<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the quarterly period ended: JUNE 30, 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 identification No.)
incorporated or organization)
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 June 30, 2000
-------------------- ----------------------------
$2.00 PAR VALUE 8,117,070
Class B Common Stock Outstanding at June 30, 2000
-------------------- ----------------------------
$.10 PAR VALUE 1,754,539
<PAGE> 2
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS JUNE 30, 2000 DEC 31, 1999
------ ------------- ------------
<S> <C> <C>
Cash and due from bank $ 8,685,333 $ 17,525,462
Federal funds sold 10,200,000 200,000
------------- -------------
Total cash and cash equivalents 18,885,333 17,725,462
------------- -------------
Investment securities held to maturity (market value of $59,259,734 at
June 30, 2000 and $81,493,670 at December 31, 1999) 60,170,837 83,064,914
Investment securities available for sale - at market value 68,663,826 59,485,027
Total loans 419,933,422 354,818,236
Less allowance for loan losses 12,023,798 11,737,337
------------- -------------
Net loans 407,909,624 343,080,899
Premises and equipment, net 6,411,869 5,784,708
Accrued interest and other assets 14,135,400 13,395,037
------------- -------------
$ 576,176,889 $ 522,536,047
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 45,634,326 $ 45,541,164
Interest bearing (includes certificates of deposit in excess
Of $100,000 of $152,706,928 at June 30, 2000 and
$126,117,263 at December 31, 1999) 385,246,287 335,744,854
------------- -------------
Total deposits 430,880,613 381,286,018
Accrued interest and other liabilities 16,765,526 14,935,932
Long - term borrowings 30,000,000 30,000,000
Mortgage payable 455,648 479,579
------------- -------------
Total liabilities 478,101,787 426,701,529
------------- -------------
Stockholders' equity
Common stock
Class A, par value $2 per share; authorized, 18,000,000 shares; issued,
8,332,458 at June 30, 2000 and 7,879,349 at December 31, 1999 16,664,916 15,758,698
Class B, par value $.10 per share; authorized, 2,000,000 shares; issued,
1,754,539 at June 30, 2000 and 1,683,113 at December 31, 1999 175,454 168,311
Capital surplus 57,647,231 50,865,395
Retained earnings 28,764,904 33,329,374
Accumulated other comprehensive income or (loss) (2,912,196) (2,022,053)
------------- -------------
100,340,309 98,099,725
Treasury stock - at cost, shares of Class A, 215,388 at June 30, 2000,
and December 31, 1999 (2,265,207) (2,265,207)
------------- -------------
98,075,102 95,834,518
------------- -------------
$ 576,176,889 $ 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
JUNE 30,
------------------
2000 1999
---- ----
<S> <C> <C>
Interest income
Loans, including fees $11,717,863 $ 8,187,479
Investment securities held to maturity
Taxable 1,198,472 1,449,009
Tax-exempt -- 11,115
Investment securities available for sale
Taxable 1,619,943 989,596
Tax-exempt -- --
Deposits in banks 9,012 4,593
Federal funds sold 318,889 129,223
----------- -----------
TOTAL INTEREST INCOME 14,864,179 10,771,015
----------- -----------
Interest expense
Deposits 5,089,460 3,288,132
Mortgage payable and other 486,467 472,539
Federal funds purchased 17 --
----------- -----------
TOTAL INTEREST EXPENSE 5,575,944 3,760,671
----------- -----------
NET INTEREST INCOME 9,288,235 7,010,344
Increase in provision for loan losses -- --
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 9,288,235 7,010,344
----------- -----------
Other income (expense)
Service charges and fees 220,248 215,819
Realized gains on sale of investment securities available for
sale -- --
Gain on sale of other real estate -- 143,868
Gain on sale of loans -- 27,879
Other income 83,029 77,903
----------- -----------
303,277 465,469
----------- -----------
Other expenses
Salaries & wages 1,600,895 1,426,008
Employee benefits 984,217 266,683
Occupancy and equipment 100,075 122,944
Other operating expenses 1,291,211 1,374,861
----------- -----------
3,976,398 3,190,496
----------- -----------
INCOME BEFORE INCOME TAXES 5,615,114 4,285,317
Income taxes 1,874,744 1,449,111
----------- -----------
NET INCOME $ 3,740,370 $ 2,836,206
=========== ===========
Per share data
Net income - basic $ .37 $ .29
=========== ===========
Net income - diluted $ .37 $ .28
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
2000 1999
----------- -----------
<S> <C> <C>
Interest income
Loans, including fees $21,733,448 $16,225,206
Investment securities held to maturity
Taxable 2,634,336 2,611,514
Tax-exempt -- 22,230
Investment securities available for sale
Taxable 2,953,079 1,770,427
Tax-exempt -- --
Deposits in banks 9,912 11,346
Federal funds sold 460,593 210,570
----------- -----------
TOTAL INTEREST INCOME 27,791,368 20,851,293
----------- -----------
Interest expense
Deposits 9,491,659 6,197,833
Mortgage payable and other 961,467 945,915
Federal funds purchased 17,238 3,001
----------- -----------
TOTAL INTEREST EXPENSE 10,470,364 7,146,749
----------- -----------
NET INTEREST INCOME 17,321,004 13,704,544
Increase in provision for loan losses 250,000 --
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 17,071,004 13,704,544
----------- -----------
Other income (expense)
Service charges and fees 429,262 388,554
Realized gains on sale of investment securities available for
sale -- --
Gain on sale of other real estate 53,407 158,910
Gain on sale of loans -- 27,879
Other income 151,887 150,648
----------- -----------
634,556 725,991
----------- -----------
Other expenses
Salaries & wages 3,064,238 2,768,944
Employee benefits 1,351,508 560,132
Occupancy and equipment 283,973 317,895
Other operating expenses 2,458,472 2,607,765
----------- -----------
7,158,191 6,254,736
----------- -----------
INCOME BEFORE INCOME TAXES 10,547,369 8,175,799
Income taxes 3,480,632 2,616,256
----------- -----------
NET INCOME $ 7,066,737 $ 5,559,543
=========== ===========
Per share data
Net income - basic $ .70 $ .56
=========== ===========
Net income - diluted $ .69 $ .55
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 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 six months ended June 30, -- -- --
Conversion of Class B common stock to Class A
Common stock 14,733 29,466 (12,815) (1,282)
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 55,519 111,038 -- --
Other comprehensive income (loss), net
of Reclassifications and taxes -- -- -- --
----------- ----------- ----------- -----------
Comprehensive income
Balance, June 30, 2000 8,332,458 $16,664,916 1,754,539 $ 175,454
=========== =========== =========== ===========
<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 six -- 7,066,737 -- -- $ 7,066,737
months ended June 30,
Conversion of Class B
common stock to Class A
Common stock -- (28,185) -- -- --
Purchase of treasury stock -- -- -- --
5% stock dividend declared 6,581,786 (7,355,924)
Cash dividends on common stock -- (4,247,098) -- -- --
Cash in lieu of fractional shares -- -- -- -- --
Stock options exercised 200,050 -- -- -- --
Other comprehensive income
(loss), net of Reclassifications
and taxes -- -- -- (890,143) (890,143)
------------ ------------ ------------ ------------ ------------
Comprehensive income $ 6,176,594
============
Balance, June 30, 2000 $ 57,647,231 $ 28,764,904 $ (2,265,207) $ (2,912,196)
============= ============ ============ ==============
</TABLE>
The accompanying notes are an integral part of the financial statement.
5
<PAGE> 6
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 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 six months ended June 30, -- -- --
Conversion of Class B common stock to
Class A Common stock 1,096 2,192 (926) (93)
Purchase of treasury stock -- -- -- --
4% stock dividend declared 288,728 577,456 65,296 6,530
Cash dividends on common stock -- -- -- --
Cash in lieu of fractional shares -- -- -- --
Stock options exercised 13,363 26,726 -- --
Other comprehensive income (loss), net of
reclassifications and taxes -- -- -- --
----------- ----------- ----------- -----------
Comprehensive income
Balance, June 30, 1999 7,732,876 $15,465,752 1,694,914 $ 169,491
=========== =========== =========== ===========
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
six months ended June 30, -- 5,559,543 -- -- $ 5,559,543
Conversion of Class B common
stock to Class A Common stock -- (2,099) -- -- --
Purchase of treasury stock -- -- -- -- --
4% stock dividend declared 4,867,469 (5,451,455) --
Cash dividends on common stock -- (3,819,321) -- -- --
Cash in lieu of fractional shares -- (3,233) -- -- --
Stock options exercised 41,990 -- -- -- --
Other comprehensive income (loss),
net of reclassifications and taxes -- -- -- (1,603,881) (1,603,881)
-----------
Comprehensive income $ 3,955,662
------------- ------------ ------------ ------------- ===========
Balance, June 30, 1999 $ 50,302,118 $ 30,839,778 $ (2,145,085) $ (360,962)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE> 7
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
Cash flows from operating activities 2000 1999
---- ----
<S> <C> <C>
Net income $ 7,066,737 $ 5,559,543
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 124,015 161,958
Provision (recovery) of loan loss reserve (credit) 250,000 --
Accretion of investment securities discount (103,124) (176,356)
Amortization of investment securities premium 171,387 342,366
Amortization of deferred loan fees (99,281) (386,413)
Accretion of discount on loans purchased (1,112,959) (953,238)
(Benefit) provision for deferred income taxes (458,543) (826,242)
(Gain) loss on other real estate (53,407) (150,648)
(Gain) on sale of loans -- (27,879)
(Gain) on sale of investment securities -- --
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (97,490) 230,637
(Increase) decrease in other assets 772,654 438,784
Increase (decrease) in accrued interest payable 1,465,124 451,514
Increase in unearned income on loans 1,908 263,238
Increase (decrease) in other liabilities 364,470 279,965
------------ ------------
Net cash provided by operating activities 8,291,491 5,207,229
Cash flows from investing activities
Net (decrease) in interest bearing balances in banks -- --
Proceeds from calls/maturities of HTM investment securities 12,702,824 9,173,831
Proceeds from calls/maturities of AFS investment securities 1,650,000 --
Purchase of HTM investment securities -- (32,054,625)
Purchase of AFS investment securities (1,595,952) (25,735,494)
Purchase of loans (46,004,183) --
Net (increase) decrease in loans (18,767,789) 4,253,210
Purchase of premises and equipment (751,176) (616,013)
------------ ------------
Net cash (used in) provided by investing activities (52,766,276) (44,979,091)
Cash flows from financing activities:
Net (decrease) in non-interest bearing and
interest bearing demand deposits and savings accounts 12,291,802 3,656,270
Net increase (decrease) in certificates of deposit 37,302,793 36,682,578
Mortgage payments (23,931) (23,432)
Net (decrease) increase in short term borrowings -- --
Cash dividends (4,247,098) (3,819,321)
Cash in lieu of fractional shares -- (3,233)
Issuance of common stock under stock option plans 311,090 68,716
Purchase of treasury stock -- --
------------ ------------
Net cash provided by (used in) financing activities 45,634,656 36,561,578
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS 1,159,871 (3,210,284)
Cash and cash equivalents at beginning of year 17,725,462 19,242,654
------------ ------------
Cash and cash equivalents at end of period $ 18,885,333 $ 16,032,370
============ ============
</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 six-month period ended June 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>
Six months ended June 30, 2000
------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- ------------- -----------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $7,066,737 10,109,716 $ 0.70
Effect of dilutive securities
Stock options 94,199
---------- ---------- --------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $7,066,737 10,203,915 $ 0.69
=========== =========== ===========
</TABLE>
(continued)
8
<PAGE> 9
Per Share Information - continued
<TABLE>
<CAPTION>
Six months ended June 30, 1999
------------------------------
Income Average
shares Per share
(numerator) (denominator) amount
----------- ------------- -----------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $5,559,543 9,943,386 $0.56
Effect of dilutive securities
Stock options 102,775
----------- ------------- -----------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $5,559,543 10,046,161 $0.55
=========== ============= ===========
</TABLE>
EPS is calculated on the basis of the weighted average number of shares
outstanding of 10,109,716 and 9,943,386 for the six months ended June 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 June 30, 2000
--------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- ------------- -----------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $3,740,370 10,133,683 $0.37
Effect of dilutive securities
Stock options 109,879
----------- ------------- -----------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $3,740,370 10,243,562 $0.37
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Three months ended June 30, 1999
--------------------------------
Income Average shares Per share
(numerator) (denominator) amount
----------- ------------- -----------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $2,836,206 9,931,483 $0.29
Effect of dilutive securities
Stock options 103,701
----------- ------------- -----------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $2,836,206 10,035,184 $0.28
========== =========== ==========
</TABLE>
EPS is calculated on the basis of the weighted average number of shares
outstanding of 10,133,683 and 9,931,483 for the three months ended June 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 June 30, 2000 are as follows:
<TABLE>
<CAPTION>
AMORTIZED
OR GROSS GROSS APPROXIMATE
PURCHASED UNREALIZED UNREALIZED MARKET CARRYING
COST GAINS LOSSES VALUE VALUE
--------- ---------- ---------- ------------ -------------
HELD TO MATURITY:
<S> <C> <C> <C> <C> <C>
US agencies $ 6,143,201 $ -- $ -- $ 6,143,201 $ 6,143,201
Corporate debt securities 54,027,636 97,759 1,008,860 53,116,535 54,027,636
----------- ------- ----------- ----------- -----------
$60,170,837 $97,759 $ 1,008,860 $59,259,736 $60,170,837
=========== =========== =========== =========== ===========
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 10,031 352,844 1,608,168 1,608,168
Other securities 67,955,517 -- 4,069,559 63,885,958 63,885,958
----------- ------- ----------- ----------- -----------
$73,076,198 $10,031 $ 4,422,403 $68,663,826 $68,663,826
=========== ========= =========== =========== ===========
</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 JUNE 30,
---------------------------
2000 1999
---- ----
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD, $ 12,028,753 $ 11,998,724
Loans charged-off (201,339) (270,798)
Recoveries 196,384 301,229
------------ ------------
Net charge-offs and recoveries (4,955) 30,431
Provision for loan losses -- --
------------ ------------
BALANCE AT END OF PERIOD $ 12,023,798 $ 12,029,155
============ ============
</TABLE>
10
<PAGE> 11
Continued
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 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 237,800 380,408
------------ ------------
Net charge-offs and recoveries 36,461 109,610
Provision for loan losses 250,000 --
------------ ------------
BALANCE AT END OF PERIOD $ 12,023,798 $ 12,029,155
============ ============
</TABLE>
7. Nonperforming loans
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $1,893,742 and $3,064,792 at June 30, 2000
and 1999, respectively. Although the Company has non-performing loans
of approximately $1,893,742 at June 30, 2000, management believes it
has adequate collateral to limit its credit risks.
The balance of impaired loans was $225,364 at June 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 June 30, 2000. The income that was
recognized on impaired loans during the six-month period ended June 30,
2000 was $1,331. The cash collected on impaired loans during the period
was $9,791, of which $8,460 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 $5,725. 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
six month period ended June 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 June 30, 2000 were $576.2 million, an
increase of $53.7 million from the $522.5 million reported at year-end, December
31, 1999. This increase is primarily due to a $65.1 million increase in loans,
partially offset by a $13.7 million decrease in investment securities.
Liabilities increased $51.4 million primarily due to an increase in deposits in
the first six months of 2000.
Total loans increased $65.1 million from the $354.8 million level at
December 31, 1999 to $419.9 million at June 30, 2000. This $65.1 million
increase in total loans was partially due to a purchase of an $18.8 million loan
portfolio in June. 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 $46.3 million of the increase
in loans is attributable to internally generated loan growth in the first six
months of 2000. The year-to-date average balance of loans was $389.7 million at
June 30, 2000.
The allowance for loan loss increased $.3 million to $12.0 million at
June 30, 2000 from $11.7 million at December 31, 1999. The level of allowance
for loan loss reserve represents approximately 2.9% of total loans at June 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 $13.7 million decrease in total investment securities is primarily
attributable to scheduled maturities during the six-month period of 2000.
Total deposits, the primary source of funds, increased $49.6 million to
$430.9 million at June 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 $37.3 million, in addition to a $11.3 million increase in NOW and money
market deposits. The $37.3 million increase in certificates of deposits was
primarily due to a $23.6 million increase in brokered deposits in 2000. The
balance of brokered deposits was $131.2 million, representing approximately 30%
of total deposits at June 30, 2000.
Consolidated stockholder's equity increased $2.2 million to $98.1
million at June 30, 2000 from $95.8 million at December 31, 1999. This increase
is primarily due to net income of $7.1 million, partially offset by a quarterly
cash dividend of $4.2 million. Additionally, stockholder's equity was increased
$.9 million due to an downward adjustment in the market value of available-for-
sale investment securities during the first six months 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, June 30, 2000 was
$3,740,370 or $.37 basic earnings per share, as compared to net income of
$2,836,206 or $.29 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 second quarter of 2000.
Consolidated net income for the six months ended, June 30, 2000 was $7,066,737
or $.70 basic earnings per share, as compared to net income of $5,559,543 or
$.56 basic earnings per share for the same six month 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 second quarter 2000, net interest income was $9.3 million as
compared to $7.0 million for the same quarter in 1999, an increase of $2.3
million or 32%. This increase is primarily due to an increase in the average
balance in loans in the second quarter period of 2000 versus the same period in
1999. The balance of average loans for the second quarter of 2000 was $406.7
million, as compared to $310.7 million for the same quarter in 1999. This $96
million increase in
13
<PAGE> 14
the average balance of loans represents a 31% increase. Interest income on
investment securities increased $.4 million, a 15% 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 $5.6 million as compared to $3.8 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 the second 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. For the comparative six-month period,
net interest income, net interest income increased $3.6 million to $17.3 million
for the six months ended June 30, 2000 as compared to $13.7 million for same
six-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 $78.4 million, or 25% increase, for the six-month period in 2000
to $389.7 million from the $311.3 million level for the same six-month period in
1999.
Provision for loan loss was $0 for the second quarter of 2000 and for
the same three-month period in 1999, respectively. Charge-offs and recoveries
were $200 thousand and $196 thousand, respectively, for the three-month period
ended June 30, 2000 versus $271 and $301 thousand, respectively, for the same
three-month period in 1999. For the comparative six-month period, provision for
loan loss was $250 thousand for the six months ended, June 30, 2000 as compared
to $-0- for the same six-month period in 1999. Charge-offs and recoveries were
$201 thousand and $238 thousand, respectively, for the six months ended June 30,
2000 as compared to $271 thousand and $380 thousand respectively for the same
six-month period in 1999. Overall, Management considers the current level of
allowance for loan loss to be adequate at June 30, 2000.
Total non-interest income for the three-month period ended June 30,
2000 was $303 thousand as compared to $465 thousand for the same three-month
period in 1999. The $162 thousand decrease in 2000 is primarily due to a
decrease in gains on sale of real estate. For the comparative six-month period,
non-interest income was $635 thousand for the six-months ended June 30, 2000 as
compared to $726 thousand for the same six-month period in 1999. This decrease
is again primarily due to a decrease in gains on sale of other real estate.
Total non-interest expense for the three months ended June 30, 2000 was
$4 million, an increase of $.8 million, or 24%, as compared to $3.2 million for
the same period in 1999. This increase in non-interest expense is primarily due
to a $.7 million increase in employee benefits, the result of a $.6 million
increase in the reserve for stock appreciation rights recorded in the second
quarter of 2000. For the comparative six-month period, non-interest expense was
$7.2 million for the six-months ended June 30, 2000 as compared to $6.3 million
for the same six-month period in 1999. This 14% increase is primarily due to in
$.8 million increase in employee benefits, the result of an increase in the
provision for stock appreciation rights of $.6 million recorded in 2000.
CAPITAL ADEQUACY
The company is required to maintain minimum amounts of capital to total
"risk weighted" assets and a minimum Tier 1 leverage ratio, as defined by the
banking regulators. At June 30, 2000,
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<PAGE> 15
the Company was required to have a minimum Tier 1 and total capital ratios of 4%
and 8%, respectively, and a minimum Tier 1 leverage ratio of 3% plus an
additional cushion of 100 to 200 basis points.
The table below provides a comparison of Royal Bancshares of
Pennsylvania's risk-based capital ratios and leverage ratios:
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
CAPITAL LEVELS
<S> <C> <C>
Tier 1 leverage ratio 17.5% 18.8%
Tier 1 risk-based ratio 18.8% 20.4%
Total risk-based ratio 20.0% 21.6%
CAPITAL PERFORMANCE
Return on average assets 2.6%(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.
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 32%
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, federal funds sold. The overall liquidity
position is monitored on a monthly basis.
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<PAGE> 16
Interest rate sensitivity is a function of the repricing
characteristics of the Company's assets and liabilities. These include the
volume of assets and liabilities repricing, the timing of the repricing, and the
interest rate sensitivity gaps is a continual challenge in a changing rate
environment. The following table shows separately the interest sensitivity of
each category of interest earning assets and interest bearing liabilities as of
June 30, 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 $ 0.8 $ -- $ -- $ -- $-- $ 0.8
Federal funds sold 10.2 -- -- -- 10.2
Investment securities:
Available for sale 4.8 0.5 24.7 38.7 -- 68.7
Held to maturity 2.0 15.1 35.1 8.0 -- 60.2
----------------------------------------------------------------------------
Total investment securities 6.8 15.6 59.8 46.7 -- 128.9
Loans: (2)
Fixed rate (3) 14.5 29.9 136.9 48.2 -- 229.5
Variable rate 177.6 9.9 3.3 6.6 -- 197.4
----------------------------------------------------------------------------
Total loans 192.1 39.8 140.2 54.8 -- 426.9
Other assets (4) -- -- -- -- 9.4 9.4
=============================================================================
Total Assets $209.9 $ 55.4 $200.0 $101.5 $ 9.4 $576.2
=============================================================================
LIABILITIES & CAPITAL
Deposits:
Non interest bearing deposits $ -- $ -- $ -- $-- $ 46.2 $ 46.2
Interest bearing deposits (5) 71.4 -- 35.4 -- -- 106.8
Certificate of deposits 16.3 68.8 192.8 -- -- 277.9
----------------------------------------------------------------------------
Total deposits 87.7 68.8 228.2 -- 46.2 430.9
Mortgage and long term borrowings -- -- 30.5 -- -- 30.5
Other liabilities -- -- -- -- 16.7 16.7
Capital -- -- -- -- 98.1 98.1
----------------------------------------------------------------------------
Total liabilities & capital $ 87.7 $ 68.8 $258.7 $ -- $161.0 $576.2
============================================================================
Net interest rate GAP $122.2 $(13.4) $(58.7) $101.5 ($151.6)
================================================================
Cumulative interest rate GAP $122.2 $108.8 $ 50.1 $151.6 --
================================================================
GAP to total assets 21% -2%
=====================
GAP to total equity 125% -14%
=====================
Cumulative GAP to total assets 21% 19%
=====================
Cumulative GAP to total equity 125% 111%
=====================
</TABLE>
(1) Interest earning assets are included in the period in which the
balances are expected to be repaid and/or repriced as a result of
anticipated prepayments, scheduled rate adjustments, and contractual
maturities.
(2) Reflects principal maturing within the specified periods for fixed and
variable rate loans and includes nonperforming loans.
(3) Fixed rate loans include a portion of variable rate loans whose floors
are in effect at June 30, 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.
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<PAGE> 17
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
On Wednesday May 24, 2000, the Annual Meeting of Shareholders of Royal
Bancshares of Pennsylvania was convened in Philadelphia, PA at 6:30 PM. The
following nominees were elected as Class III Directors of the Registrant to
serve for a three-year term:
<TABLE>
<CAPTION>
For Withhold Authority
------------------ ------------------
<S> <C> <C>
Daniel M. Tabas 21,066,741 116,708
Joseph P. Campbell 21,066,854 116,595
Howard Wurzak 21,136,347 47,102
Murray Stempel III 21,136,347 47,102
James J. McSwiggan, Jr 21,136,347 47,102
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27. Financial Data Schedule
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<PAGE> 18
SIGNATURES
Pursuant to the requirements of the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ROYAL BANCSHARES OF PENNSYLVANIA, INC.
(Registrant)
Dated: August 14th, 2000 /s/ James J. McSwiggan
-------------------------------------------
James J. McSwiggan, CFO & Treasurer
Dated: August 14th, 2000 /s/ David J. Greenfield
--------------------------------------------
David J. Greenfield, Controller & VP
18
