<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the quarterly period ended: SEPTEMBER 30, 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.
<TABLE>
<S> <C>
Class A Common Stock Outstanding at September 30, 2000
-------------------- ---------------------------------
$2.00 PAR VALUE 8,194,498
Class B Common Stock Outstanding at September 30, 2000
-------------------- ---------------------------------
$.10 PAR VALUE 1,700,280
</TABLE>
<PAGE> 2
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS SEPT. 30, 2000 DEC 31, 1999
-------------- ------------
<S> <C> <C>
Cash and due from banks $ 11,583,863 $ 17,525,462
Federal funds sold 44,450,000 200,000
------------- -------------
Total cash and cash equivalents 56,033,863 17,725,462
------------- -------------
Investment securities held to maturity (market value of $57,374,194 at
September 30, 2000 and $81,493,670 at December 31, 1999) 57,688,806 83,064,914
Investment securities available for sale - at market value 70,757,550 59,485,027
Total loans 407,277,826 354,818,236
Less allowance for loan losses 12,212,566 11,737,337
------------- -------------
Net loans 395,065,260 343,080,899
Premises and equipment, net 6,328,769 5,784,708
Accrued interest and other assets 13,620,572 13,395,037
------------- -------------
$ 599,494,820 $ 522,536,047
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 45,108,279 $ 45,541,164
Interest bearing (includes certificates of deposit in excess
of $100,000 of $153,074,403 at September 30, 2000 and
$126,117,263 at December 31, 1999) 403,268,681 335,744,854
------------- -------------
Total deposits 448,376,960 381,286,018
Accrued interest and other liabilities 19,591,455 14,935,932
Long - term borrowings 30,000,000 30,000,000
Mortgage payable 443,607 479,579
------------- -------------
Total liabilities 498,412,022 426,701,529
------------- -------------
Stockholders' equity
Common stock
Class A, par value $2 per share; authorized, 18,000,000 shares; issued,
8,409,886 at September 30, 2000 and 7,879,349 at December 31, 1999 16,819,772 15,758,698
Class B, par value $.10 per share; authorized, 2,000,000 shares; issued,
1,700,280 at September 30, 2000 and 1,683,113 at December 31, 1999 170,028 168,311
Capital surplus 57,710,432 50,865,395
Retained earnings 30,141,764 33,329,374
Accumulated other comprehensive income or (loss) (1,493,991) (2,022,053)
------------- -------------
103,348,005 98,099,725
Treasury stock - at cost, shares of Class A, 215,388 at September 30, 2000,
and December 31, 1999 (2,265,207) (2,265,207)
------------- -------------
101,082,798 95,834,518
------------- -------------
$ 599,494,820 $ 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
SEPTEMBER 30,
-------------
2000 1999
---- ----
<S> <C> <C>
Interest income
Loans, including fees $11,729,273 $ 8,275,430
Investment securities held to maturity
Taxable 1,192,987 1,600,493
Tax-exempt -- 11,115
Investment securities available for sale
Taxable 1,605,980 1,352,376
Tax-exempt -- --
Deposits in banks 2,572 2,205
Federal funds sold 473,799 106,044
----------- -----------
TOTAL INTEREST INCOME 15,004,611 11,347,663
----------- -----------
Interest expense
Deposits 5,380,403 3,548,922
Mortgage payable and other 465,083 470,490
Federal funds purchased -- --
----------- -----------
TOTAL INTEREST EXPENSE 5,845,486 4,019,412
----------- -----------
NET INTEREST INCOME 9,159,125 7,328,251
Increase in provision for loan losses -- --
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 9,159,125 7,328,251
----------- -----------
Other income (expense)
Service charges and fees 235,686 253,437
Realized gains on sale of investment securities available for sale -- --
Gain on sale of other real estate -- 193,883
Gain on sale of loans -- --
Other income 88,185 567,331
----------- -----------
323,871 1,014,651
----------- -----------
Other expenses
Salaries & wages 1,634,365 1,280,949
Employee benefits 689,796 496,723
Occupancy and equipment 184,058 164,024
Other operating expenses 1,318,447 1,225,390
----------- -----------
3,826,666 3,167,086
----------- -----------
INCOME BEFORE INCOME TAXES 5,656,330 5,175,816
Income taxes 2,028,626 1,682,263
----------- -----------
NET INCOME $ 3,627,704 $ 3,493,553
=========== ===========
Per share data
Net income - basic $ .36 $ .35
=========== ===========
Net income - diluted $ .35 $ .35
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2000 1999
----------- ------------
<S> <C> <C>
Interest income
Loans, including fees $33,462,721 $24,500,636
Investment securities held to maturity
Taxable 3,827,323 4,212,007
Tax-exempt -- 33,345
Investment securities available for sale
Taxable 4,559,059 3,122,803
Tax-exempt -- --
Deposits in banks 12,484 13,551
Federal funds sold 934,392 316,614
----------- -----------
TOTAL INTEREST INCOME 42,795,979 32,198,956
----------- -----------
Interest expense
Deposits 14,872,062 9,746,755
Mortgage payable and other 1,426,550 1,416,405
Federal funds purchased 17,238 3,001
----------- -----------
TOTAL INTEREST EXPENSE 16,315,850 11,166,161
----------- -----------
NET INTEREST INCOME 26,480,129 21,032,795
Increase in provision for loan losses 250,000 --
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 26,230,129 21,032,795
----------- -----------
Other income (expense)
Service charges and fees 664,948 641,991
Realized gains on sale of investment securities available for sale -- --
Gain on sale of other real estate 53,407 344,531
Gain on sale of loans -- 27,879
Other income 240,072 726,241
----------- -----------
958,427 1,740,642
----------- -----------
Other expenses
Salaries & wages 4,698,603 4,049,893
Employee benefits 2,041,304 1,056,855
Occupancy and equipment 468,031 481,919
Other operating expenses 3,776,919 3,833,155
----------- -----------
10,984,857 9,421,822
----------- -----------
INCOME BEFORE INCOME TAXES 16,203,699 13,351,615
Income taxes 5,509,258 4,298,519
----------- -----------
NET INCOME $10,694,441 $ 9,053,096
=========== ===========
Per share data
Net income - basic $.1.06 $ .91
=========== ===========
Net income - diluted $ 1.05 $ .90
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, January 1, 2000 7,879,349 $15,758,698 1,683,113 $168,311
Net income for the nine months ended Sept. 30, -- -- --
Conversion of Class B common stock to Class A
Common stock 77,138 154,276 (67,074) (6,707)
Purchase of treasury stock -- -- -- --
5% stock dividend declared 382,857 765,714 84,241 8,424
Cash dividends on common stock -- -- -- --
Cash in lieu of fractional shares -- -- -- --
Stock options exercised 70,542 141,084 -- --
Other comprehensive income (loss), net of
reclassifications and taxes -- -- -- --
--------- ---------- --------- --------
Comprehensive income
Balance, September 30, 2000 8,409,886 $16,819,772 1,700,280 $170,028
========= =========== ========= ========
</TABLE>
The accompanying notes are an integral part of the financial statement.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
CAPITAL RETAINED TREASURY COMPREHENSIVE COMPREHENSIVE
SURPLUS EARNINGS STOCK INCOME (LOSS) INCOME
------- -------- ----- ------------- ------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 2000 $50,865,395 $33,329,374 $(2,265,207) $(2,022,053)
Net income for the nine months ended Sept. 30, -- 10,694,441 -- -- $10,694,441
Conversion of Class B common stock to Class A
Common stock -- (147,569) -- -- --
Purchase of treasury stock -- -- -- --
5% stock dividend declared 6,581,786 (7,355,924)
Cash dividends on common stock -- (6,378,558) -- -- --
Cash in lieu of fractional shares -- -- -- -- --
Stock options exercised 263,251 -- -- -- --
Other comprehensive income (loss), net of
reclassifications and taxes -- -- -- 528,062 528,062
----------- ----------- ----------- ----------- -----------
Comprehensive income $11,222,503
===========
Balance, September 30, 2000 $57,710,432 $30,141,764 $(2,265,207) $(1,493,991)
=========== =========== =========== ===========
</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
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, January 1, 1999 7,429,689 $14,859,378 1,630,544 $163,054
Net income for the nine months ended Sept. 30, -- -- --
Conversion of Class B common stock to Class A
Common stock 4,886 9,772 (4,251) (426)
Purchase of treasury stock -- -- -- --
4% stock dividend declared 288,728 577,456 65,296 6,530
Cash dividends on common stock -- -- -- --
Cash in lieu of fractional shares -- -- -- --
Stock options exercised 145,844 291,688 -- --
Other comprehensive income (loss), net of
reclassifications and taxes -- -- -- --
--------- ---------- --------- --------
Comprehensive income
Balance, September 30, 1999 7,869,147 $15,738,294 1,691,589 $169,158
========= =========== ========= ========
</TABLE>
The accompanying notes are an integral part of this statement.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
CAPITAL RETAINED TREASURY COMPREHENSIVE COMPREHENSIVE
SURPLUS EARNINGS STOCK INCOME (LOSS) INCOME
------- -------- ----- ------------- ------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $45,392,659 $34,556,343 $(2,145,085) $ 1,242,919
Net income for the nine months ended Sept. 30, -- 9,053,096 -- -- $ 9,053,096
Conversion of Class B common stock to Class A
Common stock -- (9,347) -- -- --
Purchase of treasury stock -- -- (110,971) -- --
4% stock dividend declared 4,867,469 (5,451,455) --
Cash dividends on common stock -- (5,833,483) -- -- --
Cash in lieu of fractional shares -- (3,245) -- -- --
Stock options exercised 603,779 -- -- -- --
Other comprehensive income (loss), net of
reclassifications and taxes -- -- -- (2,108,217) (2,108,217)
----------- ----------- ----------- ----------- -----------
Comprehensive income $ 6,944,879
===========
Balance, September 30, 1999 $50,863,907 $32,311,909 $(2,256,056) $ 865,298)
=========== =========== =========== ===========
</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)
NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
Cash flows from operating activities 2000 1999
---- ----
<S> <C> <C>
Net income $ 10,694,441 $ 9,053,096
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 186,022 310,509
Provision (recovery) of loan loss reserve (credit) 250,000 --
Accretion of investment securities discount (71,884) (176,356)
Amortization of investment securities premium 199,743 339,819
Amortization of deferred loan fees (132,305) (304,044)
Accretion of discount on loans purchased (1,952,203) (1,246,188)
(Benefit) provision for deferred income taxes (458,543) (1,244,237)
(Gain) loss on other real estate (53,407) (344,531)
(Gain) on sale of loans -- (27,879)
(Gain) on sale of investment securities -- --
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (850,932) (395,052)
(Increase) decrease in other assets 2,089,500 214,594
Increase (decrease) in accrued interest payable 2,794,861 823,407
Increase in unearned income on loans (34,972) 200,707
Increase (decrease) in other liabilities 1,860,662 2,329,482
------------ ------------
Net cash provided by operating activities 14,520,983 9,533,327
Cash flows from investing activities
Net (decrease) in interest bearing balances in banks -- --
Proceeds from calls/maturities of HTM investment securities 15,125,259 12,296,074
Proceeds from calls/maturities of AFS investment securities 1,650,000 --
Purchase of HTM investment securities -- (32,054,625)
Purchase of AFS investment securities (2,261,471) (26,350,883)
Purchase of loans (32,299,245) (20,576,158)
Net (increase) decrease in loans (18,767,789) 12,547,436
Purchase of premises and equipment (730,083) (686,862)
------------ ------------
Net cash (used in) provided by investing activities (37,283,329) (54,825,018)
Cash flows from financing activities:
Net (decrease) in non-interest bearing and
interest bearing demand deposits and savings accounts 29,443,233 183,459
Net increase (decrease) in certificates of deposit 37,647,709 56,994,419
Mortgage payments (45,972) (35,252)
Net (decrease) increase in short term borrowings -- --
Cash dividends (6,378,558) (5,833,483)
Cash in lieu of fractional shares -- (3,245)
Issuance of common stock under stock option plans 404,335 895,467
Purchase of treasury stock -- (110,972)
------------ ------------
Net cash provided by (used in) financing activities 61,070,747 52,090,393
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS 38,308,401 6,798,702
Cash and cash equivalents at beginning of year 17,725,462 19,242,654
------------ ------------
Cash and cash equivalents at end of period $ 56,033,863 $ 26,041,356
============ ============
</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 un-audited 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 un-audited condensed financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information. The financial information included
herein is un-audited; however, such information reflects all
adjustments (consisting solely of normal recurring adjustments) that
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 nine-month period ended September 30,
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. Basic and
diluted EPS are calculated as follows:
<TABLE>
<CAPTION>
Nine months ended September 30, 2000
------------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $10,694,458 10,123,081 $ 1.06
Effect of dilutive securities
Stock options 106,509
----------- ----------- -----------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $10,694,458 10,229,590 $ 1.05
=========== =========== ===========
</TABLE>
(continued)
8
<PAGE> 9
Per Share Information - continued
<TABLE>
<CAPTION>
Nine months ended September 30, 1999
------------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $9,053,096 9,972,521 $ 0.91
Effect of dilutive securities
Stock options 103,832
---------- ---------- ----------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $9,053,096 10,076,353 $ 0.90
========== ========== ==========
</TABLE>
EPS is calculated on the basis of the weighted average number of shares
outstanding of 10,123,081 and 9,972,521 for the nine months ended September 30,
2000 and 1999, respectively. Per share information and weighted average shares
outstanding have been restated to reflect the 5% stock dividend of January 2000.
<TABLE>
<CAPTION>
Three months ended Sept. 30, 2000
---------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $3,627,704 10,149,812 $ 0.36
Effect of dilutive securities
Stock options 127,137
---------- ---------- ----------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $3,627,704 10,276,949 $ 0.35
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Three months ended Sept. 30, 1999
---------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $3,493,553 10,004,494 $ 0.35
Effect of dilutive securities
Stock options 103,705
---------- ---------- ----------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $3,493,553 10,108,199 $ 0.35
========== ========== ==========
</TABLE>
EPS is calculated on the basis of the weighted average number of shares
outstanding of 10,149,812 and 10,004,494 for the three months ended September
30, 2000 and 1999, respectively. Per share information and weighted average
shares outstanding have been restated to reflect the 5% stock dividend of
January 2000.
9
<PAGE> 10
4. Investment Securities:
The carrying value and approximate market value of investment
securities at September 30, 2000 are as follows: AMORTIZED
<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 $5,651,227 $ -- $10,904 $5,640,323 $5,651,227
Corporate debt securities 52,037,579 267,090 570,798 51,733,871 52,037,579
------------------ --------------- -------------- ------------------- ------------------
$57,688,806 $267,090 $581,702 $57,374,194 $57,688,806
================== =============== ============== =================== ==================
AVAILABLE FOR SALE:
Federal Home Loan
Bank Stock - at cost $3,169,700 $ -- $ -- $3,169,700 $3,169,700
Preferred and common stock 1,950,980 8,035 186,906 1,772,109 1,772,109
Other securities 67,900,490 -- 2,084,749 65,815,741 65,815,741
------------------ --------------- -------------- ------------------- ------------------
$73,021,170 $8,035 $2,271,655 $70,757,550 $70,757,550
================== =============== ============== =================== ==================
</TABLE>
5. In June 1998, the Financial Accounting Standard 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 embedded in other
contracts, and for hedging activities. It requires that an entity
recognize all value. If certain conditions are met, a derivative may be
specifically designated as a hedge. The accounting for changes in the
fair value of derivatives (gains and losses) depends on the intended
use of the derivative and resulting designation. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June
15, 1999. Earlier applications are permitted only as of the beginning
of any fiscal quarter. On April 1, 2000 the Corporation adopted SFAS
No. 133. Concurrent with the adoption, the Corporation reclassified
$12,215,496 of investment securities from the held to maturity category
to the available for sale category and recorded $1,381,054 net of taxes
of unrealized holding losses in accumulated other comprehensive income.
6. Allowance for Credit Losses: Changes in the allowance for credit losses
were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT 30,
---------------------------
2000 1999
---- ----
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD, $12,023,798 $12,029,155
Loans charged-off -- --
Recoveries 188,768 427,777
----------- -----------
Net charge-offs and recoveries 188,768 427,777
Provision for loan losses -- --
----------- -----------
BALANCE AT END OF PERIOD $12,212,566 $12,456,932
=========== ===========
</TABLE>
Continued....
10
<PAGE> 11
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPT. 30,
--------------------------------
2000 1999
------------- ------------
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD, $ 11,737,337 $ 11,919,545
Loans charged-off (201,339) (270,798)
Recoveries 426,568 808,185
------------ ------------
Net charge-offs and recoveries 225,229 537,387
Provision for loan losses 250,000 --
------------ ------------
BALANCE AT END OF PERIOD $ 12,212,566 $ 12,456,932
============ ============
</TABLE>
7. Nonperforming loans
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $4,714,937 and $2,202,582 at September 30,
2000 and 1999, respectively. Although the Company has non-performing
loans of approximately $4,714,937 at September 30, 2000, management
believes it has adequate collateral to limit its credit risks.
The balance of impaired loans was $212,413 at September 30, 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 September 30, 2000. The income that was
recognized on impaired loans during the nine-month period ended
September 30, 2000 was $1,323. The cash collected on impaired loans
during the period was $14,275, of which $12,952 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 $6,041.
The Company's policy for interest income recognition on impaired loans
is to recognize income on currently performing restructured loans under
the accrual method. The Company recognizes income on non-accrual loans
under the cash basis when the principal payments on the loans become
current and the collateral on the loan is sufficient to cover the
outstanding obligation to the Company. If these factors do not exist,
the Company does not recognize income.
11
<PAGE> 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULT OF OPERATIONS
The following discussion and analysis is intended to assist in
understanding and evaluating the major changes in the financial condition and
earnings performance of the Company and its wholly owned subsidiaries for the
nine month period ended September 30, 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, business conditions in the banking industry; the
regulatory environment; rapidly changing technology and evolving banking
industry standards; competitive factors, including increased competition with
community, regional and national financial institutions; new service and product
offerings by competitors and price pressures and similar items.
FINANCIAL CONDITION
Total consolidated assets as of September 30, 2000 were $599.5 million,
an increase of $77.0 million from the $522.5 million reported at year-end,
December 31, 1999. This increase is primarily due to a $52 million increase in
loans, partially offset by a $14.1 million decrease in investment securities.
Total liabilities increased $71.7 million primarily due to an increase in
deposits in the first nine months of 2000.
Total loans increased $52.5 million from the $354.8 million level at
December 31, 1999 to $407.3 million at September 30, 2000. This $52 million
increase in total loans was partially due to a purchase of an $18.8 million loan
portfolio. 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 $33.2 million of the increase in loans is
attributable to internally generated loan growth in the first nine months of
2000. The year-to-date average balance of loans was $381.3 million at September
30, 2000.
The allowance for loan loss increased $.5 million to $12.2 million at
September 30, 2000 from $11.7 million at December 31, 1999. The level of
allowance for loan loss reserve represents approximately 3.0% of total loans at
September 30, 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
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<PAGE> 13
adjustments to the allowance will be sufficient to cover future loan losses or
that future adjustments to the allowance will not be necessary if economic
and/or other conditions differ substantially from the economic and other
conditions considered by management in evaluating the adequacy of the current
level of the allowance.
The $14.1 million decrease in total investment securities is primarily
attributable to scheduled maturities during the nine-month period of 2000.
Hold-to-maturity (HTM) investment securities decreased $25.4 million for this
period, while available-for-sale (AFS) investment securities increased $11.3
million.
Total deposits, the primary source of funds, increased $67.1 million to
$448.4 million at September 30, 2000, from $381.3 million at December 31, 1999.
This increase in deposits is primarily due to an increase in certificates of
deposits of $37.6 million, in addition to an $28.9 million increase in NOW and
money market deposits. The $37.3 million increase in certificates of deposits
was primarily due to a $23 million increase in brokered deposits in 2000. The
balance of brokered deposits was $130.6 million, representing approximately 29%
of total deposits at September 30, 2000. The $28.9 million increase in NOW and
money market deposits is primarily due to the introduction of the Royal Treasury
account in March 2000. This is a new money market deposit account that pays
interest based on the U.S. Treasury 91 day rate. This new deposit product has
been successful in attracting $38.5 million dollars in new deposits at September
30, 2000.
Consolidated stockholder's equity increased $5.2 million to $101.1
million at September 30, 2000 from $95.8 million at December 31, 1999. This
increase is primarily due to net income of $10.7 million, partially offset by
three quarterly cash dividends totaling $6.4 million. Additionally,
stockholder's equity was increased $.5 million due to an upward adjustment in
the market value of available-for-sale investment securities during the first
nine months of 2000. Employee stock options exercised in 2000 also increased
stockholders' equity by $.4 million.
RESULTS OF OPERATIONS
Results of operations depend primarily on net interest income, which is
the difference between interest income on interest earning assets and interest
expense on interest bearing liabilities. Interest earning assets consist
principally of loans and investment securities, while interest bearing
liabilities consist primarily of deposits. Net income is also effected by the
provision for loan losses and the level of non-interest income as well as by
non-interest expenses, including salary and employee benefits, occupancy
expenses and other operating expenses.
Consolidated net income for the three months ended, September 30, 2000
was $3,627,704 or $.36 basic earnings per share, as compared to net income of
$3,493,553 or $.35 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 2000, partially offset by one time
income of $694 thousand recorded in the third quarter of 1999. Consolidated net
income for the nine months ended, September 30, 2000 was $10,694,441 or $1.06
basic earnings per share, as compared to net income of $9,053,096 or $.91 basic
earnings per share for the same nine month
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<PAGE> 14
period in 1999. This increase is primarily due to an increase in interest income
relating to loans and the investment portfolio in 2000.
For the third quarter 2000, net interest income was $9.2 million as
compared to $7.3 million for the same quarter in 1999, an increase of $1.9
million or 25%. This increase is primarily due to an increase in the average
balance in loans in the third quarter period of 2000 versus the same period in
1999. The balance of average loans for the third quarter of 2000 was $407.7
million, as compared to $298.5 million for the same quarter in 1999. This $109.2
million increase in the average balance of loans represents a 36% increase.
Interest income on investment securities increased $.2 million, a 7% 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 $1.8 million to $5.8 million as compared to
$4.0 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 addition to an increase in interest expense on NOW and money
market deposits in the third quarter of 2000. This increase in the average
balance of certificates of deposits is primarily due to the increase in higher
costing brokered certificates of deposits in 2000. The increase in Now and money
market deposits is due to the introduction of a new deposit product in March
2000. For the comparative nine-month period, net interest income increased to
$5.5 million to $26.5 million as compared to $21 million for same nine-month
period in 1999. This 26% increase in net income is primarily due to an increase
in the average balance of loans in 2000 as compared to 1999. Average loans
increased $77.2 million, or 25% increase, for the nine-month period in 2000 to
$387.9 million from the $310.7 million level for the same nine-month period in
1999.
Provision for loan loss was $0 for the third quarter of 2000 and for
the same three-month period in 1999, respectively. Charge-offs and recoveries
were $0 and $189 thousand, respectively, for the three-month period ended
September 30, 2000 versus $0 and $428 thousand, respectively, for the same
three-month period in 1999. For the comparative nine-month period, provision for
loan loss was $250 thousand for the nine months ended, September 30, 2000 as
compared to $-0- for the same nine-month period in 1999. Charge-offs and
recoveries were $201 thousand and $427 thousand, respectively, for the nine
months ended September 30, 2000 as compared to $271 thousand and $808 thousand,
respectively, for the same nine-month period in 1999. Overall, Management
considers the current level of allowance for loan loss to be adequate at
September 30, 2000.
Total non-interest income for the three-month period ended September
30, 2000 was $324 thousand as compared to $1 million for the same three-month
period in 1999. The $.7 million thousand decrease in 2000 is primarily due to a
decrease in gains on sale of real estate, in addition to a one-time receipt of
$.5 million payment from the Commonwealth of Pennsylvania as refund of
Pennsylvania Shares tax in 1999. For the comparative nine-month period,
non-interest income was $958 thousand for the nine-months ended September 30,
2000 as compared to $1.7 million for the same nine-month period in 1999. This
decrease is again primarily due to a decrease in gains on sale of other real
estate and the Pennsylvania Shares tax refund discussed previously.
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<PAGE> 15
Total non-interest expense for the three months ended September 30,
2000 was $3.8 million, an increase of $.7 million, or 22%, as compared to $3.2
million for the same period in 1999. This increase in non-interest expense is
primarily due to a $.4 million increase in salaries, a $.2 million increase in
employee benefits, and a $.1 million increase in other operating expenses. For
the comparative nine-month period, non-interest expense was $10.9 million for
the nine-months ended September 30, 2000 as compared to $9.4 million for the
same nine-month period in 1999. This 17% increase is primarily due to a $1
million increase in employee benefits, the result of an increase in the
provision for stock appreciation rights of $.9 million recorded in 2000 due to a
corresponding increase in the price of the company's stock at September 30,
2000. Additionally, salary expense increased $.6 million, or 16%, primarily due
to increase in the new employee bonus program for 2000.
POST REPORTING PERIOD EVENTS
In 1994, the Company invested approximately $4,250,000 in Christ Church
Hospital d/b/a Kearsley ("Kearsley"), and was to receive $5,214,031 in
low-income housing tax credits. Kearsley is a 227 year-old assisted
living/nursing care facility located in Philadelphia, PA. Through December 31,
1999, the Company received $1,944,397 of these tax credits. During October 2000,
Kearsley notified the Company's management that they had undergone an
examination by the Pennsylvania Housing Finance Authority ("PHFA"). The PHFA is
charged by the Internal Revenue Service with the responsibility for reviewing
all low-income housing tax credit projects within the State of Pennsylvania to
insure that they comply with the Internal Revenue Code. The results of the
examination disclosed that Kearsley was not in compliance with Internal Revenue
code requirements. Accordingly, the Internal Revenue has notified Kearsley that
unless the project is brought back into compliance, the investment tax credits
for 2000 would not be available. Additionally, it could be determined by the
PHFA that all tax credits claimed in prior years would have to be recaptured.
The management of Kearsley is working closely with the PHFA to bring the project
back into compliance and is confident that it will be successful in bringing the
project into compliance prior to December 31, 2000.
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 30%
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
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<PAGE> 16
trust securities, US Treasuries and agencies, and to a lesser extent, federal
funds sold. The overall liquidity position is monitored on a monthly basis.
Interest rate sensitivity is a function of the repricing
characteristics of the Company's assets and liabilities. These include the
volume of assets and liabilities repricing, the timing of the repricing, and the
interest rate sensitivity gaps is a continual challenge in a changing rate
environment. The following table shows separately the interest sensitivity of
each category of interest earning assets and interest bearing liabilities as of
September 30, 2000:
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY DAYS
(IN MILLIONS) -------------------- 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 $ 0.4 $ -- $ -- $ -- $ -- $ 0.4
Federal funds sold 44.5 -- -- -- -- 44.5
Investment securities:
Available for sale 4.9 0.5 26.4 38.9 -- 70.7
Held to maturity 4.5 6.7 38.6 7.9 -- 57.7
------ ------ ------ ------ ------ ------
Total investment securities 9.4 7.2 65.0 46.8 -- 128.4
Loans: (2)
Fixed rate (3) 9.6 20.2 134.0 52.5 -- 216.3
Variable rate 178.4 8.9 3.6 6.0 -- 196.9
------ ------ ------ ------ ------ ------
Total loans 188.0 29.1 137.6 58.5 -- 413.2
Other assets (4) -- -- -- -- 13.0 13.0
------ ------ ------ ------ ------ ------
Total Assets $242.3 $ 36.3 $202.6 $105.3 $ 13.0 $599.5
====== ====== ====== ====== ====== ======
LIABILITIES & CAPITAL
Deposits:
Non interest bearing deposits $ -- $ -- $ -- $ -- $ 45.1 $ 45.1
Interest bearing deposits (5) 103.3 -- 21.8 -- -- 125.1
Certificate of deposits 21.2 63.8 193.1 -- -- 278.1
------ ------ ------ ------ ------ ------
Total deposits 124.5 63.8 214.9 45.1 448.3
Mortgage and long term borrowings -- -- 30.4 -- -- 30.4
Other liabilities -- -- -- -- 19.7 19.7
Capital -- -- -- -- 101.1 101.1
------ ------ ------ ------ ------ ------
Total liabilities & capital $124.5 $ 63.8 $245.3 $ -- $165.9 $599.5
====== ====== ====== ====== ====== ======
Net interest rate GAP $117.8 $(27.5) $(42.7) $105.3 ($152.9)
====== ====== ====== ====== ======
Cumulative interest rate GAP $117.8 $ 90.3 $ 47.6 $152.9 --
====== ====== ====== ====== ======
GAP to total assets 20% -5%
====== ======
GAP to total equity 118% -28%
====== ======
Cumulative GAP to total assets 20% 15%
====== ======
Cumulative GAP to total equity 118% 91%
====== ======
</TABLE>
(1) Interest earning assets are included in the period in which the balances are
expected to be repaid and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments, and contractual maturities.
(2) Reflects principal maturing within the specified periods for fixed and
variable rate loans and includes nonperforming loans.
(3) Fixed rate loans include a portion of variable rate loans whose floors are
in effect at September 30, 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.
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The Company's exposure to interest rate risk is mitigated somewhat by a
portion of the Company's loan portfolio consisting of floating rate loans, which
are tied to the prime lending rate but which have interest rate floors and no
interest rate ceilings. Although the Company is originating fixed rate loans, a
portion of the loan portfolio continues to be comprised of floating rate loans
with interest rate floors.
CAPITAL ADEQUACY
The company is required to maintain minimum amounts of capital to total
"risk weighted" assets and a minimum Tier 1 leverage ratio, as defined by the
banking regulators. At September 30, 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>
SEPT. 30, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
CAPITAL LEVELS
Tier 1 leverage ratio 17.3% 18.8%
Tier 1 risk-based ratio 19.4% 20.4%
Total risk-based ratio 20.6% 21.6%
CAPITAL PERFORMANCE
Return on average assets 2.5%(1) 2.6%
Return on average equity 14.5%(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.
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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
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SIGNATURES
Pursuant to the requirements of the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ROYAL BANCSHARES OF PENNSYLVANIA, INC.
(Registrant)
Dated: November 13th, 2000 /s/ James J. McSwiggan
---------------------------------------
James J. McSwiggan, CFO & Treasurer
Dated: November 13th, 2000 /s/ David J. Greenfield
---------------------------------------
David J. Greenfield, Controller & VP
19
