<PAGE> 1
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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from: to
Commission file number: 0-26366
ROYAL BANCSHARES OF PENNSYLVANIA, INC.
(Exact name of the bank 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
(Registrant's telephone number, including area code)
N/A
(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 June 30, 1998
$2.00 PAR VALUE 7,094,607
Class B Common Stock Outstanding at June 30, 1998
$.10 PAR VALUE 1,650,103
<PAGE> 2
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS JUNE 30, 1998 DEC 31, 1997
------------- -------------
<S> <C> <C>
Cash and due from banks $ 10,405,054 $ 7,491,242
Federal funds sold 27,000,000 22,925,000
------------- -------------
Total cash and cash equivalents 37,405,054 30,416,242
------------- -------------
Interest bearing deposits in banks 100,030 300,030
Investment securities held to maturity (market value of $43,482,646 @
6/30/98 & $64,984,987 @ 12/31/97) 42,849,837 64,371,042
Investment securities available for sale - at market value 26,126,408 21,048,793
Total loans 291,021,358 290,897,048
Less allowance for loan losses 10,380,370 8,186,237
------------- -------------
Net loans 280,640,988 282,710,811
Premises and equipment, net 5,154,299 4,788,921
Accrued interest and other assets 12,203,869 12,962,240
------------- -------------
$ 404,480,485 $ 416,598,079
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 38,439,903 $ 37,712,928
Interest bearing (includes certificates of deposit in excess
of $100,000 of $33,769,719 @ 6/30/98 and
$33,175,135 @ 12/31/97) 229,550,247 227,650,506
------------- -------------
Total deposits 267,990,150 265,363,434
Federal funds purchased -- 15,000,000
Accrued interest and other liabilities 13,516,819 15,095,998
Long-term borrowings 31,063,000 31,063,000
Mortgage payable 549,192 570,885
------------- -------------
Total liabilities 313,119,161 327,093,317
------------- -------------
Stockholders' equity
Common stock
Class A, par value $2 per share; authorized, 18,000,000 shares; issued,
7,302,123 @ 6/30/98 & 7,015,721 @ 12/31/97 14,604,246 14,031,442
Class B, par value $.10 per share; authorized, 2,000,000 shares; issued,
1,650,103 @ 6/30/98 & 1,592,859 @ 12/31/97 165,010 159,286
Capital surplus 45,281,133 38,797,618
Retained earnings 32,766,652 38,023,359
Accumulated unrealized gain/(loss) on invest. Securities available for sale 689,368 638,142
------------- -------------
93,506,409 91,649,847
Treasury stock - at cost, shares of Class A, 207,516 @ 6/30/98,
207,516 @ 12/31/97 (2,145,085) (2,145,085)
------------- -------------
91,361,324 89,504,762
------------- -------------
$ 404,480,485 $ 416,598,079
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 3
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED, JUNE 30,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Interest income
Loans, including fees $ 8,401,373 $ 6,033,293
Investment securities held to maturity
Taxable 735,251 1,643,074
Tax-exempt 54,075 14,750
Investment securities available for sale
Taxable 463,190 116,164
Tax-exempt -- --
Deposits in banks 4,934 64,931
Federal funds sold 406,935 291,056
----------- -----------
TOTAL INTEREST INCOME 10,065,758 8,163,268
----------- -----------
Interest expense
Deposits 2,799,289 2,493,898
Mortgage payable and other 495,622 42,954
Federal funds purchased -- --
----------- -----------
TOTAL INTEREST EXPENSE 3,294,911 2,536,852
----------- -----------
NET INTEREST INCOME 6,770,847 5,626,416
Increase in provision for loan losses -- (101,108)
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 6,770,847 5,727,524
----------- -----------
Other income (expense)
Service charges and fees 195,203 253,682
Realized gains on sale of investment
securities available for sale -- 13,643
Gain on sale of other real estate -- 149,010
Gain on sale of loans 191 5,923
Other income 84,788 114,692
----------- -----------
280,182 536,950
----------- -----------
Other expenses
Salaries & wages 1,451,655 1,201,484
Employee benefits 553,324 585,608
Occupancy and equipment 159,999 167,942
Other operating expenses 1,104,969 1,115,664
----------- -----------
3,269,947 3,070,698
----------- -----------
INCOME BEFORE INCOME TAXES 3,781,082 3,193,776
Income taxes 1,167,256 952,100
----------- -----------
NET INCOME $ 2,613,826 $ 2,241,676
=========== ===========
Per share data
Net income - basic $ .29 $ .25
=========== ===========
Net income - diluted $ .28 $ .24
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 4
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended, June 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Interest income
Loans, including fees $ 16,282,233 $ 11,516,464
Investment securities held to maturity
Taxable 1,669,741 3,373,280
Tax-exempt 108,150 29,500
Investment securities available for sale
Taxable 896,183 197,727
Tax-exempt -- --
Deposits in banks 15,676 90,962
Federal funds sold 606,083 390,076
------------ ------------
TOTAL INTEREST INCOME 19,578,066 15,598,009
------------ ------------
Interest expense
Deposits 5,579,358 4,900,154
Mortgage payable and other 991,402 100,315
Federal funds purchased 4,094 --
------------ ------------
TOTAL INTEREST EXPENSE 6,574,854 5,000,469
------------ ------------
NET INTEREST INCOME 13,003,212 10,597,540
Increase in provision for loan losses 2,400,000 (101,108)
------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,603,212 10,698,648
------------ ------------
Other income (expense)
Service charges and fees 418,815 503,250
Realized gains on sale of investment
securities available for sale -- 13,643
Gain on sale of other real estate -- 329,404
Gain on sale of loans 3,831 11,448
Other income 2,585,227 180,208
------------ ------------
3,007,873 1,037,953
------------ ------------
Other expenses
Salaries & wages 2,679,679 2,348,928
Employee benefits 1,013,358 972,100
Occupancy and equipment 349,889 335,280
Other operating expenses 1,993,310 2,022,156
------------ ------------
6,036,236 5,678,464
------------ ------------
INCOME BEFORE INCOME TAXES 7,574,849 6,058,137
Income taxes 2,342,003 1,702,337
------------ ------------
NET INCOME $ 5,232,846 $ 4,335,800
============ ============
Per share data
Net income - basic $ .58 $ .49
============ ============
Net income - diluted $ .56 $ .47
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 5
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED, JUNE 30,
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net income $2,613,826 $2,241,676
---------- ----------
Other comprehensive income, net of tax
Net unrealized gains (losses) on securities 203,868 54,938
Reclassification adjustment: gain (loss) included in net income -- 9,414
---------- ----------
Comprehensive income $2,817,694 $2,287,200
========== ==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED, JUNE 30,
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net income $5,232,846 $4,355,800
---------- ----------
Other comprehensive income, net of tax
Net unrealized gains (losses) on securities 35,346 47,024
Reclassification adjustment: gain (loss) included in net income -- 9,414
---------- ----------
Comprehensive income $5,268,192 $4,393,410
========== ==========
</TABLE>
<PAGE> 6
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK
-------------------------- --------------------------- CAPITAL
SHARES AMOUNT SHARES AMOUNT SURPLUS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 7,015,721 $ 14,031,442 1,592,859 $ 159,286 $ 38,797,618
Net income for the six months ended June 30, -- -- -- --
Conversion of Class B common stock to Class A
common stock 7,062 14,124 (6,351) (635) --
Purchase of treasury stock -- -- -- -- --
4% stock dividends declared 272,313 544,626 63,595 6,360 6,466,084
Cash dividends on common stock -- -- -- -- --
Cash in lieu of fractional shares -- -- -- -- --
Stock options exercised 7,027 14,054 17,430
Net unrealized loss on securities available for sale -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, June 30, 1998 7,302,123 $ 14,604,246 1,650,103 $ 165,010 $ 45,281,133
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
NET
UNREALIZED
(LOSS)/GAIN ON
SECURITIES
RETAINED TREASURY AVAILABLE
EARNINGS STOCK FOR SALE
------------ ------------ ------------
<S> <C> <C> <C>
Balance, January 1, 1998 $ 38,023,359 $ (2,145,085) $ 638,142
Net income for the six months ended June 30, 5,232,846 -- --
Conversion of Class B common stock to Class A
common stock (13,491) -- --
Purchase of treasury stock -- -- --
4% stock dividends declared (7,017,070)
Cash dividends on common stock (3,455,164) -- --
Cash in lieu of fractional shares (3,829)
Stock options exercised
Net unrealized loss on securities available for sale -- -- 51,226
------------ ------------ ------------
Balance, June 30, 1998 $ 32,766,652 $ (2,145,085) $ 689,368
============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 7
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 5,232,846 $ 4,355,800
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 233,564 201,972
Provision (recovery )of loan loss reserve (credit) 2,400,000 (101,108)
Accretion of investment securities discount (32,111) (38,709)
Amortization of investment securities premium 126,663 399,446
Amortization of deferred loan fees (97,066) (66,197)
Accretion of discount on loans purchased (1,090,418) (596,905)
(Benefit) provision for deferred income taxes 26,390 35,108
(Gain) loss on other real estate -- (329,404)
(Gain) on sale of loans (3,831) (11,448)
(Gain) on sale of investment securities -- (13,643)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable 360,134 (190,900)
(Increase) decrease in other assets 507,549 (302,504)
Increase (decrease) in accrued interest payable 614,028 512,465
Increase in unearned income on loans 98,365 226,315
Increase (decrease) in other liabilities (2,193,207) (62,050)
------------ ------------
Net cash provided by operating activities 6,182,906 4,018,238
Cash flows from investing activities
Net (decrease) in interest bearing balances in banks 200,000 --
Proceeds from calls and maturities of HTM invest. securities 32,076,924 35,589,319
Purchase of investment securities held to maturity (10,653,841) (6,611,252)
Purchase of investment securities available for sale (5,074,045) (11,013,781)
Net decrease in loans 627,070 2,931,878
Purchase of premises and equipment (598,942) (237,271)
Proceeds from sale and payments on other real estate -- 607,892
------------ ------------
Net cash (used in) provided by investing activities 16,577,166 21,266,785
Cash flows from financing activities:
Net (decrease) in non-interest bearing and
interest bearing demand deposits and savings accounts 1,994,980 (11,878,943)
Net increase (decrease) in certificates of deposit 631,736 2,994,779
Mortgage payments (21,693) (20,624)
Purchase of treasury stock -- (119,211)
Net (decrease) increase in long term borrowings (15,000,000) (2,500,000)
Cash dividends (3,455,164) (2,223,470)
Cash in lieu of fractional shares (3,830) (2,477)
Issuance of common stock under stock option plans 31,484 224,031
Other 51,227 68,149
------------ ------------
Net cash provided by (used in) financing activities (15,771,260) (13,457,766)
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS 6,988,812 11,827,257
Cash and cash equivalents at beginning of year 30,416,242 18,369,012
------------ ------------
Cash and cash equivalents at end of period $ 37,405,054 $ 30,196,269
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 8
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 Bank of Pennsylvania (the Bank), Royal Real
Estate of Pennsylvania, Inc. and Royal Investments of Delaware, Inc. These
financial statements reflect the historical information of the Company. All
significant inter-company transactions and balances have been eliminated.
1. The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information. The financial information included
herein is unaudited; however, such information reflects all adjustments
(consisting solely of normal recurring adjustments) which are, in
opinion of management, necessary to present a fair statement of the
results for the interim periods. For further information thereto
included in the Annual Report on Form 10-K for the year ended December
31, 1997.
2. The results of operations for the six-month period ended June 30, 1998
are not necessarily indicative of the results to be expected for the
full year.
3. Per share data are based on the weighted average number of shares
outstanding of 8,991,274 and 8,906,395 for the three months ended June
30, 1997 and 8,992,460 and 8,965,928 for the six months ended, June 30,
1998 and 1997, respectively.
4. Investment Securities:
The carrying value and approximate market value of investment
securities at June 30, 1998 are as follows:
<TABLE>
<CAPTION>
AMORTIZED
OR GROSS GROSS APPROXIMATE
PURCHASED UNREALIZED UNREALIZED MARKET CARRYING
COST GAINS LOSSES VALUE VALUE
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Common stock securities $ 3,214,056 $ 16,103 $ -- $ 3,230,159 $ 3,230,159
Preferred stock securities 2,904,353 20,647 -- 2,925,000 2,925,000
Other securities 18,963,503 1,007,747 -- 19,971,250 19,971,250
----------- ----------- ----------- ----------- -----------
$25,081,912 $ 1,044,497 $ -- $26,126,409 $26,126,409
=========== =========== =========== =========== ===========
HELD TO MATURITY:
US Treasury & agencies $ 8,366,398 $ 143,314 $ 309 $ 8,509,403 $ 8,366,398
Tax exempt securities 3,098,465 40,803 -- 3,139,268 3,098,465
Taxable debt securities 31,384,974 459,929 10,928 31,833,975 31,384,974
----------- ----------- ----------- ----------- -----------
$42,849,837 $ 644,046 $ 11,237 $43,482,646 $42,849,837
=========== =========== =========== =========== ===========
</TABLE>
5. In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activity." SFAS No. 133
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments imbedded in other
contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. If certain conditions are met, a
<PAGE> 9
derivative may be specifically designated as a hedge. The accounting
for changes in the fair value of a derivative (gains and losses)
depends on the intended use of the derivative and resulting
designation. SFAS No. 133 is effective for all fiscal years beginning
after June 15, 1999. Earlier application is permitted only as of the
beginning of any fiscal quarter. The Company is currently reviewing the
provisions of SFAS No. 133.
6. Allowance for Credit Losses: Changes in the allowance for credit losses
were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
BALANCE AT APRIL 1, $ 10,449,053 $ 9,123,373
Loans charged-off (112,748) (565,232)
Recoveries 44,065 95,758
------------ ------------
Net charge-offs and recoveries (68,683) (469,574)
Provision for loan losses -- (101,107)
------------ ------------
BALANCE AT END OF PERIOD $ 10,380,370 $ 8,552,792
============ ============
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
BALANCE AT JANUARY 1, $ 8,186,237 $ 9,084,153
Loans charged-off (339,753) (601,568)
Recoveries 133,886 171,314
------------ ------------
Net charge-offs and recoveries (205,867) (430,254)
Provision for loan losses 2,400,000 (101,107)
------------ ------------
BALANCE AT END OF PERIOD $ 10,380,370 $ 8,552,792
============ ============
</TABLE>
7. Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $4,309,216 and $4,368,704 at June 30, 1998
and 1997, respectively. Although the Company has non-performing loans
of approximately $4,309,216 at June 30, 1998, management believes it
has adequate collateral to limit its credit risks.
The balance of impaired loans was $1,210,706 at June 30, 1998. The
Company identified a loan impaired when it is probable that interest
and principal will not be collected according to the contractual terms
of the loan agreements. The allowance for credit loss associated with
impaired loans was $ -0- at June 30, 1998. The income that was
recognized on impaired loans during the six-month period ended June 30,
1998 was $1,850. The cash collected on impaired loans during this three
month period was $33,736, of which $31,886 was credited to the
principal balance outstanding on such loans. Interest that would have
been accrued on impaired loans during this six-month period in 1998 was
$33,440. 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.
<PAGE> 10
ITEM 2 -MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULT OF OPERATIONS
The following discussion and analysis is intended to assist in
understanding and evaluating the major changes in the financial condition and
earnings performance of the Company and its wholly owned subsidiaries for the
six-month period ended June 30, 1998.
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, the Year 2000 problem, business conditions in the banking
industry; the regulatory environment; rapidly changing technology and evolving
banking industry standards; competitive factors, including increased competition
with community, regional and national financial institutions; new service and
product offerings by competitors and price pressures and similar items.
FINANCIAL CONDITION
Total consolidated assets as of June 30, 1998 were $404.5 million, a
decrease of $12.1 million from the $416.6 million reported at year-end, December
31, 1997. This decrease is primarily due to a $16.4 million decrease in
investment securities, partially offset by a $7.1 million increase in cash and
cash equivalents. Liabilities decreased $14.0 million primarily due to a
decrease in Federal funds purchased of $15 million from December 31, 1997,
partially offset by a $2.6 million increase in deposits.
This $16.4 million decrease in total investment securities is comprised
mostly of a decrease in held to maturity ("HTM") investment securities of $21.5
million, partially offset by a $5.1 million increase in available-for-sale
investment securities. The decrease in HTM investment securities is primarily
due to scheduled maturities in 1998. HTM investment securities are primarily
comprised of taxable corporate debt securities, which are "A" rated or better by
Moody and/or Standard & Poor at the time of purchase, with maturities in the
three to five year ranges. The $5.1 million increase in available-for-sale
investment securities is comprised of capital trust securities.
Net loans changed little from the $282.7 million level at December 31,
1997 declining $.3 million to $280.6 million at June 30, 1998. Average net loans
were $290.9 million for the first six months of 1998. The allowance for loan
loss increased $2.2 million to $10.4 million at June 30, 1998. The level of
allowance for loan loss reserve represents 3.6% of total loans at June 30, 1998
versus 2.8% at December 31, 1997. The allowance for loan loss was increased due
primarily to the
<PAGE> 11
increase in loans related to the purchase of a $75 million loan portfolio from
the FDIC in December of 1997. This loan portfolio is comprised of approximately
175 commercial loans secured primarily by land, retail, and office properties in
the mid-Atlantic and northeast regions.
Total deposits, the primary source of funds, increased $2.6 million to
$268.0 million at June 30, 1998, from $265.4 million at December 31, 1997.
Average deposits were $281.9 million for the first six months of 1998. This
increase in deposits is primarily due to increases experienced in certificates
of deposits of $3.8 million, in addition to a $2.9 million increase in NOW and
money market deposits. The balance of Federal funds purchased of $15 million at
December 31, 1997 was paid down completely on January 2, 1998. Federal Home Loan
Bank ("FHLB") advances did not change from its December 31, 1997 level of $31.1
million. This $31.1 million balance is comprised of three FHLB advances with a
weighted average interest rate of approximately 6.3%.
Consolidated stockholder's equity increased $1.9 million to $91.4
million at June 30, 1998 from $89.5 million at December 31, 1997. This increase
is primarily due to net income of $5.2 million for the six-month period of 1998,
partially offset by two quarterly cash dividends totaling $3.4 million. In the
first and second quarter of 1998, the Board of Directors declared a cash
dividends of twenty cents ($.20) per share for holders of Class A common stock
and twenty three cents ($.23) per share for holders of Class B common stock.
Additionally, the change in market value of available for sale investment
securities in 1998 caused an upward adjustment to the accumulated unrealized
gain of $51 thousand.
RESULTS OF OPERATIONS
Consolidated net income for the three months ended, June 30, 1998 was
$2,619,020 or $.30 basic earnings per share, as compared to net income of
$2,114,124 or $.26 basic earnings per share, for the same three month period in
1997. This increase is primarily due to a 21% increase in net interest income in
1998. Consolidated net income for the six month period ended, June 30, 1998 was
$5,232,846 or $.58 basic earnings per share as compared to net income of
$4,355,800 or $.49 basic earnings per share for the same six month period in
1997. This increase is primarily due to a 23% increase in net interest income
for the six-month period.
Net interest income before provision for loan loss reserve increased
$1.2 million to $6.8 million for the second quarter of 1998, as compared to $5.6
million for the same quarter ended in 1997. For the comparative six-month
period, net interest income before for loan loss reserve increased $2.4 million
to $13.0 million at June 30, 1998 as compared to $10.6 million at June 30, 1997.
These increases in net interest income for both comparative three-month and six
periods are primarily due increases in the average balance of net loans. Average
net loans increased $93.4 million and $90.9 million for the respective three and
six-month comparative periods in 1998 primarily due to the acquisition of a $75
million loan portfolio from the FDIC in December 1997, in addition to internally
generated loan growth experienced in 1997 and 1998. Total interest expense on
deposits and borrowings increased $.8 million and $1.6 million for the second
quarter and six month-period of 1998. These increases were primarily the result
of higher average balances of deposits and borrowings during 1998. These
increases in average balances were due to the funding of the purchase of the
FDIC loan portfolio in December 1997 discussed previously.
<PAGE> 12
Provision for loan loss was $2.4 million for the first six months of
1998 as compared to $-0- for the same period in 1997. Due to the increase in
loans, a $2.4 million provision for loan loss was recorded in January of 1998.
Charge-offs and recoveries were $340 and $134 thousand, respectively, for the
six month period ended June 30, 1998 versus $602 and $171 thousand,
respectively, for the same period in 1997. Overall, Management considers the
current level of allowance for loan loss to be adequate at June 30, 1998.
Total non-interest income for the comparative three and six month
periods ended June 30, 1998 was $.3 million and $3 million, respectively, as
compared to $.5 million and $1.0 million for the same respective periods in
1997. The $2 million increase for the six month comparative period is primarily
due to a $2.4 million increase in other income, the result of a reversal of a
legal accrual relating to the settlement of litigation in January of 1998. This
increase was partially offset by $.3 million decrease in gains on sale of other
real estate.
Total non interest expense for the three months ended June 30, 1998 was
$3.3 million, an increase of $.2 million, as compared to $3.1 million for the
same period in 1997. For the comparative six-month period, total non-interest
expense was $6.0 million as compared to $5.7 million for the same six-month
period in 1997. These respective increases are primarily attributable to an
increase in salaries and employee benefits expense in 1998.
YEAR 2000
Management has initiated a company program to prepare the Company's
computer systems and applications for the year 2000. The year 2000 problem is
pervasive and complex as virtually every computer system will be affected in
some way by the rollover of the two-digit year value to 00. Through special
committee, the Company is conducting a comprehensive review of its computer
systems and third party vendors providing hardware and software services to
identify systems and vendors that could be affected by the year 2000 issue. As
much of the Company's data processing is outsourced to third party vendors, the
Company does not expect the costs associated with year 2000 compliance over the
next two years to have a material effect on its financial position or results of
operation. The amount expensed in 1998 is immaterial.
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 39%
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, US
<PAGE> 13
Treasuries and agencies, and to a lesser extent, obligations of state and
political subdivisions and 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, 1998:
INTEREST RATE SENSITIVITY
(IN MILLIONS)
<TABLE>
<CAPTION>
DAYS
--------------------- 1 TO 5 OVER 5 NON-RATE
ASSETS(1) 0 - 90 91 - 365 YEARS YEARS SENSITIVE TOTAL
-------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits in banks $ 0.6 $ -- $ -- $ -- $ $ 0.6
Federal funds sold 27.0 -- -- -- -- 27.0
Investment securities:
Available for sale 26.1 -- -- -- -- 26.1
Held to maturity 6.0 14.4 13.9 8.6 -- 42.9
-------- ------- -------- -------- -------- --------
Total investment securities 32.1 14.4 13.9 8.6 -- 69.0
Loans:(2)
Fixed rate(3) 13.2 8.7 96.4 41.0 -- 159.4
Variable rate 32.0 32.8 53.5 23.1 -- 141.3
-------- ------- -------- -------- -------- --------
Total loans 45.2 41.5 149.9 64.1 -- 300.7
Other assets(4) -- -- -- -- 7.3 7.3
-------- ------- -------- -------- -------- --------
Total Assets $ 104.9 $ 55.9 $ 163.8 $ 72.6 $ 7.3 $ 404.5
======== ======= ======== ======== ======== ========
LIABILITIES & CAPITAL
Deposits:
Non interest bearing deposits $ -- $ -- $ -- $ -- $ 38.5 $ 38.5
Interest bearing deposits(5) 63.1 25.6 -- -- -- 88.7
Certificate of deposits 16.9 47.7 42.2 34.0 -- 140.8
-------- ------- -------- -------- -------- --------
Total deposits 80.0 73.3 42.2 34.0 38.5 268.0
Short term borrowings -- -- -- -- -- --
Mortgage and long term borrowings 0.6 0.6 30.4 -- -- 31.6
Other liabilities -- -- -- -- 13.5 13.5
Capital -- -- -- -- 91.4 91.4
-------- ------- -------- -------- -------- --------
Total liabilities & capital $ 80.6 $ 73.9 $ 72.6 $ 34.0 $ 143.4 $ 404.5
======== ======= ======== ======== ======== ========
Net interest rate GAP $ 24.3 ($ 18.0) $ 91.2 $ 38.6 ($ 136.0)
======== ======= ======== ======== ========
Cumulative interest rate GAP $ 24.3 $ 6.4 $ 97.5 $ 136.0 --
======== ======= ======== ======== ========
GAP to total assets 6% (5%)
======== =======
GAP to total equity 40% (29%)
======== =======
Cumulative GAP to total assets 6% 2%
======== =======
Cumulative GAP to total equity 40% 10%
======== =======
</TABLE>
(1) Interest earning assets are included in the period in which the
balances are expected to be repaid and/or repriced as a result of
anticipated prepayments, scheduled rate adjustments, and contractual
maturities.
(2) Reflects principal maturing within the specified periods for fixed and
variable rate loans and includes nonperforming loans.
(3) Fixed rate loans include a portion of variable rate loans whose floors
are in effect at June 30, 1998.
(4) For purposes of gap analysis, other assets include the allowance for
possible loan loss, unamortized discount on purchased loans and
deferred fees on loans.
(5) Based on historical analysis, Money market and Savings deposits are
assumed to have rate sensitivity of 1 month; NOW account deposits are
assumed to have a rate sensitivity of 4 months.
<PAGE> 14
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.
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, 1998, 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 cushion of 100 to 200 basis points.
The table below provides a comparison of Royal Bancshares of
Pennsylvania's risk-based capital ratios and leverage ratios:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
CAPITAL LEVELS
Tier 1 leverage ratio 22.1% 25.6%
Tier 1 risk-based ratio 26.2% 25.1%
Total risk-based ratio 27.5% 26.4%
CAPITAL PERFORMANCE
Return on average assets 2.6%(1) 2.7%
Return on average equity 11.7%(1) 10.8%
(1) annualized
</TABLE>
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 meets 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.
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE SECURITY HOLDERS
On Wednesday, June 17, 1998 the Annual Meeting of Shareholders of Royal
Bancshares of Pennsylvania, Inc. was convened in Philadelphia, PA at 6:30 PM.
The following nominees were elected as Class II Directors of the Company to
serve for a three-year term:
<TABLE>
<CAPTION>
FOR WITHHOLD AUTHORITY
------------------ ------------------
<S> <C> <C>
Jack R. Loew 18,995,826 38,241
Daniel M. Tabas 18,995,826 38,241
Albert Ominsky 19,026,025 8,042
Robert R. Tabas 19,024,905 9,162
Gregory Reardon 19,026,025 8,042
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27. Financial Data Schedule
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ROYAL BANCSHARES OF PENNSYLVANIA, INC.
(Registrant)
Dated: August 14th, 1998 /s/ James J. McSwiggan
-----------------------------------------------------
James J. McSwiggan, Chief Financial Officer
and Treasurer
Dated: August 14th, 1998 /s/ David J. Greenfield
-----------------------------------------------------
David J. Greenfield, Controller
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 10,405,054
<INT-BEARING-DEPOSITS> 100,030
<FED-FUNDS-SOLD> 27,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,126,408
<INVESTMENTS-CARRYING> 42,849,837
<INVESTMENTS-MARKET> 43,482,646
<LOANS> 291,904,622
<ALLOWANCE> 10,380,370
<TOTAL-ASSETS> 404,480,485
<DEPOSITS> 267,990,150
<SHORT-TERM> 698,000
<LIABILITIES-OTHER> 13,516,819
<LONG-TERM> 30,925,000
0
0
<COMMON> 14,769,256
<OTHER-SE> 76,592,068
<TOTAL-LIABILITIES-AND-EQUITY> 404,480,485
<INTEREST-LOAN> 16,282,233
<INTEREST-INVEST> 3,295,833
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 19,578,066
<INTEREST-DEPOSIT> 5,579,358
<INTEREST-EXPENSE> 6,579,854
<INTEREST-INCOME-NET> 13,003,212
<LOAN-LOSSES> 2,400,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,036,236
<INCOME-PRETAX> 7,574,849
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,232,846
<EPS-PRIMARY> .58
<EPS-DILUTED> .56
<YIELD-ACTUAL> 6.72
<LOANS-NON> 4,309,216
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,078,823
<LOANS-PROBLEM> 1,058,551
<ALLOWANCE-OPEN> 8,186,237
<CHARGE-OFFS> 339,753
<RECOVERIES> 133,887
<ALLOWANCE-CLOSE> 10,380,370
<ALLOWANCE-DOMESTIC> 10,380,370
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
