<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: SEPTEMBER 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 September 30, 1998
-------------------- ---------------------------------
$2.00 PAR VALUE 7,177,359
Class B Common Stock Outstanding at September 30, 1998
-------------------- ---------------------------------
$.10 PAR VALUE 1,631,710
<PAGE> 2
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS SEPT 30, 1998 DEC 31, 1997
------------- ------------
<S> <C> <C>
Cash and due from banks $ 8,509,909 $ 7,491,242
Federal funds sold 34,800,000 22,925,000
------------ ------------
Total cash and cash equivalents 43,309,909 30,416,242
------------ ------------
Interest bearing deposits in banks 100,030 300,030
Investment securities held to maturity (market value of $37,260,670 @
9/30/98 & $64,984,987 @ 12/31/97) 36,853,054 64,371,042
Investment securities available for sale - at market value 37,452,143 21,048,793
Total loans 286,901,694 290,897,048
Less allowance for loan losses 10,823,299 8,186,237
------------ ------------
Net loans 276,078,395 282,710,811
Premises and equipment, net 5,227,940 4,788,921
Accrued interest and other assets 10,435,316 12,962,240
------------ ------------
$409,456,787 $416,598,079
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 37,538,012 $ 37,712,928
Interest bearing (includes certificates of deposit in excess
Of $100,000 of $34,271,746 @ 9/30/98 and
$33,175,135 @ 12/31/97) 232,668,666 227,650,506
------------ ------------
Total deposits 270,206,678 265,363,434
Federal funds purchased -- 15,000,000
Accrued interest and other liabilities 14,035,360 15,095,998
Long -term borrowings 31,063,000 31,063,000
Mortgage payable 538,125 570,885
------------ ------------
Total liabilities 315,843,163 327,093,317
------------ ------------
Stockholders' equity
Common stock
Class A, par value $2 per share; authorized, 18,000,000 shares; issued,
7,384,875 @ 9/30/98 & 7,015,721 @ 12/31/97 14,769,750 14,031,442
Class B, par value $.10 per share; authorized, 2,000,000 shares; issued,
1,631,710 @ 9/30/98 & 1,592,859 @ 12/31/97 163,171 159,286
Capital surplus 45,322,075 38,797,618
Retained earnings 33,981,097 38,023,359
Accumulated unrealized gain/(loss) on invest. Securities available for sale 1,522,616 638,142
------------ ------------
95,758,709 91,649,847
Treasury stock - at cost, shares of Class A, 207,516 @ 9/30/98,
207,516 @ 12/31/97 (2,145,085) (2,145,085)
------------ ------------
93,613,624 89,504,762
------------ ------------
$409,456,787 $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, SEPT 30,
----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Interest income
Loans, including fees $ 8,888,125 $ 5,999,298
Investment securities held to maturity
Taxable 623,039 1,176,095
Tax-exempt 57,616 33,204
Investment securities available for sale
Taxable 675,691 331,194
Tax-exempt - -
Deposits in banks 3,535 11,658
Federal funds sold 454,110 286,153
----------- -----------
TOTAL INTEREST INCOME 10,702,116 7,837,602
----------- -----------
Interest expense
Deposits 2,900,536 2,432,801
Mortgage payable and other 501,322 42,726
Federal funds purchased -
----------- -----------
TOTAL INTEREST EXPENSE 3,401,858 2,475,527
----------- -----------
NET INTEREST INCOME 7,300,258 5,362,075
Increase in provision for loan losses - (1,573,801)
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,300,258 6,935,876
----------- -----------
Other income (expense)
Service charges and fees 188,077 250,735
Realized gains on sale of investment securities available for sale - -
Gain on sale of other real estate - 76,813
Gain on sale of loans - 15,945
Other income 77,869 133,803
----------- -----------
265,946 477,296
----------- -----------
Other expenses
Salaries & wages 1,334,789 1,241,805
Employee benefits 556,744 1,468,606
Occupancy and equipment 179,360 199,189
Other operating expenses 1,724,489 1,121,406
----------- -----------
3,795,382 4,031,006
----------- -----------
INCOME BEFORE INCOME TAXES 3,770,822 3,382,166
Income taxes 705,654 954,283
----------- -----------
NET INCOME $ 3,065,168 $ 2,427,883
=========== ===========
Per share data
Net income - basic $ .34 $ .27
=========== ===========
Net income - diluted $ .33 $ .26
=========== ===========
</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>
NINE MONTHS ENDED, SEPT 30,
--------------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Interest income
Loans, including fees $25,170,358 $17,515,762
Investment securities held to maturity
Taxable 2,292,780 4,549,374
Tax-exempt 165,766 62,704
Investment securities available for sale
Taxable 1,571,875 528,921
Tax-exempt - -
Deposits in banks 19,211 102,620
Federal funds sold 1,060,193 676,229
----------- -----------
TOTAL INTEREST INCOME 30,280,182 23,435,610
----------- -----------
Interest expense
Deposits 8,479,894 7,332,955
Mortgage payable and other 1,492,724 143,041
Federal funds purchased 4,094 -
----------- -----------
TOTAL INTEREST EXPENSE 9,976,712 7,475,996
----------- -----------
NET INTEREST INCOME 20,303,470 15,959,614
Increase in provision for loan losses 2,400,000 (1,674,909)
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 17,903,470 17,634,523
----------- -----------
Other income (expense)
Service charges and fees 606,892 753,985
Realized gains on sale of investment securities available for sale - 13,643
Gain on sale of other real estate - 406,217
Gain on sale of loans 3,831 27,393
Other income 2,663,096 314,011
----------- -----------
3,273,819 1,515,249
----------- -----------
Other expenses
Salaries & wages 4,014,468 3,590,733
Employee benefits 1,570,102 2,440,706
Occupancy and equipment 529,249 534,469
Other operating expenses 3,717,799 3,143,562
----------- -----------
9,831,618 9,709,470
----------- -----------
INCOME BEFORE INCOME TAXES 11,345,671 9,440,302
Income taxes 3,047,657 2,656,619
----------- -----------
NET INCOME $ 8,298,014 $ 6,783,683
=========== ===========
Per share data
Net income - basic $ .92 $ .76
=========== ===========
Net income - diluted $ .89 $ .73
=========== ===========
</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, SEPT 30,
---------------------------------
1998 1997
----------- ----------
<S> <C> <C>
Net income $3,065,168 $2,427,883
---------- ----------
Other comprehensive income, net of tax
Net unrealized gains (losses) on securities 778,809 (51,282)
Reclassification adjustment: (gain) loss included in net income -- --
---------- ----------
Comprehensive income $3,843,977 $2,376,601
========== ==========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED, SEPT 30,
---------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net income $8,298,014 $6,783,683
---------- ----------
Other comprehensive income, net of tax
Net unrealized gains (losses) on securities 610,287 289,835
Reclassification adjustment: (gain) loss included in net income -- (9,414)
---------- ----------
Comprehensive income $8,908,301 $7,064,104
========== ==========
</TABLE>
<PAGE> 6
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK
---------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 7,015,721 $14,031,442 1,592,859 $159,286
Net income for the nine months ended Sept 30, - - -
Conversion of Class B common stock to Class A
common stock 28,211 56,422 (24,744) (2,474)
Purchase of treasury stock - - - -
4% stock dividends declared 272,313 544,626 63,595 6,360
Cash dividends on common stock - - - -
Cash in lieu of fractional shares - - - -
Stock options exercised 68,630 137,260
Net unrealized loss on securities available for sale - - - -
--------- ----------- --------- --------
Balance, September 30, 1998 7,384,875 $14,769,750 1,631,710 $163,171
========= =========== ========= ========
</TABLE>
<TABLE>
<CAPTION>
NET
UNREALIZED
(LOSS)/GAIN ON
SECURITIES
CAPITAL RETAINED TREASURY AVAILABLE
SURPLUS EARNINGS STOCK FOR SALE
-------------- -------------- --------------- ------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 $38,797,618 $38,023,359 $(2,145,085) $ 638,142
Net income for the nine months ended Sept 30, - 8,298,012 - -
Conversion of Class B common stock to Class A
common stock - (53,949) - -
Purchase of treasury stock - - - -
4% stock dividends declared 6,466,084 (7,017,070)
Cash dividends on common stock - (5,265,426) - -
Cash in lieu of fractional shares - (3,829)
Stock options exercised 58,372
Net unrealized loss on securities available for sale - - - 884,474
----------- ----------- ------------ ----------
Balance, September 30, 1998 $45,322,075 $33,981,097 $(2,145,085) $1,522,616
=========== =========== ============ ==========
</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)
NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 8,298,014 $ 6,783,683
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 260,912 236,246
Provision (recovery )of loan loss reserve (credit) 2,400,000 (1,674,908)
Accretion of investment securities discount (41,242) (61,210)
Amortization of investment securities premium 210,769 717,252
Amortization of deferred loan fees (174,160) (109,593)
Accretion of discount on loans purchased (2,351,778) (1,150,384)
(Benefit) provision for deferred income taxes 149,215 471,627
(Gain) loss on other real estate -- (406,217)
(Gain) on sale of loans (3,831) (27,393)
(Gain) on sale of investment securities -- (13,643)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable 286,065 (284,881)
(Increase) decrease in other assets 2,745,555 1,895,371
Increase (decrease) in accrued interest payable 1,448,420 512,693
Increase in unearned income on loans 296,923 341,304
Increase (decrease) in other liabilities (2,509,058) 763,260
------------ ------------
Net cash provided by operating activities 11,015,804 7,993,207
Cash flows from investing activities
Net (decrease) in interest bearing balances in banks 200,000 --
Proceeds from calls and maturities of HTM invest. Securities 38,140,723 48,544,611
Purchase of investment securities held to maturity (10,728,818) (9,324,013)
Purchase of investment securities available for sale (16,466,796) (14,533,809)
Net decrease in loans 5,811,347 (5,180,634)
Purchase of premises and equipment (699,931) (333,122)
Proceeds from sale and payments on other real estate -- 607,892
------------ ------------
Net cash (used in) provided by investing activities 16,256,525 19,780,925
Cash flows from financing activities:
Net (decrease) in non-interest bearing and
interest bearing demand deposits nd savings accounts 2,604,560 (3,353,084)
Net increase (decrease) in certificates of deposit 2,238,684 (5,118,273)
Mortgage payments (32,760) (31,104)
Purchase of treasury stock -- (119,211)
Net (decrease) increase in long term borrowings (15,000,000) (2,500,000)
Cash dividends (5,265,425) (3,759,566)
Cash in lieu of fractional shares (3,830) (2,479)
Issuance of common stock under stock option plans 195,632 292,353
Other 884,478 420,053
------------ ------------
Net cash provided by (used in) financing activities (14,378,662) (14,171,311)
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS 12,893,668 13,602,821
Cash and cash equivalents at beginning of year 30,416,242 18,369,012
------------ ------------
Cash and cash equivalents at end of period $ 43,309,909 $ 31,971,833
============ ============
</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 nine-month period ended September
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 9,053,826 and 8,909,691 for the three months ended
September 30, 1997 and 9,013,274 and 8,905,458 for the nine months
ended, September 30, 1998 and 1997, respectively.
4. Investment Securities:
The carrying value and approximate market value of investment
securities at September 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 $3,209,556 $14,838 $ - $3,224,394 $3,224,394
Preferred stock securities 2,904,353 - 40,603 2,863,750 2,863,750
Other securities 29,031,240 2,332,759 - 31,363,999 31,363,999
----------- ---------- -------- ----------- -----------
$35,145,149 $2,347,597 $ 40,603 $37,452,143 $37,452,143
=========== ========== ======== =========== ===========
HELD TO MATURITY:
- -----------------
US Treasury & agencies $8,039,638 $ 159,829 $372 $8,199,095 $8,039,638
Tax exempt securities 3,098,465 35,223 - 3,133,688 3,098,465
Taxable debt securities 25,714,952 315,794 102,859 25,927,887 25,714,951
----------- ---------- -------- ----------- -----------
$36,853,055 $ 510,846 $103,231 $37,260,670 $36,853,054
=========== ========== ======== =========== ===========
</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. To date the Company and
its subsidiaries have not participated in derivative instruments or
hedging activity.
6. Allowance for Credit Losses: Changes in the allowance for credit
losses were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT 30,
--------------------------------------
1998 1997
------------- -----------
<S> <C> <C>
BALANCE AT JULY 1, $10,380,370 $8,552,792
Loans charged-off -- (160,222)
Recoveries 442,929 1,579,289
----------- -----------
Net charge-offs and recoveries 442,929 1,419,067
Provision for loan losses -- (1,573,801)
----------- -----------
BALANCE AT END OF PERIOD $10,823,299 $8,398,058
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPT 30,
--------------------------------------
1998 1997
------------- -----------
<S> <C> <C>
BALANCE AT JANUARY 1, $8,186,237 $9,084,153
Loans charged-off (339,753) (761,791)
Recoveries 576,815 1,750,605
----------- -----------
Net charge-offs and recoveries 237,062 988,814
Provision for loan losses 2,400,000 (1,674,909)
----------- -----------
BALANCE AT END OF PERIOD $10,823,299 $8,398,058
=========== ===========
</TABLE>
7. Loans on which the accrual of interest has been discontinued or
reduced amounted to approximately $6,024,582 and $4,368,704 at
September 30, 1998 and 1997, respectively. Although the Company has
non-performing loans of approximately $6,024,582 at September 30,
1998, management believes it has adequate collateral to limit its
credit risks.
The balance of impaired loans was $2,607,090 at September 30, 1998.
The Company identifies a loan as impaired when it is probable that
interest and principal will not be collected according to the
contractual terms of the loan agreements. The allowance for credit
loss associated with impaired loans was $ -0- at September 30, 1998.
The income that was recognized on impaired loans during the
nine-month period ended September 30, 1998 was $-0-. The cash
collected on impaired loans during this nine-month period was
$89,372, of which $89,372 was credited to the principal balance
outstanding on such loans. Interest that would have been accrued on
impaired loans during this nine-month period in 1998 was $69,736.
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
nine-month period ended September 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 September 30, 1998 were $409.5
million, a decrease of $7.1 million from the $416.6 million reported at
year-end, December 31, 1997. This decrease is primarily due to a $11.1 million
decrease in investment securities and $6.6 million decrease in net loans,
partially offset by a $12.9 million increase in cash and cash equivalents.
Liabilities decreased $11.3 million primarily due to a decrease in Federal funds
purchased of $15 million from December 31, 1997, partially offset by a $4.8
million increase in deposits.
This $11.1 million decrease in total investment securities is
comprised mostly of a decrease in held to maturity ("HTM") investment securities
of $27.5 million, partially offset by a $16.4 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 rated "BBB" or better by Moody and/or Standard & Poor at the time of
purchase, with maturities in the three to five year range. The $16.4 million
increase in available-for-sale investment securities is comprised of capital
trust securities.
Net loans changed declined slightly from the $282.7 million level at
December 31, 1997 to $276.1 million at September 30, 1998, or 2.3%. Average net
loans were $290.9 million for the first nine months of 1998. The allowance for
loan loss increased $2.6 million to $10.8 million at September 30, 1998. The
level of allowance for loan loss reserve represents 3.8% of total loans at
September 30, 1998 versus 2.8% at December 31, 1997. The allowance for loan loss
was increased
<PAGE> 11
due primarily to the increase in loans related to the purchase of a $75 million
loan portfolio from the FDIC in December of 1997. This purchased 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 $4.8 million
to $270.2 million at September 30, 1998, from $265.4 million at December 31,
1997. Average deposits were $269.0 million for the first nine months of 1998.
This increase in deposits is primarily due to increases experienced in
certificates of deposits of $2.4 million, in addition to a $2.8 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 $4.1 million to $93.6
million at September 30, 1998 from $89.5 million at December 31, 1997. This
increase is primarily due to net income of $8.3 million for the nine-month
period of 1998, partially offset by three quarterly cash dividends totaling $5.3
million. In the first, second and third quarters of 1998, the Board of Directors
declared a cash dividends of twenty cents ($.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 $.9 million.
RESULTS OF OPERATIONS
Consolidated net income for the three months ended, September 30,
1998 was $3,065,168 or $.34 basic earnings per share, as compared to net income
of $2,427,883 or $.27 basic earnings per share, for the same three month period
in 1997. This increase is primarily due to an increase in net interest income in
1998. Consolidated net income for the nine month period ended, September 30,
1998 was $8,298,014 or $.92 basic earnings per share as compared to net income
of $6,783,683 or $.76 basic earnings per share for the same nine month period in
1997. This increase is primarily due to an increase in net interest income
versus the same nine-month period in 1997.
Net interest income increased $1.9 million to $7.3 million for the
third quarter of 1998, as compared to $5.3 million for the same quarter ended in
1997. For the comparative nine-month period, net interest income increased $4.3
million to $20.3 million at September 30, 1998 as compared to $15.9 million at
September 30, 1997. These increases in net interest income for both comparative
three-month and nine-month periods are primarily due to increases in the average
balance of loans. Average net loans increased $91.3 million and $91.4 million
for the respective three and nine-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 $.9 million
and $2.5 million for the three and nine-month periods of 1998. These increases
were primarily the result of higher average balances of deposits and borrowings
during 1998. These
<PAGE> 12
increases in average balances were due to the funding of the purchase of the
FDIC loan portfolio in December 1997 discussed previously.
Provision for loan loss was $2.4 million for the first nine months
of 1998 as compared to ($1.5 million) credit, 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. In 1997, due to recoveries exceeding charge-offs, a recovery of
$1.5 million (credit) was recorded. Charge-offs and recoveries were $340 and
$577 thousand, respectively, for the nine month period ended September 30, 1998
versus $160 and $1.5 million, respectively, for the same period in 1997.
Overall, Management considers the current level of allowance for loan loss to be
adequate at September 30, 1998.
Total non-interest income for the comparative three and nine month
periods ended September 30, 1998 was $.3 million and $3.3 million, respectively,
as compared to $.5 million and $1.5 million for the same respective periods in
1997. The $1.8 million increase for the nine 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 $.4 million and $.1 million
decrease in gains on sale of other real estate and service charges,
respectively.
Total non interest expense for the three months ended September 30,
1998 was $3.8 million, a decrease of $.2 million, as compared to $4.0 million
for the same period in 1997. For the comparative nine-month period, total
non-interest expense was $9.8 million as compared to $9.7 million for the same
nine-month period in 1997.
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.
<PAGE> 13
The liquidity ratio of the Company remains strong at approximately
42% 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 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
September 30, 1998:
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY
(IN MILLIONS) DAYS
----------------------------------- 1 TO 5
ASSETS (1) 0 - 90 91 - 365 YEARS
- ------ ---------------- ---------------- ----------------
<S> <C> <C> <C>
Interest-bearing deposits in banks $ 0.5 $ -- $ --
Federal funds sold 34.8 -- --
Investment securities:
Available for sale 37.5 -- --
Held to maturity 5.0 6.6 16.7
------ ------- ------
Total investment securities 42.4 6.6 16.7
Loans: (2)
Fixed rate (3) 10.6 6.1 102.8
Variable rate 33.4 25.7 50.3
------ ------- ------
Total loans 44.1 31.8 153.1
Other assets (4) -- -- --
------ ------- ------
Total Assets $121.8 $ 38.5 $169.9
====== ======= ======
LIABILITIES & CAPITAL
Deposits:
Non interest bearing deposits $ -- $ -- $ --
Interest bearing deposits (5) 59.6 -- 30.8
Certificate of deposits 25.9 42.7 73.7
------ ------- ------
Total deposits 85.5 42.7 104.5
Short term borrowings -- -- --
Mortgage and long term borrowings 0.6 0.5 30.5
Other liabilities -- -- --
Capital -- -- --
------ ------- ------
Total liabilities & capital $ 86.1 $ 43.2 $135.0
====== ======= ======
Net interest rate GAP $ 35.7 $ ( 4.7) $ 34.9
====== ======= ======
Cumulative interest rate GAP $ 35.7 $ 31.0 $ 65.8
====== ======= ======
GAP to total assets 9% (1%)
====== =======
GAP to total equity 56% (7%)
====== =======
Cumulative GAP to total assets 9% 8%
====== =======
Cumulative GAP to total equity 56% 49%
====== =======
</TABLE>
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY
(IN MILLIONS)
OVER 5 NON-RATE
ASSETS (1) YEARS SENSITIVE TOTAL
- ------ ---------------- ----------------- ----------------
<S> <C> <C> <C>
Interest-bearing deposits in banks $ -- $ -- $ 0.5
Federal funds sold -- 34.8
Investment securities:
Available for sale -- -- 37.5
Held to maturity 8.6 -- 37.0
------ --------- ------
Total investment securities 8.6 -- 74.4
Loans: (2)
Fixed rate (3) 39.7 -- 159.2
Variable rate 26.7 -- 136.3
------ --------- ------
Total loans 66.4 -- 295.5
Other assets (4) -- 4.3 4.3
------ --------- ------
Total Assets $ 75.1 $ 4.3 $409.5
====== ========= ======
LIABILITIES & CAPITAL
Deposits:
Non interest bearing deposits $ -- $ 37.5 $ 37.5
Interest bearing deposits (5) -- -- 90.4
Certificate of deposits -- -- 142.3
------ --------- ------
Total deposits -- 37.5 270.2
Short term borrowings -- -- --
Mortgage and long term borrowings -- -- 31.6
Other liabilities -- 14.1 14.1
Capital -- 93.6 93.6
------ --------- ------
Total liabilities & capital $ -- $ 145.2 $409.5
====== ========= ======
Net interest rate GAP $ 75.1 $ ( 141.0)
====== =========
Cumulative interest rate GAP $141.0 --
====== =========
GAP to total assets
GAP to total equity
Cumulative GAP to total assets
Cumulative GAP to total equity
</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 September 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 September 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>
SEPT 30, 1998 DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
CAPITAL LEVELS
Tier 1 leverage ratio 22.3% 25.6%
Tier 1 risk-based ratio 27.2% 25.1%
Total risk-based ratio 28.4% 26.4%
CAPITAL PERFORMANCE
Return on average assets 2.7% (1) 2.7%
Return on average equity 12.2% (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
None
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: November 13th, 1998 /s/ Lee E. Tabas
---------------------------------------
Lee E. Tabas, President and CEO
Dated: November 13th, 1998 /s/ David J. Greenfield
---------------------------------------
David J. Greenfield, Controller
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,509,909
<INT-BEARING-DEPOSITS> 100,030
<FED-FUNDS-SOLD> 34,800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,452,143
<INVESTMENTS-CARRYING> 36,853,054
<INVESTMENTS-MARKET> 37,260,670
<LOANS> 286,901,694
<ALLOWANCE> 10,823,299
<TOTAL-ASSETS> 409,456,787
<DEPOSITS> 270,206,678
<SHORT-TERM> 698,000
<LIABILITIES-OTHER> 14,035,360
<LONG-TERM> 30,365,000
0
0
<COMMON> 14,932,921
<OTHER-SE> 78,680,703
<TOTAL-LIABILITIES-AND-EQUITY> 409,456,787
<INTEREST-LOAN> 25,170,358
<INTEREST-INVEST> 5,109,824
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 30,280,182
<INTEREST-DEPOSIT> 8,479,894
<INTEREST-EXPENSE> 9,976,712
<INTEREST-INCOME-NET> 20,303,470
<LOAN-LOSSES> 2,400,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,831,618
<INCOME-PRETAX> 11,345,671
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,298,014
<EPS-PRIMARY> .92
<EPS-DILUTED> .89
<YIELD-ACTUAL> 6.83
<LOANS-NON> 6,024,582
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,607,090
<LOANS-PROBLEM> 2,607,090
<ALLOWANCE-OPEN> 8,186,237
<CHARGE-OFFS> 339,753
<RECOVERIES> 576,815
<ALLOWANCE-CLOSE> 10,823,299
<ALLOWANCE-DOMESTIC> 10,823,299
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
