FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the quarterly period ended: September 30, 2003
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[ ] 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
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ROYAL BANCSHARES OF PENNSYLVANIA, INC.
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(Exact name of the registrant as specified in its charter)
PENNSYLVANIA 23-2812193
------------------------ ------------
(State or other jurisdiction of (IRS Employer
incorporated or organization) identification No.)
732 Montgomery Avenue, Narberth, PA 19072
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(Address of principal Executive Offices)
(610) 668-4700
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the bank (1) has filed all reports required to be
filed by Section 13 of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the bank was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Common Stock Outstanding at September 30, 2003
-------------------- ---------------------------------
$2.00 par value 9,947,563
Class B Common Stock Outstanding at September 30, 2003
-------------------- ---------------------------------
$.10 par value 1,909,742
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
ASSETS Sept 30, 2003 Dec 31, 2002
(Unaudited)
------------ ------------
Cash and due from banks $28,617 $27,081
Federal funds sold 13,500 13,490
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Total cash and cash equivalents 42,117 40,571
---------- ----------
Investment securities held to maturity (fair value of $68,914 at
September 30, 2003 and $32,745 at December 31, 2002) 67,135 30,614
Investment securities available for sale - at fair value 471,653 418,316
Loans held for sale 5,544 8,119
Total loans 542,015 568,615
Less allowance for loan losses 12,382 12,470
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Net loans 535,177 564,264
Premises and equipment, net 7,677 8,002
Accrued interest and other assets 42,328 26,717
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Total assets $1,166,087 $1,088,484
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $58,851 $55,575
Interest bearing (includes certificates of deposit in excess
of $100 of $101,561 at September 30, 2003 and
$180,978 at December 31, 2002) 744,817 765,265
---------- ----------
Total deposits 803,668 820,840
Accrued interest payable 10,584 11,406
Borrowings 212,000 127,500
Other liabilities 8,921 6,682
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Total liabilities 1,035,173 966,428
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MINORITY INTEREST 800 726
Stockholders' equity
Common stock
Class A, par value $2 per share; authorized, 18,000,000 shares; issued,
9,947,563 at September 30, 2003 and 9,595,191 at December 31, 2002 19,895 19,190
Class B, par value $.10 per share; authorized, 2,000,000 shares; issued,
1,909,742 at September 30, 2003 and 1,860,668 at December 31, 2002 191 186
Additional paid in capital 83,944 76,984
Retained earnings 22,458 24,819
Accumulated other comprehensive income 5,891 2,416
---------- ----------
132,379 123,595
Treasury stock - at cost, shares of Class A, 215,388 at September 30, 2003,
and December 31, 2002. (2,265) (2,265)
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Total stockholders' equity 130,114 121,330
----------
----------
Total liabilities and stockholders' equity $1,166,087 $1,088,484
========== ==========
The accompanying notes are an integral part of these statements.
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months ended
September 30,
----------------------
(in thousands, except per share data)
2003 2002
------------ ---------
Interest income
Loans, including fees $11,872 $13,255
Investment securities held to maturity 630 852
Investment securities available for sale 5,552 5,461
Deposits in banks 117 146
Federal funds sold 26 83
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TOTAL INTEREST INCOME 18,197 19,797
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Interest expense
Deposits 5,089 7,151
Borrowings 2,141 2,103
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TOTAL INTEREST EXPENSE 7,230 9,254
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NET INTEREST INCOME 10,967 10,543
Provision for loan losses 197 --
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,770 10,543
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Other income
Service charges and fees 380 302
Net gains on sales of investment securities 203 543
Gains on sales of other real estate 107 142
Gains on sales of loans 181 230
Other income 55 13
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926 1,230
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Other expenses
Salaries & wages 1,941 1,873
Employee benefits 503 438
Occupancy and equipment 328 319
Other operating expenses 1,941 2,213
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4,713 4,843
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INCOME BEFORE INCOME TAXES 6,983 6,930
Income taxes 2,221 2,468
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NET INCOME $4,762 $4,462
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Per share data
Net income - basic $ .40 $ .38
======= =======
Net income - diluted $ .40 $ .37
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The accompanying notes are an integral part of these statements.
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine months ended
September 30,
---------------------
(in thousands, except per share data)
2003 2002
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Interest income
Loans, including fees $35,562 $40,387
Investment securities held to maturity 1,801 3,392
Investment securities available for sale 16,502 13,181
Deposits in banks 401 597
Federal funds sold 116 215
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TOTAL INTEREST INCOME 54,382 57,772
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Interest expense
Deposits 17,252 22,178
Borrowings 5,636 5,520
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TOTAL INTEREST EXPENSE 22,888 27,698
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NET INTEREST INCOME 31,494 30,074
Provision for loan losses 514 250
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 30,980 29,824
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Other income
Service charges and fees 935 847
Net gains(losses) on sales of investment securities 347 529
Gains on sales of other real estate 296 400
Gains on sales of loans 465 608
Other income 112 47
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2,155 2,431
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Other expenses
Salaries & wages 5,925 5,681
Employee benefits 1,395 1,335
Occupancy and equipment 993 875
Other operating expenses 5,625 6,030
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13,938 13,921
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INCOME BEFORE INCOME TAXES 19,197 18,334
Income taxes 6,055 5,761
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NET INCOME $13,142 $12,573
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Per share data
Net income - basic $ 1.11 $ 1.06
======= =======
Net income - diluted $ 1.10 $ 1.05
======= =======
The accompanying notes are an integral part of these statements.
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Nine Months ended September 30, 2003
(UNAUDITED)
Additional
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Class A Common Stock Class B Common Stock Paid in
----------------------- -------------------- -------
(in thousands) Shares Amount Shares Amount Capital
------------ ------------- ------------- ------------- ----------
Balance, January 1, 2003 9,595 $19,190 1,861 $186 $76,984
Net income for the nine months ended - - - - -
Sept. 30,
Conversion of Class B common stock to
Class A
Common stock 8 16 (7) (1) -
Purchase of treasury stock - - - - -
3% stock dividend declared 281 563 55 6 6,443
Cash dividends on common stock - - - - -
Cash in lieu of fractional shares - - - - -
Stock options exercised 64 126 - - 517
Other comprehensive income, net of
Reclassifications and taxes - - - - -
------ ------- ------ ---- -------
Comprehensive income
Balance, September 30, 2003 9,948 $19,895 1,909 $191 $83,944
====== ======= ====== ==== =======
The accompanying notes are an integral part of the financial statement.
[STUBBED]
Accumulated
Other
Retained Treasury Comprehensive Comprehensive
(in thousands) Earnings Stock Income (loss) Income
----------- ------------ ----------------------------------
Balance, January 1, 2003 $24,819 $(2,265) $2,416
Net income for the nine months ended 13,142 - - $13,142
Sept. 30,
Conversion of Class B common stock to
Class A
Common stock (15) - - -
Purchase of treasury stock - - - -
3% stock dividend declared (7,011) - -
Cash dividends on common stock (8,469) - - -
Cash in lieu of fractional shares (8) - - -
Stock options exercised - - - -
Other comprehensive income, net of
Reclassifications and taxes - - 3,475 3,475
------ ------- ------ -------
Comprehensive income $16,617
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Balance, September 30, 2003 $22,458 $(2,265) $5,891
======= ======= ======
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30,
(in thousands)
Cash flows from operating activities 2003 2002
---------- ----------
Net income $13,142 $12,573
Adjustments to reconcile net income to
net cash provided by (used in) operating activities
Depreciation 777 946
Provision for loan loss 514 250
Net accretion of discounts on loans,
mortgage-backed securities and investments 1,497 (1,305)
Provision for deferred income taxes 2,239 3,563
Gains on other real estate (296) (400)
Gains on sales of loans (465) (608)
Net (gain)loss on sales of investment securities (112) (529)
Changes in assets and liabilities:
Increase in accrued interest receivable (2,063) (2,688)
(Increase) in other assets (15,787) (1,320)
(Decrease) in accrued interest payable (822) (912)
(Decrease) increase in other liabilities 1,956 (569)
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Net cash provided by (used in) operating activities 580 9,001
Cash flows from investing activities
Proceeds from calls/maturities of HTM investment securities 4,000 58,063
Proceeds from calls/maturities of AFS investment securities 187,288 182,691
Proceeds from sales of AFS investment securities 86,339 115,250
Purchase of AFS investment securities (321,451) (566,444)
Purchase of HTM investment securities (40,000) --
Purchase of FHLB Stock (3,685) (3,000)
Net decrease in loans 29,604 59,003
Purchase of premises and equipment (452) (720)
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Net cash provided by (used in) investing activities (58,357) (155,157)
Cash flows from financing activities:
Net increase in non-interest bearing and
interest bearing demand deposits and savings accounts 75,564 227,001
Net decrease in certificates of deposit (92,736) (126,547)
Mortgage payments (45) (39)
Net increase in borrowings 84,500 57,275
Cash dividends (8,469) (7,939)
Cash in lieu of fractional shares (8) (7)
Issuance of common stock under stock option plans 517 686
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Net cash provided by (used in) financing activities 59,323 150,430
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS 1,546 4,274
Cash and cash equivalents at beginning of year 40,571 40,018
---------- ----------
Cash and cash equivalents at end of year $42,117 $44,292
========== ==========
The accompanying notes are an integral part of these statements.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying unaudited consolidated financial statements include the
accounts of Royal Bancshares of Pennsylvania, Inc. (the Company) and its
wholly-owned subsidiaries: Royal Equity Partners, Inc. and Royal Bank of
Pennsylvania (the Bank), Royal Real Estate of Pennsylvania, Inc., Royal
Investment of Pennsylvania, Inc. and its 60% ownership interest in Crusader
Servicing Corporation. These financial statements reflect the historical
information of the Company. All significant inter-company transactions and
balances have been eliminated.
1. The accompanying unaudited condensed financial statements have been
prepared in accordance with accounting principles generally accepted in
the United States of America (US GAAP) for interim financial
information. The financial information included herein is unaudited;
however, such information reflects all adjustments (consisting solely
of normal recurring adjustments) that are, in opinion of management,
necessary to present a fair statement of the results for the interim
periods. These interim financial statements should be read in
conjunction with the consolidated financial statements and footnotes
thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2002. The results of operations for the three-month period
ended September 30, 2003, are not necessarily indicative of the
results, to be expected for the full year.
2. Segment Information
The Company's community banking segment consists of commercial and
retail banking. The community banking business segment is managed as a
single strategic unit which generates revenue from a variety of
products and services provided by the Bank. For example, commercial
lending is dependent upon the ability of the Bank to fund itself with
retail deposits and other borrowings and to manage interest rate and
credit risk. The same is also true for consumer and residential
mortgage lending.
The Company's tax lien operation does not meet the quantitative
thresholds for requiring disclosure, but has different characteristics
to the community banking operation. The Company's tax lien operation
consists of purchasing delinquent tax certificates from local
municipalities at auction. The tax lien operation is managed as a
single strategic unit which generates revenue from a nominal interest
rate achieved at the individual auction along with periodic penalties
imposed.
The accounting policies used in this disclosure of business segments
are the same as those described in the summary of significant
accountings policies. The consolidating adjustments reflect certain
eliminations of inter-segment revenues, cash and investments in
subsidiaries.
Nine months ended September 30 2003,
------------------------------------
(in thousands) Community Tax Lien
Banking Operation Consolidated
------------- ----------- ------------
Total assets $1,121,385 $44,702 $1,166,087
Total deposits 803,668 -- 803,668
Net interest income 28,807 2,687 31,494
Provision for loan losses 450 64 514
Other income 1,859 296 2,155
Other expense 12,413 1,525 13,938
Income tax expense 5,707 348 6,055
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Net income $12,096 $1,046 $13,142
========== ======== ==========
Nine months ended September 30, 2002,
-------------------------------------
(in thousands) Community Tax Lien
Banking Operation Consolidated
Total assets $1,048,113 $48,811 $1,096,924
Total deposits 802,314 -- 802,314
Net interest income 27,707 2,367 30,074
Provision for loan losses 250 -- 250
Other income 2,111 320 2,431
Other expense 12,523 1,398 13,921
Income tax expense 5,446 315 5,761
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Net income $11,600 $973 $12,573
========== ======== ==========
Interest paid to the Community Bank segment by the Tax Lien Operation
was approximately $1,426 thousand and $1,506 thousand for the nine
months period ending September 30, 2003, and 2002, respectively.
3. Per Share Information
The Company follows the provisions of SFAS No. 128, "Earnings Per
Share. Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted average common shares
outstanding during the period. Diluted EPS takes into account the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised and converted into common stock. In
January 2003 the Company declared a 3% stock dividend. All share and
per share information has been restated to reflect this dividend. Basic
and diluted EPS are calculated as follows (In thousands, except per
share data):
Three months ended September 30, 2003
Income Average shares Per share
------ -------------- ---------
(numerator) (denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $4,762 11,908 $0.40
Effect of dilutive securities
Stock options 52 --
------------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $4,762 11,960 $0.40
Three months ended September 30, 2002
Income Average shares Per share
------ -------------- ---------
(numerator) (denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $4,462 11,865 $0.38
Effect of dilutive securities
Stock options 335 (.01)
------------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $4,462 12,200 $0.37
Nine months ended September 30, 2003
Income Average shares Per share
------ -------------- ---------
(numerator) (denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $13,142 11,885 $1.11
Effect of dilutive securities
Stock options 45 (.01)
-----------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $13,142 11,930 $1.10
Nine months ended September 30, 2002
Income Average shares Per share
------ -------------- ---------
(numerator) (denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $12,573 11,837 $1.06
Effect of dilutive securities
Stock options 179 (.01)
-----------------------------------------
Diluted EPS
Income available to common shareholders
Plus assumed exercise of options $12,573 12,016 $1.05
4. Investment Securities:
The carrying value and approximate market value of investment
securities at September 30, 2003 are as follows:
Amortized Gross Gross Approximate
Purchased Unrealized Unrealized Fair Carrying
(in thousands) Cost Gains Losses Value Value
---------- --------- --------- ----------- ---------
Held to maturity:
-----------------
Mortgage Backed $376 $-- $-- $376 $376
US Agencies 39,846 -- (102) 39,744 39,846
Other Securities 26,913 1,883 -- 28,794 26,913
---------- -------- ------- ---------- --------
$67,135 $1,883 ($102) $68,914 $67,135
========== ======== ======= ========== ========
Available for sale:
-------------------
Federal Home Loan
Bank Stock - at cost $11,560 $-- $-- $11,560 $11,560
Mortgage Backed 71,171 476 (281) 71,366 71,366
CMO's 53,018 248 (269) 52,997 52,997
US Agencies 122,785 90 (1,370) 121,505 121,505
Other securities 204,209 12,593 (2,577) 214,125 214,225
---------- -------- -------- ---------- --------
$462,743 $13,407 ($4,497) $471,653 $471,653
========== ======== ======== ========== ========
5. Allowance for Credit Losses: Changes in the allowance for credit losses
were as follows:
Three months ended Sept 30,
---------------------------
2003 2002
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(in thousands)
Balance at beginning of period, $12,654 $12,158
Loans charged-off (483) --
Recoveries 14 51
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Net charge-offs and recoveries (469) 51
Provision for loan losses 197 --
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Balance at end of period $12,382 $12,209
======= =======
Nine months ended Sept 30,
--------------------------
2003 2002
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(in thousands)
Balance at beginning of period, $12,470 $11,888
Loans charged-off (685) (294)
Recoveries 83 365
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Net charge-offs and recoveries (602) 71
Provision for loan losses 514 250
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Balance at end of period $12,382 $12,209
======= =======
6. Non-performing loans
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $12.3 million and $13.3 million at September
30, 2003 and 2002, respectively. Although the Company has
non-performing loans of approximately $12.3 million at September 30,
2003, management believes it has adequate collateral to limit its'
credit risks.
The balance of impaired loans which included the loans on which the
accrual of interest has been discontinued, was approximately $12.4
million and $13.4 million at September 30, 2003 and 2002, respectively.
The Company identifies a loan as impaired when it is probable that
interest and principal will not be collected according to the
contractual terms of the loan agreements. Although the company
recognizes the balances of impaired loans when analyzing its' loan loss
reserve, the allowance for loan loss associated with impaired loans was
$2.5 million at September 30, 2003. The income that was recognized on
impaired loans during the three-month period ended September 30, 2003
was $-0-. The cash collected on impaired loans during the same period
was $137 thousand of which $137 thousand was credited to the principal
balance outstanding on such loans. The Company's policy for interest
income recognition on impaired loans is to recognize income on
currently performing restructured loans under the accrual method. The
Company recognizes income on non-accrual loans under the cash basis
when the principal payments on the loans become current and the
collateral on the loan is sufficient to cover the outstanding
obligation to the Company. If these factors do not exist, the Company
does not recognize income.
7. Stock-based Compensation
At September 30, 2003, the Company had both a director and employee
stock-based compensation plan. The Company accounts for the plan under
the recognition and measurement principals of APB No. 25, "Accounting
for Stock Issued to Employee, and related interpretations. Stock-based
employee compensation cost are not reflected in net income, as all
options granted under the plan had an exercise price equal to the
market value under the underlying common stock of the date of the
grant.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 148 "Accounting for Stock-Based
Compensation--Transition and Disclosure" ("SFAS No. 148") in December
2002. SFAS No. 148 amends the disclosure and certain transition
provisions of Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation". The new disclosure
provisions are effective for financial statements for fiscal years
ending after December 15, 2002 and financial reports containing
condensed financial statement for interim periods beginning after
December 15, 2002.
The following table provides the disclosure required by SFAS No. 148
and illustrates the effect on net income and earnings per share if the
Company had applied the fair value recognition provisions of SFAS No.
123 to stock-based employee compensation.
(in thousands, except per share data) 2003 2002
---- ----
Net income(loss), as reported $13,142 $12,573
Less: Stock-based compensation costs under
Fair value based method for all awards. (327) (72)
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Pro forma net income (loss) $12,815 $12,501
Earnings per share - Basic As reported $1.11 $1.06
Pro forma $1.08 $1.06
Earnings per share - Diluted As reported $1.10 $1.05
Pro forma $1.07 $1.04
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULT OF OPERATIONS
The following discussion and analysis is intended to assist in
understanding and evaluating the changes in the financial condition and earnings
performance of the Company and its' subsidiaries for the nine-month period ended
September 30, 2003.
From time to time, the Company may include forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters in this and other filings with the Securities
Exchange Commission. The Private Securities Litigation Reform Act of 1995
provides safe harbor for forward-looking statements. In order to comply with the
terms of the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance development and results of the Company's business
include the following: general economic conditions, including their impact on
capital expenditures, business conditions in the banking industry; the
regulatory environment; rapidly changing technology and evolving banking
industry standards; competitive factors, including increased competition with
community, regional and national financial institutions; new service and product
offerings by competitors and price pressures and similar items.
CRITICAL ACCOUNTING POLICIES, JUDGEMENTS AND ESTIMATES
The accounting and reporting policies of the company conform with
accounting principals generally accepted in the United States of America and
general practices within the financial services industry. The preparation of the
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
Allowance for Credit Losses
The company considers that the determination of the allowance for loan
losses involves a higher degree of judgment and complexity than its other
significant accounting policies. The balance in the allowance for loan losses is
determined based on management's review and evaluation of the loan portfolio in
relation to past loss experience, the size and composition of the portfolio,
current economic events and conditions, and other pertinent factors, including
management's assumptions as to future delinquencies, recoveries and losses. All
of these factors may be susceptible to significant change. To the extent actual
outcomes differ from managements estimates, additional provisions for loan
losses may be required that would adversely impact earnings in future periods.
Income Taxes
Under the liability method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax basis
of assets and liabilities. Deferred tax assets are subject to managements'
judgment based upon available evidence that future realization is more likely
than not. If management determines that the company may be unable to realize all
or part of the net deferred tax assets in the future, a direct charge to income
tax expense may be required to reduce the recorded value of net deferred tax
assets to the expected realizable amount.
FINANCIAL CONDITION
Total consolidated assets as of September 30, 2003 were $1,166 million,
an increase of $77.6 million from the $1,088 million reported at year-end,
December 31, 2002. This increase is primarily due to new deposits generated
during the year, along with the utilization of low interest rates offered on
advances at the F.H.L.B. of Pittsburgh.
Total loans decreased $26.6 million from the $568.6 million level at
December 31, 2002 to $542.0 million at September 30, 2003. This decrease is
attributed to the slow pace of the economic recovery and stiff loan competition
that is occurring throughout the industry. The year-to-date average balance of
loans was $556.8 million at September 30, 2003.
The allowance for loan loss decreased $88 thousand to $12.4 million at
September 30, 2003 from $12.5 million at December 31, 2002. The level of
allowance for loan loss reserve represents approximately 2.3% of total loans at
September 30, 2003 versus 2.2% at December 31, 2002. While management believes
that, based on information currently available, the allowance for loan loss is
sufficient to cover losses inherent in the Company's loan portfolio at this
time, no assurances can be given that the level of allowance will be sufficient
to cover future loan losses or that future adjustments to the allowance will be
sufficient to cover future loan losses or that future adjustments to the
allowance will not be necessary if economic and/or other conditions differ
substantially from the economic and other conditions considered by management in
evaluating the adequacy of the current level of the allowance.
The $89.9 million increase in total investment securities is primarily
attributable to the redeployment of excess cash on hand to achieve a higher rate
of return.
Total cash and cash equivalents increased $1.5 million from the $40.6
million level at December 31, 2002 to $42.1 million at September 30, 2003.
Total deposits, the primary source of funds, decreased $17.1 million to
$803.7 million at September 30, 2003, from $820.8 million at December 31, 2002.
This decrease in deposits is primarily due to the maturity of brokered deposits.
The balance of brokered deposits was $73.9 million, representing approximately
9% of total deposits at September 30, 2003. Generally, these brokered deposits
cannot be redeemed prior to the stated maturity, except in the event of the
death or adjudication of incompetence of the deposit holder.
Consolidated stockholder's equity increased $8.8 million to $130.1
million at September 30, 2003 from $121.3 million at December 31, 2002. This
increase is primarily due to net income of $13.1 million, partially offset by
quarterly cash dividends totaling $8.5 million. Additionally, stockholder's
equity increased by $3.5 million due to an adjustment in the market value of
available-for-sale investment securities during the first nine months of 2003.
RESULTS OF OPERATIONS
Results of operations depend primarily on net interest income, which is
the difference between interest income on interest earning assets and interest
expense on interest bearing liabilities. Interest earning assets consist
principally of loans and investment securities, while interest bearing
liabilities consist primarily of deposits. Net income is also effected by the
provision for loan losses and the level of non-interest income as well as by
non-interest expenses, including salary and employee benefits, occupancy
expenses and other operating expenses.
Consolidated net income for the three months ended, September 30, 2003
was $4.8 million or $.40 basic earnings per share, as compared to net income of
$4.5 million or $.38 basic earnings per share for the same three month period in
2002. Consolidated net income for the nine months ended, September 30, 2003 was
$13.1 million or $1.11 basic earnings per share, as compared to net income of
$12.6 million or $1.06 basic earnings per share for the same nine month period
in 2002.
For the third quarter 2003, net interest income was $11.0 million as
compared to $10.5 million for the same quarter in 2002, an increase of $424
thousand, or 4%. This increase is primarily due to a reduction in costs related
to deposits and borrowings for the third quarter 2003 as compared to the same
period in 2002. Interest income on loans decreased $1.4 million for the third
quarter of 2003 versus 2002 primarily due to a decrease in the average balance
of loans during the same period. Interest income on investment securities
decreased $131 thousand, a 2% decrease over the same three-month period in 2002,
which is primarily due to the lower yields on the average balance in investment
securities. Total interest expense on deposits and borrowings decreased $2.1
million to $7.2 million as compared to $9.3 million for the same three-month
period in 2002. This decrease in interest expense is primarily due the reduction
of interest rates on deposits and borrowings.
Provision for loan losses was $197 thousand for the third quarter of
2003 and $0 for the same three-month period in 2002. Charge-offs and recoveries
were $483 thousand and $14 thousand respectively, for the three-month period
ended September 30, 2003 versus $0 thousand and $51 thousand, respectively, for
the same three-month period in 2002. Overall, management considers the current
level of allowance for loan loss to be adequate at September 30, 2003.
Total non-interest income for the three-month period ended September
30, 2003 was $926 thousand as compared to $1.2 million for the same three-month
period in 2002. The $300 thousand decrease in 2003 is primarily due to smaller
gains relating to investment security transactions.
Total non-interest expense for the three months ended September 30,
2003 was $4.7 million, a decrease of $130 thousand, or 2.7%, as compared to $4.8
million for the same period in 2002.
CAPITAL ADEQUACY
The company is required to maintain minimum amounts of capital to total
"risk weighted" assets and a minimum Tier 1 leverage ratio, as defined by the
banking regulators. At September 30, 2003, the Company was required to have a
minimum Tier 1 and total capital ratios of 4% and 8%, respectively, and a
minimum Tier 1 leverage ratio of 3% plus an additional 100 to 200 basis points.
The table below provides a comparison of Royal Bancshares of
Pennsylvania's risk-based capital ratios and leverage ratios:
September 30, 2003 December 31, 2002
------------------ -----------------
Capital Levels
Tier 1 leverage ratio 10.6% 11.4%
Tier 1 risk-based ratio 14.3% 14.6%
Total risk-based ratio 15.6% 15.9%
Capital Performance
Return on average assets 1.6% (1) 1.7% (1)
Return on average equity 15.1% (1) 15.2% (1)
(1) annualized
The Company's ratios compare favorably to the minimum required amounts
of Tier 1 and total capital to "risk weighted" assets and the minimum Tier 1
leverage ratio, as defined by banking regulators. The Company currently meets
the criteria for a well-capitalized institution, and management believes that
the Company will continue to meet its' minimum capital requirements. At present,
the Company has no commitments for significant capital expenditures.
The Company is not under any agreement with regulatory authorities nor
is the Company aware of any current recommendations by the regulatory
authorities that, if such recommendations were implemented, would have a
material effect on liquidity, capital resources or operations of the Company.
LIQUIDITY & INTEREST RATE SENSITIVITY
Liquidity is the ability to ensure that adequate funds will be
available to meet its' financial commitments as they become due. In managing
its' liquidity position, all sources of funds are evaluated, the largest of
which is deposits. Also taken into consideration is the repayment of loans.
These sources provide alternatives to meet its' short-term liquidity needs.
Longer liquidity needs may be met by issuing longer-term deposits and by raising
additional capital. The liquidity ratio is generally maintained equal to or
greater than 25% of deposits and short-term liabilities.
The liquidity ratio of the Company remains strong at approximately 64%
and exceeds the Company's peer group levels and target ratio set forth in the
Asset/Liability Policy. The Company's level of liquidity is provided by funds
invested primarily in corporate bonds, capital trust securities, US Treasuries
and agencies, and to a lesser extent, federal funds sold. The overall liquidity
position is monitored on a monthly basis.
Interest rate sensitivity is a function of the repricing
characteristics of the Company's assets and liabilities. These include the
volume of assets and liabilities repricing, the timing of the repricing, and the
interest rate sensitivity gaps is a continual challenge in a changing rate
environment. The following table shows separately the interest sensitivity of
each category of interest earning assets and interest bearing liabilities as of
September 30, 2003:
Interest Rate Sensitivity
(in millions)
Days
----------------------- 1 to 5 Over 5 Non-rate
Assets 0 - 90 91 - 365 Years Years Sensitive Total
- ------- --------- ---------- --------- --------- ---------- --------
Interest-bearing deposits in banks $20.9 $-- $-- $-- $7.7 $28.6
Federal funds sold 13.5 -- -- -- -- 13.5
Investment securities:
Available for sale 36.0 21.2 298.4 107.2 8.9 471.7
Held to maturity 4.4 2.0 60.7 0.0 -- 67.1
----------------------------------------------------------------------------
Total investment securities 40.4 23.2 359.1 107.2 8.9 538.8
Loans:
Fixed rate 49.7 71.6 161.5 5.4 -- 288.2
Variable rate 205.2 54.2 -- -- (12.4) 247.0
----------------------------------------------------------------------------
Total loans 254.9 125.8 161.5 5.4 (12.4) 535.2
Other assets -- -- -- -- 50.0 50.0
----------------------------------------------------------------------------
Total Assets $329.7 $149.0 $520.6 $112.6 $54.2 $1,166.1
============================================================================
Liabilities & Capital
- ---------------------
Deposits:
Non interest bearing deposits $-- $-- $-- $-- $58.9 $58.9
Interest bearing deposits 24.4 73.7 409.2 -- -- 507.3
Certificate of deposits 38.8 98.7 93.3 6.7 -- 237.5
----------------------------------------------------------------------------
Total deposits 63.2 172.4 502.5 6.7 58.9 803.7
Borrowings -- -- 117.5 94.5 -- 212.0
Other liabilities -- -- .3 -- 20.0 20.3
Capital -- -- -- -- 130.1 130.1
----------------------------------------------------------------------------
Total liabilities & capital $63.2 $172.4 $620.3 $101.2 $209.0 $1,166.1
============================================================================
Net interest rate GAP $266.5 ($23.4) ($99.7) $11.4 ($154.8)
==============================================================
Cumulative interest rate GAP $266.5 $243.1 $143.4 $154.8 --
==============================================================
GAP to total assets 23% (2%)
========================
GAP to total equity 205% (18%)
========================
Cumulative GAP to total assets 23% 21%
========================
Cumulative GAP to total equity 205% 187%
========================
The Company's exposure to interest rate risk is mitigated somewhat by a
portion of the Company's loan portfolio consisting of floating rate loans, which
are tied to the prime lending rate but which have interest rate floors and no
interest rate ceilings. Although the Company is originating fixed rate loans, a
portion of the loan portfolio continues to be comprised of floating rate loans
with interest rate floors.
ITEM 4 - CONTROLS AND 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 the supervision
and with the participation of management, including our Chief Executive Officer
and Chief Financial Officer, within 90 days prior to the filing date of this
report. Based upon that evaluation, our disclosure controls and procedures are
effective in timely alerting them to material information required to be
included in our periodic Securities and Exchange Commission filings. No
significant changes were made to our internal controls or other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-based
Compensation-Transition and Disclosure". SFAS 148 amends SFAS 123 "Accounting
for Stock-Based Compensation," to provide alternative methods of transition for
a voluntary charge to the fair value based method of accounting for stock-based
employees compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the methods of accounting for stock-based employee
compensation and the effect of method used on reports results. SFAS 148 is
effective for fiscal beginning after December 15, 2002. The expanded annual
disclosure provisions are effective for financial reports containing financial
statement for interim periods beginning after December 15, 2002. Management does
not expect the adoption of SFAS 148 to have a material effect on the company's
financial position, results of operations, or cash flows.
The Company adopted FIN 45 "Guarantor's Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Others" on January 1, 2003. FIN 45 requires a guarantor entity, at the inception
of a guarantee covered by the measurement provisions of the interpretation, to
record a liability for the fair value of the obligation undertaken in issuing
the guarantee. The Company has financial and performance letters of credit.
Financial letters of credit require the company to make a payment if the
customer's condition deteriorates, as defined in the agreements. Performance
letters of credit require the company to make payments if the customer fails to
perform certain non-financial contractual obligation. The Company previously did
not record a liability when guaranteeing obligations unless it became probable
that the company would have to perform under the guarantee. FIN 45 applies
prospectively to guarantees the company issues or modifies subsequent to
December 31, 2002. The maximum potential undiscounted amount of future payments
of the letters of credit as of September 30, 2003 are $5.2 million and they
expire through August 2005. Amounts due under these letters of credit would be
reduced by any proceeds that the company would be able to obtain in liquidating
the collateral for the loans, which varies depending on the customer.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 clarifies the application
of Accounting Research Bulletin 51, "Consolidated Financial Statements", for
certain entities that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties or in which equity investors do not have the characteristics of
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains and interest after
that date. It applies in the first fiscal year or interim period beginning after
June 15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. The company is in
the process of determining what impact, if any, the adoption of the provisions
of FIN 46 will have upon its financial condition or results of operations. The
company does not anticipate FIN 46 to have a material impact on the consolidated
financial position or results of operations.
The Company adopted Statement of Financial Accounting Standard 149 (SFAS No.
149), Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, on July 1, 2003. SFAS No. 149 clarifies and amends SFAS No. 133 for
implementation issues raised by constituents or includes the conclusions reached
by the FASB on certain FASB Staff Implementation Issues. Statement 149 also
amends SFAS No. 133 to require a lender to account for loan commitments related
to mortgage loans that will be held for sale as derivatives. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003. The
Company periodically enters into commitments with its customers, which it
intends to sell in the future. The adoption of SFAS No. 149 did not have a
material impact on the Company's financial position or results of operations.
The FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, on May 15, 2003. SFAS No. 150
changes the classification in the statement of financial position of certain
common financial instruments from either equity or mezzanine presentation to
liabilities and requires an issuer of those financial statements to recognize
changes in fair value or redemption amount, as applicable, in earnings. SFAS No.
150 is effective for public companies for financial instruments entered into or
modified after May 31, 2003 and is effective at the beginning of the first
interim period beginning after June 15, 2003. Management has not entered into
any financial instruments that would qualify under SFAS No. 150. The adoption of
SFAS No. 150 did not have a material impact on the Company's financial position
or results of operations.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
- -------------------------
None
Item 2. Changes in Securities and use of Proceeds
- -------------------------------------------------
None
Item 3. Default and Upon Senior Securities
- ------------------------------------------
None
Item 4. Submission of Matters to Vote Security Holders
On Wednesday, May 21, 2003, the Annual Meeting of Shareholders of Royal
Bancshares of Pennsylvania was convened in Philadelphia, PA at 6:30 P.M. The
following nominees were elected as Class I Directors of the Registrant to serve
for a three year term:
For Withhold
--- --------
Joseph P. Campbell 24,838,632 108,843
Daniel M. Tabas 24,838,858 108,617
James J. McSwiggan 24,838,961 108,514
Murray Stempel, III 24,837,483 109,992
Howard Wurzak 24,837,483 109,992
Item 5. Other Information
- -------------------------
None
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
31 Section 302 Certification Pursuant to Section 13(a) or 15(d) of
the Securities and Exchange Act of 1934 signed by Joseph P. Campbell, Chief
Executive Officer of Royal Bancshares of Pennsylvania on November 14, 2003
31 Section 302 Certification Pursuant to Section 13(a) or 15(d) of
the Securities and Exchange Act of 1934 signed by Jeffrey T. Hanuscin, Chief
Financial Executive Officer of Royal Bancshares of Pennsylvania on November 14,
2003
32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Joseph P.
Campbell, Chief Executive Officer of Royal Bancshares of Pennsylvania on
November 14, 2003.
32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Jeffrey T.
Hanuscin, Chief Financial Officer of Royal Bancshares of Pennsylvania on
November 14, 2003.
(b) The company filed the following report on Form 8-K on September
15, 2003 announcing the passing of the Bank's Chairman Daniel M.
Tabas on September 12, 2003.
The company filed the following report on Form 8-K during the
quarter ended September 30, 2003. October 16, 2003, Royal
Bancshares of Pennsylvania, Inc. filed a Form 8-K reporting the
release of earnings and declaration of stock dividend on both
classes of common stocks.
The company filed the following report on Form 8-K on October 16,
2003 announcing the appointment of Robert R. Tabas as Chairman of
the Board of Directors and the appointment of Linda Tabas Stempel
to the Board of Directors.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROYAL BANCSHARES OF PENNSYLVANIA, INC.
(Registrant)
Dated: November 14th, 2003 /s/ Jeffrey T. Hanuscin
-------------------------
Jeffrey T. Hanuscin
Chief Financial Officer