Attached files
file | filename |
---|---|
EX-31.1 - EX-31.1 - ROYAL BANCSHARES OF PENNSYLVANIA INC | w76294exv31w1.htm |
EX-10.6 - EX-10.6 - ROYAL BANCSHARES OF PENNSYLVANIA INC | w76294exv10w6.htm |
EX-31.2 - EX-31.2 - ROYAL BANCSHARES OF PENNSYLVANIA INC | w76294exv31w2.htm |
EX-10.8 - EX-10.8 - ROYAL BANCSHARES OF PENNSYLVANIA INC | w76294exv10w8.htm |
EX-10.7 - EX-10.7 - ROYAL BANCSHARES OF PENNSYLVANIA INC | w76294exv10w7.htm |
EX-32.2 - EX-32.2 - ROYAL BANCSHARES OF PENNSYLVANIA INC | w76294exv32w2.htm |
EX-32.1 - EX-32.1 - ROYAL BANCSHARES OF PENNSYLVANIA INC | w76294exv32w1.htm |
EX-10.9 - EX-10.9 - ROYAL BANCSHARES OF PENNSYLVANIA INC | w76294exv10w9.htm |
EX-10.5 - EX-10.5 - ROYAL BANCSHARES OF PENNSYLVANIA INC | w76294exv10w5.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the quarterly period ended: September 30, 2009
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from: to
Commission file number: 0-26366
ROYAL BANCSHARES OF PENNSYLVANIA, INC.
(Exact name of the registrant as specified in its charter)
PENNSYLVANIA | 23-2812193 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer identification No.) |
732 Montgomery Avenue, Narberth, PA 19072
(Address of principal Executive Offices)
(Address of principal Executive Offices)
(610) 668-4700
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes 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 | Non-accelerated filer þ (do not check if a smaller reporting company) |
Smaller reporting company o |
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.
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class A Common Stock | Outstanding at October 31, 2009 | |
$2.00 par value | 10,847,145 |
Class B Common Stock | Outstanding at October 31, 2009 | |
$0.10 par value | 2,095,240 |
PART I FINANCIAL STATEMENTS
Item 1. Financial Statements
Item 1. Financial Statements
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
Consolidated Balance Sheets
(unaudited)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(In thousands, except share data) | ||||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 20,895 | $ | 5,910 | ||||
Interest bearing deposits |
49,881 | 7,349 | ||||||
Federal funds sold |
| 1,000 | ||||||
Total cash and cash equivalents |
70,776 | 14,259 | ||||||
Investment securities available-for-sale (AFS) at fair value |
453,980 | 350,302 | ||||||
Federal Home Loan Bank (FHLB) stock, at cost |
10,952 | 10,952 | ||||||
Total investment securities and FHLB stock |
464,932 | 361,254 | ||||||
Loans and leases held for sale |
2,091 | 267 | ||||||
Loans and leases |
637,534 | 700,722 | ||||||
Less allowance for loan and lease losses |
23,348 | 28,908 | ||||||
Net loans and leases |
614,186 | 671,814 | ||||||
Assets held for sale |
78,599 | | ||||||
Bank owned life insurance |
8,167 | 30,016 | ||||||
Real estate owned via equity investment |
17,815 | 18,927 | ||||||
Accrued interest receivable |
14,512 | 13,580 | ||||||
Other real estate owned (OREO), net |
25,611 | 10,346 | ||||||
Premises and equipment, net |
6,274 | 6,926 | ||||||
Investment in real estate joint ventures |
2,520 | 2,520 | ||||||
Other assets |
56,327 | 45,677 | ||||||
Total assets |
$ | 1,361,810 | $ | 1,175,586 | ||||
-2-
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(unaudited)
Consolidated Balance Sheets (continued)
(unaudited)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Liabilities |
||||||||
Deposits |
||||||||
Non-interest bearing |
$ | 58,443 | $ | 50,886 | ||||
Interest bearing |
785,501 | 709,182 | ||||||
Total deposits |
843,944 | 760,068 | ||||||
Liabilities held for sale |
65,318 | | ||||||
Short-term borrowings |
22,000 | 22,000 | ||||||
Long-term borrowings |
248,823 | 253,681 | ||||||
Subordinated debentures |
25,774 | 25,774 | ||||||
Obligations related to real estate owned via equity investment |
9,961 | 12,350 | ||||||
Accrued interest payable |
10,473 | 6,102 | ||||||
Other liabilities |
22,145 | 14,026 | ||||||
Total liabilities |
1,248,438 | 1,094,001 | ||||||
Shareholders equity |
||||||||
Royal Bancshares of Pennsylvania, Inc. equity: |
||||||||
Preferred stock, Series A 5% perpetual, $1,000 liquidation value,
500,000 shares authorized, 30,407 shares issued and outstanding
at September 30, 2009 and 0 shares at December 31, 2008 |
27,838 | | ||||||
Common stock |
||||||||
Class A, par value $2.00 per share, authorized 18,000,000 shares;
issued, 11,345,633 at September 30, 2009 and December 31, 2008 |
22,691 | 22,690 | ||||||
Class B, par value $0.10 per share; authorized 3,000,000 shares;
issued, 2,095,240 at September 30, 2009 and December 31, 2008 |
210 | 210 | ||||||
Additional paid in capital |
126,033 | 123,425 | ||||||
Accumulated deficit |
(56,991 | ) | (33,561 | ) | ||||
Accumulated other comprehensive loss |
(1,955 | ) | (26,106 | ) | ||||
Treasury stock at cost, shares of Class A, 498,488 at September 30,
2009 and December 31, 2008 |
(6,971 | ) | (6,971 | ) | ||||
Total Royal Bancshares of Pennsylvania, Inc. shareholders
equity |
110,855 | 79,687 | ||||||
Noncontrolling interest |
2,517 | 1,898 | ||||||
Total equity |
113,372 | 81,585 | ||||||
Total liabilities and shareholders equity |
$ | 1,361,810 | $ | 1,175,586 | ||||
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
ROYAL BANCSHARES OF PENNSYLVANIA INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
Consolidated Statements of Operations
(unaudited)
For the three months ended | For the nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands, except per share data) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Interest income |
||||||||||||||||
Loans and leases, including fees |
$ | 11,970 | $ | 12,108 | $ | 34,519 | $ | 37,851 | ||||||||
Investment securities held to maturity |
| 904 | | 3,241 | ||||||||||||
Investment securities AFS: |
||||||||||||||||
Taxable interest |
4,786 | 4,338 | 15,056 | 13,930 | ||||||||||||
Tax exempt interest |
| 19 | 19 | 56 | ||||||||||||
Deposits in banks |
43 | 258 | 129 | 309 | ||||||||||||
Federal funds sold |
| 5 | | 20 | ||||||||||||
Total Interest Income |
16,799 | 17,632 | 49,723 | 55,407 | ||||||||||||
Interest expense |
||||||||||||||||
Deposits |
6,517 | 6,359 | 19,401 | 18,632 | ||||||||||||
Short-term borrowings |
44 | 15 | 128 | 673 | ||||||||||||
Long-term borrowings |
2,940 | 3,095 | 8,835 | 8,686 | ||||||||||||
Obligations related to real estate owned via equity investments |
69 | 48 | 172 | 151 | ||||||||||||
Total Interest Expense |
9,570 | 9,517 | 28,536 | 28,142 | ||||||||||||
Net Interest Income |
7,229 | 8,115 | 21,187 | 27,265 | ||||||||||||
Provision for loan and lease losses |
3,716 | 5,275 | 13,469 | 13,087 | ||||||||||||
Net Interest Income after Provision for Loan and Lease Losses |
3,513 | 2,840 | 7,718 | 14,178 | ||||||||||||
Other income (loss) |
||||||||||||||||
Service charges and fees |
343 | 314 | 1,048 | 912 | ||||||||||||
Income from bank owned life insurance |
310 | 288 | 1,003 | 776 | ||||||||||||
Income related to real estate owned via equity investments |
600 | 1,085 | 1,467 | 2,710 | ||||||||||||
Gains on sales of loans and leases |
170 | 27 | 447 | 133 | ||||||||||||
Gains on sales related to real estate joint ventures |
| | | 1,092 | ||||||||||||
Gain on sale of premises and equipment |
| | | 1,991 | ||||||||||||
Gains on sales of other real estate owned |
300 | | 337 | 352 | ||||||||||||
Net gains (losses) on the sale of AFS investment securities |
1,334 | (1,081 | ) | 1,046 | (1,161 | ) | ||||||||||
Other income |
140 | 30 | 204 | 92 | ||||||||||||
Other income,excluding other than temporary impairment losses |
3,197 | 663 | 5,552 | 6,897 | ||||||||||||
Total other than temporary impairment losses on investment securities |
(738 | ) | (14,685 | ) | (17,644 | ) | (17,176 | ) | ||||||||
Portion of loss recognized in other comprehensive loss |
246 | | 7,809 | | ||||||||||||
Net impairment losses recognized in earnings |
(492 | ) | (14,685 | ) | (9,835 | ) | (17,176 | ) | ||||||||
Total Other Income (Loss) |
2,705 | (14,022 | ) | (4,283 | ) | (10,279 | ) | |||||||||
Other expenses |
||||||||||||||||
Employee salaries and benefits |
3,079 | 3,371 | 9,258 | 9,988 | ||||||||||||
FDIC and state assessments |
1,608 | 194 | 2,673 | 465 | ||||||||||||
OREO valuation allowance |
1,231 | | 1,781 | | ||||||||||||
Professional and legal fees |
1,012 | 1,161 | 3,004 | 2,535 | ||||||||||||
Occupancy and equipment |
834 | 859 | 2,563 | 2,436 | ||||||||||||
OREO and loan collection expenses |
658 | 1 | 1,590 | 159 | ||||||||||||
Pennsylvania shares tax |
293 | 346 | 932 | 977 | ||||||||||||
Expenses related to real estate owned via equity investments |
216 | 235 | 600 | 660 | ||||||||||||
Directors fees |
153 | 149 | 498 | 479 | ||||||||||||
Stock option expense |
84 | 173 | 142 | 517 | ||||||||||||
Other operating expenses |
661 | 982 | 2,332 | 2,900 | ||||||||||||
Total Other Expenses |
9,829 | 7,471 | 25,373 | 21,116 | ||||||||||||
Loss Before Income Tax Expense (Benefit) |
(3,611 | ) | (18,653 | ) | (21,938 | ) | (17,217 | ) | ||||||||
Income tax expense (benefit) |
474 | (6,833 | ) | 474 | (6,902 | ) | ||||||||||
Net Loss |
$ | (4,085 | ) | $ | (11,820 | ) | $ | (22,412 | ) | $ | (10,315 | ) | ||||
Less net income attributable to noncontrolling interest |
$ | 281 | $ | 192 | $ | 761 | $ | 502 | ||||||||
Net loss attributable to Royal Bancshares |
$ | (4,366 | ) | $ | (12,012 | ) | $ | (23,173 | ) | $ | (10,817 | ) | ||||
Less Preferred stock Series A accumulated dividend and accretion |
$ | 486 | $ | | $ | 1,185 | $ | | ||||||||
Net loss available to common shareholders |
$ | (4,852 | ) | $ | (12,012 | ) | $ | (24,358 | ) | $ | (10,817 | ) | ||||
Per common share data |
||||||||||||||||
Net loss basic |
$ | (0.37 | ) | $ | (0.90 | ) | $ | (1.84 | ) | $ | (0. | |||||
Net loss diluted |
$ | (0.37 | ) | $ | (0.90 | ) | $ | (1.84 | ) | $ | (0.81 | ) | ||||
Cash dividends Class A shares |
$ | | $ | | $ | | $ | 0.300 | ||||||||
Cash dividends Class B shares |
$ | | $ | | $ | | $ | 0.345 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
-4-
ROYAL BANCSHARES OF PENNSYLVANIA INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders Equity and Comprehensive Loss
Nine months ended September 30, 2009
(unaudited)
Consolidated Statement of Changes in Shareholders Equity and Comprehensive Loss
Nine months ended September 30, 2009
(unaudited)
Accumulated | ||||||||||||||||||||||||||||||||||||||||||||
Additional | other | Total | ||||||||||||||||||||||||||||||||||||||||||
Preferred stock | Class A common stock | Class B common stock | paid in | Accumulated | comprehensive | Treasury | Noncontrolling | Shareholders | ||||||||||||||||||||||||||||||||||||
(In thousands, except preferred 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 |
(23,173 | ) | 761 | (22,412 | ) | |||||||||||||||||||||||||||||||||||||||
Transfer of noncontrolling interest related to
RBA Capital |
(142 | ) | (142 | ) | ||||||||||||||||||||||||||||||||||||||||
Net unrealized gain on AFS securities, net
of tax ($4,742) |
19,075 | | 19,075 | |||||||||||||||||||||||||||||||||||||||||
Non-credit loss portion of other-than
temporary impairments, net of tax ( $2,733) |
5,076 | 5,076 | ||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income |
$ | 1,597 | ||||||||||||||||||||||||||||||||||||||||||
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 |
256 | (256 | ) | | ||||||||||||||||||||||||||||||||||||||||
Common stock
conversion from Class B to Class A |
1 | 1 | (1 | ) | (1 | ) | | |||||||||||||||||||||||||||||||||||||
Stock option expense |
142 | 142 | ||||||||||||||||||||||||||||||||||||||||||
Balance September 30, 2009 |
$ | 27,838 | 11,346 | $ | 22,691 | 2,095 | $ | 210 | $ | 126,033 | $ | (56,991 | ) | $ | (1,955 | ) | $ | (6,971 | ) | $ | 2,517 | $ | 113,372 | |||||||||||||||||||||
-5-
ROYAL BANCSHARES OF PENNSYLVANIA INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders Equity and Comprehensive Loss
Nine months ended September 30, 2008
(unaudited)
Consolidated Statement of Changes in Shareholders Equity and Comprehensive Loss
Nine months ended September 30, 2008
(unaudited)
Retained | Accumulated | |||||||||||||||||||||||||||||||||||||||||||
Additional | earnings | other | Total | |||||||||||||||||||||||||||||||||||||||||
Preferred stock | Class A common stock | Class B common stock | paid in | (Accumulated | comprehensive | Treasury | Noncontrolling | Shareholders | ||||||||||||||||||||||||||||||||||||
(In thousands, except dividend data) | Series A | Shares | Amount | Shares | Amount | capital | deficit) | 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 loss |
(10,817 | ) | 502 | (10,315 | ) | |||||||||||||||||||||||||||||||||||||||
Other comprehensive loss, net of
reclassification adjustment and taxes |
(14,336 | ) | (14,336 | ) | ||||||||||||||||||||||||||||||||||||||||
Total comprehensive loss |
$ | (24,651 | ) | |||||||||||||||||||||||||||||||||||||||||
Common stock conversion from Class B to Class A |
1 | 2 | (1 | ) | (2 | ) | | |||||||||||||||||||||||||||||||||||||
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 | 29 | 144 | | 173 | |||||||||||||||||||||||||||||||||||||||
Stock option expense |
517 | 517 | ||||||||||||||||||||||||||||||||||||||||||
Balance September 30, 2008 |
$ | | 11,345 | $ | 22,690 | 2,096 | $ | 210 | $ | 123,239 | $ | (6,297 | ) | $ | (15,918 | ) | $ | (6,971 | ) | $ | 2,369 | $ | 119,322 | |||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
-6-
ROYAL BANCSHARES OF PENNSYLVANIA INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30,
Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30,
(In thousands) | 2009 | 2008 | ||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (22,412 | ) | $ | (10,315 | ) | ||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
||||||||
Depreciation and amortization |
644 | 749 | ||||||
Net income attributable to noncontrolling interests |
(761 | ) | (502 | ) | ||||
Stock compensation expense |
142 | 517 | ||||||
Provision for loan and lease losses |
13,469 | 13,087 | ||||||
Valuation allowance for other real estate owned |
1,781 | | ||||||
Net amortization of discounts and premiums on loans, mortgage-backed securities and investments |
128 | 528 | ||||||
Benefit for deferred income taxes |
| (9,460 | ) | |||||
Gains on sales of other real estate |
(337 | ) | (352 | ) | ||||
Gains on sales of real estate joint ventures |
| (1,092 | ) | |||||
Proceeds from sales of loans and leases |
5,342 | 1,761 | ||||||
Gains on sales of loans and leases |
(447 | ) | (133 | ) | ||||
Net (gains) losses on sales of investment securities |
(1,046 | ) | 1,161 | |||||
Gain from sale of premises of real estate owned via equity investment |
(803 | ) | (1,999 | ) | ||||
Gains on sales of premises and equipment |
| (1,991 | ) | |||||
Income from equity investments |
(150 | ) | (369 | ) | ||||
Income from bank owned life insurance |
(1,003 | ) | (776 | ) | ||||
Impairment of available-for-sale investment securities |
9,835 | 17,176 | ||||||
Changes in assets and liabilities: |
||||||||
(Increase) decrease in accrued interest receivable |
(1,326 | ) | 962 | |||||
(Increase) decrease in other assets |
(20,435 | ) | 2,898 | |||||
Increase in accrued interest payable |
5,951 | 85 | ||||||
Increase in other liabilities |
9,820 | 3,050 | ||||||
Net cash (used in) provided by operating activities |
(1,608 | ) | 14,985 | |||||
Cash flows from investing activities: |
||||||||
Proceeds from call/maturities of held-to-maturity (HTM)
investment securities |
| 105,265 | ||||||
Proceeds from call/maturities of available-for-sale (AFS) investment securities |
112,939 | 133,496 | ||||||
Proceeds from sales of AFS investment securities |
130,362 | | ||||||
Purchase of AFS investment securities |
(320,072 | ) | (74,122 | ) | ||||
Redemption of Federal Home Loan Bank stock |
| 3,390 | ||||||
Net increase in loans |
(47,847 | ) | (49,048 | ) | ||||
Purchase of premises and equipment |
(223 | ) | (475 | ) | ||||
Net proceeds from sale of premises of real estate owned via equity investments |
4,100 | 7,472 | ||||||
Distribution from investments in real estate |
150 | 369 | ||||||
Net decrease in real estate owned via equity investments |
(3,297 | ) | (5,473 | ) | ||||
Proceeds from sales of foreclosed real estate |
3,987 | 728 | ||||||
Proceeds from surrender of life insurance |
10,471 | | ||||||
Purchase of life insurance |
| (5,000 | ) | |||||
Net cash (used in) provided by investing activities |
(109,430 | ) | 116,602 | |||||
Cash flows from financing activities: |
||||||||
Increase (decrease) in non-interest bearing and interest
bearing demand deposits and savings accounts |
30,860 | (60,096 | ) | |||||
Increase in certificates of deposit |
117,109 | 26,918 | ||||||
Net decrease in short-term borrowings |
| (102,000 | ) | |||||
Proceeds from long-term borrowings |
| 65,000 | ||||||
Repayments of long-term borrowings |
(4,858 | ) | (2,667 | ) | ||||
Repayment of mortgage debt of real estate owned via equity investments |
(2,389 | ) | (5,280 | ) | ||||
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 |
170,770 | (82,902 | ) | |||||
Net increase in cash and cash equivalents |
59,732 | 48,685 | ||||||
Cash and cash equivalents at the beginning of the period |
14,259 | 10,905 | ||||||
Cash and cash equivalents at the end of the period (1) |
$ | 73,991 | $ | 59,590 | ||||
(1) | Included in cash and cash equivalents at the end of the period is $3.2 million related to Royal Asian Bank as of September 30, 2009 (Note 2) |
Supplemental Disclosure |
||||||||
Interest paid |
$ | 22,585 | $ | 28,057 | ||||
Transfers to other real estate owned |
$ | 20,696 | $ | 496 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
-7-
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
(Royal Asian) (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 five 60% ownership interests in Crusader Servicing Corporation, Royal Tax Lien
Services, LLC, Royal Bank America Leasing, LP, RBA ABL Group, 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) Accounting Standards
Codification (ASC) Topic 810, Consolidation (ASC Topic 810), (please see Note 15 Trust
Preferred Securities for additional information.) 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 nine
month periods ended September 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.
On July 1, 2009, the FASB Accounting Standards CodificationTM (Codification) became
effective as the sole authoritative source of U.S. GAAP. This codification was issued under FASB
Statement No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of
Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162 and can now be
found under ASC Topic 105, Generally Accepted Accounting Principles. Codification is 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. Codification supersedes all existing non-SEC accounting
and reporting standards. All other non-grandfathered non-SEC accounting literature not included in
the Codification will become nonauthoritative. Accounting literature included in the Codification
is referenced by Topic, Subtopic, Section, Paragraph and Subparagraph. The adoption of Codification
did not have a material impact on the Companys consolidated financial statements.
The Company has evaluated events and transactions occurring subsequent to the balance sheet date of
September 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, November 13,
2009.
-8-
2. Disposal of Long-Lived Assets
On September 25, 2009, Royal Bancshares of Pennsylvania, Inc. (the Company) announced that it had
entered into a stock purchase agreement (the Agreement) with a newly formed corporation organized
by the President of Royal Asian Bank (Royal Asian), a banking subsidiary of the Company, to
purchase all of the outstanding common stock of Royal Asian owned by the Company. Under the terms
of the Agreement, Royal Asian Bancshares (the Buyer) will purchase all of the common stock of
Royal Asian owned by the Company for a purchase price of $15,217,988.
Closing of the transaction contemplated by the Agreement is subject to a number of conditions
specified in the Agreement, including receipt of all required regulatory approvals and completion
of a private placement transaction by the Buyer (the Buyer Private Placement) to fund payment of
the purchase price. Under the Agreement, the Buyer must (i), on or prior to November 15, 2009,
have received net proceeds in the Buyer Private Placement in the amount of $10.0 million for the
purpose of acquiring the Companys shares of common stock of Royal Asian and delivered a written
representation of its chief executive officer that it reasonably expects to raise the remaining
funds constituting purchase price by the closing date and (ii), on or prior to December 15, 2009,
received net proceeds in the Buyer Private Placement for the balance of the total purchase price.
Either the Company or the Buyer may terminate the Agreement if the closing has not occurred by
December 31, 2009. In addition, either party may terminate the Agreement at any time if any
governmental entity that must grant a required regulatory approval has denied approval of the
transactions, requested that an application be withdrawn, or notified either party that it will not
grant (or intends to rescind or revoke if previously approved), a required regulatory approval, or
imposed a condition in connection with approval of the transactions, which, in the good faith
judgment of the Company or Buyer, will materially impair the ability of Buyer to complete the
transactions. The Company may terminate the Agreement (i) on or after November 16, 2009 if the
Company has not received evidence satisfactory to it that Buyer has received net proceeds in the
Buyer Private Placement by November 15, 2009 in the amount of $10.0 million for the purpose of
acquiring the Companys shares of common stock of Royal Asian and a written representation of
Buyers chief executive officer that it reasonably expects to raise the remaining funds
constituting purchase price by the closing date and (ii) on or after December 16, 2009 if the
Company has not received evidence satisfactory to it that Buyer has received net proceeds in the
Buyer Private Placement by December 15, 2009 for the balance of the total purchase price. Either
party may also terminate the Agreement by mutual consent and in the event of certain breaches of
representations, warranties or obligations of the other party.
-9-
Below is a presentation of Royal Asians assets and liabilities held for sale as of September 30,
2009.
September 30, | ||||
(in thousands) | 2009 | |||
ASSETS |
||||
Cash and due from banks |
$ | 32,013 | ||
Cash eliminated in consolidation |
(28,798 | ) | ||
Total cash and cash equivalents |
3,215 | |||
Investment securities available-for-sale (AFS) at fair value |
792 | |||
Loans and leases |
66,344 | |||
Less allowance for loan and lease losses |
1,753 | |||
Net loans and leases |
64,591 | |||
Other assets |
10,001 | |||
Total assets held for sale |
$ | 78,599 | ||
LIABILITIES |
||||
Liabilities |
||||
Deposits |
||||
Non-interest bearing |
$ | 12,951 | ||
Non-interest bearing deposits eliminated in consolidation |
(560 | ) | ||
Interest bearing |
79,940 | |||
Interest bearing deposits eliminated in consolidation |
(28,238 | ) | ||
Total deposits |
64,093 | |||
Other liabilities |
1,225 | |||
Total liabilities held for sale |
$ | 65,318 |
3. Segment Information
FASB ASC Topic 280, Segment Reporting (ASC Topic 280) 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 previously made equity
investments in real estate and had extended mezzanine loans to real estate projects. At September
30, 2009 and 2008, one such equity investment in real estate meets the requirements for
consolidation under ASC Topic 810 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
-10-
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. The Company entered into a stock purchase
agreement with a newly formed corporation to purchase all of the outstanding common stock of Royal
Asian owned by the Company (please see Note 2 Disposal of Long-Lived Assets for additional
information.)
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 September 30, 2009, the Partnership also had $10.0 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 the FASB ASC Topic 360, Property, Plant and Equipment (ASC Topic 360), the
Partnership assesses for impairment by evaluating the recoverability of the condominiums 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 three quarters of 2009. The Companys investment in this entity is further discussed in
Note 14 Real Estate Owned via Equity Investment.
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 ASC Topic 280 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. The operations of the subsidiary
are now part of Royal Bank however they continue to be shown in the Other segments section of the
table below
-11-
since the type of lending is different than that of 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 nine month periods ended September 30, 2009 and 2008. Included in the Community
Banking segment are assets and deposits of $78.6 million and $64.1 million, respectively, related
to the sale of Royal Asian as of September 30, 2009.
Three months ended September 30, 2009 | ||||||||||||||||||||
Community | Tax Lien | Equity | ||||||||||||||||||
(In thousands) | Banking | Operation | Investment | Other | Consolidated | |||||||||||||||
Total assets |
$ | 1,173,562 | $ | 105,093 | $ | 15,356 | $ | 67,799 | $ | 1,361,810 | ||||||||||
Total deposits |
$ | 908,037 | $ | | $ | | $ | | $ | 908,037 | ||||||||||
Interest income |
$ | 12,509 | $ | 3,014 | $ | | $ | 1,276 | $ | 16,799 | ||||||||||
Interest expense |
8,081 | 1,113 | 69 | 307 | 9,570 | |||||||||||||||
Net interest income (expense) |
$ | 4,428 | $ | 1,901 | $ | (69 | ) | $ | 969 | $ | 7,229 | |||||||||
Provision for loan and lease losses |
3,093 | 161 | | 462 | 3,716 | |||||||||||||||
Total other income |
2,057 | 109 | 444 | 95 | 2,705 | |||||||||||||||
Total other expenses |
8,679 | 746 | 216 | 188 | 9,829 | |||||||||||||||
Income tax (benefit) expense |
(82 | ) | 429 | 56 | 71 | 474 | ||||||||||||||
Net (loss) income |
$ | (5,205 | ) | $ | 674 | $ | 103 | $ | 343 | $ | (4,085 | ) | ||||||||
Noncontrolling interest |
$ | (122 | ) | $ | 270 | $ | 79 | $ | 54 | $ | 281 | |||||||||
Net (loss) income attributable to Royal Bancshares |
$ | (5,083 | ) | $ | 404 | $ | 24 | $ | 289 | $ | (4,366 | ) | ||||||||
Three months ended September 30, 2008 | ||||||||||||||||||||
Community | Tax Lien | Equity | ||||||||||||||||||
(In thousands) | Banking | Operation | Investment | Other | Consolidated | |||||||||||||||
Total assets |
$ | 1,013,965 | $ | 74,652 | $ | 22,843 | $ | 61,026 | $ | 1,172,486 | ||||||||||
Total deposits |
$ | 736,974 | $ | | $ | | $ | | $ | 736,974 | ||||||||||
Interest income |
$ | 13,946 | $ | 2,316 | $ | | $ | 1,370 | $ | 17,632 | ||||||||||
Interest expense |
7,862 | 920 | 48 | 687 | 9,517 | |||||||||||||||
Net interest income (expense) |
$ | 6,084 | $ | 1,396 | $ | (48 | ) | $ | 683 | $ | 8,115 | |||||||||
Provision for loan and lease losses |
4,843 | | | 432 | 5,275 | |||||||||||||||
Total other (loss) income |
(15,116 | ) | 38 | 953 | 103 | (14,022 | ) | |||||||||||||
Total other expenses |
6,227 | 523 | 235 | 486 | 7,471 | |||||||||||||||
Income tax (benefit) expense |
(7,209 | ) | 188 | 235 | (47 | ) | (6,833 | ) | ||||||||||||
Net (loss) income |
$ | (12,893 | ) | $ | 723 | $ | 435 | $ | (85 | ) | $ | (11,820 | ) | |||||||
Noncontrolling interest |
$ | 44 | $ | 183 | $ | | $ | (35 | ) | $ | 192 | |||||||||
Net (loss) income attributable to Royal Bancshares |
$ | (12,937 | ) | $ | 540 | $ | 435 | $ | (50 | ) | $ | (12,012 | ) | |||||||
-12-
Nine months ended September 30, 2009 | ||||||||||||||||||||
Community | Tax Lien | Equity | ||||||||||||||||||
(In thousands) | Banking | Operation | Investment | Other | Consolidated | |||||||||||||||
Total assets |
$ | 1,173,562 | $ | 105,093 | $ | 15,356 | $ | 67,799 | $ | 1,361,810 | ||||||||||
Total deposits |
$ | 908,037 | $ | | $ | | $ | | $ | 908,037 | ||||||||||
Interest income |
$ | 38,073 | $ | 7,928 | $ | | $ | 3,722 | $ | 49,723 | ||||||||||
Interest expense |
24,480 | 2,975 | 172 | 909 | 28,536 | |||||||||||||||
Net interest income (expense) |
$ | 13,593 | $ | 4,953 | $ | (172 | ) | $ | 2,813 | $ | 21,187 | |||||||||
Provision for loan and lease losses |
11,729 | 797 | | 943 | 13,469 | |||||||||||||||
Total other (loss) income |
(5,985 | ) | 255 | 1,141 | 306 | (4,283 | ) | |||||||||||||
Total other expenses |
21,758 | 2,314 | 600 | 701 | 25,373 | |||||||||||||||
Income tax (benefit) expense |
(751 | ) | 812 | 129 | 284 | 474 | ||||||||||||||
Net (loss) income |
$ | (25,128 | ) | $ | 1,285 | $ | 240 | $ | 1,191 | $ | (22,412 | ) | ||||||||
Noncontrolling interest |
$ | 0 | $ | 514 | $ | 184 | $ | 62 | $ | 761 | ||||||||||
Net (loss) income attributable to Royal Bancshares |
$ | (25,128 | ) | $ | 771 | $ | 55 | $ | 1,129 | $ | (23,173 | ) | ||||||||
Nine months ended September 30, 2008 | ||||||||||||||||||||
Community | Tax Lien | Equity | ||||||||||||||||||
(In thousands) | Banking | Operation | Investment | Other | Consolidated | |||||||||||||||
Total assets |
$ | 1,013,965 | $ | 74,652 | $ | 22,843 | $ | 61,026 | $ | 1,172,486 | ||||||||||
Total deposits |
$ | 736,974 | $ | | $ | | $ | | $ | 736,974 | ||||||||||
Interest income |
$ | 45,224 | $ | 6,012 | $ | | $ | 4,171 | $ | 55,407 | ||||||||||
Interest expense |
23,265 | 2,585 | 151 | 2,141 | 28,142 | |||||||||||||||
Net interest income (expense) |
$ | 21,959 | $ | 3,427 | $ | (151 | ) | $ | 2,030 | $ | 27,265 | |||||||||
Provision for loan and lease losses |
11,608 | 22 | | 1,457 | 13,087 | |||||||||||||||
Total other (loss) income |
(13,461 | ) | 439 | 2,341 | 402 | (10,279 | ) | |||||||||||||
Total other expenses |
17,521 | 1,452 | 660 | 1,483 | 21,116 | |||||||||||||||
Income tax (benefit) expense |
(7,991 | ) | 731 | 536 | (178 | ) | (6,902 | ) | ||||||||||||
Net income (loss) |
$ | (12,640 | ) | $ | 1,661 | $ | 994 | $ | (330 | ) | $ | (10,315 | ) | |||||||
Noncontrolling interest |
$ | 126 | $ | 508 | $ | | $ | (132 | ) | $ | 502 | |||||||||
Net income (loss) attributable to Royal Bancshares |
$ | (12,766 | ) | $ | 1,153 | $ | 994 | $ | (198 | ) | $ | (10,817 | ) | |||||||
Interest income earned by the Community Banking segment related to the Tax Lien Operation was
approximately $1.1 million and $920,000 for the three month periods ended September 30, 2009 and
2008, respectively and $3.0 million and $2.6 million for the nine months ended September 30, 2009
and 2008, respectively.
Interest income earned by the Community Banking segment related to the Other Segment was
approximately $307,000 and $687,000 for the three month periods ended September 30, 2009 and 2008,
respectively and $909,000 and $2.1 million for the nine months ended September 30, 2009 and 2008,
respectively. The reduction in interest income earned by the Community Banking segment related to
the Other Segment for the third quarter and the first nine months of 2009 is due to RBA Capital no
longer paying interest to Royal Bank.
4. Per Share Information
The Company follows the provisions of FASB ASC Topic 260, Earnings per Share (ASC Topic 260).
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. 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. 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
nine months ended September 30, 2009, 642,178 and 739,016 options to purchase shares of common
stock, respectively, were anti-dilutive in the computation of diluted EPS, as exercise price
exceeded
-13-
average market price and as a result of the net loss for the three months and nine months ended
September 30, 2009. Additionally 30,407 warrants were also
anti-dilutive. For the three and nine months ended September 30, 2008,
873,516 and 925,630 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 nine months ended
September 30, 2008.
Basic and diluted EPS are calculated as follows:
Three months ended September 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 |
$ | (4,852 | ) | 13,257 | $ | (0.37 | ) | |||||
Three months ended September 30, 2008 | ||||||||||||
Loss | Average shares | Per share | ||||||||||
(In thousands, except for per share data) | (numerator) | (denominator) | Amount | |||||||||
Basic and Diluted EPS
Loss available to common shareholders |
$ | (12,012 | ) | 13,257 | $ | (0.90 | ) | |||||
Nine months ended September 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 |
$ | (24,358 | ) | 13,257 | $ | (1.84 | ) | |||||
Nine months ended September 30, 2008 | ||||||||||||
Loss | Average shares | Per share | ||||||||||
(in thousands, except for per share data) | (numerator) | (denominator) | Amount | |||||||||
Basic and Diluted EPS
Loss available to common shareholders |
$ | (10,817 | ) | 13,306 | $ | (0.81 | ) | |||||
See Note 11 Stock Option Plans for a discussion on the Companys stock option and restricted
stock plan.
5. Comprehensive Income
FASB ASC Topic 220, Comprehensive Income (ASC Topic 220), requires the reporting of all changes
in equity during the reporting period except investments from and distributions to shareholders.
Net income (loss) is a component of comprehensive income (loss) with all other components referred
to in the aggregate as other comprehensive income. Unrealized gains and losses on AFS securities
is an example of an other comprehensive income component.
-14-
Nine months ended September 30, 2009 | ||||||||||||
Tax | ||||||||||||
Before tax | (benefit) | Net of tax | ||||||||||
(In thousands) | amount | expense | amount | |||||||||
Unrealized gains on investment securities: |
||||||||||||
Unrealized holding gains arising during period |
$ | 23,728 | $ | 8,305 | $ | 15,423 | ||||||
Reduction in deferred tax valuation allowance related to preferred and
common stock |
| (3,001 | ) | 3,001 | ||||||||
Less adjustment for impaired debt, preferred and common stock securities |
(9,835 | ) | (3,442 | ) | (6,393 | ) | ||||||
Less reclassification adjustment for net gains realized in net loss |
1,046 | 366 | 680 | |||||||||
Unrealized gains on investment securities |
$ | 32,517 | $ | 8,380 | $ | 24,137 | ||||||
Unrecognized benefit obligation expense: |
||||||||||||
Less reclassification adjustment for amortization |
(21 | ) | (7 | ) | (14 | ) | ||||||
Other comprehensive income, net |
$ | 32,538 | $ | 8,387 | $ | 24,151 | ||||||
Tax | ||||||||||||
Before tax | (benefit) | Net of tax | ||||||||||
(In thousands) | amount | expense | amount | |||||||||
Unrealized losses on investment securities: |
||||||||||||
Unrealized holding losses arising during period |
$ | (37,494 | ) | $ | (13,123 | ) | $ | (24,371 | ) | |||
Market value adjustment on transfer of held-to-maturity
securities to available-for-sale |
(2,987 | ) | (1,045 | ) | (1,942 | ) | ||||||
Less adjustment for impaired investment securities |
(17,176 | ) | (6,011 | ) | (11,165 | ) | ||||||
Less reclassification adjustment for losses realized in net loss |
(1,161 | ) | (406 | ) | (755 | ) | ||||||
Unrealized losses on investment securities |
$ | (22,144 | ) | $ | (7,751 | ) | $ | (14,393 | ) | |||
Unrecognized benefit obligation expense: |
||||||||||||
Less reclassification adjustment for amortization |
(88 | ) | (31 | ) | (57 | ) | ||||||
Other comprehensive loss, net |
$ | (22,056 | ) | $ | (7,720 | ) | $ | (14,336 | ) | |||
-15-
6. Investment Securities:
The carrying value and fair value of investment securities at September 30, 2009 are as follows:
Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | ||||||||||||||
(In thousands) | cost | gains | losses | Fair value | ||||||||||||
Investment securities available-for-sale |
||||||||||||||||
Mortgage-backed securities-residential |
$ | 45,343 | $ | 749 | $ | | $ | 46,092 | ||||||||
U.S. government agencies |
1,175 | 6 | | 1,181 | ||||||||||||
Preferred stocks |
2,500 | | (331 | ) | 2,169 | |||||||||||
Common stocks |
381 | 60 | (7 | ) | 434 | |||||||||||
Collateralized mortgage obligations: |
||||||||||||||||
Issued or guaranteed by U.S. government agencies |
290,713 | 2,587 | (413 | ) | 292,887 | |||||||||||
Non-agency |
30,234 | 155 | (2,758 | ) | 27,631 | |||||||||||
Collateralized debt obligations |
35,000 | | (594 | ) | 34,406 | |||||||||||
Corporate bonds |
8,405 | 10 | (1,129 | ) | 7,286 | |||||||||||
Trust preferred securities |
34,272 | 1,757 | (1,076 | ) | 34,953 | |||||||||||
Other securities |
7,843 | 6 | (116 | ) | 7,733 | |||||||||||
Total available for sale before Royal Asian investments
held for sale |
455,866 | 5,330 | (6,424 | ) | 454,772 | |||||||||||
Royal Asian investments held for sale |
(792 | ) | | | (792 | ) | ||||||||||
Total available for sale |
$ | 455,074 | $ | 5,330 | $ | (6,424 | ) | $ | 453,980 | |||||||
The carrying value and fair value of investment securities at December 31, 2008 are as
follows:
Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | ||||||||||||||
(In thousands) | cost | gains | losses | Fair 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 September 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.
-16-
As of September 30, 2009 | ||||||||
Amortized | ||||||||
(In thousands) | cost | Fair value | ||||||
Within 1 year |
$ | 36,228 | $ | 35,635 | ||||
After 1 but within 5 years |
8,352 | 7,238 | ||||||
After 5 but within 10 years |
| | ||||||
After 10 years |
34,272 | 34,953 | ||||||
Mortgage-backed securities-residential |
45,343 | 46,092 | ||||||
Collateralized mortgage obligations: |
||||||||
Issued or guaranteed by U.S. government agencies |
290,713 | 292,887 | ||||||
Non-agency |
30,234 | 27,631 | ||||||
Total available for sale debt securities |
445,142 | 444,436 | ||||||
No contractual maturity |
10,724 | 10,336 | ||||||
Total available for sale before Royal Asian investments
held for sale |
455,866 | 454,772 | ||||||
Royal Asian investments held for sale |
(792 | ) | (792 | ) | ||||
Total available for sale |
$ | 455,074 | $ | 453,980 | ||||
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 FASB ASC
Topic 320, Investments-Debt & Equity Securities (ASC Topic 320). The non-agency collateralized
mortgage obligations that are rated below AA are evaluated under FASB ASC Topic 320 Subtopic 40,
Beneficial Interests in Securitized Financial Assets under FASB ASC Topic 325,
Investments-Other. 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 new provisions under ASC Topic 320 specific to OTTI.
Under the new guidance 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. Under the new
guidance, 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.
-17-
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 nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Non-agency collateralized
mortgage obligations |
$ | | $ | 3,188 | $ | 459 | $ | 3,188 | ||||||||
Corporate bonds |
| 11,497 | 1,353 | 11,497 | ||||||||||||
Trust preferred securities |
77 | | 1,942 | | ||||||||||||
Common stocks |
| | 4,334 | | ||||||||||||
Preferred stocks |
| | 1,117 | 2,491 | ||||||||||||
Other securities |
415 | | 630 | | ||||||||||||
$ | 492 | $ | 14,685 | $ | 9,835 | $ | 17,176 | |||||||||
The following table presents a roll-forward of the balance of credit-related impairment losses
on debt securities held at September 30, 2009 for which a portion of an other-than-temporary
impairment was recognized in other comprehensive income:
Three | Nine | |||||||
months | months | |||||||
Periods ended September 30, 2009 | 2009 | 2009 | ||||||
(In thousands) | ||||||||
Balance at beginning of period |
$ | 3,677 | $ | | ||||
Credit-related impairment loss on debt securities
for which an other-than-temporary impairment was
not previously recognized |
| 3,677 | ||||||
Reductions
for securities sold during the period (realized) |
(1,047 | ) | (1,047 | ) | ||||
Additional credit-related impairment loss on debt
securities for which an other-than-temporary
impairment was previously recognized |
77 | 77 | ||||||
Balance at end of period |
$ | 2,707 | $ | 2,707 | ||||
The tables below indicate the length of time individual securities have been in a continuous
unrealized loss position at September 30, 2009 and December 31, 2008:
September 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 |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
U.S. government agencies |
| | | | | | ||||||||||||||||||
Preferred stocks |
| | 2,169 | (331 | ) | 2,169 | (331 | ) | ||||||||||||||||
Common stocks |
42 | (7 | ) | | | 42 | (7 | ) | ||||||||||||||||
Collateralized mortgage obligations: |
||||||||||||||||||||||||
Issued or guaranteed by U.S. government agencies |
56,814 | (413 | ) | | | 56,814 | (413 | ) | ||||||||||||||||
Non-agency |
1,877 | (72 | ) | 16,230 | (2,686 | ) | 18,107 | (2,758 | ) | |||||||||||||||
Collateralized debt obligations |
| | 34,406 | (594 | ) | 34,406 | (594 | ) | ||||||||||||||||
Corporate bonds |
350 | (1 | ) | 5,523 | (1,128 | ) | 5,873 | (1,129 | ) | |||||||||||||||
Trust preferred securities |
| | 22,721 | (1,076 | ) | 22,721 | (1,076 | ) | ||||||||||||||||
Other securities |
1,148 | (116 | ) | | | 1,148 | (116 | ) | ||||||||||||||||
Total available for sale |
$ | 60,231 | $ | (609 | ) | $ | 81,049 | $ | (5,815 | ) | $ | 141,280 | $ | (6,424 | ) | |||||||||
-18-
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 $6.4 million at September 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 $9.8 million in impairment charges recorded in earnings for the
nine months ended September 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 have
improved significantly in the last two quarters as the financial markets have begun to recover and
have exhibited more stability. In determining the Companys intent not to sell 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, 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 September 30, 2009, the Company had one preferred stock holding of
a financial institution with a total fair value of $2.2 million and an unrealized loss of $331,000,
or 13% of its aggregate cost. 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 an 18% price recovery since the
second quarter of 2009. The issuer is current with dividend payments. Management believes that
the fair value of the preferred stock was not a result of the financial condition and near term
projections of the issuer but rather reflected investor concerns about recent losses in the
financial services industry related to subprime, construction and commercial real estate 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 September 30, 2009. During the third quarter of 2009, the Company sold a
preferred stock holding in a financial institution for a gain of $296,000. The Company had
previously recorded an OTTI charge to earnings on this preferred stock in the first quarter of 2009
for $1.1 million.
Common stocks: As of September 30, 2009, the Company had three common stocks of financial
institutions with a total fair value of $42,000 and an unrealized loss of $7,000, or 14% of its
aggregate cost. The Company recorded an OTTI charge to earnings of $62,000 related to these three
common stocks during the second quarter of 2009. 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 unrealized loss to be
other-than-temporary at September 30, 2009.
At 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.
The total fair value was $13.7 million and unrealized losses were $2.3 million, or 15% of their
aggregate cost. The Company had recorded impairment losses of $3.8 million on this portfolio during
the first six months of 2009. As a result of the improvement in the stock market during the third
quarter of 2009 management concluded that it was in the best interest of the Company to sell the
entire managed common stock portfolios. Several analysts had indicated that the market was
-19-
poised for a correction after increasing almost 50% since late in the first quarter of 2009.
During the third quarter the Company sold these stocks and minimized the loss to $130,000, or 1% of
their aggregate cost.
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.
U.S. government issued or sponsored collateralized mortgage obligations (Agency CMOs):
As of September 30, 2009, the Company had twelve Agency CMOs with a fair value of $56.8 million and
gross unrealized losses of $413,000, or 1% of their aggregate cost. All of the Agency CMOs had been
in an unrealized loss position for less than seven 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 September 30, 2009.
Non-agency collateralized mortgage obligations (Non-agency CMOs): As of September 30,
2009, the Company had seven non-agency CMOs with a fair value of $18.1 million and gross unrealized
losses of $2.8 million, or 13% of their aggregate cost. Six of the non-agency CMO bonds were in an
unrealized loss position for more than twelve months. One bond was in an unrealized loss position
for less than twelve months. Three bonds accounted for $2.4 million, or 86% of the gross
unrealized loss. During the second quarter of 2009, the Company concluded that two of these three
bonds were other-than-temporarily impaired and recognized in earnings the credit-related loss of
$459,000. 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 bonds are below investment grade and
the third bond is rated A. Management utilized discounted cash flow analysis as required under ASC
Topic 320 and ASC Topic 325 to determine the credit component of the unrealized loss for the three
bonds. As a result, management concluded that there was no additional credit-related loss on the
two bonds that were previously deemed other-than-temporarily impaired. In addition there was no
credit-related loss on the third bond. Management expects to fully collect the amortized cost
basis of all seven bonds. The Company does not intend to sell the 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 five bonds to
be other-than-temporarily impaired as of September 30, 2009. The total gross unrealized loss of
$2.8 million recognized in comprehensive income is comprised of the $1.5 million in
noncredit-related losses on the two bonds deemed other-than-temporarily impaired and $1.3 million
in unrealized losses on the five bonds not considered other-than-temporarily impaired.
Collateralized debt obligations (CDOs): As of September 30, 2009, the Company had three
CDOs with a fair value of $34.4 million and gross unrealized losses of $594,000, or 2% of the
aggregate cost. Gross unrealized losses of $594,000 for this investment category have occurred for
more than twelve months but have experienced a 93% improvement in valuation during the past nine
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
unrealized loss 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 three quarters of 2009. Based upon
-20-
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 three 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-than-temporarily impaired as of September 30, 2009.
As of September 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 they experience their first dollar of loss.
With the same 0% recovery assumption, but the lesser-weighted entities subject to credit events,
the tranche can sustain five to seven additional defaults before experiencing its first loss. As of
September 30, 2009, the CDO which matures in 2010 has absorbed 13 credit events with an average
recovery rate of 25%. Based on the current subordination, this CDO can sustain, under a worst-case
0% recovery scenario, an additional ten to eleven defaults before experiencing its first dollar of
loss. 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. 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, the previous third party reviews, and significantly improved indicative values,
management concluded that OTTI had not occurred for the CDOs.
Corporate bonds: As of September 30, 2009, the Company had two corporate bonds with a fair
value of $5.5 million and gross unrealized losses of $1.1 million, or 17% of their aggregate cost.
One of the corporate bonds was deemed other-than-temporarily impaired as of September 30, 2009.
Both bonds have been in an unrealized loss position for longer than twelve months and are below
investment grade. The Companys unrealized losses in investments in corporate bonds represent
credit risk of the underlying issuers, which are finance companies. 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
ASC Topic 320 to determine the credit risk component of the corporate bonds. Based on these
analyses, there was no further credit-related loss on the one bond that was deemed
other-than-temporarily impaired and the other bond was not deemed other-than-temporarily impaired.
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 recognized the non-credit related loss of $737,000 on the bond
that was deemed other-than-temporarily impaired and $392,000 in unrealized losses on the other bond
in comprehensive income at September 30, 2009.
-21-
During the third quarter the Company sold two bonds that were deemed other-than-temporarily
impaired. One of the bonds which had credit-related losses of $725,000 in the second quarter of
2009 was sold for a gain of $180,000. The other bond which had credit-related losses of $322,000
in the second quarter of 2009 was sold for a $768,000 loss. During the third quarter, the issuer
of the other bond had indicated that the government would not likely support the company and has
subsequently filed for bankruptcy. In order to limit the potential losses associated with this
investment the Company decided to sell the security.
Trust preferred securities: At September 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 ASC Topic 320 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 September 30, 2009, the Company has six trust preferred
securities with a fair value of $22.7 million and gross unrealized losses of $1.1 million, or 4.5%
of their aggregate cost. All six of the trust preferred securities have been in an unrealized loss
position for twelve months or longer. Five of the securities are below investment grade and one
security is not rated. Five of the trust preferreds were deemed other-than-temporarily impaired at
June 30, 2009 and September 30, 2009. 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 ASC Topic 320. As a result, there was no
additional credit-related loss on the four of the five bonds deemed other-than-temporarily
impaired. The fifth bond deemed other-than-temporarily impaired had an additional credit-related
loss of $77,000. 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 $77,000 at September 30, 2009 and the remaining
noncredit-related loss of $1.0 million was recognized in other comprehensive income. Because the
Company does not intend to sell the trust preferred security and it is not more likely than not
that the Company will be required to sell the security before recovery of its amortized cost basis,
which may be maturity, the Company does not consider the remaining security to be
other-than-temporarily impaired as of September 30, 2009. The total gross unrealized loss of $1.1
million recognized in comprehensive income is comprised of the $1.0 million in noncredit-related
losses on the five securities deemed other-than-temporarily impaired and $65,000 in unrealized loss
on the one security not considered other-than-temporarily impaired.
Other securities: As of September 30, 2009, the Company had eight investments in real
estate and SBA funds. As of September 30, 2009, 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 nine 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 third quarter of 2009, the Company recognized impairment charges
of $414,000 on two private equity global commercial real estate investment funds. 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. One of the funds was deemed other-than-temporarily impaired
as of June 30, 2009 and an additional $79,000 was recorded in impairment charges during the third
quarter of 2009 after recording an
-22-
impairment charge of $215,000 in the second quarter of 2009 on
this fund. The Company concluded that OTTI had occurred on the second fund as of September 30,
2009 and recorded a charge to earnings of $335,000.
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.
7. 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
September 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 October 29, 2009, the FHLB filed an 8-K to report their results for the
three months ended September 30, 2009. For the third quarter of 2009, the FHLB had a net loss of
$40.4 million compared to net income of $32.1 million for the second quarter of 2009 primarily
related to credit-related losses on their mortgage-backed securities portfolio. At September 30,
2009, GAAP capital was $3.6 billion as compared to a $4.1 billion at December 31, 2008. The FHLB
was in compliance with its risk-based, total and leverage capital requirements at September 30,
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 other-than-temporary impairment related to the
carrying amount of the Companys FHLB stock as of September 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.
-23-
8. Loans and Leases
September 30, | December 31, | |||||||
(In thousands) | 2009 | 2008 | ||||||
Commercial and industrial |
$ | 87,201 | $ | 86,278 | ||||
Construction |
84,169 | 167,204 | ||||||
Land Development |
65,641 | 74,168 | ||||||
Construction and land development mezzanine |
2,815 | 2,421 | ||||||
Single family residential |
54,415 | 27,480 | ||||||
Real Estate non-residential |
277,560 | 234,573 | ||||||
Real Estate non-residential-mezzanine |
| 4,111 | ||||||
Real Estate multi-family |
21,614 | 14,059 | ||||||
Real Estate -1-4 family mezzanine |
| 335 | ||||||
Tax certificates |
73,900 | 64,168 | ||||||
Leases |
36,444 | 26,123 | ||||||
Other |
1,201 | 1,243 | ||||||
Total gross loans |
704,960 | 702,163 | ||||||
Deferred fees, net |
(1,082 | ) | (1,441 | ) | ||||
Total loans and leases before Royal Asian
loans held for sale |
703,878 | 700,722 | ||||||
Royal Asian loans held for sale (1) |
(66,344 | ) | | |||||
Total loans and leases |
$ | 637,534 | $ | 700,722 | ||||
(1) | Included in Royal Asian loans held for sale is $48.2 million and $9.5 million in non-residential and commercial loans, respectively, as of September 30, 2009. |
During 2009 approximately $43.4 million in completed construction projects were reclassified as
non-residential ($8.0 million) or single family real estate ($35.4 million). The Company classifies
its leases as capital leases, in accordance with FASB ASC Topic 840, Leases. 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. As of September 30, 2009, the
Company did not have any restructured loans.
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.
-24-
The following is a summary of information pertaining to impaired loans:
September 30, | December 31, | |||||||
(In thousands) | 2009 | 2008 | ||||||
Impaired loans with a valuation allowance |
$ | 40,466 | $ | 69,350 | ||||
Impaired loans without a valuation allowance |
43,530 | 16,480 | ||||||
Total impaired loans before Royal Asian
impaired loans held for sale |
83,996 | 85,830 | ||||||
Royal Asian impaired loans held for sale(1) |
(3,935 | ) | | |||||
Total impaired loans |
$ | 80,061 | $ | 85,830 | ||||
Valuation allowance related to impaired loans |
$ | 4,079 | $ | 12,882 | ||||
Allowance related to Royal Asian impaired
loans held for sale |
(275 | ) | | |||||
Total valuation allowance related to impaired loans |
$ | 3,804 | $ | 12,882 | ||||
(1) | The $3.9 million related to the Royal Asian impaired loans held for sale is comprised of $1.6 million in impaired loans with a valuation allowance and $2.3 million in impaired loans without a valuation allowance as of September 30, 2009. |
Non-accrual and impaired loans were $84.0 million at September 30, 2009, compared to $85.8 million
at December 31, 2008, a slight decrease of $1.8 million. The $1.8 million decline was the result
of a $29.0 million reduction in existing non-accrual loan balances through payments or loans
becoming current and placed back on accrual, $17.9 million transferred to other real estate owned,
and $17.5 million in charge-offs which collectively were offset by $62.5 million in additions. If
interest had been accrued, such income would have been approximately $1.6 million and $4.9 million
for the three and nine months ended September 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 $8.8 million decline in the valuation allowance was entirely related to
loan charge-offs including charge-offs on two loans transferred to other real estate owned
(OREO). The valuation allowance of $2.9 million and $400,000 for these two loans 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 nine months ended September 30, 2009 and
September 30, 2008 was $15.6 million and $7.4 million respectively, of which $15.3 million and $7.4
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 September 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.
-25-
9. Allowance for Loan and Lease Losses:
Changes in the allowance for loan and lease losses were as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Balance at beginning period |
$ | 28,374 | $ | 26,282 | $ | 28,908 | $ | 19,282 | ||||||||
Charge-offs by loan type |
||||||||||||||||
Commercial and industrial |
(10 | ) | | (254 | ) | (568 | ) | |||||||||
Construction and land development |
(380 | ) | | (4,747 | ) | | ||||||||||
Construction and land development mezzanine |
| (768 | ) | (298 | ) | (768 | ) | |||||||||
Single family residential |
(3,323 | ) | | (3,476 | ) | (34 | ) | |||||||||
Real Estate non-residential |
(3,286 | ) | | (7,121 | ) | | ||||||||||
Real estate non-residential real estate mezzanine |
| (1,000 | ) | (1,132 | ) | (1,000 | ) | |||||||||
Leases |
(157 | ) | (225 | ) | (452 | ) | (466 | ) | ||||||||
Tax certificates |
| | | (22 | ) | |||||||||||
Total charge-offs |
(7,156 | ) | (1,993 | ) | (17,480 | ) | (2,858 | ) | ||||||||
Recoveries by loan type |
||||||||||||||||
Commercial and industrial |
12 | | 15 | 50 | ||||||||||||
Single family residential |
155 | 2 | 189 | 5 | ||||||||||||
Total recoveries |
167 | 2 | 204 | 55 | ||||||||||||
Net charge offs |
(6,989 | ) | (1,991 | ) | (17,276 | ) | (2,803 | ) | ||||||||
Provision for loan and lease losses |
3,716 | 5,275 | 13,469 | 13,087 | ||||||||||||
Balance at the end of period before Royal Asian
allowance for loan and lease losses |
$ | 25,101 | $ | 29,566 | $ | 25,101 | $ | 29,566 | ||||||||
Royal Asian allowance for loan and lease losses |
(1,753 | ) | | (1,753 | ) | | ||||||||||
Balance at the end of period |
$ | 23,348 | $ | 29,566 | $ | 23,348 | $ | 29,566 | ||||||||
There were $4.5 million, $5.9 million, and $7.1 million of loan and lease charge-offs during
the first, second, and third quarters of 2009, respectively. These charge-offs were primarily
attributed to construction, residential and non-residential real estate, and non-residential real
estate mezzanine loans that predominantly became non-performing in 2008. Of the $17.5 million in
charge-offs for the nine months ended September 30, 2009, $5.1 million were charge-offs taken
before transferring the collateral to OREO.
10. 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.
-26-
Net periodic defined benefit pension expense for the three and nine month periods ended September
30, 2009 and 2008 included the following components:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Service cost |
$ | 126 | $ | 118 | $ | 378 | $ | 354 | ||||||||
Interest cost |
141 | 131 | 422 | 395 | ||||||||||||
Amortization of prior service cost |
23 | 24 | 68 | 70 | ||||||||||||
Amortization of actuarial loss |
7 | 5 | 21 | 17 | ||||||||||||
Net periodic benefit cost |
$ | 297 | $ | 278 | $ | 889 | $ | 836 | ||||||||
11. 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 nine months ended
September 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 September 30, 2009 |
90,197 | $ | 19.15 | 3.9 | $ | | ||||||||||
Options exercisable at September 30, 2009 |
90,197 | $ | 19.15 | 3.9 | $ | | ||||||||||
(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 September 30, 2009. The intrinsic value varies based on the changes in the market value in the Companys stock. |
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
-27-
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 nine months ended
September 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 |
(263,866 | ) | 19.44 | |||||||||||||
Expired |
(20,381 | ) | 16.28 | |||||||||||||
Options outstanding at September 30, 2009 |
401,626 | $ | 20.09 | 4.5 | $ | | ||||||||||
Options exercisable at September 30, 2009 |
357,737 | $ | 19.88 | 4.2 | $ | | ||||||||||
(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 September 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 September 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 September 30, 2009, the Company had 9,056 unvested shares of restricted stock.
The following table presents the activity related to stock options granted under the 2007 Long-Term
Incentive Plan for the nine months ended September 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 |
(26,102 | ) | 14.38 | |||||||||||||
Expired |
(487 | ) | 20.08 | |||||||||||||
Options outstanding at September 30, 2009 |
135,312 | $ | 10.19 | 8.5 | $ | | ||||||||||
Options exercisable at September 30, 2009 |
33,115 | $ | 20.08 | 7.4 | $ | | ||||||||||
-28-
(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 September 30, 2009. The intrinsic value varies based on the changes in the market value in the Companys stock. |
For all Company plans as of September 30, 2009, there were 155,141 nonvested stock options and
nonvested performance-based restricted stock and unrecognized compensation cost of $431,000 which
will be expensed within three years.
12. 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 to determine the
effectiveness of their fair value hedges. The Company did not have any interest rate swaps
agreements as of September 30, 2009 and December 31, 2008.
13. Fair Value Measurements
Under FASB ASC Topic 820 Fair Value Measurements and Disclosures (ASC Topic 820), 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 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 guidance under ASC Topic 820 for estimating fair value when the
volume and level of activity for an asset or liability has significantly declined and for
identifying circumstances when a transaction is not orderly.
ASC Topic 820 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 ASC Topic 820 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. |
-29-
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 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 used a 0% recovery rate. In addition, management used two
independent third parties to validate the fair values received.
-30-
For financial assets measured at fair value on a recurring basis, the fair value measurements by
level within the fair value hierarchy used at September 30, 2009 and December 31, 2008 are as
follows:
Balances as of September 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 |
$ | | $ | 46,092 | $ | | $ | 46,092 | ||||||||
U.S. government agencies |
| 1,181 | | 1,181 | ||||||||||||
Preferred stocks |
2,169 | | | 2,169 | ||||||||||||
Common stocks |
434 | | | 434 | ||||||||||||
Collateralized mortgage obligations: |
||||||||||||||||
Issued or guaranteed by U.S. government agencies |
| 292,887 | | 292,887 | ||||||||||||
Non-agency |
| 27,631 | | 27,631 | ||||||||||||
Collateralized debt obligations |
| | 34,406 | 34,406 | ||||||||||||
Corporate bonds |
| 7,286 | | 7,286 | ||||||||||||
Trust preferred securities |
11,939 | | 23,014 | 34,953 | ||||||||||||
Other securities |
| | 7,733 | 7,733 | ||||||||||||
Total available for sale before Royal Asian
investments held for sale |
14,542 | 375,077 | 65,153 | 454,772 | ||||||||||||
Royal Asian investments held for sale |
| | (792 | ) | (792 | ) | ||||||||||
Total available for sale |
$ | 14,542 | $ | 375,077 | $ | 64,361 | $ | 453,980 | ||||||||
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 | ||||||||
-31-
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 | ||||
(In thousands) | Available for Sale | |||
Beginning Balance December 31, 2008 |
$ | 78,257 | ||
Total gains/(losses) (realized/unrealized): |
||||
Included in earnings |
(1,714 | ) | ||
Included in
other comprehensive income |
11,429 | |||
Purchases, issuances, and settlements |
| |||
Transfers in and/or out of Level 3 |
(22,819 | ) | ||
Ending balance before Royal Asian Level 3
investment held for sale |
65,153 | |||
Royal Asian Level 3 investment held for sale |
(792 | ) | ||
Ending balance September 30, 2009 |
$ | 64,361 | ||
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
were 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 FASB ASC Topic 310
Receivables. 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 scheduled to close in the fourth 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 September 30, 2009 and December 31, 2008 are as
follows:
Balances as of September 30, 2009 | Fair Value Measurements Using | |||||||||||||||
(In thousands) | Level 1 | Level 2 | Level 3 | Fair Value | ||||||||||||
Assets |
||||||||||||||||
Impaired loans (1) |
$ | | $ | | $ | 36,387 | $ | 36,387 | ||||||||
Other real estate owned |
| | 25,611 | 25,611 | ||||||||||||
Loans and leases held for sale |
| | 2,091 | 2,091 |
(1) | Included in the $36.4 million in impaired loans is $1.3 million related to Royal Asian loans included in Royal Asian assets held for sale as of September 30, 2009. |
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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 new guidance under FASB ASC Topic 825 Financial
Instruments. The new guidance requires 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. 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 September 30, 2009 | At December 31, 2008 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
(In thousands) | amount | fair value | amount | fair value | ||||||||||||
Financial Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 70,776 | $ | 70,776 | $ | 14,259 | $ | 14,259 | ||||||||
Investment securities available for sale |
453,980 | 453,980 | 350,302 | 350,302 | ||||||||||||
Federal Home Loan Bank stock |
10,952 | 10,952 | 10,952 | 10,952 | ||||||||||||
Loans, net |
614,186 | 607,015 | 671,814 | 672,449 | ||||||||||||
Accrued interest receivable |
14,512 | 14,512 | 13,580 | 13,580 | ||||||||||||
Royal Asian assets held for sale |
78,599 | 78,599 | | | ||||||||||||
Financial Liabilities: |
||||||||||||||||
Demand deposits |
70,834 | 70,834 | 50,886 | 50,886 | ||||||||||||
NOW and money markets |
205,142 | 205,142 | 193,869 | 193,869 | ||||||||||||
Savings |
14,810 | 14,810 | 15,171 | 15,171 | ||||||||||||
Time deposits |
617,251 | 630,127 | 500,142 | 513,707 | ||||||||||||
Short-term borrowings |
22,000 | 22,000 | 22,000 | 22,000 | ||||||||||||
Long-term borrowings |
248,823 | 255,054 | 253,681 | 263,552 | ||||||||||||
Subordinated debt |
25,774 | 25,774 | 25,774 | 25,774 | ||||||||||||
Obligations from equity investments |
9,961 | 9,961 | 12,350 | 12,350 | ||||||||||||
Commitments to extend credit |
| | | | ||||||||||||
Standby letters of credit |
| | | | ||||||||||||
Royal Asian liabilities held for sale |
65,318 | 65,318 | | |
Included in the deposit categories under Financial Liabilities are $92.9 million of Royal
Asian deposits held for sale. Partially offsetting these deposits are $28.8 million of deposits
that are eliminated in consolidation related to deposit accounts at Royal Bank for Royal Asian.
14. 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 FASB ASC Topic 970, Real Estate-General, and
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account for capitalized interest on
those projects in accordance with FASB ASC Topic 835, Interest. Due to the present economic
conditions, management has made a decision to curtail new equity investments.
In accordance with FASB ASC Topic 976, Real Estate-Retail Land (ASC Topic 976), 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.
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 ASC Topic 810, 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
September 30, 2009, the Company has one VIE which is consolidated into the Companys financial
statements. This VIE met the requirements for consolidation under ASC Topic 810 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 September 30, 2009, the Partnership also had $10.0 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 June 1, 2009 through August 31, 2009 and January 1, 2009 to August 31, 2009
in consolidating the financial statements of the Partnership for the three and nine month periods,
respectively for the period ending September 30, 2009.
In accordance with ASC Topic 360, the Partnership assesses the recoverability of fixed assets based
on estimated future operating cash flows. The Company had recognized $10 million in impairment
charges related to this asset through December 31, 2008. No further impairment of this asset
occurred during the first three quarters of 2009. The measurement and recognition of the
impairment was based on estimated future discounted operating cash flows.
At September 30, 2009, the Partnership had total assets of $19.3 million of which $17.8 million is
real estate as reflected on the consolidated balance sheet and total borrowings of $19.2 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 September 30, 2009, the remaining amount of the investment in and receivables due
from the Partnership totaled $7.1 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 signed a forbearance agreement and an
intercreditor agreement between the Company and the Senior Lender on October 23, 2009 which extends
the loan until December 9, 2010. As part of the agreement to extend the loan for 14 months, the
senior debt lender required the Partnership to provide additional funds to cover current and
potential future cash requirements for capital improvements, operating expenses and marketing
costs. Royal Bank America loaned $710,000 to the Partnership during the fourth quarter of 2009 and
is obligated to fund up to $2.7 million if required for the remaining costs associated with capital
improvements, operating and marketing expenses. The initial loan amount and any additional
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funds
loaned to the Partnership will be repaid from the cash flow after the senior debt is paid in full,
but prior to any other payments to partners. On October 25, 2009 the senior debt lender filed for
bankruptcy protection.
15. 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 ASC Topic 360. 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 September 30, 2009, the interest rates
paid on Capital Trust I and Capital Trust II were 2.45% and 5.80%, respectively.
The Company does not consolidate the Trusts as ASC Topic 360 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 ASC Topic 360. 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 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. As of September 30, 2009 the trust preferred interest
payment in arrears was $270,000.
16. 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 ASC Topics 310 and 976. 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 September 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.
17. 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.
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The contract amounts are as follows:
September 30, | December 31, | |||||||
(In thousands) | 2009 | 2008 | ||||||
Financial instruments whose contract amounts represent credit risk: |
||||||||
Open-end lines of credit |
$ | 56,770 | $ | 98,549 | ||||
Commitments to extend credit |
150 | 1,840 | ||||||
Standby letters of credit and financial guarantees written |
3,919 | 4,563 |
Included in the commitment amounts shown above for September 30, 2009 are $3.9 million in
commitments related to Royal Asian.
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.
18. 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 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.
As of September 30, 2009 the Series A Preferred stock dividend in arrears is $380,000.
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19. 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.
20. 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 new guidance under ASC Topic 715, Compensation-Retirement
Benefits (ASC Topic 715). The new guidance provides direction on an employers disclosures
about plan assets of a defined benefit pension or other postretirement plan. The disclosures about
plan assets required by this guidance shall be provided for fiscal years ending after December 15,
2009. The Company is currently assessing the impact of the changes to
ASC Topic 715 on the Companys consolidated
financial position and results of operations.
In December 2008, the FASB issued guidance under ASC Topic 860 Transfers and Servicing (ASC
Topic 860). The new guidance requires public entities to provide additional disclosures about
transfers of financial assets. It also requires 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, it 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 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. The new guidance
under ASC Topic 860 is effective for reporting periods (annual or interim) ending after December
15, 2008. The implementation of this guidance did not have a material impact on the Companys
consolidated financial position and results of operations.
In April 2009, the FASB issued new guidance under ASC Topic 320, which applies to debt securities,
is intended to provide greater clarity to investors about the credit and noncredit components of an
other-than-temporary (OTTI) event and to more effectively communicate when an OTTI event has
occurred. Under these circumstances as required by the new guidance, 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. This guidance 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 guidance 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 as
of September 30,
-37-
2009 by $7.8 million. Refer to Note 6 Investment Securities for additional
disclosures regarding the adoption of this guidance.
In April 2009, the FASB issued new guidance under ASC Topic 820, Fair Value Measurements and
Disclosures (ASC Topic 820) which provides additional guidance for estimating fair value when
the volume and level of activity for an asset or liability has significantly declined. The new
guidance also offers direction on identifying circumstances when a transaction is not orderly.
The new guidance became effective for interim and annual reporting periods ending after June
15, 2009, and was applied prospectively. The implementation of the new guidance 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 guidance under ASC Topic 855, Subsequent Events (ASC Topic 855),
which 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, ASC Topic 855 set forth: (1) the period 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. The guidance was effective for interim
and annual financial periods ending after June 15, 2009 and 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.
On July 1, 2009, the FASB Accounting Standards CodificationTM (Codification) became
effective as the sole authoritative source of U.S. GAAP. This codification was issued under FASB
Statement No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of
Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162 and can now be
found under FASB ASC Topic 105, Generally Accepted Accounting Principles. Codification is 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. Codification supersedes all existing non-SEC
accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not
included in the Codification will become nonauthoritative. Accounting literature included in the
Codification is referenced by Topic, Subtopic, Section, Paragraph and Subparagraph. The adoption of
Codification did not have a material impact on the Companys consolidated financial statements.
In August 2009, the FASB issued Accounting Standards Update (ASU) 2009-05, Measuring Liabilities
at Fair Value, which updates ASC Topic 820. The updated guidance clarifies that the fair value of
a liability can be measured in relation to the quoted price of the liability when it trades as an
asset in an active market, without adjusting the price for restrictions that prevent the sale of
the liability. This guidance is effective beginning October 1, 2009. The Company does not expect
that the guidance will change its valuation techniques for measuring liabilities at fair value.
-38-
21. 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; |
| 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. Royal
Bank is in compliance with all delivery requirements of the orders as of the filing date of this
Form 10-Q.
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 nine month periods ended September 30, 2009 and September 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
-39-
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 regulatory orders issued by the FDIC and Pennsylvania Department of Banking
in July 2009, 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 FASB ASC Topic 810, Consolidation (ASC Topic
810). 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, 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 new guidance under FASB ASC Topic 320, Investments-Debt & Equity
Securities (ASC Topic 320), effective April 1, 2009, the Company has revised its critical
accounting policy pertaining to other-than-temporary impairment of investment securities. The new
guidance 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.
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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.
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 September 30, 2009, the Company had consolidated total assets of approximately $1.4 billion,
total deposits of approximately $908.0 million and shareholders equity of approximately $113.4
million. The Company had interest income of $16.8 million and $49.7 million, respectively for the
three and nine month periods ended September 30, 2009, reflecting decreases of $833,000, or 4.7%,
and $5.7 million, or 10.3%, 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 nonperforming 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 101 and 87 basis points for the three and nine 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 coupled with a much lower yield being earned on the purchases
made in 2009 compared to 2008. Interest expense for the three and nine months ended September 30,
2009 was $9.6 million and $28.5 million, respectively, resulting in an increase of $53,000, or
0.6%, and an increase of $394,000, or 1.4%, respectively from the comparable periods of 2008. The
increase for the three and nine month periods was related to the higher volume of time deposits in
2009 compared to 2008. The Company recorded a net loss for the quarter ended September 30, 2009 of
$4.4 million compared to a net loss of $12.0 million reported for the quarter ended September 30,
2008, while the net loss for the nine months ended September 30, 2009 was $23.2 million compared to
a net loss of $10.8 million for the comparable period of 2008. The year-over-year reduction in net
loss of $7.6 million, or 63.7%, for the current quarter was primarily associated with a decrease of
$14.2 million in impairment losses on investment securities recognized in earnings, an increase of
$2.4 million in gains on the sales of investment securities ($1.3 million gain in 2009 versus a $1.1
million loss in 2008), and a decrease of $1.6 million in the provision for loan and lease losses.
Partially offsetting these positive effects on earnings was a $1.4 million increase in FDIC and
state assessments and $1.2 million in OREO valuation allowances related to two properties.
The year over year increase in net loss of $12.4 million for the nine month period ended September
30, 2009 compared to the same period in 2008 was primarily attributed to a tax benefit of $6.9
million being recorded in 2008 and a tax expense of $474,000 being recorded in 2009 along with a 94
basis point decrease in the net interest margin (2.38% versus 3.32%). The decrease in the net
interest margin was primarily a result of $4.9 million in lost interest due to the increase in
nonperforming loans, a lower yield on investment securities mainly related to agency bonds being
called during the first quarter of 2009 and being replaced with lower yielding agency MBS/CMOs and
managements decision to maintain a higher level of cash equivalents for liquidity purposes which
only yielded 33 basis points for the nine month period. Also contributing to the year over year
decline was OREO valuation
-41-
allowances of $1.8 million, an increase in OREO and loan collection expenses of $1.4 million as a
result of the growth in other real estate owned and nonperforming loans, a $2.2 million increase in
the FDIC and state assessments, of which $600,000 is directly related to the FDIC special
assessment that was accrued for in the second quarter and paid in September, a $2.0 million
decrease in gains on the sales of premises and equipment and a $1.1 million decrease in gains on
the sale of real estate joint ventures.
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 35.9% and 72.5% of the loan portfolios of
Royal Bank and Royal Asian at September 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 September 30, 2009, construction loans comprised 11.8%
and 12.5%, respectively, of the Royal Bank and Royal Asian loan portfolios. Land development loans
at September 30, 2009 comprised 10.6% and 0% of the loan portfolios of Royal Bank and Royal Asian,
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 September 30, 2009, the Company had $2.8 million in mezzanine loans outstanding,
and the percentage of mezzanine loans in the Companys consolidated loan portfolio was 0.4% of the
portfolio. 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
During the third quarter of 2009, the Company recorded a net loss of $4.4 million compared to a net
loss of $12.0 million for the comparable quarter of 2008. The reduction in the net loss was
primarily the result of a decrease of $14.2 million in impairment losses on available for sale
securities ($492,000 in 2009 versus $14.7 million in 2008), a $2.4 million increase in gains on the
sales of investment securities (gain in 2009 versus a loss in 2008), and a $1.6 million decrease in
the provision for loan and lease losses. The Company recorded an OREO valuation allowance of $1.2
million related to two separate properties during the third quarter of 2009. FDIC and state
assessments increased $1.4 million and OREO and loan collection expenses increased $657,000 quarter
versus quarter which offset some of the reductions mentioned above. Also, the Company recorded a
tax expense of $474,000 in the third quarter of 2009 compared to a $6.8 million tax benefit during
the third quarter of 2008 due to its current tax position. As a consequence of the slowdown in the
housing market and the economic recession, the Company has a high
level of nonperforming loans,
which continues to weigh on the net interest margin. Impaired and non-accrual loans are reviewed
in the Credit Risk Management section of this report. Basic loss per share and diluted loss per
share were both $0.37 for the third quarter of 2009, as compared to basic and diluted loss per
share of $0.90 for the same quarter of 2008.
For the nine months ended September 30, 2009, the net loss amounted to $23.2 million compared to a
net loss of $10.8 million for the comparable period of 2008. This increase in the net loss was
primarily attributable to a tax benefit of $6.9 million being recorded in 2008 and a $474,000 tax
expense being recorded in 2009 along with a 94 basis point decrease in the net interest margin
which was primarily a result of $4.9 million in lost interest due to the increase in nonperforming
loans, a lower yield on investment securities and managements decision to maintain a higher level
of cash equivalents for liquidity purposes which only yielded 33 basis points for the nine month
period. Also contributing to the year over year decline were OREO valuation allowances of $1.8
million related to three separate properties, an increase in OREO and loan collection expenses of
$1.4 million as a result of the growth in
-42-
other real estate owned and nonperforming loans, a $2.2 million increase in the FDIC and state
assessments, of which $600,000 was directly related to the FDIC special assessment that was accrued
for in the second quarter and paid in September, 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 a $382,000 increase in the provision for loan and lease losses. Net interest income decreased
$6.1 million to $21.2 million for the nine months ended September 30, 2009 compared to $27.3
million for the same period in 2008. As previously noted, as a consequence of the slowdown in the
housing market and the economic recession, the Company has a high level of non performing loans,
which continues to weigh on the net interest margin. Impaired and non-accrual loans are reviewed
in the Credit Risk Management section of this report. Basic and diluted loss per share were both
$1.84 for the first nine months of 2009, while basic and diluted loss per share were both $0.81
for the first nine months of 2008.
Interest Income
Total interest income for the third quarter of 2009 amounted to $16.8 million representing a
decline of $833,000, or 4.7%, from the level of the comparable quarter of 2008. The decrease in
interest income reflected a decline in the yields on all interest earning assets due to a decline
in the prime rate during the past fifteen months related to the Federal Reserves monetary policy
which was partially offset by the overall level of average earning assets. Additionally, the year
over year increase in non-accrual loans negatively impacted the yield on interest earning assets.
Average loan balances of $720.6 million in the third quarter of 2009 increased $38.1 million (5.6%)
year over year. The loan growth was attributed to an increased focus on commercial and industrial
lending during the past four quarters, the introduction of small business lending in the fourth
quarter of 2008, advances against existing outstanding loans, continued growth in tax certificates
and leases and minimal loan prepayments. This growth was partially offset by loan charge-offs and
transfers to OREO. Average investment securities increased $43.8 million (11.4%) from $385.4
million for the third quarter of 2008 to $429.2 million for the third quarter of 2009. The increase
was comprised mainly of purchases of government agency mortgage-backed and government agency CMO
securities which were offset by called agency investments and the recent sales of corporate bonds
and the entire managed common stock portfolios. In an effort to boost liquidity, average cash
equivalents of $78.2 million for the third quarter of 2009 increased $36.5 million, or 87.4%, from
the level of the comparable quarter of 2008.
The yield on average interest earning assets for the third quarter of 2009 of 5.43% declined by 89
basis points from the level recorded during the comparable quarter of 2008. The significant yield
reduction was comprised of year over year declines of 229, 101, and 47 basis points for cash
equivalents (0.22% versus 2.51%), investment securities (4.42% versus 5.43%), and loans (6.59%
versus 7.06%), 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 third quarter of 2009,
interest lost on non-accrual loans was $1.6 million.
For the nine months ended September 30, 2009, total interest income amounted to $49.7 million
versus $55.4 million for the comparable period of 2008 resulting in a decline of $5.7 million, or
10.3%. Consistent with the third quarter results, the decrease reflected a decline in the yields on
all interest earning assets due to a decline in the prime rate during the past eighteen months
related to the Federal Reserves monetary policy that negatively impacted prime based loans and
investments purchased within the past year. Additionally, the year over year increase in
non-accrual loans negatively impacted the yield on interest earning assets. Average interest
earning assets for the first nine months of 2009 of $1.2 billion increased $93.6 million, or 8.5%,
from the comparable period of 2008, which partially offset the decline in total interest income.
Average loan balances of $719.7 million for the nine months ended September 30, 2009 increased
$44.8 million (6.6%) year over year. The loan growth was attributed to an increased focus on
commercial and industrial lending during the past four quarters, the introduction of small business
lending in the fourth quarter of 2008, advances against existing outstanding loans, continued
growth in tax certificates and leases and minimal loan prepayments. This growth was partially
offset by loan charge-offs and transfers to OREO. Average investment securities of $426.6 million
for the first nine months of 2009 increased $14.9 million (3.6%) from $411.8 million in the
comparable period of 2008. The increase was comprised mainly of purchases of government agency
securities which were offset by called agency investments and the recent sales of corporate bonds
and the entire managed common stock portfolios. In an effort to maintain an increased
-43-
level of liquidity, the Companys average cash equivalents of $51.8 million for the nine months
ended September 30, 2009, increased $33.9 million, or 1.9 times, from the level of the comparable
nine months of 2008.
The yield on average interest earning assets for the nine months ended September 30, 2009, was
5.55% versus 6.70% for the comparable period of 2008. The overall 115 basis point reduction was
comprised of year over year declines of 213, 87, and 108 basis points for cash equivalents (0.33%
versus 2.45%), investment securities (4.72% versus 5.59%), and loans (6.41% versus 7.49%),
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 nine months of 2009, interest lost on
non-accrual loans was $4.9 million compared to $4.5 million for the same period in 2008.
Interest Expense
Interest expense increased $53,000 to $9.6 million for the quarter ended September 30, 2009
compared to the same period in 2008. The minimal increase in interest expense resulted from an
increase in average interest bearing liabilities year over year almost entirely offset by a
reduction in the interest rates paid on interest bearing liabilities year over year. Average
interest bearing liabilities amounted to $1.1 billion in the third quarter of 2009, which increased
$170.6 million, or 17.8%, above the third quarter of 2008. There was a shift in the deposit mix
with average certificates of deposit increasing $167.6 million (37.2%) while average NOW and money
markets declined $12.2 million (5.8%). 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. As a result of the recent FDIC and Department of
Banking consent orders management has implemented a reduction on its reliance on brokered
certificates of deposit and shifted the funding emphasis to retail certificates of deposit,
transaction deposits and non-interest bearing commercial deposits. The average interest rate paid
on average interest bearing liabilities was 3.34% for the third quarter of 2009 down 59 basis
points from 3.93% for the third quarter of 2008. The average interest rate paid on average
interest bearing deposits for the third quarter of 2009 was 3.11% resulting in a decline of 63
basis points from the level of 3.74% during the comparable quarter of 2008. Average borrowings
grew by $15.6 million to $296.9 million for the third quarter of 2009 relative to the prior years
comparable quarter while the corresponding yield declined by 41 basis points to 3.99% for the same
period due primarily to lower rates for overnight borrowings.
For the nine months ended September 30, 2009, interest expense of $28.5 million increased $394
thousand, or 1.4%, from $28.1 million for the comparable period in 2008. The slight increase in
interest expense was due to a $137.7 million increase in average interest bearing liabilities
offset by a 46 basis point decline in the interest rates paid on interest bearing liabilities year
over year. The decline in interest rates paid on interest bearing liabilities was primarily related
to a reduction of 68 basis points in the rates paid on certificates of deposit year over year
principally associated with the re-pricing of maturing certificates of deposit and lower interest
rates on new certificates of deposit. Average time deposits increased $166.4 million, or 40.6%,
year over year while average NOW and money markets declined $30.5 million, or 13.5%, year over
year. As a result of the decline in market interest rates, retail and brokered deposits became
more attractive during the past year. Management initially shifted the funding emphasis to these
retail and brokered deposits and away from FHLB advances since the beginning of 2009 and
subsequently away from brokered certificates of deposit since the second quarter of 2009.
Net Interest Margin
The net interest margin for the third quarter of 2009 amounted to 2.36% which represented a decline
of 57 basis points from 2.93% recorded in the comparable quarter of 2008. One of the primary
reasons 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 47 basis point reduction in
the yield on loans. Also contributing to the decline in the net interest margin was a 101 basis
point reduction in the yield on investment securities and a higher concentration of lower yielding
investment securities relative to the prior years third quarter balances. The lower investment
yields were mainly a result of higher yielding agency bonds being called during the first quarter
of 2009 and the sales of investment securities during the third quarter of 2009, which were both
replaced with lower yielding agency mortgage-backed securities
-44-
and government agency CMO securities. In addition, due to the desire to maintain sufficient
liquidity during this current economic environment coupled with the significant maturing balances
in certificates of deposit during the upcoming fourth quarter, management decided to maintain a
larger position in cash and cash equivalents ($78.2 million average balance for the third quarter
of 2009) which yielded only 22 basis points for the third quarter of 2009. Partially offsetting
these declines was a 59 basis point reduction in the cost of interest bearing liabilities (3.34% in
2009 versus 3.93% in 2008) year over year.
The net interest margin of 2.38% for the nine months ended September 30, 2009, decreased 94 basis
points from 3.32% in the comparable period of 2008. The factors negatively impacting the net
interest margin for the nine month period were consistent with those affecting the net interest
margin during the third quarter of 2009. The decline in yields on loans, investment securities and
cash equivalents coupled with a higher concentration of lower yielding investment securities and
cash equivalents accounted for the year over year decline. Partially offsetting these declines was
an overall 46 basis point reduction in the cost of interest bearing liabilities year over year
(3.49% in 2009 versus 3.95% in 2008), which was primarily attributable to interest bearing
deposits.
The Company has experienced a significant decline in the net interest margin during the previous
five quarters due to lower yields on all earning assets without a commensurate reduction of
interest rates paid on interest bearing liabilities. However the net interest margin for the third
quarter of 2009 of 2.36% increased six basis points from the second quarter of 2009 as the
Companys reduction of interest rates paid on money market accounts and the re-pricing of maturing
certificates of deposits more than offset the decline in yields of interest earning assets
previously noted.
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.
-45-
For the three months ended | For the three months ended | |||||||||||||||||||||||
September 30, 2009 | September 30, 2008 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
(In thousands, except percentages) | Balance | Interest | Yield | Balance | Interest | Yield | ||||||||||||||||||
Cash equivalents |
$ | 78,199 | $ | 43 | 0.22 | % | $ | 41,725 | $ | 263 | 2.51 | % | ||||||||||||
Investments securities |
429,165 | 4,786 | 4.42 | % | 385,373 | 5,261 | 5.43 | % | ||||||||||||||||
Loans |
720,613 | 11,970 | 6.59 | % | 682,554 | 12,108 | 7.06 | % | ||||||||||||||||
Total interest earning assets |
1,227,977 | 16,799 | 5.43 | % | 1,109,652 | 17,632 | 6.32 | % | ||||||||||||||||
Non-earning assets |
108,435 | 66,384 | ||||||||||||||||||||||
Total average assets |
$ | 1,336,412 | $ | 1,176,036 | ||||||||||||||||||||
Interest-bearing deposits
NOW and money markets |
$ | 199,221 | 705 | 1.40 | % | $ | 211,422 | 1,331 | 2.50 | % | ||||||||||||||
Savings |
14,560 | 21 | 0.57 | % | 15,027 | 19 | 0.50 | % | ||||||||||||||||
Time deposits |
618,210 | 5,791 | 3.72 | % | 450,574 | 5,009 | 4.42 | % | ||||||||||||||||
Total interest bearing deposits |
831,991 | 6,517 | 3.11 | % | 677,023 | 6,359 | 3.74 | % | ||||||||||||||||
Borrowings |
296,892 | 2,984 | 3.99 | % | 281,306 | 3,110 | 4.40 | % | ||||||||||||||||
Total interest bearing liabilities |
1,128,883 | 9,501 | 3.34 | % | 958,329 | 9,469 | 3.93 | % | ||||||||||||||||
Non-interest bearing deposits |
67,024 | 55,874 | ||||||||||||||||||||||
Other liabilities |
28,123 | 29,067 | ||||||||||||||||||||||
Shareholders equity |
112,382 | 132,766 | ||||||||||||||||||||||
Total average liabilities and equity |
$ | 1,336,412 | $ | 1,176,036 | ||||||||||||||||||||
Net interest margin |
$ | 7,298 | 2.36 | % | $ | 8,163 | 2.93 | % | ||||||||||||||||
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For the nine months ended | For the nine months ended | |||||||||||||||||||||||
September 30, 2009 | September 30, 2008 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
(In thousands, except percentages) | Balance | Interest | Yield | Balance | Interest | Yield | ||||||||||||||||||
Cash equivalents |
$ | 51,807 | $ | 129 | 0.33 | % | $ | 17,883 | $ | 329 | 2.46 | % | ||||||||||||
Investments securities |
426,621 | 15,075 | 4.72 | % | 411,760 | 17,227 | 5.59 | % | ||||||||||||||||
Loans |
719,700 | 34,519 | 6.41 | % | 674,892 | 37,851 | 7.49 | % | ||||||||||||||||
Total interest earning assets |
1,198,128 | 49,723 | 5.55 | % | 1,104,535 | 55,407 | 6.70 | % | ||||||||||||||||
Non-earning assets |
71,782 | 66,593 | ||||||||||||||||||||||
Total average assets |
$ | 1,269,910 | $ | 1,171,128 | ||||||||||||||||||||
Interest-bearing deposits |
||||||||||||||||||||||||
NOW and money markets |
$ | 195,427 | 2,614 | 1.79 | % | $ | 225,949 | 4,568 | 2.70 | % | ||||||||||||||
Savings |
14,697 | 62 | 0.56 | % | 15,156 | 60 | 0.53 | % | ||||||||||||||||
Time deposits |
576,510 | 16,725 | 3.88 | % | 410,095 | 14,004 | 4.56 | % | ||||||||||||||||
Total interest bearing deposits |
786,634 | 19,401 | 3.30 | % | 651,200 | 18,632 | 3.82 | % | ||||||||||||||||
Borrowings |
298,501 | 8,963 | 4.01 | % | 296,205 | 9,359 | 4.22 | % | ||||||||||||||||
Total interest bearing liabilities |
1,085,135 | 28,364 | 3.49 | % | 947,405 | 27,991 | 3.95 | % | ||||||||||||||||
Non-interest bearing deposits |
60,594 | 57,826 | ||||||||||||||||||||||
Other liabilities |
18,363 | 25,670 | ||||||||||||||||||||||
Shareholders equity |
105,818 | 140,227 | ||||||||||||||||||||||
Total average liabilities and equity |
$ | 1,269,910 | $ | 1,171,128 | ||||||||||||||||||||
Net interest margin |
$ | 21,359 | 2.38 | % | $ | 27,416 | 3.32 | % | ||||||||||||||||
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 nine month periods ended
September 30, 2009, as compared to the respective period in 2008, into amounts attributable to both
rates and volume variances.
-47-
For the three months ended | For the nine months ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
2009 vs. 2008 | 2009 vs. 2008 | |||||||||||||||||||||||
Increase (decrease) | Increase (decrease) | |||||||||||||||||||||||
(In thousands) | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
Interest income |
||||||||||||||||||||||||
Interest-bearing deposits |
$ | 9 | $ | (224 | ) | $ | (215 | ) | $ | 83 | $ | (263 | ) | $ | (180 | ) | ||||||||
Federal funds sold |
| (5 | ) | (5 | ) | (3 | ) | (17 | ) | (20 | ) | |||||||||||||
Total short term earning assets |
$ | 9 | $ | (229 | ) | $ | (220 | ) | $ | 80 | $ | (280 | ) | $ | (200 | ) | ||||||||
Investments securities |
||||||||||||||||||||||||
Held to maturity |
(904 | ) | | (904 | ) | (3,241 | ) | | (3,241 | ) | ||||||||||||||
Available for sale |
1,084 | (655 | ) | 429 | 3,197 | (2,108 | ) | 1,089 | ||||||||||||||||
Total investments |
$ | 180 | $ | (655 | ) | $ | (475 | ) | $ | (44 | ) | $ | (2,108 | ) | $ | (2,152 | ) | |||||||
Loans |
||||||||||||||||||||||||
Commercial demand loans |
$ | (185 | ) | $ | (495 | ) | $ | (680 | ) | $ | (302 | ) | $ | (3,658 | ) | $ | (3,960 | ) | ||||||
Commercial mortgages |
320 | (210 | ) | 110 | 1,090 | (878 | ) | 212 | ||||||||||||||||
Residential and home equity |
(12 | ) | (8 | ) | (20 | ) | (55 | ) | (92 | ) | (147 | ) | ||||||||||||
Leases receivables |
290 | (96 | ) | 194 | 687 | (296 | ) | 391 | ||||||||||||||||
Tax certificates |
819 | (82 | ) | 737 | 2,370 | (330 | ) | 2,040 | ||||||||||||||||
Other loans |
(5 | ) | (1 | ) | (6 | ) | (12 | ) | (10 | ) | (22 | ) | ||||||||||||
Loan fees |
(473 | ) | | (473 | ) | (1,846 | ) | | (1,846 | ) | ||||||||||||||
Total loans |
$ | 754 | $ | (892 | ) | $ | (138 | ) | $ | 1,932 | $ | (5,264 | ) | $ | (3,332 | ) | ||||||||
Total increase (decrease) in interest income |
$ | 943 | $ | (1,776 | ) | $ | (833 | ) | $ | 1,968 | $ | (7,652 | ) | $ | (5,684 | ) | ||||||||
Interest expense |
||||||||||||||||||||||||
Deposits |
||||||||||||||||||||||||
NOW and money market |
$ | (73 | ) | $ | (552 | ) | $ | (625 | ) | $ | (557 | ) | $ | (1,396 | ) | $ | (1,953 | ) | ||||||
Savings |
(1 | ) | 2 | 1 | (2 | ) | 4 | 2 | ||||||||||||||||
Time deposits |
1,660 | (878 | ) | 782 | 5,057 | (2,337 | ) | 2,720 | ||||||||||||||||
Total deposits |
$ | 1,586 | $ | (1,428 | ) | $ | 158 | $ | 4,498 | $ | (3,729 | ) | $ | 769 | ||||||||||
Trust preferred |
| (73 | ) | (73 | ) | | (202 | ) | (202 | ) | ||||||||||||||
Borrowings |
194 | (247 | ) | (53 | ) | 70 | (264 | ) | (194 | ) | ||||||||||||||
Total increase (decrease) in interest expense |
$ | 1,780 | $ | (1,748 | ) | $ | 32 | $ | 4,568 | $ | (4,195 | ) | $ | 373 | ||||||||||
Total decrease in net interest income |
$ | (837 | ) | $ | (28 | ) | $ | (865 | ) | $ | (2,600 | ) | $ | (3,457 | ) | $ | (6,057 | ) | ||||||
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
FASB ASC Topic 450, Contingencies (ASC Topic 450) or FASB ASC Topic 310, Receivables (ASC
Topic 310). 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
-48-
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.
The Company uses three major components in determining the appropriate value of the loan and lease
loss allowance: standards required under ASC Topic 310, an historical loss factor, and an
environmental factor. Utilizing standards required under ASC Topic 310, 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 FASB ASC Topic 840, Leases.
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 $3.7 million and $13.5 million for the three and nine
months ended September 30, 2009, respectively, compared to $5.3 million and $13.1 million for the
comparable periods in 2008. The deteriorating real estate market that continued from 2008 into the
first nine 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.
-49-
The allowance for loan and lease losses was 3.66% of total loans and leases at September 30, 2009
and 4.13% at December 31, 2008. The allowance for loan and lease losses declined $3.8 million, or
13.2%, from $28.9 million at December 31, 2008 to $25.1 million at September 30, 2009. The decline
was primarily associated with a $5.0 million increase in the formula reserves offset by an $8.8
million decrease in the specific allowance related to impaired loans. The recent charge-offs
experienced by the Company impact the historical loss factors used in the allowance calculation.
The $8.8 million decline in the specific allowance was entirely related to loan charge-offs
including charge-offs on two loans transferred to other real estate owned (OREO). During the
first nine 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 September 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.
-50-
Changes in the allowance for loan and lease losses were as follows:
For the three | For the nine | For the year | ||||||||||
months ended | months ended | ended | ||||||||||
September 30, | September 30, | December 31, | ||||||||||
(In thousands) | 2009 | 2009 | 2008 | |||||||||
Balance at beginning period |
$ | 28,374 | $ | 28,908 | $ | 19,282 | ||||||
Charge-offs |
||||||||||||
Commercial and industrial |
(10 | ) | (254 | ) | (1,009 | ) | ||||||
Construction and land development |
(380 | ) | (4,747 | ) | (3,852 | ) | ||||||
Construction and land development-mezzanine |
| (298 | ) | (1,540 | ) | |||||||
Single family residential |
(3,323 | ) | (3,476 | ) | (37 | ) | ||||||
Single family residential-mezzanine |
| | (2,220 | ) | ||||||||
Real estate- non-residential |
(3,286 | ) | (7,121 | ) | (1,330 | ) | ||||||
Real estate- non-residential mezzanine |
| (1,132 | ) | (1,675 | ) | |||||||
Leases |
(157 | ) | (452 | ) | (642 | ) | ||||||
Tax certificates |
| | (22 | ) | ||||||||
Total charge-offs |
(7,156 | ) | (17,480 | ) | (12,327 | ) | ||||||
Recoveries |
||||||||||||
Commercial and industrial |
12 | 15 | 106 | |||||||||
Single family residential |
155 | 189 | 6 | |||||||||
Total recoveries |
167 | 204 | 112 | |||||||||
Net charge offs |
(6,989 | ) | (17,276 | ) | (12,215 | ) | ||||||
Provision for loan and lease losses |
3,716 | 13,469 | 21,841 | |||||||||
Balance at the end of period before Royal Asian
allowance for loan and lease losses |
25,101 | 25,101 | 28,908 | |||||||||
Royal Asian allowance for loan and lease losses |
(1,753 | ) | (1,753 | ) | | |||||||
Balance at the end of period |
$ | 23,348 | $ | 23,348 | $ | 28,908 | ||||||
-51-
An analysis of the allowance for loan and lease losses by loan type is set forth below:
September 30, 2009 | December 31, 2008 | |||||||||||||||
Percent of | Percent of | |||||||||||||||
outstanding | outstanding | |||||||||||||||
loans in each | loans in each | |||||||||||||||
Allowance | category to | Allowance | category to | |||||||||||||
(In thousands, except percentages) | amount | total loans | amount | total loans | ||||||||||||
Commercial and industrial |
$ | 3,360 | 12.4 | % | $ | 2,403 | 12.3 | % | ||||||||
Construction |
5,357 | 11.9 | % | 11,548 | 23.8 | % | ||||||||||
Land Development |
2,670 | 9.3 | % | 2,359 | 10.6 | % | ||||||||||
Constr. and land develop. mezzanine |
13 | 0.4 | % | 1,415 | 0.3 | % | ||||||||||
Single family residential |
2,327 | 7.7 | % | 747 | 3.9 | % | ||||||||||
Real Estate non-residential |
9,028 | 39.4 | % | 5,172 | 33.4 | % | ||||||||||
Real Estate non-res. mezzanine |
| | 1,188 | 0.6 | % | |||||||||||
Real Estate multi-family |
205 | 3.1 | % | 133 | 2.0 | % | ||||||||||
Tax certificates |
453 | 10.5 | % | 2,735 | 9.1 | % | ||||||||||
Lease financing |
1,674 | 5.2 | % | 1,183 | 3.7 | % | ||||||||||
Other |
14 | 0.2 | % | 15 | 0.2 | % | ||||||||||
Unallocated |
| | 10 | | ||||||||||||
Total before Royal Asian allowance for
loan and lease losses |
25,101 | 100.0 | % | 28,908 | 100.0 | % | ||||||||||
Royal Asian allowance for loan and lease losses |
(1,753 | ) | | | | |||||||||||
Total |
$ | 23,348 | 100.0 | % | $ | 28,908 | 100.0 | % | ||||||||
The Companys nonperforming assets are set forth below:
September 30, | December 31, | |||||||
(Amounts in thousands) | 2009 | 2008 | ||||||
Non-accrual loans (1) |
$ | 83,996 | $ | 85,830 | ||||
Other real estate owned |
25,611 | 10,346 | ||||||
Total nonperforming assets before Royal Asian
non-accrual loans held for sale |
109,607 | 96,176 | ||||||
Royal Asian non-accrual loans held for sale (2) |
(3,935 | ) | | |||||
Total nonperforming assets |
$ | 105,672 | $ | 96,176 | ||||
Nonperforming assets to total assets |
7.76 | % | 8.18 | % | ||||
Nonperforming loans to total loans |
12.56 | % | 12.25 | % | ||||
Allowance for loan and lease loss to non-accrual loans |
29.16 | % | 33.68 | % | ||||
Total Loans |
$ | 637,534 | $ | 700,722 | ||||
Total Assets |
$ | 1,361,810 | $ | 1,175,586 | ||||
Allowance for Loan and Lease Losses |
$ | 23,348 | $ | 28,908 | ||||
ALLL / Loans & Leases |
3.66 | % | 4.13 | % |
-52-
(1) | Generally, a loan is placed on non-accruing status when it has been delinquent for a period of 90 days or more. | |
(2) | The $3.9 million related to the Royal Asian non-accrual loans held for sale is comprised of $3.8 million in non-residential real estate loans and $115,000 in commercial loans as of September 30, 2009. |
The composition of non-accrual loans is as follows:
September 30, 2009 | ||||||||
Total Loan | Specific | |||||||
(In thousands) | Balance | Reserves | ||||||
Construction |
$ | 20,634 | $ | 309 | ||||
Land Development |
12,185 | 38 | ||||||
Construction & land development
mezzanine |
2,815 | | ||||||
Real Estate-Non-Residential |
14,116 | 631 | ||||||
Commercial & industrial |
22,031 | 1,532 | ||||||
Residential real estate |
8,362 | 1,237 | ||||||
Leasing |
928 | 171 | ||||||
Tax certificates |
2,925 | 161 | ||||||
Total non-accrual loans before Royal
Asian non-accrual loans held for sale |
83,996 | 4,079 | ||||||
Royal Asian non-accrual loans
held for sale (1) |
(3,935 | ) | (275 | ) | ||||
Total non-accrual loans |
$ | 80,061 | $ | 3,804 | ||||
(1) | The $3.9 million related to the Royal Asian non-accrual loans held for sale is comprised of $3.8 million in non-residential real estate loans and $115,000 in commercial loans as of September 30, 2009. |
Non-accrual loan activity for the first, second, and third 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 | |||||||||
-53-
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 | ||||||||||||||||
Leasing |
525 | 381 | | (157 | ) | | 749 | |||||||||||||||||
Tax certificates |
5,300 | 11 | (94 | ) | (11 | ) | | 5,206 | ||||||||||||||||
Total |
$ | 70,048 | $ | 35,222 | $ | (5,845 | ) | $ | (5,869 | ) | $ | (7,953 | ) | $ | 85,603 | |||||||||
3rd Quarter Actvity | ||||||||||||||||||||||||||||||||
Balance at | Payments and | Royal Asian non | Balance at | |||||||||||||||||||||||||||||
June 30, | other | Transfer to | accrual loans | September 30, | ||||||||||||||||||||||||||||
(In thousands) | 2009 | Additions | decreases | Reclassed | Charge-offs | OREO | held for sale | 2009 | ||||||||||||||||||||||||
Construction |
$ | 19,093 | $ | 11,496 | $ | (2,480 | ) | $ | (5,955 | ) | $ | (1,444 | ) | $ | (76 | ) | $ | | $ | 20,634 | ||||||||||||
Land development |
14,048 | | (1,483 | ) | (380 | ) | | | 12,185 | |||||||||||||||||||||||
Construction & land development
mezzanine |
2,458 | | | 2,480 | (2,123 | ) | | | 2,815 | |||||||||||||||||||||||
Real Estate-Non-Residential |
16,006 | 1,990 | (2,509 | ) | (727 | ) | (644 | ) | (3,820 | ) | 10,296 | |||||||||||||||||||||
Real Estate-Non-Residential mezzanine |
2,978 | | | (2,480 | ) | (498 | ) | | | | ||||||||||||||||||||||
Commercial & Industrial |
22,442 | 76 | (487 | ) | | | (115 | ) | 21,916 | |||||||||||||||||||||||
Residential real estate |
2,623 | 15 | (231 | ) | 5,955 | | | | 8,362 | |||||||||||||||||||||||
Leasing |
749 | 336 | | (157 | ) | | | 928 | ||||||||||||||||||||||||
Tax certificates |
5,206 | | (454 | ) | (1,827 | ) | | | 2,925 | |||||||||||||||||||||||
Total |
$ | 85,603 | $ | 13,913 | $ | (7,644 | ) | $ | | $ | (7,156 | ) | $ | (720 | ) | $ | (3,935 | ) | $ | 80,061 | ||||||||||||
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 ASC Topic 310 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. The sale of the loan was delayed due to the Office of Thrift Supervision and the FDIC closing the lead bank in late August. The Company is working with the assuming bank to continue with 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 |
-54-
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 ASC Topic 310. 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 ASC Topic 310. 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 in process. | ||
| 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. | ||
| 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 ASC Topic 310. 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 in process. | ||
| 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. |
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| 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 ASC Topic 310. In the third quarter, the Company charged-off the mezzanine loan. At September 30, 2009 the balance of the loan is $3.3 million. |
The following is a detailed list of the significant additions to non-accrual loans during the third
quarter of 2009:
| A $3.5 million construction project in Malvern, Pennsylvania, in which the Company is a participant, became non-accrual during the third quarter of 2009. The aggregate loan balance at September 30, 2009 was approximately $67.1 million. The loan provides financing of a 1.9MM sq. ft mixed use development project. There is substantial pre-leasing of the project. However, plans for vertical take-out construction financing have not materialized, the loan has matured and a satisfactory extension has not been agreed upon. The loan has been declared in default and the lead bank is working with the borrower on a forbearance agreement. A third quarter appraisal did not indicate impairment in accordance with ASC Topic 310. |
| An acquisition and development loan to develop a 133 unit age-restricted community in Richland Township, Pennsylvania became non-accrual during the third quarter of 2009. The borrower had contracted with a national home builder to purchase the lots upon completion of improvements under a take down agreement. As the housing market began to deteriorate, the national home builder pulled the agreement and walked away from the project. As a result, the Company approved a $2.0 million construction loan to the borrower for the purpose of constructing Townhomes and Quads on the lots designated for the national home builder. The current outstanding balance of the residential construction loans is $7.9 million. The project to date is in the process of going into a Forbearance Agreement. |
Non-accrual and impaired loans were $84.0 million at September 30, 2009, compared to $85.8 million
at December 31, 2008, a slight decline of $1.8 million. The nine-month decrease was the result of
payments and improvements, transfers to other real estate owned and charge-offs of $29.0 million,
$17.9 million and $17.5 million, respectively, offset by new non-accrual loans of $62.5 million.
Of the $17.5 million in charge-offs, $5.1 million was related to the transfer of loans to OREO of
which $3.3 million had been specifically reserved. The remaining $12.4 million in charge-offs, of
which $8.3 million had been specifically reserved, were primarily related to non-residential and
residential construction loans including four mezzanine loans. If interest had been accrued, such
income would have been approximately $1.6 million for the three months ended September 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 ASC Topic 310 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.
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The following is a summary of information pertaining to impaired loans:
September 30, | December 31, | |||||||
(In thousands) | 2009 | 2008 | ||||||
Impaired loans with a valuation allowance |
$ | 40,466 | $ | 69,350 | ||||
Impaired loans without a valuation allowance |
43,530 | 16,480 | ||||||
Total impaired loans before Royal Asian impaired loans
held for sale |
83,996 | 85,830 | ||||||
Royal Asian impaired loans held for sale(1) |
(3,935 | ) | | |||||
Total impaired loans |
$ | 80,061 | $ | 85,830 | ||||
Valuation allowance related to impaired loans |
$ | 4,079 | $ | 12,882 | ||||
Allowance related to Royal Asian impaired loans held for sale |
(275 | ) | | |||||
Total valuation allowance related to impaired loans |
$ | 3,804 | $ | 12,882 | ||||
(1) | The $3.9 million related to the Royal Asian impaired loans held for sale is comprised of $1.6 million in impaired loans with a valuation allowance and $2.3 million in impaired loans without a valuation adjustment as of September 30, 2009. |
September 30, | ||||||||
(In thousands) | 2009 | 2008 | ||||||
Average investment in impaired loans |
$ | 81,464 | $ | 53,901 | ||||
Interest income recognized on impaired loans |
$ | 254 | $ | | ||||
Interest income recognized on a cash basis on
impaired loans |
$ | 254 | $ | |
The $8.8 million decline in the valuation allowance was entirely related to loan charge-offs
including charge-offs on two loans transferred to other real estate owned (OREO). The valuation
allowance of $2.9 million and $400,000 for those loans, respectively, 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 nine months ended September 30,
2009 was $4.5 million and $15.6 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. As of September 30, 2009, the
Company did not have any restructured loans.
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Other Real Estate Owned
Other real estate owned (OREO) increased $15.3 million from $10.3 million at December 31, 2008 to
$25.6 million at September 30, 2009. Set forth below is a table which details the changes in OREO
from December 31, 2008 to September 30, 2009.
2009 | ||||||||||||
(In thousands) | First Quarter | Second Quarter | Third Quarter | |||||||||
Beginning balance |
$ | 10,346 | $ | 20,244 | $ | 29,310 | ||||||
Capital improvements |
711 | 1,626 | 94 | |||||||||
Sales |
| | (2,958 | ) | ||||||||
Assets acquired on non-accrual loans |
9,231 | 7,953 | 720 | |||||||||
Other |
(44 | ) | 37 | (324 | ) | |||||||
Valuation allowance |
| (550 | ) | (1,231 | ) | |||||||
Ending balance |
$ | 20,244 | $ | 29,310 | $ | 25,611 | ||||||
During the third quarter of 2009, the Company acquired the collateral for one loan relationship
through foreclosure. At the time of the transfer to OREO, the Company recorded a $400,000
charge-off on the loan, for which $367,000 million had previously been reserved in the allowance
for loan and lease losses in accordance with ASC Topic 310. Also during the third quarter, the
Company sold the collateral for a loan that was transferred to OREO in the first quarter of 2009
and recorded a $279,000 gain. In addition, the Company established valuation allowances of
$869,000 and $362,000 against the carrying value of assets transferred to OREO during the second
quarter of 2009 and the fourth quarter of 2008, respectively.
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 ASC Topic 310. 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 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.
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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 $39.3 million and $8.8 million at September 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.
Commercial construction and land development loans, non-residential real estate loans and
commercial loans comprise $16.2 million, $10.5 million, and $8.8 million of the potential problem
loans outstanding at September 30, 2009. Commercial construction loans have continued to weaken
due to projects impacted by low tenant commitments, cash flow issues, and the sluggish economy.
Developers have been challenged in generating the cash flow needed to make loan payments. Many
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 regulatory order issued by the FDIC in July 2009,
disclosed under Regulatory Orders, the Companys board of directors will approve all advances for
additional funds on potential problem loans. Included in the problem loan totals is $1.9 million
related to two loans that are part of the Royal Asian assets held for sale.
Other Income (Loss)
For the third quarter of 2009 other income was $2.7 million compared to other loss of $14.0 million
for the comparable period in 2008. The year over year improvement in
other income of $16.7 million
was primarily related to OTTI charges recorded on AFS investment securities of $14.7 million in the
third quarter of 2008 while the
-59-
corresponding figure for the comparable quarter of 2009 was only $492,000. Refer to Note 6
Investment Securities to the consolidated financial statements for more information on the
impairment charges. During the third quarter of 2008 impairment losses were recorded for investment
securities, primarily Lehman Brothers Holdings and Washington Mutual corporate bonds, due to a
bankruptcy filing and FDIC seizure, respectively. In the third quarter of 2009 impairment losses
were mainly related to private equity investments. Also contributing to the improved results for
the linked quarters was a net improvement of $2.4 million ($1.3 million gain in 2009 versus a loss
of $1.1 million in 2008) in gains on the sale of AFS investment securities and a gain on the sale
of other real estate owned of $300,000. They were partially offset by a $485,000 reduction in
income related to real estate owned via equity investments. During the third quarter the Company
sold the managed common stock portfolios and recorded a loss of $130,000 (please see Note 6
Investment Securities.)
For the nine months ended September 30, 2009, other loss amounted to $4.3 million compared to other
loss of $10.3 million for comparable period of 2008, an improvement of $6.0 million. The
improvement was primarily attributable to a reduction of $7.3 million in OTTI charges on AFS
securities. As previously noted the impairments are described in detail in Note 6 Investment
Securities. Gains on the sales of AFS investment securities of $1.0 million in the first nine
months of 2009 versus losses on the sale of investment securities of $1.2 million in the comparable
period of 2008 also contributed $2.2 million to the improved year over year results of other
income. Partially offsetting these positive changes were year over year declines of $1.1 million
($0 in 2009 versus $1.1 million in 2008) in gains on sales related to real estate joint ventures,
$2.0 million ($0 in 2009 versus $2.0 million in 2008) in gains on the sale of premises and
equipment and $1.2 million ($1.5 million in 2009 versus $2.7 million in 2008) in income related to
real estate owned via equity investments.
Other Expense
Non-interest expense for the third quarter of 2009 amounted to $9.8 million resulting in an
increase of $2.4 million, or 31.6%, from the comparable quarter of 2008. The year over year
increase was primarily attributable to a $1.9 million increase in OREO and loan collection expenses
as a result of the increase in non-performing assets and OREO and a valuation allowance for two
properties and a $1.4 million increase in FDIC Insurance and Pennsylvania Department of Banking
assessments. Partially offsetting these increases were a reduction of $292,000 in salaries and
employee benefits associated with the elimination of management bonuses and the Companys matching
of the employee 401K contributions in 2009, a decrease of $89,000 in stock option expense related
to forfeitures and a decline in other operating expense of $321,000 primarily related to lower
management fees due to the winding down of RBA Capital in the fourth quarter of 2008. The increase
in FDIC Insurance and Pennsylvania Department of Banking assessments was primarily related to an
increased assessment rate for the FDIC expense ($0.70 per $1,000 of deposits starting in the second
quarter of 2009 versus $0.25 per $1,000 of deposits in 2008) for Royal Bank America due to
increased assessment rates overall to fund the FDIC insurance shortfall, a decline in the
regulatory rating from the FDIC resulting in another rate increase, an increase in the previous
quarterly expenses and an increase in deposit levels subject to assessment for both Royal Bank
America and Royal Asian Bank. During the current quarter management changed the accounting for FDIC
assessments from a prepaid basis, consistent with most financial institutions, to an accrual basis
as a result of the magnitude of the increase in this expense in 2009. The actual FDIC assessment
for the third quarter of 2009 amounted to approximately $610,000.
For the nine months ended September 30, 2009 non-interest expense of $25.4 million amounted to an
increase of $4.3 million, or 20.2%, above the level of the comparable period of 2008. The year over
year increase was primarily attributable to an increase of $3.2 million in OREO and loan collection
expenses as a result of an increase in non-performing assets and OREO coupled with an OREO
valuation allowance for three properties, a $2.2 million increase in FDIC Insurance and
Pennsylvania Department of Banking assessments, an increase in professional and legal fees
amounting to $469,000 mainly attributable to the increased level of impaired loans and regulatory
compliance and a $127,000 increase in occupancy and equipment primarily related to the opening of
two new lending centers. Partially offsetting these increases was a decrease of $730,000 related
to salaries and employee benefits due to the elimination of management bonuses and the Companys
matching of the employee 401K contributions in 2009, a reduction in stock option expense of
$375,000 related to forfeitures and a $650,000 decline in other operating expense due primarily to
lower management fees associated with RBA Capital. The increase in FDIC Insurance and Pennsylvania
Department of Banking assessments was primarily related to higher assessment
-60-
rates, increased deposit levels, an increase in the previous quarterly expenses and the special
FDIC insurance assessment of approximately $600,000 recorded in the second quarter of 2009.
Income Tax Expense (Benefit)
Total income tax expense for the third quarter of 2009 was $474,000 compared to a tax benefit of
$6.8 million in the third quarter of 2008. The 2009 tax expense is entirely related to a 10% excise
tax on the surrender of approximately $23 million in bank owned life insurance (BOLI). The
excise tax was not offset by a tax benefit despite the net loss in the third quarter of 2009 since
the Company had 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. The
Company 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 during
the first quarter of 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 third quarter of 2009 was 0%, excluding the effect of
the excise tax on the surrender of the BOLI, compared to an effective tax benefit of 36.6% for the
same period in 2008.
Total income tax expense for the nine months ended September 30, 2009 totaled $474,000 as compared
to a tax benefit of $6.9 million for the comparable period of 2008. The 2009 tax expense is
entirely related to a 10% excise tax on the surrender of approximately $23 million in bank owned
life insurance (BOLI). Consistent with the quarterly results, the excise tax was not offset by a
tax benefit despite the net loss for the nine month period in 2009 since the Company had 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. The Company
established a valuation allowance against deferred tax assets as of December 31, 2008 in the amount
of $15.5 million. During the first nine months of 2009, the valuation allowance increased $2.6
million to $18.1 million as of September 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 nine months of 2009 was 0%, excluding the effect of the excise tax on the surrender of the
BOLI, versus an effective tax benefit of 39.9% 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 3 Segment Information to the consolidated financial statements. Included in the Community
Banking segment are assets and deposits of $78.6 million and $64.1 million, respectively, related
to the sale of Royal Asian as of September 30, 2009 (see discussion below under Royal Asian
Bank).
-61-
Three months ended September 30, 2009 | ||||||||||||||||||||
Community | Tax Lien | Equity | ||||||||||||||||||
(In thousands) | Banking | Operation | Investment | Other | Consolidated | |||||||||||||||
Total assets |
$ | 1,173,562 | $ | 105,093 | $ | 15,356 | $ | 67,799 | $ | 1,361,810 | ||||||||||
Total deposits |
$ | 908,037 | $ | | $ | | $ | | $ | 908,037 | ||||||||||
Interest income |
$ | 12,509 | $ | 3,014 | $ | | $ | 1,276 | $ | 16,799 | ||||||||||
Interest expense |
8,081 | 1,113 | 69 | 307 | 9,570 | |||||||||||||||
Net interest income (expense) |
$ | 4,428 | $ | 1,901 | $ | (69 | ) | $ | 969 | $ | 7,229 | |||||||||
Provision for loan and lease losses |
3,093 | 161 | | 462 | 3,716 | |||||||||||||||
Total other income |
2,057 | 109 | 444 | 95 | 2,705 | |||||||||||||||
Total other expenses |
8,679 | 746 | 216 | 188 | 9,829 | |||||||||||||||
Income tax (benefit) expense |
(82 | ) | 429 | 56 | 71 | 474 | ||||||||||||||
Net (loss) income |
$ | (5,205 | ) | $ | 674 | $ | 103 | $ | 343 | $ | (4,085 | ) | ||||||||
Noncontrolling interest |
$ | (122 | ) | $ | 270 | $ | 79 | $ | 54 | $ | 281 | |||||||||
Net (loss) income attributable to Royal Bancshares |
$ | (5,083 | ) | $ | 404 | $ | 24 | $ | 289 | $ | (4,366 | ) | ||||||||
Three months ended September 30, 2008 | ||||||||||||||||||||
Community | Tax Lien | Equity | ||||||||||||||||||
(In thousands) | Banking | Operation | Investment | Other | Consolidated | |||||||||||||||
Total assets |
$ | 1,013,965 | $ | 74,652 | $ | 22,843 | $ | 61,026 | $ | 1,172,486 | ||||||||||
Total deposits |
$ | 736,974 | $ | | $ | | $ | | $ | 736,974 | ||||||||||
Interest income |
$ | 13,946 | $ | 2,316 | $ | | $ | 1,370 | $ | 17,632 | ||||||||||
Interest expense |
7,862 | 920 | 48 | 687 | 9,517 | |||||||||||||||
Net interest income (expense) |
$ | 6,084 | $ | 1,396 | $ | (48 | ) | $ | 683 | $ | 8,115 | |||||||||
Provision for loan and lease losses |
4,843 | | | 432 | 5,275 | |||||||||||||||
Total other (loss) income |
(15,116 | ) | 38 | 953 | 103 | (14,022 | ) | |||||||||||||
Total other expenses |
6,227 | 523 | 235 | 486 | 7,471 | |||||||||||||||
Income tax (benefit) expense |
(7,209 | ) | 188 | 235 | (47 | ) | (6,833 | ) | ||||||||||||
Net (loss) income |
$ | (12,893 | ) | $ | 723 | $ | 435 | $ | (85 | ) | $ | (11,820 | ) | |||||||
Noncontrolling interest |
$ | 44 | $ | 183 | $ | | $ | (35 | ) | $ | 192 | |||||||||
Net (loss) income attributable to Royal Bancshares |
$ | (12,937 | ) | $ | 540 | $ | 435 | $ | (50 | ) | $ | (12,012 | ) | |||||||
Nine months ended September 30, 2009 | ||||||||||||||||||||
Community | Tax Lien | Equity | ||||||||||||||||||
(In thousands) | Banking | Operation | Investment | Other | Consolidated | |||||||||||||||
Total assets |
$ | 1,173,562 | $ | 105,093 | $ | 15,356 | $ | 67,799 | $ | 1,361,810 | ||||||||||
Total deposits |
$ | 908,037 | $ | | $ | | $ | | $ | 908,037 | ||||||||||
Interest income |
$ | 38,073 | $ | 7,928 | $ | | $ | 3,722 | $ | 49,723 | ||||||||||
Interest expense |
24,480 | 2,975 | 172 | 909 | 28,536 | |||||||||||||||
Net interest income (expense) |
$ | 13,593 | $ | 4,953 | $ | (172 | ) | $ | 2,813 | $ | 21,187 | |||||||||
Provision for loan and lease losses |
11,729 | 797 | | 943 | 13,469 | |||||||||||||||
Total other (loss) income |
(5,985 | ) | 255 | 1,141 | 306 | (4,283 | ) | |||||||||||||
Total other expenses |
21,758 | 2,314 | 600 | 701 | 25,373 | |||||||||||||||
Income tax (benefit) expense |
(751 | ) | 812 | 129 | 284 | 474 | ||||||||||||||
Net (loss) income |
$ | (25,128 | ) | $ | 1,285 | $ | 240 | $ | 1,191 | $ | (22,412 | ) | ||||||||
Noncontrolling interest |
$ | 0 | $ | 514 | $ | 184 | $ | 62 | $ | 761 | ||||||||||
Net (loss) income attributable to Royal Bancshares |
$ | (25,128 | ) | $ | 771 | $ | 55 | $ | 1,129 | $ | (23,173 | ) | ||||||||
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Nine months ended September 30, 2008 | ||||||||||||||||||||
Community | Tax Lien | Equity | ||||||||||||||||||
(In thousands) | Banking | Operation | Investment | Other | Consolidated | |||||||||||||||
Total assets |
$ | 1,013,965 | $ | 74,652 | $ | 22,843 | $ | 61,026 | $ | 1,172,486 | ||||||||||
Total deposits |
$ | 736,974 | $ | | $ | | $ | | $ | 736,974 | ||||||||||
Interest income |
$ | 45,224 | $ | 6,012 | $ | | $ | 4,171 | $ | 55,407 | ||||||||||
Interest expense |
23,265 | 2,585 | 151 | 2,141 | 28,142 | |||||||||||||||
Net interest income (expense) |
$ | 21,959 | $ | 3,427 | $ | (151 | ) | $ | 2,030 | $ | 27,265 | |||||||||
Provision for loan and lease losses |
11,608 | 22 | | 1,457 | 13,087 | |||||||||||||||
Total other (loss) income |
(13,461 | ) | 439 | 2,341 | 402 | (10,279 | ) | |||||||||||||
Total other expenses |
17,521 | 1,452 | 660 | 1,483 | 21,116 | |||||||||||||||
Income tax (benefit) expense |
(7,991 | ) | 731 | 536 | (178 | ) | (6,902 | ) | ||||||||||||
Net income (loss) |
$ | (12,640 | ) | $ | 1,661 | $ | 994 | $ | (330 | ) | $ | (10,315 | ) | |||||||
Noncontrolling interest |
$ | 126 | $ | 508 | $ | | $ | (132 | ) | $ | 502 | |||||||||
Net income (loss) attributable to Royal Bancshares |
$ | (12,766 | ) | $ | 1,153 | $ | 994 | $ | (198 | ) | $ | (10,817 | ) | |||||||
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. The operations of the subsidiary are now part of Royal
Bank however they continue to be shown in the Other segments section of the table below since the
type of lending is different than that of 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
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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 166 people on a full-time equivalent basis as of
September 30, 2009.
Deposits: At September 30, 2009, total deposits of Royal Bank were distributed among demand
deposits (7%), money market deposit, savings and Super Now accounts (28%) and time deposits (65%).
At September 30, 2009, deposits increased $165.3 million to $848.5 million, from year-end 2008, or
24.2%, primarily due to a $121.0 million increase in time deposits. Management decided to raise
deposit rates to increase liquidity in the first and second quarter and to not increase the level
of 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
$33.3 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 September 30, 2009, Royal Bank, including its subsidiaries, had a total net loan
portfolio of $639.3 million, representing 50.2% 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 September 30, 2009, loans increased $6.9 million from year end 2008.
Business results: Total interest income of Royal Bank for the quarter ended September 30, 2009 was
$15.3 million compared to $16.2 million for the quarter ended September 30, 2008, a decrease of 6%.
Total interest income for the first nine months of 2009 was $45.1 million compared to $50.8 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, lost interest on non-accrual loans and a
175 basis point reduction in the prime rate by the Federal Reserve since the end of the second
quarter in 2008. Interest expense was $8.7 million for the quarter ended September 30, 2009,
compared to $8.9 million for the quarter ended September 30, 2008, a decrease of 2%. Interest
expense for the first nine months of 2009 was $25.8 million compared to $26.3 million for the same
period in 2008. Royal Bank recorded a net loss for the quarter ended September 30, 2009 of $4.4
million compared to a net loss of $10.5 million for the quarter ended September 30, 2008. The
improvement in the loss is mainly due to $310,000 in realized losses on AFS investment securities
during the third quarter of 2009 compared to $14.3 million for the third quarter of 2008, and a
$700,000 reduction in net interest income from $7.3 million in the third quarter of 2008 to $6.6
million in the third quarter of 2009 for the reasons mentioned above. These changes were partially
offset by a $2.2 million increase in operating expenses related to the increase in non-performing
assets and FDIC assessments. Royal Bank recorded a net loss of $16.2 million for the first nine
months of 2009 compared to a net loss of $7.7 million for the first nine months of 2008. The
increase in the net loss was largely due to a decline in net interest income of $5.2 million for
the nine months ended September 30, 2009 and an income tax benefit of $4.8 million for the nine
months ended September 30, 2008 compared to income tax expense of $1.2 million for the nine months
ended September 30, 2009. Total assets of Royal Bank were $1.3 billion at September 30, 2009 and
$1.1 billion at December 31, 2008. During the third quarter of 2009, Royal Bank received a $9.5
million capital contribution from
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Royal Bancshares. 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.
On September 25, 2009, the Company announced that it had entered into a stock purchase agreement,
dated as of September 24, 2009, with a newly formed corporation organized by the President of Royal
Asian to purchase all of the outstanding common stock of Royal Asian owned by the Company. See
Item 5 of Part II of this Form 10-Q for a description of the stock purchase agreement.
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 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 24 people on a full-time equivalent basis as of
September 30, 2009.
Deposits: At September 30, 2009, total deposits of Royal Asian were distributed among demand
deposits (14%), money market deposit, savings and Super Now accounts (13%) and time deposits (73%).
At September 30, 2009, total deposits were $92.9 million, which amounted to an increase of
$300,000, or 0.3%, from the level at December 31, 2008.
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Lending: Royal Asian had a total loan portfolio of $66.3 million, representing 61% of total assets
at September 30, 2009 that increased $3.1 million, or 4.9%, 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 September 30, 2009,
amounted to $636,000 which was a decrease of $184,000 from the comparable quarter of 2008. Net
interest income for the first nine months of 2009 was $2.0 million compared to net interest income
of $2.6 million for the same period in 2008. For the quarter ended September 30, 2009, Royal Asian
recorded a net loss of $421,000 compared to a net loss of $844,000 in the second quarter of 2008.
For the first three quarters of 2009, Royal Asian recorded a net loss of $571,000 compared to net a
loss of $803,000 for the first three quarters of 2008. Total assets of Royal Asian amounted to
$107.9 million at September 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 September 30, 2009, of
$257,000 declined 46.0% from $476,000 for the quarter ended September 30, 2008. For the first nine
months of 2009 total interest income amounted to $926,000 resulting in a 42.7% decrease from $1.6
million during the first nine months of 2008. For the quarter ended September 30, 2009, RID
reported net income of $246,000, compared to net loss of $124,000 for the quarter ended September
30, 2008. For the first three quarters of 2009, RID reported a net loss of $5.3 million compared
to a net loss of $1.1 million in the comparable period of 2008. The year over year decline for the
first nine months was primarily related to impairment of investment securities, specifically
preferred and common stocks, of $5.8 million in 2009 versus $3.0 million in 2008. At September 30,
2009, total assets of RID were $29.8 million, of which $2.6 million was held in cash and cash
equivalents and $6.6 million was held in investment securities. The amounts shown above include the
activity related to RIDs wholly owned subsidiary Royal Preferred LLC. As a result of the
improvement in the stock market during the third quarter of 2009, management concluded that it was
in the best interest of the Company to sell the entire managed common stock portfolios. Several
analysts had indicated that the market was poised for a correction after increasing almost 50%
since late in the first quarter of 2009. During the third quarter the Company sold these stocks
and minimized the loss to $130,000, or 1% of their aggregate cost. Royal Bank has extended loans
to RID, secured by securities and as per the provisions of Regulation W. During the third quarter
of 2009, RID paid off the $9.4 million loan from Royal Bank. In addition RID paid a $10.0 million
dividend to Royal Bancshares during the third quarter of 2009.
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 September 30, 2009, total assets of
Royal Captive Insurance were $2.8 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 September 30, 2009, Royal Preferred LLC had total assets of
approximately $21 million.
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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 September 30, 2009 amounted to 2.45% and 5.80%,
respectively for Capital Trust I and Capital Trust II.
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. As of September 30, 2009 the trust preferred interest
payment in arrears was $270,000.
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
September 30, 2009, total assets of CSC were $16.8 million. Included in total assets is $2.9
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. In the first
and third quarters of 2009, CSC charged-off $1.2 million and $1.8 million, respectively, of the SMI
loan balance. These charge-offs had been included in the allowance for loan and lease losses as a
specific allowance on the loan. The outstanding SMI loan balance was $2.9 million and $6.6 million
at September 30, 2009 and December 31, 2008.
Business results: Net interest income of CSC for the quarter ended September 30, 2009, amounted to
$230,000 which resulted in a decline of $143,000, from the comparable quarter of 2008. Net interest
income for the first nine months of 2009 decreased $423,000 from $1.1 million for the first nine
months of 2008 to $720,000 due to the SMI loan mentioned previously. The net loss for CSC for the
three and nine months ended September 30, 2009, was $113,000 and $482,000, respectively, compared
to net income of $77,000 and $364,000, respectively, for the comparable periods of 2008. The
provision for lien losses was $161,000 for the third quarter of 2009 compared to $0 for the third
quarter of 2008. The provision for lien losses for the nine months ended September 30, 2009 and
September 30, 2008 was $797,000 and $22,000, respectively. At September 30, 2009, total assets of
CSC were $16.8 million, of which $16.3 million was held in tax liens. The allowance for lien loss
was $342,000 at September 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 September
30, 2009, the amount due Royal Bank from CSC was $15.3 million.
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
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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 $1.7 million for the quarter ended September 30,
2009, increased $700,000, or 70%, 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 nine months of 2009, net interest income of $4.2 million increased $1.9
million, or 85.3%, above the comparable period of 2008 due to the significant growth in tax liens
year over year. Net income for RTL of $787,000 for the quarter ended September 30, 2009 increased
$141,000, or 21.8%, from the comparable quarter of 2008 due to a significant increase in tax liens
year over year. For the nine months ended 2009 net income for RTL of $1.8 million amounted to an
increase of $861,000, or 95.1%, above the comparable period of 2008 again due to the growth in tax
liens for RTL over the past year. At September 30, 2009, total assets of RTL were $88.3 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 September 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 September 30, 2009, the amount due Royal Bank
from RTL was $85.5 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 September 30, 2009, total assets of RIA under FIN 46(R) were $19.1 million
compared to $21.2 million at December 31, 2008. For the quarter ended September 30, 2009, RIA had a
net loss of $86,000 compared to net income of $520,000 for the comparable period of 2008 while the
net loss for the first nine months of 2009 amounted to $7,000 compared to net income of $2.1
million for the comparable nine months of 2008. The loss for the current quarter was primarily
attributable to an impairment charge on securities in the amount of $414,000. The 2008 nine month
period included a gain on sales of real estate of approximately $1.3 million. For more information
about Royal Investments America refer to Note 14 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
September 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 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 nine months of 2009 and 2008, neither sales nor purchases of lease
portfolios were material.
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Business results: At September 30, 2009, total assets of Royal Leasing were $35.2 million,
including $34.8 million in net leases, as compared to $25.7 million in assets at December 31, 2008.
During the quarter ended September 30, 2009, Royal Leasing had net interest income of $479,000, an
increase of $168,000 from the comparable period of 2008; provision for lease losses of $462,000
versus $242,000 in the comparable quarter of 2008; non-interest income of $95,000 as compared to
$61,000 in the third quarter of 2008; and non-interest expense of $46,000 versus $170,000 for the
third quarter of 2008.
During the nine months ended September 30, 2009, Royal Leasing had net interest income of $1.2
million, an increase of $308,000 from the comparable period in 2008;
provisions for lease loss of $943,000 compared to $711,000 for the
same period in 2008; and non-interest expenses of $260,000 compared
to $599,000 for the nine month period in 2008.
Net income for Royal Leasing for the three and nine months ended September
30, 2009, was $43,000 and $225,000, respectively as compared to net losses of $26,000 and $66,000,
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 September 30, 2009, the amount due
Royal Bank from RBA Leasing was $34.0 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. During the fourth quarter of 2008,
management decided to wind down the operation of RBA Capital. The operations of the subsidiary are
now part of Royal Bank however they continue to be shown in the Other segments section of the
table above since the type of lending is different than that of Royal Bank.
Business results: At September 30, 2009, total assets related to RBA Capital were $32.6 million
versus $37.5 million at December 31, 2008. Net loans amounted to $32.3 million at September 30,
2009, a decrease of $5.0 million, or 13.4%, from $37.3 million at December 31, 2008. Total interest
income related to RBA Capital of $490,000 for the third quarter of 2009 decreased $289,000, or
37.1%, from the comparable quarter of 2008 due principally to an increase in non-accrual loans. For
the third quarter of 2009, net income attributable to RBA Capital was $300,000 versus a net loss of $60,000
in the comparable period of 2008. For the first nine months of 2009, net income attributable to
RBA Capital was $966,000 versus a net loss of $264,000 in the comparable period of 2008. The
increase was due to the provision for loan losses booked in 2008.
FINANCIAL CONDITION
Consolidated Assets
Total consolidated assets as of September 30, 2009 were $1.4 billion, an increase of $186.2
million, or 15.8%, from December 31, 2008. This increase was attributed to a $104.5 million growth
in AFS investments, a $59.7 million increase in cash and cash equivalents, a $15.3 million increase
in other real estate owned, and a $7.0 million
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increase in net loans and leases. The changes in consolidated assets described are gross of the
Royal Asian assets held for sale of $78.6 million.
Cash and Cash Equivalents
Total cash and cash equivalents increased $56.5 million from $14.3 million at December 31, 2008 to
$70.8 million at September 30, 2009, as a result of managements decision to maintain a higher
level of liquidity as mentioned above. Excluded from cash and cash equivalents is $3.2 million
related to the sale of Royal Asian.
Investment Securities
Total investment securities grew $104.5 million, or 29.8%, to $454.8 million at September 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 nine months of 2009 that was partially redeployed
into U.S. agency collateralized mortgage obligations. FHLB stock was $11.0 million at September
30, 2009 and December 31, 2008.
Effective April 1, 2009, the Company adopted new provisions under ASC Topic 320 specific to OTTI.
Under the new guidance 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 third quarter of 2009 and the first nine months of 2009, the Company recorded OTTI
charges to earnings of $492,000 and $9.8 million, respectively, related to various equity
securities, trust preferred securities, corporate bonds, and non-agency CMOs. The credit-related
OTTI charge recorded in earnings for trust preferred securities was $77,000 for the three months
ended September 30, 2009. 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 nine months
ended September 30, 2009. The Company recorded OTTI charges related to equity and other securities
of $415,000 and $6.1 million for the three months and nine months ended September 30, 2009,
respectively.
The AFS portfolio had gross unrealized losses of $6.4 million at September 30, 2009, which
recovered from gross unrealized losses of $37.8 million at December 31, 2008. During the third
quarter of 2009 the Company recorded a $492,000 impairment charge that was primarily comprised of
other securities totaling $415,000 and trust preferred securities totaling $77,000. 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 nine months ended September 30, 2009, gross unrealized losses
have improved 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, sales of investment securities, and the impairment charges that occurred
during the first nine months of 2009. The gross unrealized losses have improved significantly in
the last two quarters as the financial markets have begun to recover and have exhibited more
stability. 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 5 Comprehensive Income. When a loss is deemed to be other
than temporary but the Company does not intend to sell
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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.
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 $3.2 million, or 0.4%, from the $700.7 million level at December
31, 2008 to $703.9 million at September 30, 2009. The $83.0 million decline in construction loans
was predominantly related to balances being paid down or reclassified to non-residential or single
family real estate as construction projects were completed. Additionally, construction balances of
$7.6 million and $4.7 million were transferred to OREO and charged-off, respectively. The $8.5
million decline in land loans was mostly related to transfers to OREO. The $26.9 million increase
in single family loans was mostly related to construction loans being reclassed. The $43.0 million
increase in non-residential real estate was related to $24.9 million in loan originations, advances
on existing loans, and $8.0 million in construction loans being reclassed partially offset by
payments, and charge-offs and transfers to OREO of $7.1 million and $2.7 million, respectively. In
addition tax certificates increased $9.7 million and leases increased $10.3 million. 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:
September 30, | December 31, | |||||||
(In thousands) | 2009 | 2008 | ||||||
Commercial and industrial |
$ | 87,201 | $ | 86,278 | ||||
Construction |
84,169 | 167,204 | ||||||
Land Development |
65,641 | 74,168 | ||||||
Construction and land development mezzanine |
2,815 | 2,421 | ||||||
Single family residential |
54,415 | 27,480 | ||||||
Real Estate non-residential |
277,560 | 234,573 | ||||||
Real Estate non-residential-mezzanine |
| 4,111 | ||||||
Real Estate multi-family |
21,614 | 14,059 | ||||||
Real Estate 1-4 family mezzanine |
| 335 | ||||||
Tax certificates |
73,900 | 64,168 | ||||||
Leases |
36,444 | 26,123 | ||||||
Other |
1,201 | 1,243 | ||||||
Total gross loans |
$ | 704,960 | $ | 702,163 | ||||
Deferred fees, net |
(1,082 | ) | (1,441 | ) | ||||
Total loans and leases before Royal Asian
loans held for sale |
703,878 | 700,722 | ||||||
Royal Asian loans held for sale (1) |
(66,344 | ) | | |||||
Total loans and leases |
$ | 637,534 | $ | 700,722 | ||||
(1) | Included in Royal Asian loans held for sale is $48.2 million and $9.5 million in non-residential and commercial loans, respectively, as of September 30, 2009. |
Deposits
Total deposits, the primary source of funds, increased $148.0 million, or 19.5%, to $908.0 million
at September 30, 2009, from December 31, 2008. The growth in deposits was primarily associated
with an increase in time deposits
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under $100,000 which increased $73.8 million, or 42.4%, time deposits over $100,000 which increased
$34.6 million, or 32.1%, and non-interest bearing demand deposits which increased $19.9 million, or
39.2%. Savings accounts had a small decline during this period. Management decided to raise
specific deposit rates during the first and second quarters of 2009 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:
September 30, | December 31, | |||||||
(In thousands) | 2009 | 2008 | ||||||
Demand (non-interest bearing) |
$ | 70,834 | $ | 50,886 | ||||
NOW and Money Markets |
205,142 | 193,869 | ||||||
Savings |
14,810 | 15,171 | ||||||
Time deposits (over $100) |
142,348 | 107,783 | ||||||
Time deposits (under $100) |
247,992 | 174,184 | ||||||
Brokered deposits |
226,911 | 218,175 | ||||||
Total deposits before Royal Asian
deposits held for sale |
$ | 908,037 | $ | 760,068 | ||||
Royal Asian deposit held for sale |
(64,093 | ) | | |||||
Total deposits |
$ | 843,944 | $ | 760,068 | ||||
Borrowings
Total borrowings, which include short and long-term borrowings, decreased $4.9 million, or 1.8%, to
$270.8 million at September 30, 2009, from $275.7 million at December 31, 2008. This reduction is
attributed to the monthly payments on amortizing borrowings during the first nine months of 2009.
During the first nine 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 $10.0 million and $12.4 million of debt at
September 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 $31.8 million, or 39.0%, to $113.4 million at September
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 improved $24.1 million to $2.0 million at September 30, 2009 from $26.1 million
at December 31, 2008. Refer to the Capital Adequacy section for more information on the TARP
funds. Partially offsetting the receipt of the TARP funds and the improvement in other
comprehensive loss was an increase in the accumulated deficit of $23.4 million, which was
predominantly related to the net loss for the nine months ended September 30, 2009.
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
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a minimum Tier 1 leverage ratio, as defined by the banking regulations. At September 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 September 30, 2009.
The table below provides a comparison of the Company, Royal Bank and Royal Asians risk-based
capital ratios and leverage ratios for September 30, 2009 and December 31, 2008:
As of September 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) |
$ | 152,070 | 15.39 | % | $ | 79,036 | 8.00 | % | N/A | N/A | ||||||||||||||
Royal Bank |
121,219 | 13.46 | % | 72,050 | 8.00 | % | $ | 90,062 | 10.00 | % | ||||||||||||||
Royal Asian |
14,357 | 16.81 | % | 6,832 | 8.00 | % | 8,540 | 10.00 | % | |||||||||||||||
Tier I capital (to risk-weighted assets) |
||||||||||||||||||||||||
Company (consolidated) |
$ | 139,563 | 14.13 | % | $ | 39,518 | 4.00 | % | N/A | N/A | ||||||||||||||
Royal Bank |
109,815 | 12.19 | % | 36,025 | 4.00 | % | $ | 54,037 | 6.00 | % | ||||||||||||||
Royal Asian |
13,281 | 15.55 | % | 3,416 | 4.00 | % | 5,124 | 6.00 | % | |||||||||||||||
Tier I Capital (to average assets, leverage) |
||||||||||||||||||||||||
Company (consolidated) |
$ | 139,563 | 10.35 | % | $ | 40,468 | 3.00 | % | N/A | N/A | ||||||||||||||
Royal Bank |
109,815 | 8.80 | % | 37,437 | 3.00 | % | $ | 62,395 | 5.00 | % | ||||||||||||||
Royal Asian |
13,281 | 11.67 | % | 3,414 | 3.00 | % | 5,691 | 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 | % |
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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 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.
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 September 30, 2009, the Companys
liquidity ratios well exceeded the policy minimums.
On August 13, 2009, the Companys board of directors 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. As of September 30, 2009 the trust
preferred interest payment in arrears was $270,000 and the Series A Preferred stock dividend in
arrears was $380,000.
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 of Royal Bank is monitored on a weekly basis while the remaining legal entities
are monitored monthly.
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 which
are a continual challenge in a
changing rate environment.
-74-
The following table shows separately the interest sensitivity of each category of interest earning
assets and interest bearing liabilities as of September 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 |
$ | 49.9 | $ | | $ | | $ | | $ | 24.1 | $ | 74.0 | ||||||||||||
Federal funds sold |
| | | | | | ||||||||||||||||||
Investment securities: |
||||||||||||||||||||||||
Available for sale |
76.3 | 93.1 | 204.3 | 82.2 | (1.1 | ) | 454.8 | |||||||||||||||||
Loans: |
||||||||||||||||||||||||
Fixed rate |
12.9 | 74.4 | 229.6 | 25.0 | | 341.9 | ||||||||||||||||||
Variable rate |
310.3 | 52.0 | 1.8 | | (25.1 | ) | 339.0 | |||||||||||||||||
Total loans |
323.2 | 126.4 | 231.4 | 25.0 | (25.1 | ) | 680.9 | |||||||||||||||||
Other assets |
| 19.2 | | | 132.9 | 152.1 | ||||||||||||||||||
Total Assets |
$ | 449.4 | $ | 238.7 | $ | 435.7 | $ | 107.2 | $ | 130.8 | $ | 1,361.8 | ||||||||||||
Liabilities & Capital |
||||||||||||||||||||||||
Deposits: |
||||||||||||||||||||||||
Non interest bearing deposits |
$ | | $ | | $ | | $ | | $ | 70.8 | $ | 70.8 | ||||||||||||
Interest bearing deposits |
16.0 | 70.1 | 133.8 | | | 219.9 | ||||||||||||||||||
Certificate of deposits |
127.1 | 302.6 | 183.3 | 4.3 | | 617.3 | ||||||||||||||||||
Total deposits |
143.1 | 372.7 | 317.1 | 4.3 | 70.8 | 908.0 | ||||||||||||||||||
Borrowings (1) |
96.2 | 39.7 | 147.8 | 12.9 | 10.0 | 306.6 | ||||||||||||||||||
Other liabilities |
| | | | 33.8 | 33.8 | ||||||||||||||||||
Capital |
| | | | 113.4 | 113.4 | ||||||||||||||||||
Total liabilities & capital |
$ | 239.3 | $ | 412.4 | $ | 464.9 | $ | 17.2 | $ | 228.0 | $ | 1,361.8 | ||||||||||||
Net interest rate GAP |
$ | 210.1 | $ | (173.7 | ) | $ | (29.2 | ) | $ | 90.0 | $ | (97.2 | ) | |||||||||||
Cumulative interest rate GAP |
$ | 210.1 | $ | 36.4 | $ | 7.2 | $ | 97.2 | ||||||||||||||||
GAP to total assets |
15 | % | -13 | % | ||||||||||||||||||||
GAP to total equity |
185 | % | -153 | % | ||||||||||||||||||||
Cumulative GAP to total assets |
15 | % | 3 | % | ||||||||||||||||||||
Cumulative GAP to total equity |
185 | % | 32 | % | ||||||||||||||||||||
(1) | The $10.0 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 September 30, 2009, floating rate loans with floors and without
floors were $134.3 million and $204.7 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; |
-75-
| 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. Royal
Bank is in compliance with all delivery requirements of the orders as of the filing date of this
Form 10-Q.
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 4 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
-76-
Act), is recorded, processed, summarized and reported within the time periods specified in the
Securities Exchange 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 our CEO and CFO concluded, as a result of the material
weakness described in the following paragraph, that the Companys disclosure controls and
procedures were not effective at September 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 and third quarters 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 third 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
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.
The cease and desist order limits certain activities that we may perform and increases our compliance costs
Royal Bank is regulated by the FDIC and the Commonwealth of Pennsylvania Department of Banking. As
more fully described in 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 (the Orders) with each of
the FDIC and the Department of
-77-
Banking. The Orders include a number of provisions relating to the operation of the business of
Royal Bank, including provisions requiring Royal Bank to reduce its concentration in commercial
real estate loans and reliance on wholesale funding sources. The provisions of the Orders,
including any actions that the FDIC or Department of Banking may take to enforce them, as well as
the additional compliance costs resulting from the Orders, may adversely affect our business,
financial condition, or results of operations.
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
None
Item 5. Other Information
On September 25, 2009, Royal Bancshares of Pennsylvania, Inc. (the Company) announced that it had
entered into a stock purchase agreement (the Agreement) with a newly formed corporation organized
by the President of Royal Asian Bank (Royal Asian), a banking subsidiary of the Company, to purchase all
of the outstanding common stock of Royal Asian owned by the Company. Under the terms of the Agreement,
Royal Asian Bancshares (the Buyer) will purchase all of the common stock of Royal Asian owned by the
Company for a purchase price of $15,217,988.
Closing of the transactions contemplated by the Agreement are subject to a number of conditions
specified in the Agreement, including receipt of all required regulatory approvals and completion
of a private placement transaction by the Buyer (the Buyer Private Placement) to fund payment of
the purchase price. Under the Agreement, the Buyer must (i), on or prior to November 15, 2009,
have received net proceeds in the Buyer Private Placement in the amount of $10.0 million for the
purpose of acquiring the Companys shares of common stock of Royal Asian and delivered a written
representation of its chief executive officer that it reasonably expects to raise the remaining
funds constituting purchase price by the closing date and (ii), on or prior to December 15, 2009,
received net proceeds in the Buyer Private Placement for the balance of the total purchase price.
Either the Company or the Buyer may terminate the Agreement if the closing has not occurred by
December 31, 2009. In addition, either party may terminate the Agreement at any time if any
governmental entity that must grant a required regulatory approval has denied approval of the
transactions, requested that an application be withdrawn, or notified either party that it will not
grant (or intends to rescind or revoke if previously approved), a required regulatory approval, or
imposed a condition in connection with approval of the transactions, which, in the good faith
judgment of the Company or Buyer, will materially impair the ability of Buyer to complete the
transactions. The Company may terminate the Agreement (i) on or after November 16, 2009 if the
Company has not received evidence satisfactory to it that Buyer has received net proceeds in the
Buyer Private Placement by November 15, 2009 in the amount of $10.0 million for the purpose of
acquiring the Companys shares of common stock of Royal Asian and a written representation of Buyers chief
executive officer that it reasonably expects to raise the remaining funds constituting purchase
price by the closing date and (ii) on or after December 16, 2009 if the Company has not received
evidence satisfactory to it that Buyer has received net proceeds in the Buyer Private Placement by
December 15, 2009 for the balance of the total purchase price. Either party may also terminate the
Agreement by mutual consent and in the event of certain breaches of representations, warranties or
obligations of the other party.
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The Buyer has deposited $250,000 into an escrow account (the Escrow Amount), which will be
credited toward the purchase price at closing, unless the Company terminates the Agreement as a
result of a breach by the Buyer of any representation, warranty or obligation of Buyer or as a
result of the Buyers inability to raise the funds necessary to complete the transactions
contemplated by the Agreement in the Buyer Private Placement, in which case the Company will retain
the Escrow Amount as liquidated damages.
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). | |
10.4 | Stock Purchase Agreement, dated as of September 24, 2009, between Royal Bancshares of Pennsylvania, Inc. and Royal Asian Bancshares, Inc. (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 September 25, 2009). | |
10.5 | Royal Bank America Supplemental Executive Retirement Plan. | |
10.6 | SERP Participation Agreement, as amended Robert Tabas. | |
10.7 | SERP Participation Agreement, as amended James J. McSwiggan, Jr. | |
10.8 | SERP Participation Agreement, as amended Murray Stempel. | |
10.9 | SERP Participation Agreement, as amended Joseph P. Campbell. | |
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 November 13, 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 November 13, 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 November 13, 2009. |
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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 November 13, 2009. |
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) |
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Dated: November 13, 2009 | /s/ Robert A. Kuehl | |||
Robert A. Kuehl | ||||
Principal Financial Officer | ||||
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