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: JUNE 30, 2005
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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.
----------------------------------------------------------
(Exact name of the registrant as specified in its charter)
PENNSYLVANIA 23-2812193
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporated or organization) identification No.)
732 MONTGOMERY AVENUE, NARBERTH, PA 19072
-----------------------------------------
(Address of principal Executive Offices)
(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 by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act 12b-2). 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 July 31, 2005
-------------------- ----------------------------
$2.00 PAR VALUE 10,493,526
Class B Common Stock Outstanding at July 31, 2005
-------------------- ----------------------------
$.10 PAR VALUE 1,973,531
ITEM 1- PART 1. FINANCIAL STATEMENTS
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data) (UNAUDITED)
ASSETS JUNE 30, 2005 DEC 31, 2004
------------- ------------
Cash and due from banks $16,470 $26,109
Federal funds sold 11,800 1,000
Total cash and cash equivalents 28,270 27,109
Investment securities held to maturity (HTM) (fair value of $239,745 at
June 30, 2005 and $211,865 at December 31, 2004) 240,538 212,227
Investment securities available for sale (AFS) - at fair value 372,530 372,034
Loans held for sale 1,062 2,204
Loans 511,997 467,294
Less allowance for loan losses 10,295 12,519
---------- ----------
Net loans 501,702 454,775
Premises and equipment, net 54,067 72,433
Accrued interest and other assets 65,530 64,492
---------- ----------
Total assets $1,263,699 $1,205,274
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $64,065 $64,371
Interest bearing (includes certificates of deposit in excess
of $100 of $151,844 at June 30, 2005 and
$90,596 at December 31, 2004) 637,054 678,011
---------- ----------
Total deposits 701,119 742,382
Accrued interest payable 5,807 5,602
Borrowings 399,039 304,023
Other liabilities 8,827 8,736
---------- ----------
Total liabilities 1,114,792 1,060,743
MINORITY INTEREST 3,122 3,655
Stockholders' equity
Common stock
Class A, par value $2 per share; authorized, 18,000,000 shares; issued,
10,493,526 at June 30, 2005 and 10,276,672 at December 31, 2004 20,987 20,553
Class B, par value $.10 per share; authorized, 2,000,000 shares; issued,
1,973,531 at June 30, 2005 and 1,939,490 at December 31, 2004 197 194
Additional paid in capital 98,828 92,037
Retained earnings 24,781 26,558
Accumulated other comprehensive income 3,257 3,799
---------- ----------
148,050 143,141
Treasury stock - at cost, shares of Class A, 215,388 at June 30, 2005,
and December 31, 2004. (2,265) (2,265)
---------- ----------
Total stockholders' equity 145,785 140,876
---------- ----------
Total liabilities and stockholders' equity $1,263,699 $1,205,274
========== ==========
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
JUNE 30,
------------------------
(in thousands, except per share data)
2005 2004
------- -------
Interest income
Loans, including fees $12,166 $10,017
Investment securities held to maturity 2,227 1,220
Investment securities available for sale 4,908 5,095
Deposits in banks 18 146
Federal funds sold 11 30
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TOTAL INTEREST INCOME 19,330 16,508
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Interest expense
Deposits 4,069 4,288
Borrowings 3,626 2,681
------- -------
TOTAL INTEREST EXPENSE 7,695 6,969
------- -------
NET INTEREST INCOME 11,635 9,539
Provision for loan losses -- 4
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 11,635 9,535
------- -------
Other income
Service charges and fees 288 318
Net (loss) gains on sales of investment securities (88) 33
Income related to equity investments 2,952 1,903
Gains on sales of other real estate 404 542
Gains on sales of loans 103 252
Other income 221 416
------- -------
3,880 3,464
------- -------
Other expenses
Salaries and wages 2,391 2,200
Employee benefits 1,550 558
Occupancy and equipment 408 358
Expenses related to equity investments 968 1,170
Other operating expenses 2,252 2,496
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7,569 6,782
------- -------
INCOME BEFORE INCOME TAXES 7,946 6,217
Income taxes 704 1,823
------- -------
NET INCOME $7,242 $ 4,394
======= =======
Net income - basic $.58 $ .35
======= =======
Net income - diluted $.57 $ .35
======= =======
Cash dividend - Class A shares $.25 $ .25
======= =======
Cash dividend - Class B shares $.2875 $ .2875
======= =======
The accompanying notes are an integral part of these statements.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
------------------------
(in thousands, except per share data)
2005 2004
------- -------
Interest income
Loans, including fees $22,292 $20,652
Investment securities held to maturity 4,475 2,393
Investment securities available for sale 9,697 10,651
Deposits in banks 41 287
Federal funds sold 29 53
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TOTAL INTEREST INCOME 36,534 34,036
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Interest expense
Deposits 8,079 8,655
Borrowings 6,982 5,044
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TOTAL INTEREST EXPENSE 15,061 13,699
------- -------
NET INTEREST INCOME 21,473 20,337
Provision for loan losses 1 5
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 21,472 20,332
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Other income
Service charges and fees 581 671
Net gains on sales of investment securities 162 226
Income related to equity investments 4,395 3,760
Gains on sales of other real estate 693 874
Gains on sales of loans 228 431
Other income 434 685
------- -------
6,493 6,647
------- -------
Other expenses
Salaries and wages 4,705 4,290
Employee benefits 2,126 1,070
Occupancy and equipment 817 741
Expenses related to equity investments 1,788 2,898
Other operating expenses 4,492 4,359
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13,928 13,358
------- -------
INCOME BEFORE INCOME TAXES 14,037 13,621
Income taxes 2,474 4,063
------- -------
NET INCOME $11,563 $ 9,558
======= =======
Per share data
Net income - basic $ .92 $ .76
======= =======
Net income - diluted $ .92 $ .76
======= =======
Cash dividend - Class A shares $ .50 $ .50
======= =======
Cash dividend - Class B shares $ .575 $ .575
======= =======
The accompanying notes are an integral part of these statements.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 2005
(UNAUDITED)
ADDITIONAL
CLASS A COMMON STOCK CLASS B COMMON STOCK PAID IN RETAINED
(dollars in thousands, except per share data) SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------ ------- ------ ------ ------- -------
Balance, January 1, 2005 10,277 $20,553 1,939 $194 $92,037 $26,558
Net income - - - - - 11,563
Conversion of Class B common stock to Class A
Common stock 6 12 (4) (1) - (11)
Purchase of treasury stock - - - - - -
2% stock dividend 201 402 39 4 6,640 (7,046)
Cash dividends on common stock (6,271)
Cash in lieu of fractional shares - - - - - (12)
Stock options exercised 10 20 - - 151 -
Other comprehensive loss, net of reclassification
adjustment and tax benefit of $292 - - - - - -
------ ------- ----- ------ ------- -------
Comprehensive income
Balance, June 30, 2005 10,494 $20,987 1,974 $197 $98,828 $24,781
====== ======= ===== ====== ======= =======
[RESTUBBED TABLE]
ACCUMULATED
OTHER
TREASURY COMPREHENSIVE COMPREHENSIVE
(dollars in thousands, except per share data) STOCK INCOME (LOSS) INCOME
-------- ------------- -------------
Balance, January 1, 2005 $(2,265) $3,799
Net income - - $11,563
Conversion of Class B common stock to Class A
Common stock - - -
Purchase of treasury stock - - -
2% stock dividend - -
Cash dividends on common stock
Cash in lieu of fractional shares - - -
Stock options exercised - - -
Other comprehensive loss, net of reclassification
adjustment and tax benefit of $292 - (542) (542)
-------- ------------- -------------
Comprehensive income $11,021
=============
Balance, June 30, 2005 $(2,265) $3,257
======= =============
The accompanying notes are an integral part of the financial statement.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 2004
(UNAUDITED)
ADDITIONAL
CLASS A COMMON STOCK CLASS B COMMON STOCK PAID IN RETAINED
(dollars in thousands, except per share data) SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------- ------- ------ ------ ------- -------
Balance, January 1, 2004 10,027 $20,054 1,909 $191 $85,448 $24,989
Net income for the three months ended June 30, - - - - - 9,558
Conversion of Class B common stock to Class A
Common stock 7 14 (6) (1) -- (13)
Purchase of treasury stock - - - - - -
2% stock dividend declared 196 392 39 4 5,842 (6,237)
Cash dividends on common stock (6,063)
Cash in lieu of fractional shares - - - - - (11)
Stock options exercised 7 14 - - 74 -
Other comprehensive income, net of reclassification
adjustment and tax benefit of $1,783 - - - - - -
------- ------ ----- ------ ------- -------
Comprehensive income
Balance, June 30, 2004 $10,237 $20,474 1,942 $194 $91,364 $22,223
======= ======= ===== ====== ======= =======
[RESTUBBED TABLE]
ACCUMULATED
OTHER
TREASURY COMPREHENSIVE COMPREHENSIVE
(dollars in thousands, except per share data) STOCK INCOME (LOSS) INCOME
-------- ------------- -------------
Balance, January 1, 2004 $(2,265) $6,415
Net income for the three months ended June 30, - - $9,558
Conversion of Class B common stock to Class A
Common stock - - -
Purchase of treasury stock - - -
2% stock dividend declared - -
Cash dividends on common stock
Cash in lieu of fractional shares - - -
Stock options exercised - - -
Other comprehensive income, net of reclassification
adjustment and tax benefit of $1,783 - (3,311) (3,311)
-------- ------------- -------------
Comprehensive income $6,247
=============
Balance, June 30, 2004 $ (2,265) $3,104
======== =============
The accompanying notes are an integral part of the financial statement
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30,
(in thousands)
Cash flows from operating activities 2005 2004
-------- ---------
Net income $ 11,563 $ 9,558
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 1,440 420
Provision for loan losses 1 5
Net accretion of discounts and premiums
on loans, mortgage-backed securities and investments (1,881) 1,479
Provision for deferred income taxes (135) (711)
Gains on other real estate (693) (874)
Gains on sales of loans (228) (432)
Net gains on sales of investment securities (162) (226)
Changes in assets and liabilities:
Increase in accrued interest receivable 1,060 1,132
(Increase) in other assets (1,963) (5,915)
Increase in accrued interest payable 205 6,804
(Decrease) increase in other liabilities (612) 773
-------- ---------
Net cash provided by operating activities 8,595 12,013
Cash flows from investing activities
Proceeds from calls/maturities of HTM investment securities 36,650 89,285
Proceeds from calls/maturities of AFS investment securities 12,727 126,104
Proceeds from sales of AFS investment securities 6,345 890
Purchase of AFS investment securities (15,137) (86,302)
Purchase of HTM investment securities (65,025) (155,125)
Redemption(purchase) of FHLB Stock (6,050) 807
Net (increase) decrease in loans (41,457) 78,208
(Purchase) of premises and equipment (548) (827)
Deconsolidation of premise and equipment relating to VIE 12,976 --
(Purchase) sales of premises and equipment relating to VIE 4,498 (62,937)
-------- ---------
Net cash (used in) investing activities (55,021) (9,897)
Cash flows from financing activities:
Net (decrease) in non-interest bearing and
interest bearing demand deposits and savings accounts (108,220) (5,280)
Net increase (decrease) increase in certificates of deposit 66,957 (22,106)
Mortgage payments (34) (31)
Net increase in FHLB borrowings 108,500 --
Obligations through equity investments (13,484) 55,762
Cash dividends (6,271) (6,064)
Cash in lieu of fractional shares (12) (11)
Issuance of common stock under stock option plans 151 87
-------- ---------
Net cash provided by financing activities 47,587 22,357
NET INCREASE IN
CASH AND CASH EQUIVALENTS 1,161 24,473
Cash and cash equivalents at beginning of year 27,109 25,070
-------- ---------
Cash and cash equivalents at end of year $ 28,270 $ 49,543
======== =========
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 and its wholly-owned subsidiaries, Royal
Investments of Delaware, Inc. and Royal Bank, including Royal Bank's
subsidiaries, Royal Real Estate of Pennsylvania, Inc., Royal Investments
America, LLC, and 60% ownership of Crusader Servicing Corporation. The two
recently formed Delaware trusts, Royal Bancshares Capital Trust I and Royal
Bancshares Capital Trust II are not consolidated per requirements under FIN
46(R). These financial statements reflect the historical information of the
Company. All significant inter-company transactions and balances have been
eliminated.
1. The accompanying unaudited 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, 2004. The results of operations for the three-month period
and the six-month period ended June 30, 2005, are not necessarily
indicative of the results to be expected for the full year.
2. Segment Information
-------------------
Royal Bancshares' 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 Royal Bank. For example, commercial
lending is dependent upon the ability of Royal 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.
Royal Bancshares' Tax Lien Operation does not meet the quantitative
thresholds for requiring disclosure, but has different characteristics
than the community banking operation. Royal Bancshares' 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 auctions along with periodic penalties
imposed.
As a result of the adoption of FIN 46(R), Royal Bancshares is reporting
on a consolidated basis its interest in two Equity Investments as
Variable Interest Entities ("VIE") which have different characteristics
than the community banking segment. Royal Bancshares has investments in
two apartment complexes.
THREE MONTHS ENDED JUNE 30, 2005
---------------------------------------------
(in thousands) COMMUNITY TAX LIEN EQUITY
BANKING OPERATION INVESTMENTS CONSOLIDATED
---------- --------- ----------- ------------
Total assets $1,164,373 $ 51,358 $ 47,968 $1,263,699
Total deposits 701,119 -- -- 701,119
Net interest income $ 11,429 $ 467 ($261) $ 11,635
Provision for loan losses -- -- -- --
Other income 566 362 2,952 3,880
Other expense 6,038 563 968 7,569
Income tax expense 636 68 -- 704
---------- --------- ----------- ----------
Net income $ 5,321 $ 198 $ 1,723 $ 7,242
========== ========= =========== ==========
THREE MONTHS ENDED JUNE 30, 2004
--------------------------------------------
(in thousands) COMMUNITY TAX LIEN EQUITY
BANKING OPERATION INVESTMENTS CONSOLIDATED
---------- --------- ----------- ------------
Total assets $1,070,931 $ 49,984 $ 64,819 $1,185,734
Total deposits 763,672 -- -- 763,672
Net interest income $ 9,375 $ 757 ($593) $ 9,539
Provision for loan losses -- 4 -- 4
Other income 920 641 1,903 3,464
Other expense 5,300 704 778 6,782
Income tax expense 1,691 132 -- 1,823
---------- --------- ----------- ----------
Net income $ 3,304 $ 558 $ 532 $ 4,394
========== ========= =========== ==========
Interest paid to the Community Banking segment by the Tax Lien
Operation was approximately $659,000 and $402,000 for the three-month
periods ended June 30, 2005, and 2004, respectively.
SIX-MONTHS ENDED JUNE 30, 2005
--------------------------------------------
(in thousands) COMMUNITY TAX LIEN EQUITY
BANKING OPERATION INVESTMENTS CONSOLIDATED
---------- --------- ----------- ------------
Total assets $1,164,373 $ 51,358 $ 47,968 $1,263,699
Total deposits 701,119 -- -- 701,119
Net interest income $ 21,147 $ 1,141 ($815) $ 21,473
Provision for loan losses -- 1 -- 1
Other income 1,645 453 4,395 6,493
Other expense 11,080 1,075 1,773 13,928
Income tax expense 2,357 117 -- 2,474
---------- -------- ----------- ----------
Net income $ 9,355 $ 401 $ 1,807 $ 11,563
========== ========= =========== ==========
SIX-MONTHS ENDED JUNE 30, 2004
--------------------------------------------
(in thousands) COMMUNITY TAX LIEN EQUITY
BANKING OPERATION INVESTMENTS CONSOLIDATED
---------- --------- ----------- ------------
Total assets $1,070,931 $ 49,984 $ 64,819 $1,185,734
Total deposits 763,672 -- -- 763,672
Net interest income $ 19,561 $ 1,638 ($862) $ 20,337
Provision for loan losses -- 5 -- 5
Other income 1,921 966 3,760 6,647
Other expense 9,722 1,272 2,364 13,358
Income tax expense 3,809 254 -- 4,063
---------- --------- ----------- ----------
Net income $ 7,951 $ 1,073 $ 534 $ 9,558
========== ========= =========== ==========
Interest paid to the Community Banking segment by the Tax Lien
Operation was approximately $1.3 million and $857, for the six-month
periods ended June 30, 2005, and 2004, respectively.
3. Per Share Information
---------------------
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share". The Company has two classes of
common stock currently outstanding. The classes are A and B, of which
Class B has a 1:1.15 conversion rate to Class A. Basic EPS excludes
dilution and is computed by dividing income available to common
shareholders by the weighted average common shares outstanding during
the period. Diluted EPS takes into account the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised and converted into common stock. December 15, 2004 the
Company declared a 2% stock dividend payable on January 12, 2005. All
share and per share information has been restated to reflect this
dividend. Basic and diluted EPS are calculated as follows (in
thousands, except per share data):
THREE MONTHS ENDED JUNE 30, 2005
Income Average shares Per share
------ -------------- ---------
(numerator) (denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $7,242 12,545 $0.58
Effect of dilutive securities
Stock options 78 (0.01)
--------------------------------------------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $7,242 12,623 $0.57
THREE MONTHS ENDED JUNE 30, 2004
Income Average shares Per share
------ -------------- ---------
(numerator) (denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $4,394 12,518 $0.35
Effect of dilutive securities
Stock options 62 --
--------------------------------------------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $4,394 12,580 $0.35
The tables above do not include 418 thousand options granted that have an
exercise price above the market value at June 30, 2005. No options were
anti dilutive for the period ended June 30, 2004.
SIX MONTHS ENDED JUNE 30, 2005
Income Average shares Per share
------ -------------- ---------
(numerator) (denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $11,563 12,543 $0.92
Effect of dilutive securities
Stock options 84 --
------------------------------------------------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $11,563 12,627 $0.92
SIX MONTHS ENDED JUNE 30, 2004
Income Average shares Per share
------ -------------- ---------
(numerator) (denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common shareholders $9,558 12,495 $0.76
Effect of dilutive securities
Stock options 88 --
------------------------------------------------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $9,558 12,583 $0.76
The tables above do not include 252 thousand options granted that have an
exercise price above the market value at June 30, 2005. No options were anti
dilutive for the six-month period ended June 30, 2004.
4. Investment Securities:
The carrying value and approximate market value of investment
securities at June 30, 2005 are as follows:
AMORTIZED GROSS GROSS APPROXIMATE
PURCHASED UNREALIZED UNREALIZED FAIR CARRYING
(in thousands) COST GAINS LOSSES VALUE VALUE
----------- ------------ ------------ ------------ ----------
HELD TO MATURITY:
-----------------
Mortgage Backed $199 $-- $-- $199 $199
US Agencies 195,000 9 (1,466) 193,543 195,000
Other Securities 45,339 664 -- 46,003 45,339
---------- ------ -------- --------- --------
$240,538 $673 ($1,466) $239,745 $240,538
========== ====== ======== ========= ========
AVAILABLE FOR SALE:
-------------------
Federal Home Loan
Bank Stock - at cost $17,150 $-- $-- $17,150 $17,150
Mortgage Backed 46,320 219 (151) 46,388 46,388
CMO's 26,357 73 (63) 26,367 26,367
US Agencies 94,978 42 (1,188) 93,832 93,832
Other securities 182,714 6,714 (635) 188,793 188,793
---------- ------ -------- --------- --------
$367,519 $7,048 ($2,037) $372,530 $372,530
========== ====== ======== ========= ========
5. Allowance for Loan Losses: Changes in the allowance were as follows:
THREE MONTHS ENDED JUNE 30,
2005 2004
------- -------
(in thousands)
BALANCE AT BEGINNING OF PERIOD $12,495 $12,467
Loans charged-off (2,259) (34)
Recoveries 59 102
--------- --------
Net charge-offs and recoveries (2,200) 68
Provision for loan losses -- 4
--------- --------
BALANCE AT END OF PERIOD $10,295 $12,539
========= ========
SIX MONTHS ENDED JUNE 30,
2005 2004
--------- --------
(in thousands)
BALANCE AT BEGINNING OF PERIOD $12,519 $12,426
Loans charged-off (2,292) (91)
Recoveries 67 199
--------- --------
Net charge-offs and recoveries (2,225) 108
Provision for loan losses -- 5
--------- --------
BALANCE AT END OF PERIOD $10,295 $12,539
========= ========
6. Non-performing loans
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $7.2 million and $6.8 million at June 30,
2005 and 2004, respectively. Although the Company has non-performing
loans of approximately $7.2 million at June 30, 2005, management
believes it has adequate collateral to limit its credit risk with these
loans.
The balance of impaired loans, which included the loans on which the
accrual of interest has been discontinued, was approximately $7.2
million and $6.8 million at June 30, 2005 and 2004, 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 $1.1 million at June 30,
2005. The income that was recognized on impaired loans during the
three-month and six-month periods ended June 30, 2005 was $-0-. The
cash collected on impaired loans during the same period was $1.1
million all of which 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. 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
consecutive years during the last 10 years of employment. The Company's
policy is to fund pension costs allowable for income tax purposes.
Net periodic defined benefit pension expense for the three months and
six months ended June 30, 2005 and 2004 included the following
components:
Three months ended Six months ended
June 30, June 30,
(in thousands) 2005 2004 2005 2004
---- ---- ---- ----
Service cost $1,053 $274 $1,259 $382
Interest cost 68 43 133 106
------- ------ ------- -----
Net periodic benefit cost $1,121 $317 $1,392 $488
======= ====== ======= =====
The total accumulated benefit obligation under the plan including
adjustments is estimated to be $6.2 million at December 31, 2005.
8. Stock-based Compensation
At June 30, 2005, the Company had both a director and employee
stock-based compensation plan. The Company accounts for the plan under
the recognition and measurement provisions of Accounting Principals
Board No. 25, "Accounting for Stock Issued to Employee," and related
interpretations. Stock-based employee compensation costs 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 SFAS 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 statements 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.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(in thousands, except per share data) 2005 2004 2005 2004
---- ---- ---- ----
Net income, as reported $7,242 $4,394 $11,563 $9,558
Less: Stock-based compensation costs
under fair value based method for (123) (106) (246) (212)
all awards, net of related tax effect
Pro forma net income $7,119 $4,288 $11,317 $9,346
Earnings per share - Basic As reported $0.58 $0.35 $0.92 $0.76
Pro forma $0.57 $0.34 $0.90 $0.75
Earnings per share - Diluted As reported $0.57 $0.35 $0.92 $0.76
Pro forma $0.56 $0.34 $0.89 $0.74
9. Interest Rate Swaps
For asset/liability management purposes, Royal Bancshares uses interest rate
swap agreements to hedge various exposures or to modify interest rate
characteristics of various balance sheet accounts. Such derivatives are used
as part of the asset/liability management process and are linked to specific
liabilities which have a high correlation between the contract and the
underlying item being hedged, both at inception and throughout the hedge
period.
Royal Bancshares currently utilizes interest rate swap agreements to convert
a portion of its fixed rate time deposits to a variable rate (fair value
hedge) to fund variable rate loans. Interest rate swaps are contracts in
which a series of interest flows are exchanged over a prescribed period. The
notional amount ($75 million) on which interest payments are based is not
exchanged.
10. Variable Interest Entities ("VIE")
The Company, together with a real estate development company, formed
Brook View Investors, L.L.C. ("Brook View") in May 2001. Brook View was formed
to construct 13 apartment buildings with a total of 116 units in a gated
apartment community. The development company is the general partner of the
project. The Company invested 60% of initial capital contributions with the
development company holding the remaining equity interest. Upon the repayment of
the initial capital contributions and a preferred return, distributions will
convert to 50% for the Company and 50% for the development company. At June 30,
2005, Brook View had total assets of $12.9 million and total borrowings of $12.8
million of which $0 is guaranteed by the Company. The Company has determined
that Brook View is a VIE and it is the primary beneficiary. The Company's
exposure to loss due to its investment in and receivables due from Brook View is
$88,000.
The Company, together with a real estate development company, formed
Burrough's Mill Apartment, L.L.C. ("Burrough's Mill") in December 2001.
Burrough's Mill was formed to construct 32 apartment buildings with a total of
308 units in a gated apartment community. The development company is the general
partner of the project. The Company invested 72% of initial capital
contributions with the development company holding the remaining equity
interest. Upon the repayment of the initial capital contributions and a
preferred return, distributions will convert to 50% for the Company and 50% for
the development company. At June 30, 2005, Burrough's Mill had total assets of
$35.1 million and total borrowings of $30.0 million of which $0 is guaranteed by
the Company. The Company has determined that Burrough's Mill is a VIE and it is
the primary beneficiary. The Company's exposure to loss due to its investment in
and receivables due from Burrough's Mill is $2.5 million.
The Company, together with a real estate investment company, formed 212
C Associates, L.P. ("212 C") in May 2002. 212 C was formed to acquire, hold,
improve, and operate office space located in Lansdale, Pennsylvania. The
investment company is the general partner of the project. The Company invested
90% of initial capital contributions with the investment company holding the
remaining equity interest. Upon the repayment of the initial capital
contributions and a preferred return, distributions will convert to 50% for the
Company and 50% for the investment company. On June 7, 2005, 212 C made a
distribution to the Company of approximately $4.0 million which paid back the
Company's original investment and accrued preferred return. In addition, the
company recorded a profit of $1.8 million as result of this distribution. As a
result of the transaction the Company no longer qualifies as the primary
beneficiary and is no longer obligated to consolidate this VIE into the
Company's financial statement.
The Company, together with a real estate development company, formed
Main Street West Associates, L.P. ("Main Street") in February 2002. Main Street
was formed to acquire, maintain, improve, and operate office space located in
Norristown, Pennsylvania. The development company is the general partner of the
project. The Company invested 90% of initial capital contributions with the
development company holding the remaining equity interest. Upon the repayment of
the initial capital contributions and a preferred return, distributions will
convert to 50% for the Company and 50% for the development company. On June 30,
2005, Main Street sold the property and paid back the Company's original
investment plus the accrued preferred return in full.
Trust Preferred Securities
Management has determined that Royal Bancshares Capital Trust I/II ("the
Trusts") qualify as VIE's under FASB Interpretation 46 (FIN 46), "Consolidation
of Variable Interest Entities," as revised. The Trusts issued mandatory
redeemable preferred stock to investors and loaned the proceeds to Royal
Bancshares.
The Company adopted the provision under the revised interpretation, FIN 46(R),
in the first quarter of 2004. Accordingly, Royal Bancshares does not consolidate
the Trust. FIN 46(R) precludes consideration of the call option embedded in the
preferred stock when determining if the Company has the right to a majority of
the Trusts' expected residual returns. The deconsolidation resulted in the
investment in the common stock of the Trusts to be included in other assets as
of June 30, 2005 and the corresponding increase in outstanding debt of $774,000.
In addition, income received on the Company's stock investment is included in
other income.
11. Income Taxes.
Total income tax expense for the three months ended June 30, 2005 was
$704,000, as compared to $1.8 million for the same period in 2004. During the
second quarter of 2005 the company recorded an approximate $1.7 million decrease
in tax expense resulting from the completion of an Internal Revenue Service
audit with respect to a valuation allowance against the deferred tax asset
derived from net operating loss carryovers. For the six-month period June 30,
2005 income tax expense was $2.5 million, as compared to $4.1 million for same
period in 2004. The $1.6 million decrease was primarily due the $1.7 million
dollar tax benefit mentioned above.
12. Commitments, Contingencies and Concentrations
The Company is party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit totaling $177.6 million at June 30, 2005. These
instruments involve to varying degrees, elements of credit and interest rate in
excess of the amount recognized in the financial statements.
Financial instruments whose contract amounts represent potential credit
risk are commitments to extend credit of approximately $175.0 million and $119.5
million and standby letters of credit of approximately $2.6 million and $1.8
million at June 30, 2005, and December 31, 2004, respectively.
13. Recent Accounting Pronouncements
In March 2005, the FASB issued Interpretation No. 47 ("FIN 47"), "Accounting for
Conditional Asset Retirement Obligations," that requires an entity to recognize
a liability for a conditional asset retirement obligation when incurred if the
liability can be reasonably estimated. FIN 47 clarifies that the term Condition
Asset Retirement Obligation refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of
entity. FIN 47 also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement obligation. FIN 47
is effective no later than the end of fiscal years ending after December 15,
2005. We are currently evaluating the impact of this standard on our
Consolidated Financial Statement.
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 123(R), "Share-Based Payment." Statement No. 123(R) replaces
Statement No. 123, "Accounting for Stock-Based Compensation," and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Statement No. 123(R)
requires compensation costs related to share-based payment transactions to be
recognized in the financial statements over the period that an employee provides
service in exchange for the award. Public companies are required to adopt the
new standard using a modified prospective method and may elect to restate prior
periods using the modified retrospective method. Under the modified prospective
method, companies are required to record compensation cost for new and modified
awards over the related vesting period of such awards prospectively and record
compensation cost prospectively for the unvested portion, at the date of
adoption, of previously issued and outstanding awards over the remaining vesting
period of such awards. No change to prior periods presented is permitted under
the modified prospective method. Under the modified retrospective method,
companies record compensation costs for prior periods retroactively through
restatement of such periods using the exact pro forma amounts disclosed in the
companies' footnotes. Also, in the period of adoption and after, companies
record compensation cost based on the modified prospective method.
On April 14, 2005, the Securities and Exchange Commission ("SEC") adopted a new
rule that amends the compliance dates for FASB's Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS No.
123R"). Under the new rule, the Company is required to adopt SFAS No. 123R in
the first annual period beginning after June 15, 2005. The Company has not yet
determined the method of adoption or the effect of adopting SFAS No. 123R, and
it has not determined whether the adoption will result in amounts that are
similar to the current pro forma disclosures under SFAS No. 123.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB No. 107"),
"Share-Based Payment", providing guidance on option valuation methods, the
accounting for income tax effects of share-based payment arrangements upon
adoption of SFAS No. 123(R), and the disclosures in MD&A subsequent to the
adoption. The Company will provide SAB No. 107 required disclosures upon
adoption of SFAS No. 123(R) on January 1, 2006.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULT OF OPERATIONS
The following discussion and analysis is intended to assist in
understanding and evaluating the changes in the financial condition and earnings
performance of the Company and its subsidiaries for the three-month and
six-month periods ended June 30, 2005.
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, 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 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 Loan Losses
The Company considers that the determination of the allowance for loan
losses involves a higher degree of judgment and complexity than its other
significant accounting policies. 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 management's 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 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 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.
Interest Rate Swaps
For asset/liability management purposes, Royal Bancshares uses interest rate
swap agreements to hedge various exposures or to modify interest rate
characteristics of various balance sheet accounts. Such derivatives are used as
part of the asset/liability management process and are linked to specific
liabilities which have a high correlation between the contract and the
underlying item being hedged, both at inception and throughout the hedge period.
Royal Bancshares currently utilizes interest rate swap agreements to convert a
portion of its fixed rate time deposits to a variable rate (fair value hedge) to
fund variable rate loans. Interest rate swaps are contracts in which a series of
interest flows are exchanged over a prescribed period. The notional amount ($75
million) on which interest payments are based is not exchanged.
FINANCIAL CONDITION
Total consolidated assets as of June 30, 2005 were $1.26 billion, an
increase of $50 million from the $1.21 billion reported at year-end, December
31, 2004. This increase is primarily due to a $45 million increase in the loan
balance and $28 million increase in investments classified as held to maturity
during the first six months of 2005, partially offset by an $18 million decrease
in premises and equipment as a result of the deconsolidation of two of the VIE's
as mentioned above.
Total loans increased $44.7 million from the $467.3 million level at
December 31, 2004 to $512.0 million at June 30, 2005. This increase is
attributed to an increase in lending staff, competitive interest rates and
expansion of lending area into the Virginia, Washington D.C. and Northern New
Jersey area. The year-to-date average balance of loans was $495.0 million at
June 30, 2005.
The allowance for loan loss decreased $2.2 million to $10.3 million at
June 30, 2005 from $12.5 million at December 31, 2004. The $2.2 million
reduction was attributed to a loan the Company had in Texas. The level of
allowance for loan loss reserve represents approximately 2.0% of total loans at
June 30, 2005 versus 2.7% at December 31, 2004. 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 $28.8 million increase in total investment securities is primarily
attributable to a $25 million dollar leverage strategy completed during the
second quarter of 2005. This leverage strategy included a $25 million brokered
deposit which was matched with an interest rate swap with an identical maturity
and rate reset period.
Total cash and cash equivalents increased $1.2 million from the $27.1
million level at December 31, 2004 to $28.3 million at June 30, 2005. This
balance was held for anticipated funding needs in the lending area.
Total deposits, the primary source of funds, decreased $41.3 million to
$701.1 million at June 30, 2005, from $742.4 million at December 31, 2004. The
balance of brokered deposits was $107.0 million, representing approximately 15%
of total deposits at June 30, 2005. 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.
Total borrowings increased $95.0 million to $399.0 million at June 30,
2005, from $304.0 million at December 31, 2004. This increase is primarily
attributed to the utilization of FHLB borrowings, in the amount of $108.5
million, for funding of loan volume and covering the decline in the balance of
higher yielding deposits. This increase in FHLB borrowings was partially offset
by the deconsolidation of two VIE's as mentioned above which resulted in a
reduction in borrowings of $13.5 million.
Consolidated stockholders' equity increased $4.9 million to $145.8
million at June 30, 2005 from $140.9 million at December 31, 2004. This increase
is primarily due to increased earnings in excess of dividends paid during the
six month period.
RESULTS OF OPERATIONS
Results of operations depend primarily on net interest income, which is
the difference between interest income on interest earning assets and interest
expense on interest bearing liabilities. Interest earning assets consist
principally of loans and investment securities, while interest bearing
liabilities consist primarily of deposits and borrowings. 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, June 30, 2005 was
$7.2 million or $0.58 basic earnings per share, as compared to net income of
$4.4 million or $0.35 basic earnings per share for the same three month period
in 2004. Consolidated net income for the six months ended, June 30, 2005 was
$11.6 million or $0.92 basic earnings per share, as compared to net income of
$9.6 million or $0.76 basic earnings per share for the same six month period in
2004.
For the second quarter of 2005, net interest income was $11.6 million
as compared to $9.5 million for the same quarter in 2004, an increase of $2.1
million. This increase is primarily due to an exit fee collected on a mezzanine
loan in the amount $1.3 million which is recorded under interest and fees earned
on loans. Net interest income for the six-month period ended June 30, 2005 was
$21.5 million as compared to $20.3 million, an increase of $1.2 million. This
increase is primarily due to the $1.3 million exit fee received along with an
increase in interest income of $1.2 million (excluding the exit fee received).
The increase in interest income is attributed to an increase in the average loan
balance of $24.8 million. The $2.5 million increase in interest income was
partially offset by an increase in interest expense of $1.3 million, which
mainly resulted from an increase in average borrowings and deposits of $23.5
million.
There was no provision for loan losses taken during the second quarter
of 2005 as compared to the $4 thousand taken during the second quarter of 2004.
Charge-offs and recoveries for the second quarter of 2005 were $2.3 million and
$59,000, as compared to $34,000 and $102,000 for the second quarter of 2004,
respectively. Charge-offs and recoveries for the six month period ended June 30,
2005 were $2.3 million and $67,000 respectively as compared to $91,000 and
$199,000 for the same period in 2004. Overall, management considers the current
level of allowance for loan loss to be adequate at June 30, 2005.
Total non-interest income for the three-month period ended June 30,
2005 was $3.9 million as compared to $3.5 million for the same three-month
period in 2004. During the second quarter of 2005 the company recorded a $1.8
million gain as a result of the distribution from 212 C as mentioned in Variable
Interest Entities. Total non-interest income for the six-month period ended June
30, 2005 was $6.5 million as compared to the $6.6 million for the same period
during 2004. This decrease is a result of the deconsolidation of the two VIE's
in the amount of $1.4 million which is offset by the $1.8 million gain from 212
C.
Total non-interest expense for the three months ended June 30, 2005 was
$7.6 million, as compared to $6.8 million for the same period in 2004, an
increase of $800,000. The increase is primarily attributed to three items, the
first is an additional expense of approximately $930,000 related to the
Company's pension fund as a result of changes to the plan, the write down of an
asset, in the approximate amount of $420,000, on the books related a sublease
that was terminated, and the reversal of losses that were previously booked, in
the approximate amount of $400,000, related to the Main Street West VIE, which
the Company was paid in full on its' investment following the sale of the
property during the second quarter of 2005. Total non-interest expense for the
six-month period ended June 30, 2005 was $13.9 million, as compared to $13.4
million for the same period in 2004, an increase of $500,000. The increase is
primarily attributed to the same three items mentioned above.
Total income tax expense for the three months ended June 30, 2005 was
$704,000, as compared to $1.8 million for the same period in 2004. During the
second quarter of 2005 the company recorded an approximate $1.7 million decrease
in tax expense resulting from the completion of an Internal Revenue Service
audit with respect to a valuation allowance against the deferred tax asset
derived from net operating loss carryovers. For the six-month period June 30,
2005 income tax expense was $2.5 million, as compared to $4.1 million for same
period in 2004. The $1.6 million decrease was primarily due the $1.7 million
dollar tax benefit mentioned above.
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 June 30, 2005, 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 and Royal Bank risk-based capital ratios and leverage ratios:
ROYAL BANCSHARES ROYAL BANK
JUNE 30, 2005 DEC 31, 2004 JUNE 30, 2005 DEC 31, 2004
------------- ------------ ------------- ------------
CAPITAL LEVELS
Tier 1 leverage ratio 13.6% 13.9% 9.6% 9.6%
Tier 1 risk-based ratio 18.5% 19.2% 13.1% 13.3%
Total risk-based ratio 19.6% 20.4% 14.3% 14.6%
CAPITAL PERFORMANCE
Return on average assets 2.3%(1) 1.7%(1) 2.4%(1) 1.7%(1)
Return on average equity 20.4%(1) 14.6%(1) 25.1%(1) 18.0%(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 calculated by adding total cash and investments
less reserve requirements divided by deposits and short-term liabilities which
is generally maintained equal to or greater than 25%.
The liquidity ratio of the Company remains strong at approximately 42%
and exceeds the Company's target ratio set forth in the Asset/Liability Policy.
The Company's level of liquidity is provided by funds invested primarily in
corporate bonds, capital trust securities, US Treasuries and agencies, and to a
lesser extent, federal funds sold. The overall liquidity position is monitored
on a monthly basis.
Interest rate sensitivity is a function of the repricing
characteristics of the Company's assets and liabilities. These include the
volume of assets and liabilities repricing, the timing of the repricing, and the
interest rate sensitivity gaps is a continual challenge in a changing rate
environment. The following table shows separately the interest sensitivity of
each category of interest earning assets and interest bearing liabilities as of
June 30, 2005:
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 $1.2 $0.0 $0.0 $0.0 $15.3 $16.5
Federal funds sold 11.8 0.0 0.0 0.0 0.0 11.8
Investment securities:
Available for sale 7.4 49.0 212.5 99.1 4.5 372.5
Held to maturity 7.1 28.1 205.3 0.0 0.0 240.5
----------- ----------- ----------- ----------- ----------- -----------
Total investment securities 14.5 77.1 417.8 99.1 4.5 613.0
Loans:
Fixed rate 33.5 38.9 153.7 14.5 0.0 240.6
Variable rate 197.7 15.5 59.3 0.0 (10.3) 262.2
----------- ----------- ----------- ----------- ----------- -----------
Total loans 231.2 54.4 213.0 14.5 (10.3) 502.8
Other assets 0.0 0.0 0.0 0.0 119.6 119.6
----------- ----------- ----------- ----------- ----------- -----------
Total Assets $258.7 $131.5 $630.8 $113.6 $129.1 $1,263.7
=========== =========== =========== =========== =========== ===========
LIABILITIES & CAPITAL
Deposits:
Non interest bearing deposits $0.0 $0.0 $0.0 $0.0 $64.0 $64.0
Interest bearing deposits 20.6 61.7 285.6 0.0 0.0 367.9
Certificate of deposits 21.2 84.9 124.1 39.0 0.0 269.2
----------- ----------- ----------- ----------- ----------- -----------
Total deposits 41.8 146.6 409.7 39.0 64.0 701.1
Borrowings (1) 126.0 85.7 50.0 94.5 42.8 399.0
Other liabilities 0.0 0.0 0.3 0.0 17.5 17.8
Capital 0.0 0.0 0.0 0.0 145.8 145.8
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities & capital $167.8 $232.3 $460.0 $133.5 $270.1 $1,263.7
=========== =========== =========== =========== =========== ===========
Net interest rate GAP $90.9 ($100.8) $170.8 ($19.9) ($141.0)
=========== =========== =========== =========== ===========
Cumulative interest rate GAP $90.9 ($9.9) $160.9 $141.0
=========== =========== =========== =========== ===========
GAP to total assets 7% -8%
=========== ===========
GAP to total equity 62% -69%
=========== ===========
Cumulative GAP to total assets 7% -1%
=========== ===========
Cumulative GAP to total equity 62% -7%
=========== ===========
(1) The $42.8 in borrowings classified as non-rate sensitive are related to
variable interest entities and are not obligations of the Company.
The Company's exposure to interest rate risk is mitigated somewhat by a
portion of the Company's loan portfolio consisting of floating rate loans, which
are tied to the prime lending rate but which have interest rate floors and no
interest rate ceilings. Although the Company is originating fixed rate loans, a
portion of the loan portfolio continues to be comprised of floating rate loans
with interest rate floors.
ITEM 4 - CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our Chief Executive Officer and Chief Financial Officer, with the
assistance of management, evaluated the effectiveness of our disclosure controls
and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the
period covered by this report (the "Evaluation Date"). Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that, as of
the Evaluation Date, our disclosure controls and procedures were effective to
ensure that information required to be disclosed in our reports under the
Exchange Act, is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms,
and that such information is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosures.
(b) Changes in internal controls.
There has not been any change in our internal control over financial
reporting during our quarter ended June 30, 2005 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
RECENT DEVELOPMENTS
None
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2005, the FASB issued Interpretation No. 47 ("FIN 47"), "Accounting for
Conditional Asset Retirement Obligations," that requires an entity to recognize
a liability for a conditional asset retirement obligation when incurred if the
liability can be reasonably estimated. FIN 47 clarifies that the term Condition
Asset Retirement Obligation refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of
entity. FIN 47 also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement obligation. FIN 47
is effective no later than the end of fiscal years ending after December 15,
2005. We are currently evaluating the impact of this standard on our
Consolidated Financial Statement.
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 123(R), "Share-Based Payment." Statement No. 123(R) replaces
Statement No. 123, "Accounting for Stock-Based Compensation," and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Statement No. 123(R)
requires compensation costs related to share-based payment transactions to be
recognized in the financial statements over the period that an employee provides
service in exchange for the award. Public companies are required to adopt the
new standard using a modified prospective method and may elect to restate prior
periods using the modified retrospective method. Under the modified prospective
method, companies are required to record compensation cost for new and modified
awards over the related vesting period of such awards prospectively and record
compensation cost prospectively for the unvested portion, at the date of
adoption, of previously issued and outstanding awards over the remaining vesting
period of such awards. No change to prior periods presented is permitted under
the modified prospective method. Under the modified retrospective method,
companies record compensation costs for prior periods retroactively through
restatement of such periods using the exact pro forma amounts disclosed in the
companies' footnotes. Also, in the period of adoption and after, companies
record compensation cost based on the modified prospective method.
On April 14, 2005, the Securities and Exchange Commission ("SEC") adopted a new
rule that amends the compliance dates for FASB's Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS No.
123R"). Under the new rule, the Company is required to adopt SFAS No. 123R in
the first annual period beginning after June 15, 2005. The Company has not yet
determined the method of adoption or the effect of adopting SFAS No. 123R, and
it has not determined whether the adoption will result in amounts that are
similar to the current pro forma disclosures under SFAS No. 123.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB No. 107"),
"Share-Based Payment", providing guidance on option valuation methods, the
accounting for income tax effects of share-based payment arrangements upon
adoption of SFAS No. 123(R), and the disclosures in MD&A subsequent to the
adoption. The Company will provide SAB No. 107 required disclosures upon
adoption of SFAS No. 123(R) on January 1, 2006.
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 18, 2005, the Annual Meeting of Shareholder of Royal
Bancshares of Pennsylvania was convened in Philadelphia, PA at 6:30 P.M. The
following nominees were elected as Class III Directors of the Registrant to
serve for a three year term:
FOR WITHOLD
--- -------
Carl M. Cousin 26,055,818 382,823
Lee E. Tabas 25,764,625 674,016
Evelyn R. Tabas 25,760,009 678,632
John M. Decker 25,763,569 675,072
Edward B. Tepper 26,056,193 382,448
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a)
31.1 Section 302 Certification Pursuant to Section 13(a) or 15(d) of the
Securities and Exchange Act of 1934 signed by Joseph P. Campbell,
Chief Executive Officer of Royal Bancshares of Pennsylvania on
August 8, 2005.
31.2 Section 302 Certification Pursuant to Section 13(a) or 15(d) of the
Securities and Exchange Act of 1934 signed by Jeffrey T. Hanuscin,
Chief Financial Officer of Royal Bancshares of Pennsylvania on
August 8, 2005.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by
Joseph P. Campbell, Chief Executive Officer of Royal Bancshares of
Pennsylvania on August 8, 2005.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by
Jeffrey T. Hanuscin, Chief Financial Officer of Royal Bancshares of
Pennsylvania on August 8, 2005.
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: August 8, 2005 /s/ Jeffrey T. Hanuscin
--------------------------
Jeffrey T. Hanuscin
Chief Financial Officer