<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: MARCH 31, 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 March 31, 1999
$2.00 PAR VALUE 7,432,273
Class B Common Stock Outstanding at March 31, 1999
$.10 PAR VALUE 1,630,626
<PAGE> 2
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1999 DEC 31, 1998
-------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 10,879,714 $ 5,692,624
Federal funds sold 9,860,000 13,550,000
------------- -------------
Total cash and cash equivalents 20,739,714 19,142,624
------------- -------------
Investment securities held to maturity (market value of $75,006,620 @
3/31/99 & $62,159,860 @ 12/31/98) 74,503,756 61,894,538
Investment securities available for sale - at market value 38,441,425 36,951,162
Total loans 305,165,595 304,475,629
Less allowance for loan losses 11,998,724 11,919,545
------------- -------------
Net loans 293,166,871 292,556,084
Other real estate 663,296 707,397
Premises and equipment, net 5,813,435 5,452,765
Accrued interest and other assets 12,507,277 10,817,184
============= =============
$ 445,835,774 $ 427,621,784
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 42,161,644 $ 41,150,730
Interest bearing (includes certificates of deposit in excess
Of $100,000 of $62,403,072 @ 3/31/99 and
$48,754,354 @ 12/31/98) 266,619,505 249,238,955
------------- -------------
Total deposits 308,781,149 290,389,685
Federal funds purchased -- --
Accrued interest and other liabilities 12,285,402 12,271,111
Long -term borrowings 30,365,000 30,365,000
Mortgage payable 518,977 526,720
------------- -------------
Total liabilities 351,950,528 333,552,516
------------- -------------
Stockholders' equity
Common stock
Class A, par value $2 per share; authorized, 18,000,000 shares; issued,
7,432,273 @ 3/31/99 & 7,429,689 @ 12/31/98 14,864,546 14,859,378
Class B, par value $.10 per share; authorized, 2,000,000 shares; issued,
1,630,626 @ 3/31/99 & 1,630,544 @ 12/31/98 163,063 163,054
Capital surplus 45,396,970 45,392,659
Retained earnings 35,369,325 34,556,343
Accumulated unrealized gain/(loss) on invest. Securities available for sale 236,427 1,242,919
------------- -------------
96,030,328 96,214,353
Treasury stock - at cost, shares of Class A, 207,516 @ 3/31/99,
207,516 @ 12/31/98 (2,145,085) (2,145,085)
------------- -------------
93,885,246 94,069,268
------------- -------------
$ 445,835,774 $ 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
MARCH 31, 1999
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Interest income
Loans, including fees $ 8,037,727 $ 7,880,860
Investment securities held to maturity
Taxable 1,162,505 934,490
Tax-exempt 11,115 54,075
Investment securities available for sale
Taxable 780,831 432,993
Tax-exempt -- --
Deposits in banks 6,753 10,742
Federal funds sold 81,347 199,148
----------- -----------
TOTAL INTEREST INCOME 10,080,278 9,512,308
----------- -----------
Interest expense
Deposits 2,909,701 2,780,069
Mortgage payable and other 473,376 495,780
Federal funds purchased 3,001 4,094
----------- -----------
TOTAL INTEREST EXPENSE 3,386,078 3,279,943
----------- -----------
NET INTEREST INCOME 6,694,200 6,232,365
Increase in provision for loan losses -- 2,400,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 6,694,200 3,832,365
----------- -----------
Other income (expense)
Service charges and fees 172,735 223,612
Realized gains on sale of investment securities
available for sale -- --
Gain on sale of other real estate 3,390 --
Gain on sale of loans -- 3,640
Other income 84,397 2,500,439
----------- -----------
260,522 2,727,691
----------- -----------
Other expenses
Salaries & wages 1,342,936 1,228,024
Employee benefits 293,449 460,034
Occupancy and equipment 194,951 189,890
Other operating expenses 1,232,904 888,341
----------- -----------
3,064,240 2,766,289
----------- -----------
INCOME BEFORE INCOME TAXES 3,890,482 3,793,767
Income taxes 1,167,145 1,174,747
=========== ===========
NET INCOME $ 2,723,337 $ 2,619,020
=========== ===========
Per share data
Net income - basic $ .30 $ .29
=========== ===========
Net income - diluted $ .29 $ .28
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK CAPITAL RETAINED TREASURY
SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS STOCK
---------- ----------- ---------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 7,429,689 $14,859,378 1,630,544 $163,054 $45,392,659 $34,556,343 $(2,145,085)
Net income for the three
months ended March 31, - - - - 2,723,337 -
Conversion of Class B common
stock to Class A Common stock 61 122 82 8 - (130) -
Purchase of treasury stock - - - - - - -
Cash dividends on common stock - - - - - (1,910,225) -
Cash in lieu of fractional shares - - - - - -
Stock options exercised 2,523 5,046 - - 4,311
Other comprehensive income (loss),
net of net of reclassifications
and taxes - - - - - - -
---------- ----------- ---------- -------- ---------- ----------- -----------
Comprehensive income
Balance, March 31, 1999 7,432,273 $14,864,546 1,630,626 $163,062 $45,396,970 $35,369,325 $(2,145,085)
========== =========== ========== ======== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME (LOSS) INCOME
------------- -------------
<S> <C> <C>
Balance, January 1, 1999 $ 1,242,919
Net income for the three
months ended March 31, - $ 2,723,337
Conversion of Class B common
stock to Class A Common stock -
Purchase of treasury stock -
Cash dividends on common stock -
Cash in lieu of fractional shares
Stock options exercised
Other comprehensive income (loss),
net of net of reclassifications
and taxes (1,006,492) (1,006,492)
----------- ------------
Comprehensive income $ 1,716,845
============
Balance, March 31, 1999 $ 236,427
===========
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE> 5
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,723,337 $ 2,619,020
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 80,979 117,352
Provision (recovery )of loan loss reserve (credit) -- 2,400,000
Accretion of investment securities discount (36,641) (16,892)
Amortization of investment securities premium 89,087 65,956
Amortization of deferred loan fees (79,815) (48,054)
Accretion of discount on loans purchased (500,639) (528,023)
(Benefit) provision for deferred income taxes (518,497) (125,817)
(Gain) loss on other real estate -- --
(Gain) on sale of loans (3,390) (3,640)
(Gain) on sale of investment securities -- --
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (472,490) 55,725
(Increase) decrease in other assets (572,436) 786,399
Increase (decrease) in accrued interest payable 295,411 640,846
Increase in unearned income on loans -- 58,267
Increase (decrease) in other liabilities (281,120) (2,336,921)
------------ ------------
Net cash provided by operating activities 723,786 3,684,218
Cash flows from investing activities
Net (decrease) in interest bearing balances in banks -- 200,000
Proceeds from calls and maturities of HTM invest. Securities 7,113,059 14,086,440
Purchase of investment securities held to maturity (19,739,116) --
Purchase of investment securities available for sale (2,532,362) --
Net (increase) decrease in loans (109,512) (1,713,127)
Purchase of premises and equipment (441,649) (31,231)
Proceeds from sale and payments on other real estate --
------------ ------------
Net cash (used in) provided by investing activities (15,709,580) 12,542,082
Cash flows from financing activities:
Net (decrease) in non-interest bearing and
interest bearing demand deposits and savings accounts 5,185,091 3,055,797
Net increase (decrease) in certificates of deposit 13,206,373 3,802,692
Mortgage payments (7,743) (10,767)
Net (decrease) increase in long term borrowings -- (15,000,000)
Cash dividends (1,910,217) (1,727,447)
Cash in lieu of fractional shares -- --
Issuance of common stock under stock option plans 9,350 (244,235)
Other --
------------ ------------
Net cash provided by (used in) financing activities 16,482,854 (10,123,960)
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS 1,497,060 6,102,340
Cash and cash equivalents at beginning of year 19,142,624 30,416,242
------------ ------------
Cash and cash equivalents at end of period $ 20,639,684 $ 36,518,582
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
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, 1998.
2. The results of operations for the three-month period ended March 31,
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>
Three months ended March 31, 1999
-------------------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- -------------- ---------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $ 2,723,337 9,099,137 $ 0.30
Effect of dilutive securities
Stock options 333,016
----------- ---------- ---------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $ 2,723,337 9,432,153 $ 0.29
=========== ========== =========
</TABLE>
(continued)
6
<PAGE> 7
Per Share Information - continued
<TABLE>
<CAPTION>
Three months ended March 31, 1998
-------------------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- -------------- ---------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $ 2,619,020 8,985,427 $ 0.29
Effect of dilutive securities
Stock options 353,572
----------- ---------- ---------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $ 2,619,020 9,338,999 $ 0.28
=========== ========== =========
</TABLE>
EPS is calculated on the basis of the weighted average number of shares
outstanding of 9,099,137 and 8,985,427 for the three months ended March 31, 1999
and 1998, respectively.
4. Investment Securities:
The carrying value and approximate market value of investment securities
at March 31, 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 $ 4,154,310 $ 115,239 $ 101 $ 4,269,448 $ 4,154,310
Preferred stock securities 398,465 21,031 -- 419,496 398,465
Other securities 69,950,981 774,693 407,998 70,317,676 69,950,981
----------- ----------- ----------- ----------- -----------
$74,503,756 $ 910,963 $ 408,099 $75,006,620 $74,503,756
=========== =========== =========== =========== ===========
HELD TO MATURITY:
US Treasury & agencies $ 3,209,556 $ 14,749 $ -- $ 3,224,305 $ 3,224,305
Tax exempt securities 2,842,408 -- 13,658 2,828,750 2,828,750
Taxable debt securities 32,031,240 1,249,800 892,670 32,388,370 32,388,370
----------- ----------- ----------- ----------- -----------
$38,083,204 $ 1,264,549 $ 906,328 $38,441,425 $38,441,425
=========== =========== =========== =========== ===========
</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.
(continued)
7
<PAGE> 8
6. Allowance for Credit Losses: Changes in the allowance for credit losses
were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
----------- ----------
<S> <C> <C>
BALANCE AT DECEMBER 1, $11,919,545 $ 8,186,236
Loans charged-off -- (227,005)
Recoveries 79,179 89,822
----------- -----------
Net charge-offs and recoveries 79,179 (137,183)
Provision for loan losses -- 2,400,000
----------- -----------
BALANCE AT END OF PERIOD $11,998,724 $10,449,053
=========== ===========
</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>
THREE MONTHS ENDED MARCH 31, 1999
--------------------------------------------
Net of
Before Tax Tax Tax
Amount Expense Amount
---------- ---------- ----------
<S> <C> <C> <C>
Unrealized gains or losses on securities
Unrealized holding losses arising during the period $1,524,988 $ 518,496 $1,006,492
Less reclassification adjustment for gains/losses
Realized in net income -- -- --
---------- ---------- ----------
Other comprehensive income, net $1,524,988 $ 518,496 $1,006,492
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------
Net of
Before Tax Tax Tax
Amount Expense Amount
---------- -------- --------
<S> <C> <C> <C>
Unrealized gains or losses on securities
Unrealized holding losses arising during the period $ 370,053 $125,818 $244,235
Less reclassification adjustment for losses
Realized in net income -- -- --
---------- -------- --------
Other comprehensive income, net $ 370,053 $125,818 $244,235
========== ======== ========
</TABLE>
(continued)
<PAGE> 9
8. Nonperforming loans
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $3,952,850 and $4,309,216 at March 31, 1999 and
1998, respectively. Although the Company has non-performing loans of
approximately $3,952,850 at March 31, 1999, management believes it has
adequate collateral to limit its credit risks.
The balance of impaired loans was $1,446,372 at March 31, 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 March 31, 1999. The income that was recognized
on impaired loans during the nine-month period ended March 31, 1999 was
$1,367. The cash collected on impaired loans during his three-month period
was $54,586, of which $53,219 was credited to the principal balance
outstanding on such loans. Interest that would have been accrued on
impaired loans during this three-month period in 1999 was $35,600. 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.
9
<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
three month period ended March 31, 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 March 31, 1999 were $445.8 million, an
increase of $18.2 million from the $427.6 million reported at year-end, December
31, 1998. This increase is primarily due to a $14.1 million increase in total
investment securities. Liabilities increased $18.4 million primarily due to an
increase in deposits from December 31, 1998.
This $14.1 million increase in total investment securities is comprised
mostly of an increase in held to maturity ("HTM") investment securities of $12.6
million and $1.4 million increase in available for sale ("AFS") investment
securities. This increase in HTM investment securities is primarily due to
purchases of approximately $19.7 million in corporate bonds partially offset by
scheduled maturities of approximately $7.1 million in the first quarter. 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 $1.4
million increase in AFS investment securities is comprised of capital trust
securities.
Net loans changed increased slightly from the $292.6 million level at
December 31, 1998 to $293.2 million at March 31, 1999. Average net loans were
$312.5 million for the first quarter of 1999. The allowance for loan loss
increased $.1 million to $12.0 million at March 31, 1999 from $11.9 million. The
level of allowance for loan loss reserve represents 3.9% of total loans at March
31, 1999 versus 3.9% at December 31, 1998.
10
<PAGE> 11
Total deposits, the primary source of funds, increased $18.4 million to
$308.8 million at March 31, 1999, from $290.4 million at December 31, 1998.
Average deposits were $313.0 million for the first three months of 1999. This
increase in deposits is primarily due to increases experienced in certificates
of deposits of $13.2 million, in addition to a $3.6 million increase in NOW and
money market deposits. The $13.2 million increase in certificates of deposits
was primarily due to an increase in brokered deposits in the first quarter 1999.
Consolidated stockholder's equity decreased $.2 million to $93.9
million at March 31, 1999 from $94.1 million at December 31, 1998. This decrease
is primarily due to a downward adjustment in the market value of available for
sale investment securities of $1 million in the first quarter of 1999, and in
addition to quarterly cash dividend of $1.9 million, partially offset by net
income of $2.7 million.
RESULTS OF OPERATIONS
Consolidated net income for the three months ended, March 31, 1999 was
$2,723,337 or $.30 basic earnings per share, as compared to net income of
$2,619,020 or $.29 basic earnings per share, for the same three month period in
1998. This increase is primarily due to an increase in net interest income in
1999.
Net interest income increased $.5 million to $2.7 million for the first
quarter of 1999, as compared to $2.6 million for the same quarter ended in 1998.
This increases in net interest income for the three-month period is primarily
due to increases in the average balance of loans and investment securities in
1999 versus 1998. The balance of average net loans and investment securities for
the first quarter of 1999 was $312.5 and $105.1 million, respectively, as
compared to $304.1 and $78.7 million for the same quarter in 1998. Total
interest expense on deposits and borrowings increased $.1 million to $3.4
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.
Provision for loan loss was $0 for the first the first quarter of 1999
as compared to $2.4 million for the same period in 1998. This decrease in
provision in 1999 was primarily due a $2.4 million provision recorded in January
1998 due to the acquisition of a $75 million loan portfolio in December 1997.
Charge-offs and recoveries were $0 and $80 thousand, respectively, for the three
month period ended March 31, 1999 versus $227 and $90 thousand, respectively,
for the same period in 1998. Overall, Management considers the current level of
allowance for loan loss to be adequate at March 31, 1999.
Total non-interest income for the three month period ended March 31,
1999 was $.3 million, as compared to $2.7 million for the same period in 1998.
The $2.4 million decrease period is primarily due to a decrease in other income,
the result of a reversal of a legal accrual relating to the conclusion in the
Company's favor of litigation in January of 1998. Additionally, service
11
<PAGE> 12
charge income decreased $51 thousand in the first quarter of 1999 as compared
the same period in 1998.
Total non-interest expense for the three months ended March 31, 1999
was $3.1 million, an increase of $.3 million, as compared to $2.8 million for
the same period in 1998. This increase in non-interest expense is primarily due
to increases in data processing expense, travel and entertainment expense,
advertising expense, and a $91 thousand accrued expense recorded in the first
quarter of 1999 associated with a loss on an investment in a real estate
partnership.
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 to have a
material effect on its financial position or results of operation. The amount
expensed in 1999 is immaterial.
LIQUIDITY & INTEREST RATE SENSITIVITY
Liquidity is the ability to ensure that adequate funds will be
available to meet its financial commitments as they become due. In managing its
liquidity position, all sources of funds are evaluated, the largest of which is
deposits. Also taken into consideration is the repayment of loans. These sources
provide alternatives to meet its short-term liquidity needs. Longer liquidity
needs may be met by issuing longer-term deposits and by raising additional
capital. The liquidity ratio is generally maintained equal to or greater than
25% of deposits and short-term liabilities.
The liquidity ratio of the Company remains strong at approximately 39%
and exceeds the Company's peer group levels and target ratio set forth in the
Asset/Liability Policy. The Company's level of liquidity is provided by funds
invested primarily in corporate bonds, US 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.
12
<PAGE> 13
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
March 31, 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 $ 0.6 $ -- $ -- $ -- $ -- $ 0.6
Federal funds sold 9.9 -- -- -- 9.9
Investment securities:
Available for sale 38.0 -- -- -- -- 38.0
Held to maturity 1.9 12.5 42.0 18.1 -- 74.5
-------- ------- -------- -------- -------- -------
Total investment securities 39.9 12.5 42.0 18.1 -- 112.5
Loans: (2)
Fixed rate (3) 9.6 6.2 111.1 25.1 -- 152.0
Variable rate 43.0 30.0 61.2 26.5 -- 160.7
-------- ------- -------- -------- -------- -------
Total loans 52.6 36.2 172.3 51.6 -- 312.7
Other assets (4) -- -- -- -- 10.1 10.1
-------- ------- -------- -------- -------- -------
Total Assets $ 103.0 $ 48.7 $ 214.3 $ 69.7 $ 10.1 $ 445.8
======== ======= ======== ======== ======== ========
LIABILITIES & CAPITAL
Deposits:
Non interest bearing deposits $ -- $ -- $ -- $ -- $ 39.6 $ 39.6
Interest bearing deposits (5) 67.2 -- 34.3 -- -- 101.5
Certificate of deposits 17.6 48.4 101.7 -- -- 167.7
-------- ------- -------- -------- -------- -------
Total deposits 84.8 48.4 136.0 -- 39.6 308.8
Short term borrowings -- -- -- -- -- --
Mortgage and long term borrowings -- 0.4 30.5 -- -- 30.9
Other liabilities -- -- -- -- 12.0 12.0
Capital -- -- -- -- 94.1 94.1
-------- ------- -------- -------- -------- --------
Total liabilities & capital $ 84.8 $ 48.8 $ 166.5 $ -- $ 145.7 $ 445.8
======== ======= ======== ======== ======== ========
Net interest rate GAP $ 18.2 $ (0.1) $ 47.8 $ 69.7 $ (136.0)
======== ======= ======== ======== ========
Cumulative interest rate GAP $ 18.2 $ 18.1 $ 65.9 $ 136.0 --
======== ======= ======== ======== ========
GAP to total assets 4% 0%
======== =======
GAP to total equity 19% 0%
======== =======
Cumulative GAP to total assets 4% 4%
======== =======
Cumulative GAP to total equity 19% 19%
======== =======
</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 March 31, 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.
13
<PAGE> 14
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 March 31, 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>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
CAPITAL LEVELS
Tier 1 leverage ratio 20.8% 22.1%
Tier 1 risk-based ratio 23.3% 24.1%
Total risk-based ratio 24.6% 25.4%
CAPITAL PERFORMANCE
Return on average assets 2.6% (1) 2.6%
Return on average equity 11.7% (1) 11.8%
</TABLE>
(1) annualized
The Company's ratios compare favorably to the minimum required amounts
of Tier 1 and total capital to "risk weighted" assets and the minimum Tier 1
leverage ratio, as defined by banking regulators. The Company currently meets
the criteria for a well-capitalized institution, and management believes that
the Company will continue to 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.
14
<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
15
<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: May 14th, 1999 /s/ James J. McSwiggan
-----------------------------------------------------
James J. McSwiggan, CFO & Treasurer
Dated: May 14th, 1999 /s/ David J. Greenfield
-----------------------------------------------------
David J. Greenfield, Controller & VP
16
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 10,779,684
<INT-BEARING-DEPOSITS> 100,030
<FED-FUNDS-SOLD> 9,860,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,441,425
<INVESTMENTS-CARRYING> 74,503,756
<INVESTMENTS-MARKET> 75,006,620
<LOANS> 305,165,595
<ALLOWANCE> 11,998,724
<TOTAL-ASSETS> 445,835,774
<DEPOSITS> 308,781,149
<SHORT-TERM> 365,000
<LIABILITIES-OTHER> 12,285,402
<LONG-TERM> 30,518,977
0
0
<COMMON> 15,027,609
<OTHER-SE> 78,857,637
<TOTAL-LIABILITIES-AND-EQUITY> 445,835,774
<INTEREST-LOAN> 8,037,727
<INTEREST-INVEST> 2,042,551
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 10,080,278
<INTEREST-DEPOSIT> 2,909,701
<INTEREST-EXPENSE> 3,386,078
<INTEREST-INCOME-NET> 6,694,200
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,064,240
<INCOME-PRETAX> 3,890,482
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,723,337
<EPS-PRIMARY> .30
<EPS-DILUTED> .29
<YIELD-ACTUAL> 6.25
<LOANS-NON> 3,952,850
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,446,372
<LOANS-PROBLEM> 1,446,372
<ALLOWANCE-OPEN> 11,919,545
<CHARGE-OFFS> 0
<RECOVERIES> 79,179
<ALLOWANCE-CLOSE> 11,998,724
<ALLOWANCE-DOMESTIC> 11,998,724
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
