchase method of accounting. There
was no goodwill recorded in connection with this transaction.
The Financial Accounting Standards Board (FASB) issued SFAS No. 147,
Acquisitions of Certain Financial Institutions: An amendment of FASB Statement
No. 72 and 144 and FASB Interpretation No 9, which removes acquisitions of
financial institutions from the scope of SFAS 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, except for transactions
between mutual enterprises. SFAS No. 147 also requires that the acquisition of
a less-than-whole financial institution, such as a branch, be accounted for as
a business combination if the transferred assets and activities constitute a
business. The adoption of SFAS No. 147 did not have a material impact on the
Company's financial position or results of operations.
NOTE C - SEGMENT INFORMATION
SFAS No. 131, Segment Reporting, establishes standards for public business
enterprises to report information about operating segments in their annual
financial statements and requires that those enterprises report selected
information about operating segments in subsequent interim financial reports
issued to shareholders. It also established standards for related disclosure
about products and services, geographic areas, and major customers. Operating
segments are components of an enterprise, which are evaluated regularly by
chief operating decision maker in deciding how to allocate and assess
resources and performance. The Company's chief operating decision maker is the
President and Chief Executive Officer. The Company has identified its
reportable operating segment as "Community Banking".
The Company's community banking segment consists of commercial and retail
banking. The community banking business segment is managed as a single
strategic unit which generates revenue from a variety of products and services
provided by the Banks. For example, commercial lending is dependent upon the
ability of the Bank to fund itself with retail deposits and other borrowings
and to manage interest rate and credit risk. This situation is also similar
for consumer and residential mortgage lending.
The Company's tax lien operation does not meet the quantitative thresholds
for requiring disclosure, but has different characteristics to the community
banking operation. The Company's tax lien operation consists of purchasing
delinquent tax certificates from local municipalities at auction. The tax lien
segment is managed as a single strategic unit which generates revenue from a
nominal interest rate achieved at the individual auction along with periodic
penalties imposed.
(Continued)
46
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE C - SEGMENT INFORMATION - Continued
The accounting policies used in this disclosure of business segments are
the same as those described in the summary of significant accounting policies.
The consolidating adjustments reflect certain eliminations of inter-segment
revenues, cash and investments in subsidiaries.
Selected segment information and reconciliations to consolidated financial
information is as follows:
Community Tax Lien
Bank Operation Consolidated
---------- --------- ------------
(in thousands)
December 31, 2002
Total assets............................................................................ $1,040,568 $47,916 $1,088,484
Total deposits.......................................................................... 820,840 -- 820,840
Net interest income..................................................................... 37,185 3,178 40,363
Total non-interest income............................................................... 2,829 371 3,200
Total non-interest expense.............................................................. 23,882 2,276 26,158
---------- ------- ----------
Net Income.............................................................................. 16,132 1,273 17,405
December 31, 2001
Total assets............................................................................ $ 889,061 $41,919 $ 930,980
Total deposits.......................................................................... 701,860 -- 701,860
Net interest income..................................................................... 35,906 1,510 37,416
Total non-interest income............................................................... 1,677 61 1,738
Total non-interest expense.............................................................. 22,476 924 23,400
---------- ------- ----------
Net Income.............................................................................. 15,107 647 15,754
========== ======= ==========
Interest was paid to the Community Bank segment by the Tax Lien Operation
was approximately $2,039,000 and $904,000 for the years ending December 31,
2002 and 2001, respectively.
NOTE D - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of
the Company's investment securities held to maturity and available for sale
are summarized as follows (in thousands):
2002
----------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- ---------- ---------- -------
Investment securities held to maturity
Corporate securities ........................................................... $30,076 $2,131 $-- $32,207
U.S. government agencies ....................................................... -- -- -- --
Mortgage backed securities ..................................................... 538 -- -- 538
------- ------ --- -------
$30,614 $2,131 $-- $32,745
======= ====== === =======
(Continued)
47
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE D - INVESTMENT SECURITIES - Continued
2002
-----------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- ---------- ---------- --------
Investment securities available for sale
Federal Home Loan Bank stock .................................................. $ 8,949 $ -- $ -- $ 8,949
Preferred and common stock .................................................... 56 -- -- 56
Corporate bonds ............................................................... 111,227 4,732 (221) 115,738
Trust preferred securities .................................................... 39,160 726 (2,557) 37,329
Foreign bonds ................................................................. 16,068 554 (259) 16,363
Mortgage backed securities .................................................... 235,965 1,155 (487) 236,633
Other securities .............................................................. 3,247 1 -- 3,248
-------- ------ ------- --------
$414,672 $7,168 $(3,524) $418,316
======== ====== ======= ========
2001
----------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- ---------- ---------- -------
Investment securities held to maturity
Corporate securities ........................................................... $56,826 $2,042 $ -- $58,868
U.S. government agencies ....................................................... 35,000 64 (385) 34,679
Mortgage backed securities ..................................................... 1,077 1 -- 1,078
------- ------ ----- -------
$92,903 $2,107 $(385) $94,625
======= ====== ===== =======
2001
-----------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- ---------- ---------- --------
Investment securities available for sale
Federal Home Loan Bank stock .................................................. $ 4,875 $ -- $ -- $ 4,875
Preferred and common stock .................................................... 39 15 -- 54
Corporate bonds ............................................................... 60,899 268 (323) 60,844
Trust preferred securities .................................................... 39,294 896 (5,283) 34,907
Foreign bonds ................................................................. 16,403 470 (99) 16,774
Mortgage backed securities .................................................... 11,942 109 (100) 11,951
Other securities .............................................................. 350 -- -- 350
-------- ------ ------- --------
$133,802 $1,758 $(5,805) $129,755
======== ====== ======= ========
The amortized cost and estimated fair value of investment securities at
December 31, 2002, by contractual maturity, are shown below (in thousands).
Expected maturities will differ from contractual maturities because
(Continued)
48
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE D - INVESTMENT SECURITIES - Continued
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
2002
-------------------------------------------
Held to maturity Available for sale
------------------- --------------------
Amortized Fair Amortized Fair
cost value cost value
--------- ------- --------- --------
Within 1 year ...................................................................... $ 7,242 $ 7,478 $ 6,296 $ 6,339
After 1 but within 5 years ......................................................... 22,978 24,873 105,497 109,205
After 5 but within 10 years ........................................................ 75 75 65,673 66,609
After 10 years ..................................................................... 319 319 230,201 227,158
Federal Home Loan Bank stock ....................................................... -- -- 8,949 8,8949
Preferred and common stocks ........................................................ -- -- 56 56
------- ------- -------- --------
$30,614 $32,745 $414,672 $418,316
======= ======= ======== ========
Proceeds from the sale of investment securities available for sale during
2002, 2001 and 2000 were $115,250,000, $6,270,000 and $610,000, respectively,
resulting in gross realized gain (loss) of $790,000, $60,000 and $(302,000)
during 2002, 2001 and 2000, respectively.
As of December 31, 2002 and 2001, investment securities with a book value
of $135,499,000 and $32,878,000, respectively, were pledged as collateral to
secure public deposits and for other purposes required or permitted by law.
NOTE E - LOANS
Major classifications of loans are as follows (in thousands):
2002 2001
-------- --------
Commercial and industrial ............................... $241,373 $218,498
Real Estate
Construction and land development ...................... 82,736 64,551
Residential ........................................... 127,230 151,020
Other .................................................. 124,006 201,457
Consumer ................................................ 3,509 13,909
-------- --------
Total gross loans..................................... 578,854 649,435
Less
Unearned income ........................................ (1,082) (1,056)
Unamortized discount on purchased loans ................ (1,038) (2,144)
-------- --------
Total loans........................................... $576,734 $646,235
======== ========
(Continued)
49
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE E - LOANS - Continued
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $11,908,000 and $10,794,000 at December 31, 2002 and
2001, respectively. If interest had been accrued, such income would have been
approximately $473,000, $526,000 and $319,000 for the years ended December 31,
2002, 2001 and 2000, respectively. Management believes it has adequate
collateral to limit its credit risk with these loans.
The Company granted loans to the officers and directors of the Company and
to their associates. Related party loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with unrelated persons and do not involve
more than normal risk of collectibility. The aggregate dollar amount of these
loans was $5,290,000 and $8,383,000 at December 31, 2002 and 2001,
respectively. During 2002, no new loans were made and repayments totaled
$3,093,000.
The balance of impaired loans, which include the loans on which the
accrual of interest has been discontinued, was approximately $11,966,000 and
$10,852,000 at December 31, 2002 and 2001, respectively. The Company has
identified a loan as impaired when it is probable that interest and principal
will not be collected according to the contractual terms of the loan
agreements. The income recognized on impaired loans during 2002 was $1,000.
Total cash collected on impaired loans during 2002 was $900,000 of which
$898,000 was credited to the principal balance outstanding on such loans.
Interest that would have been accrued on impaired loans during 2002 was
$1,618,000. The Company's policy for interest income recognition on impaired
loans is to recognize income on currently performing restructured loans under
the accrual method. The Company recognizes income on non-accrual loans under
the cash basis when the principal payments on the loans become current and the
collateral on the loan is sufficient to cover the outstanding obligation to
the Company. If these factors do not exist, the Company does not recognize
income.
The Company primarily grants commercial and real estate loans in the
greater Philadelphia metropolitan area. The Company has concentrations of
credit risk in real estate development loans at December 31, 2002. A
substantial portion of its debtors' ability to honor these contracts is
dependent upon the economic sector.
Changes in the allowance for loan losses were as follows (in thousands):
2002 2001 2000
---- ---- ----
Balance at beginning of year....................................................................... $11,888 $11,973 $11,737
Charge-offs....................................................................................... (925) (517) (628)
Recoveries........................................................................................ 1,257 432 614
------- ------- -------
Net charge-offs .................................................................................. 332 (85) (14)
Provision for loan losses......................................................................... 250 -- 250
------- ------- -------
Balance at end of year............................................................................. $12,470 $11,888 $11,973
======= ======= =======
50
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (in thousands):
Estimated
useful lives 2002 2001
------------ ---- ----
Land....................................................................................... -- $ 2,396 $ 2,396
Buildings and leasehold improvements....................................................... 15 - 31.5 years 6,424 6,217
Furniture and fixtures..................................................................... 3 - 7 years 5,748 5,132
------- -------
14,568 13,745
Less accumulated depreciation and amortization............................................. 6,566 5,233
------- -------
$ 8,002 $ 8,512
======= =======
Depreciation and amortization in expense was approximately $1,296,000,
$865,000 and $414,000 for the years ended 2002, 2001 and 2000, respectively.
NOTE G - DEPOSITS
Deposits are summarized as follows (in thousands):
2002 2001
---- ----
Demand .................................................. $ 55,575 $ 51,991
NOW and money market .................................... 412,860 158,784
Savings ................................................. 22,212 26,312
Time, $100,000 and over ................................. 180,977 303,793
Other time .............................................. 149,216 160,980
-------- --------
$820,840 $701,860
======== ========
Maturities of certificates of deposit for the next five years and
thereafter are as follows (in thousands):
2003 ................................................................ $157,030
2004 ................................................................ 92,184
2005 ................................................................ 36,736
2006 ................................................................ 11,478
2007 ................................................................ 7,257
Thereafter .......................................................... 25,508
--------
$330,193
========
51
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE H - BORROWINGS
1. Advances from the Federal Home Loan Bank
At December 31, 2002, advances from the Federal Home Loan Bank (FHLB)
totaling $127,500,000 will mature within one to ten years. The advances are
collateralized by FHLB stock and certain first mortgage loans and mortgage-
backed securities. These advances had a weighted average interest rate of
4.95%.
Outstanding borrowings mature as follows (in thousands):
2003 ................................................................ $ 3,000
2004 ................................................................ --
2005 ................................................................ --
2006 ................................................................ --
2007 ................................................................ --
Thereafter .......................................................... 124,500
--------
$127,500
========
NOTE I - LEASE COMMITMENTS
The Company leases various premises under non--cancelable agreements,
which expire through 2012 and require minimum annual rentals. The approximate
minimum rental commitments under the leases are as follows for the year ended
December 31, (in thousands):
2003 .................................................................. $ 655
2004 .................................................................. 353
2005 .................................................................. 290
2006 .................................................................. 135
2007 .................................................................. 112
Thereafter ............................................................ 490
------
$2,035
======
Rental expense for all leases was approximately $614,000, $501,000 and
$388,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
NOTE J - COMMON STOCK
Each holder of Class A and Class B common stock is entitled to one vote
for each Class A share and ten votes for each Class B share held. Holders of
either class of common stock are entitled to equal per share dividends when
declared.
(Continued)
52
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE J - COMMON STOCK - Continued
The Class B shares may not be transferred in any manner except to the
holder's immediate family. Class B shares have been converted to Class A
shares at the average rate of 1.15 to 1.
Per share information and weighted average shares outstanding have been
restated to reflect the 3% stock dividend of January 2003, the 6% stock
dividend of January 2002, the 5% stock dividend of January 2001, and the 5%
stock dividend of January 2000.
NOTE K - INCOME TAXES
The components of the income tax expense (benefit) included in the
consolidated statements of income are as follows (in thousands):
2002 2001 2000
---- ---- ----
Income tax expense (benefit)
Current............................................................................................. $7,269 $ 6,485 $8,266
Deferred federal tax................................................................................ (32) (1,560) (543)
Benefit applied to reduce goodwill................................................................... -- 872 259
------ ------- ------
$7,237 $ 5,797 $7,982
====== ======= ======
(Continued)
53
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE K - INCOME TAXES - Continued
The difference between the applicable income tax expense and the amount
computed by applying the statutory federal income tax rate of 35% in 2002,
2001 and 2000 is as follows (in thousands):
2002 2001 2000
---- ---- ----
Computed tax expense at statutory rate................................................................ $8,620 $7,543 $7,785
Tax-exempt income..................................................................................... (101) (130) (84)
Low-income housing tax credit......................................................................... (545) (650) (545)
Other, net............................................................................................ (737) (966) 826
Effect of 34% rate bracket............................................................................ -- -- --
------ ------ ------
Applicable income tax expense......................................................................... $7,237 $5,797 $7,982
====== ====== ======
Deferred tax assets and liabilities consist of the following (in
thousands):
2002 2001
---- ----
Deferred tax assets
Allowance for loan losses............................. $ 2,843 $ 2,137
Unrealized losses on investment securities available
for sale............................................. -- 1,415
Accrued stock-based compensation...................... 194 855
Asset valuation reserves.............................. 812 812
Other................................................. 1,458 1,324
Net operating loss carryovers from Knoblauch State
Bank................................................. 7,277 7,449
------- -------
12,584 13,992
Less valuation allowance............................... (7,277) (7,449)
------- -------
5,307 6,543
------- -------
Deferred tax liabilities
Unrealized gains on investment securities available
for sale............................................. 1,199 --
Other................................................. 722 576
------- -------
3,386 576
------- -------
Net deferred tax asset, included in other assets.... $ 3,386 $ 5,967
======= =======
The Company has approximately $21,000,000 of net operating loss carryovers
from the acquisition of Knoblauch State Bank (KSB). These losses will fully
expire in 2015. The utilization of these losses is subject to limitation under
Section 382 of the Internal Revenue Code. As a result, a valuation allowance
has been established to eliminate the deferred tax asset attributable to these
net operating losses.
During 2002, 2001 and 2000, the Company realized a tax benefit related to
the net operating loss carryovers from the acquisition of KSB. The deferred
tax asset associated with those loss carryovers is fully offset by a valuation
allowance. Accordingly, the realized tax benefit is reflected as a reduction
of the goodwill associated with the acquisition and a corresponding reduction
of deferred income tax benefit for the year.
(Continued)
54
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE K - INCOME TAXES - Continued
In addition, the Company has approximately $15,700,000 of tax goodwill
from the acquisition of KSB. The ability to deduct this goodwill for tax
purposes will expire in 2015. The utilization of this goodwill for tax
purposes was subject to the limitations under Section 382 of the Internal
Revenue Code. For 2002, approximately $1,353,000 has been deducted for tax
purposes.
For 2001, the Company has taken a recovery of $550,000 from income tax
payable and reduced its federal income tax expense accordingly in order to
recapture a provision established for issues that arose concerning the low
income housing tax credits acquired from the Kearsley limited partnership in
1994. All issues regarding this tax credit were resolved favorably and as a
result there is no need to maintain this tax reserve.
NOTE L - EARNINGS PER SHARE
Basic and diluted EPS are calculated as follows (in thousands, except per
share data):
2002
-----------------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- -------------- ---------
Basic EPS
Income available to common shareholders.............................................. $17,405 11,845 $ 1.47
Effect of dilutive securities
Stock options........................................................................ -- 248 (0.03)
------- ------ ------
Diluted EPS
Income available to common shareholders plus assumed exercise of options............. $17,405 12,093 $ 1.44
======= ====== ======
All options to purchase shares of common stock were included in the computation
of 2002 diluted EPS because the exercise price was less than the average market
price of the common stock.
2001
-----------------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- -------------- ---------
Basic EPS
Income available to common shareholders.............................................. $15,754 11,671 $ 1.35
Effect of dilutive securities
Stock options........................................................................ -- 171 (0.02)
------- ------ ------
Diluted EPS
Income available to common shareholders plus assumed exercise of options............. $15,754 11,842 $ 1.33
======= ====== ======
All options to purchase shares of common stock were included in the
computation of 2001 diluted EPS because the exercise price was less than the
average market price of the common stock.
(Continued)
55
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE L - EARNINGS PER SHARE - Continued
2000
-----------------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- -------------- ---------
Basic EPS
Income available to common shareholders.............................................. $14,260 11,649 $ 1.22
Effect of dilutive securities
Stock options........................................................................ -- 151 (0.01)
------- ------ ------
Diluted EPS
Income available to common shareholders plus assumed exercise of options............. $14,260 11,801 $ 1.21
======= ====== ======
Options to purchase 50,206 shares of common stock with an exercise price
of $15.33 per share were not included in the computation of 2000 diluted EPS
because the exercise price was greater than the average market price of the
common stock.
NOTE M - STOCK OPTION PLANS
The Company has two stock-based compensation plans, which are described
below. The Company accounts for these plans under APB Opinion No. 25.
1. Outside Directors' Stock Option Plan
The Company adopted a non-qualified outside Directors' Stock Option Plan
(the Director's Plan). Under the terms of the Director's Plan, 250,000 shares
of Class A stock are authorized for grants. Each director is entitled to 1,500
shares of stock annually, which are exercisable after one year of service. The
options were granted at the fair market value at the date of the grant.
Stock option transactions consist of the following:
2002 2001 2000
------------------ ----------------- ------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------- -------- ------ -------- ------- --------
Outstanding at beginning of year ................................. 73,820 $11.70 62,593 $11.82 70,088 $11.20
Granted ......................................................... 15,723 19.95 16,167 13.66 12,600 14.26
Exercised ....................................................... (10,826) 9.85 (4,940) 10.09 (20,095) 7.69
Cancelled ....................................................... -- -- -- -- -- --
------- ------ -------
Outstanding at end of year ....................................... 78,717 13.18 73,820 $11.70 62,593 $11.82
======= ====== =======
Weighted average fair value of options granted during the year ... $ 8.70 $ 3.36 $ 2.45
(Continued)
56
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
December 31, 2002 and 2001
NOTE M - STOCK OPTION PLANS - Continued
The following table summarizes information about options outstanding and
exercisable at December 31, 2002:
Options outstanding Options exercisable
-------------------------------------------- ----------------------------
Weighted
average
remaining Weighted Weighted
Number contractual average Number average
Range of exercise prices outstanding life (years) exercise price exercisable exercise price
- --------------------------------------------------- ----------- ------------ -------------- ----------- --------------
$3.87 - 5.67....................................... 8,272 1.4 $ 5.26 8,272 $ 5.26
$7.39 - 11.10...................................... 10,140 3.8 9.06 10,140 9.06
$10.17 - 15.25..................................... 46,400 6.7 13.47 46,400 13.47
$19.95............................................. 13,905 9.2 19.95 --
------- ------
78,717 64,812
======= ======
2. Employee Stock Option and Appreciation Right Plan
The Company adopted a Stock Option and Appreciation Right Plan (the Plan).
The Plan is an incentive program under which Company officers and other key
employees may be awarded additional compensation in the form of options to
purchase up to 1,500,000 shares of the Company's Class A common stock (but not
in excess of 15% of outstanding shares). At the time a stock option is issued,
a stock appreciation right for an identical number of shares may also be
granted. The option price is equal to the fair market value at the date of the
grant. The options are exercisable at 20% per year beginning one year after
the date of grant and must be exercised within ten years of the grant.
Stock option transactions consist of the following:
2002 2001 2000
------------------- ------------------ ------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
-------- -------- ------- -------- ------- --------
Outstanding at beginning
of year ....................................................... 502,362 $10.44 375,778 $ 9.34 377,247 $ 6.81
Granted ....................................................... 160,336 19.95 174,577 13.66 67,717 12.96
Exercised ..................................................... (157,623) 5.83 (33,488) 5.30 (63,281) 4.74
Cancelled ..................................................... (16,053) 17.62 (14,505) 13.22 (5,905) 13.68
-------- ------- -------
Outstanding at end of year ..................................... 489,022 $14.40 502,362 $10.44 375,778 $ 9.34
======== ======= =======
Weighted average fair value of options granted during the year . $ 8.70 $ 3.36 $ 2.45
(Continued)
57
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE M - STOCK OPTION PLANS - Continued
The following table summarizes information about options outstanding and
exercisable at December 31, 2002:
Options outstanding Options exercisable
-------------------------------------------- ----------------------------
Weighted
average
remaining Weighted Weighted
Number contractual average Number average
Range of exercise prices outstanding life (years) exercise price exercisable exercise price
- --------------------------------------------------- ----------- ------------ -------------- ----------- --------------
$5.43 - 8.15....................................... 39,457 2.3 $ 6.33 39,457 $ 6.33
$10.17 - 15.26..................................... 276,444 6.3 12.62 109,654 11.93
$15.34 - 19.95..................................... 173,121 9.0 19.07 26,578 15.34
------- --------
489,022 175,688
======= ========
58
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE N - PENSION PLAN
The Company has a noncontributory nonqualified defined benefit pension
plan covering certain eligible employees. The Company-sponsored pension plan
provides retirement benefits under pension trust agreements and under
contracts with insurance companies. The benefits are based on years of service
and the employee's compensation during the highest five consecutive years
during the last 10 years of employment. The Company's policy is to fund
pension costs allowable for income tax purposes.
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets (in thousands):
2002 2001
---- ----
Change in benefit obligation
Benefit obligation at beginning of year ....... $2,377 $1,782
Service cost .................................. (800) 488
Interest cost ................................. 191 124
Other changes ................................. 1,280 (17)
------ ------
Benefits obligation at end of year ............ $3,048 $2,377
====== ======
Net pension cost included the following components (in thousands):
2002 2001 2000
---- ---- ----
Service cost................................................................................................ $208 $553 $341
Interest cost............................................................................................... 191 124 86
---- ---- ----
Net periodic benefit cost................................................................................... $399 $677 $427
==== ==== ====
The assumed discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected
benefit obligation were 7% for 2002, 2001 and 2000. The expected long-term
rate of return on assets was 4% for 2002, 2001 and 2000.
The Company has a capital accumulation and salary reduction plan under
Section 401(k) of the Internal Revenue Code of 1986, as amended. Under the
plan, all employees are eligible to contribute from 1% to a maximum of 15% of
their annual salary, with the Company matching 100% of any contribution
between 1% and 5% subject to a $2,500 per employee annual limit. Matching
contributions to the plan were approximately $187,000, $167,000 and $141,000
for the years ended December 31, 2002, 2001 and 2000, respectively.
NOTE O - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit and standby
letters of credit. Such financial instruments are recorded in the financial
statements when they become payable. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The contract amounts of those
instruments reflect the extent of involvement the Company has in particular
classes of financial instruments.
(Continued)
59
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE O - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK - Continued
The Company's exposure to credit loss in the event of non--performance by
the other party to commitments to extend credit and standby letters of credit
is represented by the contractual amount of those instruments. The Company
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
The contract amounts are as follows (in thousands):
December 31,
-----------------
2002 2001
---- ----
Financial instruments whose contract amounts represent
credit risk
Commitments to extend credit........................... $89,792 $111,643
Standby letters of credit and financial guarantees
written ............................................. 5,188 4,782
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, and others are for staged construction,
the total commitment amounts do not necessarily represent immediate cash
requirements.
The Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Company
upon extension of credit, is based on management's credit evaluation.
Collateral held varies but may include personal or commercial real estate,
accounts receivable, inventory and equipment.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. Most guarantees extend for one year and expire in decreasing
amounts through 2003. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The Company holds personal or commercial real estate, accounts
receivable, inventory and equipment as collateral supporting those commitments
for which collateral is deemed necessary. The extent of collateral held for
those commitments is 80%.
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an
entity's assets and liabilities considered to be financial instruments. For
the Company, as for most financial institutions, the majority of its assets
and liabilities are considered financial instruments as defined in SFAS No.
107. However, many of such instruments lack an available trading market, as
characterized by a willing buyer and seller engaging in an exchange
transaction. Also, it is the Company's general practice and intent to hold its
financial instruments to maturity and not to engage in trading or sales
activities. Therefore, the Company had to use significant estimations and
present value calculations to prepare this disclosure.
(Continued)
60
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
Changes in the assumptions or methodologies used to estimate fair value
may materially affect the estimated amounts. Also, management is concerned
that there may not be reasonable comparability between institutions due to the
wide range of permitted assumptions and methodologies in the absence of active
markets. This lack of uniformity gives rise to a high degree of subjectivity
in estimating financial instrument fair value.
Fair values have been estimated using data which management considered the
best available and estimation methodologies deemed suitable for the pertinent
category of financial instrument. The estimation methodologies, resulting fair
values and recorded carrying amounts at December 31, 2002 and 2001 were as
follows:
Fair values of loans and deposits with floating interest rates are
generally presumed to approximate the recorded carrying amounts.
Fair value of financial instruments actively traded in a secondary market
has been estimated using quoted market prices as follows (in thousands):
2002 2001
-------------------- --------------------
Estimated Estimated
fair Carrying fair Carrying
value amount value amount
----- ------ ----- ------
Cash and cash equivalents ......................................................... $ 40,571 $ 40,571 $ 40,018 $ 40,018
Investment securities held to maturity ............................................ 32,745 30,614 94,625 92,903
Investment securities available for sale .......................................... 418,316 418,316 129,755 129,755
Fair value of financial instruments with stated maturities has been
estimated using present value cash flow, discounted at a rate approximating
current market for similar assets and liabilities, as follows (in thousands):
2002 2001
-------------------- --------------------
Estimated Estimated
fair Carrying fair Carrying
value amount value amount
----- ------ ----- ------
Deposits with stated maturities ................................................... $319,551 $330,193 $454,191 $464,773
Long-term borrowings .............................................................. 122,448 127,500 67,574 70,225
Fair value of financial instrument liabilities with no stated maturities
has been estimated to equal the carrying amount (the amount payable on
demand), totaling approximately $490,647,000 and $237,087,000 at December 31,
2002 and 2001, respectively.
Fair value of the net loan portfolio has been estimated using present
value cash flow, discounted at the treasury rate adjusted for non-interest
operating costs and giving consideration to estimated prepayment risk and
credit loss factors, as follows (in thousands):
(Continued)
61
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
2002 2001
-------------------- --------------------
Estimated Estimated
fair Carrying fair Carrying
value amount value amount
----- ------ ----- ------
Net loans ......................................................................... $635,495 $576,734 $668,693 $646,235
The fair value of commitments to extend credit is estimated based on the
amount of unamortized deferred loan commitment fees. The fair value of letters
of credit is based on the amount of unearned fees plus the estimated cost to
terminate the letters of credit. Fair values of unrecognized financial
instruments including commitments to extend credit and the fair value of
letters of credit are considered immaterial.
The Company's remaining assets and liabilities are not considered
financial instruments. No disclosure of the relationship value of the
Company's deposits is required by SFAS No. 107.
NOTE Q - REGULATORY MATTERS
1. Payment of Dividends
Under the Pennsylvania Business Corporation Law, the Company may pay
dividends only if it is solvent and would not be rendered insolvent by the
dividend payment. There are also restrictions set forth in the Pennsylvania
Banking Code of 1965 (the Banking Code) and in the Federal Deposit Insurance
Act (FDIA) concerning the payment of dividends by the Company. Under the
Banking Code, no dividends may be paid except from "accumulated net
earnings" (generally undivided profits). Under the FDIA, no dividend may be
paid if a bank is in arrears in the payment of any insurance assessment due to
the Federal Deposit Insurance Corporation (FDIC).
2. Capital Ratios
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possible additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of
the Bank's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulations to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined
in the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). As of December 31, 2002,
management believes that the Bank meets all capital adequacy requirements to
which it is subject.
(Continued)
62
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE Q - REGULATORY MATTERS - Continued
As of December 31, 2002, the Bank met all regulatory requirements for
classification as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the
table (in thousands).
2002
------------------------------------------------------
To be well
capitalized
under
prompt
For capital corrective
adequacy action
Actual purposes provisions
---------------- --------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total capital (to risk-weighted assetsz)
Company (consolidated) ................................................. $129,873 15.91% $65,304 8.00% N/A N/A
Bank ................................................................... 93,276 11.69 63,815 8.00 $79,769 10.00%
Tier I capital (to risk-weighted assets)
Company (consolidated) ................................................. 119,641 14.61 32,742 4.00 N/A N/A
Bank ................................................................... 83,279 10.41 32,006 4.00 48,010 6.0
Tier I capital (to average assets, leverage)
Company (consolidated) ................................................. 119,641 11.41 31,466 3.00 N/A N/A
Bank ................................................................... 83,279 8.10 30,836 3.00 51,393 5.0
2001
------------------------------------------------------
To be well
capitalized
under
prompt
For capital corrective
adequacy action
Actual purposes provisions
---------------- --------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total capital (to risk-weighted assets)
Company (consolidated) ................................................. $121,237 15.92% $60,920 8.00% N/A N/A
Bank ................................................................... 87,432 11.58 60,408 8.00 $75,510 10.00%
Tier I capital (to risk-weighted assets)
Company (consolidated) ................................................. 111,718 14.42 30,993 4.00 N/A N/A
Bank ................................................................... 77,993 10.33 30,204 4.00 45,306 6.00
Tier I capital (to average assets, leverage)
Company (consolidated) ................................................. 111,718 14.17 23,653 3.00 N/A N/A
Bank ................................................................... 77,993 10.08 23,214 3.00 38,690 5.00
63
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE R - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Condensed financial information for the parent company only follows (in
thousands).
CONDENSED BALANCE SHEETS
December 31,
-------------------
2002 2001
---- ----
Assets
Cash ................................................... $ 2,527 $ 1,444
Investment in Royal Investments of Delaware, Inc. - at
equity ............................................... 33,531 31,887
Investment in Royal Bank of Pennsylvania - at equity ... 84,960 74,716
Other assets ........................................... 312 402
-------- --------
$121,330 $108,449
======== ========
Stockholders' equity ................................... 121,330 108,449
-------- --------
$121,330 $108,449
======== ========
CONDENSED STATEMENTS OF INCOME
Year ended December 31,
----------------------------
2002 2001 2000
---- ---- ----
Income
Equity in undistributed net earnings of subsidiaries.............................................. $ 6,840 $ 6,796 $ 5,763
Dividends from subsidiary bank.................................................................... 10,589 8,984 8,513
Other income...................................................................................... 49 35 50
------- ------- -------
Total income.................................................................................... 17,478 15,815 14,326
------- ------- -------
Expenses
Other expenses.................................................................................... 85 75 68
Income tax benefit................................................................................ (12) (14) (2)
------- ------- -------
Total expenses.................................................................................. 73 61 66
------- ------- -------
Net income...................................................................................... $17,405 $15,754 $14,260
======= ======= =======
(Continued)
64
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE R - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities
Net income........................................................................................ $ 17,405 $15,754 $14,260
Adjustments to reconcile net income to net cash
provided by operating activities
Undistributed earnings from subsidiaries......................................................... (6,840) (6,796) (4,647)
Operating expenses............................................................................... 85 75 68
Rental income.................................................................................... (49) (35) (50)
Non-cash income tax benefit...................................................................... (12) (14) (2)
-------- ------- -------
Net cash provided by operating activities...................................................... 10,589 8,984 9,629
-------- ------- -------
Cash flows from financing activities
Cash dividends paid............................................................................... (10,589) (8,984) (8,510)
Other, net........................................................................................ 1,083 48 (655)
-------- ------- -------
Net cash used in financing activities.......................................................... 1,444 (8,936) (9,165)
-------- ------- -------
Net increase in cash........................................................................... 1,083 48 464
Cash at beginning of year......................................................................... 1,444 1,396 932
-------- ------- -------
Cash at end of year............................................................................... $ 2,527 $ 1,444 $ 1,396
======== ======= =======
NOTE S - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summarizes the consolidated results of operations during
2002 and 2001, on a quarterly basis, for the Company (in thousands except per
share data):
2002
--------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income ......................................................................... $19,332 $19,797 $18,833 $19,143
Net interest income ..................................................................... 10,540 10,543 9,605 9,926
Provision for loan losses ............................................................... -- -- 50 200
Income before income taxes 6,308 6,930 5,428 5,976
Net income .............................................................................. 4,831 4,462 3,897 4,215
Net income per share
Basic .................................................................................. $ 0.40 $ 0.38 $ 0.33 $ 0.36
Diluted ................................................................................ $ 0.40 $ 0.37 $ 0.32 $ 0.35
(Continued)
65
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
December 31, 2002 and 2001
NOTE R - SUMMARY OF QUARTERLY RESULTS (UNAUDITED) - Continued
2001
--------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income ......................................................................... $19,645 $19,901 $14,971 $14,708
Net interest income ..................................................................... 10,199 10,031 8,597 8,589
Provision for loan losses ............................................................... -- -- -- --
Income before income taxes .............................................................. 6,449 5,423 4,108 5,572
Net income .............................................................................. 4,456 3,572 3,811 3,914
Net income per share
Basic .................................................................................. $ 0.38 $ 0.31 $ 0.33 $ 0.33
Diluted ................................................................................ $ 0.38 $ 0.30 $ 0.32 $ 0.33
66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required in this Item, relating to directors, executive
officers, control persons is set forth in Royal Bancshares' Proxy Statement to
be used in connection with the 2003 Annual Meeting of Shareholders under the
heading "Remuneration of directors and Officers and Other Transactions," which
pages are incorporated herein by reference.
Beneficial Ownership - Compliance. Section 16(a) of the Securities
Exchange Act of 1934, as amended, requires the Corporation's officers and
directors, and persons who own more than 10 percent of the registered class of
the Corporation's equity securities, to file reports of ownership and changes
in ownership with the Securities and Exchange Commission ("SEC"). Officers,
directors and greater than 10 percent shareholders are required by SEC
regulation to furnish the Corporation copies of all Section 16(a) forms they
file.
Based solely on its review of forms that were received from certain
reporting persons, the Corporation believes that during the period January 1,
2002 through December 31, 2002, its officers and directors were in compliance
with all filing requirements applicable to them.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item, relating to executive compensation,
is set forth in the Registrant's Proxy Statement to be used in connection with
the 2003 Annual Meeting of Shareholders, under the heading "Remuneration of
Directors and Officers and Other Transactions," which pages are incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item, relating to beneficial ownership of
the Registrant's Common Stock, is set forth in Royal Bancshares' Proxy
Statement to be used in connection with the 2003 Annual Meeting of
Shareholders, under the heading "Information About Nominees, Continuing
Directors and Executive Officers", which pages are incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item, relating to transactions with
management and others, certain business relationships and indebtedness of
management, is set forth in Royal Bancshares' Proxy Statement to be used in
connection with the 2003 Annual Meeting of Shareholders, under the heading
"Interest of Management and Others in Certain Transactions," which page are
incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
We maintain a system of controls and procedures designed to provide
reasonable assurance to the reliability of the financial statements and other
disclosures included in this report, as well as to safeguard assets from
unauthorized use or disposition. We evaluated the effectiveness of the design
and operation of our disclosure controls and procedures under supervision and
with the participation of management, including our Chief Executive Officer
and Chief Financial Officer, within 90 days prior to the filing date of this
report. Based upon that evaluation, our disclosure controls and procedures are
effective in timely alerting them at material information required to be
included in our periodic Securities and Exchange Commission filings. No
significant changes were made to our internal controls or other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
67
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. 1. Financial Statements
The following financial statements are included by
reference in Part II, Item 8 hereof.
Report of Independent Certified Public
Accountants.
Consolidated Balance Sheets.
Consolidated Statements of Income.
Consolidated Statements of Changes in
Stockholders' Equity.
Consolidated Statement of Cash Flows.
Notes To Consolidated Financial Statements.
2. Financial Statement Schedules
Financial Statement Schedules are omitted because the required
information is either not applicable, not required or is shown
in the respective financial statements or in the notes thereto.
3. The following Exhibits are files herewith or
incorporated by reference as a part of this Annual
Report.
2 Purchase and Assumption Agreement, dated as of
March 12, 2001, among Royal Bank of
Pennsylvania, Crusader Holding Corporation,
Crusader Savings Bank, F.S.B. and Asset
Investment Corporation. (Incorporated by
reference to Exhibit 2 to Registrant's Report on
Form 8-K, filed with the Commission on March 15,
2001.)
3(i) Articles of Incorporation. (Incorporated by
reference to Exhibit 3(i) to Registrant's
Registration Statement No. 0-26366 on Form S-4.)
3(ii) By-laws. (Incorporated by reference to Exhibit
99 to Registrant's Current Report on Form 8-K,
filed with the Commission on March 13, 2001.)
10.1 Stock Option and Appreciation Right Plan.
(Incorporated by reference to the Registrant's
Registration Statement N0. 333-25855, on form S-
8 filed with the Commission on April 5, 1997).
10.2 Outside Directors' Stock Option Plan.
(Incorporated by reference to the Registrant's
Registration Statement N0. 333-25855, on form S-
8 filed with the Commission on April 5, 1997).
11. Statement Re: Computation of Earnings Per Share.
Included at Item 8, hereof, Note A, "Per Share
Information,,.
12. Statement re: Computation of Ratios. (Included
at Item 8 here of, Note Q, "Regulatory
Matters.")
21. Subsidiaries of Registrant.
23. Consent of Independent Accountants.
(b) No Current Report on Form 8-K was filed by the Registrant
during the fourth quarter of the fiscal year December 31, 2002.
(c) The exhibits required to be filed by this Item are listed under
Item 14(a)3 above.
(d) Not applicable.
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of l934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
68
ROYAL BANCSHARES OF PENNSYLVANIA, INC.
DATE TITLE SIGNATURE
- ---- ----- ---------
March 27, 2003 Chairman /s/ Daniel M. Tabas
--------------------------------------------------
Daniel M. Tabas
March 27, 2003 President/CEO /s/ Joseph P. Campbell
Director --------------------------------------------------
Joseph P. Campbell
March 27, 2003 Treasurer/EVP /s/ James J. McSwiggan
Director --------------------------------------------------
James J. McSwiggan
March 27, 2003 Director /s/ Albert Ominsky
--------------------------------------------------
Albert Ominsky
March 27, 2003 Director /s/ Anthony J. Micale
--------------------------------------------------
Anthony J. Micale
Vice Chairman/
March 27, 2003 Senior Vice President/ /s/ Robert R. Tabas
Director --------------------------------------------------
Robert R. Tabas
March 27, 2003 Director /s/ Gregory T. Reardon
--------------------------------------------------
Gregory T. Reardon
March 27, 2003 Director /s/ Carl M. Cousins
--------------------------------------------------
Carl M. Cousins
March 27, 2003 Director /s/ Lee E. Tabas
--------------------------------------------------
Lee E. Tabas
March 27, 2003 Director /s/ Howard Wurzak
--------------------------------------------------
Howard Wurzak
March 27, 2003 Senior Vice President/ /s/ John M. Decker
Director --------------------------------------------------
John M. Decker
March 27, 2003 Senior Vice President/ /s/ Murray Stempel
Director --------------------------------------------------
Murray Stempel
March 27, 2003 Director /s/ Jack R. Loew
--------------------------------------------------
Jack R. Loew
March 27, 2003 Director /s/ Edward B. Tepper
--------------------------------------------------
Edward B. Tepper
March 27, 2003 Director /s/ Evelyn Rome Tabas
--------------------------------------------------
Evelyn Rome Tabas
March 27, 2003 Director /s/ Mitchell L. Morgan
--------------------------------------------------
Mitchell L. Morgan
69
ROYAL BANCSHARES OF PENNSYLVANIA, INC.
ANNUAL REPORT ON FORM 10-K
EXHIBIT INDEX
2 Purchase and Assumption Agreement, dated as of March 12, 2001,
among Royal Bank of Pennsylvania, Crusader Holding Corporation,
Crusader Savings Bank, F.S.B. and Asset Investment Corporation.
(Incorporated by reference to Exhibit 2 to Registrant's Report
on Form 8-K, filed with the Commission on March 15, 2001.)
3(i) Articles of Incorporation. (Incorporated by reference to
Exhibit 3(i) to Registrant's Registration Statement No. 0-26366
on Form S-4.)
3(ii) By-laws. (Incorporated by reference to Exhibit 99 to
Registrant's Current Report on Form 8-K, filed with the
Commission on March 13, 2001.)
10.1 Stock Option and Appreciation Right Plan. (Incorporated by
reference to the Registrant's Registration Statement N0. 333-
25855, on form S-8 filed with the Commission on April 5, 1997).
10.2 Outside Directors' Stock Option Plan. (Incorporated by
reference to the Registrant's Registration Statement N0. 333-
25855, on form S-8 filed with the Commission on April 5, 1997).
11. Statement Re: Computation of Earnings Per Share. (Included at
Item 8, hereof, Note A, "Per Share Information".)
12. Statements re: Computation of Ratios. (Included at Item 8 here
of, Note Q, "Regulatory Matters.")
21. Subsidiaries of Registrant.
23. Consent of Independent Accountants.
99.1 Certification pursuant to 18 U.S.C. Section 1350 as added by
Section 906 of the Sarbanes-Oxley Act 2002
99.2 Certification pursuant to 18 U.S.C. Section 1350 as added by
Section 906 of the Sarbanes-Oxley Act 2002
70