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| RBPAA > SEC Filings for RBPAA > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
Resolved Staff Comments
As previously reported, the Company had received comment letters from the
Securities and Exchange Commission relating to its 2006 Form 10-K filed in
December 31, 2007 and certain related filings. The Company responded to these
comment letters in February 2008. On November 5, 2008, the Commission advised
the Company that the Commission had completed its review of the subject filings
and has no further comments at the present time.
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 Royal Bancshares 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. Royal Bancshares also has a wholly owned non-bank
subsidiary, Royal Investments of Delaware, Inc., which is engaged in investment
activities. At September 30, 2008, Royal Bancshares had consolidated total
assets of approximately $1.2 billion, total deposits of approximately
$737.0 million and shareholders' equity of approximately $117.0 million. Royal
Bancshares had interest income of $17.6 million and $55.4 million, respectively
for the three and nine month periods ended September 30, 2008, reflecting
decreases of $4.7 million, or 21.1%, and 9.5 million, or 14.6%, respectively
from the comparable periods of 2007. The year over year decline in interest
income was attributed to a lower level of investments and a 325 basis point
reduction in the prime rate by the Federal Reserve since the fall of 2007 that
negatively impacted prime based and variable rate loans coupled with an increase
in non-performing loans that resulted in the loss of accrued interest. Interest
expense for the three and nine months ended September 30, 2008 was $9.5 million
and $28.1 million, respectively, resulting in decreases of $2.7 million, or
22.3%, and $8.6 million, or 23.5%, respectively from the comparable periods of
2007 due to improved pricing of FHLB borrowings and deposit products as well as
a reduction of funding levels, mainly higher cost time deposits. The Company
recorded a net loss for the quarter ended September 30, 2008 of $12.0 million, a
30.8% increase from the loss of $9.2 million reported for the quarter ended
September 30, 2007, while the net loss for the nine months ended September 30,
2008 was $10.8 million representing an increase of 2.74 times the loss of
$2.9 million for the comparable period of 2007. The year-over-year increase for
both the current quarter and year-to-date net loss was primarily associated with
impairment charges on specific investment securities in the available-for-sale
investment portfolio, and an increase in nonperforming loans which significantly
increased the provision for loan losses and resulted in the loss of interest
income associated with those nonperforming loans.
The chief sources of revenue for Royal Bancshares 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% and 74% of the loan portfolios
of Royal Bank and Royal Asian at September 30, 2008, 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, 2008, construction loans comprised 18.8% and 14.5%,
respectively, of the Royal Bank and Royal Asian loan portfolios. Land
development loans at September 30, 2008 comprised 13.1% 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. During 2005, Royal Bancshares received
permission to offer loans, including mezzanine loans, by the Federal Reserve
Board. Royal Bank also offers 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. Royal Bancshares and its subsidiaries do not typically
offer mezzanine loans for purposes other than the acquisition or construction of
projects related to real estate. On occasion, Royal Bancshares has extended
mezzanine financing on a project where Royal Bank extended senior debt
financing. During the fourth quarter of 2007, management of Royal Bancshares
made a decision to curtail mezzanine lending due to the elevation of risk given
the current economic conditions. At September 30, 2008, Royal Bancshares had
$11.5 million in mezzanine loans outstanding, and the percentage of mezzanine
loans in the Royal Bancshares consolidated loan portfolio was 1.7% of the
portfolio. Mezzanine loans inherently carry more risk and accordingly at
September 30, 2008, the portion of the Company's loan loss reserve attributed to
mezzanine loans was $4.1 million, or 35.7% of outstanding mezzanine loans. Net
earnings of Royal Bancshares 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.
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"). (Royal Bank America's financial results are included in the "Community
Banking" segment within segment reporting in Note 2 to the Consolidated
Financial Statements)
During the third quarter of 2006, Royal Bank formed a subsidiary, RBA ABL Group,
LP, to originate asset based loans. The Bank owns 60% of the subsidiary. Royal
Bank discontinued operating ABL in January 2008, with no material impact on
operating results. During the fourth quarter of 2006, Royal Bank formed a
subsidiary, Royal Tax Lien Services, LLC, to purchase and service delinquent tax
liens. The 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. The Bank owns 60% of the subsidiary.
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 Bank's 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 Bank's primary service area includes Montgomery, Chester,
Bucks, Delaware, Berks and Philadelphia counties, Southern and Northern New
Jersey and the State of Delaware. This area includes residential areas and
industrial and commercial businesses of the type usually found within a major
metropolitan area. Royal Bank serves this area from sixteen branches located
throughout Montgomery, Philadelphia and Berks counties and New Jersey. Royal
Bank also considers the states of Pennsylvania, New Jersey, New York, Florida,
Washington DC, Maryland, Northern Virginia and Delaware as a part of its service
area for certain products and services. Frequently, Royal Bank will do business
with clients located outside of its service area. Royal Bank has loans in
twenty-seven states via loan originations and/or participations with other
lenders who have broad experience in those respective markets. Royal Bank's
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.
Many bank holding companies have elected to become financial holding companies
under the Gramm-Leach-Bliley Act of 1999, which give a broader range of products
with which Royal Bank must compete. Although the long-range effects of this
development cannot be predicted, it will likely further narrow the differences
and intensify competition among commercial banks, investment banks, insurance
firms and other financial services companies. Royal Bancshares has not elected
financial holding company status.
Employees: Royal Bank employed approximately 166 people on a full-time
equivalent basis as of September 30, 2008.
Deposits: At September 30, 2008, total deposits of Royal Bank were distributed
among demand deposits (8.3%), money market deposit, savings and Super Now
accounts (30.3%) and time deposits (61.4%). At September 30, 2008, deposits
decreased $44.7 million to $683.5 million, from year-end 2007, or 6.1%,
primarily due to a decrease in time deposits based upon management's decision to
replace higher cost retail deposits with lower cost FHLB borrowings. Included in
Royal Banks' deposits are approximately $18.6 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 Bank's size,
objective of profit maintenance and stable capital structure.
Lending: At September 30, 2008, Royal Bank, including its subsidiaries, had a
total loan portfolio of $636.5 million, representing 59.1% 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, 2008, loans increased $44.5 million from year end 2007.
Business results: Total interest income of Royal Bank for the quarter ended
September 30, 2008 was $16.2 million compared to $20.8 million for the quarter
ended September 30, 2007. Interest expense was $8.9 million for the quarter
ended September 30, 2008, as compared to $11.7 million at September 30, 2007, a
decrease of 24.8%. Royal Bank recorded a net loss for the quarter ended
September 30, 2008 of $10.5 million, a 15.4% increase from a net loss of
$9.1 million for the quarter ended September 30, 2007. Royal Bank recorded
$13.7 million in impairment charges on four bonds in the available-for-sale
investment portfolio. Total assets of Royal Bank were $1.1 billion at
September 30, 2008. The above amounts reflect the consolidation totals for Royal
Bank and its subsidiaries. The subsidiaries included in these amounts are Royal
Investments America, Royal Real Estate, RBA Capital, Royal Bank America Leasing,
Royal Tax Lien Services, and Crusader Servicing Corporation.
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 Asian's 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. (Royal Asian's
financial results are included in the "Community Banking" segment within segment
reporting in Note 2 to the Consolidated Financial Statements)
Service Area: Royal Asian's 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 Bank, on competitive terms.
Employees: Royal Asian employed approximately 31 people on a full-time
equivalent basis as of September 30, 2008.
Deposits: At September 30, 2008, total deposits of Royal Asian were distributed
among demand deposits (10.1%), money market deposit, savings and Super Now
accounts (17.9%) and time deposits (72.0%). At September 30, 2008, total
deposits were $72.1 million, which amounted to a slight decline of $300,000, or
0.4%, from the level at December 31, 2007.
Lending: Royal Asian had a total loan portfolio of $60.9 million, representing
69.7% of total assets at September 30, 2008 that declined $2.8 million, or 4.4%,
from the level at December 31, 2007. 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, 2008, amounted to $820,000 which was a decrease of $128,000 from
the comparable quarter of 2007. For the first nine months of 2008, net interest
income amounted to $2.6 million compared to $2.7 million for the comparable
period of 2007 as the decline in interest income due to lower interest rates on
loans was offset by a corresponding decline in the interest rates paid on retail
deposits. For the quarter ended September 30, 2008, Royal Asian recorded a net
loss of $844,000 compared to net income of $40,000 in the third quarter of 2007.
Royal Asian recorded a $1 million impairment charge on a Lehman Brothers
Holding, Inc investment security in the available-for-sale investment portfolio.
For the nine months ended September 30, 2008, the net loss amounted to $803,000
compared to net income of $172,000 for the comparable 2007 period due mainly to
the previously mentioned impairment charge. Total assets of Royal Asian amounted
to $87.3 million at September 30, 2008 versus $87.8 million at December 31,
2007.
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 Asian's size,
objective of profit maintenance and stable capital structure.
Non-Bank Subsidiaries
Royal Investments of Delaware
On June 30, 1995, Royal Bancshares established a special purpose Delaware
investment company, Royal Investment 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. (Royal
Investments of Delaware financial results are included in the "Community
Banking" segment within segment reporting in Note 2 to the Consolidated
Financial Statements)
Business results: Total interest income of RID for the quarter ended
September 30, 2008, of $476,000 declined 24.4% from $630,000 for the quarter
ended September 30, 2007. For the first nine months of 2008 total interest
income amounted to $1.6 million resulting in a 19.0% decrease from $2.0 million
during the first nine months of 2007. For the quarter ended September 30, 2008,
RID reported a net loss of $124,000, compared to net income of $217,000 for the
quarter ended September 30, 2007. For the first nine months of 2008, RID
reported a net loss of $1.4 million versus net income of $839,000 for the
comparable 2007 period. The decline year-over-year for both the third quarter
and the first nine month results was primarily related to an impairment of
investment securities of $2.5 million. At September 30, 2008, total assets of
RID were $55.0 million, of which $3.8 million was held in cash and cash
equivalents and $27.2 million was held in investment securities. The amounts
shown above include the activity related to RID's wholly owned subsidiary Royal
Preferred LLC. Royal Bank has extended loans to RID, secured by securities and
as per the provisions of Regulation W. At September 30, 2008, the amount due
Royal Bank from RID was $12.0 million.
Crusader Servicing Corporation
Royal Bancshares, 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. During 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. The SMI loan has since been paid down to $6.5 million at September 30,
2008. During the first quarter of 2008, the servicer of the SMI portfolio was
terminated. RTL began to fully service the SMI portfolio at that time. Following
the termination of the relationship with the other servicer, CSC conducted an
evaluation of the estimated fair market value of all properties subject to SMI
liens, as well as an evaluation of the fair market value of OREO property in the
SMI portfolio. The SMI liens and OREO property were evaluated as one portfolio
as the liens have common characteristics. As a result of this evaluation, CSC
determined that the total estimated fair market value of the property subject to
SMI liens, plus the estimated fair market value of the OREO property, less
disposition costs, was approximately $17.0 million as of March 31, 2008. This
portfolio will be reevaluated at the end of December 31, 2008. Since the
outstanding balance of the CSC loan to SMI is $6.5 million and is secured by
real property having an approximate fair market value of $17.0 million, no
provision for lien losses was recorded. (Crusader Servicing Corporation's
financial results are included in the "Tax Lien Operation" segment within
segment reporting in Note 2 to the Consolidated Financial Statements)
Business results: Net interest income of CSC for the quarter ended September 30,
2008, amounted to $373,000 which resulted in an increase of $11,000, from the
comparable quarter of 2007. Net interest income for the first nine months of
2008 increased $167,000, or 17.1%, to $1.1 million from $976,000, for the first
nine months of 2007 due to a comparable increase in tax liens. Net income for
. . .
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