<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, 2000
[ ] 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, 2000
$2.00 PAR VALUE 8,067,132
Class B Common Stock Outstanding at March 31, 2000
$.10 PAR VALUE 1,759,265
<PAGE> 2
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS MARCH 31, 2000 DEC 31, 1999
-------------- -------------
<S> <C> <C>
Cash and due from banks $ 9,267,525 $ 17,525,462
Federal funds sold 13,000,000 200,000
------------- -------------
Total cash and cash equivalents 22,267,525 17,725,462
------------- -------------
Investment securities held to maturity (market value of $73,113,678 at
March 31, 2000 and $62,159,860 at December 31, 1999) 75,077,314 83,064,914
Investment securities available for sale - at market value 59,262,896 59,485,027
Total loans 393,605,468 354,818,236
Less allowance for loan losses 12,028,753 11,737,337
------------- -------------
Net loans 381,576,715 343,080,899
Premises and equipment, net 5,726,812 5,784,708
Accrued interest and other assets 14,261,038 13,395,037
------------- -------------
$ 558,172,300 $ 522,536,047
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 47,790,379 $ 45,541,164
Interest bearing (includes certificates of deposit in excess
Of $100,000 of $145,933,015 at March 31, 2000 and
$126,117,263 at December 31, 1999) 366,881,524 335,744,854
------------- -------------
Total deposits 414,671,903 381,286,018
Accrued interest and other liabilities 14,936,141 14,935,932
Long-term borrowings 30,000,000 30,000,000
Mortgage payable 467,605 479,579
------------- -------------
Total liabilities 460,075,649 426,701,529
------------- -------------
Stockholders' equity
Common stock
Class A, par value $2 per share; authorized, 18,000,000 shares; issued,
8,282,520 at March 31, 2000 and 7,879,349 at December 31, 1999 16,565,040 15,758,698
Class B, par value $.10 per share; authorized, 2,000,000 shares; issued,
1,759,265 at March 31, 2000 and 1,683,113 at December 31, 1999 175,927 168,311
Capital surplus 57,484,191 50,865,395
Retained earnings 27,162,351 33,329,374
Accumulated other comprehensive income or (loss) (1,025,651) (2,022,053)
------------- -------------
100,361,858 98,099,725
Treasury stock - at cost, shares of Class A, 215,388 at March 31, 2000,
and December 31, 1999 (2,265,207) (2,265,207)
------------- -------------
98,096,651 95,834,518
------------- -------------
$ 558,172,300 $ 522,536,047
============= =============
</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,
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Interest income
Loans, including fees $10,015,585 $ 8,037,727
Investment securities held to maturity
Taxable 1,435,864 1,162,505
Tax-exempt -- 11,115
Investment securities available for sale
Taxable 1,333,136 780,831
Tax-exempt -- --
Deposits in banks 900 6,753
Federal funds sold 141,704 81,347
----------- -----------
TOTAL INTEREST INCOME 12,927,189 10,080,278
----------- -----------
Interest expense
Deposits 4,402,199 2,909,701
Mortgage payable and other 475,000 473,376
Federal funds purchased 17,221 3,001
----------- -----------
TOTAL INTEREST EXPENSE 4,894,420 3,386,078
----------- -----------
NET INTEREST INCOME 8,032,769 6,694,200
Increase in provision for loan losses 250,000 --
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,782,769 6,694,200
----------- -----------
Other income (expense)
Service charges and fees 209,014 172,735
Realized gains on sale of investment securities -- --
available for sale
Gain on sale of other real estate 53,407 --
Gain on sale of loans -- 3,390
Other income 68,858 84,397
----------- -----------
331,279 260,522
----------- -----------
Other expenses
Salaries & wages 1,463,343 1,342,936
Employee benefits 367,291 293,449
Occupancy and equipment 183,898 194,951
Other operating expenses 1,167,261 1,232,904
----------- -----------
3,181,793 3,064,240
----------- -----------
INCOME BEFORE INCOME TAXES 4,932,255 3,890,482
Income taxes 1,605,888 1,167,145
----------- -----------
NET INCOME $ 3,326,367 $ 2,723,337
=========== ===========
Per share data
Net income - basic $ .33 $ .27
=========== ===========
Net income - diluted $ .32 $ .27
=========== ===========
</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, 2000
(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, 2000 7,879,349 $15,758,698 1,683,113 $168,311 $50,865,395
Net income for the three months ended
March 31, -- -- -- --
Conversion of Class B common stock to
Class A Common stock 9,300 18,600 (8,089) (809) --
Purchase of treasury stock -- -- -- -- --
5% stock dividend declared 382,857 765,714 84,241 8,424 6,581,786
Cash dividends on common stock -- -- -- -- --
Cash in lieu of fractional shares -- -- -- -- --
Stock options exercised 11,014 22,028 -- -- 37,010
Other comprehensive income (loss), net
of Reclassifications and taxes -- -- -- -- --
--------- ----------- --------- -------- -----------
Comprehensive income
Balance, March 31, 2000 8,282,520 $16,565,040 1,759,265 $175,927 $57,484,191
========= =========== ========= ======== ===========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
RETAINED TREASURY COMPREHENSIVE COMPREHENSIVE
EARNINGS STOCK INCOME (LOSS) INCOME
----------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 2000 $33,329,374 $(2,265,207) $(2,022,053)
Net income for the three months ended
March 31, 3,326,367 -- -- $ 3,326,367
Conversion of Class B common stock to
Class A Common stock (17,791) -- -- --
Purchase of treasury stock -- -- --
5% stock dividend declared (7,355,924)
Cash dividends on common stock (2,119,675) -- -- --
Cash in lieu of fractional shares -- -- -- --
Stock options exercised -- -- -- --
Other comprehensive income (loss), net
of Reclassifications and taxes -- -- 996,402 996,402
----------- ----------- ----------- ------------
Comprehensive income $ 4,322,769
============
Balance, March 31, 2000 $27,162,351 $(2,265,207) $(1,025,651)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statement.
4
<PAGE> 5
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
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 three months ended
March 31, -- -- -- --
Conversion of Class B common stock to
Class A Common stock 61 122 82 7 --
Purchase of treasury stock -- -- -- -- --
4% stock dividend declared -- -- -- -- --
Cash dividends on common stock -- -- -- -- --
Cash in lieu of fractional shares -- -- -- -- --
Stock options exercised 2.523 5,046 -- -- 4,311
Other comprehensive income (loss), net
of reclassifications and taxes -- -- -- -- --
--------- ----------- --------- -------- -----------
Comprehensive income
Balance, March 31, 1999 7,432,273 $14,864,546 1,630,626 $163,063 $45,396,970
========= =========== ========= ======== ===========
</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 three months ended
March 31, 2,723,337 -- -- $2,723,337
Conversion of Class B common stock to
Class A Common stock (130) -- -- --
Purchase of treasury stock -- -- -- --
4% stock dividend declared -- --
Cash dividends on common stock (1,910,225) -- -- --
Cash in lieu of fractional shares -- -- -- --
Stock options exercised -- -- -- --
Other comprehensive income (loss), net
of reclassifications and taxes -- -- (1,006,492) (1,006,492)
----------- ----------- -------------- ------------
Comprehensive income $1,716,845
============
Balance, March 31, 1999 $35,369,325 $(2,145,085) $236,427
=========== =========== ==============
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE> 6
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
<TABLE>
<CAPTION>
Cash flows from operating activities 2000 1999
------------ ------------
<S> <C> <C>
Net income $ 3,326,367 $ 2,723,337
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 147,553 80,979
Provision (recovery) of loan loss reserve (credit) 250,000 --
Accretion of investment securities discount (92,665) (36,641)
Amortization of investment securities premium 114,968 89,087
Amortization of deferred loan fees (63,047) (79,815)
Accretion of discount on loans purchased (700,689) (500,639)
(Benefit) provision for deferred income taxes 513,314 (518,497)
(Gain) loss on other real estate (53,407) --
(Gain) on sale of loans -- (3,390)
(Gain) on sale of investment securities -- --
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (991,370) (472,490)
(Increase) decrease in other assets (395,270) (572,436)
Increase (decrease) in accrued interest payable 832,197 295,411
Increase in unearned income on loans 59,404 --
Increase (decrease) in other liabilities (831,988) (281,120)
------------ ------------
Net cash provided by operating activities 2,115,367 723,786
Cash flows from investing activities
Net (decrease) in interest bearing balances in banks -- --
Proceeds from calls/maturities of HTM investment securities 7,965,297 7,113,059
Proceeds from calls/maturities of AFS investment securities 1,650,000 --
Purchase of HTM investment securities -- (19,739,116)
Purchase of AFS investment securities (431,467) (2,532,362)
Purchase of loans (18,767,789) --
Net (increase) decrease in loans (19,302,621) (109,512)
Purchase of premises and equipment -- (441,649)
------------ ------------
Net cash (used in) provided by investing activities (28,886,580) (15,709,580)
Cash flows from financing activities:
Net (decrease) in non-interest bearing and
interest bearing demand deposits and savings accounts 7,009,437 5,185,091
Net increase (decrease) in certificates of deposit 26,376,448 13,206,373
Mortgage payments (11,974) (7,743)
Net (decrease) increase in short term borrowings -- --
Cash dividends (2,119,674) (1,910,217)
Cash in lieu of fractional shares -- --
Issuance of common stock under stock option plans 59,039 9,350
Purchase of treasury stock -- --
------------ ------------
Net cash provided by (used in) financing activities 31,313,276 16,482,854
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS 4,542,063 1,497,060
Cash and cash equivalents at beginning of year 17,725,462 19,142,624
------------ ------------
Cash and cash equivalents at end of period $ 22,267,525 $ 20,639,684
============ ============
</TABLE>
The accompanying notes are an integral part of these statements
6
<PAGE> 7
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, 1999.
2. The results of operations for the three-month period ended March 31,
2000 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, 2000
-------------------------------------------
Income Average shares Per share
(numerator) (denominator) amount
---------- -------------- ---------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $3,326,367 10,085,748 $ 0.33
Effect of dilutive securities
Stock options 171,991
---------- ---------- ---------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $3,326,367 10,257,739 $ 0.32
========== ========== =========
</TABLE>
(continued)
7
<PAGE> 8
Per Share Information - continued
<TABLE>
<CAPTION>
Three months ended March 31, 2000
-------------------------------------------
Income Average shares Per share
(numerator) (denominator) amount
---------- -------------- ---------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $2,723,337 9,955,289 $ 0.27
Effect of dilutive securities
Stock options 183,991
---------- ---------- ---------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $2,723,337 10,139,280 $ 0.27
========== ========== =========
</TABLE>
EPS is calculated on the basis of the weighted average number of shares
outstanding of 10,085,748 and 9,955,289 for the three months ended March 31,
2000 and 1999, respectively. Per share information and weighted average shares
outstanding have been restated to reflect the 5% stock dividend of January 2000.
4. Investment Securities:
The carrying value and approximate market value of investment
securities at March 31, 2000 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>
HELD TO MATURITY:
US agencies $ 6,432,465 $ 10,057 $ -- $ 6,442,522 $ 6,432,465
Corporate debt securities 68,644,849 96,332 2,070,025 66,671,156 68,644,849
----------- ----------- ----------- ----------- -----------
$75,077,314 $ 106,389 $ 2,070,025 $73,113,678 $75,077,314
=========== =========== =========== =========== ===========
AVAILABLE FOR SALE:
Federal Home Loan
Bank Stock - at cost $ 3,169,700 $ -- $ -- $ 3,169,700 $ 3,169,700
Preferred and common stock 1,950,981 9,493 73,000 1,887,474 1,887,474
Other securities 55,696,185 -- 1,490,463 54,205,722 54,205,722
----------- ----------- ----------- ----------- -----------
$60,816,866 $ 9,493 $ 1,563,463 $59,262,896 $59,262,896
=========== =========== =========== =========== ===========
</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
8
<PAGE> 9
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 MARCH 31,
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
BALANCE AT JANUARY 1, $11,737,337 $11,919,545
Loans charged-off -- --
Recoveries 41,416 79,179
----------- -----------
Net charge-offs and recoveries 41,416 79,179
Provision for loan losses 250,000 --
----------- -----------
BALANCE AT END OF PERIOD $12,028,753 $11,998,724
=========== ===========
</TABLE>
7. Nonperforming loans
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $1,602,504 and $3,952,850 at March 31, 2000
and 1999, respectively. Although the Company has non-performing loans
of approximately $1,602,504 at March 31, 2000, management believes it
has adequate collateral to limit its credit risks.
The balance of impaired loans was $186,733 at March 31, 2000. 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, 2000. The income that was
recognized on impaired loans during the three-month period ended March
31, 2000 was $1,338. The cash collected on impaired loans during the
period was $6,032, of which $4,694 was credited to the principal
balance outstanding on such loans. Interest that would have been
accrued on impaired loans during this period in 2000 was $2,919. 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, 2000.
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, 2000 were $558.2 million, an
increase of $35.7 million from the $522.5 million reported at year-end, December
31, 1999. This increase is primarily due to a $38.8 million increase in loans
and a $8.3 million increase in cash and cash equivalents, partially offset by
$8.2 million decrease in total investment securities. Liabilities increased
$33.4 million primarily due to an increase in deposits from December 31, 1999.
Total loans increased $38.8 million from the $354.8 million level at
December 31, 1999 to $393.6 at March 31, 2000. This $38.8 million increase in
total loans was primarily due to a purchase of a $18.8 million loan portfolio in
March. This portfolio of 106 performing commercial mortgage loans located
primarily in New Jersey and New York, and to a lesser extent, Connecticut and
Maine. Additionally, approximately $20.0 million of the increase in loans is
attributable to internally generated loan growth in the first quarter of 2000.
The allowance for loan loss increased $.3 million to $12.0 million at
March 31, 2000 from $11.7 million. The level of allowance for loan loss reserve
represents 3% of total loans at March 31, 2000 versus 3.3% at December 31, 1999.
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
10
<PAGE> 11
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.
The $8.2 million decrease in total investment securities is primarily
attributable to a $8 million decrease in held-to-maturity ("HTM") investment
securities and a $.2 million decrease in available-for-sale ("AFS") investment
securities. 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. AFS investment securities are comprised
primarily of non-rated capital trust security issues of regional banks, rated
foreign corporate debt securities and to a lesser extent, preferred and common
stock. This $8.2 million decrease in HTM and AFS investment securities is due to
scheduled maturities in the first quarter of 2000.
Total deposits, the primary source of funds, increased $33.4 million to
$414.7 million at March 31, 2000, from $381.3 million at December 31, 1999. This
increase in deposits is primarily due to an increase in certificates of deposits
of $26.4 million, in addition to a $4.0 million increase in NOW and money market
deposits. The $26.4 million increase in certificates of deposits was primarily
due to a $18.3 million increase in brokered deposits in 2000. The balance of
brokered deposits was $125.9 million, representing approximately 30% of total
deposits at March 31, 2000.
Consolidated stockholder's equity increased $2.3 million to $98.1
million at March 31, 2000 from $95.8 million at December 31, 1999. This increase
is primarily due to net income of $3.3 million, partially offset by a quarterly
cash dividend of $2.1 million. Additionally, stockholder's equity was increased
$1.0 million due to an upward adjustment in the market value of available-for-
sale investment securities during the first quarter of 2000.
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, March 31, 2000 was
$3,326,367 or $.33 basic earnings per share, as compared to net income of
$2,723,337 or $.27 basic earnings per share for the same three month period in
1999. This increase is primarily due to an increase in interest income relating
to loans and the investment portfolio in the first quarter of 2000.
For the first quarter 2000, net interest income was $8.0 million as
compared to $6.7 million for the same quarter in 1999, an increase of $1.3
million or 19%. This increase is primarily due to an increase in the average
balance in loans in the first quarter period of 2000 versus the same period in
1999. The balance of average loans for the first quarter of 2000 was $372.7
million, as compared
11
<PAGE> 12
to $312.5 million for the same quarter in 1999. This $60.2 million increase in
the average balance of loans represents a 19% increase. Interest income on
investment securities increased $.9 million, a 41% increase over the same three
month period in 1999, which is primarily due to the increase in the average
balance in investment securities. Total interest expense on deposits and
borrowings increased $1.5 million to $4.9 million as compared to $3.4 million
for the same three-month period in 1999. This increase in interest expense is
primarily due to an increase in the average balance of certificates of deposits
in 2000. The increase in the average balance of certificates of deposits is
primarily due to the increase in higher costing brokered certificates of
deposits in 2000.
Provision for loan loss was $.3 million for the first quarter of 2000
as compared to $-0- for the same period in 1999. Charge-offs and recoveries were
$-0- thousand and $41 thousand, respectively, for the three month period ended
March 31, 2000 versus $0 and $79 thousand, respectively, for the same period in
1999. Overall, Management considers the current level of allowance for loan loss
to be adequate at March 31, 2000.
Total non-interest income for the three-month period ended March 31,
2000 was $331 thousand as compared to $261 thousand for the same period in 1999.
The $71 thousand increase is primarily due to a gain on sale of foreclosed
property, in addition to a modest increase in service charges on deposits in the
first quarter of 2000.
Total non-interest expense for the three months ended March 31, 2000
was $3.2 million, an increase of $.1 million, or 3%, as compared to $3.1 million
for the same period in 1999. This increase in non-interest expense is primarily
due to an increase in salaries and employee benefits totaling $.2 million for
the first three months in 2000. This increase is partially offset by a decrease
in other operating expenses and occupancy expense totaling of $.1 million.
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 34%
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, capital trust securities, US Treasuries
and agencies, and to a lesser extent, and federal funds sold. The overall
liquidity position is monitored on a monthly basis.
Interest rate sensitivity is a function of the repricing
characteristics of the Company's assets and liabilities. These include the
volume of assets and liabilities repricing, the timing of the repricing, and the
interest rate sensitivity gaps is a continual challenge in a changing rate
12
<PAGE> 13
environment. The following table shows separately the interest sensitivity of
each category of interest earning assets and interest bearing liabilities as of
March 31, 2000:
<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 $ 0.5 $ -- $ -- $ -- $ -- $ 0.5
Federal funds sold 13.0 -- -- -- 13.0
Investment securities:
Available for sale 4.0 -- 11.5 42.7 1.0 59.2
Held to maturity 2.4 8.5 47.1 17.0 -- 75.0
------ ------ ------ ------ ------ ------
Total investment securities 6.4 8.5 58.6 59.7 1.0 134.2
Loans: (2)
Fixed rate (3) 6.2 28.0 126.8 39.0 -- 200.0
Variable rate 181.3 1.3 12.0 5.7 -- 200.3
------ ------ ------ ------ ------ ------
Total loans 187.5 29.3 138.8 44.7 -- 400.3
Other assets (4) -- -- -- -- 10.2 10.2
------ ------ ------ ------ ------ ------
Total Assets $207.4 $ 37.8 $197.4 $104.4 $ 11.2 $558.2
====== ====== ====== ====== ====== ======
LIABILITIES & CAPITAL
Deposits:
Non interest bearing deposits $ -- $ -- $ -- $ -- $ 48.5 $ 48.5
Interest bearing deposits (5) 58.6 -- 42.1 -- -- 100.7
Certificate of deposits 16.0 66.0 183.5 -- -- 265.5
------ ------ ------ ------ ------ ------
Total deposits 74.6 66.0 225.6 -- 48.5 414.7
Mortgage and long term borrowings -- -- 30.5 -- -- 30.5
Other liabilities -- -- -- -- 15.0 15.0
Capital -- -- -- -- 98.0 98.0
------ ------ ------ ------ ------ ------
Total liabilities & capital $ 74.6 $ 66.0 $256.1 $ -- $161.5 $558.2
====== ====== ====== ====== ====== ======
Net interest rate GAP $132.8 $(28.2) $(58.7) $104.4 ($150.3)
====== ====== ====== ====== ======
Cumulative interest rate GAP $132.8 $104.6 $ 45.9 $(150.3) --
====== ====== ====== ====== ======
GAP to total assets -24% -5%
====== ======
GAP to total equity 136% -29%
====== ======
Cumulative GAP to total assets 24% 19%
====== ======
Cumulative GAP to total equity 136% 107%
====== ======
</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, 2000.
(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, 2000, 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, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
CAPITAL LEVELS
Tier 1 leverage ratio 18.5% 18.8%
Tier 1 risk-based ratio 19.4% 20.4%
Total risk-based ratio 20.7% 21.6%
CAPITAL PERFORMANCE
Return on average assets 2.5% (1) 2.6%
Return on average equity 13.7% (1) 12.8%
(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.
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 12th, 2000 /s/ James J. McSwiggan
-----------------------------------------------------
James J. McSwiggan, CFO & Treasurer
Dated: May 12th, 2000 /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-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 9,267,525
<INT-BEARING-DEPOSITS> 184,000
<FED-FUNDS-SOLD> 13,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 59,262,896
<INVESTMENTS-CARRYING> 75,077,314
<INVESTMENTS-MARKET> 73,113,678
<LOANS> 393,605,468
<ALLOWANCE> 12,028,753
<TOTAL-ASSETS> 558,172,300
<DEPOSITS> 414,671,903
<SHORT-TERM> 0
<LIABILITIES-OTHER> 14,936,141
<LONG-TERM> 30,467,605
0
0
<COMMON> 16,740,967
<OTHER-SE> 81,355,684
<TOTAL-LIABILITIES-AND-EQUITY> 558,172,300
<INTEREST-LOAN> 10,015,585
<INTEREST-INVEST> 2,769,000
<INTEREST-OTHER> 142,604
<INTEREST-TOTAL> 12,927,189
<INTEREST-DEPOSIT> 4,402,199
<INTEREST-EXPENSE> 4,894,420
<INTEREST-INCOME-NET> 8,032,769
<LOAN-LOSSES> 250,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,181,793
<INCOME-PRETAX> 4,932,255
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,326,367
<EPS-BASIC> .33
<EPS-DILUTED> .32
<YIELD-ACTUAL> 5.93
<LOANS-NON> 1,602,504
<LOANS-PAST> 0
<LOANS-TROUBLED> 12,714
<LOANS-PROBLEM> 186,733
<ALLOWANCE-OPEN> 11,737,337
<CHARGE-OFFS> 0
<RECOVERIES> 41,416
<ALLOWANCE-CLOSE> 12,028,753
<ALLOWANCE-DOMESTIC> 12,028,753
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
