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, 2006
--------------
[ ] 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
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ROYAL BANCSHARES OF PENNSYLVANIA, INC.
--------------------------------------------------------
(Exact name of the registrant 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 registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non- accelerated filer. See definitions of large
accelerated filer and accelerated filer in Rule 12-b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Applicable only to corporate issuers:
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 April 30, 2006
-------------------- -----------------------------
$2.00 PAR VALUE 10,700,720
Class B Common Stock Outstanding at April 30, 2006
-------------------- -----------------------------
$.10 PAR VALUE 1,992,129
PART I-FINANICAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
(UNAUDITED)
ASSETS MAR 31, 2006 DEC 31, 2005
------------ ------------
Cash and due from banks $ 19,279 $ 17,095
Federal funds sold 1,000 13,800
---------- ----------
Total cash and cash equivalents 20,279 30,895
Investment securities held to maturity (HTM) (fair value of $250,650 at
March 31, 2006 and $253,198 at December 31, 2005) 255,456 255,467
Investment securities available for sale (AFS) - at fair value 306,441 326,189
FHLB Stock, at cost 16,062 17,073
Loans held for sale 1,291 803
Loans 593,625 549,636
Less allowance for loan losses 10,550 10,276
---------- ----------
Net loans 583,075 539,360
Premises and equipment, net 66,918 66,582
Accrued interest and other assets 67,251 64,650
---------- ----------
Total assets $1,316,773 $1,301,019
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 67,151 $ 75,754
Interest bearing (includes certificates of deposit in excess
of $100 of $222,295 at March 31, 2006 and
$203,611 at December 31, 2005) 651,739 621,655
---------- ----------
Total deposits 718,890 697,409
Accrued interest payable 7,367 6,606
Borrowings 422,189 427,130
Other liabilities 10,356 11,879
---------- ----------
Total liabilities 1,158,802 1,143,024
MINORITY INTEREST 2,150 2,487
Stockholders' equity
Common stock
Class A, par value $2 per share; authorized, 18,000,000 shares; issued,
10,700,689 at March 31, 2006 and 10,699,592 at December 31, 2005 21,401 21,400
Class B, par value $.10 per share; authorized, 2,000,000 shares; issued,
1,992,156 at March 31, 2006 and 1,992,957 at December 31, 2005 199 199
Undistributed Class B shares 2 2
Additional paid in capital 104,285 104,285
Retained earnings 34,649 32,827
Accumulated other comprehensive loss (2,450) (940)
---------- ----------
158,086 157,773
Treasury stock - at cost, shares of Class A, 215,388 at March 31, 2006,
and December 31, 2005. (2,265) (2,265)
---------- ----------
Total stockholders' equity 155,821 155,508
---------- ----------
Total liabilities and stockholders' equity $1,316,773 $1,301,019
========== ==========
The accompanying notes are an integral part of these statements.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------
(in thousands, except per share data) 2006 2005
-------- -------
Interest income
Loans, including fees $ 14,096 $10,126
Investment securities held to maturity 2,856 2,248
Investment securities available for sale 4,429 4,789
Deposits in banks 12 23
Federal funds sold 20 18
-------- -------
TOTAL INTEREST INCOME 21,413 17,204
-------- -------
Interest expense
Deposits 5,464 4,010
Borrowings 4,615 3,356
-------- -------
TOTAL INTEREST EXPENSE 10,079 7,366
-------- -------
NET INTEREST INCOME 11,334 9,838
Provision for loan losses 335 1
-------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,999 9,837
-------- -------
Other income
Service charges and fees 354 293
Net gains on sales of investment securities 83 250
Income related to equity investments 778 1,443
Gains on sales of other real estate 1,493 289
Gains on sales of loans 43 125
Other income 247 213
-------- -------
2,998 2,613
-------- -------
Other expenses
Salaries and wages 2,445 2,314
Employee benefits 813 576
Occupancy and equipment 404 409
Expenses related to equity investments 276 1,064
Other operating expenses 2,248 1,997
-------- -------
6,186 6,360
-------- -------
INCOME BEFORE INCOME TAXES 7,811 6,090
Income taxes 2,465 1,769
-------- -------
NET INCOME 5,346 $ 4,321
======== =======
Per share data
Net income - basic $ 0.42 $ 0.34
======== =======
Net income - diluted $ 0.41 $ 0.34
======== =======
Cash dividends- Class A shares $ 0.275 $ 0.25
======== =======
Cash dividends- Class B shares $0.31625 $0.2875
======== =======
The accompanying notes are an integral part of these statements.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2006
(UNAUDITED)
(in thousands, except per share data) Class A common stock Class B common stock Un- Additional
-------------------- -------------------- Distributed Paid in Retained
Shares Amount Shares Amount B-shares Capital earnings
-------- -------- -------- -------- ----------- ---------- --------
Balance, January 1, 2006 10,700 $ 21,400 1,993 $ 199 $ 2 $ 104,285 32,827
Net income - - - - - - 5,346
Conversion of Class B common stock
to Class A common stock 1 1 (1) - - - (1)
Cash in lieu of fractional shares - - - - - - (12)
Cash dividends on common stock
(Class A $0.275, Class B $0.31625) - - - - - - (3,511)
Other comprehensive loss, net of
reclassifications and tax
benefit of $529 - - - - - - -
------ -------- ----- ------ ----- --------- --------
Comprehensive income
Balance, March 31, 2006 10,701 $ 21,401 1,992 $ 199 $ 2 $ 104,285 $ 34,649
====== ======== ===== ====== ===== ========= ========
Accumulated
other
comprehensive Treasury Comprehensive
income (loss) stock income
------------- -------- -------------
Balance, January 1, 2006 $ (940) $ (2,265)
Net income - - $ 5,346
Conversion of Class B common stock
to Class A common stock - - -
Cash in lieu of fractional shares - - -
Cash dividends on common stock
(Class A $0.275, Class B $0.31625) - - -
Other comprehensive loss, net of
reclassifications and tax
benefit of $529 (1,510) - (1,510)
-------- -------- -------
Comprehensive income $ 3,836
=======
Balance, March 31, 2006 $ (2,450) $ (2,265)
======== ========
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
THREE MONTHS ENDED MARCH 31, 2005
(UNAUDITED)
CLASS A COMMON STOCK CLASS B COMMON STOCK ADDITIONAL
----------------------- ---------------------- PAID IN RETAINED
(in thousands, except per share data) SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
-------- -------- -------- -------- ---------- --------
Balance, January 1, 2005 10,277 $20,553 1,939 $194 $92,037 $26,558
Net income - - - - - 4,321
Conversion of Class B common stock to
Class A Common stock - - - - - -
Purchase of treasury stock - - - - - -
2% stock dividend declared 201 402 39 4 6,640 (7,046)
Cash dividends on common stock - - - - -
(per share: Class A $0.25 and Class B
$0.2875) (3,135)
Cash in lieu of fractional shares - - - - - (12)
Stock options exercised 7 14 - - 64 -
Other comprehensive loss, net of
reclassification adjustment and tax
benefit of $1,045 - - - - - -
------ ------- ------ ---- ------- -------
Comprehensive income
Balance, March 31, 2005 10,485 $20,969 1,978 $198 $98,741 $20,686
====== ======= ====== ==== ======= =======
ACCUMULATED
OTHER
TREASURY COMPREHENSIVE COMPREHENSIVE
STOCK INCOME (LOSS) INCOME
-------- ------------- -------------
Balance, January 1, 2005 $(2,265) $3,799
Net income - - $4,321
Conversion of Class B common stock to
Class A Common stock - - -
Purchase of treasury stock - - -
2% stock dividend declared - - -
Cash dividends on common stock - - -
(per share: Class A $0.25 and Class B
$0.2875)
Cash in lieu of fractional shares - - -
Stock options exercised - - -
Other comprehensive loss, net of
reclassification adjustment and tax
benefit of $1,045 - (2,987) (2,987)
------- ------ ------
Comprehensive income $1,334
======
Balance, March 31, 2005 $(2,265) $ 812
======= ======
The accompanying notes are an integral part of the financial statement
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
(in thousands)
Cash flows from operating activities 2006 2005
--------- ---------
Net income $5,346 $4,321
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 291 587
Stock compensation expense 178 --
Provision for loan losses 335 1
Net accretion of discounts and premiums
on loans, mortgage-backed securities and investments 1,494 1,788
Provision for deferred income taxes (1,998) (1,007)
Gains on sales of other real estate (1,493) (289)
Gains on sales of loans (43) (125)
Net gains on sales of investment securities (83) (250)
Changes in assets and liabilities:
Increase in accrued interest receivable (1,007) (1,056)
(Increase) decrease in other assets (408) 1,709
Increase (decrease) in accrued interest payable 761 (18)
(Decrease) increase in other liabilities (2,160) 1,323
--------- ---------
Net cash provided by operating activities 1,213 6,984
Cash flows from investing activities
Proceeds from calls/maturities of HTM investment securities -- 32,750
Proceeds from calls/maturities of AFS investment securities 13,951 3,970
Proceeds from sales of AFS investment securities 1,595 6,345
Purchase of AFS investment securities (185) (5,137)
Purchase of HTM investment securities -- (40,025)
Redemption (Purchase) of FHLB Stock 1,011 (4,825)
Net increase in loans (40,570) (23,018)
(Purchase) of premises and equipment (77) 933
(Purchase) sales of premises and equipment relating to VIE (550) --
--------- ---------
Net cash used in investing activities (24,825) (29,007)
Cash flows from financing activities:
Net decrease in non-interest bearing and
interest bearing demand deposits and savings accounts (5,417) (77,263)
Net increase in certificates of deposit 26,898 5,655
Mortgage payments (21) (15)
Net (decrease)increase in FHLB borrowings (5,000) 96,500
Obligations through equity investments 59 1,292
Cash dividends (3,511) (3,135)
Cash in lieu of fractional shares (12) (12)
Issuance of common stock under stock option plans -- 64
--------- ---------
Net cash provided by financing activities 12,996 23,086
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (10,616) 1,063
Cash and cash equivalents at beginning of period 30,895 27,109
--------- ---------
Cash and cash equivalents at end of period $ 20,279 $ 28,172
========= =========
The accompanying notes are an integral part of these statements.
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 ("Company") and its
wholly-owned subsidiaries, Royal Investments of Delaware, Inc. and Royal Bank
America ("Royal Bank"), including Royal Bank's subsidiaries, Royal Real Estate
of Pennsylvania, Inc., Royal Investments America, LLC, and their two 60%
ownership interests in Crusader Servicing Corporation and Royal Bank America
Leasing, LP. The two Delaware trusts, Royal Bancshares Capital Trust I and Royal
Bancshares Capital Trust II are not consolidated per requirements under FIN
46(R). 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 accounting principles generally accepted in
the United States of America (US GAAP) for interim financial
information. The financial information included herein is unaudited;
however, such information reflects all adjustments (consisting solely
of normal recurring adjustments) that are, in the opinion of
management, necessary to present a fair statement of the results for
the interim periods. These interim financial statements should be read
in conjunction with the consolidated financial statements and footnotes
thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2005. The results of operations for the three-month period
ended March 31, 2006, are not necessarily indicative of the results to
be expected for the full year.
The accounting and reporting policies of the Company conform with
accounting principles generally accepted in the United States of
America and general practices within the financial services industry.
Applications of the principles in the Company's preparation of the
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and the accompanying notes. These estimates and
assumptions are based on information available as of the date of the
financial statements; therefore, actual results could differ from those
estimates.
2. Segment Information
The Company's Community Banking segment consists of commercial and
retail banking. The Community Banking business segment is managed as a
single strategic unit which generates revenue from a variety of
products and services provided by Royal Bank. For example, commercial
lending is dependent upon the ability of Royal Bank to fund itself with
retail deposits and other borrowings and to manage interest rate and
credit risk. This situation is also similar for consumer and
residential mortgage lending.
The Company' Tax Lien Operation does not meet the quantitative
thresholds for requiring disclosure, but has different characteristics
than the community banking operation. The Company' Tax Lien Operation
consists of purchasing delinquent tax certificates from local
municipalities at auction. The tax lien segment is managed as a single
strategic unit which generates revenue from a nominal interest rate
achieved at the individual auctions along with periodic penalties
imposed.
As of March 31, 2006, the Company is reporting on a consolidated basis
its interest in one Equity Investment as a Variable Interest Entity
("VIE") which has different characteristics than the community banking
segment. Royal Bancshares has an equity investment in an apartment
complex that is being converted into condominiums.
As of March 31, 2005, the Company reported on a consolidated basis its
interest in four equity investments as "VIE's" which have different
characteristics than the community banking segment. Royal Bancshares
has investments in two apartment complexes and two buildings leased as
commercial office space.
Royal Bancshares' investments in VIE's is further discussed in Note 9.
The following table presents selected financial information for
reportable business segments for the three month periods ended March
31, 2006 and 2005.
THREE MONTHS ENDED MARCH 31, 2006
---------------------------------
(in thousands) COMMUNITY TAX LIEN EQUITY
BANKING OPERATION INVESTMENTS CONSOLIDATED
--------- --------- ----------- ------------
Total assets $1,208,287 $48,062 $66,424 $1,316,773
========== ======= ======= ==========
Total deposits 718,890 -- -- 718,890
========== ======= ======= ==========
Net interest income $ 11,565 $ 380 ($ 611) $ 11,334
Provision for loan losses 333 2 -- 335
Other income 1,638 582 778 2,998
Other expense 5,435 475 276 6,186
Income tax expense 2,370 95 -- 2,465
---------- ------- ------- ----------
Net income $ 5,065 $ 390 ($ 109) $ 5,346
========== ======= ======= ==========
THREE MONTHS ENDED MARCH 31, 2005
---------------------------------
(in thousands) COMMUNITY TAX LIEN EQUITY
BANKING OPERATION INVESTMENTS CONSOLIDATED
--------- --------- ----------- ------------
Total assets $1,117,768 $46,400 $66,858 $1,231,026
========== ======= ======= ==========
Total deposits 670,772 -- 670,772
========== ======= ======= ==========
Net interest income $ 9,718 $ 674 ($ 554) $ 9,838
Provision for loan losses -- 1 -- 1
Other income 1,079 91 1,443 2,613
Other expense 4,632 512 1,064 6,360
Income tax expense 1,720 49 -- 1,769
---------- ------- ------- ----------
Net income $ 4,445 $ 203 ($ 175) $ 4,321
========== ======= ======= ==========
Interest paid to the Community Banking segment by the Tax Lien
Operation was approximately $837 thousand and $617 thousand for the
three-month periods ended March 31, 2006, and 2005, respectively.
Equity Investments, interest paid to Community Banking segment from
mezzanine financing was approximately $230 thousand and $0 thousand for
the three-month periods ended March 31, 2006 and 2005, respectively.
3. Per Share Information
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share". The Company has two
classes of common stock currently outstanding. The classes are A and B,
of which a share of Class B is convertible into 1.15 shares of Class A.
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. On
December 22, 2005, the Company declared a 2% stock dividend payable on
January 17, 2006. All share and per share information has been restated
to reflect this dividend. Basic and diluted EPS are calculated as
follows (in thousands, except per share data):
THREE MONTHS ENDED MARCH 31, 2006
Income Average shares Per share
(numerator) (denominator) Amount
----------- -------------- ---------
Basic EPS
Income available to common shareholders $5,346 12,799 $0.42
Effect of dilutive securities
Stock options 103 --
------ ------ -----
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $5,346 12,902 $0.41
====== ====== =====
THREE MONTHS ENDED MARCH 31, 2005
Income Average shares Per share
(numerator) (denominator) Amount
----------- -------------- ---------
Basic EPS
Income available to common shareholders $4,321 12,792 $0.34
Effect of dilutive securities
Stock options 93 --
------ ------ -----
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $4,321 12,885 $0.34
====== ====== =====
No options were anti dilutive for the periods ended March 31, 2006 and
March 31, 2005.
Note: The stock dividend resulted in the issuance of 205,120 additional
shares of Class A common stock and 19,426 additional shares of Class B
common stock. There was 20,117 Class B shares deferred (agreed to by
the Tabas Family Trust) until the Annual Shareholders meeting to be
held on May 17, 2006, where the Company will request the shareholders
to approve amending Royal Bancshares' Articles of Incorporation to
increased the number of Class B shares authorized.
4. Investment Securities:
The carrying value and approximate market value of investment
securities at March 31, 2006 are as follows:
AMORTIZED GROSS GROSS APPROXIMATE
PURCHASED UNREALIZED UNREALIZED FAIR CARRYING
(in thousands) COST GAINS LOSSES VALUE VALUE
--------- ---------- ---------- ----------- --------
HELD TO MATURITY:
Mortgage Backed $ 156 $ -- $ -- $ 156 $156
US Agencies 195,000 -- (4,931) 190,069 195,000
Other Securities 60,300 125 -- 60,425 60,300
-------- ------ ------ -------- --------
$255,456 $ 125 ($4,931) $250,650 $255,456
======== ====== ====== ======== ========
AVAILABLE FOR SALE:
Mortgage Backed $31,504 $ 1 ($1,095) $ 30,410 $ 30,410
CMO's 22,647 10 (354) 22,303 22,303
US Agencies 104,979 -- (4,660) 100,319 100,319
Other securities 151,080 3,888 (1,559) 153,409 153,409
-------- ------ ------ -------- --------
$310,210 $3,899 ($7,668) $306,441 $306,441
======== ====== ====== ======== ========
5. Allowance for Loan Losses:
Changes in the allowance for loan losses were as follows:
THREE MONTHS ENDED MARCH 31,
2006 2005
---- ----
(in thousands)
Balance at beginning period $10,276 $12,519
Charge-offs
Single family residential (122) (30)
Non-residential -- --
Tax certificates (2) (1)
Commercial and Industrial -- --
Other loans -- (2)
------- -------
Total charge-offs (124) (33)
Recoveries
Single family residential 55 3
Non-residential 3 --
Tax certificates -- --
Commercial and Industrial -- 4
Other loans 5 1
------- -------
Total recoveries 63 8
Provision for loan losses 335 1
------- -------
Balance at the end of period $10,550 $12,495
======= =======
6. Pension Plan
The Company has a noncontributory nonqualified defined benefit pension
plan covering certain eligible employees. The Company's sponsored
pension plan provides retirement benefits under pension trust
agreements and under contracts with insurance companies. The benefits
are based on years of service and the employee's compensation during
the highest three consecutive years during the last 10 years of
employment. The Company's policy is to fund pension costs allowable for
income tax purposes.
Net periodic defined benefit pension expense for the three months ended
March 31, 2006 and 2005 included the following components:
Three months ended
March 31,
------------------
(in thousands) 2006 2005
---- ----
Service cost $ 93 $206
Interest cost 85 65
---- ----
Net periodic benefit cost $178 $271
==== ====
The total accumulated benefit obligation under the plan including
adjustments is estimated to be $6.6 million at December 31, 2006.
7. Stock-based Compensation
Prior to January 1, 2006, the Company accounted for stock-based
compensation expense using the intrinsic value method as required by
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and as permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation." No compensation expense for stock options
was reflected in net income for the quarter ended March 31, 2005, as
all options granted had an exercise price equal to the market price of
the underlying common stock at the date of grant.
On January 1, 2006, the Company adopted SFAS No. 123(R) (revised
version of SFAS No.123) which requires measurement of the compensation
cost for stock-based awards based on the grant date fair value and
recognition of compensation cost over the service period of stock based
awards. The fair value of stock options is determined using a
Black-Scholes valuation model, which is consistent with the Company's
valuation methodology previously utilized for options in the footnote
disclosures required under SFAS No.123. The Company has adopted SFAS
No. 123(R) using the modified prospective method, which provides for no
restatement of prior periods and no cumulative adjustment to equity
accounts. It also provides for expense recognition, for both new and
existing stock based awards.
The adoption of SFAS No. 123(R) had the following impact on reported
amounts compared with what would have been reported using the intrinsic
value under previous accounting.
THREE MONTHS ENDED MARCH 31, 2006
(In thousands, except for per share data) USING PREVIOUS SFAS 123(R) AS
ACCOUNTING ADJUSTMENT REPORTED
---------- ---------- --------
Income before income taxes $7,989 ($178) $7,811
Income taxes $2,527 ($62) $2,465
------ ------ ------
Net Income $5,462 ($116) $5,346
====== ====== ======
Basic earnings per share $0.43 ($0.01) $0.42
====== ====== ======
Diluted earnings per share $0.42 ($0.01) $0.41
====== ====== ======
The following table illustrates the effect on net income and earnings
per share if expense had been measured using the fair value recognition
provisions of SFAS No. 123(R).
THREE MONTHS ENDED MARCH 31, 2005
(In thousands, except for per share data) AS SFAS 123(R)
REPORTED ADJUSTMENT PROFORMA
-------- ---------- --------
Income before income taxes $6,090 ($189) $5,901
Income taxes $1,769 ($66) $1,703
------ ------ ------
Net Income $4,321 ($123) $4,198
====== ====== ======
Basic earnings per share $0.34 ($0.01) $0.33
====== ====== ======
Diluted earnings per share $0.33 -- $0.33
====== ====== ======
Outside Directors' Stock option Plan.
Royal Bancshares adopted a non-qualified outside Directors' Stock
Option Plan (the Director's Plan). Under the terms of the Director's
Plan, 250,000 shares of Class A stock are authorized for grants. Each
director is entitled to a grant of an option to purchase 1,500 shares
of stock annually, which are exercisable one year after the grant date.
The options were granted at the fair market value at the date of the
grant.
The following table presents the activity related to Outside Directors
Stock Option Plan for the three months ended March 31, 2006.
Weighted Weighted
Average Average
Exercise Remaining
Options Price Term (yrs)
Options outstanding at December 31, 2005 91,068 $18.53
Granted --
Exercised --
Forfeited --
Options outstanding at March 31, 2006 91,068 $18.53 6.6
Options exercisable at March 31, 2006 74,238 $17.53 6.0
Employee Stock Option Plan and Appreciation Right Plan
Royal Bancshares adopted a Stock Option and Appreciation Right Plan
(the Plan). The Plan is an incentive program under which Company
officers and other key employees may be awarded additional compensation
in the form of options to purchase up to 1,650,000 shares of Royal
Bancshares' Class A common stock (but not in excess of 15% of
outstanding shares). At the time a stock option is granted, a stock
appreciation right for an identical number of shares may also be
granted. The option price is equal to the fair market value at the date
of the grant. The options are exercisable at 20% per year beginning one
year after the date of grant and must be exercised within ten years of
the grant.
The following table presents the activity related to Employee Stock
Option Plan for the three months ended March 31, 2006.
Weighted Weighted
Average Average
Exercise Remaining
Options Price Term (yrs)
Options outstanding at December 31, 2005 737,170 $19.61
Granted --
Exercised 176 $12.64
Forfeited --
Options outstanding at March 31, 2006 736,994 $19.61 7.1
Options exercisable at March 31, 2006 292,176 $16.11 8.1
8. Interest Rate Swaps
For asset/liability management purposes, The Company uses interest rate
swap agreements to hedge various exposures or to modify interest rate
characteristics of various balance sheet accounts. Such derivatives are
used as part of the asset/liability management process and are linked
to specific liabilities which have a high correlation between the
contract and the underlying item being hedged, both at inception and
throughout the hedge period.
The Company currently utilizes interest rate swap agreements to convert
a portion of its fixed rate time deposits to a variable rate (fair
value hedge) to fund variable rate loans. Interest rate swaps are
contracts in which a series of interest flows are exchanged over a
prescribed period. The notional amount ($60 million) on which interest
payments are based is not exchanged. During the quarter ended September
30, 2005, the Company recorded expense in the amount of $676 thousand
in other operating expenses which reflects the fair value of the
interest rate swaps resulting from the Company not meeting the upfront
documentation and the effectiveness assessment requirements of SFAS No.
133. As of October 1, 2005 and March 31, 2006 the Company has completed
documentation determining the effectiveness of each hedge using the
Volatility Reduction Measure ("VRM"). It was determined that these
swaps are effective and are treated as fair value hedges.
At March 31, 2006 and December 31, 2005, the information pertaining to
outstanding interest rate swap agreement used to hedge fixed rate loans
and investments is as follows:
Mar. 31 Dec. 31
(in thousands) 2006 2005
---- ----
Notional Amount $60,000 $60,000
Weighted average pay rate 4.79% 4.40%
Weighted average receive rate 3.87% 3.87%
Weighted average maturity (years) 4.3 4.5
Fair value relating to interest rate swaps ($1,447) ($1,281)
9. Variable Interest Entities ("VIE")
Royal Bancshares, together with a real estate development company,
formed Royal Scully Associates, G.P. ("Royal Scully") in September
2005. Royal Scully was formed to convert an apartment complex into
condominiums in Blue Bell, Pennsylvania. The development company is the
general partner of Royal Scully. Royal Bancshares invested 66% of the
initial capital contribution, or $2.5 million, with the development
company holding the remaining equity interest. In addition The Company
holds two notes totaling $9.2 million with a competitive term and
interest rate. Upon the repayment of the initial capital contributions
and preferred return, distributions will convert to 50% for the Company
and 50% for the development company. Royal Scully had total assets of
$60.4 million and total borrowings of $47.4 million, of which $-0- is
guaranteed by the Company. The Company has determined that Royal Scully
is a VIE and it is the primary beneficiary. The Company's exposure to
loss due to its investment is $11.3 million at March 31, 2006.
Royal Bancshares, together with a real estate investment company,
formed 212 C Associates, L.P. ("212 C") in May 2002. 212 C was formed
to acquire, hold, improve, and operate office space located in
Lansdale, Pennsylvania. The investment company is the general partner
of the project. The Company invested 90% of initial capital
contributions with the investment company holding the remaining equity
interest. Upon the repayment of the initial capital contributions and a
preferred return, distributions will convert to 50% for the Company and
50% for the investment company. On June 7, 2005, 212 C made a
distribution to the Company of approximately $4.0 million which paid
back the Company's original investment and accrued preferred return. In
addition, the Company recorded a profit of $1.8 million as result of
this distribution during the second quarter of 2005. As a result of the
transaction the Company no longer qualifies as the primary beneficiary
and discontinued consolidating this VIE into the Company's financial
statement beginning with the second quarter of 2005.
Royal Bancshares, together with a real estate development company,
formed Brook View Investors, L.L.C. ("Brook View") in May 2001. Brook
View was formed to construct 13 apartment buildings with a total of 116
units in a gated apartment community. On October 19, 2005, the Company
sold its ownership interest in Brook View which resulted in an after
tax gain of approximately $3.3 million. As a result of the sale the
Company discontinued consolidating the financial statements of Brook
View during the fourth quarter of 2005.
Royal Bancshares, together with a real estate development company,
formed Burrough's Mill Apartment, L.L.C. ("Burrough's Mill") in
December 2001. Burrough's Mill was formed to construct 32 apartment
buildings with a total of 308 units in a gated apartment community. On
October 19, 2005, the Company sold its ownership interest in Burrough's
Mill which resulted in an after tax gain of approximately $7.6 million.
As a result of the sale the Company discontinued consolidating the
financial statements of Burrough's Mill during the fourth quarter of
2005.
Royal Bancshares, together with a real estate development company,
formed Main Street West Associates, L.P. ("Main Street") in February
2002. Main Street was formed to acquire, maintain, improve, and operate
office space located in Norristown, Pennsylvania. On June 30, 2005,
Main Street sold the property and paid back the Company's original
investment plus the accrued preferred return in full. As a result of
the sale the Company discontinued consolidating the financial
statements of Main Street during the second quarter of 2005.
Trust Preferred Securities
Management has determined that The Company Capital Trust I/II ("the
Trusts") qualify as VIE's under FASB Interpretation 46 (FIN 46),
"Consolidation of Variable Interest Entities," as revised. The Trusts
have previously issued mandatory redeemable trust preferred securities
to investors and loaned the proceeds to The Company.
The Company adopted the provision under the revised interpretation, FIN
46(R), in the first quarter of 2004. Accordingly, The Company does not
consolidate the Trust. FIN 46(R) precludes consideration of the call
option embedded in the preferred securities when determining if the
Company has the right to a majority of the Trusts' expected residual
returns. The deconsolidation resulted in the investment in the common
stock of the Trusts to be included in other assets as of March 31, 2006
and the corresponding increase in outstanding debt of $774 thousand. In
addition, income received on the Company's stock investment is included
in other income.
10. Income Taxes.
Total income tax expense for the three months ended March 31, 2006 was
$2.5 million, as compared to $1.8 million for the same period in 2005.
The effective tax rate for the three months ended March 31, 2006, was
31.6% compared to the 29.0% for the same period in 2005.
11. Commitments, Contingencies and Concentrations
The Company is party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and standby letters. These instruments involve, to
varying degrees, elements of risk in excess of the amount recognized in
consolidated balance sheet.
A summary of the Company's commitments is as follows:
(in thousands) MARCH 31, 2006 DECEMBER 31,2005
-------------- ----------------
Open-end lines of credit 3,005 2,954
Loan commitments 154,085 173,461
Letters of credits 5,056 3,228
------- -------
Total 162,146 179,643
======= =======
12. Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board (FASB)
issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments -- an amendment of SFAS No. 133 and 140 (SFAS No. 155).
SFAS No. 155 permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and
principal-only strips are not subject to the requirements of SFAS No.
133, establishes a requirement to evaluate interests in securitized
financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an
embedded derivative requiring bifurcation, clarifies that
concentrations of credit risk in the form of subordination are not
embedded derivatives, and amends SFAS No. 140 to eliminate the
prohibition on a qualifying special purpose entity from holding a
derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. SFAS No.155 is
effective for all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September
15, 2006. The Company does not expect the adoption of SFAS No. 155 to
have a material effect on the results of operations or the statement of
condition.
In March 2006, the FASB issued SFAS No. 156 Accounting for Servicing of
Financial Assets an amendment of SFAS No. 140 (SFAS 140 and SFAS 156).
SFAS No. 140 establishes, among other things, the accounting for all
separately recognized servicing assets and servicing liabilities. SFAS
No. 156 amends SFAS No. 140 to require that all separately recognized
servicing assets and servicing liabilities be initially measured at
fair value, if practicable. This Statement permits, but does not
require, the subsequent measurement of separately recognized servicing
assets and servicing liabilities at fair value. Under this Statement,
an entity can elect subsequent fair value measurement to account for
its separately recognized servicing assets and servicing liabilities.
Adoption of this Statement is required as of the beginning of the first
fiscal year that begins after September 15, 2006. Upon adoption, the
Company will apply the requirements for recognition and initial
measurement of servicing assets and servicing liabilities prospectively
to all transactions. The Company will adopt SFAS No. 156 for the fiscal
year beginning January 1, 2007 and currently has not determined if it
will adopt SFAS No. 156 using the fair value election.
In February 2006, the FASB issued FASB Staff Position No. FAS 123(R)-4,
"Classification of Options and Similar Instruments Issued as Employee
Compensation That Allow for Cash Settlement upon the Occurrence of a
Contingent Event." This position amends SFAS 123R to incorporate that a
cash settlement feature that can be exercised only upon the occurrence
of a contingent event that is outside the employee's control does not
meet certain conditions in SFAS 123R until it becomes probable that the
event will occur. The guidance in this FASB Staff Position shall be
applied upon initial adoption of Statement 123R. The Company is
currently evaluating the impact that the adoption of SFAS 123R will
have on its financial statements.
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 changes in the financial condition and earnings
performance of the Company and its subsidiaries for the three-month period ended
March 31, 2006. This discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes thereto for the year
ended December 31, 2005 included in the Company's 2005 Form 10-K. Operating
results for the three months ended March 31, 2006 are not necessarily indicative
of the results for the year ending December 31, 2006.
Forward-Looking Statements.
From time to time, the Company may include forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, credit quality, credit risk, reserve adequacy, liquidity, new
products, and similar matter in this and other filings with the Securities and
Exchange Commission. These forward-looking statements may involve known and
unknown risks, uncertainties and other factors which may cause actual results,
performance or achievements of the Company to material different from the future
results, performance or achievement expressed or implied by such forward-looking
statements. When the Company uses words such as "expect," "believe,"
"anticipate," "should," "estimate," or similar expressions, the Company is
making a forward-looking statement. The Private Securities Litigation Reform Act
of 1995 provides a "safe harbor" for such forward-looking statements. In order
to comply with the terms of the "safe harbor," the Company provides the
following cautionary statement which identifies certain factors that could cause
the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the forward-looking
statements.
Certain risks and uncertainties could affect the future financial results of the
Company including the following:
o The effect of general economic conditions, including their
impact on capital expenditures, credit risk, consumer
confidence and savings rates.
o Changes in interest rates and their impact on the level of
deposits, loan demand and the value of loan collateral.
o Business conditions in the banking industry.
o The bank regulatory environment.
o The accuracy of management's assumptions.
o The ability of the Company to adapt to rapidly changing
technology and evolving banking industry standards.
o Competitive factors, including increased competition with
community, regional and national financial institutions.
o The risk that anticipated demand for the Company's new service
and product offerings will not occur.
All forward-looking statements contained in this report are based on
information available as of the date of this report. The Company expressly
disclaims any obligation to update any forward-looking statement to reflect
future statements to reflect future events or developments.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The accounting and reporting policies of the Company conform with
accounting principles generally accepted in the United States of America and
general practices within the financial services industry. Applications of the
principles in the Company's preparation of the financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and the accompanying notes. These
estimates and assumptions are based on information available as of the date of
the financial statements; therefore, actual results could differ from those
estimates.
Allowance for Loan Losses
The Company considers that the determination of the allowance for loan
losses involves a higher degree of judgment and complexity than its other
significant accounting policies. Management determines the allowance for loan
losses with the objective of maintaining a reserve level sufficient to absorb
estimated probable credit losses. Management has determined the Company's
balance in the allowance for loan losses based on management's detailed analysis
and review loan portfolio. Management considers all known relevant internal and
external factors that may affect loan collectibility. The periodic analysis and
review includes an evaluation of the loan portfolio in relation to past loss
experience, the size and composition of the portfolio, current economic events
and conditions, and other pertinent factors, including Management's assumptions
as to future delinquencies, recoveries and losses. Management's evaluation is
inherently subjective and all of these factors may be susceptible to significant
change. To the extent actual outcomes differ from management's the Company may
be required to make additional provisions for loan losses that could adversely
impact earnings in future periods.
The Company uses the reserve method of accounting for loans losses. The
balance in the allowance for loan and lease losses is determined based on
management's review and evaluation of the loan portfolio in relation to past
loss experience, the size and composition of the portfolio, current economics
events and conditions, and other pertinent factors, including management's
assumptions related to future delinquencies, recoveries and losses. Increases to
the allowance for loans and leases losses are made by charges to the provision
for loan losses. Credit exposures deemed to be uncollectible are charged against
the allowance for loans losses. Recoveries of amounts previously charged-off are
credited to the allowance for loan losses.
Non-performing loans
Loans on which the accrual of interest has been discontinued or reduced amounted
to approximately $2.9 million at March 31, 2006, as compared to $4.4 million at
December 31, 2005, a decrease of $1.5 million. This decrease is primarily
attributed to multiple payments totaling approximately $860 thousand received
from a participation loan secured by a pool of golf courses, charge-offs during
the quarter of approximately $124 thousand, and $153 thousand of loans being
transferred to other real estate owned. Although the Company has non-performing
loans of approximately $2.9 million at March 31, 2006, management believes it
has adequate collateral to limit its credit risk with these loans.
The balance of impaired loans and loans on which the accrual of interest has
been discontinued, was approximately $12.3 million and $10.0 million at March
31, 2006 and December 31, 2005, respectively. 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 or where there is a
significant reduction in collateral associated with the loan. As of March 31,
2006 the company had five loans in the amount of $9.4 million that are
considered to be potential problem loans with a specific reserve of $1.3
million. The $1.3 million associated with impaired loans consist of: $1.0
million related to a golf course in New Jersey, $249 thousand for a hotel under
construction in New Orleans and approximately $50 thousand associated with
residential loans. During the quarter a loan to a hospital in Louisiana was
restructured to modify the payment terms. Based upon a review of the collateral
value a specific reserve was not applied. The income that was recognized on
impaired loans during the three-month period ended March 31, 2006 was $139
thousand. The cash collected on impaired loans during the same period ended
March 31, 2006 was $1.0 million, of which $938 thousand was credited to the
principal balance outstanding on such loans. 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.
Income Taxes
Under the liability method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax basis
of assets and liabilities. Deferred tax assets are subject to management's
judgment based upon available evidence that future realization of the gain or
loss attributable to the asset or liability is more likely than not. If
management determines that the Company may be unable to realize all or part of
the net deferred tax assets in the future, a direct charge to income tax expense
may be required to reduce the recorded value of net deferred tax assets to the
expected realizable amount.
Interest Rate Swaps
The Company uses derivatives instruments, such as interest rate swap
agreements to hedge various exposures or to modify interest rate characteristics
of various balance sheet accounts. Such derivatives are used as part of the
asset/liability management process and are linked to specific liabilities which
have a high correlation between the contract and the underlying item being
hedged, both at inception and throughout the hedge period.
The Company currently utilizes interest rate swap agreements to convert a
portion of its fixed rate time deposits to a variable rate (fair value hedge) to
fund variable rate loans and investments. Interest rate swaps are contracts in
which a series of interest flows are exchanged over a prescribed period. The
notional amount ($60 million) on which interest payments are based is not
exchanged.
FINANCIAL CONDITION
Total consolidated assets as of March 31, 2006 were $1.317 billion, an
increase of $16 million from the $1.301 billion reported at year-end, December
31, 2005. This increase is primarily due to a $44 million increase in the loan
balance which was funded by an increase in deposit balances and a reduction of
$21 million of available for sale securities due to maturities and the $10.6
million reduction in cash and cash equivalents.
Total loans increased $44.0 million from the $549.6 million level at
December 31, 2005 to $593.6 million at March 31, 2006. This increase is
attributed to an increase in lending staff, competitive interest rates and
expansion of the Company's lending area into the Virginia, Washington D.C. and
Northern New Jersey area. The year-to-date average balance of loans was $565.8
million at March 31, 2006 compared to $480.2 million for the same three month
period in 2005.
The allowance for loan loss increased $274 thousand to $10.6 million
at March 31, 2006 from $10.3 million at December 31, 2005. The $274 thousand
increase was attributed to recording a provision of $335 thousand offset by net
charge offs of $61 thousand. The level of allowance for loan loss reserve
represents approximately 1.8% of total loans at March 31, 2006 versus 1.9% at
December 31, 2005. 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 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.
Analysis of the Allowance for Loan losses by loan type
MARCH 31, 2006 DECEMBER 31, 2005
Percent of
loans
Reserve Percent of loans Reserve in each
Amount in each Amount category
(in category to (in to total
thousands) total loans thousands) loans
Domestic
Construction loans $ 4,765 33.04% $ 3,397 31.43%
Single family residents $ 734 5.21% $ 925 7.74%
Tax certificates -- 5.62% -- 6.44%
Real estate - non-residential $ 4,008 44.81% $ 5,132 43.19%
Real estate - multi-family $ 463 4.51% $ 277 4.51%
Commercial and industrial $ 455 5.59% $ 494 5.45%
Installment loans to individual $ 20 .39% $ 41 .70%
Lease financing $ 108 .83% $ 75 .54%
Foreign -- 00% -- 00%
Unallocated ($ 3) N/A ($ 65) N/A
------- ------- ------- -------
$10,550 100.00% $10,276 100.00%
======= ======= ======= =======
Total investment securities decreased $20.8 million to $578.0 million
at March 31, 2006, from $598.8 million at December 31, 2005. This decrease in
total investment securities during the first quarter of 2006 is primarily
attributable to $11.5 million of corporate bonds maturing along with principal
payments received from mortgaged-back securities.
Total cash and cash equivalents decreased $10.6 million from the $30.9
million level at December 31, 2005 to $20.3 million at March 31, 2006. This
decrease was primarily attributed to the funding of loan originations during the
period and payments to reduce overnight advance balance.
Total deposits, the primary source of funds, increased $21.5 million to
$718.9 million at March 31, 2006, from $697.4 million at December 31, 2005. The
balance of brokered deposits was $151.1 million, representing approximately 21%
of total deposits at March 31, 2006. Generally, these brokered deposits cannot
be redeemed prior to the stated maturity, except in the event of the death or
adjudication of incompetence of the deposit holder.
Total borrowings decreased $4.9 million to $422.2 million at March 31,
2006, from $427.1 million at December 31, 2005. This decrease is primarily
attributed to a reduction of overnight borrowings resulting from a decline in
the investment portfolio and an increase in deposits.
Consolidated stockholders' equity increased $313 thousand to $155.8
million at March 31, 2006 from $155.5 million at December 31, 2005. This
increase is primarily due to increased earnings offset by a cash dividend paid
and a decline in market value of the Company's available for sale portfolio.
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 and borrowings. Interest income is
recognized according to the effective interest yield method. Net income is also
affected 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, 2006 was
$5.3 million or $0.42 basic earnings per share, as compared to net income of
$4.3 million or $0.34 basic earnings per share for the same three month period
in 2005.
For the first quarter of 2006, net interest income was $11.3 million as
compared to $9.8 million for the same quarter in 2005, an increase of $1.5
million. This increase is primarily due to an increase in the average loan
balances along with an increase of interest rates on variable rate loans.
There was a $335 thousand provision for loan losses taken during the
first quarter of 2006 as compared to $1 thousand taken during the first quarter
of 2005, an increase of $334 thousand. This increase is primarily due to an
increase in the loan balance where the amount was determined according to
documentation required by SAB No. 102. Charge-offs and recoveries for the first
quarter of 2006 were $124 thousand and $63 thousand, as compared to $33 thousand
and $8 thousand for the first quarter of 2005, respectively. Overall, management
considers the current level of allowance for loan losses to be adequate at March
31, 2006.
Total non-interest income for the three-month period ended March 31,
2006 was $3.0 million as compared to $2.6 million for the same three-month
period in 2005. This increase is primarily attributed to the sale of other real
estate owned which included a $949 thousand gain from the sale of a bowling
alley in Texas. This increase was partially offset by a reduction in income
related to VIE's, due to 2006 including only Royal Scully whereas in 2005 income
related to VIE's include four investments.
Total non-interest expense for the three months ended March 31, 2006
was $6.2 million, as compared to $6.4 million for the same period in 2005, a
decrease of $200 thousand. The decrease is primarily attributed to expenses
related to VIE's which was partially offset by the recording of stock option
expense in the amount of $178 thousand and an increase in minority interest
expense.
Total income tax expense for the three months ended March 31, 2006 was
$2.5 million, as compared to $1.8 million for the same period in 2005. This
increase is attributed to an increase in earnings during 2006 as compared to
2005. The effective tax rate for the three months ended March 31, 2006, was
31.6% compared to the 29.0% for the same period in 2005.
CAPITAL ADEQUACY
The Company and its banking subsidiary are subject to various
regulatory capital requirements administered by state and federal banking
agencies. Capital adequacy guidelines involve quantitative measure of assets and
liabilities calculated under regulatory accounting practices. Quantitative
measures established by banking regulations, designed to ensure capital
adequacy, required the maintenance of minimum amounts of capital to total "risk
weighted" assets and a minimum Tier 1 leverage ratio, as defined by the banking
regulations. At March 31, 2006, 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 100 to 200 basis points.
The table below provides a comparison of Royal Bancshares of
Pennsylvania's and Royal Bank's risk-based capital ratios and leverage ratios:
ROYAL BANCSHARES ROYAL BANK
MARCH 31, DEC 31, MARCH 31, DEC 31,
2006 2005 2006 2005
---- ---- ---- ----
CAPITAL LEVELS
Tier 1 leverage ratio 14.2% 14.2% 10.4% 10.4%
Tier 1 risk-based ratio 18.3% 18.8% 13.5% 13.8%
Total risk-based ratio 19.4% 19.8% 14.6% 14.9%
CAPITAL PERFORMANCE
Return on average assets 1.7%(1) 2.5% 1.7%(1) 2.6%
Return on average equity 13.9%(1) 22.0% 16.3%(1) 27.0%
(1) annualized
The Company's ratios compare favorably to the minimum required amounts
of Tier 1 and total capital to "risk weighted" assets and the minimum Tier 1
leverage ratio, as defined by banking regulations. 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 the Company's 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 are securities maturing in
one year or less, other short-term investment and the repayment of loans. These
sources provide alternatives to meet its short-term liquidity needs. In
addition, the FHLB is available to provide short-term liquidity when other
sources are unavailable. Longer liquidity needs may be met by issuing
longer-term deposits and by raising additional capital. The liquidity ratio is
calculated by adding total cash and investments less reserve requirements
divided by deposits and short-term liabilities which is generally maintained at
a level equal to or greater than 25%.
The liquidity ratio of the Company remains adequate at approximately
28% and exceeds the Company's 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.
In managing its interest rate sensitivity positions, the Company seeks
to develop and implement strategies to control exposure of net interest income
to risks associated with interest rate movements Interest rate sensitivity is a
function of the repricing characteristics of the Company's assets and
liabilities. These include the volume of assets and liabilities repricing, the
timing of the repricing, and the interest rate sensitivity gaps is a continual
challenge in a changing rate environment. The following table shows separately
the interest sensitivity of each category of interest earning assets and
interest bearing liabilities as of March 31, 2006:
INTEREST RATE SENSITIVITY
(IN MILLIONS) DAYS
-------------------------- 1 TO 5 OVER 5 NON-RATE
ASSETS 0 - 90 91 - 365 YEARS YEARS SENSITIVE TOTAL
------ ---------------------------------------------------------------------------------
Interest-bearing deposits in banks $4.2 $0.0 $0.0 $0.0 $15.1 $19.3
Federal funds sold 1.0 0.0 0.0 0.0 0.0 1.0
Investment securities:
Available for sale 8.5 20.7 187.6 93.4 (3.8) 306.4
Held to maturity 25.0 26.1 204.1 0.0 0.0 255.5
---------------------------------------------------------------------------------
Total investment securities 33.5 46.8 392.0 93.4 (3.8) 561.9
Loans:
Fixed rate 10.7 24.2 140.5 38.2 0.0 213.6
Variable rate 269.5 57.4 54.3 0.0 (10.5) 370.7
---------------------------------------------------------------------------------
Total loans 280.2 81.6 194.8 38.2 (10.5) 584.3
Other assets 38.4 0.0 0.0 0.0 111.9 150.3
---------------------------------------------------------------------------------
Total Assets $357.3 $128.4 $586.8 $131.6 $112.7 $1,316.8
=================================================================================
LIABILITIES & CAPITAL
Deposits:
Non interest bearing deposits $0.0 $0.0 $0.0 $0.0 $67.1 $67.1
Interest bearing deposits 26.5 79.5 196.9 0.0 0.0 302.9
Certificate of deposits 62.1 82.4 201.0 3.3 0.0 348.8
---------------------------------------------------------------------------------
Total deposits 88.6 161.9 397.9 3.3 67.1 718.9
Borrowings (1) 106.5 12.9 212.5 42.9 47.4 422.2
Other liabilities 0.0 0.0 0.1 0.0 19.8 19.9
Capital 0.0 0.0 0.0 0.0 155.8 155.8
---------------------------------------------------------------------------------
Total liabilities & capital $195.1 $174.8 $610.5 $46.2 $290.1 $1,316.8
=================================================================================
Net interest rate GAP $162.2 ($46.4) ($23.7) $85.4 ($177.4)
===================================================================
Cumulative interest rate GAP $162.2 $115.8 $92.1 $177.4
===================================================================
GAP to total assets 12% (4%)
=========================
GAP to total equity 104% (30%)
=========================
Cumulative GAP to total assets 12% 9%
=========================
Cumulative GAP to total equity 104% 74%
=========================
(1) The $60.3 in borrowings classified as non-rate sensitive are related to
variable interest entities and are not obligations of the Company.
Royal Bancshares' 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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information presented in the Liquidity and Interest Rate
Sensitivity section of the Management's Discussion and Analysis of Financial
Condition and Results Operations of this Report is incorporated herein by
reference.
ITEM 4 - CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
We maintain a set of disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our reports
filed under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), is recorded, processed, summarized and reported within the time periods
specified in the Securities Exchange Commission's rules and forms. As of the end
of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness
of the design and operation of our disclosure controls and procedures pursuant
to Rule 13a-15 of the Exchange Act. Based on that evaluation, our CEO and CFO
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's Exchange
Act filings.
There are inherent limitations to the effectiveness of any controls
system. A controls system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that its objectives are met. Further,
the design of a control system must reflect the fact that there are limits on
resources, and the benefits of controls must be considered relative to their
costs and their impact on the business model. We intend to continue to improve
and refine our internal control over financial reporting.
(b) Changes in internal controls.
There has not been any change in our internal control over financial
reporting during our quarter ended March 31, 2006 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
RECENT DEVELOPMENTS
On February 20, 2006, the Company announced the appointment of Patrick J.
McCormick to its Board of Directors.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 155, Accounting for Certain
Hybrid Financial Instruments -- an amendment of FASB Statements No. 133 and 140
(FAS 155). FAS 155 permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation, clarifies which interest-only strips and principal-only strips are
not subject to the requirements of Statement 133, establishes a requirement to
evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends Statement 140 to eliminate the prohibition on a
qualifying special purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. FAS 155 is effective for all financial instruments acquired or
issued after the beginning of an entity's first fiscal year that begins after
September 15, 2006. The company does not expect the adoption of FAS 155 to have
a material effect on the results of operations or the statement of condition.
In March 2006, the FASB issued Statement of Financial Accounting
Standards No. 156 Accounting for Servicing of Financial Assets an amendment of
FASB Statement No. 140 (FAS 140 and FAS 156). FAS 140 established, among other
things, the accounting for all separately recognized servicing assets and
servicing liabilities. This Statement amends FAS 140 to require that all
separately recognized servicing assets and servicing liabilities be initially
measured at fair value, if practicable. This Statement permits, but does not
require, the subsequent measurement of separately recognized servicing assets
and servicing liabilities at fair value. Under this Statement, an entity can
elect subsequent fair value measurement to account for its separately recognized
servicing assets and servicing liabilities. Adoption of this Statement is
required as of the beginning of the first fiscal year that begins after
September 15, 2006. Upon adoption, the company will apply the requirements for
recognition and initial measurement of servicing assets and servicing
liabilities prospectively to all transactions. The Company will adopt FAS 156
for the fiscal year beginning January 1, 2007 and currently has not determined
if it will adopt FAS 156 using the fair value election.
In February 2006, the FASB issued FASB Staff Position No. FAS 123(R)-4,
"Classification of Options and Similar Instruments Issued as Employee
Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent
Event." This position amends SFAS 123R to incorporate that a cash settlement
feature that can be exercised only upon the occurrence of a contingent event
that is outside the employee's control does not meet certain conditions in SFAS
123R until it becomes probable that the event will occur. The guidance in this
FASB Staff Position shall be applied upon initial adoption of Statement 123R.
The Company is currently evaluating the impact that the adoption of SFAS 123R
will have on its financial statements.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 1A. RISK FACTORS
There have been no material changes from risk factors as previously
disclosed in our Form 10-K for the year ended December 31, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a)
31.1 Section 302 Certification Pursuant to Section 13(a) or 15(d)
of the Securities and Exchange Act of 1934 signed by Joseph P.
Campbell, Chief Executive Officer of Royal Bancshares of
Pennsylvania on May 9, 2006.
31.2 Section 302 Certification Pursuant to Section 13(a) or 15(d)
of the Securities and Exchange Act of 1934 signed by Jeffrey
T. Hanuscin, Chief Financial Officer of Royal Bancshares of
Pennsylvania on May 9, 2006.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by Joseph P. Campbell, Chief Executive Officer of Royal
Bancshares of Pennsylvania on May 9, 2006.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by Jeffrey T. Hanuscin, Chief Financial Officer of
Royal Bancshares of Pennsylvania on May 9, 2006.
SIGNATURES
Pursuant to 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 9, 2006 /s/ Jeffrey T. Hanuscin
-----------------------
Jeffrey T. Hanuscin
Chief Financial Officer