<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, 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.
<TABLE>
<CAPTION>
Class A Common Stock Outstanding at June 30, 1999
-------------------- ----------------------------
<S> <C>
$2.00 PAR VALUE 7,525,360
</TABLE>
<TABLE>
<CAPTION>
Class B Common Stock Outstanding at June 30, 1999
-------------------- ----------------------------
<S> <C>
$.10 PAR VALUE 1,694,914
</TABLE>
<PAGE> 2
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS JUNE 30, 1999 DEC 31, 1998
------------- -------------
<S> <C> <C>
Cash and due from banks $ 8,782,370 $ 5,692,654
Federal funds sold 7,250,000 13,550,000
------------- -------------
Total cash and cash equivalents 16,032,370 19,242,654
------------- -------------
Investment securities held to maturity (market value of $83,420,137 @
6/30/99 & $62,159,860 @ 12/31/98) 84,609,322 61,894,538
Investment securities available for sale - at market value 61,082,776 36,951,162
Total loans 301,056,711 304,475,629
Less allowance for loan losses 12,029,155 11,919,545
------------- -------------
Net loans 293,166,871 292,556,084
Other real estate 656,075 707,397
Premises and equipment, net 5,906,820 5,452,765
Accrued interest and other assets 11,555,584 10,817,184
============= =============
$ 468,870,503 $ 427,621,784
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 43,386,697 $ 41,150,730
Interest bearing (includes certificates of deposit in excess
Of $100,000 of $85,156,335 @ 6/30/99 and
$48,754,354 @ 12/31/98) 287,341,836 249,238,955
------------- -------------
Total deposits 330,728,533 290,389,685
Federal funds purchased -- --
Accrued interest and other liabilities 13,002,590 12,271,111
Long - term borrowings 30,365,000 30,365,000
Mortgage payable 503,288 526,720
------------- -------------
Total liabilities 374,599,411 333,552,516
------------- -------------
Stockholders' equity
Common stock
Class A, par value $2 per share; authorized, 18,000,000 shares; issued,
7,732,876 @ 6/30/99 & 7,429,689 @ 12/31/98 15,465,752 14,859,378
Class B, par value $.10 per share; authorized, 2,000,000 shares; issued,
1,694,914 @ 6/30/99 & 1,630,544 @ 12/31/98 169,491 163,054
Capital surplus 50,302,118 45,392,659
Retained earnings 30,839,778 34,556,343
Accumulated other comprehensive income or (loss) (360,962) 1,242,919
------------- -------------
96,416,177 96,214,353
Treasury stock - at cost, shares of Class A, 207,516 @ 6/30/99,
207,516 @ 12/31/98 (2,145,085) (2,145,085)
------------- -------------
94,271,092 94,069,268
------------- -------------
$ 468,870,503 $ 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
JUNE 30,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Interest income
Loans, including fees $ 8,187,479 $ 8,401,373
Investment securities held to maturity
Taxable 1,449,009 735,251
Tax-exempt 11,115 54,075
Investment securities available for sale
Taxable 989,596 463,190
Tax-exempt -- --
Deposits in banks 4,593 4,934
Federal funds sold 129,223 406,935
----------- -----------
TOTAL INTEREST INCOME 10,771,015 10,065,758
----------- -----------
Interest expense
Deposits 3,288,132 2,799,289
Mortgage payable and other 472,539 495,622
Federal funds purchased -- --
----------- -----------
TOTAL INTEREST EXPENSE 3,760,671 3,294,911
----------- -----------
NET INTEREST INCOME 7,010,344 6,770,847
Increase in provision for loan losses -- --
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,010,344 6,770,847
----------- -----------
Other income (expense)
Service charges and fees 215,819 195,203
Realized gains on sale of investment securities available for sale -- --
Gain on sale of other real estate 143,868 --
Gain on sale of loans 27,879 191
Other income 77,903 84,788
----------- -----------
465,469 280,182
----------- -----------
Other expenses
Salaries & wages 1,426,008 1,451,655
Employee benefits 266,683 553,324
Occupancy and equipment 122,944 159,999
Other operating expenses 1,374,861 1,104,969
----------- -----------
3,190,496 3,269,947
----------- -----------
INCOME BEFORE INCOME TAXES 4,285,317 3,781,082
Income taxes 1,449,111 1,167,256
=========== ===========
NET INCOME $ 2,836,206 $ 2,613,826
=========== ===========
Per share data
Net income - basic $ .30 $ .28
=========== ===========
Net income - diluted $ .29 $ .27
=========== ===========
</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>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Interest income
Loans, including fees $16,225,206 $16,282,233
Investment securities held to maturity
Taxable 2,611,514 1,669,741
Tax-exempt 22,230 108,150
Investment securities available for sale
Taxable 1,770,427 896,183
Tax-exempt -- --
Deposits in banks 11,346 15,676
Federal funds sold 210,570 606,083
----------- -----------
TOTAL INTEREST INCOME 20,851,293 19,578,066
----------- -----------
Interest expense
Deposits 6,197,833 5,579,358
Mortgage payable and other 945,915 991,402
Federal funds purchased 3,001 4,094
----------- -----------
TOTAL INTEREST EXPENSE 7,146,749 6,574,854
----------- -----------
NET INTEREST INCOME 13,704,544 13,003,212
Increase in provision for loan losses -- 2,400,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 13,704,544 10,603,212
----------- -----------
Other income (expense)
Service charges and fees 388,554 418,815
Realized gains on sale of investment securities
available for sale -- --
Gain on sale of other real estate 150,648 --
Gain on sale of loans 27,879 3,831
Other income 158,910 2,585,227
----------- -----------
725,991 3,007,873
----------- -----------
Other expenses
Salaries & wages 2,768,944 2,679,679
Employee benefits 560,132 1,013,358
Occupancy and equipment 317,895 349,889
Other operating expenses 2,607,765 1,993,310
----------- -----------
6,254,736 6,036,236
----------- -----------
INCOME BEFORE INCOME TAXES 8,175,799 7,574,849
Income taxes 2,616,256 2,342,003
=========== ===========
NET INCOME $ 5,559,543 $ 5,232,846
=========== ===========
Per share data
Net income - basic $ .59 $ .56
=========== ===========
Net income - diluted $ .57 $ .54
=========== ===========
</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
SIX MONTHS ENDED JUNE 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 six months ended June 30, -- -- -- --
Conversion of Class B common stock to
Class A Common stock 1,096 2,192 (926) (93) --
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 13,363 26,726 -- -- 41,990
Other comprehensive income (loss), net of
net of reclassifications and taxes -- -- -- -- --
--------- ------------ --------- ------------ ------------
Comprehensive income
Balance, June 30, 1999 7,732,876 $ 15,465,752 1,694,914 $ 169,491 $ 50,302,118
========= ============ ========= ============ ============
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
RETAINED TREASURY COMPREHENSIVE COMPREHENSIVE
EARNINGS STOCK INCOME (LOSS) INCOME
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1999 $ 34,556,343 $ (2,145,085) $ 1,242,919
Net income for the six months ended June 30, 5,559,543 -- -- $ 5,559,543
Conversion of Class B common stock to
Class A Common stock (2,099) -- -- --
Purchase of treasury stock -- -- -- --
4% stock dividend declared (5,451,455)
Cash dividends on common stock (3,819,321) -- -- --
Cash in lieu of fractional shares (3,233) -- -- --
Stock options exercised -- -- --
Other comprehensive income (loss), net of
net of reclassifications and taxes -- -- (1,603,881) (1,603,881)
------------ ------------ ------------- ------------
Comprehensive income $ 3,955,662
============
Balance, June 30, 1999 $ 30,839,778 $ (2,145,085) $ (360,962)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statement.
5
<PAGE> 6
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
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 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 7,027 14,054 -- -- 17,430
Other comprehensive income (loss), net of
net of reclassifications and taxes -- -- -- -- --
--------- ------------ --------- ------------ ------------
Comprehensive income
Balance, June 30, 1998 7,302,123 $ 14,604,246 1,650,103 $ 165,010 $ 45,281,133
========= ============ ========= ============ ============
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
RETAINED TREASURY COMPREHENSIVE COMPREHENSIVE
EARNINGS STOCK INCOME (LOSS) INCOME
------------ ------------ ------------- -------------
<S> <C> <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 -- -- $ 5,232,846
Conversion of Class B common stock to
Class A Common stock (13,491) -- --
Purchase of treasury stock -- -- --
4% stock dividend declared (7,017,070)
Cash dividends on common stock (3,455,164) -- --
Cash in lieu of fractional shares (3,829)
Stock options exercised
Other comprehensive income (loss), net of
net of reclassifications and taxes -- -- 51,226 51,226
------------ ------------ ------------- -------------
Comprehensive income $ 5,284,072
============
Balance, June 30, 1998 $ 32,766,652 $ (2,145,085) $ 689,368
============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE> 7
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 5,559,543 $ 5,232,846
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 161,958 233,564
Provision (recovery )of loan loss reserve (credit) -- 2,400,000
Accretion of investment securities discount (176,356) (32,111)
Amortization of investment securities premium 342,366 126,663
Amortization of deferred loan fees (386,413) (97,066)
Accretion of discount on loans purchased (953,238) (1,090,418)
(Benefit) provision for deferred income taxes (826,242) 26,390
(Gain) loss on other real estate (150,648) --
(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 230,637 360,134
(Increase) decrease in other assets 438,784 507,549
Increase (decrease) in accrued interest payable 451,514 614,028
Increase in unearned income on loans 263,238 98,365
Increase (decrease) in other liabilities 279,965 (2,193,207)
------------ ------------
Net cash provided by operating activities 5,207,229 6,182,906
Cash flows from investing activities
Net (decrease) in interest bearing balances in banks -- 200,000
Proceeds from calls/maturities of HTM invest. securities 9,173,831 32,076,924
Purchase of HTM investment securities (32,054,625) (10,653,841)
Purchase of AFS investment securities (25,735,494) (5,074,045)
Net (increase) decrease in loans 4,253,210 627,070
Purchase of premises and equipment (616,013) (598,942)
------------ ------------
Net cash (used in) provided by investing activities (44,979,091) 16,577,166
Cash flows from financing activities:
Net (decrease) in non-interest bearing and
interest bearing demand deposits and savings accounts 3,656,270 1,994,980
Net increase (decrease) in certificates of deposit 36,682,578 631,736
Mortgage payments (23,432) (21,693)
Net (decrease) increase in short term borrowings -- (15,000,000)
Cash dividends (3,819,321) (3,455,164)
Cash in lieu of fractional shares (3,233) (3,830)
Issuance of common stock under stock option plans 68,716 31,484
Other -- 51,227
------------ ------------
Net cash provided by (used in) financing activities 36,561,578 (15,771,260)
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (3,210,284) 6,988,812
Cash and cash equivalents at beginning of year 19,242,654 30,416,242
------------ ------------
Cash and cash equivalents at end of period $ 16,032,370 $ 37,405,054
============ ============
</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 six and three month period ended June
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>
Six months ended June 30, 1999
----------------------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- -------------- ----------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $5,559,543 9,472,556 $ 0.59
Effect of dilutive securities
Stock options 298,348
---------- --------- ---------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $5,559,543 9,770,904 $ 0.57
========== ========= =========
</TABLE>
(continued)
8
<PAGE> 9
Per Share Information - continued
<TABLE>
<CAPTION>
Six months ended June 30, 1998
----------------------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- -------------- ----------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $5,232,846 9,298,076 $ 0.56
Effect of dilutive securities
Stock options 347,320
---------- --------- ---------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $5,232,846 9,645,396 $ 0.54
========== ========= =========
</TABLE>
EPS is calculated on the basis of the weighted average number of shares
outstanding of 9,472,556 and 9,298,076 for the six months ended June 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 June 30, 1999
----------------------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- -------------- ----------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $2,836,206 9,473,764 $ 0.30
Effect of dilutive securities
Stock options 302,519
---------- --------- ---------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $2,836,206 9,776,283 $ 0.29
========= ========== ========
</TABLE>
<TABLE>
<CAPTION>
Three months ended June 30, 1998
----------------------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- -------------- ----------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $2,613,826 9,325,584 $ 0.28
Effect of dilutive securities
Stock options 348,932
---------- --------- ---------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $2,613,826 9,674,516 $ 0.27
========= ========== ========
</TABLE>
EPS is calculated on the basis of the weighted average number of shares
outstanding of 9,473,764 and 9,325,584 for the three months ended June 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 June 30, 1999 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 $14,854 $ $3,224,411 $3,224,411
Preferred stock securities 2,828,750 -- 11,760 2,816,990 2,816,990
Other securities 55,591,382 1,387,197 1,937,204 55,041,375 55,041,375
----------- ---------- ----------- ----------- -----------
$61,929,688 $1,402,051 $ 1,948,964 $61,082,776 $61,082,776
=========== ========== =========== =========== ===========
HELD TO MATURITY:
US agencies $3,692,931 $38,298 $ 26,611 $3,704,618 $3,692,931
Tax exempt securities 398,465 13,161 -- 411,626 398,465
Taxable debt securities 80,517,926 583,359 1,797,392 79,303,893 80,517,926
=========== ========== =========== =========== ===========
$84,609,322 $634,818 $1,824,003 $83,420,137 $84,609,322
=========== ========== =========== =========== ===========
</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. 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 JUNE 30,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
BALANCE AT APRIL 1, $11,998,724 $10,449,053
Loans charged-off (270,798) (112,748)
Recoveries 301,229 44,065
----------- -----------
Net charge-offs and recoveries 30,431 (68,683)
Provision for loan losses -- --
----------- -----------
BALANCE AT END OF PERIOD $12,029,155 $10,380,370
=========== ===========
</TABLE>
(continued.....)
10
<PAGE> 11
Allowance for Credit Losses (continued)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
BALANCE AT JANUARY 1, $11,919,545 $8,186,237
Loans charged-off (270,798) (339,753)
Recoveries 380,408 133,886
----------- -----------
Net charge-offs and recoveries 109,610 (205,867)
Provision for loan losses -- 2,400,000
----------- -----------
BALANCE AT END OF PERIOD $12,029,155 $10,380,370
=========== ===========
</TABLE>
7. Comprehensive income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. This standard establishes new standards for
reporting comprehensive income that includes net income as well as
certain other items that result in a change to equity during the
period. These financial statements have been classified to reflect the
provisions of SFAS No. 130.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
------------------------------
Net of
Before Tax Tax Tax
Amount Expense Amount
----------- ----------- -----------
<S> <C> <C> <C>
Unrealized losses on securities
Unrealized holding losses arising during the period $(2,430,123) $ (826,242) $(1,603,881)
Less reclassification adjustment for gains/losses
Realized in net income -- -- --
----------- ----------- -----------
Other comprehensive loss, net $(2,430,123) $ (826,242) $(1,603,881)
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
------------------------------
Net of
Before Tax Tax Tax
Amount Expense Amount
---------- ------- -------
<S> <C> <C> <C>
Unrealized gains on securities
Unrealized holding gains arising during the period $77,615 $26,389 $51,226
Less reclassification adjustment for losses
Realized in net income -- -- --
------- ------- -------
Other comprehensive income, net $77,615 $26,389 $51,226
======= ======= =======
</TABLE>
11
<PAGE> 12
8. Nonperforming loans
Loans on which the accrual of interest has been discontinued
or reduced amounted to approximately $3,064,792 and $4,309,216 at June
30, 1999 and 1998, respectively. Although the Company has
non-performing loans of approximately $3,064,792 at June 30, 1999,
management believes it has adequate collateral to limit its credit
risks.
The balance of impaired loans was $557,751 at June 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 June 30, 1999. The income that was
recognized on impaired loans during the six-month period ended June 30,
1999 was $1,360. The cash collected on impaired loans during the period
was $257,107, of which $255,747 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 $35,450. 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.
12
<PAGE> 13
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, 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 June 30, 1999 were $468.9 million, an
increase of $41.3 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 $41 million primarily due to an
increase in deposits from December 31, 1998.
This $46.1 million increase in total investment securities is comprised
of an increase in held to maturity ("HTM") investment securities of $22.7
million and a $24.1 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 $9.2 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 $24.1 million increase in AFS investment securities is primarily
due to the purchase in the second quarter of 1999 of $20.5 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.
13
<PAGE> 14
Net loans increased slightly from the $292.6 million level at December
31, 1998 to $293.2 million at June 30, 1999. Average net loans were $299.9
million for the six-month period of 1999. The allowance for loan loss increased
$.1 million to $12.0 million at June 30, 1999 from $11.9 million. The level of
allowance for loan loss reserve represents 4% of total loans at June 30, 1999
versus 3.9% at December 31, 1998.
Total deposits, the primary source of funds, increased $40.3 million to
$330.7 million at June 30, 1999, from $290.4 million at December 31, 1998.
Average deposits were $329.7 million for the six-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 $68.7 million, representing 20% of total deposits at June
30, 1999.
Consolidated stockholder's equity increased $.2 million to $94.3
million at June 30, 1999 from $94.1 million at December 31, 1998. This increase
is primarily due to net income of $5.6 million, partially offset by two
quarterly cash dividends totaling $3.8 million. Additionally, stockholder's
equity was reduced $1.6 million due to a downward adjustment in the market value
of available for sale investment securities in 1999.
RESULTS OF OPERATIONS
Consolidated net income for the three months ended, June 30, 1999 was
$2,836,206 or $.30 basic earnings per share, as compared to net income of
$2,613,826 or $.28 basic earnings per share, for the same three month period in
1998. Consolidated net income for the six months ended, June 30, 1999 was
$5,559,543 or $.59 basic earnings per share as compared to net income of
$5,232,846 or $.56 basic earnings per share. These increases are primarily due
to an increase in interest income relating to the investment portfolio in 1999.
Net interest income increased $.2 million to $7 million for the second
quarter of 1999, as compared to $6.8 million for the same quarter ended in 1998.
This increases in net interest income for the three-month period is primarily
due to increase in the average balance of investment securities in 1999 versus
1998. The balance of average investment securities for the second quarter of
1999 was $129.3 million, as compared to $70.8 million for the same quarter in
1998. Total interest expense on deposits and borrowings increased $.5 million to
$3.8 million as compared to $3.3 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
six-month period, net interest income increased $.7 million to $13.7 million for
the six months ended June 30, 1999 as compared to $13 million for the same
six-month period in 1998. This increase is primarily due to an increase in the
average balance of investment securities in 1999 as compared with 1998. The
balance of average investment securities for the six-month period was $117.3
million versus $82.3 million for the same six-month period in 1998.
14
<PAGE> 15
Provision for loan loss was $0 for the second quarter of 1999 and 1998.
Charge-offs and recoveries were $.3 and $.3 million, respectively, for the three
month period ended June 30, 1999 versus $.1 million and $90 thousand,
respectively, for the same period in 1998. For the comparative six-month period,
provision for loan loss was $0 for the six months ended June 30, 1999 as
compared to $2.4 million for the same six-month period in 1998. Overall,
Management considers the current level of allowance for loan loss to be adequate
at June 30, 1999.
Total non-interest income for the three month period ended June 30,
1999 was $.5 million, as compared to $.3 million for the same period in 1998.
The $.2 million increase is primarily due to an increase in gains on sale of
other real estate and loans $.2 million in the second quarter of 1999. For the
comparative six-income period, total non-interest income was $.7 million for the
six-month period ended June 30, 1999 versus $3 million for the same six-month
period in 1998. This decrease is the result of a reversal of a legal accrual
relating to the conclusion of litigation in the Company's favor in January of
1998. Additionally, service charge income decreased $30 thousand in 1999 as
compared the same period in 1998.
Total non-interest expense for the three months ended June 30, 1999 was
$3.2 million, a decrease of $.2 million, as compared to $3.3 million for the
same period in 1998. This decrease in non-interest expense is primarily due to
decrease in employee benefits and occupancy expense of $.3 million and $36
thousand, respectfully, partially offset by a $.3 million increase in other
operating expense in 1999. For the comparative six-month period total
non-interest expense increased $.2 million to $6.3 million for the six months
ended June 30, 1999 as compared to $6 million for the six months ended June 30,
1998. This increase is primarily due to a $.6 million increase in other
operating expenses, partially offset by a $.5 million decrease in employee
benefits of 1999. The $.6 million increase in other operating expenses is
primarily due to increases associated with a $227 thousand loss on an investment
in a real estate partnership, and increases in advertising expense ($58
thousand), and travel and entertainment expense ($189 thousand).
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. Presently, the Company is developing 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.
15
<PAGE> 16
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 46%
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.
16
<PAGE> 17
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, 1999:
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 $ 0.5 $ -- $ -- $ -- $ -- $ 0.5
Federal funds sold 7.3 -- -- -- 7.3
Investment securities:
Available for sale 6.0 -- 11.8 43.3 -- 61.0
Held to maturity 6.2 10.0 47.4 21.0 -- 84.6
------------------------------------------------------------------------------
Total investment securities 12.2 10.0 59.2 64.2 -- 145.6
Loans: (2)
Fixed rate (3) 11.7 12.2 122.0 22.9 -- 168.8
Variable rate 44.5 24.5 47.9 22.4 -- 139.3
------------------------------------------------------------------------------
Total loans 56.2 36.7 169.9 45.3 -- 308.1
Other assets (4) -- -- -- -- 7.4 7.4
===============================================================================
Total Assets $ 76.3 $ 46.7 $ 229.1 $ 109.5 $ 7.4 $ 468.9
===============================================================================
LIABILITIES & CAPITAL
Deposits:
Non interest bearing deposits $ -- $ -- $-- $ -- $ 43.5 $ 43.5
Interest bearing deposits (5) 63.0 -- 33.2 -- -- 96.2
Certificate of deposits 19.6 43.8 127.8 -- -- 191.2
------------------------------------------------------------------------------
Total deposits 82.6 48.4 161.0 -- 43.5 330.9
Short term borrowings -- -- -- -- -- --
Mortgage and long term borrowings -- 0.4 30.5 -- -- 30.9
Other liabilities -- -- -- -- 13.3 13.3
Capital -- -- -- -- 93.8 93.8
===============================================================================
Total liabilities & capital $ 82.6 $ 44.2 $ 191.5 $ -- $ 150.6 $ 468.9
===============================================================================
Net interest rate GAP $ (6.3) $ 2.5 $ 37.6 $ 109.5 ($ 143.0)
================================================================
Cumulative interest rate GAP $ (6.3) $ (3.9) $ 33.7 $ 143.0 --
================================================================
GAP to total assets -1% 1%
======================
GAP to total equity -10% 4%
======================
Cumulative GAP to total assets -1% -1%
======================
Cumulative GAP to total equity -10% -6%
=======================
</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, 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.
17
<PAGE> 18
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, 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>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
<S> <C> <C>
CAPITAL LEVELS
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 2.5% (1) 2.6%
Return on average equity 11.9% (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.
18
<PAGE> 19
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
19
<PAGE> 20
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 12th, 1999 /s/ James J. McSwiggan
--------------------------------------------------
James J. McSwiggan, CFO & Treasurer
Dated: August 12th, 1999 /s/ David J. Greenfield
--------------------------------------------------
David J. Greenfield, Controller & VP
20
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,227,370
<INT-BEARING-DEPOSITS> 555,000
<FED-FUNDS-SOLD> 7,250,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 61,082,776
<INVESTMENTS-CARRYING> 84,609,322
<INVESTMENTS-MARKET> 83,420,137
<LOANS> 301,056,711
<ALLOWANCE> 12,029,155
<TOTAL-ASSETS> 468,870,503
<DEPOSITS> 330,728,533
<SHORT-TERM> 365,000
<LIABILITIES-OTHER> 13,002,590
<LONG-TERM> 30,503,288
0
0
<COMMON> 16,635,243
<OTHER-SE> 78,635,849
<TOTAL-LIABILITIES-AND-EQUITY> 468,870,503
<INTEREST-LOAN> 16,225,206
<INTEREST-INVEST> 4,626,087
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 20,851,293
<INTEREST-DEPOSIT> 6,197,833
<INTEREST-EXPENSE> 7,146,749
<INTEREST-INCOME-NET> 13,704,544
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,254,736
<INCOME-PRETAX> 8,175,799
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,559,543
<EPS-BASIC> .59
<EPS-DILUTED> .57
<YIELD-ACTUAL> 6.04
<LOANS-NON> 3,064,792
<LOANS-PAST> 0
<LOANS-TROUBLED> 557,751
<LOANS-PROBLEM> 557,751
<ALLOWANCE-OPEN> 11,919,545
<CHARGE-OFFS> 270,798
<RECOVERIES> 380,408
<ALLOWANCE-CLOSE> 12,029,155
<ALLOWANCE-DOMESTIC> 12,029,155
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
