UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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for the quarterly period ended:
June 30, 2009
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For the transition period
from:
to
Commission file number:
0-26366
ROYAL BANCSHARES OF PENNSYLVANIA, INC.
(Exact name of the registrant as specified in its charter)
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|
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PENNSYLVANIA
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23-2812193
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employer
identification No.)
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7
32 Montgomery Avenue, Narberth, PA
19072
(Address of principal Executive Offices)
(Registrants telephone number, including area code)
(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
þ
No
o
Indicate by checkmark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding twelve
months (or for such shorter period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12-b-2 of the Exchange Act.
Large accelerated filer
o
|
Accelerated filer
o
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Non-accelerated filer
þ
(do not check if a smaller reporting company)
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Smaller reporting company
o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No.
þ
Applicable
only to corporate issuers:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Class A Common Stock
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Outstanding at July 31, 2009
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$2.00 par value
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10,847,117
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Class B Common Stock
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Outstanding at July 31, 2009
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$0.10 par value
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2,095,265
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PART I FINANCIAL STATEMENTS
Item 1.
Financial Statements
ROYAL BANCSHARES OF PENNSYLVANIA INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
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June 30,
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December 31,
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2009
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2008
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(In thousands, except share data)
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ASSETS
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Cash and due from banks
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$
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14,161
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$
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5,910
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Interest bearing deposits
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40,047
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7,349
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Federal funds sold
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1,000
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Total cash and cash equivalents
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54,208
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14,259
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Investment securities available-for-sale (AFS) at fair value
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414,545
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350,302
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Federal Home Loan Bank (FHLB) stock, at cost
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10,952
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10,952
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Total investment securities and FHLB stock
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425,497
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361,254
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Loans and leases held for sale
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2,471
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267
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Loans and leases
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716,167
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700,722
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Less allowance for loan and lease losses
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28,374
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28,908
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Net loans and leases
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687,793
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671,814
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Bank owned life insurance
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30,709
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30,016
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Real estate owned via equity investment
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18,798
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18,927
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Accrued interest receivable
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13,455
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13,580
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Other real estate owned (OREO), net
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29,310
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10,346
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Premises and equipment, net
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6,733
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6,926
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Investment in real estate joint ventures
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2,520
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2,520
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Other assets
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49,151
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45,677
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Total assets
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$
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1,320,645
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$
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1,175,586
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LIABILITIES AND SHAREHOLDERS EQUITY
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Liabilities
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Deposits
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Non-interest bearing
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$
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64,829
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$
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50,886
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Interest bearing
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811,860
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709,182
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Total deposits
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876,689
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760,068
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Short-term borrowings
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22,000
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22,000
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Long-term borrowings
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250,457
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253,681
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Subordinated debentures
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25,774
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25,774
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Obligations related to real estate owned via equity
investment
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11,478
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12,350
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Accrued interest payable
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10,455
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6,102
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Other liabilities
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14,968
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14,026
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Total liabilities
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1,211,821
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1,094,001
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Shareholders equity
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Royal Bancshares of
Pennsylvania equity:
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Preferred stock, Series A 5% perpetual, $1,000 liquidation value, 500,000 shares
authorized, 30,407
shares issued and outstanding at June 30, 2009 and 0 shares at December 31, 2008
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27,732
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Common stock
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Class A, par value $2.00 per share, authorized 18,000,000 shares; issued, 11,345,127 at
June 30, 2009 and December 31, 2008
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22,690
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22,690
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Class B, par value $0.10 per share; authorized 3,000,000 shares; issued,
2,095,681 at
June 30, 2009 and December 31, 2008
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210
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210
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Additional paid in capital
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125,949
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123,425
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Accumulated deficit
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(52,518
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)
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(33,561
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)
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Accumulated other comprehensive loss
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(10,646
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)
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(26,106
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)
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Treasury stock at cost, shares of Class A, 498,488 at June 30, 2009 and December
31, 2008
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(6,971
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)
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(6,971
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)
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Total Royal Bancshares shareholders equity
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106,446
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79,687
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Noncontrolling interest
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2,378
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1,898
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Total equity
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108,824
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81,585
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Total liabilities and shareholders equity
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$
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1,320,645
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$
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1,175,586
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The accompanying notes are an integral part of these consolidated financial statements.
-2-
ROYAL BANCSHARES OF PENNSYLVANIA INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
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For the three months ended
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For the six months ended
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June 30,
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June 30,
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(In thousands, except per share data)
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2009
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2008
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2009
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2008
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Interest income
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Loans and leases, including fees
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$
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11,204
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$
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12,058
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$
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22,549
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$
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25,742
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Investment securities held to maturity
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1,041
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|
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2,337
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Investment securities AFS:
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Taxable interest
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5,308
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4,537
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10,270
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9,592
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Tax exempt interest
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18
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|
19
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37
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Deposits in banks
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58
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|
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37
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86
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|
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51
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Federal funds sold
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11
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|
15
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|
|
|
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|
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|
|
|
|
|
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Total Interest Income
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|
16,570
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|
|
|
17,702
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32,924
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|
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37,774
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|
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|
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Interest expense
|
|
|
|
|
|
|
|
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|
|
|
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|
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Deposits
|
|
|
6,632
|
|
|
|
5,339
|
|
|
|
12,884
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|
|
|
12,273
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|
Short-term borrowings
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|
42
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|
|
|
|
|
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|
84
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|
|
|
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Long-term borrowings
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|
2,944
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|
|
|
3,056
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|
|
|
5,895
|
|
|
|
6,249
|
|
Obligations related to real estate owned via equity investments
|
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|
63
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|
|
|
57
|
|
|
|
103
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
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Total Interest Expense
|
|
|
9,681
|
|
|
|
8,452
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|
|
|
18,966
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|
|
|
18,625
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
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|
|
Net Interest Income
|
|
|
6,889
|
|
|
|
9,250
|
|
|
|
13,958
|
|
|
|
19,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Provision for loan and lease losses
|
|
|
6,956
|
|
|
|
4,531
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|
|
|
9,753
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|
|
|
7,812
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net Interest (Loss) Income after Provision for Loan and Lease Losses
|
|
|
(67
|
)
|
|
|
4,719
|
|
|
|
4,205
|
|
|
|
11,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Other (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and fees
|
|
|
359
|
|
|
|
305
|
|
|
|
705
|
|
|
|
598
|
|
Income from bank owned life insurance
|
|
|
349
|
|
|
|
270
|
|
|
|
693
|
|
|
|
488
|
|
Income related to real estate owned via equity investments
|
|
|
681
|
|
|
|
938
|
|
|
|
867
|
|
|
|
1,625
|
|
Gains on sales of loans and leases
|
|
|
277
|
|
|
|
43
|
|
|
|
277
|
|
|
|
106
|
|
Gains on sales related to real estate joint ventures
|
|
|
|
|
|
|
1,092
|
|
|
|
|
|
|
|
1,092
|
|
Gain on sale of premises and equipment
|
|
|
|
|
|
|
1,991
|
|
|
|
|
|
|
|
1,991
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|
Gains on sales of other real estate owned
|
|
|
74
|
|
|
|
292
|
|
|
|
37
|
|
|
|
352
|
|
Net losses on the sale of AFS investment securities
|
|
|
(74
|
)
|
|
|
(30
|
)
|
|
|
(288
|
)
|
|
|
(80
|
)
|
Other income
|
|
|
35
|
|
|
|
42
|
|
|
|
64
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income, excluding other than temporary impairment losses
|
|
|
1,701
|
|
|
|
4,943
|
|
|
|
2,355
|
|
|
|
6,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other than temporary impairment losses on investment securities
|
|
|
(12,668
|
)
|
|
|
(2,491
|
)
|
|
|
(16,906
|
)
|
|
|
(2,491
|
)
|
Portion of loss recognized in other comprehensive loss
|
|
|
7,563
|
|
|
|
|
|
|
|
7,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(5,105
|
)
|
|
|
(2,491
|
)
|
|
|
(9,343
|
)
|
|
|
(2,491
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other (Loss) Income
|
|
|
(3,404
|
)
|
|
|
2,452
|
|
|
|
(6,988
|
)
|
|
|
3,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee salaries and benefits
|
|
|
3,063
|
|
|
|
3,225
|
|
|
|
6,179
|
|
|
|
6,616
|
|
OREO and loan collection expenses
|
|
|
1,200
|
|
|
|
125
|
|
|
|
1,482
|
|
|
|
158
|
|
Professional and legal fees
|
|
|
968
|
|
|
|
619
|
|
|
|
1,992
|
|
|
|
1,374
|
|
Occupancy and equipment
|
|
|
857
|
|
|
|
802
|
|
|
|
1,729
|
|
|
|
1,577
|
|
FDIC and state assessments
|
|
|
834
|
|
|
|
191
|
|
|
|
1,065
|
|
|
|
271
|
|
Pennsylvania shares tax
|
|
|
318
|
|
|
|
334
|
|
|
|
639
|
|
|
|
631
|
|
Expenses related to real estate owned via equity investments
|
|
|
221
|
|
|
|
249
|
|
|
|
384
|
|
|
|
425
|
|
Directors fees
|
|
|
146
|
|
|
|
163
|
|
|
|
345
|
|
|
|
330
|
|
Stock option (income) expense, net
|
|
|
(53
|
)
|
|
|
172
|
|
|
|
58
|
|
|
|
344
|
|
Other operating expenses
|
|
|
765
|
|
|
|
1,161
|
|
|
|
1,671
|
|
|
|
1,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Expenses
|
|
|
8,319
|
|
|
|
7,041
|
|
|
|
15,544
|
|
|
|
13,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income Before Income Taxes (Benefit)
|
|
|
(11,790
|
)
|
|
|
130
|
|
|
|
(18,327
|
)
|
|
|
1,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
(185
|
)
|
|
|
|
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
|
$
|
(11,790
|
)
|
|
$
|
315
|
|
|
$
|
(18,327
|
)
|
|
$
|
1,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less net income attributable to noncontrolling interest
|
|
$
|
264
|
|
|
$
|
163
|
|
|
$
|
480
|
|
|
$
|
310
|
|
Net (loss) income attributable to Royal Bancshares
|
|
$
|
(12,054
|
)
|
|
$
|
152
|
|
|
$
|
(18,807
|
)
|
|
$
|
1,195
|
|
Less Preferred stock Series A accumulated dividend and accretion
|
|
$
|
484
|
|
|
$
|
|
|
|
$
|
699
|
|
|
$
|
|
|
Net (loss) income available to common shareholders
|
|
$
|
(12,538
|
)
|
|
$
|
152
|
|
|
$
|
(19,506
|
)
|
|
$
|
1,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) basic
|
|
$
|
(0.95
|
)
|
|
$
|
0.01
|
|
|
$
|
(1.47
|
)
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) diluted
|
|
$
|
(0.95
|
)
|
|
$
|
0.01
|
|
|
$
|
(1.47
|
)
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends Class A shares
|
|
$
|
|
|
|
$
|
0.150
|
|
|
$
|
|
|
|
$
|
0.300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends Class B shares
|
|
$
|
|
|
|
$
|
0.173
|
|
|
$
|
|
|
|
$
|
0.345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
-3-
ROYAL BANCSHARES OF PENNSYLVANIA INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders Equity and Comprehensive Loss
Six months ended June 30, 2009
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
other
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
(In thousands,
|
|
Preferred stock
|
|
|
Class A common stock
|
|
|
Class B common stock
|
|
|
paid in
|
|
|
Accumulated
|
|
|
comprehensive
|
|
|
Treasury
|
|
|
Noncontrolling
|
|
|
Shareholders
|
|
except dividend per share data)
|
|
Series A
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
deficit
|
|
|
loss
|
|
|
stock
|
|
|
Interest
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2009
|
|
$
|
|
|
|
|
11,345
|
|
|
$
|
22,690
|
|
|
|
2,096
|
|
|
$
|
210
|
|
|
$
|
123,425
|
|
|
$
|
(33,561
|
)
|
|
$
|
(26,106
|
)
|
|
$
|
(6,971
|
)
|
|
$
|
1,898
|
|
|
$
|
81,585
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,807
|
)
|
|
|
|
|
|
|
|
|
|
|
480
|
|
|
|
(18,327
|
)
|
Net unrealized loss on AFS securities, net
of tax ($1,972)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,544
|
|
|
|
|
|
|
|
|
|
|
|
10,544
|
|
Non-credit loss portion of other-than
temporary impairments, net of tax ($2,647)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,916
|
|
|
|
|
|
|
|
|
|
|
|
4,916
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(359
|
)
|
Issuance of Series A perpetual preferred stock
(30,407 shares) and warrants to purchase
common stock (1,140,307 shares)
|
|
|
27,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,407
|
|
Accretion of discount on preferred stock
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
|
Balance June 30, 2009
|
|
$
|
27,732
|
|
|
|
11,345
|
|
|
$
|
22,690
|
|
|
|
2,096
|
|
|
$
|
210
|
|
|
$
|
125,949
|
|
|
$
|
(52,518
|
)
|
|
$
|
(10,646
|
)
|
|
$
|
(6,971
|
)
|
|
$
|
2,378
|
|
|
$
|
108,824
|
|
|
|
|
ROYAL BANCSHARES OF PENNSYLVANIA INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders Equity and Comprehensive Loss
Six months ended June 30, 2008
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
other
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
(In thousands,
|
|
stock
|
|
|
Class A common stock
|
|
|
Class B common stock
|
|
|
paid in
|
|
|
Retained
|
|
|
comprehensive
|
|
|
Treasury
|
|
|
Noncontrolling
|
|
|
Shareholders
|
|
except dividend per share data)
|
|
Series A
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
earnings
|
|
|
loss
|
|
|
stock
|
|
|
Interest
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2008
|
|
$
|
|
|
|
|
11,329
|
|
|
$
|
22,659
|
|
|
|
2,097
|
|
|
$
|
210
|
|
|
$
|
122,578
|
|
|
$
|
8,527
|
|
|
$
|
(1,582
|
)
|
|
$
|
(6,025
|
)
|
|
$
|
1,867
|
|
|
$
|
148,234
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,195
|
|
|
|
|
|
|
|
|
|
|
|
310
|
|
|
|
1,505
|
|
Other comprehensive loss, net of
reclassification and taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,124
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,124
|
)
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Class A $0.30; Class B $0.345)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,005
|
)
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(946
|
)
|
|
|
|
|
|
|
(946
|
)
|
Stock options exercised
|
|
|
|
|
|
|
15
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
344
|
|
|
|
|
Balance June 30, 2008
|
|
$
|
|
|
|
|
11,344
|
|
|
$
|
22,689
|
|
|
|
2,097
|
|
|
$
|
210
|
|
|
$
|
123,066
|
|
|
$
|
5,717
|
|
|
$
|
(7,706
|
)
|
|
$
|
(6,971
|
)
|
|
$
|
2,177
|
|
|
$
|
139,182
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
-4-
ROYAL BANCSHARES OF PENNSYLVANIA INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30,
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(18,327
|
)
|
|
$
|
1,505
|
|
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
458
|
|
|
|
492
|
|
Net income attributable to noncontrolling interests
|
|
|
(480
|
)
|
|
|
(310
|
)
|
Stock compensation expense
|
|
|
58
|
|
|
|
344
|
|
Provision for loan and lease losses
|
|
|
9,753
|
|
|
|
7,812
|
|
Net (accretion) amortization of discounts and premiums on loans, mortgage-backed securities and investments
|
|
|
(117
|
)
|
|
|
375
|
|
Benefit for deferred income taxes
|
|
|
|
|
|
|
(2,672
|
)
|
Gains on sales of other real estate
|
|
|
(37
|
)
|
|
|
(352
|
)
|
Gains on sales of real estate joint ventures
|
|
|
|
|
|
|
(1,092
|
)
|
Prcoeeds from sales of loans and leases
|
|
|
3,065
|
|
|
|
1,486
|
|
Gains on sales of loans and leases
|
|
|
(277
|
)
|
|
|
(106
|
)
|
Net losses on sales of investment securities
|
|
|
288
|
|
|
|
80
|
|
Distribution from investments in real estate
|
|
|
(100
|
)
|
|
|
(237
|
)
|
Gain from sale of premises of real estate owned via equity investment
|
|
|
(502
|
)
|
|
|
(1,197
|
)
|
Gains on sales of premises and equipment
|
|
|
|
|
|
|
(1,991
|
)
|
Income from bank owned life insurance
|
|
|
(693
|
)
|
|
|
(488
|
)
|
Impairment of available-for-sale investment securities
|
|
|
9,343
|
|
|
|
2,491
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease in accrued interest receivable
|
|
|
50
|
|
|
|
1,552
|
|
(Increase) decrease in other assets
|
|
|
(8,582
|
)
|
|
|
4,296
|
|
Increase (decrease) in accrued interest payable
|
|
|
4,353
|
|
|
|
(1,260
|
)
|
Increase in other liabilities
|
|
|
2,085
|
|
|
|
1,467
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
338
|
|
|
|
12,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from call/maturities of held-to-maturity (HTM) investment securities
|
|
|
|
|
|
|
80,261
|
|
Proceeds from call/maturities of available-for-sale (AFS) investment securities
|
|
|
89,912
|
|
|
|
126,220
|
|
Proceeds from sales of AFS investment securities
|
|
|
42,442
|
|
|
|
|
|
Proceeds from sale of premises and equipment
|
|
|
|
|
|
|
2,015
|
|
Purchase of AFS investment securities
|
|
|
(186,002
|
)
|
|
|
(67,612
|
)
|
Redemption of Federal Home Loan Bank stock
|
|
|
|
|
|
|
1,800
|
|
Net increase in loans
|
|
|
(49,904
|
)
|
|
|
(37,505
|
)
|
Purchase of premises and equipment
|
|
|
(265
|
)
|
|
|
(2,274
|
)
|
Net proceeds from sale of premises of real estate owned via equity investments
|
|
|
1,918
|
|
|
|
4,477
|
|
Distribution from investments in real estate
|
|
|
100
|
|
|
|
237
|
|
Net decrease in real estate owned via equity investments
|
|
|
(1,416
|
)
|
|
|
(3,280
|
)
|
Proceeds from sales of foreclosed real estate
|
|
|
253
|
|
|
|
728
|
|
Purchase of life insurance
|
|
|
|
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(102,962
|
)
|
|
|
100,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Increase (decrease) in non-interest bearing and interest bearing demand deposits and savings accounts
|
|
|
12,589
|
|
|
|
(27,980
|
)
|
Increase (decrease) in certificates of deposit
|
|
|
104,032
|
|
|
|
(59,871
|
)
|
Net decrease in short-term borrowings
|
|
|
|
|
|
|
(79,500
|
)
|
Proceeds from long-term borrowings
|
|
|
|
|
|
|
65,000
|
|
Repayments of long-term borrowings
|
|
|
(3,224
|
)
|
|
|
(1,113
|
)
|
Repayment of mortgage debt of real estate owned via equity investments
|
|
|
(872
|
)
|
|
|
(3,028
|
)
|
Proceeds from issuance of preferred stock
|
|
|
30,407
|
|
|
|
|
|
Cash dividends
|
|
|
(359
|
)
|
|
|
(4,005
|
)
|
Purchase of treasury stock
|
|
|
|
|
|
|
(946
|
)
|
Issuance of common stock under stock option plans
|
|
|
|
|
|
|
174
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
142,573
|
|
|
|
(111,269
|
)
|
Net increase in cash and cash equivalents
|
|
|
39,949
|
|
|
|
993
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the beginning of the period
|
|
|
14,259
|
|
|
|
10,905
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period
|
|
$
|
54,208
|
|
|
$
|
11,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure
|
|
|
|
|
|
|
|
|
Taxes paid
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
14,613
|
|
|
$
|
19,885
|
|
|
|
|
|
|
|
|
Transfers to other real estate owned
|
|
$
|
17,184
|
|
|
$
|
74
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
-5-
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. (Royal Bancshares or the Company) and its wholly-owned
subsidiaries, Royal Investments of Delaware, Inc., including Royal Investments of Delaware, Incs
wholly owned subsidiary, Royal Preferred, LLC, Royal Captive Insurance Company, Royal Asian Bank
(effective July 17, 2006, prior thereto, a division of Royal Bank America) and Royal Bank America
(Royal Bank), including Royal Banks subsidiaries, Royal Real Estate of Pennsylvania, Inc., Royal
Investments America, LLC, RBA Property LLC, Narberth Property Acquisition LLC, and its four 60%
ownership interests in Crusader Servicing Corporation, Royal Tax Lien Services, LLC, Royal Bank
America Leasing, LP, and RBA Capital, LP. During the first quarter of 2008,
Royal Bank discontinued operations of RBA ABL Group, LP. The two Delaware trusts, Royal Bancshares
Capital Trust I and Royal Bancshares Capital Trust II are not consolidated per requirements under
Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 46 (R). These consolidated
financial statements reflect the historical information of the Company. All significant
intercompany transactions and balances have been eliminated.
1.
Accounting Policies
The accompanying unaudited consolidated 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 interim 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 consolidated 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, 2008. The results of operations for the three and six
month periods ended June 30, 2009, are not necessarily indicative of the results to be expected for
the full year.
The accounting and reporting policies of the Company conform to accounting principles generally
accepted in the United States of America and general practices within the financial services
industry. Applications of the principles in the Companys preparation of the consolidated
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 consolidated financial statements and the accompanying notes. These estimates and
assumptions are based on information available as of the date of the consolidated financial
statements; therefore, actual results could differ from those estimates.
The Company has evaluated events and transactions occurring subsequent to the balance sheet date of
June 30, 2009, for items that should be potentially recognized or disclosed in these financial
statements. The evaluation was conducted through the filing date of this report, August 14, 2009.
2.
Segment Information
Statement of Financial Accounting Standards (SFAS) No. 131, Segment Reporting, established
standards for public business enterprises to report information about operating segments in their
annual financial statements and requires that those enterprises report selected information about
operating segments in subsequent interim financial reports issued to shareholders. It also
established standards for related disclosure about products and services, geographic areas, and
major customers. Operating segments are components of an enterprise, which are evaluated regularly
by the chief operating decision makers in deciding how to allocate and assess resources and
performance. The Companys chief operating decision makers are the Chief Executive Officer and the
President. The Company has identified its reportable operating segments as Community Banking,
Tax Liens and Equity Investments. The Company has two operating segments that do not meet the
quantitative thresholds for requiring disclosure, but have different characteristics than the
Community Banking, Tax Liens and Equity Investments segments, and from each other, RBA Leasing and
RBA Capital (Other in the segment table below). The Tax Liens segment
includes Crusader Servicing Corporation and Royal Tax Lien Services, LLC (collectively the Tax
Lien Operation); and the Equity Investments segment is a wholly owned subsidiary of Royal Bank,
Royal Investments America, that makes
-6-
equity investments in real estate and had extended mezzanine loans to real estate projects. At June
30, 2009 and 2008, one such equity investment in real estate meets the requirements for
consolidation under FIN 46 (R) based on Royal Investments America being the primary financial
beneficiary, and therefore the Company is reporting on a consolidated basis said investment as a
Variable Interest Entity (VIE). This was determined based on the amount invested by Royal
Investments America compared to our partners. The VIE is included below in the Equity Investment
category.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS
No. 167). The FASB issued SFAS No. 167 to improve financial reporting by enterprises involved
with variable interest entities. The FASB undertook this project to address (1) the effects on
certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities (FIN 46-R), as a result of the elimination of the qualifying
special-purpose entity concept in SFAS No. 166, and (2) constituent concerns about the application
of certain key provisions of FIN 46(R), including those in which the accounting and disclosures
under FIN 46(R) do not always provide timely and useful information about an enterprises
involvement in a variable interest entity. SFAS No. 167 shall be effective as of the beginning of
each reporting entitys first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period, and for interim and annual reporting
periods thereafter. Earlier application is prohibited. The Company is currently evaluating the
impact the adoption of SFAS No. 167 will have on its consolidated financial statements.
Community banking
The Companys Community Banking segment which includes Royal Bank America and Royal Asian Bank
(the Banks) 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 the Banks. For example, commercial lending is
dependent upon the ability of the Banks to fund cash needed to make loans with retail deposits and
other borrowings and to manage interest rate and credit risk. While the Banks make very few
consumer loans, cash needed to make such loans would be funded similarly to commercial loans.
Tax lien operation
The Companys Tax Lien Operation consists of purchasing delinquent tax certificates from local
municipalities at auction and then processing those liens to either encourage the property holder
to pay off the lien, or to foreclose and sell the property. The tax lien operation earns income
based on interest rates (determined at auction) and penalties assigned by the municipality along
with gains on sale of foreclosed properties.
Equity investments
In September 2005, the Company, together with a real estate development company, formed a limited
partnership. The Company is a limited partner in the partnership (Partnership). The Partnership
was formed to convert an apartment complex into condominiums. The development company is the
general partner of the Partnership. The Company invested 66% of the initial capital contribution,
or $2.5 million, with the development company investing the remaining equity of $1.3 million. The
Company is entitled to earn a preferred return on the $2.5 million capital contribution. In
addition, the Company made two mezzanine loans totaling $9.2 million at market terms and interest
rates. As of June 30, 2009, the Partnership also had $11.5 million outstanding of senior debt with
another bank. Upon the repayment of the mezzanine loan interest and principal and the initial
capital contributions and preferred return, the Company and the development company will both
receive 50% of the remaining distribution, if any. The Company is not obligated to pay the senior
debt.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
the Partnership assesses the recoverability of fixed assets based on estimated future operating
cash flows. The Company had previously recognized $10.0 million in impairment ($8.5 million in
2007 and $1.5 million in 2008). There was no further impairment in the first two quarters of 2009.
The Companys investment in this entity is further discussed in Note 13 Real Estate Owned via
Equity Investment.
-7-
Other segments
RBA Capital and RBA Leasing are reported in this category. RBA Capital is a re-discount lender.
RBA Leasing is a small ticket leasing company. Neither RBA Capital nor RBA Leasing met the
threshold requirements under SFAS 131 that would preclude them from being combined and reported
below as Other segments. During the fourth quarter of 2008, management decided to wind down the
operation of RBA Capital. In the near future, the operations of the subsidiary will be folded into
Royal Bank. See the Results of Operations by Business Segments section in Item 2 Managements
Discussion and Analysis of Financial Condition and Results of Operations for further discussion on
these subsidiaries.
The following table presents selected financial information for reportable business segments for
the three and six month periods ended June 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2009
|
|
|
|
Community
|
|
|
Tax Lien
|
|
|
Equity
|
|
|
|
|
|
|
|
(In thousands)
|
|
Banking
|
|
|
Operation
|
|
|
Investment
|
|
|
Other
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,129,239
|
|
|
$
|
108,336
|
|
|
$
|
16,581
|
|
|
$
|
66,489
|
|
|
$
|
1,320,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
876,689
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
876,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
12,929
|
|
|
$
|
2,410
|
|
|
$
|
|
|
|
$
|
1,231
|
|
|
$
|
16,570
|
|
Interest expense
|
|
|
8,154
|
|
|
|
934
|
|
|
|
63
|
|
|
|
530
|
|
|
|
9,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
$
|
4,775
|
|
|
$
|
1,476
|
|
|
$
|
(63
|
)
|
|
$
|
701
|
|
|
$
|
6,889
|
|
Provision for loan and lease losses
|
|
|
6,105
|
|
|
|
567
|
|
|
|
|
|
|
|
284
|
|
|
|
6,956
|
|
Total other (loss) income
|
|
|
(4,206
|
)
|
|
|
120
|
|
|
|
568
|
|
|
|
114
|
|
|
|
(3,404
|
)
|
Total other expenses
|
|
|
7,069
|
|
|
|
807
|
|
|
|
222
|
|
|
|
221
|
|
|
|
8,319
|
|
Income tax (benefit) expense
|
|
|
(322
|
)
|
|
|
115
|
|
|
|
99
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(12,282
|
)
|
|
$
|
106
|
|
|
$
|
184
|
|
|
$
|
202
|
|
|
$
|
(11,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
$
|
36
|
|
|
$
|
42
|
|
|
$
|
142
|
|
|
$
|
44
|
|
|
$
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Royal Bancshares
|
|
$
|
(12,318
|
)
|
|
$
|
64
|
|
|
$
|
42
|
|
|
$
|
158
|
|
|
$
|
(12,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2008
|
|
|
|
Community
|
|
|
Tax Lien
|
|
|
Equity
|
|
|
|
|
|
|
|
(In thousands)
|
|
Banking
|
|
|
Operation
|
|
|
Investment
|
|
|
Other
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,002,278
|
|
|
$
|
77,633
|
|
|
$
|
24,225
|
|
|
$
|
57,599
|
|
|
$
|
1,161,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
682,301
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
682,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
14,348
|
|
|
$
|
1,957
|
|
|
$
|
|
|
|
$
|
1,397
|
|
|
$
|
17,702
|
|
Interest expense
|
|
|
6,963
|
|
|
|
758
|
|
|
|
57
|
|
|
|
674
|
|
|
|
8,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
$
|
7,385
|
|
|
$
|
1,199
|
|
|
$
|
(57
|
)
|
|
$
|
723
|
|
|
$
|
9,250
|
|
Provision for loan and lease losses
|
|
|
4,157
|
|
|
|
22
|
|
|
|
|
|
|
|
352
|
|
|
|
4,531
|
|
Total other income
|
|
|
1,193
|
|
|
|
319
|
|
|
|
813
|
|
|
|
127
|
|
|
|
2,452
|
|
Total other expenses
|
|
|
5,645
|
|
|
|
613
|
|
|
|
249
|
|
|
|
534
|
|
|
|
7,041
|
|
Income tax (benefit) expense
|
|
|
(678
|
)
|
|
|
328
|
|
|
|
177
|
|
|
|
(12
|
)
|
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(546
|
)
|
|
$
|
555
|
|
|
$
|
330
|
|
|
$
|
(24
|
)
|
|
$
|
315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
$
|
|
|
|
$
|
172
|
|
|
$
|
|
|
|
$
|
(9
|
)
|
|
$
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Royal Bancshares
|
|
$
|
(546
|
)
|
|
$
|
383
|
|
|
$
|
330
|
|
|
$
|
(15
|
)
|
|
$
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-8-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2009
|
|
|
|
Community
|
|
|
Tax Lien
|
|
|
Equity
|
|
|
|
|
|
|
|
(In thousands)
|
|
Banking
|
|
|
Operation
|
|
|
Investment
|
|
|
Other
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,129,239
|
|
|
$
|
108,336
|
|
|
$
|
16,581
|
|
|
$
|
66,489
|
|
|
$
|
1,320,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
876,689
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
876,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
25,564
|
|
|
$
|
4,914
|
|
|
$
|
|
|
|
$
|
2,446
|
|
|
$
|
32,924
|
|
Interest expense
|
|
|
15,947
|
|
|
|
1,862
|
|
|
|
103
|
|
|
|
1,054
|
|
|
|
18,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
$
|
9,617
|
|
|
$
|
3,052
|
|
|
$
|
(103
|
)
|
|
$
|
1,392
|
|
|
$
|
13,958
|
|
Provision for loan and lease losses
|
|
|
8,636
|
|
|
|
636
|
|
|
|
|
|
|
|
481
|
|
|
|
9,753
|
|
Total other (loss) income
|
|
|
(8,043
|
)
|
|
|
146
|
|
|
|
698
|
|
|
|
211
|
|
|
|
(6,988
|
)
|
Total other expenses
|
|
|
13,079
|
|
|
|
1,568
|
|
|
|
384
|
|
|
|
513
|
|
|
|
15,544
|
|
Income tax (benefit) expense
|
|
|
(669
|
)
|
|
|
383
|
|
|
|
74
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(19,471
|
)
|
|
$
|
611
|
|
|
$
|
137
|
|
|
$
|
396
|
|
|
$
|
(18,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
$
|
37
|
|
|
$
|
245
|
|
|
$
|
105
|
|
|
$
|
93
|
|
|
$
|
480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Royal Bancshares
|
|
$
|
(19,508
|
)
|
|
$
|
367
|
|
|
$
|
32
|
|
|
$
|
303
|
|
|
$
|
(18,807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2008
|
|
|
|
Community
|
|
|
Tax Lien
|
|
|
Equity
|
|
|
|
|
|
|
|
(In thousands)
|
|
Banking
|
|
|
Operation
|
|
|
Investment
|
|
|
Other
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,002,278
|
|
|
$
|
77,633
|
|
|
$
|
24,225
|
|
|
$
|
57,599
|
|
|
$
|
1,161,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
682,301
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
682,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
31,277
|
|
|
$
|
3,696
|
|
|
$
|
|
|
|
$
|
2,801
|
|
|
$
|
37,774
|
|
Interest expense
|
|
|
15,403
|
|
|
|
1,665
|
|
|
|
103
|
|
|
|
1,454
|
|
|
|
18,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
$
|
15,874
|
|
|
$
|
2,031
|
|
|
$
|
(103
|
)
|
|
$
|
1,347
|
|
|
$
|
19,149
|
|
Provision for loan and lease losses
|
|
|
6,765
|
|
|
|
22
|
|
|
|
|
|
|
|
1,025
|
|
|
|
7,812
|
|
Total other income
|
|
|
1,656
|
|
|
|
401
|
|
|
|
1,388
|
|
|
|
299
|
|
|
|
3,744
|
|
Total other expenses
|
|
|
11,294
|
|
|
|
929
|
|
|
|
425
|
|
|
|
997
|
|
|
|
13,645
|
|
Income tax (benefit) expense
|
|
|
(782
|
)
|
|
|
543
|
|
|
|
301
|
|
|
|
(131
|
)
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
253
|
|
|
$
|
938
|
|
|
$
|
559
|
|
|
$
|
(245
|
)
|
|
$
|
1,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
$
|
82
|
|
|
$
|
325
|
|
|
$
|
|
|
|
$
|
(97
|
)
|
|
$
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Royal Bancshares
|
|
$
|
171
|
|
|
$
|
613
|
|
|
$
|
559
|
|
|
$
|
(148
|
)
|
|
$
|
1,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income earned by the Community Banking segment related to the Tax Lien Operation was
approximately $934,000 and $758,000 for the three month periods ended June 30, 2009 and 2008,
respectively and $1.9 million and $1.7 million for the six months ended June 30, 2009 and 2008,
respectively.
Interest income earned by the Community Banking segment related to the Other Segment was
approximately $530,000 and $674,000 for the three month periods ended June 30, 2009 and 2008,
respectively and $1.1 million and $1.5 million for the six months ended June 30, 2009 and 2008,
respectively.
3.
Per Share Information
The Company follows the provisions of SFAS No. 128, Earnings Per Share. The Company has two
classes of common stock currently outstanding. The classes are A and B, of which one share of Class
B is convertible into 1.15 shares of Class A. Basic earnings per share (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 using the treasury stock method. For the three months and six months ended June
30, 2009 657,978 and 788,237 options to purchase shares of common stock, respectively, were
anti-dilutive in the computation of diluted EPS, as exercise price exceeded average market price
and as a result of the net loss for the three months and six months ended June 30, 2009. At June
30, 2008, 340,671 stock options were anti-dilutive and were not included in the calculation of
diluted earnings per share because the exercise price exceeded the average market price. All share
and per share information has been restated to reflect stock dividends paid in prior periods.
Basic and diluted EPS are calculated as follows:
-9-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2009
|
|
|
Loss
|
|
Average shares
|
|
Per share
|
(In thousands, except for per share data)
|
|
(numerator)
|
|
(denominator)
|
|
Amount
|
|
|
|
Basic and Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common shareholders
|
|
$
|
(12,538
|
)
|
|
|
13,257
|
|
|
$
|
(0.95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2008
|
|
|
Income
|
|
Average shares
|
|
Per share
|
(In thousands, except for per share data)
|
|
(numerator)
|
|
(denominator)
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders
|
|
$
|
152
|
|
|
|
13,319
|
|
|
$
|
0.01
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders plus
assumed exercise of options
|
|
$
|
152
|
|
|
|
13,325
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2009
|
|
|
Loss
|
|
Average shares
|
|
Per share
|
(in thousands, except for per share data)
|
|
(numerator)
|
|
(denominator)
|
|
Amount
|
|
|
|
Basic and Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common shareholders
|
|
$
|
(19,506
|
)
|
|
|
13,257
|
|
|
$
|
(1.47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2008
|
|
|
Income
|
|
Average shares
|
|
Per share
|
(in thousands, except for per share data)
|
|
(numerator)
|
|
(denominator)
|
|
Amount
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders
|
|
$
|
1,195
|
|
|
|
13,331
|
|
|
$
|
0.09
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders plus
assumed exercise of options
|
|
$
|
1,195
|
|
|
|
13,340
|
|
|
$
|
0.09
|
|
|
|
|
See Note 10 Stock Option Plans for a discussion on the Companys stock option and restricted stock plan.
-10-
4.
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, requires the reporting of other comprehensive income,
which includes net income (loss) as well as certain other items, including unrealized gains and
losses on available for sale securities (AFS), which results in changes to equity during the
period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2009
|
|
|
|
Before tax
|
|
|
Tax benefit
|
|
|
Net of tax
|
|
(In thousands)
|
|
amount
|
|
|
(expense)
|
|
|
amount
|
|
|
Unrealized gains on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains arising during period
|
|
$
|
10,946
|
|
|
$
|
3,831
|
|
|
$
|
7,115
|
|
Reduction in deferred tax valuation allowance
related to preferred and common stock
|
|
|
|
|
|
|
(2,076
|
)
|
|
|
2,076
|
|
Less adjustment for impaired debt, preferred
and common stock securities
|
|
|
(9,343
|
)
|
|
|
(3,270
|
)
|
|
|
(6,073
|
)
|
Less reclassification adjustment for net losses
realized in net loss
|
|
|
(288
|
)
|
|
|
(101
|
)
|
|
|
(187
|
)
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on investment securities
|
|
$
|
20,577
|
|
|
$
|
5,126
|
|
|
$
|
15,451
|
|
Unrecognized benefit obligation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Less reclassification adjustment for
amortization
|
|
|
(14
|
)
|
|
|
(5
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net
|
|
$
|
20,591
|
|
|
$
|
5,131
|
|
|
$
|
15,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2008
|
|
|
|
Before tax
|
|
|
Tax benefit
|
|
|
Net of tax
|
|
(In thousands)
|
|
amount
|
|
|
(expense)
|
|
|
amount
|
|
|
Unrealized losses on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses arising during period
|
|
$
|
(12,050
|
)
|
|
$
|
(4,218
|
)
|
|
$
|
(7,832
|
)
|
Less adjustment for impaired preferred
and stock securities
|
|
|
(2,491
|
)
|
|
|
(873
|
)
|
|
|
(1,618
|
)
|
Less reclassification adjustment for losses
realized in net income
|
|
|
(80
|
)
|
|
|
(28
|
)
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on investment securities
|
|
$
|
(9,479
|
)
|
|
$
|
(3,317
|
)
|
|
$
|
(6,162
|
)
|
Unrecognized benefit obligation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Less reclassification adjustment for
amortization
|
|
|
(58
|
)
|
|
|
(20
|
)
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net
|
|
$
|
(9,421
|
)
|
|
$
|
(3,297
|
)
|
|
$
|
(6,124
|
)
|
|
|
|
|
|
|
|
|
|
|
(The balance of this page was left blank intentionally.)
-11-
5.
Investment Securities
:
The carrying value and fair value of investment securities at June 30, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
Fair
|
|
(In thousands)
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential
|
|
$
|
81,353
|
|
|
$
|
839
|
|
|
$
|
(383
|
)
|
|
$
|
81,809
|
|
U.S. government agencies
|
|
|
1,325
|
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
1,327
|
|
Preferred stocks
|
|
|
2,883
|
|
|
|
73
|
|
|
|
(660
|
)
|
|
|
2,296
|
|
Common stocks
|
|
|
15,242
|
|
|
|
743
|
|
|
|
(2,321
|
)
|
|
|
13,664
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies
|
|
|
188,194
|
|
|
|
2,389
|
|
|
|
(484
|
)
|
|
|
190,099
|
|
Non-agency
|
|
|
36,365
|
|
|
|
34
|
|
|
|
(3,867
|
)
|
|
|
32,532
|
|
Collateralized debt obligations
|
|
|
35,000
|
|
|
|
|
|
|
|
(3,727
|
)
|
|
|
31,273
|
|
Corporate bonds
|
|
|
25,000
|
|
|
|
271
|
|
|
|
(3,318
|
)
|
|
|
21,953
|
|
Trust preferred securities
|
|
|
34,383
|
|
|
|
789
|
|
|
|
(3,751
|
)
|
|
|
31,421
|
|
Other securities
|
|
|
8,257
|
|
|
|
30
|
|
|
|
(116
|
)
|
|
|
8,171
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
428,002
|
|
|
$
|
5,171
|
|
|
$
|
(18,628
|
)
|
|
$
|
414,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying value and fair value of investment securities at December 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
Fair
|
|
(In thousands)
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential
|
|
$
|
53,871
|
|
|
$
|
1,190
|
|
|
$
|
|
|
|
$
|
55,061
|
|
U.S. government agencies
|
|
|
48,109
|
|
|
|
82
|
|
|
|
|
|
|
|
48,191
|
|
Preferred stocks
|
|
|
4,000
|
|
|
|
|
|
|
|
(1,703
|
)
|
|
|
2,297
|
|
Common stocks
|
|
|
19,907
|
|
|
|
8
|
|
|
|
(7,208
|
)
|
|
|
12,707
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S.
government agencies
|
|
|
77,848
|
|
|
|
1,649
|
|
|
|
(72
|
)
|
|
|
79,425
|
|
Non-agency
|
|
|
43,711
|
|
|
|
|
|
|
|
(6,221
|
)
|
|
|
37,490
|
|
Collateralized debt obligations
|
|
|
35,000
|
|
|
|
|
|
|
|
(8,840
|
)
|
|
|
26,160
|
|
Corporate bonds
|
|
|
57,445
|
|
|
|
641
|
|
|
|
(6,748
|
)
|
|
|
51,338
|
|
Trust preferred securities
|
|
|
36,316
|
|
|
|
606
|
|
|
|
(6,778
|
)
|
|
|
30,144
|
|
Other securities
|
|
|
7,631
|
|
|
|
54
|
|
|
|
(196
|
)
|
|
|
7,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
383,838
|
|
|
$
|
4,230
|
|
|
$
|
(37,766
|
)
|
|
$
|
350,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair value of investment securities at June 30, 2009, by contractual
maturity, are shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call or prepayment
penalties.
-12-
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
|
Amortized
|
|
|
Fair
|
|
(In thousands)
|
|
cost
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
35,999
|
|
|
$
|
32,273
|
|
After 1 but within 5 years
|
|
|
25,326
|
|
|
|
22,280
|
|
After 5 but within 10 years
|
|
|
|
|
|
|
|
|
After 10 years
|
|
|
34,383
|
|
|
|
31,421
|
|
Mortgage-backed securities-residential
|
|
|
81,353
|
|
|
|
81,809
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government
agencies
|
|
|
188,194
|
|
|
|
190,099
|
|
Non-agency
|
|
|
36,365
|
|
|
|
32,532
|
|
|
|
|
|
|
|
|
Total available for sale debt securities
|
|
|
401,620
|
|
|
|
390,414
|
|
|
|
|
|
|
|
|
|
|
No contractual maturity
|
|
|
26,382
|
|
|
|
24,131
|
|
|
|
|
|
|
|
|
Total available for sale securities
|
|
$
|
428,002
|
|
|
$
|
414,545
|
|
|
|
|
|
|
|
|
The Company evaluates securities for other-than-temporary impairment (OTTI) at least on a
quarterly basis. The Company assesses whether OTTI is present when the fair value of a security is
less than its amortized cost. All investment securities are evaluated for OTTI under SFAS 115
Accounting for Certain Investments in Debt and Equity Securities. The non-agency collateralized
mortgage obligations that are rated below AA are evaluated under Emerging Issues Task Force
(EITF) issue No. 99-20 Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets, and FSP No. EITF 99-20-1 Amendments to the
Impairment and Interest Income Measurement Guidance of EITF Issue No. 99-20. In determining
whether OTTI exists, management considers numerous factors, including but not limited to: (1) the
length of time and the extent to which the fair value is less than the amortized cost, (2) the
Companys intent to hold or sell the security, (3) the financial condition and results of the
issuer including changes in capital, (4) the credit rating of the issuer, (5) analysts earnings
estimate, (6) industry trends specific to the security, and (7) timing of debt maturity and status
of debt payments.
Effective April 1, 2009, the Company adopted FSP FAS 115-2 and FAS 124, Recognition and
Presentation of Other-Than-Temporary Impairments. Under the new FSP which applies to existing and
new debt securities, OTTI is considered to have occurred (1) if an entity intends to sell the
security; (2) if it is more likely than not an entity will be required to sell the security before
recovery of its amortized cost basis; or (3) the present value of the expected cash flows is not
sufficient to recover the entire amortized cost basis. In addition, the amount of the OTTI
recognized in earnings depends on whether an entity intends to sell or will more likely than not be
required to sell the security. If an entity intends to sell the security or will be required to
sell the security, the OTTI shall be recognized in earnings equal to the entire difference between
the fair value and the amortized cost basis at the balance sheet date. If an entity does not
intend to sell the security and it is not more likely than not that the entity will be required to
sell the security before the recovery of its amortized cost basis, the OTTI shall be separated into
two amounts, the credit related loss and the loss related to other factors. The credit related
loss is based on the present value of the expected cash flows and is recognized in earnings. The
noncredit-related loss is based on other factors such as illiquidity and is recognized in other
comprehensive income. As a result of the adoption of the new FSP a $3.7 million credit-related
impairment loss was recognized in earnings and a $7.6 million noncredit-related impairment was
recognized in other comprehensive income for trust preferred securities, corporate bonds, and two
collateralized mortgage obligations (CMOs). Under the new FSP, if applicable, noncredit-related
OTTI recognized in earnings previous to April 1, 2009 would be reclassified from retained earnings
to accumulated OCI as a cumulative effect transition adjustment. The Company did not record a cumulative effect adjustment as of April 1,
2009 because prior OTTI recorded in earnings was all credit related.
-13-
The following table summarizes other-than-temporary impairment losses on securities recognized in
earnings in the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency collateralized
mortgage obligations
|
|
$
|
459
|
|
|
$
|
|
|
|
$
|
459
|
|
|
$
|
|
|
Corporate bonds
|
|
|
1,353
|
|
|
|
|
|
|
|
1,353
|
|
|
|
|
|
Trust preferred securities
|
|
|
1,865
|
|
|
|
|
|
|
|
1,865
|
|
|
|
|
|
Common stocks
|
|
|
1,213
|
|
|
|
|
|
|
|
4,334
|
|
|
|
|
|
Preferred stocks
|
|
|
|
|
|
|
2,491
|
|
|
|
1,117
|
|
|
|
2,491
|
|
Other securities
|
|
|
215
|
|
|
|
|
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,105
|
|
|
$
|
2,491
|
|
|
$
|
9,343
|
|
|
$
|
2,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents a roll-forward of the balance of credit related impairment losses on
debt securities held at June 30, 2009 for which a portion of an other-than-temporary impairment was
recognized in other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
Six
|
|
Periods ended June 30, 2009
|
|
months
|
|
|
months
|
|
(In thousands)
|
|
2009
|
|
|
2009
|
|
Balance at beginning of period
|
|
$
|
|
|
|
$
|
|
|
Credit related impairment loss on debt securities for which an
other-than-temporary impairment was not previously recognized
|
|
|
3,677
|
|
|
|
3,677
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
3,677
|
|
|
$
|
3,677
|
|
|
|
|
|
|
|
|
The tables below indicate the length of time individual securities have been in a continuous
unrealized loss position at June 30, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Unrealized
|
|
(In thousands)
|
|
Fair value
|
|
|
losses
|
|
|
Fair value
|
|
|
losses
|
|
|
Fair value
|
|
|
losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential
|
|
$
|
35,575
|
|
|
$
|
(383
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
35,575
|
|
|
$
|
(383
|
)
|
U.S. government agencies
|
|
|
699
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
699
|
|
|
|
(1
|
)
|
Preferred stocks
|
|
|
|
|
|
|
|
|
|
|
1,840
|
|
|
|
(660
|
)
|
|
|
1,840
|
|
|
|
(660
|
)
|
Common stocks
|
|
|
5,516
|
|
|
|
(1,702
|
)
|
|
|
1,645
|
|
|
|
(619
|
)
|
|
|
7,161
|
|
|
|
(2,321
|
)
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government
agencies
|
|
|
48,250
|
|
|
|
(484
|
)
|
|
|
|
|
|
|
|
|
|
|
48,250
|
|
|
|
(484
|
)
|
Non-agency
|
|
|
8,745
|
|
|
|
(309
|
)
|
|
|
22,023
|
|
|
|
(3,558
|
)
|
|
|
30,768
|
|
|
|
(3,867
|
)
|
Collateralized debt obligations
|
|
|
|
|
|
|
|
|
|
|
31,273
|
|
|
|
(3,727
|
)
|
|
|
31,273
|
|
|
|
(3,727
|
)
|
Corporate bonds
|
|
|
873
|
|
|
|
(1
|
)
|
|
|
14,115
|
|
|
|
(3,317
|
)
|
|
|
14,988
|
|
|
|
(3,318
|
)
|
Trust preferred securities
|
|
|
13,455
|
|
|
|
(1,979
|
)
|
|
|
7,585
|
|
|
|
(1,772
|
)
|
|
|
21,040
|
|
|
|
(3,751
|
)
|
Other securities
|
|
|
1,148
|
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
1,148
|
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
114,261
|
|
|
$
|
(4,975
|
)
|
|
$
|
78,481
|
|
|
$
|
(13,653
|
)
|
|
$
|
192,742
|
|
|
$
|
(18,628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-14-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Unrealized
|
|
(In thousands)
|
|
Fair value
|
|
|
losses
|
|
|
Fair value
|
|
|
losses
|
|
|
Fair value
|
|
|
losses
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
U.S. government agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stocks
|
|
|
1,940
|
|
|
|
(560
|
)
|
|
|
357
|
|
|
|
(1,143
|
)
|
|
|
2,297
|
|
|
|
(1,703
|
)
|
Common stocks
|
|
|
12,657
|
|
|
|
(7,208
|
)
|
|
|
|
|
|
|
|
|
|
|
12,657
|
|
|
|
(7,208
|
)
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies
|
|
|
5,228
|
|
|
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
|
5,228
|
|
|
|
(72
|
)
|
Non-agency
|
|
|
25,483
|
|
|
|
(5,328
|
)
|
|
|
12,008
|
|
|
|
(893
|
)
|
|
|
37,491
|
|
|
|
(6,221
|
)
|
Collateralized debt obligations
|
|
|
20,353
|
|
|
|
(4,647
|
)
|
|
|
5,807
|
|
|
|
(4,193
|
)
|
|
|
26,160
|
|
|
|
(8,840
|
)
|
Corporate bonds
|
|
|
23,794
|
|
|
|
(5,902
|
)
|
|
|
8,643
|
|
|
|
(846
|
)
|
|
|
32,437
|
|
|
|
(6,748
|
)
|
Trust preferred securities
|
|
|
22,818
|
|
|
|
(6,484
|
)
|
|
|
1,720
|
|
|
|
(294
|
)
|
|
|
24,538
|
|
|
|
(6,778
|
)
|
Other securities
|
|
|
1,470
|
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
|
|
|
1,470
|
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
113,743
|
|
|
$
|
(30,397
|
)
|
|
$
|
28,535
|
|
|
$
|
(7,369
|
)
|
|
$
|
142,278
|
|
|
$
|
(37,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The AFS portfolio had gross unrealized losses of $18.6 million at June 30, 2009, which declined
from gross unrealized losses of $37.8 million at December 31, 2008. The improvement in gross
unrealized losses is related to $9.3 million in impairment charges recorded in earnings for the six
months ended June 30, 2009 as described below and to the overall improvement in the fair values of
the securities in the Companys investment portfolio. The gross unrealized losses are primarily
related to the turbulent credit and financial markets coupled with the current economic environment
but have improved during the past quarter as markets have exhibited more stability.
In determining the Companys ability and intent
to hold a security until a recovery in fair value,
management considers the following factors: current liquidity and availability of other non-pledged
assets that permits the investment to be held for an extended period
of time but not necessarily
until maturity, capital planning, and any specific investment committee goals or guidelines related
to the disposition of specific investments.
Preferred stocks:
As of June 30, 2009, the Company had two preferred stock holdings of financial institutions with a
total fair value of $2.3 million and unrealized losses of $660,000, or 23% of their aggregate cost.
The Company recorded an OTTI charge to earnings on one of the preferred stocks in the first quarter
of 2009 for $1.1 million. For the other preferred stock, management evaluated analysts near term
earnings estimates and recent stock price recovery in relation to the severity and duration of the
unrealized loss. While the stock is rated below investment grade, the stock price has seen a 70%
price recovery since the first quarter of 2009. Management believes that the decline in fair value
of the other preferred stock was not a result of the financial condition and near term projections
of the issuer but rather reflected increased investor concerns about recent losses in the financial
services industry related to subprime lending, a recent acquisition, and other credit related
factors. Because the Company does not intend to sell this stock before recovery of its cost basis
and will not more likely than not be required to sell the stock before recovery of their cost
basis, it does not consider the impairment to be other-than-temporary at June 30, 2009.
Common stocks:
As of June 30, 2009, the Company had 276 large cap, small cap and mid-cap common stocks in six
separate accounts managed exclusively for the benefit of the Company by an investment management
company and nine common stocks of financial institutions. The total fair value was $13.7 million
and unrealized losses were $2.3 million, or 15% of their aggregate cost. On six of the small bank
stocks, the Company recorded an OTTI charge to earnings of $543,000 during the second quarter of
2009. Management had concluded that due to the continued loss severity of 61% for more than twelve
months and the financial outlook for these banks, OTTI had occurred. Within the managed portfolio
at June 30, 2009 there were 276 common stocks of which 148 stocks were in an unrealized loss
position of $2.3 million, or 16% of their aggregate cost. After analyzing the common stocks loss
severities, duration of unrealized losses, analyst year-end price projections, recent significant
price recoveries subsequent to quarter end, and any unusual situation pertaining to specific stock, such as significant changes in the dividend, industry trend or critical negative factor,
management determined that 17 of the common stocks were OTTI. Consequently the Company recorded an
impairment charge to earnings of $670,000 in the second quarter of 2009 due mainly to the
additional time the 17 common stocks were in a loss position. The loss severities ranged from 31.2%
to 73.4% and the unrealized loss duration was six to 19 months. The Company also recorded an
impairment charge to earnings of
$3.1 million in the first quarter of 2009 related to 81 of these common stocks. For the second
quarter of 2009, the total impairment charge recorded in earnings related to all common stocks was
$1.2 million.
For the common stocks for which OTTI was not recognized, there were 116 common stocks that were in
a $1.7 million unrealized loss position for less than twelve months and 32 common stocks that were
in a $619,000
-15-
unrealized loss position for more than twelve months. The loss severity ranged from
1%-49% for one month to 19 months. Management used the same criteria mentioned in the paragraph
above for determining OTTI. Because the Company does not intend to sell these stocks before
recovery of their cost basis and will not more likely than not be required to sell the stocks
before recovery of their cost basis, it does not consider the impairment to be other-than-temporary
on these 148 common stocks.
For all debt security types discussed below the fair value is based on prices provided by brokers
and safekeeping custodians with the exception of trust preferred securities which is described
below.
Mortgage-backed securities issued by U.S. government agencies and U.S. government sponsored
enterprises:
As of June 30, 2009, the Company had nine mortgage-backed securities with a fair value of $35.6
million and gross unrealized losses of $383,000, or 1% of their aggregate cost. All of the
mortgage-backed securities had been in an unrealized loss position for two months. The unrealized
loss is attributable to a combination of factors, including relative changes in interest rates
since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S.
government agencies and U.S. government-sponsored enterprises. Based on its assessment of these
factors, management believes that the unrealized losses on these debt securities are a function of
changes in investment spreads and interest rate movements and not changes in credit quality.
Management expects to recover the entire amortized cost basis of these securities. The Company
does not intend to sell these securities before recovery of their cost basis and will not more
likely than not be required to sell these securities before recovery of their cost basis.
Therefore, management has determined that these securities are not other-than-temporarily impaired
at June 30, 2009.
U.S. government issued or sponsored collateralized mortgage obligations (Agency CMOs):
As of June 30, 2009, the Company had ten Agency CMOs with a fair value of $48.2 million and gross
unrealized losses of $484,000, or 1% of their aggregate cost. All of the Agency CMOs
had been in an unrealized loss position for less than six months. Consistent with the
mortgage-backed securities mentioned previously the unrealized loss is attributable to relative
changes in interest rates since the time of purchase and not changes in credit quality. The
contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S.
government-sponsored enterprises. Management expects to recover the entire amortized cost basis of
these securities. The Company does not intend to sell these securities before recovery of their
cost basis and will not more likely than not be required to sell these securities before recovery
of their cost basis. Therefore, management has determined that these securities are not
other-than- temporarily impaired at June 30, 2009.
Non-agency collateralized mortgage obligations (Non-agency CMOs):
As of June 30, 2009, the Company had twelve non-agency CMOs with a fair value of $30.8 million and
gross unrealized losses of $3.9 million, or 11% of their aggregate cost. Four bonds accounted for
$3.4 million, or 84% of the gross unrealized loss. Six of the non-agency CMO bonds were in an
unrealized loss position for more than twelve months but for five of them the fair value was
approximately equal to the amortized cost basis. The other six bonds were in an unrealized loss
position for less than twelve months. The Company evaluated the impairment to determine if it
could expect to recover the entire amortized cost basis of the non-agency CMO bonds by considering
numerous factors including credit default rates, conditional prepayment rates, current and expected
loss severities, delinquency rates, and geographic concentrations. Two of the four bonds are rated
AAA, the third bond is rated A, and the fourth bond is not rated. Management utilized discounted
cash flow analysis as required under FAS 115-2 to determine the credit component of the unrealized
loss for the four bonds. As a result, management concluded that two of the four bonds were OTTI.
Because the Company does not intend to sell these two bonds before recovery of their cost basis and
will not more likely than not be required to sell these two bonds before recovery of their cost
basis only the credit-related loss was recognized in earnings. The resulting credit loss was
$459,000 at June 30, 2009 and the remaining noncredit-related loss of $2.2 million was recognized
in other comprehensive income. Management expects to fully collect the amortized cost basis of the
remaining ten bonds. In addition, the Company does not intend to sell the remaining non-agency
CMOs and it is not more likely than not that the Company will be required to sell the investments
before recovery of their amortized cost basis. Therefore, the Company does not consider the
remaining ten bonds to be other-thantemporarily impaired as of June 30, 2009. The total gross
unrealized loss of $3.9 million recognized in comprehensive income is comprised of the $2.2 million
in noncredit-related losses on the two bonds deemed OTTI and $1.7 million in unrealized losses on
the ten bonds not considered OTTI.
-16-
Collateralized debt obligations (CDOs):
As of June 30, 2009, the Company had three CDOs
with a fair value of $31.3 million and gross unrealized losses of $3.7 million, or 11% of the
aggregate cost. Gross unrealized losses of $3.7 million for this investment category have
occurred for more than twelve months but have experienced a 20% improvement in valuation during the
past six months. The unrealized losses for the Companys CDO investments relate to the credit
default risk of the pool of diversified companies within each of three collateralized debt
obligations. The decline reflects the uncertainty associated with the current economic recession
and the potential for increased company bankruptcies that could potentially result in losses within
these investments. Given the illiquid market for these synthetic CDOs there was no market pricing
available for determining fair value. The Company did receive third party pricing that incorporated
the copula model, corporate spreads in the marketplace and the timing of the maturity of these
investments in arriving at indicative pricing. Based upon the range of the bid and ask price for
actual sales, albeit limited, of similarly structured CDOs during the past three quarters,
management concluded that the indicative pricing represented a reasonable approach in arriving at
fair value for these investments. The analysis did not look at indicators of defaults but instead
it analyzed what would happen to the principal if actual defaults occurred (see paragraph below for
further information). Two of the CDOs have an aggregate amortized cost of $10 million and mature in
December of 2009. These two CDOs have a diversified pool of approximately 100 companies that
experienced additional defaults during the first and second quarter of 2009. Based upon the number
of defaults occurring to date and the maturity dates of these CDOs, the Company expects full
payment of principal at maturity. The third CDO, which has an amortized cost of $25.0 million, has
a diversified pool of almost 100 companies. This CDO also experienced additional defaults during
the first two quarters of 2009 and matures in June of 2010. Based upon the defaults to date, the
lack of significant debt maturities scheduled between now and maturity in 2010 and the reduced
potential for additional defaults due to the CDOs maturity date, management expects to receive
full payment of principal at maturity. Because the Company does not intend to sell the CDOs and it
is not more likely than not that the Company will be required to sell the investments prior to
maturity, the Company does not consider these investments to be other-thantemporarily impaired as
of June 30, 2009.
As of June 30, 2009, the two CDOs that mature in December 2009 had absorbed six credit events with
an average recovery rate of 49%. Based on the current subordination, these two CDOs can sustain,
under a worst-case scenario with 0% recovery and the heavily-weighted credits defaulting, a total
of two to three additional credit events before the tranche experiences its first dollar of loss.
With the same 0% recovery assumption, but the lesser-weighted entities subject to credit events,
the tranche can sustain eight to nine additional defaults before experiencing its first loss. At a
40% recovery rate, principal impairment would require an additional four to five heavily-weighted
or an additional eleven to fifteen lesser weighted entities to default in the portfolio. As of
June 30, 2009, the CDO which matures in 2010 has absorbed 13 credit events with an average recovery
rate of 33%. Based on the current subordination, this CDO can sustain, under a worst-case 0%
recovery scenario, an additional twelve defaults before experiencing its first dollar of loss. At a
40% recovery rate, principal erosion will not occur until the 20th default in the reference
portfolio. Management also engaged two independent third parties to review the CDOs as noted below
to validate the fair values received and determine potential impairment.
In addition to receiving indicative pricing for the CDOs as previously noted, management received
valuation updates from two separate organizations to determine potential impairment. One
independent third party analysis was provided by a specialized rating agency that issues credit
reports on high yield corporate bonds. The analysis prepared by the specialized rating agency
compared their assigned ratings (default risk ranking) that utilized a numerical rating system from
one through eight with both a two year and a five year outlook to Moodys and S & Ps ratings for
the individual companies within the $25.0 million CDO pool. The two year ranking was more relevant
considering that the CDO matures in June of 2010. Based upon the individual ratings, which
considered cash flow when available, of approximately 100 diversified companies within the CDO,
they concluded that the expected credit defaults would result in a return of 100% of the principal
invested. Another third party independent analysis provided by an investment advisor on all three
CDOs approached the potential for future credit defaults using various credit ratings of three
agencies (Moodys, S & P and Fitch) in conjunction with Value Line, a highly regarded independent
investment research firm. The volatility of financial markets has impacted the fair value of these
investments; however, the volatility of the insurance markets has had no impact since the credit
enhancement
for these CDOs are tied to the originator, which is a well capitalized bank in Canada, rather than
an insurance company like many other CDOs. Based on managements analysis and the third party
reviews, management concluded that OTTI had not occurred for the CDOs.
-17-
Corporate bonds:
As of June 30, 2009, the Company had nine corporate bonds with a fair
value of $15.0 million and gross unrealized losses of $3.3 million, or 18% of their aggregate cost.
Five of the corporate bonds had been in an unrealized loss position for twelve months or longer
and represent substantially all of the impairment. The Companys unrealized losses in investments
in corporate bonds represent credit risk of the underlying issuers, which are primarily financial
institutions and insurance companies. Three of the corporate bonds are rated below investment
grade. As previously mentioned management also considered (1) the length of time and the extent to
which the fair value is less than the amortized cost, (2) the Companys intent to hold or sell the
security, (3) the financial condition and results of the issuer including changes in capital, (4)
the credit rating of the issuer, (5) analysts earnings estimate, (6) industry trends specific to
the security, and (7) timing of debt maturity and status of debt payments. Management utilized
discounted cash flow analysis based upon the credit ratings of the securities, liquidity risk
premiums, and the recent corporate spreads for similar securities to arrive at the credit risk
component as required under FAS 115-2 to determine the credit risk component of the five corporate
bonds within this category. Based on these analyses, the three bonds that are below investment
grade were deemed to be OTTI. At June 30, 2009 only the credit-related loss was recognized in
earnings because the Company does not intend to sell these corporate bonds and it is not more
likely than not that the Company will be required to sell the bonds before recovery of their
amortized cost basis, which may be maturity. The resulting credit-related loss was $1.3 million
and the remaining noncredit-related loss of $2.5 million was recognized in other comprehensive
income at June 30, 2009. Because the Company does not intend to sell the corporate bonds and it is
not more likely than not that the Company will be required to sell the bonds before recovery of
their amortized cost basis, which may be maturity, the Company does not consider the remaining six
bonds to be other-thantemporarily impaired as of June 30, 2009. The total gross unrealized loss
of $3.3 million recognized in comprehensive income is comprised of the $2.8 million in
noncredit-related losses on the three bonds deemed OTTI and $825,000 in unrealized losses on the
two bonds not considered OTTI.
Trust preferred securities:
At June 30, 2009, the Company had eleven trust preferred
securities issued by eight individual name companies (reflecting, where applicable the impact of
mergers and acquisitions of issuers subsequent to original purchase) in the financial
services/banking industry. The valuations of trust preferred securities were based upon the fair
market values of active trades for four of the securities and FAS 157-4 using cash flow analysis
for the remaining seven securities. Contractual cash flows and a market rate of return were used to
derive fair value for each of these securities. Factors that affected the market rate of return
included (1) any uncertainty about the amount and timing of the cash flows, (2) the credit risk,
(3) liquidity of the instrument, and (4) observable yields from trading data and bid/ask
indications. Credit risk spreads and liquidity premiums were analyzed to derive the appropriate
discount rate. As of June 30, 2009, the Company has seven trust preferred securities with a fair
value of $21.0 million and gross unrealized losses of $3.8 million, or 15% of their aggregate cost.
Four of the trust preferred securities have been in an unrealized loss position for twelve months
or longer. Six of the securities are below investment grade and one security is not rated. The
unrealized losses in investments in trust preferred securities of the Company reflect the credit
concerns related to the financial institutions that issued these long term financial obligations.
The recent financial losses and reductions of capital coupled with bank failures and the overall
market uncertainty within the financial services industry has resulted in lower values for all
trust preferred securities. Management then applied a discounted cash flow analysis based upon the
credit ratings of the securities, liquidity risk premiums, and the recent corporate spreads for
similar securities to arrive at the credit risk component of the unrealized loss as required by FAS
115-2. As a result, management concluded that five of the trust preferred securities were OTTI.
Because the Company does not intend to sell these securities and it is not more likely than not
that the Company will be required to sell the bonds before recovery of their amortized cost basis,
which may be maturity, the credit-related loss was recognized in earnings. The resulting
credit-related loss was $1.9 million at June 30, 2009 and the remaining noncredit-related loss of
$3.3 million was recognized in other comprehensive income. Because the Company does not intend to
sell the trust preferred securities and it is not more likely than not that the Company will be
required to sell the securities before recovery of their amortized cost basis, which may be
maturity, the Company does not consider the remaining two securities to be other-thantemporarily
impaired as of June 30, 2009. The total gross unrealized loss of $3.8 million recognized in
comprehensive income is comprised of the $2.9 million in noncredit-related losses on the five
securities deemed OTTI and $831,000 in unrealized losses on the two securities not considered OTTI.
-18-
Other securities:
As of June 30, 2009, the Company had eight investments in real estate
and SBA funds. One of the private equity real estate funds has a fair value of $1.1 million and
an unrealized loss of $116,000, or 9% of the cost basis. It has been in an unrealized loss
position for six months. Management reviewed the funds financials and asset values, its near-term
projections, spoke with the fund managers, and considered any unusual situation pertaining to a
specific fund, such as significant changes in the dividend, industry trend or critical negative
factor. Because the Company does not intend to sell the private equity fund and it is not more
likely than not that the Company will be required to sell the private equity fund before recovery
of its amortized cost basis, it does not consider the impairment to be other-than-temporary.
During the second quarter of 2009, the Company took an impairment charge of $215,000 on a private
equity global commercial real estate investment fund. The decline in value reflects the current
worldwide recession in general and the specific reduction in values of commercial real estate
globally. After reviewing the funds financials and asset values, its near-term projections, and
speaking with the fund managers, the Company does not anticipate recovery to the original cost
basis. Therefore the Company concluded that OTTI had occurred and recorded a charge to earnings
equal to the unrealized loss of $215,000.
The Company will continue to monitor these investments to determine if the discounted cash flow
analysis, continued negative trends, market valuations or credit defaults result in impairment that
is other than temporary.
6.
Federal Home Loan Bank stock
As a member of the Federal Home Loan Bank of Pittsburgh (FHLB), the Company is required to
purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. The stock
can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be
at par. As a result of these restrictions, there is no active market for the FHLB stock. As of June
30, 2009 and December 31, 2008, FHLB stock totaled $11.0 million.
In December 2008, the FHLB voluntarily suspended dividend payments on its stock, as well as the
repurchase of excess stock from members. The FHLB cited a significant reduction in the level of
core earnings resulting from lower short-term interest rates, the increased cost of liquidity, and
constrained access to the debt markets at attractive rates and maturities as the main reasons for
the decision to suspend dividends and the repurchase of excess capital stock. The FHLB last paid a
dividend in the third quarter of 2008.
FHLB stock is held as a long-term investment and its value is determined based on the ultimate
recoverability of the par value. The Company evaluates impairment quarterly. The decision of
whether impairment exists is a matter of judgment that reflects managements view of the FHLBs
long-term performance, which includes factors such as the following: (1) its operating performance,
(2) the severity and duration of declines in the fair value of its net assets related to its
capital stock amount, (3) its liquidity position, and (4) the impact of legislative and regulatory
changes on the FHLB. On June 12, 2009, the FHLB filed its 10-Q for the three months ended March 31,
2009. For the first quarter of 2009, the FHLB had a net loss of $23.6 million, a $293.0 million
reduction in capital, and $8.9 million in manditorily redeemable preferred stock. The FHLB was in
compliance with its risk-based, total and leverage capital requirements at March 31, 2009. The
FHLB is also updating its capital restoration plan. The FHLB has the capacity to issue additional
debt if necessary to raise cash. If needed, the FHLB also has the ability to secure funding
available to GSEs through the U.S. Treasury. Based on the capital adequacy and the liquidity
position of the FHLB, management believes that the par value of its investment in FHLB stock will
be recovered. Accordingly, there is no impairment related to the carrying amount of the Companys
FHLB stock as of June 30, 2009. Further deterioration of the FHLBs capital levels may require the
Company to deem its restricted investment in FHLB stock to be other-than-temporarily impaired.
(The balance of this page was left blank intentionally.)
-19-
7.
Loans and Leases
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
87,101
|
|
|
$
|
86,278
|
|
Construction
|
|
|
168,175
|
|
|
|
167,204
|
|
Land Development
|
|
|
69,735
|
|
|
|
74,168
|
|
Construction and land development mezzanine
|
|
|
2,458
|
|
|
|
2,421
|
|
Single family residential
|
|
|
36,526
|
|
|
|
27,480
|
|
Real Estate non-residential
|
|
|
221,769
|
|
|
|
234,573
|
|
Real Estate non-residential-mezzanine
|
|
|
2,979
|
|
|
|
4,111
|
|
Real Estate multi-family
|
|
|
13,967
|
|
|
|
14,059
|
|
Real Estate -1-4 family mezzanine
|
|
|
|
|
|
|
335
|
|
Tax certificates
|
|
|
81,088
|
|
|
|
64,168
|
|
Leases
|
|
|
32,226
|
|
|
|
26,123
|
|
Other
|
|
|
1,306
|
|
|
|
1,243
|
|
|
|
|
|
|
|
|
Total gross loans
|
|
$
|
717,330
|
|
|
$
|
702,163
|
|
Deferred fees, net
|
|
|
(1,163
|
)
|
|
|
(1,441
|
)
|
|
|
|
|
|
|
|
Total loans and leases
|
|
$
|
716,167
|
|
|
$
|
700,722
|
|
|
|
|
|
|
|
|
The Company classifies its leases as capital leases, in accordance with SFAS No. 13, Accounting
for Leases, as amended by SFAS No. 98 and No. 145. The difference between the Companys gross
investment in the lease and the cost or carrying amount of the leased property, if different, is
recorded as unearned income, which is amortized to income over the lease term by the interest
method.
The Companys policy for income recognition on restructured loans is to recognize income on
currently performing restructured loans under the accrual method.
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 agreement. The Company does not accrue
interest income on impaired loans. Excess proceeds received over the principal amounts due on
impaired loans are recognized as income on a cash basis.
The following is a summary of information pertaining to impaired loans:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with a valuation allowance
|
|
$
|
53,514
|
|
|
$
|
69,350
|
|
Impaired loans without a valuation allowance
|
|
|
32,089
|
|
|
|
16,480
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
85,603
|
|
|
$
|
85,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance related to impaired loans
|
|
$
|
9,055
|
|
|
$
|
12,882
|
|
Non-accrual and impaired loans were $85.6 million at June 30, 2009, compared to $85.8 million at
December 31, 2008, a slight decrease of $227,000. The $227,000 decline was the result of $21.3
million in loans becoming current and placed back on accrual and loan payoffs, $17.2 million
transferred to other real estate owned, and $10.3 million in
-20-
charge-offs which collectively were
offset by $48.6 million in additions. If interest had been accrued, such income would have been
approximately $1.2 million and $2.7 million for the three and six months ended June 30, 2009. The
Company has no troubled debt restructured loans or loans past due 90 days or more on which it has
continued to accrue interest during the quarter. The $3.8 million decline in the valuation
allowance was primarily related to one loan that was transferred to other real estate owned
(OREO) during the second quarter of 2009. The valuation allowance of $2.9 million for that loan
was charged to the allowance for loan and lease losses at the time of transfer to OREO.
Total cash collected on impaired loans during the six months ended June 30, 2009 and June 30, 2008
was $12.6 million and $2.6 million respectively, of which $11.1 million and $2.6 million was
credited to the principal balance outstanding on such loans, respectively.
The Company grants commercial and real estate loans, including construction and land development
primarily in the greater Philadelphia metropolitan area as well as selected locations throughout
the mid-Atlantic region. The Company ceased new mezzanine lending in 2007. The Company defines a
mezzanine loan as a financing that bridges the gap between private equity investment and the
traditional bank loan. Generally, it is a secured junior mortgage lien along with a pledge of
ownership interest in a project. In substantially all mezzanine loans, a personal guarantee of the
principal individual is obtained. The Company also has participated with other financial
institutions in selected construction and land development loans outside these geographic areas.
The Company has a concentration of credit risk in commercial real estate, construction and land
development loans at June 30, 2009. A substantial portion of its debtors ability to honor these
contracts is dependent upon the housing sector specifically and the economy in general.
8.
Allowance for Loan and Lease Losses:
Changes in the allowance for loan and lease losses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Balance at beginning period
|
|
$
|
27,269
|
|
|
$
|
21,961
|
|
|
$
|
28,908
|
|
|
$
|
19,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs by loan type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
(239
|
)
|
|
|
|
|
|
|
(254
|
)
|
|
|
(568
|
)
|
Construction and land development
|
|
|
(4,357
|
)
|
|
|
|
|
|
|
(4,357
|
)
|
|
|
|
|
Construction and land development mezzanine
|
|
|
(298
|
)
|
|
|
|
|
|
|
(298
|
)
|
|
|
|
|
Single family residential
|
|
|
(153
|
)
|
|
|
|
|
|
|
(153
|
)
|
|
|
(34
|
)
|
Real Estate non-residential
|
|
|
(665
|
)
|
|
|
|
|
|
|
(3,834
|
)
|
|
|
|
|
Real estate non-residential real estate mezzanine
|
|
|
|
|
|
|
|
|
|
|
(1,132
|
)
|
|
|
|
|
Leases
|
|
|
(157
|
)
|
|
|
(241
|
)
|
|
|
(310
|
)
|
|
|
(241
|
)
|
Tax certificates
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
(5,869
|
)
|
|
|
(263
|
)
|
|
|
(10,338
|
)
|
|
|
(865
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries by loan type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1
|
|
|
|
50
|
|
|
|
3
|
|
|
|
50
|
|
Single family residential
|
|
|
2
|
|
|
|
3
|
|
|
|
33
|
|
|
|
3
|
|
Leases
|
|
|
15
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
18
|
|
|
|
53
|
|
|
|
51
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs
|
|
|
(5,851
|
)
|
|
|
(210
|
)
|
|
|
(10,287
|
)
|
|
|
(812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses
|
|
|
6,956
|
|
|
|
4,531
|
|
|
|
9,753
|
|
|
|
7,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of period
|
|
$
|
28,374
|
|
|
$
|
26,282
|
|
|
$
|
28,374
|
|
|
$
|
26,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were $5.9 million and $4.5 million of loan and lease charge-offs during the first and second
quarters of 2009, respectively. These charge-offs were primarily attributed to construction,
non-residential real estate, and non-
-21-
residential real estate mezzanine loans that primarily became
non-performing in 2008. Of the $10.3 million in charge-offs for the six months ended June 30,
2009, $4.7 million were charge-offs taken before transferring the collateral to OREO.
9.
Pension Plan
The Company has a noncontributory nonqualified defined benefit pension plan (Pension Plan)
covering certain eligible employees. The Companys Pension Plan provides retirement benefits under
pension trust agreements. The benefits are based on years of service and the employees
compensation during the highest three consecutive years during the last 10 years of employment.
Net periodic defined benefit pension expense for the three and six month periods ended June 30,
2009 and 2008 included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
126
|
|
|
$
|
118
|
|
|
$
|
252
|
|
|
$
|
236
|
|
Interest cost
|
|
|
141
|
|
|
|
132
|
|
|
|
282
|
|
|
|
264
|
|
Amortization of prior service cost
|
|
|
23
|
|
|
|
23
|
|
|
|
45
|
|
|
|
46
|
|
Amortization of actuarial loss
|
|
|
7
|
|
|
|
6
|
|
|
|
14
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
297
|
|
|
$
|
279
|
|
|
$
|
593
|
|
|
$
|
558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
Stock Option Plans
Outside Directors Stock Option Plan
The Company previously adopted a non-qualified Outside Directors Stock Option Plan (the
Directors Plan). Under the terms of the Directors Plan, 250,000 shares of Class A stock were
authorized for grants. Each director was entitled to a grant of an option to purchase 1,500 shares
of stock annually, which are exercisable one year after the grant date and must be exercised within
ten years of the grant. The options were granted at the fair market value at the date of the
grant. The ability to issue new grants under this plan has expired. See the discussion below
concerning the 2007 Long-Term Incentive Plan.
The following table presents the activity related to the Directors Plan for the six months ended
June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
Average
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
Remaining
|
|
Intrinsic
|
|
|
Options
|
|
Price
|
|
Term (yrs)
|
|
Value (1)
|
|
|
|
Options outstanding at December 31, 2008
|
|
|
95,950
|
|
|
$
|
18.82
|
|
|
|
4.4
|
|
|
$
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,575
|
)
|
|
|
21.78
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(4,178
|
)
|
|
|
10.57
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2009
|
|
|
90,197
|
|
|
$
|
19.15
|
|
|
|
4.1
|
|
|
$
|
|
|
|
|
|
Options exercisable at June 30, 2009
|
|
|
90,197
|
|
|
$
|
19.15
|
|
|
|
4.1
|
|
|
$
|
|
|
|
|
|
|
|
|
(1)
|
|
The aggregate intrinsic value of a stock option in the table above represents the total pre-tax
intrinsic value (the amount by which the current market value of the underlying stock exceeds the
exercise price of the option) that would have been received by the option holders had they
exercised their options on June 30, 2009. The intrinsic value varies based on the changes in the
market value in the Companys stock.
|
-22-
Employee Stock Option Plan and Appreciation Right Plan
The Company previously adopted a Stock Option and Appreciation Right Plan (the Employee Plan).
The Employee Plan is an incentive program under which Company officers and other key employees were
awarded additional compensation in the form of options to purchase under the Employee Plan, up to
1,800,000 shares of the Companys Class A common stock (but not in excess of 19% 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 ability to issue new grants
under the plan has expired. See the discussion below concerning the 2007 Long- Term Incentive
Plan.
The following table presents the activity related to the Employee Plan for the six months ended
June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
Average
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
Remaining
|
|
Intrinsic
|
|
|
Options
|
|
Price
|
|
Term (yrs)
|
|
Value (1)
|
|
|
|
Options outstanding at December 31, 2008
|
|
|
685,873
|
|
|
$
|
19.72
|
|
|
|
3.4
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(252,790
|
)
|
|
|
19.43
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(20,381
|
)
|
|
|
16.28
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2009
|
|
|
412,702
|
|
|
$
|
20.08
|
|
|
|
4.6
|
|
|
$
|
|
|
|
|
|
Options exercisable at June 30, 2009
|
|
|
366,654
|
|
|
$
|
19.86
|
|
|
|
4.4
|
|
|
$
|
|
|
|
|
|
|
|
|
(1)
|
|
The aggregate intrinsic value of a stock option in the table above represents the total pre-tax
intrinsic value (the amount by which the current market value of the underlying stock exceeds the
exercise price of the option) that would have been received by the option holders had they
exercised their options on June 30, 2009. The intrinsic value varies based on the changes in the
market value in the Companys stock.
|
Long-Term Incentive Plan
Under the 2007 Long-Term Incentive Plan, all employees and non-employee directors of the Company
and its designated subsidiaries are eligible participants. The plan includes 1,000,000 shares of
Class A common stock (of which 250,000 shares may be issued as restricted stock), subject to
customary anti-dilution adjustments, or approximately 9.0% of total outstanding shares of the Class
A common stock. As of June 30, 2009, 172,390 stock options and 18,682 shares of restricted stock
from this plan have been granted. For the stock options, the option strike price is equal to the
fair market value at the date of the grant. For employees, the stock 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. For outside directors, the stock options vest 100% one year from the grant date and
must be exercised within ten years of the grant date. The restricted stock is granted with an
estimated fair value equal to the market value of the Companys closing stock price on the date of
the grant. Restricted stock will vest three years from the grant date, if the Company achieves
specific goals set by the Compensation Committee and approved by the Board of Directors. These
goals include a three year average return on assets compared to peers, a three year average return
on equity compared to peers and a minimum return on both assets and equity over the three year
period. As of June 30, 2009, the Company had 9,056 unvested shares of restricted stock.
-23-
The following table presents the activity related to stock options granted under the 2007 Long-Term
Incentive Plan for the six months ended June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
Average
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
Remaining
|
|
Intrinsic
|
|
|
Options
|
|
Price
|
|
Term (yrs)
|
|
Value (1)
|
|
|
|
Options outstanding at December 31, 2008
|
|
|
161,901
|
|
|
$
|
10.89
|
|
|
|
8.4
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(22,249
|
)
|
|
|
15.49
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(487
|
)
|
|
|
20.08
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2009
|
|
|
139,165
|
|
|
$
|
10.13
|
|
|
|
8.5
|
|
|
$
|
|
|
|
|
|
Options exercisable at June 30, 2009
|
|
|
27,853
|
|
|
$
|
20.08
|
|
|
|
7.6
|
|
|
$
|
|
|
|
|
|
|
|
|
(1)
|
|
The aggregate intrinsic value of a stock option in the table above represents the total pre-tax
intrinsic value (the amount by which the current market value of the underlying stock exceeds the
exercise price of the option) that would have been received by the option holders had they
exercised their options on June 30, 2009. The intrinsic value varies based on the changes in the
market value in the Companys stock.
|
For all Company plans as of June 30, 2009, there were 166,416 nonvested stock options and nonvested
performance-based restricted stock and unrecognized compensation cost of $491,000 which will be
expensed within four years.
11.
Interest Rate Swaps
For asset/liability management purposes, the Company uses interest rate swaps which are agreements
between the Company and another party (known as counterparty) where one stream of future interest
payments is exchanged for another based on a specified principal amount (known as notional amount).
The Company will use interest rate swaps 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, are linked to specific liabilities, and have a high correlation
between the contract and the underlying item being hedged, both at inception and throughout the
hedge period.
The Company had utilized 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 as well
as convert a portion of variable rate borrowings (cash flow hedge) to fund fixed rate loans.
Interest rate swap contracts represent a series of interest flows exchanged over a prescribed
period. Each quarter the Company used the Volatility Reduction Measure (VRM) to determine the
effectiveness of their fair value hedges. The Company did not have any interest rate swaps
agreements as of June 30, 2009 and December 31, 2008.
12.
Fair Value Measurements
Under SFAS No. 157 Fair Value Measurements (SFAS 157), fair values are based on the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When available, Management uses quoted market
prices to determine fair value. If quoted prices are not available, fair value is based upon
valuation techniques such as matrix pricing or other models that use, where possible, current
market-based or independently sourced market parameters, such as interest rates. If
-24-
observable market-based inputs are not available, the Company uses unobservable inputs to determine
appropriate valuation adjustments using discounted cash flow methodologies.
In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly (FSP FAS 157-4). FSP FAS 157-4 provides additional guidance for estimating fair
value in accordance with SFAS 157 Fair Value Measurements when the volume and level of activity
for an asset or liability has significantly declined. FSP FAS 157-4 also offers guidance on
identifying circumstances when a transaction is not orderly. FSP FAS 157-4 became effective for
interim and annual reporting periods ending after June 15, 2009, and was applied prospectively.
SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used
to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority
to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under
SFAS 157 are as follows:
|
|
|
Level 1
:
|
|
Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities.
|
|
|
|
Level 2:
|
|
Quoted prices in markets that are not active, or inputs that are observable
either directly or indirectly, for substantially the full term of the asset or
liability. Includes debt securities with quoted prices that are traded less frequently
then exchange-traded instruments. Valuation techniques include matrix pricing which is
a mathematical technique used widely in the industry to value debt securities without
relying exclusively on quoted market prices for the specific securities but rather by
relying on the securities relationship to other benchmark quoted prices.
|
|
|
|
Level 3:
|
|
Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable (i.e., supported with little
or no market activity).
|
A financial instruments level within the fair value hierarchy is based on the lowest level of
input that is significant to the fair value measurement.
Items Measured on a Recurring Basis
The Companys available for sale investment securities are recorded at fair value on a recurring
basis.
Fair value for Level 1 securities are determined by obtaining quoted market prices on nationally
recognized securities exchanges. Level 1 securities include the Companys preferred and common
stocks and four trust preferreds securities which are actively traded.
Level 2 securities include debt securities with quoted prices, which are traded less frequently
than exchange-traded instruments, whose value is determined using matrix pricing with inputs that
are observable in the market or can be derived principally from or corroborated by observable
market data. The prices were obtained from third party vendors. This category generally includes
obligations of U.S. government-sponsored agencies, mortgage-backed securities and CMOs issued by
U.S. government and government-sponsored agencies, non-agency CMOs and corporate bonds.
The Company engaged third parties to assist in valuing Level 3 securities which include seven trust preferred
securities and three collateralized debt obligations (CDOs). The fair value for the trust
preferred securities were derived by using contractual cash flows and a market rate of return for
each of these securities. Factors that affected the market rate of return included (1) any
uncertainty about the amount and timing of the cash flows, (2) the credit risk, (3) liquidity of
the instrument, and (4) observable yields from trading data and bid/ask indications. Credit risk
spreads and liquidity premiums were analyzed to derive the appropriate discount rate. The CDO
valuations were determined using a copula method, which is a type of market standard valuation
modeling for structured credit derivative products that is dependent on the correlated default
events of the obligors within the underlying collateral pool, corporate
-25-
bond spreads, and the timing of the maturity of the CDOs to arrive at indicative pricing. The analysis did not look at
indicators of defaults but instead it analyzed what would happen to the principal if actual
defaults occurred. The analysis included 0% and 40% recovery rates. In addition, management used
two independent third parties to validate the fair values received.
For financial assets measured at fair value on a recurring basis, the fair value measurements by
level within the fair value hierarchy used at June 30, 2009 and December 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of June 30, 2009
|
|
Fair Value Measurements Using
|
|
|
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential
|
|
$
|
|
|
|
$
|
81,809
|
|
|
$
|
|
|
|
$
|
81,809
|
|
U.S. government agencies
|
|
|
|
|
|
|
1,327
|
|
|
|
|
|
|
|
1,327
|
|
Preferred stocks
|
|
|
2,296
|
|
|
|
|
|
|
|
|
|
|
|
2,296
|
|
Common stocks
|
|
|
13,664
|
|
|
|
|
|
|
|
|
|
|
|
13,664
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies
|
|
|
|
|
|
|
190,099
|
|
|
|
|
|
|
|
190,099
|
|
Non-agency
|
|
|
|
|
|
|
32,532
|
|
|
|
|
|
|
|
32,532
|
|
Collateralized debt obligations
|
|
|
|
|
|
|
|
|
|
|
31,273
|
|
|
|
31,273
|
|
Corporate bonds
|
|
|
|
|
|
|
21,953
|
|
|
|
|
|
|
|
21,953
|
|
Trust preferred securities
|
|
|
10,666
|
|
|
|
|
|
|
|
20,755
|
|
|
|
31,421
|
|
Other securities
|
|
|
|
|
|
|
|
|
|
|
8,171
|
|
|
|
8,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
26,626
|
|
|
$
|
327,720
|
|
|
$
|
60,199
|
|
|
$
|
414,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2008
|
|
Fair Value Measurements Using
|
|
|
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential
|
|
$
|
|
|
|
$
|
55,061
|
|
|
$
|
|
|
|
$
|
55,061
|
|
U.S. government agencies
|
|
|
48,191
|
|
|
|
|
|
|
|
|
|
|
|
48,191
|
|
Preferred stocks
|
|
|
|
|
|
|
|
|
|
|
2,297
|
|
|
|
2,297
|
|
Common stocks
|
|
|
540
|
|
|
|
|
|
|
|
12,167
|
|
|
|
12,707
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies
|
|
|
|
|
|
|
79,425
|
|
|
|
|
|
|
|
79,425
|
|
Non-agency
|
|
|
|
|
|
|
37,490
|
|
|
|
|
|
|
|
37,490
|
|
Collateralized debt obligations
|
|
|
|
|
|
|
|
|
|
|
26,160
|
|
|
|
26,160
|
|
Corporate bonds
|
|
|
|
|
|
|
51,338
|
|
|
|
|
|
|
|
51,338
|
|
Trust preferred securities
|
|
|
|
|
|
|
|
|
|
|
30,144
|
|
|
|
30,144
|
|
Other securities
|
|
|
|
|
|
|
|
|
|
|
7,489
|
|
|
|
7,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
48,731
|
|
|
$
|
223,314
|
|
|
$
|
78,257
|
|
|
$
|
350,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(The balance of this page was left blank intentionally.)
-26-
The following table presents additional information about assets measured at fair value on a
recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
|
|
|
|
|
|
|
Investment Securities
|
|
|
|
Available for Sale
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Beginning Balance December 31, 2008
|
|
$
|
78,257
|
|
Total gains/(losses) (realized/unrealized):
|
|
|
|
|
Included in earnings
|
|
|
(1,222
|
)
|
Included in other comprehensive loss
|
|
|
5,983
|
|
Purchases, issuances, and settlements
|
|
|
|
|
Transfers in and/or out of Level 3
|
|
|
(22,819
|
)
|
|
|
|
|
Ending balance June 30, 2009
|
|
$
|
60,199
|
|
|
|
|
|
During 2009, the Company transferred out of Level 3 and into Level 1 four trust preferred
securities that are actively traded and for which quoted prices are available. In addition, the
Company also transferred from Level 3 to Level 1 the individual stocks from the six accounts that
are managed exclusively for the Company by an investment management company.
Items Measured on a Nonrecurring Basis
Non-accrual loans are evaluated for impairment on an individual basis under SFAS No. 114. The
impairment analysis includes current collateral values, known relevant factors that may affect loan
collectability, and risks inherent in different kinds of lending. When the collateral value or
discounted cash flows less costs to sell is less than the carrying value of the loan a specific
reserve (valuation allowance) is established. Loans held for sale are carried at the lower of cost
or fair value. In the second quarter the Company transferred one impaired participation loan to
loans and leases held for sale. During the second quarter of 2009, the lead bank negotiated the
sale of the loan which is schedule to close in the third quarter. Other real estate owned (OREO)
is carried at the lower of cost or fair value. These assets are included as Level 3 fair values,
based upon the lowest level of input that is significant to the fair value measurements.
For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by
level within the fair value hierarchy used at June 30, 2009 and December 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of June 30, 2009
|
|
Fair Value Measurements Using
|
|
|
(In thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
44,459
|
|
|
$
|
44,459
|
|
Other real estate owned
|
|
|
|
|
|
|
|
|
|
|
29,310
|
|
|
|
29,310
|
|
Loans and leases held for sale
|
|
|
|
|
|
|
|
|
|
|
2,471
|
|
|
|
2,471
|
|
-27-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2008
|
|
Fair Value Measurements Using
|
|
|
(In thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
56,468
|
|
|
$
|
56,468
|
|
Other real estate owned
|
|
|
|
|
|
|
|
|
|
|
10,346
|
|
|
|
10,346
|
|
Loans and leases held for sale
|
|
|
|
|
|
|
|
|
|
|
267
|
|
|
|
267
|
|
Effective June 30, 2009, the Company adopted FASB FSP No. 107-1 and Accounting Principles Board
Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP No. 107-1
and APB No, 28-1). FSP No. 107-1 and APB No. 28-1 require interim and annual disclosures made by
publicly traded companies to include the fair value of its financial instruments, whether
recognized or not recognized in the statement of financial position, as required by SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The methodologies for estimating the fair
value of financial instruments that are measured on a recurring or nonrecurring basis are discussed
above. The methodologies for other financial instruments are discussed in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2009
|
|
At December 31, 2008
|
|
|
Carrying
|
|
Estimated
|
|
Carrying
|
|
Estimated
|
(In thousands)
|
|
amount
|
|
fair value
|
|
amount
|
|
fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
54,208
|
|
|
$
|
54,208
|
|
|
$
|
14,259
|
|
|
$
|
14,259
|
|
Investment securities available for sale
|
|
|
414,545
|
|
|
|
414,545
|
|
|
|
350,302
|
|
|
|
350,302
|
|
Federal Home Loan Bank stock
|
|
|
10,952
|
|
|
|
10,952
|
|
|
|
10,952
|
|
|
|
10,952
|
|
Loans, net
|
|
|
687,793
|
|
|
|
687,645
|
|
|
|
671,814
|
|
|
|
672,449
|
|
Accrued interest receivable
|
|
|
13,455
|
|
|
|
13,455
|
|
|
|
13,580
|
|
|
|
13,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
64,829
|
|
|
|
64,829
|
|
|
|
50,886
|
|
|
|
50,886
|
|
NOW and money markets
|
|
|
192,895
|
|
|
|
192,895
|
|
|
|
193,869
|
|
|
|
193,869
|
|
Savings
|
|
|
14,791
|
|
|
|
14,791
|
|
|
|
15,171
|
|
|
|
15,171
|
|
Time deposits
|
|
|
604,174
|
|
|
|
619,482
|
|
|
|
500,142
|
|
|
|
513,707
|
|
Short-term borrowings
|
|
|
22,000
|
|
|
|
22,000
|
|
|
|
22,000
|
|
|
|
22,000
|
|
Long-term borrowings
|
|
|
250,457
|
|
|
|
257,800
|
|
|
|
253,681
|
|
|
|
263,552
|
|
Subordinated debt
|
|
|
25,774
|
|
|
|
25,774
|
|
|
|
25,774
|
|
|
|
25,774
|
|
Obligations from equity investments
|
|
|
11,478
|
|
|
|
11,478
|
|
|
|
12,350
|
|
|
|
12,350
|
|
13.
Real Estate Owned via Equity Investment
The Company, together with third party real estate development companies, forms variable interest
entities (VIEs) to construct various real estate development projects. These VIEs account for
acquisition, development and construction costs of the real estate development projects in
accordance with SFAS No. 67, Accounting for Costs and Initial Rental Operations of Real Estate
Projects, and account for capitalized interest on those projects in accordance with SFAS No. 34,
Capitalization of Interest Cost, as amended by SFAS No. 58,
"
Capitalization of Interest Cost in
Financial Statements That Include Investments Accounted for by the Equity Method"
.
Due to the
present economic conditions, management has made a decision to curtail new equity investments.
In accordance with SFAS No. 66, Accounting for Sales of Real Estate, the full accrual method is
used by the VIEs to recognize profit on real estate sales. Profits on the sales of this real
estate are recorded by the VIEs when cash in excess of the amount of the original investment is
received, and calculation of same is made in accordance with the terms of the partnership
agreement. Neither the VIEs nor the Company are obligated to perform significant activities after
the sale to earn profits, and there is no continuing involvement with the property. The usual
risks and rewards of ownership in the transaction have passed to the acquirer.
-28-
In July 2003, Royal Bank (through its wholly owned subsidiary Royal Investments America, LLC)
received regulatory approval to acquire ownership interest in real estate projects. With the
adoption of FIN 46(R) the Company is required to perform an analysis to determine whether such
investments meet the criteria for consolidation into the Companys financial statements. As of
June 30, 2009, the Company has one VIE which is consolidated into the Companys financial
statements. This VIE met the requirements for consolidation under FIN 46(R) based on Royal
Investments America being the primary financial beneficiary. This was determined based on the
amount invested by Royal Investments America compared to the Companys partners. In September
2005, the Company, together with a real estate development company, formed a limited partnership.
Royal Investments America is a limited partner in the partnership (the Partnership). The
Partnership was formed to convert an apartment complex into condominiums. The development company
is the general partner of the Partnership. The Company invested 66% of the initial capital
contribution, or $2.5 million, with the development company investing the remaining equity of $1.3
million. The Company is entitled to earn a preferred return on the $2.5 million capital
contribution. In addition, the Company made two mezzanine loans totaling $9.2 million at market
terms and interest rates. As of June 30, 2009, the Partnership also had $11.5 million outstanding
of senior debt with another bank. Upon the repayment of the mezzanine loan interest and principal
and the initial capital contributions and preferred return, the Company and the development company
will both receive 50% of the remaining distribution, if any. The Company utilized the period of
March 1, 2009 through May 31, 2009 and January 1, 2009 to May 31, 2009 in consolidating the
financial statements of the Partnership for the three and six month periods, respectively for the
period ending June 30, 2009.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
the Partnership assesses the recoverability of fixed assets based on estimated future operating
cash flows. The Company has recognized $10 million in impairment charges related to this asset
through December 31, 2008. No further impairment of this asset occurred during the first two
quarters of 2009. The measurement and recognition of the impairment was based on estimated future
discounted operating cash flows.
At June 30, 2009, the Partnership had total assets of $20.4 million of which $18.8 million is real
estate as reflected on the consolidated balance sheet and total borrowings of $20.7 million, of
which $9.2 million relates to the Companys mezzanine loans discussed above. None of the third
party borrowings are guaranteed by the Company. The Company has made an investment of $11.7
million in this Partnership ($2.5 million capital contribution and $9.2 million of mezzanine
loans). The impairments mentioned above have contributed to an overall reduction in the Companys
investment. At June 30, 2009, the remaining amount of the investment in and receivables due from
the Partnership totaled $6.9 million.
As of December 31, 2008, the Partnership projected sales insufficient to repay a portion of its
mortgages payable by July 9, 2009, had delinquent condominium fees resulting in a technical default
and has a net capital deficiency that raises substantial doubt about its ability to continue as a
going concern. The Partnerships December 31, 2008 financial statements were prepared assuming
that the Partnership will continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty. On August 13, 2009, the
Company received a Senior Loan Default Notice from the Senior Lender as a result of the Partnership
not making the required repayment by July 9, 2009. The Company has the right to cure this default
pursuant to an Intercreditor Agreement between the Company and the Senior Lender. As of the date
of this filing, the Company is exploring its options as well as the Partnerships options to cure
this default. In the event the default is not cured per the terms of
the Intercreditor Agreement, all amounts outstanding under the loan
agreement at such time will become currently payable and reflected as
a current liability on the Companys consolidated financial
statements.
14.
Trust Preferred Securities
Management previously determined that Royal Bancshares Trust I/II (Trusts), utilized for the
Companys $25.8 million of pooled trust preferred securities issuance, qualify as a variable
interest entity under FIN 46. The Trusts issued mandatory redeemable preferred stock to investors
and loaned the proceeds to the Company. The Trusts hold, as their sole asset, subordinated
debentures issued by the Company in 2004. At June 30, 2009, the interest rates paid on Capital
Trust I and Capital Trust II were 2.78% and 5.80%, respectively.
-29-
The Company does not consolidate the Trusts as FIN 46(R) precludes consideration of the call option
embedded in the preferred stock when determining if the Company has the right to a majority of the
Trusts expected returns. The non-consolidation results in the investment in common stock of the
Trusts to be included in other assets with a corresponding increase in outstanding debt of
$774,000. In addition, the income received on the common stock investments is included in other
income. The Federal Reserve Bank has issued final guidance on the regulatory treatment for the
trust-preferred securities issued by the Trusts as a result of the adoption of FIN 46(R). The final
rule would retain the current maximum percentage of total capital permitted for trust preferred
securities at 25%, but would enact other changes to the rules governing trust preferred securities
that affect their use as a part of the collection of entities known as restricted core capital
elements. The final adoption of the rule has delayed the effective date until March 31, 2011.
Management is evaluating the effects of the final rule and does not anticipate a material impact on
its capital ratios.
On
August 13, 2009, the Companys board of directors has
determined to suspend interest payments on
the trust preferred securities. The Companys board of directors took this action in consultation
with the Federal Reserve Bank of Philadelphia as required by recent regulatory policy guidance.
The Company currently has sufficient capital and liquidity to pay the
scheduled interest payments; however,
the Company believes this decision will better support the capital position of Royal Bank, a wholly
owned subsidiary of the Company.
15.
Investment in Real Estate Joint Ventures
The Company reviewed the financial reporting of its real estate acquisition, development and
construction (ADC) loans during 2007. As a result of this review, the Company determined that
three ADC loans should have been accounted for as investments in real estate joint ventures in
accordance with AICPA Practice Bulletin 1 and SFAS No. 66, Accounting for Sales of Real Estate.
An investment in a real estate joint venture of this nature is distinguished from an equity
investment in real estate by the fact that the Company is not a party to an operating agreement and
has no legal ownership of the entity that owns the real estate. The Company reclassified two of
these ADC loans in the amount of $10.7 million to investments in real estate joint ventures as of
December 31, 2006. One investment in the amount of $4.7 million was to fund the purchase of
property for construction of an office and residential building, which was paid off during the
second quarter of 2008, which resulted in a gain on sales related to real estate joint ventures of
$1.1 million, and the other investment for $6.0 million was to fund the construction of a 55 unit
condominium building. The third investment in the amount of $2.5 million was classified as an
investment in a real estate joint venture at December 31, 2007 and was to fund the acquisition of a
marina project. The balance of the investment in the construction of a 55 unit condominium
building of $5.9 million was impaired for its full amount during the third quarter of 2007 and the
impairment was charged to operating expenses during the same quarter. As of June 30, 2009, the
balance of the marina investment was $2.5 million, for a total investment in real estate joint
ventures of $2.5 million.
16.
Commitments, Contingencies, and Concentrations
The Companys exposure to credit loss in the event of non-performance by the other party to
commitments to extend credit and standby letters of credit is represented by the contractual amount
of those instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
The contract amounts are as follows:
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June 30,
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December 31,
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(In thousands)
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2009
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2008
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Financial instruments whose contract amounts represent credit risk:
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Open-end lines of credit
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$
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65,820
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$
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98,549
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Commitments to extend credit
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6,765
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1,840
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Standby letters of credit and financial guarantees written
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3,794
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4,563
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-30-
Litigation
From time to time, the Company is a party to routine legal proceedings within the normal course of
business. Such routine legal proceedings in the aggregate are believed by management to be
immaterial to the Companys financial condition or results of operations.
Royal Bank holds a 60% equity interest in each of Crusader Servicing Corporation (CSC) and Royal
Tax Lien Services, LLC (RTL). CSC and RTL acquire, through public auction, delinquent tax liens
in various jurisdictions thereby assuming a superior lien position to most other lien holders,
including mortgage lien holders. As previously discussed in the Companys form 10-K for the year
ended December 31, 2008, on March 4, 2009, each of CSC and RTL received a grand jury subpoena
issued by the U.S. District Court for New Jersey upon application of the Antitrust Division of the
U.S. Department of Justice (DOJ). The subpoena seeks certain documents and information relating
to an ongoing investigation being conducted by the DOJ. Royal Bank has been advised that neither
CSC nor RTL are targets of the DOJ investigation, but they are subjects of the investigation.
Royal Bank, CSC and RTL are cooperating in the investigation.
17.
Shareholders Equity
On February 20, 2009, as part of the Capital Purchase Program (CPP) established by the United
States Department of Treasury (Treasury), the Company issued to Treasury 30,407 shares of the
Companys Fixed Rate Cumulative Perpetual Preferred Stock, Series A, without par value per share
(the Series A Preferred Stock), and a liquidation preference of $1,000 per share. In conjunction
with the purchase of the Series A Preferred Stock, Treasury received a warrant to purchase
1,104,370 shares of the Companys Class A common stock. The aggregate purchase price for the
Series A Preferred Stock and Warrant was $30.4 million in cash. The Series A Preferred Stock
qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum for the first
five years, and 9% per annum thereafter. The Series A Preferred Stock may generally be redeemed by
the Company at any time following consultation with its primary banking regulators. The warrant
issued to Treasury has a 10-year term and is immediately exercisable upon its issuance, with an
exercise price, subject to anti-dilution adjustments, equal to $4.13 per share of the common stock.
The Companys intention is to utilize the extra capital provided by the CPP funds to support its
efforts to prudently and transparently provide lending and liquidity.
On August 13, 2009, the Companys board of directors has determined to suspend regular quarterly
cash dividends on the $30.4 million in Series A Preferred Stock. The Companys board of directors
took this action in consultation with the Federal Reserve Bank of Philadelphia as required by
recent regulatory policy guidance. The Company currently has sufficient capital and liquidity to
pay the scheduled dividends on the preferred stock; however, the Company believes this decision
will better support the capital position of Royal Bank, a wholly owned subsidiary of the Company.
18.
Reclassifications
Certain items in the 2008 consolidated financial statements and accompanying notes have been
reclassified to conform to the current years presentation format. There was no effect on net
income for the periods presented herein as a result of reclassification.
19.
Recent Accounting Pronouncements
In November 2008, the SEC released a proposed roadmap regarding the potential use by U.S. issuers
of financial statements prepared in accordance with International Financial Reporting Standards
(IFRS). IFRS is a comprehensive series of accounting standards published by the International
Accounting Standards Board (IASB). Under the proposed roadmap, the Company may be required to
prepare consolidated financial statements in accordance with IFRS as early as 2014. The SEC will
make a determination in 2011 regarding the mandatory adoption of IFRS. The Company is currently
assessing the impact that this potential change would have on its consolidated financial
statements, and it will continue to monitor the development of the potential implementation of
IFRS.
In December 2008, the FASB issued FSP FAS 132(R)-1, Employers Disclosures about Postretirement
Benefit Plan Assets. This FSP amends SFAS 132(R), Employers Disclosures about Pensions and
Other Postretirement
-31-
Benefits, to provide guidance on an employers disclosures about plan assets
of a defined benefit pension or other postretirement plan. The disclosures about plan assets
required by this FSP shall be provided for fiscal years ending after December 15, 2009. The
Company is currently assessing the impact of SFAS 132(R)-1 on its consolidated financial position
and results of operations.
In December 2008, the FASB issued FSP SFAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities
(FSP SFAS 140-4 and FIN 46(R)-8). FSP SFAS 140-4 and FIN 46(R)-8 amends FASB SFAS 140 Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to require
public entities to provide additional disclosures about transfers of financial assets. It also
amends FIN 46(R), Consolidation of Variable Interest Entities, to require public enterprises,
including sponsors that have a variable interest in a variable interest entity, to provide
additional disclosures about their involvement with variable interest entities. Additionally, this
FSP requires certain disclosures to be provided by a public enterprise that is (a) a sponsor of a
qualifying special purpose entity (SPE) that holds a variable interest in the qualifying SPE but
was not the transferor of financial assets to the qualifying SPE and (b) a servicer of a qualifying
SPE that holds a significant variable interest in the qualifying SPE but was not the transferor of
financial assets to the qualifying SPE. The disclosures required by FSP SFAS 140-4 and FIN 46(R)-8
are intended to provide greater transparency to financial statement users about a transferors
continuing involvement with transferred financial assets and an enterprises involvement with
variable interest entities and qualifying SPEs. FSP SFAS 140-4 and FIN 46(R) are effective for
reporting periods (annual or interim) ending after December 15, 2008. The implementation of FSP
SFAS 140-4 and Fin 46(R) did not have a material impact on the Companys consolidated financial
position and results of operations.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2). This FSP, which applies to debt
securities, is intended to provide greater clarity to investors about the credit and noncredit
components of an OTTI event and to more effectively communicate when an OTTI event has occurred.
Under these circumstances as required by the new FSP, OTTI is considered to have occurred (1) if an
entity intends to sell the security; (2) if it is more likely than not an entity will be required
to sell the security before recovery of its amortized cost basis; or (3) the present value of
expected cash flows is not sufficient to recover the entire amortized cost basis. The more likely
than not criteria is a lower threshold than the probable criteria used under previous guidance.
The FSP requires that credit-related OTTI is recognized in earnings while noncredit-related OTTI on
securities not expected to be sold is recognized in other comprehensive income (OCI).
Noncredit-related OTTI is based on other factors, including illiquidity. Presentation of OTTI is
made in the statement of income on a gross basis with an offset for the amount of OTTI recognized
in OCI. For securities classified as HTM, the amount of OTTI recognized in OCI
is accreted to the credit-adjusted expected cash flow amounts of the securities over future
periods. If applicable, noncredit-related OTTI recognized in earnings previous to April 1, 2009
would be reclassified from retained earnings to accumulated OCI as a cumulative effect transition
adjustment. The Company adopted this FSP for the quarter ended June 30, 2009 and did not record a
cumulative effect adjustment as of April 1, 2009 because prior OTTI recorded in earnings was all
credit related. The adoption of the FSP resulted in reducing the loss recognized in earnings on
debt securities determined to be other-than-temporarily impaired during the quarter ended June 30,
2009 by $7.6 million. Refer to Note 5 Investment Securities for additional disclosures regarding
the adoption of this FSP.
In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly (FSP FAS 157-4). FSP FAS 157-4 provides additional guidance for estimating fair
value in accordance with SFAS 157 Fair Value Measurements when the volume and level of activity
for an asset or liability has significantly declined. FSP FAS 157-4 also offers guidance on
identifying circumstances when a transaction is not orderly. FSP FAS 157-4 became effective for
interim and annual reporting periods ending after June 15, 2009, and was applied prospectively. The
implementation of FAS 157-4 resulted in an adjustment to the fair values associated with Level 3
trust preferred securities. The net impact of the adjustment was an immaterial decline in the fair
value of the securities.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No. 165). SFAS No. 165
established general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued. In
particular, SFAS No. 165 set forth: (1) the period
-32-
after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, (2) the circumstances under which
an entity should recognize events or transactions occurring after the balance sheet date in its
financial statements and (3) the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim and
annual financial periods ending after June 15, 2009. The adoption of SFAS No. 165 did not have a
material impact on the Companys consolidated financial statements.
In June 2009, the FASB issued SFAS No. 166 Accounting for Transfers of Financial Assets an
amendment of FASB Statement No. 140 (SFAS 166). The purpose of SFAS 166 is to improve the
relevance, representational faithfulness, and comparability of the information that a reporting
entity provides in its financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a transferors
continuing involvement, if any, in transferred financial assets. SFAS 166 must be applied as of the
beginning of each reporting entitys first annual reporting period that begins after November 15,
2009, for interim periods within that first annual reporting period and for interim and annual
reporting periods thereafter. Earlier application is prohibited. SFAS 166 must be applied to
transfers occurring on or after the effective date. Additionally, on and after the effective date,
the concept of a qualifying special purpose entity is no longer relevant for accounting purposes.
Therefore, formerly qualifying special-purpose entities (as defined under previous accounting
standards) should be evaluated for consolidation by reporting entities on and after the effective
date in accordance with the applicable consolidation guidance. If the evaluation on the effective
date results in consolidation, the reporting entity should apply the transition guidance provided
in the pronouncement that requires consolidation. The Company is currently evaluating the impact
the adoption of SFAS No. 166 will have on its consolidated financial statements.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS
No. 167). The FASB issued SFAS No. 167 to improve financial reporting by enterprises involved
with variable interest entities. The FASB undertook this project to address (1) the effects on
certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities (FIN 46-R), as a result of the elimination of the qualifying
special-purpose entity concept in SFAS No. 166, and (2) constituent concerns about the application
of certain key provisions of FIN 46(R), including those in which the accounting
and disclosures under FIN 46(R) do not always provide timely and useful information about an
enterprises involvement in a variable interest entity. SFAS No. 167 shall be effective as of the
beginning of each reporting entitys first annual reporting period that begins after November 15,
2009, for interim periods within that first annual reporting period, and for interim and annual
reporting periods thereafter. Earlier application is prohibited. The Company is currently
evaluating the impact the adoption of SFAS No. 167 will have on its consolidated financial
statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification
TM
and the Hierarchy of Generally Accepted Accounting Principles a
replacement of FASB Statement No. 162 (SFAS No. 168). The FASB Accounting Standards
Codification
TM
(Codification) will become the source of authoritative GAAP recognized
by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative GAAP for SEC
registrants. On the effective date of SFAS No. 168, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become nonauthoritative. SFAS No. 168
is effective for financial statements issued for interim and annual periods ending after September
15, 2009. The FASB believes that the issuance of SFAS No. 168 will not change GAAP.
20.
Subsequent Events
On July 15, 2009, Royal Bank agreed to enter into a Stipulation and Consent to the Issuance of an
Order to Cease and Desist with each of the Federal Deposit Insurance Corporation (FDIC) and the
Commonwealth of Pennsylvania Department of Banking (Department).
-33-
The material terms of the orders are identical and require Royal Bank to:
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have and retain qualified management, and notify the FDIC and the Department of any
changes in Royal Banks board of directors or senior management;
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increase participation of Royal Banks board of directors in Royal Banks affairs by
having the board assume full responsibility for approving Royal Banks policies and
objectives and for supervising Royal Banks management;
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eliminate all assets classified as Loss and formulate a written plan to reduce
assets classified as Doubtful and Substandard at its regulatory examination;
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develop a written plan to reduce delinquent loans, and restrict additional advances
to borrowers with existing credits classified as Loss, Doubtful or Substandard;
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develop a written plan to reduce Royal Banks commercial real estate loan
concentration;
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maintain, after establishing an adequate allowance for loan and lease losses, a
ratio of Tier 1 capital to total assets (leverage ratio) equal to or greater than 8%
and a ratio of qualifying total capital to risk-weighted assets (total risk-based
capital ratio) equal to or greater than 12%;
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formulate and implement written profit plans and comprehensive budgets for each year
during which the orders are in effect;
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formulate and implement a strategic plan covering at least three years, to be
reviewed quarterly and revised annually;
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revise the liquidity and funds management policy and update and review the policy
annually;
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refrain from increasing the amount of brokered deposits held by Royal Bank and
develop a plan to reduce the reliance on non-core deposits and wholesale funding
sources;
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refrain from paying cash dividends without prior approval of the FDIC and the
Department;
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refrain from making payments to or entering contracts with Royal Banks holding
company or other Royal Bank affiliates without prior approval of the FDIC and the
Department;
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submit to the FDIC for review and approval an executive compensation plan that
incorporates qualitative as well as profitability performance standards for Royal
Banks executive officers;
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establish a compliance committee of the board of directors of Royal Bank with the
responsibility to ensure Royal Banks compliance with the orders; and
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prepare and submit quarterly reports to the FDIC and the Department detailing the
actions taken to secure compliance with the orders.
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The orders will remain in effect until modified or terminated by the FDIC and the Department.
On August 13, 2009, the Companys board of directors has determined to suspend the regular
quarterly cash dividends on the $30.4 million in Series A Preferred Stock issued to the United
States Department of the Treasury (Treasury) as part of the Capital Purchase Program (CPP)
established by the Treasury. The Companys board of directors took this action in consultation
with the Federal Reserve Bank of Philadelphia as required by recent regulatory policy guidance.
The board of directors also intends to suspend interest payments on its $25.8 million of
outstanding trust preferred securities. The Company currently has sufficient capital and liquidity
to pay the scheduled dividends and interest payments on its preferred stock and trust preferred securities. However, the
Company believes this decision will better support the capital position of Royal Bank, a wholly
owned subsidiary of the Company.
-34-
ITEM 2
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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 and six month periods ended June 30, 2009 and June 30, 2008. This discussion and
analysis should be read in conjunction with the Companys consolidated financial statements and
notes thereto for the year ended December 31, 2008, included in the Companys Form 10-K for the
year ended December 31, 2008.
FORWARD-LOOKING STATEMENTS
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 and Exchange Commission. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. When we use words such as believes, expects,
anticipates or similar expressions, we are making 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
Companys actual results and experience to differ materially from the anticipated results or other
expectations expressed in the Company forward-looking statements. The risks and uncertainties that
may affect the operations, performance development and results of the Companys business include
the following: general economic conditions, including their impact on capital expenditures; the
possibility that we will be unable to comply with the conditions imposed upon us in the Order to
Cease and Desist, which could result in the imposition of further restrictions on our operations;
interest rate fluctuations; 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.
All forward-looking statements contained in this report are based on information available as of
the date of this report. These statements speak only as of the date of this report, even if
subsequently made available by the Company on its website, or otherwise. 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 Companys preparation of the consolidated
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 consolidated financial statements and the accompanying notes. These estimates and
assumptions are based on information available as of the date of the consolidated financial
statements; therefore, actual results could differ from those estimates.
Note A to the Companys consolidated financial statements (included in Item 8 of the Form 10-K for
the year ended December 31, 2008) lists significant accounting policies used in the development and
presentation of the Companys consolidated financial statements. The following discussion and
analysis, the significant accounting policies, and other financial statement disclosures identify
and address key variables and other quantitative and qualitative factors that are necessary for an
understanding and evaluation of the Company and its results of operations. The Company is an
investor in a variable interest entity and is required to report its investment in the variable
interest entity on a consolidated basis under FIN 46(R). The variable interest entity is
responsible for providing its financial information to the Company. We complete an internal review
of this financial information. This review requires substantive judgment and estimation. As
disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31,
-35-
2008, we have identified accounting for allowance for loan and leases losses, deferred tax assets,
other than temporary impairment on investments securities, accounting for acquisition, development
and construction loans and derivative securities as among the most critical accounting policies and
estimates in that they are important to the presentation of the Companys financial condition and
results of operations, and they require difficult, subjective or complex judgments as a result of
the need to make estimates.
As a result of the adoption of FSP No. FAS 115-2 and FAS 124-2 effective April 1, 2009, the Company
has revised its critical accounting policy pertaining to other-than-temporary impairment of
investment securities. FSP No. FAS 115-2 and FAS 124-2 applied to existing and new debt securities
held by the Company as of April 1, 2009, the beginning of the interim period in which it was
adopted. Therefore, the revised accounting policy below represents the only change in the
Corporations critical accounting policies from those disclosed in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2008 and applies prospectively beginning April 1, 2009.
Valuation of Investment Securities for Impairment
Securities available for sale are carried at fair value, with any unrealized gains and losses, net
of taxes, reported as accumulated other comprehensive income or loss in shareholders equity. The
fair values of securities are based on either quoted market prices, third party pricing services or
third party valuation specialists. When the fair value of an investment security is less than its
amortized cost basis, the Company assesses whether the decline in value is other-than-temporary.
The Company considers whether evidence indicating the cost of the investment is recoverable
outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for
impairment, the severity and duration of the impairment, changes in the value subsequent to the
reporting date, financial condition and results of the issuer including changes in capital, the
issuers credit rating, analysts earnings estimates, industry trends specific to the security, and
timing of debt maturity and status of debt payments. Future adverse changes in market conditions,
continued poor operating results of the issuer, projected adverse changes in cash flows which might
impact the collection of all principal and interest related to the security, or other factors could
result in further losses that may not be reflected in an investments current carrying value,
possibly requiring an additional impairment charge in the future.
Equity securities:
In determining whether an other-than-temporary impairment has occurred for common equity
securities, the Company also considers whether it has the ability and intent to hold the investment
until a market price recovery in the foreseeable future. Management evaluates the near-term
prospects of the issuers in relation to the severity and duration of the impairment. If necessary,
the investment is written down to its current fair value through a charge to earnings at the time
the impairment is deemed to have occurred. For preferred stocks, the Companys determination of
other-than-temporary impairment is made using an impairment model (including an anticipated
recovery period) similar to a debt security, provided there has been no evidence of a deterioration
in credit of the issuer.
Debt securities:
In determining whether an other-than-temporary impairment has occurred for debt securities, the
Company compares the present value of cash flows expected to be collected from the security with
the amortized cost of the security. If the present value of expected cash flows is less than the
amortized cost of the security, then the entire amortized cost of the security will not be
recovered, that is, a credit loss exists, and an other-than temporary impairment shall be
considered to have occurred. When an other-than-temporary impairment has occurred, the amount of
the other-than-temporary impairment recognized in earnings for a debt security depends on whether
the Company intends to sell the security or more likely than not will be required to sell the
security before recovery of its amortized cost less any current period credit loss. If the Company
intends to sell the security or more likely than not will be required to sell the security before
recovery of its amortized cost, the other-than-temporary impairment shall be recognized in earnings
equal to the entire difference between the amortized cost and fair value of the security. If the
Company does not intend to sell or more likely than not will not be required to sell the security
before recovery of its amortized cost, the amount of the other-than-temporary impairment related to
credit loss shall be recognized in earnings and the noncredit-related portion of the
other-than-temporary impairment shall be recognized in other comprehensive income.
-36-
Financial Highlights and Business Results
On June 29, 1995, pursuant to the plan of reorganization approved by the shareholders of Royal Bank
America, formerly Royal Bank of Pennsylvania (Royal Bank), all of the outstanding shares of
common stock of Royal Bank were acquired by Royal Bancshares and were exchanged on a one-for-one
basis for common stock of Royal Bancshares. On July 17, 2006, Royal Asian Bank (Royal Asian) was
chartered by the Commonwealth of Pennsylvania Department of Banking and commenced operation as a
Pennsylvania state-chartered bank. Prior to obtaining a separate charter, the business of Royal
Asian was operated as a division of Royal Bank. The principal activities of the Company is
supervising Royal Bank and Royal Asian, collectively known as the Banks, which engage in a general
banking business principally in Montgomery, Chester, Bucks, Philadelphia and Berks counties in
Pennsylvania and in Northern and Southern New Jersey and Delaware. The Company also has a wholly
owned non-bank subsidiary, Royal Investments of Delaware, Inc., which is engaged in investment
activities.
At June 30, 2009, the Company had consolidated total assets of approximately $1.3 billion, total
deposits of approximately $876.7 million and shareholders equity of approximately $108.8 million.
The Company had interest income of $16.6 million and $32.9 million, respectively for the three and
six month periods ended June 30, 2009, reflecting decreases of $1.1 million, or 6.4%, and 4.9
million, or 12.8%, respectively from the comparable periods of 2008. The year over year decline in
interest income was attributed to a 325 basis point reduction in the prime rate by the Federal
Reserve since the beginning of 2008 that negatively impacted prime based and variable rate loans
coupled with an increase in non-performing loans that resulted in the loss of accrued interest.
Also contributing to the decline in interest income was a higher level of cash and cash equivalents
during 2009, which was at a much lower yield, as a result of managements decision to maintain an
increased level of liquidity during the current economic times. In addition, the yield on
investment securities has decreased 106 and 78 basis points for the three and six month periods in
2009, respectively, compared to the same periods in 2008 mainly as a result of higher yielding
agency investments being called in the first quarter of 2009 and being replaced with considerably
lower yielding agency investments. Interest expense for the three and six months ended June 30,
2009 was $9.7 million and $19.0 million, respectively, resulting in an increase of $1.2 million, or
14.5%, and an increase of $341,000, or 1.8%, respectively from the comparable periods of 2008. The
increase for the three month period was related to the higher volume of time deposits in 2009
compared to 2008. The Company recorded a net loss for the quarter ended June 30, 2009 of $12.1
million compared to net income of $152,000 reported for the quarter ended June 30, 2008, while the
net loss for the six months ended June 30, 2009 was $18.8 million compared to net income of $1.2
million for the comparable period of 2008. The year-over-year decrease in net income (income in
2008 compared to a loss in 2009) for the current quarter was primarily associated with an increase
of $2.6 million in impairment losses on available for sale securities, a $2.4 million increase in
the provision for loan and lease losses, a $2.0 million decrease in gains on the sales of premises
and equipment, a $1.1 million decrease in gains on the sale of real estate joint ventures, an
increase in nonperforming loans that resulted in a loss of $1.7 million in interest income which
contributed to the 124 basis point decrease in the net interest margin (2.30% versus 3.54%) and a
$643,000 increase in the FDIC and state assessments, of which $600,000 is directly related to the
FDIC special assessment to be collected in September.
The year over year decline in net income for the six month period ended June 30, 2009 compared to
the same period in 2008 was primarily attributed to an increase of $6.8 million in impairment
losses on available for sale securities, a $2.0 million decrease in gains on the sales of premises
and equipment, a $1.9 million increase in provision for loan and lease losses, a $1.1 million
decrease in gains on the sale of real estate joint ventures, a 114 basis point decrease in the net
interest margin (2.40% versus 3.54%) which was a result of $3.3 million in lost interest due to the
increase in nonperforming loans and a lower yield on investment securities mainly related to agency
bonds being called and a $794,000 increase in the FDIC and state assessments, of which $600,000 is
directly related to the FDIC special assessment to be collected in September.
The chief sources of revenue for the Company are interest income from extending loans and interest
income from investing in security instruments, mostly through its subsidiaries Royal Bank and Royal
Asian. Both Royal Bank and Royal Asian principally generate commercial real estate loans secured
by first mortgage liens. These types of loans make up 27.0% and 70.8% of the loan portfolios of
Royal Bank and Royal Asian at June 30, 2009, respectively. Additionally, Royal Bank and Royal
Asian offer construction loans, including construction loans for commercial real estate projects
and for residential home development. At June 30, 2009, construction loans comprised 24.5% and
12.7%, respectively, of the Royal Bank and Royal Asian loan portfolios. Land development loans at
June 30, 2009 comprised 10.7% and 0% of the loan portfolios of Royal Bank and Royal Asian,
-37-
respectively. Construction loans and land development loans can have more risk associated with
them, especially when a weakened economy, such as we are experiencing now, adversely impacts the
commercial rental or home sales market. In the past, the Company and Royal Bank offered mezzanine
loans. Mezzanine loans are typically inherently more risky, higher rewarding, loans. They are
often secured by subordinate lien positions with loan to value ratios typically between 75% and 95%
of collateral value. The Company and its subsidiaries did not typically offer mezzanine loans for
purposes other than the acquisition or construction of projects related to real estate. On
occasion, the Company had extended mezzanine financing on a project where Royal Bank extended
senior debt financing. During the fourth quarter of 2007, management of the Company made a
decision to curtail mezzanine lending due to the elevation of risk given the current economic
conditions. At June 30, 2009, the Company had $4.6 million in mezzanine loans outstanding, and the
percentage of mezzanine loans in the Companys consolidated loan portfolio was 0.7% of the
portfolio. Mezzanine loans inherently carry more risk and accordingly at June 30, 2009, the
portion of the Companys loan loss reserve attributed to mezzanine loans was $2.2 million, or 52.9%
of outstanding mezzanine loans. Net earnings of the Company are largely dependent on taking in
deposits at competitive market rates, and then redeploying those deposited funds into loans and
investments in securities at rates higher than those paid to the depositors to earn an interest
rate spread. Please see the Net Interest Margin section in Managements Discussion and Analysis of
Financial Condition and Results of Operation below for additional information on interest yield and
cost.
Consolidated Net (Loss) Income
During the second quarter of 2009, the Company recorded a net loss of $12.1 million compared to net
income of $152,000 for the comparable quarter of 2008. The net loss was primarily the result of an
increase of $2.6 million in impairment losses on available for sale securities, a $2.4 million
increase in the provision for loan and lease losses, a decline in net interest income of $2.3
million related to a decline in interest earning assets as well as an increase in nonperforming
loans, a $2.0 million decrease in gains on the sales of premises and equipment, a $1.1 million
decrease in gains on the sale of real estate joint ventures, and an increase of $1.3 million in
other expenses related to OREO and loan collection expenses, legal and professional fees, and
higher FDIC insurance, of which $600,000 was related to the special FDIC assessment for the second
quarter of 2009. As a consequence of the slowdown in the housing market and the economic recession,
the Company continued to experience a weakening in the performance of real estate related loans and
impairment losses on investment securities. Impaired and non-accrual loans are reviewed in the
Credit Risk Management section of this report while the impaired investment securities are
discussed in the Investment Securities section under Financial Condition. Basic loss per share
and diluted loss per share were both $0.95 for the second quarter of 2009, as compared to basic and
diluted earnings per share of $0.01 for the same quarter of 2008.
For the six months ended June 30, 2009, the net loss amounted to $18.8 million compared to net
income of $1.2 million for the comparable period of 2008. This decline was primarily attributable
to a $6.8 million increase in investment impairment, an increase in nonperforming loans which
resulted in the loss of $3.3 million in interest income associated with those nonperforming loans,
lower yields on loans and investments, a $2.0 million decrease in gains on the sales of premises
and equipment, and a $1.9 million increase in the provision for loan and lease losses. Net
interest income decreased $5.1 million from $19.1 million in the first half of 2008 to $14.0
million in the first half of 2009. As previously noted, as a consequence of the slowdown in the
housing market and the economic recession, the Company continued to experience a weakening in the
performance of real estate related loans and impairment losses on investment securities. Impaired
and non-accrual loans are reviewed in the Credit Risk Management section of this report while the
impaired investment securities are discussed in the Investment Securities section under
Financial Condition. Basic and diluted loss per share were both $1.47 for the first six months
of 2009, while basic and diluted earnings per share were both $0.09 for the first six months of
2008.
Interest Income
Despite a 14.8% increase in average interest earning assets, total interest income for the second
quarter of 2009 amounted to $16.6 million representing a decline of $1.1 million, or 6.4%, from the
level of the comparable quarter of 2008. Average interest earning assets were $1.2 billion in the
second quarter of 2009 compared to $1.1 billion in the second quarter of 2008. The decrease in
interest income was driven by a decline in the yields on all earning assets due to a 175 basis
point decline in the prime rate during the past twelve months related to the Federal
-38-
Reserves monetary policy that negatively impacted prime based loans and investments purchased
within the last year. Additionally, the year over year increase in non-accrual loans negatively
impacted the yield on interest earning assets. Average loan balances of $718.7 million in the
second quarter of 2009 increased $47.6 million (7.1%) year over year. The loan growth was
attributed to an increased focus on commercial and industrial lending during the past three
quarters, the introduction of small business lending in the fourth quarter of 2008, advances
against existing outstanding loans, continued growth in tax certificates and minimal loan
prepayments partially offset by charge-offs and transfers to OREO. Average investment securities
increased $58.1 million (15.3%) from $379.2 million for the second quarter of 2008 to $437.3
million for the second quarter of 2009. The Company mainly purchased government agency
mortgage-backed and government agency CMO securities. In an effort to boost liquidity, average cash
equivalents grew $50.7 million (6.4 times) from $7.9 million for the three months ended June 30,
2008 to $58.6 million for the three months ended June 30, 2009.
The yield on average interest earning assets for the second quarter of 2009 of 5.47% declined by
126 basis points from the level recorded during the comparable quarter of 2008. The 126 basis
point reduction was comprised of year over year declines of 204, 106, and 98 basis points for cash
equivalents (0.40% versus 2.44%) investment securities (4.87% versus 5.93%), and loans (6.25%
versus 7.23%), respectively. Lower interest rates on all three earning asset categories reflected
the general market decline in interest rates during the past year and the significant impact on
variable rate loans in particular. In addition the yield on average loans was negatively impacted
by the increase of non-accrual loans during the past year. During the second quarter of 2009,
interest lost on non-accrual loans was $1.7 million.
For the six months ended June 30, 2009, total interest income amounted to $32.9 million versus
$37.8 million for the comparable period of 2008 resulting in a decline of $4.9 million, or 12.8%.
Average interest earning assets were $1.2 billion for the first six months of 2009 compared to $1.1
billion for the comparable 2008 period. As with the second quarter results, the decrease was
driven by a decline in the yields on all earning assets due to a 175 basis point decline in the
prime rate during the past twelve months related to the Federal Reserves monetary policy that
negatively impacted prime based loans and investments purchased within the last year. Additionally,
the year over year increase in non-accrual loans negatively impacted the yield on interest earning
assets. Average loan balances of $719.2 million in the second quarter of 2009 increased $55.8
million (8.4%) year over year. The loan growth was attributed to an increased focus on commercial
and industrial lending during the past three quarters, the introduction of small business lending
in the fourth quarter of 2008, advances against existing outstanding loans, continued growth in tax
certificates and minimal loan prepayments partially offset by charge-offs and transfers to OREO.
Average investment securities slightly increased $229,000 (.05%) from $425.1 million for the first
six months of 2008 to $425.3 million for the first six months of 2009. The Company mainly purchased
government agency mortgage-backed and government agency CMO securities to replace called government
agency securities. In an effort to boost liquidity, average cash equivalents grew $33.3 million
(6.5 times) from $5.1 million for the six months ended June 30, 2008 to $38.4 million for the six
months ended June 30, 2009.
The yield on average interest earning assets for the six months ended June 30, 2009 of 5.61%
declined by 134 basis points from 6.95% for the comparable period of 2008. The 134 basis point
reduction was comprised of year over year declines of 215, 78, and 148 basis points for cash
equivalents (0.45% versus 2.60%) investment securities (4.88% versus 5.66%), and loans (6.32%
versus 7.80%), respectively. Lower interest rates on all three earning asset categories reflected
the general market decline in interest rates during the past year and the significant impact on
variable rate loans in particular. In addition the yield on average loans was negatively impacted
by the increase of non-accrual loans during the past year. During the first six months of 2009,
interest lost on non-accrual loans was $3.3 million.
Interest Expense
Interest expense increased $1.2 million to $9.7 million for the quarter ended June 30, 2009
compared to the same period in 2008. The change in interest expense resulted from average interest
bearing deposits growing $176.3 million to $796.3 million for the second quarter of 2009. There
was a shift in the deposit mix with average time deposits increasing $212.2 million (56.1%) while
average NOW and money markets declined $35.2 million (15.6%). As a result of the decline in market
interest rates, retail and brokered deposits became more attractive during the past
-39-
three quarters and management shifted the funding emphasis to these deposits and away from FHLB
advances. Management elected to reduce the reliance on FHLB advances due to the suspension of the
dividend at year end 2008 coupled with the current requirement of full collateral delivery status
for FHLB advances. The yield on average interest bearing liabilities was 3.52% for the second
quarter of 2009 down 22 basis points from 3.74% for the second quarter of 2008. The average
interest rate paid on average interest bearing deposits for the second quarter of 2009 was 3.34%
resulting in a decline of 12 basis points from the level of 3.46% during the comparable quarter of
2008. Average borrowings grew by $15.3 million to $298.5 million for the second quarter of 2009
while the corresponding yield declined by 33 basis points to 4.01% for the same period.
For the six months ended June 30, 2009, interest expense of $19.0 million increased $341,000, or
1.8% from $18.6 million for the comparable period in 2008. The slight increase in interest expense
was due to a $120.2 million increase in average interest bearing liabilities offset by a 37 basis
point decline in the yield on interest bearing liabilities year over year. Average time deposits
increased $165.7 million while average NOW and money markets declined $39.8 million and average
borrowings declined $5.2 million. Consistent with the current quarters results, as a result of
the decline in market interest rates, retail and brokered deposits became more attractive during
the past three quarters and management shifted the funding emphasis to these deposits and away from
FHLB advances. The interest expense related to real estate owned via equity investments amounted to
$103,000 for the first six months of 2009 which was equivalent to the same period in 2008.
Net Interest Margin
The net interest margin in the second quarter of 2009 of 2.30% declined 124 basis points from the
comparable quarter of 2008 of 3.54%. The primary reason for the significant decline in the net
interest margin from quarter to quarter was an increase in non performing loans which along with
the 200 basis point reduction in the prime rate by the Federal Reserve since the first quarter of
2008 contributed to a 98 basis point reduction in the yield on loans. Also contributing to the
decline in the net interest margin was a 106 basis point reduction in the yield on investment
securities which was mainly a result of higher yielding agency bonds being called during the first
quarter of 2009 and replaced with lower yielding agency mortgage-backed securities and government
agency CMO securities. In addition, due to the current economic environment, management decided to
maintain a larger position in cash and cash equivalents ($58.6 million average balance for the
second quarter of 2009) which yielded only 40 basis points for the second quarter of 2009.
Partially offsetting these declines was a 22 basis point reduction in the cost of interest bearing
liabilities (3.52% in 2009 versus 3.74% in 2008).
The net interest margin of 2.40% for the six month period ended June 30, 2009, decreased 114 basis
points from 3.54% in the comparable period of 2008. The factors driving down the net interest
margin for the six month period were similar to those that affected the net interest margin during
the second quarter. The yield on loans dropped 148 basis points to 6.32% for the six month period
in 2009 from 7.80% for the same period in 2008, the yield on investment securities declined 78
basis points to 4.88% for the six month period in 2009 from 5.66% for the same period in 2008, and
the average balance in cash and cash equivalents for the six month period ended June 30, 2009 was
$38.4 million which yielded only 45 basis points. Partially offsetting these declines was an
overall 37 basis point reduction in the cost of interest bearing liabilities (3.58% in 2009 versus
3.95% in 2008), which was primarily attributable to interest bearing deposits.
The following table represents the average daily balances of assets, liabilities and shareholders
equity and the respective interest bearing assets and interest bearing liabilities, as well as
average rates for the periods indicated, exclusive of interest on obligations related to real
estate owned via equity investment. The loans outstanding include non-accruing loans. The yield
on earning assets and the net interest margin are presented on a fully tax-equivalent (FTE) and
annualized basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt
investments and loans using the federal statutory tax rate of 35% for each period presented.
-40-
(The balance of this page was left blank intentionally.)
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|
|
|
|
|
|
|
For the three months ended
|
|
|
For the three months ended
|
|
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
58,628
|
|
|
$
|
58
|
|
|
|
0.40
|
%
|
|
$
|
7,910
|
|
|
$
|
48
|
|
|
|
2.44
|
%
|
Investments securities
|
|
|
437,290
|
|
|
|
5,308
|
|
|
|
4.87
|
%
|
|
|
379,239
|
|
|
|
5,596
|
|
|
|
5.93
|
%
|
Loans
|
|
|
718,707
|
|
|
|
11,204
|
|
|
|
6.25
|
%
|
|
|
671,082
|
|
|
|
12,058
|
|
|
|
7.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
1,214,625
|
|
|
|
16,570
|
|
|
|
5.47
|
%
|
|
|
1,058,231
|
|
|
|
17,702
|
|
|
|
6.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-earning assets
|
|
|
72,634
|
|
|
|
|
|
|
|
|
|
|
|
77,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets
|
|
$
|
1,287,259
|
|
|
|
|
|
|
|
|
|
|
$
|
1,135,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money markets
|
|
$
|
191,263
|
|
|
|
892
|
|
|
|
1.87
|
%
|
|
$
|
226,481
|
|
|
|
1,406
|
|
|
|
2.50
|
%
|
Savings
|
|
|
14,491
|
|
|
|
20
|
|
|
|
0.55
|
%
|
|
|
15,176
|
|
|
|
21
|
|
|
|
0.56
|
%
|
Time deposits
|
|
|
590,587
|
|
|
|
5,720
|
|
|
|
3.88
|
%
|
|
|
378,399
|
|
|
|
3,912
|
|
|
|
4.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
796,341
|
|
|
|
6,632
|
|
|
|
3.34
|
%
|
|
|
620,056
|
|
|
|
5,339
|
|
|
|
3.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
298,519
|
|
|
|
2,986
|
|
|
|
4.01
|
%
|
|
|
283,197
|
|
|
|
3,056
|
|
|
|
4.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
1,094,860
|
|
|
|
9,618
|
|
|
|
3.52
|
%
|
|
|
903,253
|
|
|
|
8,395
|
|
|
|
3.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
|
60,908
|
|
|
|
|
|
|
|
|
|
|
|
56,501
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
20,919
|
|
|
|
|
|
|
|
|
|
|
|
34,149
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
110,572
|
|
|
|
|
|
|
|
|
|
|
|
141,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average liabilities and equity
|
|
$
|
1,287,259
|
|
|
|
|
|
|
|
|
|
|
$
|
1,135,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
$
|
6,952
|
|
|
|
2.30
|
%
|
|
|
|
|
|
$
|
9,307
|
|
|
|
3.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(The balance of this page was left blank intentionally.)
-41-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
For the six months ended
|
|
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
Cash equivalents
|
|
$
|
38,392
|
|
|
$
|
86
|
|
|
|
0.45
|
%
|
|
$
|
5,112
|
|
|
$
|
66
|
|
|
|
2.60
|
%
|
Investments securities
|
|
|
425,328
|
|
|
|
10,289
|
|
|
|
4.88
|
%
|
|
|
425,099
|
|
|
|
11,966
|
|
|
|
5.66
|
%
|
Loans
|
|
|
719,237
|
|
|
|
22,549
|
|
|
|
6.32
|
%
|
|
|
663,391
|
|
|
|
25,742
|
|
|
|
7.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
1,182,957
|
|
|
|
32,924
|
|
|
|
5.61
|
%
|
|
|
1,093,602
|
|
|
|
37,774
|
|
|
|
6.95
|
%
|
Non-earning assets
|
|
|
61,848
|
|
|
|
|
|
|
|
|
|
|
|
75,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets
|
|
$
|
1,244,805
|
|
|
|
|
|
|
|
|
|
|
$
|
1,168,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money markets
|
|
$
|
193,498
|
|
|
|
1,909
|
|
|
|
1.99
|
%
|
|
$
|
233,293
|
|
|
|
3,236
|
|
|
|
2.79
|
%
|
Savings
|
|
|
14,767
|
|
|
|
41
|
|
|
|
0.56
|
%
|
|
|
15,222
|
|
|
|
41
|
|
|
|
0.54
|
%
|
Time deposits
|
|
|
555,314
|
|
|
|
10,934
|
|
|
|
3.97
|
%
|
|
|
389,633
|
|
|
|
8,996
|
|
|
|
4.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
763,579
|
|
|
|
12,884
|
|
|
|
3.40
|
%
|
|
|
638,148
|
|
|
|
12,273
|
|
|
|
3.87
|
%
|
Borrowings
|
|
|
299,318
|
|
|
|
5,979
|
|
|
|
4.03
|
%
|
|
|
304,510
|
|
|
|
6,249
|
|
|
|
4.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
1,062,897
|
|
|
|
18,863
|
|
|
|
3.58
|
%
|
|
|
942,658
|
|
|
|
18,522
|
|
|
|
3.95
|
%
|
Non-interest bearing deposits
|
|
|
57,326
|
|
|
|
|
|
|
|
|
|
|
|
58,039
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
20,566
|
|
|
|
|
|
|
|
|
|
|
|
23,156
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
104,016
|
|
|
|
|
|
|
|
|
|
|
|
144,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average liabilities and equity
|
|
$
|
1,244,805
|
|
|
|
|
|
|
|
|
|
|
$
|
1,168,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
$
|
14,061
|
|
|
|
2.40
|
%
|
|
|
|
|
|
$
|
19,252
|
|
|
|
3.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Volume Analysis
The following tables sets forth a rate/volume analysis, which segregates in detail the major
factors contributing to the change in net interest income exclusive of interest on obligation
through real estate owned via equity investment, for the three and six month periods ended June 30,
2009, as compared to the respective period in 2008, into amounts attributable to both rates and
volume variances.
(The balance of this page was left blank intentionally.)
-42-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009 vs. 2008
|
|
|
2009 vs. 2008
|
|
|
|
Increase (decrease)
|
|
|
Increase (decrease)
|
|
(In thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
55
|
|
|
$
|
(34
|
)
|
|
$
|
21
|
|
|
$
|
77
|
|
|
$
|
(42
|
)
|
|
$
|
35
|
|
Federal funds sold
|
|
|
(4
|
)
|
|
|
(7
|
)
|
|
|
(11
|
)
|
|
|
(2
|
)
|
|
|
(13
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short term earning assets
|
|
$
|
51
|
|
|
$
|
(41
|
)
|
|
$
|
10
|
|
|
$
|
75
|
|
|
$
|
(55
|
)
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity
|
|
|
(1,041
|
)
|
|
|
|
|
|
|
(1,041
|
)
|
|
|
(2,337
|
)
|
|
|
|
|
|
|
(2,337
|
)
|
Available for sale
|
|
|
1,411
|
|
|
|
(658
|
)
|
|
|
753
|
|
|
|
1,993
|
|
|
|
(1,333
|
)
|
|
|
660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
370
|
|
|
$
|
(658
|
)
|
|
$
|
(288
|
)
|
|
$
|
(344
|
)
|
|
$
|
(1,333
|
)
|
|
$
|
(1,677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial demand loans
|
|
$
|
(74
|
)
|
|
$
|
(1,252
|
)
|
|
$
|
(1,326
|
)
|
|
$
|
14
|
|
|
$
|
(3,293
|
)
|
|
$
|
(3,279
|
)
|
Commercial mortgages
|
|
|
354
|
|
|
|
(47
|
)
|
|
|
307
|
|
|
|
774
|
|
|
|
(672
|
)
|
|
|
102
|
|
Residential and home equity
|
|
|
(16
|
)
|
|
|
(42
|
)
|
|
|
(58
|
)
|
|
|
(43
|
)
|
|
|
(84
|
)
|
|
|
(127
|
)
|
Leases receivables
|
|
|
233
|
|
|
|
(105
|
)
|
|
|
128
|
|
|
|
639
|
|
|
|
(441
|
)
|
|
|
198
|
|
Tax certificates
|
|
|
778
|
|
|
|
(110
|
)
|
|
|
668
|
|
|
|
1,552
|
|
|
|
(249
|
)
|
|
|
1,303
|
|
Other loans
|
|
|
(6
|
)
|
|
|
(3
|
)
|
|
|
(9
|
)
|
|
|
(7
|
)
|
|
|
(10
|
)
|
|
|
(17
|
)
|
Loan fees
|
|
|
(564
|
)
|
|
|
|
|
|
|
(564
|
)
|
|
|
(1,373
|
)
|
|
|
|
|
|
|
(1,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
705
|
|
|
$
|
(1,559
|
)
|
|
$
|
(854
|
)
|
|
$
|
1,556
|
|
|
$
|
(4,749
|
)
|
|
$
|
(3,193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest income
|
|
$
|
1,126
|
|
|
$
|
(2,258
|
)
|
|
$
|
(1,132
|
)
|
|
$
|
1,287
|
|
|
$
|
(6,137
|
)
|
|
$
|
(4,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market
|
|
$
|
(198
|
)
|
|
$
|
(315
|
)
|
|
$
|
(513
|
)
|
|
$
|
(493
|
)
|
|
$
|
(835
|
)
|
|
$
|
(1,328
|
)
|
Savings
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
1
|
|
Time deposits
|
|
|
2,068
|
|
|
|
(261
|
)
|
|
|
1,807
|
|
|
|
3,372
|
|
|
|
(1,434
|
)
|
|
|
1,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
1,869
|
|
|
$
|
(576
|
)
|
|
$
|
1,293
|
|
|
$
|
2,878
|
|
|
$
|
(2,267
|
)
|
|
$
|
611
|
|
Trust preferred
|
|
|
|
|
|
|
(52
|
)
|
|
|
(52
|
)
|
|
|
|
|
|
|
(129
|
)
|
|
|
(129
|
)
|
Borrowings
|
|
|
157
|
|
|
|
(175
|
)
|
|
|
(18
|
)
|
|
|
(102
|
)
|
|
|
(39
|
)
|
|
|
(141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest expense
|
|
$
|
2,026
|
|
|
$
|
(803
|
)
|
|
$
|
1,223
|
|
|
$
|
2,776
|
|
|
$
|
(2,435
|
)
|
|
$
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total decrease in net interest income
|
|
$
|
(900
|
)
|
|
$
|
(1,455
|
)
|
|
$
|
(2,355
|
)
|
|
$
|
(1,489
|
)
|
|
$
|
(3,702
|
)
|
|
$
|
(5,191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk Management
The Companys loan and lease portfolio (the credit portfolio) is subject to varying degrees of
credit risk. The Company maintains an allowance for loan and lease losses (the allowance) to
absorb possible losses in the loan and lease portfolio. The allowance is based on the review and
evaluation of the loan and lease portfolio, along with ongoing, quarterly assessments of the
probable losses inherent in that portfolio. The allowance represents an estimation made pursuant to
SFAS No. 5, Accounting for Contingencies, or SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. The adequacy of the allowance is determined through evaluation of the credit
portfolio, and involves consideration of a number of factors, as outlined below, to establish a
prudent level. Determination of the allowance is inherently subjective and requires significant
estimates, including estimated losses on pools of homogeneous loans and leases based on historical
loss experience and consideration of current economic trends, which may be susceptible to
significant change. Loans and leases deemed uncollectible are charged against the allowance, while
recoveries are credited to the allowance. Management adjusts the level of the allowance through the
provision for loan and lease losses, which is recorded as a current period expense. The Companys
systematic methodology for assessing the appropriateness of the allowance includes: (1) the formula
allowance reflecting
historical losses, as adjusted, by loan category, and (2) the specific allowance for risk-rated
credits on an individual or portfolio basis.
-43-
The Company uses three major components in determining the appropriate value of the loan and lease
loss allowance: standards required under SFAS No. 114, an historical loss factor, and an
environmental factor. Utilizing standards required under SFAS No. 114, loans are evaluated for
impairment on an individual basis considering current collateral values (current appraisals or rent
rolls for income producing properties), all known relevant factors that may affect loan
collectability, and risks inherent in different kinds of lending (such as source of repayment,
quality of borrower and concentration of credit quality). Once a loan is determined to be impaired
(or is classified) such loans will be deducted from the portfolio and the net remaining balance
will be used in the historical and environmental analysis.
The formula allowance, which is based upon historical loss factors, as adjusted, establishes
allowances for the major loan and lease categories based upon a five year rolling average of the
historical loss experienced. The factors used to adjust the historical loss experience address
various risk characteristics of the Companys loan and lease portfolio including: (1) trends in
delinquencies and other non-performing loans, (2) changes in the risk profile related to large
loans in the portfolio, (3) changes in the growth trends of categories of loans comprising the loan
and lease portfolio, (4) concentrations of loans and leases to specific industry segments, and (5)
changes in economic conditions on both a local and national level.
Management recognizes the higher credit risk associated with commercial and construction loans. As
a result of the higher credit risk related to commercial and construction loans, the Company
computes its formula allowance (which is based upon historical loss factors, as adjusted) using
higher quantitative risk weighting factors than used for its consumer related loans. As an example,
the Company applies an internal quantitative risk-weighting factor for construction loans which is
approximately three times higher than the quantitative risk-weighting factor used for multi-family
real estate loans. These higher economic risk factors for commercial and construction loans are
used to compensate for the higher volatility of commercial and construction loans to changes in the
economy and various real estate markets.
A loan is considered impaired when it is probable that interest and principal will not be collected
according to the contractual terms of the loan agreement. Analysis resulting in specific
allowances, including those on loans identified for evaluation of impairment, includes
consideration of the borrowers overall financial condition, resources and payment record, support
available from financial guarantors and the sufficiency of collateral. For such loans that are
classified as impaired, an allowance is established when the discounted cash flows (or collateral
value or observable market price) of the impaired loan are lower than the carrying value of that
loan. These factors are combined to estimate the probability and severity of inherent losses. Then
a specific allowance is established based on the Companys calculation of the potential loss in
individual loans. Additional allowances may also be established in special circumstances involving
a particular group of credits or portfolio when management becomes aware that losses incurred may
exceed those determined by application of the risk factors.
The Company classifies its leases as capital leases, in accordance to SFAS No. 13, Accounting for
Leases, as amended by SFAS 98 and 145. The difference between the Companys gross investment in
the lease and the cost or carrying amount of the leased property, if different, is recorded as
unearned income, which is amortized to income over the lease term by the interest method.
The amount of the allowance is reviewed and approved by the Chief Operating Officer (COO), Chief
Financial Officer (CFO) and Chief Accounting Officer (CAO) on at least a quarterly basis. The
provision for loan and lease losses was $7.0 million and $9.8 million for the three and six months
ended June 30, 2009, respectively, compared to $4.5 million and $7.8 million for the comparable
periods in 2008. The deteriorating real estate market that continued from 2008 into the first six
months of 2009 has negatively impacted construction and real estate loans throughout the banking
industry. This weak sales market has affected land development, construction and mezzanine loans
of the Company. The Company has considered these economic conditions in its methodologies used in
setting the allowance for loan and lease losses.
-44-
The allowance for loan and lease losses was 3.96% of total loans and leases at June 30, 2009 and
4.13% at December 31, 2008. The allowance for loan and lease losses slightly declined $534,000, or
1.8%, from $28.9 million at December 31, 2008 to $28.4 million at June 30, 2009. The decline was
primarily associated with a $3.8 million decrease in the specific allowance related to impaired
loans offset by a $3.3 million increase in the formula reserves. The recent charge-offs experienced
by the Company impact the historical loss factors used in the allowance calculation. During the
first six months of 2009, there were changes in estimation methods or assumptions that affected the
allowance methodology. These changes included increasing the risk factors specific to construction,
non-residential, and RBA Capital loans.
Management believes that the allowance for loan and lease losses is adequate at June 30, 2009.
However, its determination requires significant judgment, and estimates of probable losses inherent
in the credit portfolio can vary significantly from the amounts actually observed. While management
uses available information to recognize probable losses, future changes to the allowance may be
necessary based on changes in the credits comprising the portfolio and changes in the financial
condition of borrowers, such as may result from changes in economic conditions. In addition,
regulatory agencies, as an integral part of their examination process, and independent consultants
engaged by the Company, periodically review the credit portfolio and the allowance. Such review may
result in additional provisions based on these third-party judgments of information available at
the time of each examination.
Changes in the allowance for loan and lease losses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three
|
|
|
For the six
|
|
|
|
|
|
|
months ended
|
|
|
months ended
|
|
|
For the year ended
|
|
(In thousands)
|
|
June 30, 2009
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning period
|
|
$
|
27,269
|
|
|
$
|
28,908
|
|
|
$
|
19,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
(239
|
)
|
|
|
(254
|
)
|
|
|
(1,009
|
)
|
Construction and land development
|
|
|
(4,357
|
)
|
|
|
(4,357
|
)
|
|
|
(3,852
|
)
|
Construction and land development-mezzanine
|
|
|
(298
|
)
|
|
|
(298
|
)
|
|
|
(1,540
|
)
|
Single family residential
|
|
|
(153
|
)
|
|
|
(153
|
)
|
|
|
(37
|
)
|
Single family residential-mezzanine
|
|
|
|
|
|
|
|
|
|
|
(2,220
|
)
|
Real estate- non-residential
|
|
|
(665
|
)
|
|
|
(3,834
|
)
|
|
|
(1,330
|
)
|
Real estate- non-residential mezzanine
|
|
|
|
|
|
|
(1,132
|
)
|
|
|
(1,675
|
)
|
Leases
|
|
|
(157
|
)
|
|
|
(310
|
)
|
|
|
(642
|
)
|
Tax certificates
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
(5,869
|
)
|
|
|
(10,338
|
)
|
|
|
(12,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1
|
|
|
|
3
|
|
|
|
106
|
|
Single family residential
|
|
|
2
|
|
|
|
33
|
|
|
|
6
|
|
Leases
|
|
|
15
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
18
|
|
|
|
51
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs
|
|
|
(5,851
|
)
|
|
|
(10,287
|
)
|
|
|
(12,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses
|
|
|
6,956
|
|
|
|
9,753
|
|
|
|
21,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of period
|
|
$
|
28,374
|
|
|
$
|
28,374
|
|
|
$
|
28,908
|
|
|
|
|
|
|
|
|
|
|
|
-45-
An analysis of the allowance for loan and lease losses by loan type is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
outstanding
|
|
|
|
|
|
|
outstanding
|
|
|
|
|
|
|
|
loans in each
|
|
|
|
|
|
|
loans in each
|
|
|
|
Allowance
|
|
|
category to total
|
|
|
Allowance
|
|
|
category to total
|
|
(In thousands, except percentages)
|
|
amount
|
|
|
loans
|
|
|
amount
|
|
|
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
3,305
|
|
|
|
12.1
|
%
|
|
$
|
2,403
|
|
|
|
12.3
|
%
|
Construction
|
|
|
9,255
|
|
|
|
23.4
|
%
|
|
|
11,548
|
|
|
|
23.8
|
%
|
Land Development
|
|
|
2,026
|
|
|
|
9.7
|
%
|
|
|
2,359
|
|
|
|
10.6
|
%
|
Constr. and land develop. mezzanine
|
|
|
2,136
|
|
|
|
0.3
|
%
|
|
|
1,415
|
|
|
|
0.3
|
%
|
Single family residential
|
|
|
778
|
|
|
|
5.1
|
%
|
|
|
747
|
|
|
|
3.9
|
%
|
Real Estate non-residential
|
|
|
6,719
|
|
|
|
30.9
|
%
|
|
|
5,172
|
|
|
|
33.4
|
%
|
Real Estate non-res. mezzanine
|
|
|
499
|
|
|
|
0.4
|
%
|
|
|
1,188
|
|
|
|
0.6
|
%
|
Real Estate multi-family
|
|
|
133
|
|
|
|
1.9
|
%
|
|
|
133
|
|
|
|
2.0
|
%
|
Tax certificates
|
|
|
2,139
|
|
|
|
11.3
|
%
|
|
|
2,735
|
|
|
|
9.1
|
%
|
Lease financing
|
|
|
1,369
|
|
|
|
4.5
|
%
|
|
|
1,183
|
|
|
|
3.7
|
%
|
Other
|
|
|
15
|
|
|
|
0.2
|
%
|
|
|
15
|
|
|
|
0.2
|
%
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,374
|
|
|
|
100.0
|
%
|
|
$
|
28,908
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys non-performing assets are set forth below:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
(Amounts in thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans
(1)
|
|
$
|
85,603
|
|
|
$
|
85,830
|
|
Other real estate owned
|
|
|
29,310
|
|
|
|
10,346
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
114,913
|
|
|
$
|
96,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets to total assets
|
|
|
8.70
|
%
|
|
|
8.18
|
%
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans
|
|
|
11.95
|
%
|
|
|
12.25
|
%
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease loss to non-accrual loans
|
|
|
33.15
|
%
|
|
|
33.68
|
%
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$
|
716,167
|
|
|
$
|
700,722
|
|
Total Assets
|
|
$
|
1,320,645
|
|
|
$
|
1,175,586
|
|
Allowance for Loan and Lease Losses
|
|
$
|
28,374
|
|
|
$
|
28,908
|
|
|
|
|
|
|
|
|
|
|
ALLL / Loans & Leases
|
|
|
3.96
|
%
|
|
|
4.13
|
%
|
|
|
|
(1)
|
|
Generally, a loan is placed on non-accruing status when it has been delinquent for a
period of 90 days or more.
|
-46-
The composition of non-accrual loans is as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
Total Loan
|
|
|
Specific
|
|
(In thousands)
|
|
Balance
|
|
|
Reserves
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
19,093
|
|
|
$
|
1,736
|
|
Land Development
|
|
|
14,048
|
|
|
|
118
|
|
Construction & Land Develop. mezzanine
|
|
|
2,458
|
|
|
|
2,123
|
|
Real Estate-Non-Residential
|
|
|
16,005
|
|
|
|
1,142
|
|
Real Estate-Non-Residential mezzanine
|
|
|
2,979
|
|
|
|
499
|
|
Commercial & industrial
|
|
|
22,442
|
|
|
|
1,431
|
|
Residential real estate
|
|
|
2,623
|
|
|
|
96
|
|
Leasing
|
|
|
749
|
|
|
|
83
|
|
Tax certificates
|
|
|
5,206
|
|
|
|
1,827
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
85,603
|
|
|
$
|
9,055
|
|
|
|
|
|
|
|
|
Non-accrual loan activity for the first and second quarters of 2009 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter Actvity
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
Payments and
|
|
|
|
|
|
|
Transfer to
|
|
|
Balance at
|
|
(In thousands)
|
|
December 31, 2008
|
|
|
Additions
|
|
|
other decreases
|
|
|
Charge-offs
|
|
|
OREO
|
|
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
41,485
|
|
|
$
|
4,966
|
|
|
$
|
(14,120
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
32,331
|
|
Land development
|
|
|
11,044
|
|
|
|
4,442
|
|
|
|
(807
|
)
|
|
|
(913
|
)
|
|
|
(7,301
|
)
|
|
|
6,465
|
|
Construction & land development -
mezzanine
|
|
|
2,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,421
|
|
Real Estate-Non-Residential
|
|
|
6,324
|
|
|
|
2,244
|
|
|
|
|
|
|
|
(1,035
|
)
|
|
|
(1,930
|
)
|
|
|
5,603
|
|
Real Estate-Non-Residential -
mezzanine
|
|
|
3,612
|
|
|
|
|
|
|
|
|
|
|
|
(1,132
|
)
|
|
|
|
|
|
|
2,480
|
|
Commercial & Industrial
|
|
|
12,145
|
|
|
|
1,530
|
|
|
|
(412
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
13,248
|
|
Residential real estate
|
|
|
1,472
|
|
|
|
210
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
1,675
|
|
Leasing
|
|
|
711
|
|
|
|
|
|
|
|
(33
|
)
|
|
|
(153
|
)
|
|
|
|
|
|
|
525
|
|
Tax certificates
|
|
|
6,616
|
|
|
|
|
|
|
|
(95
|
)
|
|
|
(1,221
|
)
|
|
|
|
|
|
|
5,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
85,830
|
|
|
$
|
13,392
|
|
|
$
|
(15,474
|
)
|
|
$
|
(4,469
|
)
|
|
$
|
(9,231
|
)
|
|
$
|
70,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2nd Quarter Actvity
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
Payments and
|
|
|
|
|
|
|
Transfer to
|
|
|
Balance at
|
|
(In thousands)
|
|
March 31, 2009
|
|
|
Additions
|
|
|
other decreases
|
|
|
Charge-offs
|
|
|
OREO
|
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
32,331
|
|
|
$
|
179
|
|
|
$
|
(1,509
|
)
|
|
$
|
(4,357
|
)
|
|
$
|
(7,551
|
)
|
|
$
|
19,093
|
|
Land development
|
|
|
6,465
|
|
|
|
9,882
|
|
|
|
(1,471
|
)
|
|
|
(426
|
)
|
|
|
(402
|
)
|
|
|
14,048
|
|
Construction & land development -
mezzanine
|
|
|
2,421
|
|
|
|
335
|
|
|
|
|
|
|
|
(298
|
)
|
|
|
|
|
|
|
2,458
|
|
Real Estate-Non-Residential
|
|
|
5,603
|
|
|
|
12,986
|
|
|
|
(2,355
|
)
|
|
|
(228
|
)
|
|
|
|
|
|
|
16,006
|
|
Real Estate-Non-Residential -
mezzanine
|
|
|
2,480
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,978
|
|
Commercial & Industrial
|
|
|
13,248
|
|
|
|
9,706
|
|
|
|
(273
|
)
|
|
|
(239
|
)
|
|
|
|
|
|
|
22,442
|
|
Residential real estate
|
|
|
1,675
|
|
|
|
1,244
|
|
|
|
(143
|
)
|
|
|
(153
|
)
|
|
|
|
|
|
|
2,623
|
|
Residential real estate mezzanine
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasing
|
|
|
525
|
|
|
|
381
|
|
|
|
|
|
|
|
(157
|
)
|
|
|
|
|
|
|
749
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax certificates
|
|
|
5,300
|
|
|
|
11
|
|
|
|
(94
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
5,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
70,048
|
|
|
$
|
35,222
|
|
|
$
|
(5,845
|
)
|
|
$
|
(5,869
|
)
|
|
$
|
(7,953
|
)
|
|
$
|
85,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-47-
The following is a detailed list of the significant additions to non-accrual loans during the first
quarter of 2009:
|
|
|
A $2.5 million loan, in which the bank is a participant, became non-accrual during
the first quarter of 2009. The loan is collateralized by a first lien Deed of Trust on
two parcels comprising 141.59 acres in Highland, Howard County, Maryland. The land was
purchased in August, 2005. The original plan was to build 37 single family lots
averaging over 3 acres each under contract with a national builder to take down these
lots over a minimum of two years. The contract with the builder has been amended five
times. To date, there have been only five lots taken down. The loan has been declared
in default and judgment confessed. A foreclosure action was commenced. During the
first quarter of 2009, an impairment analysis was performed in accordance with SFAS 114
and the loan was deemed impaired. As a result, a charge-off was recorded in the amount
of $913,000. During the second quarter of 2009, the lead bank negotiated the sale of
the loan which is scheduled to close in the third quarter. Accordingly the loan has
been transferred to loans and leases held for sale. An additional charge-off of
$416,000 was recorded in the second quarter of 2009 which was based on the expected
proceeds from the sale of the loan.
|
|
|
|
|
Two loans in the aggregate amount of $4.8 million for a construction project in
Minneapolis, Minnesota, to renovate a historic building into a luxury hotel and to
construct 86 residential condominiums connected to the hotel became non-accrual during
the first quarter of 2009. The two loans are under a forbearance agreement. These
loans are loan participations in larger loans in the aggregate of $60.3 million. The
hotel is fully operational and the construction of the condominiums is complete. As of
the date of this filing, approximately 33% percent of the condominiums have been sold.
Preliminary appraisals as of March 2009 indicated impairment in accordance with SFAS
114. Consequently, the Company established a specific reserve of $218,000 for these
loans.
|
|
|
|
|
A $1.9 million loan for a fully leased 100,000 square foot industrial building and
1.5 acre parcel of land located in New Morgan, Pennsylvania became non-accrual in the
first quarter of 2009. The loan was paid in full during the second quarter of 2009.
|
|
|
|
|
One loan of RBA Capital in the amount of $1.5 million was related to one borrower
extending loans to third-party buyers of single family residences in need of rehab
work. During the first quarter of 2009, the borrower failed to meet certain loan
covenants and terms and the loan was classified as impaired. RBA Capital has taken
over management of this portfolio and is in the process of working out the underlying
assets in the portfolio. The independent valuations showed a portfolio value of over
$2.0 million and the expectation is that all of the principal and expenses will be
recovered at this time.
|
The following is a detailed list of the significant additions to non-accrual loans during the
second quarter of 2009:
|
|
|
A $9.2 million commercial participation loan became non-accrual during the second
quarter of 2009. The borrower is located in Fort Lauderdale, Florida and the loan is
secured by aircraft. Current appraisals of the aircraft indicated impairment in
accordance with SFAS 114. As a result, the Company established a valuation allowance
of $1.1 million for this loan.
|
|
|
|
|
A $1.1 million loan on 5 condominium units located in Philadelphia, Pennsylvania
became non-accrual in the second quarter of 2009. The loan has been declared in
default and judgment confessed. A foreclosure action is being commenced.
|
|
|
|
|
A $5.3 million loan on a commercial building located in Conshohocken, Pennsylvania
became non-accrual in the second quarter of 2009. The loan is secured by a first
mortgage on the property with assignment of rents and leases and a $1.0 million life
insurance policy on the guarantor. The building is currently 50% leased with an
additional 17% to be leased early in the third quarter. The Company is currently
working with the borrower to bring the loan current.
|
-48-
|
|
|
A $1.9 million loan for a commercial building became non-accrual in the second
quarter of 2009. The loan is secured by a second mortgage with assignment of rents on
a property located in Wayne, New Jersey. The current appraisal and occupancy rate
indicated impairment in accordance with SFAS 114. As a result, the Company established
a valuation allowance of $547,000 for this loan. The loan has been declared in default
and has been referred for foreclosure.
|
|
|
|
|
A $5.8 million land development loan comprised of a $5.5 million loan and a $335,000
mezzanine loan became non-accrual in the second quarter of 2009. The loan is secured
by a first mortgage on vacant land in Brigantine, New Jersey. The site is approved for
nine single family lots. The borrower is awaiting final approval to change the use to
a 42-unit hotel condominium development. The Company declared the loan in default and
confessed judgment. A foreclosure action is being commenced.
|
|
|
|
|
A $1.2 million loan for a hotel became non-accrual in the second quarter of 2009.
The loan is secured by first mortgages on a 12-unit hotel and a commercial building in
Philadelphia, Pennsylvania. In July, the borrower brought the loan current and agreed
to list the property for sale.
|
|
|
|
|
A $3.5 million loan for a commercial building became non-accrual in the second
quarter of 2009. The loan is secured by a first mortgage on a commercial building
located in Jamaica, New York and a $500,000 life insurance policy on the guarantor.
The loan has been declared in default and foreclosure commenced.
|
|
|
|
|
A $4.6 million land development participation loan, comprised of a $4.1 million loan
and a $498,000 mezzanine loan, became non-accrual in the second quarter of 2009. The
project is a 114-unit townhouse development located in Millville, Delaware. Current
appraisals indicated impairment in accordance with SFAS 114. Consequently, the Company
established a specific reserve of $617,000 for these loans.
|
Non-accrual and impaired loans were $85.6 million at June 30, 2009, compared to $85.8 million at
December 31, 2008, a marginal decrease of $227,000. The six-month decline was the result of
payments and improvements, transfers to other real estate owned and charge-offs of $21.3 million,
$17.2 million and $10.3 million, respectively, offset by new non-accrual loans of $48.6 million.
Of the $10.3 million in charge-offs, $4.7 million was related to the transfer of loans to OREO of
which $2.9 million had been specifically reserved. The remaining $5.6 million in charge-offs, of
which $2.8 million had been specifically reserved, were primarily related to non-residential loans
including two mezzanine loans. If interest had been accrued, such income would have been
approximately $1.7 million for the three months ended June 30, 2009. The Company has no troubled
debt restructured loans or loans past due 90 days or more on which it has continued to accrue
interest during the quarter.
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 agreement. Analysis resulting in
specific allowances, including those on loans identified for evaluation of impairment, includes
consideration of the borrowers overall financial condition, resources and payment record, support
available from financial guarantors and the sufficiency of collateral. For such loans that are
classified as impaired, per FAS 114 analysis, a specific allowance is established only when the
discounted cash flows (or collateral value or observable market price) of the impaired loan is
lower than the carrying value of that loan. The Company does not accrue interest income on
impaired loans. Excess proceeds received over the principal amounts due on impaired loans are
recognized as income on a cash basis.
-49-
The following is a summary of information pertaining to impaired loans:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with a valuation allowance
|
|
$
|
53,514
|
|
|
$
|
69,350
|
|
Impaired loans without a valuation allowance
|
|
|
32,089
|
|
|
|
16,480
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
85,603
|
|
|
$
|
85,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance related to impaired loans
|
|
$
|
9,055
|
|
|
$
|
12,882
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
(In thousands)
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Average investment in impaired loans
|
|
$
|
80,494
|
|
|
$
|
46,952
|
|
Interest income recognized on impaired loans
|
|
$
|
196
|
|
|
$
|
|
|
Interest income recognized on a cash basis on impaired loans
|
|
$
|
196
|
|
|
$
|
|
|
The $3.8 million decline in the valuation allowance was primarily related to one loan that was
transferred to other real estate owned (OREO) during the second quarter of 2009. The valuation
allowance of $2.9 million for that loan was charged to the allowance for loan and lease losses at
the time of transfer to OREO.
Total cash collected on impaired loans for the three months and six months ended June 30, 2009 was
$7.8 million and $12.6 million, respectively.
The Companys policy for interest income recognition on restructured loans is to recognize income
on currently performing impaired loans under the accrual method.
Other Real Estate Owned
Other real estate owned (OREO) increased $19.0 million from $10.3 million at December 31, 2008 to
$29.3 million at June 30, 2009. Set forth below is a table which details the changes in OREO from
December 31, 2008 to June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
10,346
|
|
|
$
|
20,244
|
|
Capital improvements
|
|
|
711
|
|
|
|
1,626
|
|
Assets acquired on non-accrual loans
|
|
|
9,231
|
|
|
|
7,953
|
|
Other
|
|
|
(44
|
)
|
|
|
37
|
|
Valuation allowance
|
|
|
|
|
|
|
(550
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
20,244
|
|
|
$
|
29,310
|
|
|
|
|
|
|
|
|
During the second quarter of 2009, the Company acquired the collateral for four loans through, or
in lieu of, foreclosure. At the time of the transfer to OREO, the Company recorded $3.8 million in
charge-offs on two of the loans, for which $2.9 million had previously been reserved in the
allowance for loan and lease losses in accordance with FAS 114. A third loan had a $954,000
charge-off recorded against the allowance for loan and lease losses in 2008 and was transferred to
OREO at the current carrying value. The last loan was transferred at cost. During the
-50-
first quarter of 2009, the Company acquired the collateral for three loans through, or in lieu of,
foreclosure. At the time of the transfer to OREO, the Company recorded a charge-off of $867,000
through the allowance for loan and lease losses on one of the properties due to the loan balance
exceeding the fair market value of the collateral. On another property during the fourth quarter
of 2008, the Company recorded a charge-off of $2.3 million through the allowance for loan and lease
losses and transferred the remaining balance to OREO in the first quarter of 2009. Additionally,
the Company established a $550,000 valuation allowance against the carrying value of an asset
transferred to OREO during the first quarter of 2009. The Company is currently negotiating the sale
of that asset and used the offered purchase price in valuing the asset. The remaining asset
acquired was recorded to OREO at the carrying value of the loan.
Credit Classification Process
All loans, at the time of presentation to the appropriate loan committee, are given an initial loan
risk rating by the Chief Credit Officer (CCO). From time to time, and at the general direction
of any of the various loan committees, the ratings may be changed based on the findings of that
committee. Items considered in assigning ratings include the financial strength of the borrower
and/or guarantors, the type of collateral, the collateral lien position, the type of loan and loan
structure, any potential risk inherent in the specific loan type, and higher than normal monitoring
of the loan or any other factor deemed appropriate by any of the various committees for changing
the rating of the loan. Any such change in rating is reflected in the minutes of that committee.
The riskier classifications include Watch, Special Mention, Substandard, Doubtful and Loss.
The loan review function is outsourced to a third party vendor which applies the Companys loan
rating system to specific credits. Upon completion of a loan review, any loan receiving an adverse
classification by the reviewer is presented to the Loan Review Committee for discussion. Minutes
outlining in detail the Committees findings and recommendations are issued after each meeting for
follow-up by individual loan officers. The Committee is comprised of the voting members of the
Officers Loan Committee. The CCO is the primary bank officer dealing with the third party vendor
during the reviews.
All loans are subject to initial loan review. Additional review is undertaken with respect to loans
providing potentially greater exposure. This is accomplished by:
|
a.
|
|
Reviewing all loans of $1 million or more annually;
|
|
|
b.
|
|
Reviewing 25% of all loans from $500,000 up to $1 million annually;
|
|
|
c.
|
|
Reviewing 2% of all loans below $500,000 annually; and
|
|
|
d.
|
|
Reviewing any loan requested specifically by bank management.
|
Loans on the Companys Special Assets Committee list are also subject to loan review even though
they are receiving the daily attention of the assigned officer and monthly attention of the Special
Assets Committee.
A watch list is maintained and reviewed at each meeting of the Loan Review Committee. Loans are
added to the watch list, even though current or less than 30 days delinquent if they exhibit
elements of substandard creditworthiness. The watch list contains a statement for each loan as to
why it merits special attention, and this list is distributed to the Board on a monthly basis.
Loans may be removed from the watch list if the Loan Review Committee determines that exception
items have been resolved or creditworthiness has improved. Additionally, if loans become serious
collection matters and are listed on the Banks monthly delinquent loan or Special Assets Committee
lists, they may be removed from the watch list.
Potential Problem Loans
Potential problem loans are loans not currently classified as non-performing loans, but for which
management has doubts as to the borrowers ability to comply with present repayment terms. The
assets are principally commercial loans delinquent more than 30 days but less than 90 days.
Potential problem loans amounted to approximately $38.0 million and $8.8 million at June 30, 2009
and December 31, 2008, respectively. The principal reason for the increase has been a weakening of
the credit quality in our commercial loan portfolio particularly related to companies in the
residential homebuilder construction industry. Management has considered the trend in growth of
potential problem loans and has included a factor for same in the formula used to set the Companys
general loan loss reserve.
-51-
Residential construction and land development loans comprise the bulk of potential problem loans,
aggregating $26.7 million of the $38.0 million in total potential problem loans outstanding at June
30, 2009. The chief reason that residential constructions loans have continued to weaken is due in
large part to the poor sales market for homes, especially new construction. Homebuilders and
developers have been challenged in generating the cash flow needed to make loan payments. Many
residential construction loans have interest reserves from which monthly interest payments are
taken. However, the lengthening of the marketing period due to a weak sales economy has caused
depletion in these reserves. In cases where interest reserves are nearing depletion, the Company
seeks to obtain additional collateral from its borrowers, where possible, prior to advancing
additional funds to restore interest reserves. As a result of the FDICs Order to Cease and
Desist, disclosed under Regulatory Orders, the Companys board of directors will approve all
advances for additional funds on potential problem loans.
Other (Loss) Income
For the second quarter of 2009 other loss was $3.4 million compared to other income of $2.5 million
for the comparable period in 2008. The other loss during the second quarter of 2009 was directly
related to $5.1 million of OTTI charges recorded on AFS securities compared to $2.5 million during
the second quarter of 2008. Refer to Note 5 Investment Securities to the consolidated financial
statements for more information on the impairment charges. Also contributing to the $5.9 million
decline for the comparable quarters was a $2.0 million decrease in gains on the sales of premises
and equipment ($0 in 2009 versus $2.0 million in 2008), a $1.1 million decrease in the gains on the
sales related to real estate joint ventures ($0 in 2009 versus $1.1 million in 2008), a $257,000
decrease in income related to real estate owned via equity investments, and a $218,000 decrease in
gains on the sales of other real estate owned. Partially offsetting these declines was an increase
of $234,000 from gains on the sales of loans and leases.
For the six months ended June 30, 2009, other loss amounted to $7.0 million compared to other
income of $3.7 million for comparable period of 2008, a decline of $10.7 million. The $10.7 million
decline was primarily attributable to an increase of $6.8 million in OTTI charges on AFS securities
($9.3 million during 2009 compared to $2.5 million during the first six months of 2008). As
previously noted the impairments are described in detail in Note 5 Investment Securities. In
addition, gains on the sales of premises and equipment declined $2.0 million, gains on the sales of
real estate joint ventures declined $1.1 million, income associated with real estate owned via
equity investment declined $758,000 ($867,000 in 2009 versus $1.6 million in 2008), a decrease of
$315,000 from the gains on the sales of other real estate owned ($37,000 in 2009 versus $352,000 in
2008) and net losses on the sale of AFS investment securities increased $208,000 ($288,000 loss in
2009 versus $80,000 in 2008). Partially offsetting these declines was an increase of $205,000 in
income from bank owned life insurance and an increase of $171,000 in gains on the sales of loans
and leases.
Other Expense
Non-interest expense for the second quarter of 2009 amounted to $8.3 million resulting in an
increase of $1.3 million, or 18.2%, from the comparable quarter of 2008. The increase was primarily
attributable to a $1.1 million increase in OREO and loan collection expenses as a result of the
increase in non-performing assets, a $643,000 increase in FDIC Insurance and Pennsylvania
Department of Banking assessments, which was largely due to the accrual for a special industry-wide
insurance assessment from the FDIC in the amount of $600,000 that is to be paid in the third
quarter, a $349,000 increase in professional and legal fees from the prior year due to the
increased level of impaired loans, and a $55,000 increase in occupancy and equipment. Partially
offsetting these increases were a reduction in stock option expense of $225,000 related to
forfeitures and a decrease of $162,000 related to salaries and employee benefits.
For the six months ended June 30, 2009 non-interest expense of $15.5 million amounted to an
increase of $1.9 million, or 13.9%, above the level of the comparable period of 2008. The increase
was primarily attributable to a increase of $1.3 million in OREO and loan collection expenses as a
result of an increase in non-performing assets, a $794,000 increase in FDIC Insurance and
Pennsylvania Department of Banking assessments, which was largely due
-52-
to the $600,000 accrual for the special insurance assessment from the FDIC mentioned above, a
$618,000 increase in professional and legal fees as a result of the increased level of impaired
loans, and a $152,000 increase in occupancy and equipment which was a result of the opening of two
new lending centers. Partially offsetting these increases was a decrease of $437,000 related to
salaries and employee benefits and a reduction in stock option expense of $286,000 related to
forfeitures.
Income Tax Expense (Benefit)
Total income tax expense for the second quarter of 2009 was $0 compared to a tax benefit of
$185,000 in the second quarter of 2008. The Company did not record a tax benefit despite the net
loss in the second quarter of 2009 since it concluded at December 31, 2008 that it was more likely
than not that the Company would not generate sufficient future taxable income to realize all of the
deferred tax assets and therefore established a valuation allowance against deferred tax assets as
of December 31, 2008 in the amount of $15.5 million. The valuation allowance increased $2.6 million
to $18.1 million as of June 30, 2009 based on activity during 2009. Managements conclusion was
based on consideration of the relative weight of the available evidence and the uncertainty of
future market conditions on results of operations. The effective tax rate for the second quarter of
2009 was 0% compared to an effective tax benefit of 142.3% for the same period in 2008.
Total income tax expense for the six months ended June 30, 2009 totaled $0 as compared to a tax
benefit of $69,000 for the comparable period of 2008. This was primarily related to a decline in
net income for the first six months of 2009 relative to the comparable period of 2008. The Company
did not record a tax benefit despite the net loss for the six month period in 2009 since it
concluded at December 31, 2008 that it was more likely than not that the Company would not generate
sufficient future taxable income to realize all of the deferred tax assets and therefore
established a valuation allowance against deferred tax assets as of December 31, 2008 in the amount
of $15.5 million. During the first six months of 2009, the valuation allowance increased $2.6
million to $18.1 million as of June 30, 2009 based on activity during 2009. Managements conclusion
was based on consideration of the relative weight of the available evidence and the uncertainty of
future market conditions on results of operations. The effective tax rate for the first half of
2009 was 0% versus an effective tax benefit of 4.8% for the comparable period of 2008.
Results of Operations by Business Segments
The Company has identified its reportable operating segments as Community Banking, Tax Liens
and Equity Investments. The Company has two operating segments that do not meet the quantitative
thresholds for requiring disclosure, but have different characteristics than the Community Banking,
Tax Liens and Equity Investments segments, and from each other, RBA Leasing and RBA Capital
(Other in the segment table below). For a description of the different business segments refer to
Note 2 Segment Information to the consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2009
|
|
|
|
Community
|
|
|
Tax Lien
|
|
|
Equity
|
|
|
|
|
|
|
|
(In thousands)
|
|
Banking
|
|
|
Operation
|
|
|
Investment
|
|
|
Other
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,129,239
|
|
|
$
|
108,336
|
|
|
$
|
16,581
|
|
|
$
|
66,489
|
|
|
$
|
1,320,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
876,689
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
876,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
12,929
|
|
|
$
|
2,410
|
|
|
$
|
|
|
|
$
|
1,231
|
|
|
$
|
16,570
|
|
Interest expense
|
|
|
8,154
|
|
|
|
934
|
|
|
|
63
|
|
|
|
530
|
|
|
|
9,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
$
|
4,775
|
|
|
$
|
1,476
|
|
|
$
|
(63
|
)
|
|
$
|
701
|
|
|
$
|
6,889
|
|
Provision for loan and lease losses
|
|
|
6,105
|
|
|
|
567
|
|
|
|
|
|
|
|
284
|
|
|
|
6,956
|
|
Total other (loss) income
|
|
|
(4,206
|
)
|
|
|
120
|
|
|
|
568
|
|
|
|
114
|
|
|
|
(3,404
|
)
|
Total other expenses
|
|
|
7,069
|
|
|
|
807
|
|
|
|
222
|
|
|
|
221
|
|
|
|
8,319
|
|
Income tax (benefit) expense
|
|
|
(322
|
)
|
|
|
115
|
|
|
|
99
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(12,282
|
)
|
|
$
|
106
|
|
|
$
|
184
|
|
|
$
|
202
|
|
|
$
|
(11,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
$
|
36
|
|
|
$
|
42
|
|
|
$
|
142
|
|
|
$
|
44
|
|
|
$
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Royal Bancshares
|
|
$
|
(12,318
|
)
|
|
$
|
64
|
|
|
$
|
42
|
|
|
$
|
158
|
|
|
$
|
(12,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-53-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2008
|
|
|
|
Community
|
|
|
Tax Lien
|
|
|
Equity
|
|
|
|
|
|
|
|
(In thousands)
|
|
Banking
|
|
|
Operation
|
|
|
Investment
|
|
|
Other
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,002,278
|
|
|
$
|
77,633
|
|
|
$
|
24,225
|
|
|
$
|
57,599
|
|
|
$
|
1,161,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
682,301
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
682,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
14,348
|
|
|
$
|
1,957
|
|
|
$
|
|
|
|
$
|
1,397
|
|
|
$
|
17,702
|
|
Interest expense
|
|
|
6,963
|
|
|
|
758
|
|
|
|
57
|
|
|
|
674
|
|
|
|
8,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
$
|
7,385
|
|
|
$
|
1,199
|
|
|
$
|
(57
|
)
|
|
$
|
723
|
|
|
$
|
9,250
|
|
Provision for loan and lease losses
|
|
|
4,157
|
|
|
|
22
|
|
|
|
|
|
|
|
352
|
|
|
|
4,531
|
|
Total other income
|
|
|
1,193
|
|
|
|
319
|
|
|
|
813
|
|
|
|
127
|
|
|
|
2,452
|
|
Total other expenses
|
|
|
5,645
|
|
|
|
613
|
|
|
|
249
|
|
|
|
534
|
|
|
|
7,041
|
|
Income tax (benefit) expense
|
|
|
(678
|
)
|
|
|
328
|
|
|
|
177
|
|
|
|
(12
|
)
|
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(546
|
)
|
|
$
|
555
|
|
|
$
|
330
|
|
|
$
|
(24
|
)
|
|
$
|
315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
$
|
|
|
|
$
|
172
|
|
|
$
|
|
|
|
$
|
(9
|
)
|
|
$
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Royal Bancshares
|
|
$
|
(546
|
)
|
|
$
|
383
|
|
|
$
|
330
|
|
|
$
|
(15
|
)
|
|
$
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2009
|
|
|
|
Community
|
|
|
Tax Lien
|
|
|
Equity
|
|
|
|
|
|
|
|
(In thousands)
|
|
Banking
|
|
|
Operation
|
|
|
Investment
|
|
|
Other
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,129,239
|
|
|
$
|
108,336
|
|
|
$
|
16,581
|
|
|
$
|
66,489
|
|
|
$
|
1,320,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
876,689
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
876,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
25,564
|
|
|
$
|
4,914
|
|
|
$
|
|
|
|
$
|
2,446
|
|
|
$
|
32,924
|
|
Interest expense
|
|
|
15,947
|
|
|
|
1,862
|
|
|
|
103
|
|
|
|
1,054
|
|
|
|
18,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
$
|
9,617
|
|
|
$
|
3,052
|
|
|
$
|
(103
|
)
|
|
$
|
1,392
|
|
|
$
|
13,958
|
|
Provision for loan and lease losses
|
|
|
8,636
|
|
|
|
636
|
|
|
|
|
|
|
|
481
|
|
|
|
9,753
|
|
Total other (loss) income
|
|
|
(8,043
|
)
|
|
|
146
|
|
|
|
698
|
|
|
|
211
|
|
|
|
(6,988
|
)
|
Total other expenses
|
|
|
13,079
|
|
|
|
1,568
|
|
|
|
384
|
|
|
|
513
|
|
|
|
15,544
|
|
Income tax (benefit) expense
|
|
|
(669
|
)
|
|
|
383
|
|
|
|
74
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(19,471
|
)
|
|
$
|
611
|
|
|
$
|
137
|
|
|
$
|
396
|
|
|
$
|
(18,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
$
|
37
|
|
|
$
|
245
|
|
|
$
|
105
|
|
|
$
|
93
|
|
|
$
|
480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Royal Bancshares
|
|
$
|
(19,508
|
)
|
|
$
|
367
|
|
|
$
|
32
|
|
|
$
|
303
|
|
|
$
|
(18,807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2008
|
|
|
|
Community
|
|
|
Tax Lien
|
|
|
Equity
|
|
|
|
|
|
|
|
(In thousands)
|
|
Banking
|
|
|
Operation
|
|
|
Investment
|
|
|
Other
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,002,278
|
|
|
$
|
77,633
|
|
|
$
|
24,225
|
|
|
$
|
57,599
|
|
|
$
|
1,161,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
682,301
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
682,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
31,277
|
|
|
$
|
3,696
|
|
|
$
|
|
|
|
$
|
2,801
|
|
|
$
|
37,774
|
|
Interest expense
|
|
|
15,403
|
|
|
|
1,665
|
|
|
|
103
|
|
|
|
1,454
|
|
|
|
18,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
$
|
15,874
|
|
|
$
|
2,031
|
|
|
$
|
(103
|
)
|
|
$
|
1,347
|
|
|
$
|
19,149
|
|
Provision for loan and lease losses
|
|
|
6,765
|
|
|
|
22
|
|
|
|
|
|
|
|
1,025
|
|
|
|
7,812
|
|
Total other income
|
|
|
1,656
|
|
|
|
401
|
|
|
|
1,388
|
|
|
|
299
|
|
|
|
3,744
|
|
Total other expenses
|
|
|
11,294
|
|
|
|
929
|
|
|
|
425
|
|
|
|
997
|
|
|
|
13,645
|
|
Income tax (benefit) expense
|
|
|
(782
|
)
|
|
|
543
|
|
|
|
301
|
|
|
|
(131
|
)
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
253
|
|
|
$
|
938
|
|
|
$
|
559
|
|
|
$
|
(245
|
)
|
|
$
|
1,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
$
|
82
|
|
|
$
|
325
|
|
|
$
|
|
|
|
$
|
(97
|
)
|
|
$
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Royal Bancshares
|
|
$
|
171
|
|
|
$
|
613
|
|
|
$
|
559
|
|
|
$
|
(148
|
)
|
|
$
|
1,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-54-
Community Bank Segment
Royal Bank America
Royal Bank was incorporated in the Commonwealth of Pennsylvania on July 30, 1963, was chartered by
the Commonwealth of Pennsylvania Department of Banking and commenced operation as a Pennsylvania
state-chartered bank on October 22, 1963. Royal Bank is the successor of the Bank of King of
Prussia, the principal ownership of which was acquired by the Tabas family in 1980. The deposits of
Royal Bank are insured by the Federal Deposit Insurance Corporation (the FDIC). During the
fourth quarter of 2006, Royal Bank formed a subsidiary, Royal Tax Lien Services, LLC, to purchase
and service delinquent tax liens. Royal Bank owns 60% of the subsidiary. During the fourth quarter
of 2006, Royal Bank formed a subsidiary, RBA Capital, LP, to originate structured or re-discounted
debt. Royal Bank owns 60% of the subsidiary. During the fourth quarter of 2008, management decided
to wind down the operation of RBA Capital. In the near future, the operations of the subsidiary
will be folded into Royal Bank. On October 17, 2008, Royal Bank established RBA Property LLC, a
wholly owned subsidiary. RBA Property was formed to hold other real estate owned acquired through
foreclosure of collateral associated with non-performing loans. On December 1, 2008, Royal Bank
established Narberth Property Acquisition LLC, a wholly owned subsidiary. Narberth Property
Acquisition was formed to hold other real estate owned acquired through foreclosure of collateral
associated with non-accrual loans.
Royal Bank derives its income principally from interest charged on loans, interest earned on
investment securities, and fees received in connection with the origination of loans and other
services. Royal Banks principal expenses are interest expense on deposits and operating expenses.
Operating revenues, deposit growth, investment maturities, loan sales and the repayment of
outstanding loans provide the majority of funds for activities.
Royal Bank conducts business operations as a commercial bank offering checking accounts, savings
and time deposits, and loans, including residential mortgages, home equity and SBA loans. Royal
Bank also offers safe deposit boxes, collections, internet banking and bill payment along with
other customary bank services (excluding trust) to its customers. Drive-up, ATM, and night
depository facilities are available. Services may be added or deleted from time to time. The
services offered and the business of Royal Bank is not subject to significant seasonal
fluctuations. Royal Bank is a member of the Federal Reserve Fedline Wire Transfer System.
Service Area:
Royal Banks primary service area includes Montgomery, Chester, Bucks, Delaware,
Berks and Philadelphia counties, Southern and Northern New Jersey and the State of Delaware. This
area includes residential areas and industrial and commercial businesses of the type usually found
within a major metropolitan area. Royal Bank serves this area from sixteen branches located
throughout Montgomery, Philadelphia and Berks counties and New Jersey. Royal Bank also considers
the states of Pennsylvania, New Jersey, New York, Florida, Washington DC, Maryland, Northern
Virginia and Delaware as a part of its service area for certain products and services. Frequently,
Royal Bank will do business with clients located outside of its service area. Royal Bank has loans
in twenty-seven states via loan originations and/or participations with other lenders who have
broad experience in those respective markets. Royal Banks headquarters are located at 732
Montgomery Avenue, Narberth, PA.
Competition:
The financial services industry in our service area is extremely competitive.
Competitors within our service area include banks and bank holding companies with greater
resources. Many competitors have substantially higher legal lending limits.
In addition, savings banks, savings and loan associations, credit unions, money market and other
mutual funds, mortgage companies, leasing companies, finance companies and other financial services
companies offer products and services similar to those offered by Royal Bank, on competitive terms.
Employees:
Royal Bank employed approximately 165 people on a full-time equivalent basis as of June
30, 2009.
Deposits:
At June 30, 2009, total deposits of Royal Bank were distributed among demand deposits
(8%), money market deposit, savings and Super Now accounts (26%) and time deposits (66%). At June
30, 2009, deposits increased $110.2 million to $793.4 million, from year-end 2008, or 16.1%, primarily
due to a $92.3 million increase in time deposits. Management decided to raise deposit rates to increase
liquidity and to not increase the level of
-55-
FHLB advances due to the FHLBs full collateral delivery
requirement applicable to Royal Bank and the FHLBs suspension of its cash dividend. Included in
Royal Banks deposits are approximately $20.9 million of intercompany deposits that are eliminated
through consolidation.
Current market and regulatory trends in banking are changing the basic nature of the banking
industry. Royal Bank intends to keep pace with the banking industry by being competitive with
respect to interest rates and new types or classes of deposits insofar as it is practical to do so
consistent with Royal Banks size, objective of profit maintenance and stable capital structure.
Lending:
At June 30, 2009, Royal Bank, including its subsidiaries, had a total net loan portfolio
of $632.3 million, representing 53% of total assets. The loan portfolio is categorized into
commercial demand, commercial mortgages, residential mortgages (including home equity lines of
credit), construction, real estate tax liens, asset based loans, small business leases and
installment loans. At June 30, 2009, loans increased $12.7 million from year end 2008.
Business results
: Total interest income of Royal Bank for the quarter ended June 30, 2009 was $15.0
million compared to $16.1 million for the quarter ended June 30, 2008, a decrease of 7%. Total
interest income for the first six months of 2009 was $29.8 million compared to $34.7 million for
the same period in 2008. The decline in interest income for both the quarter and year to date was
attributed to a lower yield on investment securities and a 200 basis point reduction in the prime
rate by the Federal Reserve since the end of the first quarter in 2008. Interest expense was $8.7
million for the quarter ended June 30, 2009, compared to $7.9 million for the quarter ended June
30, 2008, an increase of 10%. Interest expense for the first six months of 2009 was $17.1 million
compared to $17.5 million for the same period in 2008. Royal Bank recorded a net loss for the
quarter ended June 30, 2009 of $9.5 million compared to net income of $1.8 million for the quarter
ended June 30, 2008. The loss is mainly due to $5.9 million of provision for loan and lease losses
during the second quarter of 2009 compared to $4.5 million for the second quarter of 2008, $3.9
million of impairments on AFS investment securities recorded during the second quarter of 2009
compared to $0 during the second quarter of 2008, the $1.9 million, or 23%, reduction in net
interest income from $8.2 million in the second quarter of 2009 to $6.3 million in the second
quarter of 2009 for the reasons mentioned above, and an increase in operating expenses related to
the increase in non-performing assets. Royal Bank recorded a net loss of $11.8 million for the
first half of 2009 compared to net income of $2.8 million for the first half of 2008. The net loss
was largely due to similar factors that affected the second quarter earnings. Total assets of
Royal Bank were $1.2 billion at June 30, 2009 and $1.1 billion at December 31, 2008. The above
amounts reflect the consolidation totals for Royal Bank and its subsidiaries. The subsidiaries
included in these amounts are Royal Investments America, Royal Real Estate, RBA Capital, Royal Bank
America Leasing, Royal Tax Lien Services, Crusader Servicing Corporation, RBA Property LLC, and
Narberth Property Acquisition LLC.
Royal Asian Bank
Royal Asian was incorporated in the Commonwealth of Pennsylvania on October 4, 2005, and was
chartered by the Commonwealth of Pennsylvania Department of Banking and commenced operation as a
Pennsylvania state-chartered bank on July 17, 2006. Royal Asian is an insured bank by the Federal
Deposit Insurance Corporation (the FDIC). Royal Asian derives its income principally from
interest charged on loans and fees received in connection with the other services. Royal Asians
principal expenses are interest expense on deposits and operating expenses. Operating revenues,
deposit growth, and the repayment of outstanding loans provide the majority of funds for
activities.
Service Area:
Royal Asians primary service area includes Philadelphia County, Northern New Jersey,
and New York City. The service area includes residential areas and industrial and commercial
businesses of the type usually found within a major metropolitan area. Royal Asian serves this area
from six branches located throughout Philadelphia, Northern New Jersey, and New York City. Royal
Asian also considers the states of Pennsylvania, New Jersey, New York, Washington DC, California,
Maryland, Northern Virginia and Delaware as a part of its
service area for certain products and services. Frequently, Royal Asian will do business with
clients located outside of its service area.
Royal Asian conducts business operations as a commercial bank offering checking accounts, savings
and time deposits, and loans, including residential mortgages, home equity and SBA loans. Royal
Asian also offers
-56-
collections, internet banking, safe deposit boxes and bill payment along with
other customary bank services (excluding trust) to its customers. Drive-up, ATM, and night
depository facilities are available. Certain international services are offered via a SWIFT machine
which provides international access to transfer information through a secured web based system.
This system is for informational purposes only and no funds are transferred through SWIFT. Services
may be added or deleted from time to time. The services offered and the business of Royal Asian is
not subject to significant seasonal fluctuations. Royal Asian through its affiliation with Royal
Bank is a member of the Federal Reserve Fedline Wire Transfer System.
Competition:
The financial services industry in our service area is extremely competitive.
Competitors within our service area include banks and bank holding companies with greater
resources. Many competitors have substantially higher legal lending limits.
In addition, savings banks, savings and loan associations, credit unions, money market and other
mutual funds, mortgage companies, leasing companies, finance companies and other financial services
companies offer products and services similar to those offered by Royal Asian, on competitive
terms.
Employees:
Royal Asian employed approximately 26 people on a full-time equivalent basis as of June
30, 2009.
Deposits:
At June 30, 2009, total deposits of Royal Asian were distributed among demand deposits
(8%), money market deposit, savings and Super Now accounts (12%) and time deposits (80%). At June
30, 2009, total deposits were $103.9 million, which amounted to an increase of $11.3 million, or
10.9%, from the level at December 31, 2008.
Lending:
Royal Asian had a total loan portfolio of $67.8 million, representing 57% of total assets
at June 30, 2009 that increased $4.6 million, or 7.3%, from the level at December 31, 2008. The
loan portfolio is comprised of commercial demand, commercial mortgages, construction, and
installment loans.
Business results:
Net interest income of Royal Asian for the quarter ended June 30, 2009, amounted
to $521,000 which was a decrease of $372,000 from the comparable quarter of 2008. Net interest
income for the first six months of 2009 was $1.3 million compared to net interest income of $1.8
million for the same period in 2008. For the quarter ended June 30, 2009, Royal Asian recorded a
net loss of $138,000 compared to net income of $5,000 in the second quarter of 2008. For the first
half of 2009, Royal Asian recorded a net loss of $197,000 compared to net income of $41,000 for the
first half of 2008. Total assets of Royal Asian amounted to $119.4 million at June 30, 2009
compared to $106.9 million at December 31, 2008.
Current market and regulatory trends in banking are changing the basic nature of the banking
industry. Royal Asian intends to keep pace with the banking industry by being competitive with
respect to interest rates and new types or classes of deposits insofar as it is practical to do so
consistent with Royal Asians size, objective of profit maintenance and stable capital structure.
Royal Investments of Delaware
On June 30, 1995, the Company established a special purpose Delaware investment company, Royal
Investments of Delaware (RID), as a wholly owned subsidiary. Legal headquarters are at 1105 N.
Market Street, Suite 1300, Wilmington, DE 19899. RID buys, holds and sells investment securities.
Business results
: Total interest income of RID for the quarter ended June 30, 2009, of $350,000
declined 40.9% from $592,000 for the quarter ended June 30, 2008. For the first six months of 2009
total interest income amounted to $669,000 resulting in a 41.3% decrease from $1.1 million during
the first six months of 2008. For the
quarter ended June 30, 2009, RID reported a net loss of $987,000, compared to net loss of $1.4
million for the quarter ended June 30, 2008 primarily due to $1.3 million of impairments on
available for sale securities being recorded in 2009 versus $2.5 million during 2008. For the
first half of 2009, RID reported a net loss of $5.5 million versus a net loss of $1.3 million in
the comparable period of 2008. The year over year decline for the first half was primarily related
to impairment of investment securities of $5.7 million in 2009 versus $2.5 million in 2008. At June
30, 2009, total assets of RID were $47.1 million, of which $6.3 million was held in cash and cash
equivalents and
-57-
$20.0 million was held in investment securities. The amounts shown above include
the activity related to RIDs wholly owned subsidiary Royal Preferred LLC. Royal Bank has extended
loans to RID, secured by securities and as per the provisions of Regulation W. At June 30, 2009,
the amount due Royal Bank from RID was $9.4 million.
Royal Captive Insurance Company
On November 21, 2007, the Company established Royal Captive Insurance Company, a wholly owned
subsidiary. Royal Captive Insurance was formed to insure commercial property and comprehensive
umbrella liability for the Company and its affiliates. At June 30, 2009, total assets of Royal
Captive Insurance were $2.6 million.
Royal Preferred LLC
On June 16, 2006, the Company, through its wholly owned subsidiary RID, established Royal Preferred
LLC as a wholly owned subsidiary. Royal Preferred LLC was formed to purchase a subordinated
debenture from Royal Bank America. At June 30, 2009, Royal Preferred LLC had total assets of
approximately $21 million.
Royal Bancshares Capital Trust I and II
On October 27, 2004, the Company formed two Delaware trust affiliates, Royal Bancshares Capital
Trust I and Royal Bancshares Capital Trust II, in connection with the sale of an aggregate of $25.0
million of a private placement of trust preferred securities. The interest rates for the debt
securities associated with the Trusts at June 30, 2009 amounted to 2.78% and 5.80%, respectively
for Capital Trust I and Capital Trust II.
Tax Lien Operations
Crusader Servicing Corporation
The Company, through its wholly owned subsidiary Royal Bank, holds a 60% ownership interest in
Crusader Servicing Corporation (CSC). Legal headquarters are at 732 Montgomery Avenue, Narberth,
PA 19072. CSC acquires, through auction, delinquent property tax liens in various jurisdictions,
assuming a lien position that is generally superior to any mortgage liens on the property, and
obtaining certain foreclosure rights as defined by local statute. Due to a change in CSC
management, Royal Bank and other shareholders, constituting a majority of CSC shareholders, voted
to liquidate CSC under an orderly, long term plan adopted by CSC management. Royal Bank will
continue acquiring tax liens through its newly formed subsidiary, Royal Tax Lien Services, LLC. At
June 30, 2009, total assets of CSC were $18.3 million. Included in total assets is $5.2 million
for the Strategic Municipal Investments (SMI) portfolio, which is comprised of residential,
commercial, and land tax liens, primarily in Alabama. In 2005, CSC entered into a partnership with
Strategic Municipal Investments (SMI), ultimately acquiring a 50% ownership interest in SMI. In
connection with acquiring this ownership interest, CSC extended financing to SMI in the approximate
amount of $18.0 million, which was used by SMI to purchase a tax lien portfolio at a discount. As
a result of the recent deterioration in residential, commercial and land values principally in
Alabama, management concluded based on an analysis of the portfolio in the fourth quarter of 2008
that the loan was impaired by approximately $2.5 million. Subsequently, in the second quarter of
2009 further deterioration occurred in this market and an additional impairment of approximately
$560,000 was recorded. In the first quarter of 2009, CSC charged-off $1.2 million of the
impairment. The outstanding SMI loan balance was $5.2 million and $6.6 million at June 30, 2009
and December 31, 2008.
Business results
: Net interest income of CSC for the quarter ended June 30, 2009, amounted to
$196,000 which resulted in a decline of $191,000, from the comparable quarter of 2008. Net interest
income for the first half of 2009 decreased $280,000 from $770,000 for the first half of 2008 to
$490,000 due to the SMI loan mentioned previously. The net loss for CSC for the three and six
months ended June 30, 2009, was $331,000 and $369,000, respectively, compared to net income of
$246,000 and $287,000, respectively, for the comparable periods of 2008. The provision for lien
losses increased $545,000 from the second quarter of 2008 to $567,000 for the second quarter of
2009. The provision for lien losses for the six months ended June 30, 2009 and June 30, 2008 was
$636,000 and $22,000, respectively. At June 30, 2009, total assets of CSC were $18.3 million, of
which $19.1 million was held in tax liens. The provision for lien loss was $2.0 million at June 30,
2009. Royal Bank has extended loans to CSC at
market interest rates, secured by the tax lien
portfolio of CSC and as per the provisions of Regulation W. At June 30, 2009, the amount due Royal
Bank from CSC was $16.8 million.
-58-
Royal Tax Lien Services, LLC
On November 17, 2006, the Company, through its wholly owned subsidiary Royal Bank, formed Royal Tax
Lien Services, LLC (RTL). Royal Bank holds a 60% ownership interest in RTL. Legal headquarters
are 732 Montgomery Avenue, Narberth, Pennsylvania 19072. RTL was formed to purchase and service
delinquent tax certificates. RTL typically acquires delinquent property tax liens through public
auctions in various jurisdictions, assuming a lien position that is generally superior to any
mortgage liens that are on the property, and obtaining certain foreclosure rights as defined by
local statute.
Business results:
Net interest income of RTL of $1.3 million for the quarter ended June 30, 2009,
increased $640,000, or 100%, for the comparable quarter of 2008 largely due to increased interest
on certificates and penalty income year over year associated with a significant increase in tax
liens. For the first half of 2009, net interest income of $2.6 million increased $1.3 million, or
1.03 times, above the comparable period of 2008 due to the significant growth in tax liens year
over year. Net income for RTL of $437,000 for the quarter ended June 30, 2009 increased $106,000,
or 31.9%, from the comparable quarter of 2008 due to a significant increase in tax liens year over
year. For the six months ended 2009 net income for RTL of $981,000 amounted to an increase of
$330,000, or 50.6%, above the comparable period of 2008 again due to the growth in tax liens for
RTL over the past year. At June 30, 2009, total assets of RTL were $90.0 million, of which the
majority was held in tax liens as compared to total assets at December 31, 2008 of $64.6 million
and total assets at June 30, 2008 of $50.3 million, of which the majority was held in tax liens.
Royal Bank has extended loans to RTL at market interest rates, secured by the tax lien portfolio of
RTL and as per the provisions of Regulation W. At June 30, 2009, the amount due Royal Bank from RTL
was $88.0 million.
Equity Investments Segment
Royal Investments America
On June 23, 2003, the Company, through its wholly owned subsidiary Royal Bank, established Royal
Investments America, LLC (RIA) as a wholly owned subsidiary. Legal headquarters are at 732
Montgomery Avenue, Narberth, Pennsylvania. RIA was formed to invest in equity real estate ventures
subject to limitations imposed by the FDIC and Pennsylvania Department of Banking by regulation.
Business results
: At June 30, 2009, total assets of RIA under FIN 46(R) were $20.5 million compared
to $21.2 million at December 31, 2008. For the quarter ended June 30, 2009, RIA had net income of
$81,000 compared to $1.3 million for the comparable period of 2008 while net income for the first
half of 2009 amounted to $79,000 compared to $1.6 million for the comparable six months of 2008.
The 2008 periods included a gain on sales of real estate. For more information about Royal
Investments America refer to Note 13 Real Estate Owned via Equity Investment to the consolidated
financial statements. Royal Bank had previously extended loans to RIA at market interest rates,
secured by the loan portfolio of RIA and as per the provisions of Regulation W. At June 30, 2009,
there were no outstanding loans from Royal Bank to RIA.
Other Segment
Royal Bank America Leasing, LP
On July 25, 2005, the Company, through its wholly owned subsidiary Royal Bank, formed Royal Bank
America Leasing, LP (Royal Leasing). Royal Bank holds a 60% ownership interest in Royal Leasing.
Legal headquarters are 550 Township Line Road, Blue Bell, Pennsylvania. Royal Leasing was formed to
originate small business leases. Royal Leasing originates small ticket leases through its internal
sales staff and through independent brokers located throughout its business area. In general, Royal
Leasing will portfolio individual small ticket leases in amounts of up to $250,000. Leases
originated in amounts in excess of that are sold for a profit to other leasing
-59-
companies. On occasion, Royal Bank will purchase municipal leases originated by Royal Leasing for its own
portfolio. These purchases are at market based on pricing and terms that Royal Leasing would expect
to receive from unrelated third-parties. From time to time Royal Leasing will sell small lease
portfolios to third-parties and will, on occasion, purchase lease portfolios from other
originators. During the first six months of 2009 and 2008, neither sales nor purchases of lease
portfolios were material.
Business results
: At June 30, 2009, total assets of Royal Leasing were $31.3 million, including
$30.9 million in net leases, as compared to $25.7 million in assets at December 31, 2008. During
the quarter ended June 30, 2009, Royal Leasing had net interest income of $403,000, an increase of
$90,000 from the comparable period of 2008; provision for lease losses of $284,000 versus $350,000
in the comparable quarter of 2008; non-interest income of $114,000 as compared to $83,000 in the
second quarter of 2008; and non-interest expense of $111,000 versus $240,000 for the second quarter
of 2008. Net income for Royal Leasing for the three and six months ended June 30, 2009, was
$79,000 and $182,000, respectively as compared to net losses of $127,000 and $40,000, respectively
for the comparable periods of 2008.
Royal Bank has extended loans to RBA Leasing at market interest rates, secured by the lease
portfolio of RBA Leasing and in accordance with Regulation W. At June 30, 2009, the amount due
Royal Bank from RBA Leasing was $30.2 million.
RBA Capital, LP
On October 1, 2006, the Company, through its wholly owned subsidiary Royal Bank, formed RBA
Capital, LP (RBA Capital). Royal Bank holds a 60% ownership interest in RBA Capital. Legal
headquarters are 150 North Radnor Chester Road, Radnor Pennsylvania 19087. RBA Capital was formed
to lend to lenders on a re-discounted basis. By on a re-discounted basis, we mean the main business
line of RBA Capital is to extend loans to other lenders (RBA Loan). These other lenders are
typically not financial institutions, but rather individuals, smaller corporations, or partnerships
(Borrowing Lender) that make small loans including, but not limited to, loans to contractors,
home buyers or the purchasers of smaller, owner occupied, commercial real estate buildings
(Discounted Loans). The Discounted Loans can also be small construction or improvement loans. The
lender is required to have equity in each Discounted Loan so as to afford RBA Capital a prudent
maximum loan to value ratio for its portion of the RBA Loan extended for the respective Discounted
Loan. By way of an example, if a Borrowing Lender wanted to extend financing for one of its
borrowers to purchase property for $100,000, the Borrowing Lender would not lend the full purchase
price to its borrower, but rather would impose a loan to value (LTV) limit, generally discounting
the purchase price by 15% to maintain a maximum LTV of 85%, thereby lending $85,000 to its borrower
for the purchase. The Borrowing Lender would then borrow funds from RBA Capital to fund loan
advances to its borrower. RBA Capital would not lend 100% of the Borrowing Lenders loan advances,
but would instead re-discount those advances by generally striving to maintain a 65% LTV ratio,
and would in this example lend $65,000 to the Borrowing Lender. The Discounted Loans are then
pledged to RBA Capital as collateral for its RBA Loan. RBA Capital typically originates its loans
through internal sales staff and advertising in trade publications. RBA Capital on occasion will
refer loans to Royal Bank, or for certain larger loans it originates, participate with Royal Bank
in the loan. Royal Bank pays RBA Capital a referral fee for loans referred from RBA Capital or for
loans participated with RBA Capital. All transactions between Royal Bank and RBA Capital are on
commercially reasonable terms at market rates and terms that would be paid, received or
granted by unrelated third-parties. During the fourth quarter of 2008, management decided to wind
down the operation of RBA Capital. In the near future, the operations of the subsidiary will be
folded into Royal Bank.
Business results
: At June 30, 2009, total assets of RBA Capital were $35.2 million versus $37.5
million at December 31, 2008. Net loans amounted to $34.9 million at June 30, 2009, a decrease of
$2.4 million, or 6.4%, from $37.3 million at December 31, 2008. Net interest income of $297,000 for
the second quarter of 2009 decreased $112,000, or 27.4%, from the comparable quarter of 2008 due
principally to an increase in non-accrual loans. For the first half of 2009, net interest income
amounted to $628,000, a decline of $95,000, or 13.1%, from the comparable period of 2008. RBA
Capital had net income for the second quarter of 2009 of $122,000 versus net income of $103,000 in
the comparable quarter of 2008. Net income for the first half of 2009 was $214,000 versus a net
loss of $204,000 for the comparable period of 2008. The increase was due to the provision for loan
losses booked in the first quarter of 2008. Royal Bank has extended loans to RBA Capital at market
interest rates, secured by the loan portfolio of RBA Capital and as per the provisions of
Regulation W. At June 30, 2009, the amount due Royal Bank from RBA Capital was $34.6 million.
-60-
FINANCIAL CONDITION
Consolidated Assets
Total consolidated assets as of June 30, 2009 were $1.3 billion, an increase of $145.1 million, or
12.3%, from December 31, 2008. This increase was attributed to a $64.2 million growth in AFS
investments, a $39.9 million increase in cash and cash equivalents, a $19.0 million increase in
other real estate owned, and a $16.0 million increase in net loans and leases.
Cash and Cash Equivalents
Total cash and cash equivalents increased $39.9 million from $14.3 million at December 31, 2008 to
$54.2 million at June 30, 2009, as a result of managements decision to maintain a higher level of
liquidity as mentioned above.
Investment Securities
Total investment securities grew $64.2 million, or 17.8%, to $425.5 million at June 30, 2009, from
the level at December 31, 2008. This increase was primarily due to an increased level of cash
generated from deposit growth during the first six months of 2009 that was partially redeployed
into U.S. agency collateralized mortgage obligations. FHLB stock was $11.0 million at June 30,
2009 and December 31, 2008.
Effective April 1, 2009, the Company adopted FSP FAS 115-2 and FAS 124, Recognition and
Presentation of Other-Than-Temporary Impairments. Under the new FSP which applies to existing and
new debt securities, OTTI is considered to have occurred (1) if an entity intends to sell the
security; (2) if it is more likely than not an entity will be required to sell the security before
recovery of its amortized cost basis; or (3) the present value of the expected cash flows is not
sufficient to recover the entire amortized cost basis. In addition, the amount of the OTTI
recognized in earnings depends on whether an entity intends to sell or will more likely than not be
required to sell the security. If an entity intends to sell the security or will be required to
sell the security, the OTTI shall be recognized in earnings equal to the entire difference between
the fair value and the amortized cost basis at the balance sheet date. If an entity does not
intend to sell the security and it is not more likely than not that the entity will be required to
sell the security before the recovery of its amortized cost basis, the OTTI shall be separated into
two amounts, the credit related loss and the loss related to other factors. The credit related
loss is based on the present value of the expected cash flows and is recognized in earnings. The
noncredit-related loss is based on other factors such as illiquidity and is recognized in other
comprehensive income.
During the second quarter of 2009 and the first six months of 2009, the Company recorded OTTI
charges to earnings of $5.1 million and $9.3 million, respectively, related to various equity
investments, trust preferred securities, corporate bonds, and non-agency CMOs. The credit-related
OTTI charge recorded in earnings for the trust preferred securities, corporate bonds, and
non-agency CMOs was $3.7 million for the three months and six
months ended June 30, 2009. The Company recorded OTTI charges related to equity and other
securities of $1.4 million and $4.2 million for the three months and six months ended June 30,
2009, respectively.
The AFS portfolio had gross unrealized losses of $18.6 million at June 30, 2009, which declined
from gross unrealized losses of $37.8 million at December 31, 2008. During the second quarter of
2009 the Company recorded a $5.1 million total impairment charge that was primarily comprised of
preferred and common stocks totaling $1.2 million, corporate bonds totaling $1.3 million, trust
preferred securities totaling $1.9 million and CMOs totaling $459,000. During the first quarter of
2009, the Company recorded a $4.2 million impairment charge related to preferred and common stocks.
For the six months ended June 30, 2009, gross unrealized losses have declined for preferred and
common stocks, collateralized mortgage obligations, collateralized debt obligations, corporate
bonds, and trust preferred securities due to increased fair market values of the investments and
the impairment charges that occurred during the first and second quarters. The gross unrealized
losses are primarily related to the turbulent credit and financial markets coupled with the current
economic environment but have improved during the past quarter as markets have exhibited more
stability. As
-61-
a result many of the investment securities are expected to continue to increase in
value as the markets become normalized and the resulting fair market values recover. Management
expects full collection of cash flows on the non impaired investments within the AFS portfolio.
Investment securities within the AFS portfolio are marked to market quarterly and any resulting
gains or losses are recorded in other comprehensive income, net of taxes, within the equity section
of the balance sheet as shown in Note 4 Comprehensive Income. When a loss is deemed to be other
than temporary but the Company does not intend to sell the security and it is not more likely than
not that the Company will have to sell the security before recovery of its cost basis, the Company
will recognize the credit component of an OTTI charge in earnings and the remaining portion in
other comprehensive income.
The Company will continue to monitor these investments to determine if the continued negative
trends, market valuations or credit defaults result in impairment that is other than temporary.
Loans and Leases
Total loans and leases increased $15.5 million, or 2.2%, from the $700.7 million level at December
31, 2008 to $716.2 million at June 30, 2009. This increase was primarily due to an increase in tax
certificates of $16.9 million, an increase of $9.0 million in single family residential loans, and
an increase of $6.1 million in leases, which was partially offset by a decrease of $12.8 million in
non-residential real estate loans and a decrease of $4.4 million in land development loans. The
Company has become more selective in approving land development loans as well as commercial real
estate loans given the existing loan concentration coupled with the current extremely weak housing
market and commercial real estate market. As a result, the Company has shifted its lending focus to
generating small business loans.
The following table represents loan balances by type:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
87,101
|
|
|
$
|
86,278
|
|
Construction
|
|
|
168,175
|
|
|
|
167,204
|
|
Land Development
|
|
|
69,735
|
|
|
|
74,168
|
|
Const. and land develop. mezzanine
|
|
|
2,458
|
|
|
|
2,421
|
|
Single family residential
|
|
|
36,526
|
|
|
|
27,480
|
|
Real Estate non-residential
|
|
|
221,769
|
|
|
|
234,573
|
|
Real Estate non-res. mezzanine
|
|
|
2,979
|
|
|
|
4,111
|
|
Real Estate multi-family
|
|
|
13,967
|
|
|
|
14,059
|
|
Real Estate -1-4 family mezzanine
|
|
|
|
|
|
|
335
|
|
Tax certificates
|
|
|
81,088
|
|
|
|
64,168
|
|
Leases
|
|
|
32,226
|
|
|
|
26,123
|
|
Other
|
|
|
1,306
|
|
|
|
1,243
|
|
|
|
|
|
|
|
|
Total gross loans and leases
|
|
$
|
717,330
|
|
|
$
|
702,163
|
|
Deferred fees, net
|
|
|
(1,163
|
)
|
|
|
(1,441
|
)
|
|
|
|
|
|
|
|
Total loans and leases
|
|
$
|
716,167
|
|
|
$
|
700,722
|
|
|
|
|
|
|
|
|
Deposits
Total deposits, the primary source of funds, increased $116.6 million, or 15.3%, to $876.7 million
at June 30, 2009, from December 31, 2008. The growth in deposits was primarily associated with an
increase in time deposits under $100,000 which increased $61.4 million, or 35.3%, time deposits
over $100,000 which increased $42.6 million, or 13.1%, and non-interest bearing demand deposits
which increased $13.9 million, or 27.4%. Now and money market
-62-
accounts and savings accounts had small declines during this period. Management decided to raise
specific deposit rates to grow deposits and to improve liquidity during the current economic times
which caused the increase in overall deposits.
The following table represents ending deposit balances by type:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Demand (non-interest bearing)
|
|
$
|
64,829
|
|
|
$
|
50,886
|
|
NOW and Money Markets
|
|
|
192,895
|
|
|
|
193,869
|
|
Savings
|
|
|
14,791
|
|
|
|
15,171
|
|
Time deposits (over $100)
|
|
|
368,585
|
|
|
|
325,958
|
|
Time deposits (under$100)
|
|
|
235,589
|
|
|
|
174,184
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
876,689
|
|
|
$
|
760,068
|
|
|
|
|
|
|
|
|
Borrowings
Total borrowings, which include short and long-term borrowings, decreased $3.2 million, or 1.2%, to
$272.5 million at June 30, 2009, from $275.7 million at December 31, 2008. This reduction is
attributed to the monthly payments on amortizing borrowings during the first six months of 2009.
During the first six months of 2009, management decided not to incur additional borrowings because
of the FHLB full collateral delivery requirement applicable to Royal Bank and the FHLBs suspension
of its cash dividend.
Obligations Related to Equity Investments in Real Estate
The Company consolidated into its balance sheet $11.5 million and $12.4 million of debt at June 30,
2009 and December 31, 2008, respectively, related to a real estate equity investment of which none
is guaranteed by the Company. The reduction was due to sales of units during the period.
Stockholders Equity
Consolidated shareholders equity increased $27.2 million, or 33.4%, to $108.8 million at June 30,
2009 from $81.6 million at December 31, 2008. On February 20, 2009, the Company received
approximately $30.4 million via the issuance of preferred stock under the Troubled Assets Relief
Program (TARP) Capital Purchase Plan (CPP) established by the U.S. Treasury. Other
comprehensive loss declined $15.5 million to $10.6 million at June 30, 2009 from $26.1 million at
December 31, 2008. Refer to the Capital Adequacy section for more information on the TARP funds.
CAPITAL ADEQUACY
The Company and its banking subsidiaries 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 June 30, 2009, 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.
On July 15, 2009, Royal Bank agreed to enter into a Consent Order with each of the Federal Deposit
Insurance Corporation and the Commonwealth of Pennsylvania Department of Banking. As a result of
this order, Royal Bank America is required to maintain a minimum Tier 1 leverage ratio of 8% and a
Total risk-based capital ratio of 12% during the term of the Orders. As shown in the table below,
Royal Bank met these requirements as of June 30, 2009.
-63-
The table below provides a comparison of the Company, Royal Bank and Royal Asians risk-based
capital ratios and leverage ratios for June 30, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be well capitalized
|
|
|
|
|
|
|
|
|
|
|
For capital
|
|
capitalized under prompt
|
|
|
Actual
|
|
adequacy purposes
|
|
corrective action provision
|
(Dollars in thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company (consolidated)
|
|
$
|
154,878
|
|
|
|
14.71
|
%
|
|
$
|
84,216
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Royal Bank
|
|
|
116,583
|
|
|
|
12.21
|
%
|
|
|
76,404
|
|
|
|
8.00
|
%
|
|
$
|
95,505
|
|
|
|
10.00
|
%
|
Royal Asian
|
|
|
14,465
|
|
|
|
16.34
|
%
|
|
|
7,083
|
|
|
|
8.00
|
%
|
|
|
8,853
|
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company (consolidated)
|
|
$
|
141,531
|
|
|
|
13.44
|
%
|
|
$
|
42,108
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Royal Bank
|
|
|
104,469
|
|
|
|
10.94
|
%
|
|
|
38,202
|
|
|
|
4.00
|
%
|
|
$
|
57,303
|
|
|
|
6.00
|
%
|
Royal Asian
|
|
|
13,354
|
|
|
|
15.08
|
%
|
|
|
3,541
|
|
|
|
4.00
|
%
|
|
|
5,312
|
|
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital (to average assets, leverage)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company (consolidated)
|
|
$
|
141,531
|
|
|
|
10.88
|
%
|
|
$
|
39,017
|
|
|
|
3.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Royal Bank
|
|
|
104,469
|
|
|
|
8.81
|
%
|
|
|
35,554
|
|
|
|
3.00
|
%
|
|
$
|
59,257
|
|
|
|
5.00
|
%
|
Royal Asian
|
|
|
13,354
|
|
|
|
11.38
|
%
|
|
|
3,520
|
|
|
|
3.00
|
%
|
|
|
5,867
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be well capitalized
|
|
|
|
|
|
|
|
|
|
|
For capital
|
|
capitalized under prompt
|
|
|
Actual
|
|
adequacy purposes
|
|
corrective action provision
|
(Dollars in thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company (consolidated)
|
|
$
|
136,273
|
|
|
|
13.04
|
%
|
|
$
|
83,611
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Royal Bank
|
|
|
97,478
|
|
|
|
10.26
|
%
|
|
|
76,007
|
|
|
|
8.00
|
%
|
|
$
|
95,008
|
|
|
|
10.00
|
%
|
Royal Asian
|
|
|
14,739
|
|
|
|
18.65
|
%
|
|
|
6,322
|
|
|
|
8.00
|
%
|
|
|
7,903
|
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company (consolidated)
|
|
$
|
123,013
|
|
|
|
11.77
|
%
|
|
$
|
41,806
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Royal Bank
|
|
|
85,406
|
|
|
|
8.99
|
%
|
|
|
38,003
|
|
|
|
4.00
|
%
|
|
$
|
57,005
|
|
|
|
6.00
|
%
|
Royal Asian
|
|
|
13,749
|
|
|
|
17.40
|
%
|
|
|
3,161
|
|
|
|
4.00
|
%
|
|
|
4,742
|
|
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital (to average assets, leverage)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company (consolidated)
|
|
$
|
123,013
|
|
|
|
10.30
|
%
|
|
$
|
35,835
|
|
|
|
3.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Royal Bank
|
|
|
85,406
|
|
|
|
7.81
|
%
|
|
|
32,819
|
|
|
|
3.00
|
%
|
|
$
|
54,698
|
|
|
|
5.00
|
%
|
Royal Asian
|
|
|
13,749
|
|
|
|
13.97
|
%
|
|
|
2,952
|
|
|
|
3.00
|
%
|
|
|
4,921
|
|
|
|
5.00
|
%
|
The Companys 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.
On February 20, 2009, as part of the Capital Purchase Program (CPP) established by the United
States Department of Treasury (Treasury), the Company issued to Treasury 30,407 shares of the
Companys Fixed Rate
-64-
Cumulative Perpetual Preferred Stock, Series A, without par value per share
(the Series A Preferred Stock), and a liquidation preference of $1,000 per share. In conjunction
with the purchase of the Series A Preferred Stock, Treasury received a warrant to purchase
1,104,370 shares of the Companys Class A common stock. The aggregate purchase price for the
Series A Preferred Stock and Warrant was $30.4 million in cash. The Series A Preferred Stock
qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum for the first
five years, and 9% per annum thereafter. The Series A Preferred Stock may generally be redeemed by
the Company at any time following consultation with its primary banking regulators. The warrant
issued to Treasury has a 10-year term and is immediately exercisable upon its issuance, with an
exercise price, subject to anti-dilution adjustments, equal to $4.13 per share of the common stock.
The Companys intention is to utilize the extra capital provided by the CPP funds to support its
efforts to prudently and transparently provide lending and liquidity.
LIQUIDITY & INTEREST RATE SENSITIVITY
Liquidity is the ability to ensure that adequate funds will be available to meet the Companys
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 investments and 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
calculated by adding total cash, availability on lines of credit, and unpledged investment
securities and subtracting any reserve requirements, this amount is then divided by total deposits
as well as by total liabilities to determine the liquidity ratios. The Companys policy is to
maintain a liquidity ratio as a percentage of total deposits of at least 12% and a liquidity ratio
as a percentage of total liabilities of at least 10%. At June 30, 2009, the Companys liquidity
ratios well exceeded the policy minimums.
On August 13, 2009, the Companys board of directors has determined to suspend the regular
quarterly cash dividends on the $30.4 million in Series A Preferred Stock issued to the United
States Department of the Treasury (Treasury) as part of the Capital Purchase Program (CPP)
established by the Treasury. The Companys board of directors took this action in consultation
with the Federal Reserve Bank of Philadelphia as required by recent regulatory policy guidance.
The board of directors also intends to suspend interest payments on its $25.8 million of
outstanding trust preferred securities. The Company currently has sufficient capital and liquidity
to pay the scheduled dividends and interest payments on its preferred stock and trust preferred securities. However, the
Company believes this decision will better support the capital position of Royal Bank, a wholly
owned subsidiary of the Company.
The Companys level of liquidity is provided by funds invested primarily in corporate bonds,
capital trust securities, U.S. agencies, and to a lesser extent, federal funds sold. The overall
liquidity position is monitored on a weekly 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
Companys 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 balance of this page was left blank intentionally.)
-65-
The following table shows separately the interest sensitivity of each category of interest earning
assets and interest bearing liabilities as of June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days
|
|
1 to 5
|
|
Over 5
|
|
Non-rate
|
|
|
(In millions)
|
|
0 - 90
|
|
91 - 365
|
|
Years
|
|
Years
|
|
Sensitive
|
|
Total
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits in banks
|
|
$
|
40.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14.2
|
|
|
$
|
54.2
|
|
Federal funds sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
103.2
|
|
|
|
65.7
|
|
|
|
173.2
|
|
|
|
96.9
|
|
|
|
(13.5
|
)
|
|
|
425.5
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
|
37.7
|
|
|
|
70.7
|
|
|
|
191.1
|
|
|
|
31.2
|
|
|
|
|
|
|
|
330.7
|
|
Variable rate
|
|
|
334.7
|
|
|
|
51.4
|
|
|
|
1.9
|
|
|
|
|
|
|
|
(28.4
|
)
|
|
|
359.6
|
|
|
|
|
Total loans
|
|
|
372.4
|
|
|
|
122.1
|
|
|
|
193.0
|
|
|
|
31.2
|
|
|
|
(28.4
|
)
|
|
|
690.3
|
|
Other assets
|
|
|
|
|
|
|
41.7
|
|
|
|
|
|
|
|
|
|
|
|
108.9
|
|
|
|
150.6
|
|
|
|
|
Total Assets
|
|
$
|
515.6
|
|
|
$
|
229.5
|
|
|
$
|
366.2
|
|
|
$
|
128.1
|
|
|
$
|
81.2
|
|
|
$
|
1,320.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest
bearing deposits
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
64.8
|
|
|
$
|
64.8
|
|
Interest bearing deposits
|
|
|
20.2
|
|
|
|
68.1
|
|
|
|
119.4
|
|
|
|
|
|
|
|
|
|
|
|
207.7
|
|
Certificate of deposits
|
|
|
34.8
|
|
|
|
274.8
|
|
|
|
290.4
|
|
|
|
4.2
|
|
|
|
|
|
|
|
604.2
|
|
|
|
|
Total deposits
|
|
|
55.0
|
|
|
|
342.9
|
|
|
|
409.8
|
|
|
|
4.2
|
|
|
|
64.8
|
|
|
|
876.7
|
|
Borrowings
(1)
|
|
|
81.4
|
|
|
|
34.6
|
|
|
|
169.4
|
|
|
|
12.9
|
|
|
|
11.5
|
|
|
|
309.8
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.3
|
|
|
|
25.3
|
|
Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108.8
|
|
|
|
108.8
|
|
|
|
|
Total liabilities & capital
|
|
$
|
136.4
|
|
|
$
|
377.5
|
|
|
$
|
579.2
|
|
|
$
|
17.1
|
|
|
$
|
210.4
|
|
|
$
|
1,320.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate GAP
|
|
$
|
379.2
|
|
|
$
|
(148.0
|
)
|
|
$
|
(213.0
|
)
|
|
$
|
111.0
|
|
|
$
|
(129.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest rate GAP
|
|
$
|
379.2
|
|
|
$
|
231.2
|
|
|
$
|
18.2
|
|
|
$
|
129.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAP to total assets
|
|
|
27
|
%
|
|
|
-11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAP to total equity
|
|
|
228
|
%
|
|
|
-136
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative GAP to total assets
|
|
|
27
|
%
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative GAP to total equity
|
|
|
228
|
%
|
|
|
213
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The $11.5 million in borrowings classified as non-rate sensitive are related to
variable interest entities and are not obligations of the Company.
|
The Companys exposure to interest rate risk is mitigated somewhat by a portion of the Companys
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. At June 30, 2009, floating rate loans with floors and without floors
were $141.0 million and $218.6 million, respectively.
REGULATORY ORDERS
On July 15, 2009, Royal Bank agreed to enter into a Stipulation and Consent to the Issuance of an
Order to Cease and Desist with each of the Federal Deposit Insurance Corporation (FDIC) and the
Commonwealth of Pennsylvania Department of Banking (Department).
The material terms of the orders are identical and require Royal Bank to:
|
|
|
have and retain qualified management, and notify the FDIC and the Department of any
changes in Royal Banks board of directors or senior management;
|
-66-
|
|
|
increase participation of Royal Banks board of directors in Royal Banks affairs by
having the board assume full responsibility for approving Royal Banks policies and
objectives and for supervising Royal Banks management;
|
|
|
|
|
eliminate all assets classified as Loss and formulate a written plan to reduce
assets classified as Doubtful and Substandard at its regulatory examination;
|
|
|
|
|
develop a written plan to reduce delinquent loans, and restrict additional advances
to borrowers with existing credits classified as Loss, Doubtful or Substandard;
|
|
|
|
|
develop a written plan to reduce Royal Banks commercial real estate loan
concentration;
|
|
|
|
|
maintain, after establishing an adequate allowance for loan and lease losses, a
ratio of Tier 1 capital to total assets (leverage ratio) equal to or greater than 8%
and a ratio of qualifying total capital to risk-weighted assets (total risk-based
capital ratio) equal to or greater than 12%;
|
|
|
|
|
formulate and implement written profit plans and comprehensive budgets for each year
during which the orders are in effect;
|
|
|
|
|
formulate and implement a strategic plan covering at least three years, to be
reviewed quarterly and revised annually;
|
|
|
|
|
revise the liquidity and funds management policy and update and review the policy
annually;
|
|
|
|
|
refrain from increasing the amount of brokered deposits held by Royal Bank and
develop a plan to reduce the reliance on non-core deposits and wholesale funding
sources;
|
|
|
|
|
refrain from paying cash dividends without prior approval of the FDIC and the
Department;
|
|
|
|
|
refrain from making payments to or entering contracts with Royal Banks holding
company or other Royal Bank affiliates without prior approval of the FDIC and the
Department;
|
|
|
|
|
submit to the FDIC for review and approval an executive compensation plan that
incorporates qualitative as well as profitability performance standards for Royal
Banks executive officers;
|
|
|
|
|
establish a compliance committee of the board of directors of Royal Bank with the
responsibility to ensure Royal Banks compliance with the orders; and
|
|
|
|
|
prepare and submit quarterly reports to the FDIC and the Department detailing the
actions taken to secure compliance with the orders.
|
The orders will remain in effect until modified or terminated by the FDIC and the Department.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information presented in the Liquidity and Interest Rate Sensitivity section of the
Managements Discussion and Analysis of Financial Condition and Results Operations of this Report
is incorporated herein by reference.
ITEM 4T CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures that are designed to ensure that
information required to be disclosed in 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
-67-
Commissions rules and forms. As of the end of the period covered by this report, the Company
evaluated, under the supervision and with the participation of our management, including our Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange
Act. Based on that evaluation, except as described below, our CEO and CFO concluded, subject to the
limitations on effectiveness described in Item 9A(T) in our Annual Report on Form 10-K for the year
ended December 31, 2008, that the Companys disclosure controls and procedures were effective at
June 30, 2009.
As described in Item 9A(T) in our annual report on Form 10-K for the year-ended December 31, 2008,
management had identified a material weakness associated with internal controls related to the
accounting for deferred income taxes. To remediate this weakness, the Company engaged a nationally
recognized independent public accounting firm to review the Companys accounting procedures related
to deferred income taxes for December 31, 2008 and March 31, 2009. The Company continued to consult
with the independent public accounting firm during the second quarter of 2009.
(b) Changes in Internal Control Over Financial Reporting
Other than as described above, there have been no changes in the Companys internal control over
financial reporting during the second quarter of 2009 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.
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.
PART II OTHER INFORMATION
Item 1.
Legal Proceedings
Royal Bank holds a 60% equity interest in each of Crusader Servicing Corporation (CSC) and Royal
Tax Lien Services, LLC (RTL). CSC and RTL acquire, through public auction, delinquent tax liens
in various jurisdictions thereby assuming a superior lien position to most other lien holders,
including mortgage lien holders. As previously discussed in the Companys form 10-K for the year
ended December 31, 2008, on March 4, 2009, each of CSC and RTL received a grand jury subpoena
issued by the U.S. District Court for New Jersey upon application of the Antitrust Division of the
U.S. Department of Justice (DOJ). The subpoena seeks certain documents and information relating
to an ongoing investigation being conducted by the DOJ. Royal Bank has been advised that neither
CSC nor RTL are targets of the DOJ investigation, but they are subjects of the investigation.
Royal Bank, CSC and RTL are cooperating in the investigation.
Item 1A.
Risk Factors
There have been no material changes from risk factors as previously disclosed in Part I, Item 1A .
Risk Factors of our Form 10-K for the year ended December 31, 2008. Before making an investment
decision, investors should carefully consider the risks described below and in our Annual Report on
Form 10-K for the year ended December 31, 2008 in conjunction with the other information in this
report, including our consolidated financial statements and related notes. If any of the following
risks or other risks, which have not been identified or which we may believe are immaterial or
unlikely, actually occurs, our business, financial condition and results of operations could be
harmed. In such a case, the trading price of our common stock could decline, and investors may lose
all or part of their investment.
-68-
The cease and desist order limits certain activities that we may perform and increases our compliance costs
Royal Bank is primarily supervised by the Federal Deposit Insurance Company (FDIC) and the
Commonwealth of Pennsylvania Department of Banking (Department), and Royal Banks good standing
with its regulators is of fundamental importance to the continuation of its business. As more
fully described in Note 20 Subsequent Events, Royal Bank agreed to enter into a Stipulation and
Consent to the Issuance of an Order to Cease and Desist (the Order) with each of the FDIC and the
Department. The Order requires Royal Bank, among other things, to file progress reports related
to its compliance with the Order. The Order also stipulates that Royal Bank reduce its
concentration in commercial real estate loans and reliance on wholesale funding sources. We cannot
predict the further impact of the Orders upon our business, financial condition, or results of
operations. In addition we cannot predict whether the FDIC or the Department will take any further
action with respect to Royal Bank, or, if any such action were taken, whether such action would
have a material adverse effect on the Company or Royal Bank.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None
Stock Repurchases
None
Item 3.
Default Upon Senior Securities
None
Item 4.
Submission of Matters to Vote Security Holders
On May 20, 2009, at the Annual Meeting of Shareholders of Royal Bancshares of Pennsylvania, Inc.,
the shareholders voted by proxy or in person to (i) elect the four nominees as Class I Directors of
the Corporation to serve for a three year term and until their successors are elected and
qualified; (ii) ratify Beard Miller Company LLP as the independent registered public accounting
firm for 2009; and (iii) approve a non-binding resolution on executive compensation.
The voting results to elect the four nominees as Class I Directors of the Corporation to serve for
a three year term and until their successors are elected and qualified are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
Total votes
|
|
% of votes
|
|
|
Total votes for
|
|
votes for
|
|
withheld
|
|
withheld
|
|
|
|
|
|
Edward F. Bradley
|
|
|
24,920,547
|
|
|
|
78.36
|
%
|
|
|
273,712
|
|
|
|
0.86
|
%
|
James J. McSwiggan
|
|
|
24,946,031
|
|
|
|
78.44
|
%
|
|
|
248,228
|
|
|
|
0.78
|
%
|
Linda Tabas Stempel
|
|
|
24,859,219
|
|
|
|
78.17
|
%
|
|
|
335,040
|
|
|
|
1.05
|
%
|
Howard J. Wurzak
|
|
|
24,906,503
|
|
|
|
78.31
|
%
|
|
|
287,756
|
|
|
|
0.91
|
%
|
The voting results to ratify Beard Miller Company LLP as the independent registered public
accounting firm for 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
Total shares
|
|
shares
|
|
|
voted
|
|
voted
|
|
|
|
For
|
|
|
24,836,844
|
|
|
|
78.10
|
%
|
Against
|
|
|
331,545
|
|
|
|
1.04
|
%
|
Abstain
|
|
|
25,870
|
|
|
|
0.81
|
%
|
-69-
The voting results to approve the non-binding resolution on executive compensation are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
Total shares
|
|
shares
|
|
|
voted
|
|
voted
|
|
|
|
For
|
|
|
24,614,231
|
|
|
|
77.40
|
%
|
Against
|
|
|
520,483
|
|
|
|
1.64
|
%
|
Abstain
|
|
|
59,545
|
|
|
|
0.19
|
%
|
Item 5.
Other Information
None
Item 6.
Exhibits
(a)
|
3.1
|
|
Articles of Incorporation of the Company. (Incorporated by reference to Exhibit
3(i) of the Companys report on Form 10-K filed with the Commission on March 30, 2009.)
|
|
|
3.2
|
|
Bylaws of the Company (Incorporated by reference to Exhibit
3.(ii) to the Companys report on Form 10-K filed with the Commission on March
30, 2009.)
|
|
|
10.1
|
|
FDIC Stipulation and Consent to the Issuance of an Order to
Cease and Desist (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K (File No 000-26366) filed with the Commission on
July 16, 2009).
|
|
|
10.2
|
|
FDIC Order to Cease and Desist (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on Form 8-K (File No 000-26366)
filed with the Commission on July 16, 2009).
|
|
|
10.3
|
|
Pennsylvania Department of Banking Stipulation and Consent and
Order to Cease and Desist (incorporated by reference to Exhibit 10.3 to the
Companys Current Report on Form 8-K (File No 000-26366) filed with the
Commission on July 16, 2009).
|
|
|
31.1
|
|
Section 302 Certification Pursuant to Section 13(a) or 15(d) of
the Securities and Exchange Act of 1934 signed by Robert R, Tabas, Principal Executive Officer of Royal
Bancshares of Pennsylvania on August 14, 2009.
|
|
|
31.2
|
|
Section 302 Certification Pursuant to Section 13(a) or 15(d) of
the Securities and Exchange Act of 1934 signed by Robert A. Kuehl, Principal
Financial Officer of Royal Bancshares of Pennsylvania on August 14, 2009.
|
|
|
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 Robert R.
Tabas, Principal Executive Officer of Royal Bancshares of Pennsylvania on
August 14, 2009.
|
|
|
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 Robert A.
Kuehl, Principal Financial Officer of Royal Bancshares of Pennsylvania on
August 14, 2009.
|
-70-
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: August 14, 2009
|
/s/ Robert A. Kuehl
|
|
|
Robert A. Kuehl
|
|
|
Principal Financial Officer
|
|
|
-71-
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