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| RBPAA > SEC Filings for RBPAA > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
Quarterly Report
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 Company's financial condition and
results of operations, and they require difficult, subjective or complex
judgments as a result of the need to make estimates.
As a result of the adoption of FSP No. FAS 115-2 and FAS 124-2 effective
April 1, 2009, the Company has revised its critical accounting policy pertaining
to other-than-temporary impairment of investment securities. FSP No. FAS 115-2
and FAS 124-2 applied to existing and new debt securities held by the Company as
of April 1, 2009, the beginning of the interim period in which it was adopted.
Therefore, the revised accounting policy below represents the only change in the
Corporation's 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 issuer's 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
investment's 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 Company's determination of other-than-temporary impairment is made
using an impairment model (including an anticipated recovery period) similar to
a debt security, provided there has been no evidence of a deterioration in
credit of the issuer.
Debt securities:
In determining whether an other-than-temporary impairment has occurred for debt
securities, the Company compares the present value of cash flows expected to be
collected from the security with the amortized cost of the security. If the
present value of expected cash flows is less than the amortized cost of the
security, then the entire amortized cost of the security will not be recovered,
that is, a credit loss exists, and an other-than temporary impairment shall be
considered to have occurred. When an other-than-temporary impairment has
occurred, the amount of the other-than-temporary impairment recognized in
earnings for a debt security depends on whether the Company intends to sell the
security or more likely than not will be required to sell the security before
recovery of its amortized cost less any current period credit loss. If the
Company intends to sell the security or more likely than not will be required to
sell the security before recovery of its amortized cost, the
other-than-temporary impairment shall be recognized in earnings equal to the
entire difference between the amortized cost and fair value of the security. If
the Company does not intend to sell or more likely than not will not be required
to sell the security before recovery of its amortized cost, the amount of the
other-than-temporary impairment related to credit loss shall be recognized in
earnings and the noncredit-related portion of the other-than-temporary
impairment shall be recognized in other comprehensive income.
Financial Highlights and Business Results
On June 29, 1995, pursuant to the plan of reorganization approved by the
shareholders of Royal Bank America, formerly Royal Bank of Pennsylvania ("Royal
Bank"), all of the outstanding shares of common stock of Royal Bank were
acquired by Royal Bancshares and were exchanged on a one-for-one basis for
common stock of Royal Bancshares. On July 17, 2006, Royal Asian Bank ("Royal
Asian") was chartered by the Commonwealth of Pennsylvania Department of Banking
and commenced operation as a Pennsylvania state-chartered bank. Prior to
obtaining a separate charter, the business of Royal Asian was operated as a
division of Royal Bank. The principal activities of the Company is supervising
Royal Bank and Royal Asian, collectively known as the Banks, which engage in a
general banking business principally in Montgomery, Chester, Bucks, Philadelphia
and Berks counties in Pennsylvania and in Northern and Southern New Jersey and
Delaware. The Company also has a wholly owned non-bank subsidiary, Royal
Investments of Delaware, Inc., which is engaged in investment activities.
At June 30, 2009, the Company had consolidated total assets of approximately
$1.3 billion, total deposits of approximately $876.7 million and shareholders'
equity of approximately $108.8 million. The Company had interest income of
$16.6 million and $32.9 million, respectively for the three and six month
periods ended June 30, 2009, reflecting decreases of $1.1 million, or 6.4%, and
4.9 million, or 12.8%, respectively from the comparable periods of 2008. The
year over year decline in interest income was attributed to a 325 basis point
reduction in the prime rate by the Federal Reserve since the beginning of 2008
that negatively impacted prime based and variable rate loans coupled with an
increase in non-performing loans that resulted in the loss of accrued interest.
Also contributing to the decline in interest income was a higher level of cash
and cash equivalents during 2009, which was at a much lower yield, as a result
of management's decision to maintain an increased level of liquidity during the
current economic times. In addition, the yield on investment securities has
decreased 106 and 78 basis points for the three and six month periods in 2009,
respectively, compared to the same periods in 2008 mainly as a result of higher
yielding agency investments being called in the first quarter of 2009 and being
replaced with considerably lower yielding agency investments. Interest expense
for the three and six months ended June 30, 2009 was $9.7 million and
$19.0 million, respectively, resulting in an increase of $1.2 million, or 14.5%,
and an increase of $341,000, or 1.8%, respectively from the comparable periods
of 2008. The increase for the three month period was related to the higher
volume of time deposits in 2009 compared to 2008. The Company recorded a net
loss for the quarter ended June 30, 2009 of $12.1 million compared to net income
of $152,000 reported for the quarter ended June 30, 2008, while the net loss for
the six months ended June 30, 2009 was $18.8 million compared to net income of
$1.2 million for the comparable period of 2008. The year-over-year decrease in
net income (income in 2008 compared to a loss in 2009) for the current quarter
was primarily associated with an increase of $2.6 million in impairment losses
on available for sale securities, a $2.4 million increase in the provision for
loan and lease losses, a $2.0 million decrease in gains on the sales of premises
and equipment, a $1.1 million decrease in gains on the sale of real estate joint
ventures, an increase in nonperforming loans that resulted in a loss of
$1.7 million in interest income which contributed to the 124 basis point
decrease in the net interest margin (2.30% versus 3.54%) and a $643,000 increase
in the FDIC and state assessments, of which $600,000 is directly related to the
FDIC special assessment to be collected in September.
The year over year decline in net income for the six month period ended June 30,
2009 compared to the same period in 2008 was primarily attributed to an increase
of $6.8 million in impairment losses on available for sale securities, a
$2.0 million decrease in gains on the sales of premises and equipment, a
$1.9 million increase in provision for loan and lease losses, a $1.1 million
decrease in gains on the sale of real estate joint ventures, a 114 basis point
decrease in the net interest margin (2.40% versus 3.54%) which was a result of
$3.3 million in lost interest due to the increase in nonperforming loans and a
lower yield on investment securities mainly related to agency bonds being called
and a $794,000 increase in the FDIC and state assessments, of which $600,000 is
directly related to the FDIC special assessment to be collected in September.
The chief sources of revenue for the Company are interest income from extending
loans and interest income from investing in security instruments, mostly through
its subsidiaries Royal Bank and Royal Asian. Both Royal Bank and Royal Asian
principally generate commercial real estate loans secured by first mortgage
liens. These types of loans make up 27.0% and 70.8% of the loan portfolios of
Royal Bank and Royal Asian at June 30, 2009, respectively. Additionally, Royal
Bank and Royal Asian offer construction loans, including construction loans for
commercial real estate projects and for residential home development. At
June 30, 2009, construction loans comprised 24.5% and 12.7%, respectively, of
the Royal Bank and Royal Asian loan portfolios. Land development loans at
June 30, 2009 comprised 10.7% and 0% of the loan portfolios of Royal Bank and
Royal Asian,
respectively. Construction loans and land development loans can have more risk
associated with them, especially when a weakened economy, such as we are
experiencing now, adversely impacts the commercial rental or home sales market.
In the past, the Company and Royal Bank offered mezzanine loans. Mezzanine loans
are typically inherently more risky, higher rewarding, loans. They are often
secured by subordinate lien positions with loan to value ratios typically
between 75% and 95% of collateral value. The Company and its subsidiaries did
not typically offer mezzanine loans for purposes other than the acquisition or
construction of projects related to real estate. On occasion, the Company had
extended mezzanine financing on a project where Royal Bank extended senior debt
financing. During the fourth quarter of 2007, management of the Company made a
decision to curtail mezzanine lending due to the elevation of risk given the
current economic conditions. At June 30, 2009, the Company had $4.6 million in
mezzanine loans outstanding, and the percentage of mezzanine loans in the
Company's consolidated loan portfolio was 0.7% of the portfolio. Mezzanine loans
inherently carry more risk and accordingly at June 30, 2009, the portion of the
Company's loan loss reserve attributed to mezzanine loans was $2.2 million, or
52.9% of outstanding mezzanine loans. Net earnings of the Company are largely
dependent on taking in deposits at competitive market rates, and then
redeploying those deposited funds into loans and investments in securities at
rates higher than those paid to the depositors to earn an interest rate spread.
Please see the Net Interest Margin section in Managements Discussion and
Analysis of Financial Condition and Results of Operation below for additional
information on interest yield and cost.
Consolidated Net (Loss) Income
During the second quarter of 2009, the Company recorded a net loss of
$12.1 million compared to net income of $152,000 for the comparable quarter of
2008. The net loss was primarily the result of an increase of $2.6 million in
impairment losses on available for sale securities, a $2.4 million increase in
the provision for loan and lease losses, a decline in net interest income of
$2.3 million related to a decline in interest earning assets as well as an
increase in nonperforming loans, a $2.0 million decrease in gains on the sales
of premises and equipment, a $1.1 million decrease in gains on the sale of real
estate joint ventures, and an increase of $1.3 million in other expenses related
to OREO and loan collection expenses, legal and professional fees, and higher
FDIC insurance, of which $600,000 was related to the special FDIC assessment for
the second quarter of 2009. As a consequence of the slowdown in the housing
market and the economic recession, the Company continued to experience a
weakening in the performance of real estate related loans and impairment losses
on investment securities. Impaired and non-accrual loans are reviewed in the
"Credit Risk Management" section of this report while the impaired investment
securities are discussed in the "Investment Securities" section under "Financial
Condition". Basic loss per share and diluted loss per share were both $0.95 for
the second quarter of 2009, as compared to basic and diluted earnings per share
of $0.01 for the same quarter of 2008.
For the six months ended June 30, 2009, the net loss amounted to $18.8 million
compared to net income of $1.2 million for the comparable period of 2008. This
decline was primarily attributable to a $6.8 million increase in investment
impairment, an increase in nonperforming loans which resulted in the loss of
$3.3 million in interest income associated with those nonperforming loans, lower
yields on loans and investments, a $2.0 million decrease in gains on the sales
of premises and equipment, and a $1.9 million increase in the provision for loan
and lease losses. Net interest income decreased $5.1 million from $19.1 million
in the first half of 2008 to $14.0 million in the first half of 2009. As
previously noted, as a consequence of the slowdown in the housing market and the
economic recession, the Company continued to experience a weakening in the
performance of real estate related loans and impairment losses on investment
securities. Impaired and non-accrual loans are reviewed in the "Credit Risk
Management" section of this report while the impaired investment securities are
discussed in the "Investment Securities" section under "Financial Condition".
Basic and diluted loss per share were both $1.47 for the first six months of
2009, while basic and diluted earnings per share were both $0.09 for the first
six months of 2008.
Interest Income
Despite a 14.8% increase in average interest earning assets, total interest
income for the second quarter of 2009 amounted to $16.6 million representing a
decline of $1.1 million, or 6.4%, from the level of the comparable quarter of
2008. Average interest earning assets were $1.2 billion in the second quarter of
2009 compared to $1.1 billion in the second quarter of 2008. The decrease in
interest income was driven by a decline in the yields on all earning assets due
to a 175 basis point decline in the prime rate during the past twelve months
related to the Federal
Reserve's monetary policy that negatively impacted prime based loans and
investments purchased within the last year. Additionally, the year over year
increase in non-accrual loans negatively impacted the yield on interest earning
assets. Average loan balances of $718.7 million in the second quarter of 2009
increased $47.6 million (7.1%) year over year. The loan growth was attributed to
an increased focus on commercial and industrial lending during the past three
quarters, the introduction of small business lending in the fourth quarter of
2008, advances against existing outstanding loans, continued growth in tax
certificates and minimal loan prepayments partially offset by charge-offs and
transfers to OREO. Average investment securities increased $58.1 million (15.3%)
from $379.2 million for the second quarter of 2008 to $437.3 million for the
second quarter of 2009. The Company mainly purchased government agency
mortgage-backed and government agency CMO securities. In an effort to boost
liquidity, average cash equivalents grew $50.7 million (6.4 times) from
$7.9 million for the three months ended June 30, 2008 to $58.6 million for the
three months ended June 30, 2009.
The yield on average interest earning assets for the second quarter of 2009 of
5.47% declined by 126 basis points from the level recorded during the comparable
quarter of 2008. The 126 basis point reduction was comprised of year over year
declines of 204, 106, and 98 basis points for cash equivalents (0.40% versus
2.44%) investment securities (4.87% versus 5.93%), and loans (6.25% versus
7.23%), respectively. Lower interest rates on all three earning asset categories
reflected the general market decline in interest rates during the past year and
the significant impact on variable rate loans in particular. In addition the
yield on average loans was negatively impacted by the increase of non-accrual
loans during the past year. During the second quarter of 2009, interest lost on
non-accrual loans was $1.7 million.
For the six months ended June 30, 2009, total interest income amounted to
$32.9 million versus $37.8 million for the comparable period of 2008 resulting
in a decline of $4.9 million, or 12.8%. Average interest earning assets were
$1.2 billion for the first six months of 2009 compared to $1.1 billion for the
comparable 2008 period. As with the second quarter results, the decrease was
driven by a decline in the yields on all earning assets due to a 175 basis point
decline in the prime rate during the past twelve months related to the Federal
Reserve's monetary policy that negatively impacted prime based loans and
investments purchased within the last year. Additionally, the year over year
increase in non-accrual loans negatively impacted the yield on interest earning
assets. Average loan balances of $719.2 million in the second quarter of 2009
increased $55.8 million (8.4%) year over year. The loan growth was attributed to
an increased focus on commercial and industrial lending during the past three
quarters, the introduction of small business lending in the fourth quarter of
2008, advances against existing outstanding loans, continued growth in tax
certificates and minimal loan prepayments partially offset by charge-offs and
transfers to OREO. Average investment securities slightly increased $229,000
(.05%) from $425.1 million for the first six months of 2008 to $425.3 million
for the first six months of 2009. The Company mainly purchased government agency
mortgage-backed and government agency CMO securities to replace called
government agency securities. In an effort to boost liquidity, average cash
equivalents grew $33.3 million (6.5 times) from $5.1 million for the six months
ended June 30, 2008 to $38.4 million for the six months ended June 30, 2009.
The yield on average interest earning assets for the six months ended June 30,
2009 of 5.61% declined by 134 basis points from 6.95% for the comparable period
of 2008. The 134 basis point reduction was comprised of year over year declines
of 215, 78, and 148 basis points for cash equivalents (0.45% versus 2.60%)
investment securities (4.88% versus 5.66%), and loans (6.32% versus 7.80%),
respectively. Lower interest rates on all three earning asset categories
reflected the general market decline in interest rates during the past year and
the significant impact on variable rate loans in particular. In addition the
yield on average loans was negatively impacted by the increase of non-accrual
loans during the past year. During the first six months of 2009, interest lost
on non-accrual loans was $3.3 million.
Interest Expense
Interest expense increased $1.2 million to $9.7 million for the quarter ended
June 30, 2009 compared to the same period in 2008. The change in interest
expense resulted from average interest bearing deposits growing $176.3 million
to $796.3 million for the second quarter of 2009. There was a shift in the
deposit mix with average time deposits increasing $212.2 million (56.1%) while
average NOW and money markets declined $35.2 million (15.6%). As a result of the
decline in market interest rates, retail and brokered deposits became more
attractive during the past
three quarters and management shifted the funding emphasis to these deposits and
away from FHLB advances. Management elected to reduce the reliance on FHLB
advances due to the suspension of the dividend at year end 2008 coupled with the
current requirement of full collateral delivery status for FHLB advances. The
yield on average interest bearing liabilities was 3.52% for the second quarter
of 2009 down 22 basis points from 3.74% for the second quarter of 2008. The
average interest rate paid on average interest bearing deposits for the second
quarter of 2009 was 3.34% resulting in a decline of 12 basis points from the
level of 3.46% during the comparable quarter of 2008. Average borrowings grew by
$15.3 million to $298.5 million for the second quarter of 2009 while the
corresponding yield declined by 33 basis points to 4.01% for the same period.
For the six months ended June 30, 2009, interest expense of $19.0 million
increased $341,000, or 1.8% from $18.6 million for the comparable period in
2008. The slight increase in interest expense was due to a $120.2 million
increase in average interest bearing liabilities offset by a 37 basis point
decline in the yield on interest bearing liabilities year over year. Average
time deposits increased $165.7 million while average NOW and money markets
declined $39.8 million and average borrowings declined $5.2 million. Consistent
with the current quarter's results, as a result of the decline in market
interest rates, retail and brokered deposits became more attractive during the
past three quarters and management shifted the funding emphasis to these
deposits and away from FHLB advances. The interest expense related to real
estate owned via equity investments amounted to $103,000 for the first six
months of 2009 which was equivalent to the same period in 2008.
Net Interest Margin
The net interest margin in the second quarter of 2009 of 2.30% declined 124
basis points from the comparable quarter of 2008 of 3.54%. The primary reason
for the significant decline in the net interest margin from quarter to quarter
was an increase in non performing loans which along with the 200 basis point
reduction in the prime rate by the Federal Reserve since the first quarter of
2008 contributed to a 98 basis point reduction in the yield on loans. Also
contributing to the decline in the net interest margin was a 106 basis point
reduction in the yield on investment securities which was mainly a result of
higher yielding agency bonds being called during the first quarter of 2009 and
. . .
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