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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

 

FORM 10-Q

 

(Mark One)

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

for the quarterly period ended:           March 31, 2016         

 

 

 

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.)

 

One Bala Plaza, Suite 522, 231 St. Asaph’s Road, Bala Cynwyd, PA 19004

(Address of principal Executive Offices)

 

(610)  668-4700

(Registrant’s telephone number, including area code)

 

 N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

 

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   No 

 

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 12b-2 of the Exchange Act.

 

 

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer  (do not check if a smaller reporting company)

Smaller reporting company 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 

 

Applicable only to corporate issuers:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

 

Class A Common Stock

 

Outstanding at April 30, 2016

$2.00 par value

 

27,867,629

 

 

 

 

 

Class B Common Stock

 

Outstanding at April 30, 2016

$0.10 par value

 

1,927,890

 

 

 

 

 

 


 

TABLE OF CONTENTS

 

    

 

PAGE

PART I 

 

FINANCIAL STATEMENTS

 

Item 1 

 

Financial Statements

 

 

 

Consolidated Balance Sheets-unaudited

 

 

Consolidated Statements of Income-unaudited

 

 

Statements of Consolidated Comprehensive Income-unaudited

 

 

Consolidated Statements of Changes in Shareholders’ Equity-unaudited

 

 

Consolidated Statements of Cash Flows-unaudited

 

 

Notes to Consolidated Financial Statement (unaudited)

Item 2 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

43 

Item 3 

 

Quantitative and Qualitative Disclosures about Market Risk

69 

Item 4 

 

Controls and Procedures

69 

PART II 

 

OTHER INFORMATION

69 

Item 1 

 

Legal Proceedings

69 

Item 1A 

 

Risk Factors

70 

Item 2 

 

Unregistered Sales of Equity Securities and Use of Proceeds

70 

Item 3 

 

Defaults Upon Senior Securities

70 

Item 4 

 

Mine Safety Disclosures

70 

Item 5 

 

Other Information

70 

Item 6 

 

Exhibits

70 

 

 

SIGNATURES

71 

 

 

 

1


 

PART I — FINANCIAL STATEMENTS

Item 1.Financial Statements

 ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Consolidated Balance Sheets-unaudited

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

    

2016

    

2015

ASSETS

 

(Dollars in thousands, except share data)

Cash and due from banks

 

$

10,806

 

$

10,394

Interest-earning deposits

 

 

16,756

 

 

15,026

Total cash and cash equivalents

 

 

27,562

 

 

25,420

Investment securities available for sale (“AFS”), at fair value

 

 

201,228

 

 

224,067

Other investment, at cost

 

 

2,250

 

 

2,250

Federal Home Loan Bank (“FHLB”) stock

 

 

2,545

 

 

2,545

Loans and leases (“LHFI”)

 

 

531,147

 

 

499,103

Less allowance for loan and lease losses

 

 

9,941

 

 

9,689

Net loans and leases

 

 

521,206

 

 

489,414

Bank owned life insurance

 

 

16,254

 

 

16,133

Accrued interest receivable

 

 

4,220

 

 

4,149

Other real estate owned (“OREO”), net

 

 

7,096

 

 

7,435

Premises and equipment, net

 

 

3,982

 

 

3,959

Other assets

 

 

12,205

 

 

12,911

Total assets

 

$

798,548

 

$

788,283

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

Non-interest bearing

 

$

87,350

 

$

83,529

Interest-bearing

 

 

501,981

 

 

494,363

Total deposits

 

 

589,331

 

 

577,892

Short-term borrowings

 

 

9,000

 

 

9,000

Long-term borrowings

 

 

81,857

 

 

81,970

Subordinated debentures

 

 

25,774

 

 

25,774

Accrued interest payable

 

 

1,238

 

 

709

Other liabilities

 

 

20,881

 

 

20,640

Total liabilities

 

 

728,081

 

 

715,985

Shareholders’ equity

 

 

 

 

 

 

Royal Bancshares of Pennsylvania, Inc. equity:

 

 

 

 

 

 

Preferred stock, Series A perpetual, $1,000 liquidation value per share, 500,000 shares authorized, 14,856 and 18,856 shares outstanding at March 31, 2016 and December 31, 2015, respectively

 

 

14,856

 

 

18,856

Class A common stock, par value $2.00 per share, authorized 40,000,000 shares; issued and outstanding, 28,224,182 and 28,204,182 at March 31, 2016 and December 31, 2015, respectively

 

 

56,448

 

 

56,408

Class B common stock, par value $0.10 per share; authorized 3,000,000 shares; issued and outstanding, 1,928,289 at March 31, 2016 and December 31, 2015, respectively

 

 

193

 

 

193

Additional paid in capital

 

 

108,515

 

 

110,494

Accumulated deficit

 

 

(102,690)

 

 

(104,879)

Accumulated other comprehensive loss

 

 

(2,253)

 

 

(3,919)

Treasury stock - at cost, shares of Class A, 359,497 and 375,333 at March 31, 2016 and December 31, 2015, respectively

 

 

(5,027)

 

 

(5,249)

Total Royal Bancshares of Pennsylvania, Inc. shareholders’ equity

 

 

70,042

 

 

71,904

Noncontrolling interest

 

 

425

 

 

394

Total equity

 

 

70,467

 

 

72,298

Total liabilities and shareholders’ equity

 

$

798,548

 

$

788,283

 

The accompanying notes are an integral part of these consolidated financial statements.

2


 

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Consolidated Statements of Income-unaudited

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

March 31,

(In thousands, except per share data)

    

2016

    

2015

Interest Income

 

 

 

 

 

 

Loans and leases, including fees

 

$

6,864

 

$

5,699

Investment securities

 

 

1,334

 

 

1,576

Deposits in banks

 

 

16

 

 

5

Total Interest Income

 

 

8,214

 

 

7,280

Interest Expense

 

 

 

 

 

 

Deposits

 

 

1,040

 

 

908

Short-term borrowings

 

 

12

 

 

 —

Long-term borrowings

 

 

671

 

 

663

Total Interest Expense

 

 

1,723

 

 

1,571

Net Interest Income

 

 

6,491

 

 

5,709

Provision (credit) for loan and lease losses

 

 

212

 

 

(580)

Net Interest Income after Provision (Credit) for Loan and Lease Losses

 

 

6,279

 

 

6,289

Non-interest Income

 

 

 

 

 

 

Service charges and fees

 

 

316

 

 

195

Income from bank owned life insurance

 

 

467

 

 

126

Net gains on the sale of AFS investment securities

 

 

367

 

 

187

Other income

 

 

57

 

 

59

Total Non-interest Income

 

 

1,207

 

 

567

Non-interest Expense

 

 

 

 

 

 

Employee salaries and benefits

 

 

2,718

 

 

2,611

Occupancy and equipment

 

 

724

 

 

756

Professional and legal fees

 

 

392

 

 

423

Net OREO expenses

 

 

219

 

 

42

Pennsylvania shares tax expense

 

 

113

 

 

113

FDIC and state assessments

 

 

173

 

 

193

Communications and data processing

 

 

247

 

 

200

(Credit) provision for credit losses on off-balance sheet credit exposures

 

 

(150)

 

 

127

Directors’ fees

 

 

141

 

 

118

Insurance

 

 

90

 

 

78

Other operating expenses

 

 

554

 

 

434

Total Non-interest Expense

 

 

5,221

 

 

5,095

Income Before Tax Expense

 

 

2,265

 

 

1,761

Income Tax Expense

 

 

 —

 

 

 —

Net Income

 

$

2,265

 

$

1,761

Less Net Income Attributable to Noncontrolling Interest

 

$

76

 

$

170

Net Income Attributable to Royal Bancshares of Pennsylvania, Inc.

 

$

2,189

 

$

1,591

Less Preferred Stock Series A Accumulated Dividend and Accretion

 

$

334

 

$

424

Net Income Available to Common Shareholders

 

$

1,855

 

$

1,167

Per Common Share Data:

 

 

 

 

 

 

Net Income — Basic and Diluted

 

$

0.06

 

$

0.04

 

The accompanying notes are an integral part of these consolidated financial statements.

3


 

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Statements of Consolidated Comprehensive Income-unaudited

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

March 31,

(In thousands)

    

2016

    

2015

Net income

 

$

2,265

 

$

1,761

Other comprehensive income, net of tax

 

 

 

 

 

 

Unrealized gains on investment securities:

 

 

 

 

 

 

Unrealized holding gains arising during period, net of tax

 

 

2,333

 

 

1,095

Less reclassification adjustment for gains realized in net income, net of tax (1)

 

 

242

 

 

123

Unrealized gains on investment securities

 

 

2,091

 

 

972

Unrecognized benefit obligation:

 

 

 

 

 

 

Reclassification adjustment for amortization (2)

 

 

(103)

 

 

(17)

Unrecognized benefit obligation expense

 

 

(103)

 

 

(17)

Unrealized loss on derivative instrument, net of tax

 

 

(322)

 

 

(121)

Other comprehensive income

 

 

1,666

 

 

834

Comprehensive income

 

 

3,931

 

 

2,595

Less net income attributable to noncontrolling interest

 

 

76

 

 

170

Comprehensive income attributable to Royal Bancshares of Pennsylvania, Inc.

 

$

3,855

 

$

2,425

 

 

1.

Gross amounts are included in net gains on the sale of AFS investment securities on the Consolidated Statements of Income in total non-interest income, net of $125 thousand and $64 thousand in taxes. See Note 15. Comprehensive Income.

2.

Gross amounts are included in salaries and benefits on the Consolidated Statements of Income in non-interest expense.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

4


 

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity

For the three months ended March 31, 2016-unaudited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Preferred

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

other

 

 

 

 

 

 

 

Total

 

 

stock

 

Class A common stock

 

Class B common stock

 

paid in

 

Accumulated

 

comprehensive

 

Treasury

 

Noncontrolling

 

Shareholders’

(In thousands, except share data)

    

Series A

    

Shares

    

Amount

    

Shares

    

Amount

    

capital

    

deficit

    

loss

    

stock

    

Interest

    

Equity

Balance January 1, 2016

 

$

18,856

 

28,204

 

$

56,408

 

1,928

 

$

193

 

$

110,494

 

$

(104,879)

 

$

(3,919)

 

$

(5,249)

 

$

394

 

$

72,298

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,189

 

 

 

 

 

 

 

 

76

 

 

2,265

Other comprehensive income, net of reclassifications and taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,666

 

 

 

 

 

 

 

 

1,666

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(45)

 

 

(45)

Repurchase of 4,000 shares of preferred stock

 

 

(4,000)

 

 

 

 

 

 

 

 

 

 

 

 

(1,800)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,800)

Treasury shares issued for compensation (15,836 shares)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(189)

 

 

 

 

 

 

 

 

222

 

 

 

 

 

33

Stock options exercised (20,000 shares)

 

 

 

 

20

 

 

40

 

 

 

 

 

 

 

(11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29

Stock option expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21

Balance March 31,  2016

 

$

14,856

 

28,224

 

$

56,448

 

1,928

 

$

193

 

$

108,515

 

$

(102,690)

 

$

(2,253)

 

$

(5,027)

 

$

425

 

$

70,467

 

The accompanying notes are an integral part of these consolidated financial statements. 

5


 

 

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity

For the three months ended March 31, 2015-unaudited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Preferred

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

other

 

 

 

 

 

 

 

Total

 

 

stock

 

Class A common stock

 

Class B common stock

 

paid in

 

Accumulated

 

comprehensive

 

Treasury

 

Noncontrolling

 

Shareholders’

(In thousands, except share data)

    

Series A

    

Shares

    

Amount

    

Shares

    

Amount

    

capital

    

deficit

    

loss

    

stock

    

Interest

    

Equity

Balance January 1, 2015

 

$

18,856

 

28,200

 

$

56,400

 

1,932

 

$

193

 

$

110,697

 

$

(115,864)

 

$

(2,492)

 

$

(5,571)

 

$

387

 

$

62,606

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,591

 

 

 

 

 

 

 

 

170

 

 

1,761

Other comprehensive income, net of reclassifications and taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

834

 

 

 

 

 

 

 

 

834

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(172)

 

 

(172)

Treasury shares issued for compensation (14,962 shares)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(184)

 

 

 

 

 

 

 

 

210

 

 

 

 

 

26

Stock option expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16

Balance March 31,  2015

 

$

18,856

 

28,200

 

$

56,400

 

1,932

 

$

193

 

$

110,529

 

$

(114,273)

 

$

(1,658)

 

$

(5,361)

 

$

385

 

$

65,071

 

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

For the three months ended March 31,

 

 

 

 

 

 

 

 

(In thousands)

    

2016

    

2015

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

2,265

 

$

1,761

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

132

 

 

145

Stock compensation expense

 

 

21

 

 

16

Provision (credit) for loan and lease losses

 

 

212

 

 

(580)

(Credit) provision for credit losses on off-balance sheet credit exposures

 

 

(150)

 

 

127

Impairment charge for OREO

 

 

58

 

 

130

Net amortization of AFS investment securities

 

 

348

 

 

410

Net accretion on loans

 

 

(144)

 

 

(110)

Net losses (gains) on sales of OREO

 

 

18

 

 

(280)

Net gains on sales of investment securities

 

 

(367)

 

 

(187)

Income from bank owned life insurance

 

 

(467)

 

 

(126)

Changes in assets and liabilities:

 

 

 

 

 

 

(Increase) decrease in accrued interest receivable

 

 

(71)

 

 

397

Decrease in other assets

 

 

(477)

 

 

(600)

Increase in accrued interest payable

 

 

529

 

 

544

Increase (decrease) in other liabilities

 

 

391

 

 

(104)

Net cash provided by operating activities

 

 

2,298

 

 

1,543

Cash flows from investing activities:

 

 

 

 

 

 

Proceeds from maturities, calls and paydowns of AFS investment securities

 

 

17,308

 

 

8,226

Proceeds from sales of AFS investment securities

 

 

10,022

 

 

18,698

Purchase of AFS investment securities

 

 

(1,277)

 

 

(2,884)

Net increase in loans

 

 

(31,967)

 

 

(4,762)

Additions to OREO

 

 

(91)

 

 

(173)

Purchase of premises and equipment

 

 

(155)

 

 

(69)

Proceeds from sales of OREO

 

 

461

 

 

648

Net cash (used in) provided by investing activities

 

 

(5,699)

 

 

19,684

 

7


 

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows-unaudited (continued)

For the three months ended March 31,

 

 

 

 

 

 

 

 

 

 

    

2016

    

2015

Cash flows from financing activities:

 

 

 

 

 

 

Net increase in demand and NOW accounts

 

$

8,684

 

$

857

Net increase (decrease) in money market and savings accounts

 

 

2,873

 

 

(7,455)

Net decrease in certificates of deposit

 

 

(118)

 

 

(3,541)

Repayments of long-term borrowings

 

 

(113)

 

 

(114)

Distributions to noncontrolling interest

 

 

(45)

 

 

(172)

Issuance of treasury stock

 

 

33

 

 

26

Repurchase of preferred stock

 

 

(5,800)

 

 

 —

Proceeds from stock options exercised

 

 

29

 

 

 —

Net cash provided by (used in) financing activities

 

 

5,543

 

 

(10,399)

Net increase in cash and cash equivalents

 

 

2,142

 

 

10,828

Cash and cash equivalents at the beginning of the period

 

 

25,420

 

 

30,790

Cash and cash equivalents at the end of the period

 

$

27,562

 

$

41,618

Supplemental Disclosure:

 

 

 

 

 

 

Interest paid

 

$

1,194

 

$

1,027

Transfers from loans to OREO

 

$

107

 

$

1,087

 

The accompanying notes are an integral part of these consolidated financial statements.

8


 

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1.Summary of Significant Accounting Policies

Nature of Operations

Royal Bancshares of Pennsylvania, Inc. (“Royal Bancshares”, the “Company”, “We” or “Our”), through its wholly-owned subsidiary Royal Bank America (“Royal Bank”) offers a full range of banking services to individual and corporate customers primarily located in the Mid-Atlantic states.  Royal Bank competes with other banking and financial institutions in certain markets, including financial institutions with resources substantially greater than its own.  Commercial banks, savings banks, savings and loan associations, credit unions and brokerage firms actively compete for savings and time deposits and for various types of loans.  Such institutions, as well as consumer finance and insurance companies, may be considered competitors of Royal Bank with respect to one or more of the services it renders.

Basis of Financial Presentation

The accompanying unaudited consolidated financial statements include the accounts of Royal Bancshares of Pennsylvania, Inc. and its wholly-owned subsidiaries, Royal Investments of Delaware, Inc., including Royal Investments of Delaware, Inc.’s wholly owned subsidiary, Royal Preferred, LLC, and Royal Bank, including Royal Bank’s subsidiaries, Royal Real Estate of Pennsylvania, Inc., Royal Investments America, LLC, RBA Property LLC, Narberth Property Acquisition LLC, Rio Marina LLC, and Royal Tax Lien Services, LLC (“RTL”).  Royal Bank also has an 80% and 60% ownership interest in Crusader Servicing Corporation (“CSC”) and Royal Bank America Leasing, LP, respectively. 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”). These consolidated financial statements reflect the historical information of the Company. All significant intercompany transactions and balances have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Applications of the principles in our preparation of the consolidated financial statements in conformity with U.S. GAAP require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes.  These estimates and assumptions are based on information available as of the date of the consolidated financial statements; therefore, actual results could differ from those estimates. The 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, 2015.  The results of operations for the three month period ended March 31, 2016 are not necessarily indicative of the results to be expected for the full year.

Reclassifications

Certain items in the 2015 consolidated financial statements and accompanying notes have been reclassified to conform to the current year’s presentation format.  There was no effect on net income for the periods presented herein as a result of the reclassification.

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 14-09”), which establishes a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts

9


 

to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The ASU is effective for public entities for annual periods beginning after December 15, 2016, including interim periods therein. Three basic transition methods are available – full retrospective, retrospective with certain practical expedients, and a cumulative effect approach. Under the third alternative, an entity would apply the new revenue standard only to contracts that are incomplete under legacy U.S. GAAP at the date of initial application (e.g. January 1, 2017) and recognize the cumulative effect of the new standard as an adjustment to the opening balance of retained earnings. That is, prior years would not be restated and additional disclosures would be required to enable users of the financial statements to understand the impact of adopting the new standard in the current year compared to prior years that are presented under legacy U.S. GAAP. Early adoption is prohibited under U.S. GAAP. In August 2015, the FASB Issued ASU 2015-14 which deferred the effective date to December 31, 2017 and the initial application date (e.g. January 1, 2018.) We do not believe ASU 2014-09 will have a material effect on its financial statements.

In June 2014, the FASB issued ASU No. 2014-12,  Compensation – Stock Compensation (Topic 718) - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”).  The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation – Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The amendments in ASU 2014-12 are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption was permitted. Entities may apply the amendments in this ASU either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of ASU 2014-12 did not have a significant impact on our consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Topic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 amends the guidance on the classification and measurement of financial instruments.  Some of the amendments in ASU 2016-01 include the following: 1) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and 4) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; among others.  ASU 2016-01 also clarifies that an entity should assess the need for a valuation allowance on a deferred tax asset related to unrealized losses of investments in debt instruments recognized in OCI in combination with the entity’s other deferred tax assets. Prior to this guidance, the alternative approach used in practice evaluated the need for a valuation allowance for a deferred tax asset related to unrealized losses on debt instruments recognized in other comprehensive income separately from other deferred tax assets. This alternative approach will no longer be acceptable. For public business entities, the amendments of ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  We do not believe ASU 2016-01 will have a material effect on our financial statements. 

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In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases” (“ASU 2016-02”). From the lessee's perspective, the new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for a lessees. From the lessor's perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing lease. If the lessor doesn’t convey risks and rewards or control, an operating lease results.  The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update No. 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships” (“ASU 2016-05”).  The term novation refers to replacing one counterparty to a derivative instrument with a new counterparty. That change occurs for a variety of reasons, including financial institution mergers, intercompany transactions, an entity exiting a particular derivatives business or relationship, an entity managing against internal credit limits, or in response to laws or regulatory requirements.  The amendments in ASU 2016-05 clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815, does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met.  For public business entities, the amendments in this ASU 2016-05 are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. An entity has an option to apply the amendments in ASU 2016-05 on either a prospective basis or a modified retrospective basis.  Early adoption is permitted, including adoption in an interim period. We do not believe ASU 2016-05 will have a material effect on our financial statements.

In March 2016, FASB issued Accounting Standards Update No. 2016-09, ”Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”).  FASB is issuing ASU 2016-09 as part of its initiative to reduce complexity in accounting standards. The areas for simplification in this ASU 2016-09  involve several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period.  We do not believe ASU 2016-09 will have a material effect on our financial statements.

Note 2.Regulatory Matters and Significant Risks or Uncertainties

Federal Reserve Agreement

In March 2010, we agreed to enter into a written agreement (the “Federal Reserve Agreement”) with the Federal Reserve Bank of Philadelphia (the “Federal Reserve Bank”).  In July 2013, the Board of Governors of the Federal Reserve System terminated the enforcement action under the Federal Reserve Agreement, and it was replaced with an informal non-public agreement, a memorandum of understanding (“MOU”), with the Federal Reserve Bank, effective July 17, 2013.  Included in this MOU are certain continued reporting requirements and a requirement that we receive the prior approval of the Federal Reserve Bank and the Director of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System prior to declaring or paying any dividends on our capital stock, making interest payments related to our outstanding trust preferred securities or subordinate securities, incurring or guaranteeing certain debt with an original maturity date greater than one year, and purchasing or redeeming any shares of stock. The MOU will remain in effect until

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stayed, modified, terminated or suspended in writing by the Federal Reserve Bank.  During the first quarter of 2016, we requested and received approval to repurchase 4,000 shares of our Series A preferred stock.

Dividend and Interest Restrictions

Due to the MOU, our ability to obtain lines of credit, to receive attractive collateral treatment from funding sources, and to pursue all attractive funding alternatives in this current low interest rate environment could be impacted and thereby limit liquidity alternatives. On August 13, 2009, the Company’s Board suspended the regular quarterly cash dividends on the 30,407 shares of Series A Preferred Stock.  We made the decision to suspend the preferred cash dividends in order to support the liquidity position of Royal Bank.  The dividend in arrears on the outstanding 14,856 shares of Series A preferred stock is approximately $7.5 million and includes additional dividends on arrearagesIn the event we declared the preferred dividend in arrears, our equity and capital ratios would be negatively affected; however, they would remain above the required minimum ratios.

Under the MOU, we may not declare or pay any dividends on our capital stock or make interest payments related to our outstanding trust preferred securities or subordinate securities without the prior written approval of the Federal Reserve Bank and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System. During the first quarter of 2016, we received approval from the Federal Reserve Bank and paid the respective quarterly interest payment on the trust preferred securities in March 2016.

Note 3.Investment Securities

The carrying value and fair value of investment securities available-for-sale (“AFS”) at March 31, 2016 and December 31, 2015 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2016

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

 

 

(In thousands)

    

cost

    

gains

    

losses

    

Fair value

U.S. government agencies

 

$

15,949

 

$

11

 

$

(69)

 

$

15,891

Mortgage-backed securities-residential

 

 

10,673

 

 

250

 

 

 —

 

 

10,923

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

Issued or guaranteed by U.S. government agencies

 

 

155,465

 

 

2,852

 

 

(397)

 

 

157,920

Non-agency

 

 

2,449

 

 

29

 

 

 —

 

 

2,478

Corporate bonds

 

 

1,500

 

 

58

 

 

 —

 

 

1,558

Municipal bonds

 

 

9,895

 

 

172

 

 

(66)

 

 

10,001

Other securities

 

 

2,117

 

 

314

 

 

 —

 

 

2,431

Common stocks

 

 

26

 

 

 —

 

 

 —

 

 

26

Total available for sale

 

$

198,074

 

$

3,686

 

$

(532)

 

$

201,228

 

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As of December 31, 2015

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

 

 

(In thousands)

    

cost

    

gains

    

losses

    

Fair value

U.S. government agencies

 

$

26,127

 

$

 —

 

$

(564)

 

$

25,563

Mortgage-backed securities-residential

 

 

11,002

 

 

106

 

 

(50)

 

 

11,058

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

Issued or guaranteed by U.S. government agencies

 

 

170,764

 

 

1,524

 

 

(1,554)

 

 

170,734

Non-agency

 

 

2,729

 

 

1

 

 

(26)

 

 

2,704

Corporate bonds

 

 

1,500

 

 

56

 

 

 —

 

 

1,556

Municipal bonds

 

 

9,910

 

 

73

 

 

(52)

 

 

9,931

Other securities

 

 

2,050

 

 

445

 

 

 —

 

 

2,495

Common stocks

 

 

26

 

 

 —

 

 

 —

 

 

26

Total available for sale

 

$

224,108

 

$

2,205

 

$

(2,246)

 

$

224,067

 

The amortized cost and fair value of investment securities at March 31, 2016, 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.

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2016

 

    

Amortized

    

 

 

(In thousands)

    

cost

    

Fair value

Within 1 year

 

$

 —

 

$

 —

After 1 but within 5 years

 

 

11,644

 

 

11,622

After 5 but within 10 years

 

 

11,587

 

 

11,649

After 10 years

 

 

4,113

 

 

4,179

Mortgage-backed securities-residential

 

 

10,673

 

 

10,923

Collateralized mortgage obligations:

 

 

 

 

 

 

Issued or guaranteed by U.S. government agencies

 

 

155,465

 

 

157,920

Non-agency

 

 

2,449

 

 

2,478

Total available for sale debt securities

 

 

195,931

 

 

198,771

No contractual maturity

 

 

2,143

 

 

2,457

Total available for sale securities

 

$

198,074

 

$

201,228

 

Proceeds from the sales of AFS investments during the three months ended March 31, 2016 and 2015 were $10.0 million and $18.7 million, respectively. The following table summarizes gross realized gains and losses on the sale of securities recognized in earnings in the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

March 31,

(In thousands)

    

2016

    

2015

Gross realized gains

 

$

367

 

$

187

Gross realized losses

 

 

 —

 

 

 —

Net realized gains

 

$

367

 

$

187

 

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The tables below indicate the length of time individual AFS securities have been in a continuous unrealized loss position at March 31, 2016 and December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

Less than 12 months

 

12 months or longer

 

Total

 

    

 

 

    

Gross

 

    

Number

 

 

 

    

Gross

 

 

Number

    

 

 

    

Gross

 

Number

 

 

 

 

 

unrealized

 

 

of

 

 

 

 

unrealized

 

 

of

 

 

 

 

unrealized

 

of

(In thousands)

    

Fair value

    

losses

 

    

positions

 

Fair value

    

losses

 

 

positions

    

Fair value

    

losses

    

positions

U.S. government agencies

 

$

 —

 

$

 —

 

 

 —

 

$

4,288

 

$

(69)

 

 

2

 

$

4,288

 

$

(69)

 

2

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issued or guaranteed by U.S. government agencies

 

 

6,970

 

 

(82)

 

 

3

 

 

13,372

 

 

(315)

 

 

4

 

 

20,342

 

 

(397)

 

7

Municipal bonds

 

 

3,521

 

 

(63)

 

 

4

 

 

991

 

 

(3)

 

 

1

 

 

4,512

 

 

(66)

 

5

Total available for sale

 

$

10,491

 

$

(145)

 

 

7

 

$

18,651

 

$

(387)