Item 2.06 Material Impairments.
On February 3, 2009, Royal Bancshares of Pennsylvania, Inc. (the "Company")
determined that it expects to record pre-tax non-cash charges of approximately
$6.2 million for the fourth quarter of 2008 relating to other than temporary
impairment for the following items:
• Approximately $1.3 million for preferred stock held in the Company's
investment portfolio relating to two separate financial institutions. One of
such institutions was closed by regulators and the other institution has
been unable to raise additional equity capital. The investments in these two
financial institutions have been written down to $0 as of December 31, 2008.
• Approximately $4.9 million relating to a government mortgage-backed security
previously pledged to Lehman Brothers Special Financing, Inc. ("LBSF") in
connection with an interest rate swap master agreement entered into in 2002
between the Company and LBSF. As a consequence of the bankruptcy filing of
Lehman Brothers Holdings, Inc., an affiliate of LBSF, in September 2008, the
interest rate swap agreement was terminated and the Company demanded return
of its collateral. In October 2008, the Company sued LBSF to recover
possession of its collateral. The Company intends to continue to vigorously
pursue the return of the collateral pledged in connection with the interest
rate swap. Because of the uncertainty surrounding the litigation and the
bankruptcy of Lehman Brothers Holdings, Inc., the Company has recorded an
other than temporary impairment charge for the entire carrying value as of
December 31, 2008.
Item 8.01 Other Events.
The Company expects to record a provision for loan losses of approximately
$9.0 million for the fourth quarter of 2008. Included in the provision are
amounts related to a specific reserve of $2.5 million for a loan collateralized
by a tax lien portfolio held by the Company's subsidiary, Crusader Servicing
Corporation, specific reserves of $6.4 million related to other credits, and
$300,000 added to the general loan loss reserve. The increase in the provision
for loan losses results from a number of factors, including current economic
conditions, and an increase in net charge-offs.
In addition, as previously disclosed, Joseph P. Campbell, the Company's former
President and Chief Executive Officer, retired during the fourth quarter of
2008. The Company recorded a pre-tax charge of approximately $2.1 million in
connection with its obligations to Mr. Campbell under his transition and
separation agreement with the Company. Mr. Campbell's retirement and a
description of his transition agreement was included in a Form 8-K filed by the
Company on October 16, 2008.
As a result of the expected operating loss for 2008, including the losses for
the fourth quarter specifically, the Company has determined that a valuation
allowance against deferred tax assets of approximately $7.9 million, a portion
of which will represent a charge to earnings, will be recorded in the fourth
quarter of 2008. Therefore, a tax benefit on the operating losses for the fourth
quarter of 2008 is not expected to be recognized.
In addition, as previously disclosed, the Company, through a subsidiary, owns a
limited partnership interest in a real estate project for the conversion of an
apartment complex into condominiums. Due to a recent decline in condominium
sales for the project, the Company is presently reviewing additional information
in connection with determining whether a potential impairment charge for the
long lived assets of the project may be necessary for the fourth quarter of
2008. To the extent any such charge is determined to be necessary, it will be
reflected in the full-year 2008 earnings.
After giving effect to the impairment charges described under Item 2.06 and the
additional charges described in this Item 8.01, the Company and its two bank
subsidiaries, Royal Bank America and Royal Asian Bank, will remain
"well-capitalized," as defined by current regulatory requirements as of
December 31, 2008.
The Company expects to release fourth quarter and full-year 2008 earnings
information later in February.
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