<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, 1999
[ ] 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, 1999
$2.00 PAR VALUE 7,654,354
Class B Common Stock Outstanding at September 30, 1999
$.10 PAR VALUE 1,691,589
<PAGE> 2
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS SEPT. 30, 1999 DEC 31, 1998
-------------- ------------
<S> <C> <C>
Cash and due from banks $ 9,581,356 $ 5,692,654
Federal funds sold 16,460,000 13,550,000
------------- -------------
Total cash and cash equivalents 26,041,356 19,242,654
------------- -------------
Investment securities held to maturity (market value of $80,842,732 at
September 30, 1999 and $62,159,860 at December 31, 1998) 81,489,626 61,894,538
Investment securities available for sale - at market value 61,193,828 36,951,162
Total loans 313,610,958 304,475,629
Less allowance for loan losses 12,456,932 11,919,545
------------- -------------
Net loans 301,154,026 292,556,084
Other real estate -- 707,397
Premises and equipment, net 5,829,119 5,452,765
Accrued interest and other assets 14,101,991 10,817,184
------------- -------------
$ 489,809,946 $ 427,621,784
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 42,188,348 $ 41,150,730
Interest bearing (includes certificates of deposit in excess
Of $100,000 of $108,537,732 at September 30, 1999 and
$48,754,354 at December 31, 1998) 305,379,215 249,238,955
------------- -------------
Total deposits 347,567,563 290,389,685
Federal funds purchased -- --
Accrued interest and other liabilities 15,424,000 12,271,111
Long-term borrowings 30,365,000 30,365,000
Mortgage payable 491,469 526,720
------------- -------------
Total liabilities 393,848,032 333,552,516
------------- -------------
Stockholders' equity
Common stock
Class A, par value $2 per share; authorized, 18,000,000 shares; issued,
7,869,147 at September 30, 1999 and 7,429,689 at December 31, 1998 15,738,294 14,859,378
Class B, par value $.10 per share; authorized, 2,000,000 shares; issued,
1,691,589 at September 30, 1999 and 1,630,544 at December 31, 1998 169,158 163,054
Capital surplus 50,863,907 45,392,659
Retained earnings 32,311,909 34,556,343
Accumulated other comprehensive income or (loss) (865,298) 1,242,919
------------- -------------
98,217,970 96,214,353
Treasury stock - at cost, shares of Class A, 214,793 at September 30, 1999,
and 207,516 at December 31, 1998 (2,256,056) (2,145,085)
------------- -------------
95,961,914 94,069,268
------------- -------------
$ 489,809,946 $ 427,621,784
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 3
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1999 1998
----------- -----------
Interest income
<S> <C> <C>
Loans, including fees $ 8,275,430 $ 8,888,125
Investment securities held to maturity
Taxable 1,600,493 623,039
Tax-exempt 11,115 57,616
Investment securities available for sale
Taxable 1,352,376 675,691
Tax-exempt -- --
Deposits in banks 2,205 3,535
Federal funds sold 106,044 454,110
----------- -----------
TOTAL INTEREST INCOME 11,347,663 10,702,116
----------- -----------
Interest expense
Deposits 3,548,922 2,900,536
Mortgage payable and other 470,490 501,322
Federal funds purchased -- --
----------- -----------
TOTAL INTEREST EXPENSE 4,019,412 3,401,858
----------- -----------
NET INTEREST INCOME 7,328,251 7,300,258
Increase in provision for loan losses -- --
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,328,251 7,300,258
----------- -----------
Other income (expense)
Service charges and fees 253,437 188,077
Realized gains on sale of investment securities
available for sale -- --
Gain on sale of other real estate 193,883 --
Gain on sale of loans -- --
Other income 567,331 77,869
----------- -----------
1,014,651 265,946
----------- -----------
Other expenses
Salaries & wages 1,280,949 1,334,789
Employee benefits 496,723 556,744
Occupancy and equipment 164,024 179,360
Other operating expenses 1,225,390 1,724,489
----------- -----------
3,167,086 3,795,382
----------- -----------
INCOME BEFORE INCOME TAXES 5,175,816 3,770,822
Income taxes 1,682,263 705,654
----------- -----------
NET INCOME $ 3,493,553 $ 3,065,168
=========== ===========
Per share data
Net income - basic $ .37 $ .33
=========== ===========
Net income - diluted $ .35 $ .31
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1999 1998
----------- -----------
Interest income
<S> <C> <C>
Loans, including fees $24,500,636 $25,170,358
Investment securities held to maturity
Taxable 4,212,007 2,292,780
Tax-exempt 33,345 165,766
Investment securities available for sale
Taxable 3,122,803 1,571,875
Tax-exempt -- --
Deposits in banks 13,551 19,211
Federal funds sold 316,614 1,060,192
----------- -----------
TOTAL INTEREST INCOME 32,198,956 30,280,182
----------- -----------
Interest expense
Deposits 9,746,755 8,479,894
Mortgage payable and other 1,416,405 1,492,724
Federal funds purchased 3,001 4,094
----------- -----------
TOTAL INTEREST EXPENSE 11,166,161 9,976,712
----------- -----------
NET INTEREST INCOME 21,032,795 20,303,470
Increase in provision for loan losses -- 2,400,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 21,032,795 17,903,470
----------- -----------
Other income (expense)
Service charges and fees 641,991 606,892
Realized gains on sale of investment securities
available for sale -- --
Gain on sale of other real estate 344,531 --
Gain on sale of loans 27,879 3,831
Other income 726,241 2,663,096
----------- -----------
1,740,642 3,273,819
----------- -----------
Other expenses
Salaries & wages 4,049,893 4,014,468
Employee benefits 1,056,855 1,570,102
Occupancy and equipment 481,919 529,249
Other operating expenses 3,833,155 3,717,798
----------- -----------
9,421,822 9,831,617
----------- -----------
INCOME BEFORE INCOME TAXES 13,351,615 11,345,672
Income taxes 4,298,519 3,047,657
----------- -----------
NET INCOME $ 9,053,096 $ 8,298,015
=========== ===========
Per share data
Net income - basic $ .95 $ .89
=========== ===========
Net income - diluted $ .92 $ .86
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1999
(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, 1999 7,429,689 $ 14,859,378 1,630,544 $ 163,054 $ 45,392,659
Net income for the nine months ended
Sept. 30, -- -- -- --
Conversion of Class B common stock to
Class A Common stock 4,886 9,772 (4,251) (426) --
Purchase of treasury stock -- -- -- -- --
4% stock dividend declared 288,728 577,456 65,296 6,530 4,867,469
Cash dividends on common stock -- -- -- -- --
Cash in lieu of fractional shares -- -- -- -- --
Stock options exercised 145,844 291,688 -- -- 603,779
Other comprehensive income (loss), net
of Reclassifications and taxes -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Comprehensive income
Balance, September 30, 1999 7,869,147 $ 15,738,294 1,691,589 $ 169,158 $ 50,863,907
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
RETAINED TREASURY COMPREHENSIVE COMPREHENSIVE
EARNINGS STOCK INCOME (LOSS) INCOME
------------ ------------ ------------ ------------
<S> <C> <C> <C>
Balance, January 1, 1999 $ 34,556,343 $ (2,145,085) $ 1,242,919
Net income for the nine months ended
Sept. 30, 9,053,096 -- -- $ 9,053,096
Conversion of Class B common stock to
Class A Common stock (9,347) -- -- --
Purchase of treasury stock -- (110,971) -- --
4% stock dividend declared (5,451,455)
Cash dividends on common stock (5,833,483) -- -- --
Cash in lieu of fractional shares (3,245) -- -- --
Stock options exercised -- -- --
Other comprehensive income (loss), net
of Reclassifications and taxes -- -- (2,108,217) (2,108,217)
------------ ------------ ------------ ------------
Comprehensive income
Balance, September 30, 1999 $ 32,311,909 $ (2,256,056) $ (865,298) $ 6,944,879
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statement.
<PAGE> 6
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 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 nine months ended
Sept. 30, -- -- -- --
Conversion of Class B common stock to
Class A Common stock 28,211 56,422 (24,744) (2,475) --
Purchase of treasury stock -- -- -- -- --
4% stock dividend 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 68,630 137,260 -- -- 58,373
Other comprehensive income (loss), net
of reclassifications and taxes -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Comprehensive income
Balance, September 30, 1998 7,384,875 $ 14,769,750 1,631,710 $ 163,171 $ 45,322,075
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
RETAINED TREASURY COMPREHENSIVE COMPREHENSIVE
EARNINGS STOCK INCOME (LOSS) INCOME
------------ ------------ ------------ ------------
<S> <C> <C> <C>
Balance, January 1, 1998 $ 38,023,359 $ (2,145,085) $ 638,142
Net income for the nine months ended
Sept. 30, 8,298,012 -- -- $ 8,298,012
Conversion of Class B common stock to
Class A Common stock (53,949) -- --
Purchase of treasury stock -- -- --
4% stock dividend declared (7,017,070)
Cash dividends on common stock (5,265,426) -- --
Cash in lieu of fractional shares (3,829)
Stock options exercised
Other comprehensive income (loss), net
of reclassifications and taxes -- -- 884,474 884,474
------------ ------------ ------------ ------------
Comprehensive income
Balance, September 30, 1998 $ 33,981,097 $ (2,145,085) $ 1,522,616 $ 9,182,486
============ ============ ============ ============
</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>
Cash flows from operating activities 1999 1998
------------ ------------
<S> <C> <C>
Net income $ 9,053,096 $ 8,298,014
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 310,509 260,912
Provision (recovery) of loan loss reserve (credit) -- 2,400,000
Accretion of investment securities discount (176,356) (41,242)
Amortization of investment securities premium 339,819 210,769
Amortization of deferred loan fees (304,044) (174,160)
Accretion of discount on loans purchased (1,246,188) (2,351,778)
(Benefit) provision for deferred income taxes (1,244,237) 149,215
(Gain) loss on other real estate (344,531) --
(Gain) on sale of loans (27,879) (3,831)
(Gain) on sale of investment securities -- --
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (395,052) 286,065
(Increase) decrease in other assets 214,594 2,745,555
Increase (decrease) in accrued interest payable 823,407 1,448,420
Increase in unearned income on loans 200,707 296,923
Increase (decrease) in other liabilities 2,329,482 (2,509,058)
------------ ------------
Net cash provided by operating activities 9,533,327 11,015,804
Cash flows from investing activities
Net (decrease) in interest bearing balances in banks -- 200,000
Proceeds from calls/maturities of HTM invest. Securities 12,296,074 38,140,723
Purchase of HTM investment securities (32,054,625) (10,728,818)
Purchase of AFS investment securities (26,350,883) (15,582,319)
Purchase of loans (20,576,158) --
Net (increase) decrease in loans 12,547,436 5,811,347
Purchase of premises and equipment (686,862) (699,931)
------------ ------------
Net cash (used in) provided by investing activities (54,825,018) 17,141,002
Cash flows from financing activities:
Net (decrease) in non-interest bearing and
interest bearing demand deposits and savings accounts 183,459 2,604,560
Net increase (decrease) in certificates of deposit 56,994,419 2,238,684
Mortgage payments (35,252)
(32,760)
Net (decrease) increase in short term borrowings -- (15,000,000)
Cash dividends (5,833,483) (5,265,426)
Cash in lieu of fractional shares (3,245)
(3,829)
Issuance of common stock under stock option plans 895,467 195,632
Purchase of treasury stock (110,972) --
------------ ------------
Net cash provided by (used in) financing activities 52,090,393 (15,263,139)
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS 6,798,702 12,893,667
Cash and cash equivalents at beginning of year 19,242,654 30,416,242
------------ ------------
Cash and cash equivalents at end of period $ 26,041,356 $ 43,309,909
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
7
<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. Further information is included in the
Annual Report on Form 10-K for the year ended December 31, 1998.
2. The results of operations for the nine and three month period ended
September 30, 1999 are not necessarily indicative of the results to be
expected for the full year.
3. Per Share Information
In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings
Per Share," which eliminates primary and fully diluted EPS and requires
presentation of basic and diluted EPS in conjunction with the
disclosure of the methodology used in computing such EPS. 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. Prior
period EPS calculations have been restated to reflect the adoption of
SFAS No. 128. Basic and diluted EPS are calculated as follows:
<TABLE>
<CAPTION>
Nine months ended September 30, 1999
-----------------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- -------------- ---------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $9,053,096 9,500,366 $0.95
Effect of dilutive securities
Stock options 296,182
---------- ---------- -----
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $9,053,096 9,796,548 $0.92
========== ========== =====
</TABLE>
(continued)
8
<PAGE> 9
Per Share Information - continued
<TABLE>
<CAPTION>
Nine months ended September 30, 1998
------------------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- -------------- ---------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $8,298,015 9,337,377 $0.89
Effect of dilutive securities
Stock options 347,320
---------- ---------- -----
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $8,298,015 9,684,697 $0.86
========== ========== =====
</TABLE>
EPS is calculated on the basis of the weighted average number of shares
outstanding of 9,500,366 and 9,337,337 for the nine months ended September 30,
1999 and 1998, respectively. Per share information and weighted average shares
outstanding have been restated to reflect the 4% stock dividend of May 1999.
<TABLE>
<CAPTION>
Three months ended September 30, 1999
------------------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- -------------- ---------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $3,493,553 9,555,987 $0.37
Effect of dilutive securities
Stock options 291,741
---------- ---------- -----
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $3,493,553 9,847,728 $0.35
========== ========== =====
</TABLE>
<TABLE>
<CAPTION>
Three months ended September 30, 1998
------------------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- -------------- ---------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $3,065,168 9,415,978 $0.33
Effect of dilutive securities
Stock options 348,932
---------- ---------- -----
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $3,065,168 9,764,910 $0.31
========== ========== =====
</TABLE>
EPS is calculated on the basis of the weighted average number of shares
outstanding of 9,555,987 and 9,415,978 for the three months ended September 30,
1999 and 1998, respectively. Per share information and weighted average shares
outstanding have been restated to reflect the 4% stock dividend of May 1999.
9
<PAGE> 10
4. Investment Securities:
The carrying value and approximate market value of investment
securities at September 30, 1999 are as follows:
<TABLE>
<CAPTION>
AMORTIZED
OR GROSS GROSS APPROXIMATE
PURCHASED UNREALIZED UNREALIZED MARKET CARRYING
COST GAINS LOSSES VALUE VALUE
----------- ----------- ----------- ----------- -----------
AVAILABLE FOR SALE:
<S> <C> <C> <C> <C>
Common stock securities $ 4,120,681 $ 14,956 $ 109,563 $ 4,026,074 $ 4,026,074
Preferred stock securities 2,775,691 -- 3,816 2,771,875 2,771,875
Other securities 55,608,512 923,693 2,136,326 54,395,879 54,395,879
----------- ----------- ----------- ----------- -----------
$62,504,884 $ 938,649 $ 2,249,705 $61,193,828 $61,193,828
=========== =========== =========== =========== ===========
HELD TO MATURITY:
US agencies $ 3,415,688 $ 37,502 $ 26,512 $ 3,426,678 $ 3,415,688
Tax exempt securities 398,465 5,358 -- 403,823 398,465
Taxable debt securities 77,675,473 330,758 994,000 77,012,231 77,675,473
----------- ----------- ----------- ----------- -----------
$81,489,626 $ 373,618 $ 1,020,512 $80,842,732 $81,489,626
=========== =========== =========== =========== ===========
</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 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. Subsequent to
SFAS No. 133, the FASB issued SFAS #137 which amended the effective
date of SFAS No. 133 to be all fiscal quarters of all fiscal years
beginning after June 15, 2000. 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,
1999 1998
--------------- ---------------
<S> <C> <C>
BALANCE AT JULY 1, $12,029,155 $10,380,370.
Loans charged-off -- --
Recoveries 427,777 442,929
--------------- ---------------
Net charge-offs and recoveries 427,777 442,929
Provision for loan losses -- --
--------------- ---------------
BALANCE AT END OF PERIOD $12,456,932 $10,823,299
=============== ===============
</TABLE>
(continued.....)
10
<PAGE> 11
Allowance for Credit Losses (continued)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPT 30,
1999 1998
--------------- ---------------
<S> <C> <C>
BALANCE AT JANUARY 1, $11,919,545 $8,186,237
Loans charged-off (270,798) (339,753)
Recoveries 808,185 576,815
--------------- ---------------
Net charge-offs and recoveries 537,387 237,062
Provision for loan losses -- 2,400,000
--------------- ---------------
BALANCE AT END OF PERIOD $12,456,932 $10,823,299
=============== ===============
</TABLE>
7. Nonperforming loans
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $2,202,800 and $6,024,582 at September 30,
1999 and 1998, respectively. Although the Company has non-performing
loans of approximately $2,202,800 at September 30, 1999, management
believes it has adequate collateral to limit its credit risks.
The balance of impaired loans was $914,663 at September 30, 1999. 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, 1999. The income that was
recognized on impaired loans during the nine-month period ended
September 30, 1999 was $1,353. The cash collected on impaired loans
during the period was $29,372, of which $28,020 was credited to the
principal balance outstanding on such loans. Interest that would have
been accrued on impaired loans during this period in 1999 was $14,885.
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.
11
<PAGE> 12
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, 1999.
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, 1999 were $489.8 million,
an increase of $62.2 million from the $427.6 million reported at year-end,
December 31, 1998. This increase is primarily due to a $46.8 million increase in
total investment securities. Liabilities increased $60.3 million primarily due
to an increase in deposits from December 31, 1998.
This $62.2 million increase in total investment securities is comprised
of an increase in held to maturity ("HTM") investment securities of $19.6
million and a $24.2 million increase in available for sale ("AFS") investment
securities. This increase in HTM investment securities is primarily due to
purchases of approximately $32.1 million in corporate bonds partially offset by
scheduled maturities of approximately $12.3 million in 1999. 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 primarily in the three to five year range.
The $24.2 million increase in AFS investment securities is primarily
due to the purchase in 1999 of $20.6 million of dollar denominated, non-US
corporate securities. These corporate securities are rated "BBB" or better by
Moody and/or Standard & Poor at the time of purchase, with maturities primarily
in the three to five year ranges. Additionally, $6 million of capital trust
securities were purchased during 1999.
12
<PAGE> 13
Net loans increased $9.1 million from the $292.6 million level at
December 31, 1998 to $301.2 million at September 30, 1999. Average net loans
were $299.9 million for the nine-month period of 1999. The allowance for loan
loss increased $.5 million to $12.5 million at September 30, 1999 from $11.9
million. The level of allowance for loan loss reserve represents 4% of total
loans at September 30, 1999 versus 3.9% at December 31, 1998.
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.
Total deposits, the primary source of funds, increased $57.1 million to
$347.6 million at September 30, 1999, from $290.4 million at December 31, 1998.
Average deposits were $357.1 million for the nine-month period of 1999. This
increase in deposits is primarily due to an increase in certificates of deposits
of $36.7 million, in addition to a $3.7 million increase in NOW and money market
deposits. The $36.7 million increase in certificates of deposits was primarily
due to a $38.5 million increase in brokered deposits in 1999. The balance of
brokered deposits was $88.6 million, representing approximately 25% of total
deposits at September 30, 1999.
Consolidated stockholder's equity increased $2 million to $96 million
at September 30, 1999 from $94.1 million at December 31, 1998. This increase is
primarily due to net income of $9.1 million, partially offset by three quarterly
cash dividends totaling $5.8 million. Additionally, stockholder's equity was
reduced $2.1 million due to a downward adjustment in the market value of
available for sale investment securities during 1999.
RESULTS OF OPERATIONS
Results of operations depend primarily on net interest income, which is
the difference between interest income on interest earning assets and interest
expense on interest bearing liabilities. Interest earning assets consist
principally of loans and investment securities, while interest bearing
liabilities consist primarily of deposits. Net income is also effected by the
provision for loan losses and the level of non-interest income as well as by
non-interest expenses, including salary and employee benefits, occupancy
expenses and other operating expenses.
Consolidated net income for the three months ended, September 30, 1999
was $3,493,553 or $.37 basic earnings per share, as compared to net income of
$3,065,168 or $.33 basic earnings per share for the same three month period in
1998. Consolidated net income for the nine months ended, September 30, 1999 was
$9,053,096 or $.95 basic earnings per share as compared to net income of
$8,298,015 or $.89 basic earnings per share. These increases are primarily due
to an increase in interest income relating to the investment portfolio, in
addition to changes in non-interest income and provision for loan losses in
1999.
13
<PAGE> 14
For the third quarter 1999, net interest income was $7.3 million as
compared to $7.3 million for the same quarter in 1998. While total net interest
income did not change, interest on investment securities increased $1.2 million
for the third quarter of 1999 primarily due to increase in the average balance
of investment securities in 1999 versus 1998. The balance of average investment
securities for the third quarter of 1999 was $145.3 million, as compared to
$71.9 million for the same quarter in 1998. Interest income on loans decreased
$.6 million from $8.3 million for third quarter of 1999 versus $8.9 million for
the same three-month period in 1998. Total interest expense on deposits and
borrowings increased $.6 million to $4 million as compared to $3.4 million for
the same three-month period in 1998. This increase in interest expense is
primarily due to an increase in the average balance of certificates of deposits
in 1999.
For the comparative nine-month period, net interest income increased
$.7 million to $21 million for the period ended September 30, 1999 as compared
to $20.3 million for the same nine-month period in 1998. This increase is
primarily due to an increase in the average balance of investment securities in
1999 as compared to the same nine-month period in 1998. The balance of average
investment securities for the nine-month period was $126.7 million versus $73.8
million for the same nine-month period in 1998.
Provision for loan loss was $0 for the third quarter of 1999 and 1998.
Charge-offs and recoveries were $0 and $.4 million, respectively, for the three
month period ended September 30, 1999 versus $0 and $.4 million, respectively,
for the same period in 1998. For the comparative nine-month period, provision
for loan loss was $0 for the period September 30, 1999 as compared to $2.4
million for the same nine-month period in 1998. Overall, Management considers
the current level of allowance for loan loss to be adequate at September 30,
1999.
Total non-interest income for the three month period ended September
30, 1999 was $1 million, as compared to $.3 million for the same period in 1998.
The $.7 million increase is primarily due to a $.5 million payment by the
Commonwealth of Pennsylvania to Royal Bank as refund of Pennsylvania Shares tax,
in addition an increase in gains on sale of other real estate and loans of $.2
million in the third quarter of 1999. For the comparative nine-period income
period, total non-interest income was $1.7 million for the period ended
September 30, 1999 versus $3.3 million for the same nine-month period in 1998.
This decrease is the result of a reversal of a legal accrual of $2.4 million
relating to the conclusion of litigation in the Company's favor in January of
1998.
Total non-interest expense for the three months ended September 30,
1999 was $3.2 million, a decrease of $.5 million, as compared to $3.8 million
for the same period in 1998. This decrease in non-interest expense is primarily
due to decrease in other operating expenses of $.5 million. For the comparative
nine-month period total non-interest expense decreased $.4 million to $9.4
million for the nine months ended September 30, 1999 as compared to $9.8 million
for the nine months ended September 30, 1998. This decrease is primarily due to
a $.5 million increase in employee benefits, partially offset by a $.1 million
increase in other operating expenses.
14
<PAGE> 15
YEAR 2000
Through the efforts of its Year 2000 Committee, the Company has
remediated or replaced its computer systems and applications so that
company-wide these systems and applications are now Year 2000 ("Y2K") compliant.
In addition, the Year 2000 Committee has monitored the Y2K compliance efforts of
its mission critical third party vendors to ensure sure that their systems and
applications are also Y2K compliant. All of the computer systems and
applications of the company have been fully tested and the testing of mission
critical third party vendors have been diligently monitored. Management believes
that all mission critical systems and applications, and the systems and
applications of mission critical third party vendors are Y2K compliant and fully
tested. The Company has developed a contingency plan as well as a plan to
address the expected liquidity demands resulting from Y2K concerns of customers
toward the end of 1999. Given that much of the Company's data processing is
serviced by third party vendors, the Company has not incurred material costs
associated with Y2K compliance. The amount expensed in 1999 is not material.
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 43%
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.
15
<PAGE> 16
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, 1999:
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY
(IN MILLIONS) 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 16.5 -- -- -- 16.5
Investment securities:
Available for sale 6.8 -- 11.8 42.6 -- 61.2
Held to maturity 4.6 11.7 45.2 19.9 -- 81.4
------ ------ ------ ------ ------ ------
Total investment securities 11.4 11.7 57.0 62.5 -- 142.6
Loans: (2)
Fixed rate (3) 14.0 9.6 126.2 28.0 -- 177.8
Variable rate 41.8 26.1 54.4 20.4 -- 142.7
------ ------ ------ ------ ------ ------
Total loans 55.8 35.7 180.6 48.4 -- 320.5
Other assets (4) -- -- -- -- 9.6 9.6
------ ------ ------ ------ ------ ------
Total Assets $ 84.3 $ 47.4 $237.6 $110.9 $ 9.6 $489.8
====== ====== ====== ====== ====== ======
LIABILITIES & CAPITAL
Deposits:
Non interest bearing deposits $ -- $ -- $ -- $-- $ 42.4 $ 42.4
Interest bearing deposits (5) 64.4 -- 29.8 -- -- 94.2
Certificate of deposits 22.7 40.7 148.0 -- -- 211.4
------ ------ ------ ------ ------ ------
Total deposits 87.1 40.7 177.8 -- 42.4 348.0
Short term borrowings 0.4 -- -- -- -- 0.4
Mortgage and long term borrowings -- -- 30.5 -- -- 30.5
Other liabilities -- -- -- -- 16.1 16.1
Capital -- -- -- -- 94.8 94.8
------ ------ ------ ------ ------ ------
Total liabilities & capital $ 87.5 $ 40.7 $208.3 $ -- $153.3 $489.8
====== ====== ====== ====== ====== ======
Net interest rate GAP $ (3.2) $ 6.7 $ 29.3 $110.9 $(144.0)
====== ====== ====== ====== ======
Cumulative interest rate GAP $ (3.2) $ 3.5 $ 32.8 $144.0 --
====== ====== ====== ====== ======
GAP to total assets -1% 1%
====== ======
GAP to total equity -3% 7%
====== ======
Cumulative GAP to total assets -1% 1%
====== ======
Cumulative GAP to total equity -3% 4%
====== ======
</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, 1999.
(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.
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.
16
<PAGE> 17
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, 1999, 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, 1999 DECEMBER 31, 1998
-------------- -----------------
CAPITAL LEVELS
<S> <C> <C>
Tier 1 leverage ratio 20.3% 22.1%
Tier 1 risk-based ratio 22.2% 24.1%
Total risk-based ratio 23.5% 25.4%
CAPITAL PERFORMANCE
Return on average assets 2.7% (1) 2.6%
Return on average equity 12.8% (1) 11.8%
(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 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.
17
<PAGE> 18
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
18
<PAGE> 19
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 12th, 1999 /s/ James J. McSwiggan
James J. McSwiggan, CFO & Treasurer
Dated: November 12th, 1999 /s/ David J. Greenfield
David J. Greenfield, Controller & VP
19
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,581,356
<INT-BEARING-DEPOSITS> 555,000
<FED-FUNDS-SOLD> 16,460,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 61,193,828
<INVESTMENTS-CARRYING> 81,489,626
<INVESTMENTS-MARKET> 80,842,732
<LOANS> 313,610,958
<ALLOWANCE> 12,456,932
<TOTAL-ASSETS> 489,809,946
<DEPOSITS> 347,567,563
<SHORT-TERM> 365,000
<LIABILITIES-OTHER> 15,424,000
<LONG-TERM> 30,491,468
0
0
<COMMON> 15,907,452
<OTHER-SE> 80,054,462
<TOTAL-LIABILITIES-AND-EQUITY> 489,809,946
<INTEREST-LOAN> 24,500,636
<INTEREST-INVEST> 7,368,155
<INTEREST-OTHER> 330,165
<INTEREST-TOTAL> 32,198,956
<INTEREST-DEPOSIT> 9,746,755
<INTEREST-EXPENSE> 11,166,161
<INTEREST-INCOME-NET> 21,032,795
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,421,822
<INCOME-PRETAX> 13,351,615
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,053,096
<EPS-BASIC> .95
<EPS-DILUTED> .92
<YIELD-ACTUAL> 5.93
<LOANS-NON> 2,202,800
<LOANS-PAST> 0
<LOANS-TROUBLED> 531,036
<LOANS-PROBLEM> 531,036
<ALLOWANCE-OPEN> 11,919,545
<CHARGE-OFFS> 270,798
<RECOVERIES> 808,185
<ALLOWANCE-CLOSE> 12,456,932
<ALLOWANCE-DOMESTIC> 12,456,932
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
