Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
RBPAA > SEC Filings for RBPAA > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for ROYAL BANCSHARES OF PENNSYLVANIA INC

Form 10-Q for ROYAL BANCSHARES OF PENNSYLVANIA INC


14-Nov-2012

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to assist in understanding and evaluating the changes in the financial condition and earnings performance of the Company and its subsidiaries for the three and nine month periods ended September 30, 2012 and 2011. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto for the year ended December 31, 2011, included in the Company's Form 10-K for the year ended December 31, 2011.

FORWARD-LOOKING STATEMENTS

From time to time, Royal Bancshares of Pennsylvania, Inc. (the "Company") may include forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters in this and other filings with the Securities and Exchange Commission. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. When we use words such as "believes," "expects," "anticipates" or similar expressions, we are making forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance development and results of the Company's business include the following: general economic conditions, including their impact on capital expenditures; interest rate fluctuations; business conditions in the banking industry; the regulatory environment; the nature, extent, and timing of governmental actions and reforms, including the rules of participation for the Troubled Asset Relief Program voluntary Capital Purchase Plan under the Emergency Economic Stabilization Act of 2008, which may be changed unilaterally and retroactively by legislative or regulatory actions; rapidly changing technology and evolving banking industry standards; competitive factors, including increased competition with community, regional and national financial institutions; new service and product offerings by competitors and price pressures and similar items.

All forward-looking statements contained in this report are based on information available as of the date of this report. These statements speak only as of the date of this report, even if subsequently made available by the Company on its website, or otherwise. The Company expressly disclaims any obligation to update any forward-looking statement to reflect future statements to reflect future events or developments.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and general practices within the financial services industry. Applications of the principles in the Company's preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. These estimates and assumptions are based on information available as of the date of the consolidated financial statements; therefore, actual results could differ from those estimates.

Note 1 to the Company's Consolidated Financial Statements (included in Item 8 of
the Form 10-K for the year ended December 31, 2011) lists significant accounting policies used in the development and presentation of the Company's consolidated financial statements. The following discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other quantitative and qualitative factors that are necessary for an understanding and evaluation of the Company and its results of operations. We complete an internal review of this financial information. This review requires substantive judgment and estimation. As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, we have identified other-than-temporary impairment on investments securities, accounting for allowance for loan and lease losses, and deferred tax assets as among the most critical accounting policies and estimates. These critical accounting policies and estimates 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.

- 46 -

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. The principal activities of the Company are supervising Royal Bank, which engages 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.

Like many other financial institutions the Company's financial results were negatively impacted by the recession, but the effects on the Company were more pronounced than the effects on its competitors. The concentration of commercial real estate loans coupled with the introduction of additional lines of business resulted in a much higher level of non-performing loans and losses. The past losses were partially attributed to charge-offs and impairment of commercial, construction and land loans associated with real estate projects, many of which were participation loans outside the Company's primary market. Some of the participation loans were located in Florida, Nevada, North Carolina and other markets that were overbuilt during the construction boom within the United States from 2000-2007. The Company also launched new business initiatives such as mezzanine lending, real estate joint ventures, hard money lending and equity investments in real estate shortly before the housing bubble burst which contributed to the losses. Additionally, the Company experienced a high level of investment impairment associated with corporate bonds, common stocks, private label mortgage backed securities and real estate investment funds that experienced declines in value during the past few years. Also contributing to the losses were increased costs associated with reduced credit quality, legal expenses related to credit quality issues and the U.S. Department of Justice ("DOJ") tax lien investigation (for additional information please read "Part II Other Information" "Item 1 Legal Proceedings" of this Form 10-Q), and higher Federal Deposit Insurance Corporation ("FDIC") assessments resulting from the higher rates for deposit insurance due to the Orders to Cease and Desist (the "Orders") which were issued in 2009. Finally, the establishment of a valuation allowance in 2008 and subsequent years that currently amounts to $36.4 million, has prevented the Company from utilizing tax credits on losses during the past four years.

In each of the four quarters prior to the current quarter ended September 30, 2012, net losses were less than $2.0 million per quarter. However for the most recent quarter ended September 30, 2012, the net loss was $4.8 million. The increase in the quarterly loss during the current quarter was directly related to other real estate owned ("OREO") impairment of $2.4 million, additional provision for loan and lease losses of $1.8 million, and impairment on loans held for sale ("LHFS") of $856,000. During the third quarter, there were two properties (one related to a land acquisition and development loan and one related to an OREO property which was originally a land development and single family residential project) that as a result of the significant lack of progress and the uncertainty about future progress management determined that liquidation value appraisals were appropriate at this time and accounted for $2.5 million of the net loss for the third quarter of 2012.

The level of non-performing assets has contributed to the Company's continued losses. As a result of the decline in the outstanding level of non-performing assets ($22.4 million, or 31.0%, in the past nine months), the Company has experienced a year-over-year reduction in expenses associated with this decline which includes the provision for loan and lease losses, OREO and loan collection expenses, and OREO impairment. However the Company's deleveraging strategy, which improved the risk profile of the Company by shedding higher risk assets and paying off higher cost brokered CDs has had a negative impact on income. The deleveraging has resulted in lower average loan balances and a higher proportion of lower yielding investment securities, which have negatively impacted net interest income, a principal source of income. During the four year period beginning with the nine months ended September 30, 2008 through the nine months ended September 30, 2012, net interest income has declined 36.6%. Due to the continued re-pricing of retail deposits and the redemption of FHLB advances and brokered CDs, net interest income has declined by only 11.6% over the past four quarters. While the Company still expects external headwinds and credit quality costs associated with non-performing assets to negatively affect financial results, over time their impact may decline as the overall level of non-performing assets declines.

- 47 -

The chief sources of revenue for the Company are interest income from extending loans and from investing in security instruments, mostly through its subsidiary Royal Bank. Royal Bank principally generates commercial real estate loans primarily secured by first mortgage liens, construction loans for commercial real estate projects and residential home development, land development loans, tax liens and leases. At September 30, 2012, commercial real estate loans, construction and land development loans, commercial and industrial loans, leases and tax liens comprised 47%, 12%, 12%, 11%, and 8%, respectively, of Royal Bank's loan portfolio. Construction loans and land development loans can have more risk associated with them, especially when a weakened economy, such as we have experienced the past few years, adversely impacts the commercial rental or home sales market. 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 Management's Discussion and Analysis of Financial Condition and Results of Operation below for additional information on interest yield and cost. At September 30, 2012, the Company had consolidated total assets of $801.7 million, total loans and leases of approximately $343.0 million, total deposits of approximately $571.3 million, and shareholders' equity of approximately $69.0 million.

Consolidated Net Loss

The Company recorded a net loss of $4.8 million for the third quarter of 2012 compared to a net loss of $1.9 million for the comparable quarter of 2011. The $2.9 million increase in net loss was primarily related to a reduction of $1.5 million in net interest income, a $1.3 million increase in the provision for loan and lease losses, an increase of $871,000 in OREO impairment and an $856,000 increase in impairment on loans held for sale. Partially offsetting these unfavorable changes was a $1.1 million increase in other income which was primarily associated with a $1.4 million improvement in impairment on investment securities ($0 in 2012 compared to $1.4 million in 2011). The $1.5 million decrease in net interest income was associated with a 48 basis point decline in net interest margin quarter versus quarter. The decline in net interest margin was primarily due to two main factors: the mix of interest earning assets and the significant decline in yields earned on investment securities. Like many other financial institutions, the Company has experienced pressure on its net interest margin. Factors contributing to the margin compression include a declining loan portfolio as evidenced by the $86.9 million decline in the average loan balances quarter versus quarter and a corresponding increase in the investment portfolio of $27.2 million. Due to historically sustained low interest rates, the Company has experienced an accelerated amortization of premiums paid on its mortgage backed securities ("MBS") and collateralized mortgage obligations ("CMO") portfolio as many homeowners are refinancing, including some that previously refinanced. The accelerated amortization of premiums coupled with the replacement of sold and called higher yielding investment securities and the replacement of increased payments received on cash flowing investment securities with lower yielding government agency securities during the continued lower interest rate environment has had a significant impact on the yield earned on investment securities which has declined 139 basis points quarter versus quarter.

Management has taken steps to improve the net interest margin including reducing the cost of interest bearing liabilities as reflected in the 34 basis point decline quarter versus quarter. In addition, the Company hired a new Chief Lending Officer ("CLO") in May 2012 in an effort to shift the mix of interest earnings assets to loans with an emphasis on commercial and industrial and small business lending. For the third quarter 2012, loans represented 49.4% of average interest earning assets compared to 56.3% for the comparable quarter in 2011. As a consequence of the slowdown in the housing market and the economic recession, the Company continues to have a high level of non-performing assets despite the recent progress which negatively impacts net interest income as well as operating expenses, such as legal, loan collection and OREO costs, and therefore the overall level of profitability. The Company has been able to mitigate part of the impact of the non-performing assets and the decline in loan balances by reducing funding costs through the re-pricing of retail CDs and by the run off of higher costing brokered deposits and the paying down of FHLB advances (see the "Net Interest Margin" section of this report). Impaired and non-accrual loans are reviewed in the "Credit Risk Management" section of this report. Losses per share for basic and diluted were both $0.40 for the third quarter of 2012, as compared to basic and diluted losses per share of $0.18 for the same quarter of 2011.

- 48 -

For the nine months ended September 30, 2012, the net loss amounted to $7.6 million which was equivalent to the net loss for the comparable period of 2011. The year to date loss in 2012 was mainly related to a provision for loan and lease losses amounting to $3.4 million, $3.4 million in OREO impairment, a $2.0 million loss contingency accrual for potential DOJ fines and penalties related to the tax lien subsidiaries that was recorded during the first six months of 2012, an impairment on investment securities of $859,000 which was related to one private equity real estate fund and $856,000 in impairment on loans held for sale related to one property. Also contributing to the loss was a decline in net interest income as a result of the decline in the net interest margin as noted in the third quarter results above. These unfavorable contributing factors were partially offset by $2.0 million in gains on sales of loans which was primarily related to the sale of one non-performing loan during the second quarter of 2012. After adjusting for the noncontrolling interest, the Company's 60% share of the loss contingency amounts to $1.2 million. (For additional information on the DOJ matter, see Item 1 "Legal Proceedings" of this Form 10-Q.) The year to date loss in 2011 was mainly related to a provision for loan and lease losses amounting to $5.6 million; impairment on investment securities of $1.8 million, resulting primarily from a complete write-down of one trust preferred security in the amount of $1.7 million; OREO impairment of $4.6 million; and lower net interest income due to a continued reduction in loan and investment balances, a continued high level of non-performing assets, and reduced yields on loans and investments; and higher operating expenses attributed mainly to credit quality. As previously noted, as a consequence of the continued weak housing market and slow growth economy, the Company continued to experience a high level of non-performing assets despite the recent progress. Impaired and non-accrual loans are reviewed in the "Credit Risk Management" section of this report. Basic and diluted losses per share were both $0.69 for the first nine months of 2012 and 2011.

Interest Income

Total interest income of $7.8 million for the third quarter of 2012 amounted to a decline of $2.3 million, or 22.8%, from the comparable quarter of 2011. The decrease was primarily driven by a decline in average loan balances year over year and a decline in the yield on investment securities. Average interest earning assets of $744.4 million in the third quarter of 2012 declined $62.3 million, or 7.7%, from $806.7 million in the third quarter of 2011, which was primarily attributed to a decline in loans. Average loan balances amounted to $367.7 million in the third quarter of 2012, which resulted in a decline of $86.9 million, or 19.1%, year over year. The decline in loan balances was attributed to loan prepayments, loan pay downs including $25.2 million in higher yielding tax certificates, charge-offs, and transfers to OREO through foreclosure proceedings, and was accompanied by minimal new loan growth. The Company hired a new CLO in May 2012 in an effort to shift the mix of interest earnings assets to loans with an emphasis on commercial and industrial and small business lending. Average investment securities of $352.3 million during the third quarter of 2012 experienced an increase of $27.2 million, or 8.4%, from the comparable quarter of 2011. This increase in investments was primarily due to the decline in the loan portfolio. Average cash equivalents for the three months ended September 30, 2012, amounted to $24.4 million which resulted in a decline of $2.7 million, or 10.1%, from the comparable quarter of 2011. The decline resulted from the current strong liquidity levels.

For the third quarter of 2012, the yield on average interest earning assets of 4.15% decreased 79 basis points from the level recorded during the comparable quarter of 2011. The yield reduction was primarily driven by a year over year decline of 139 basis points for investments (1.64% versus 3.03%) and was partially offset by a year over year increase of 22 basis points for loans (6.81% versus 6.59%). The decrease in investment yield was due to the replacement of sold and called higher yielding investment securities and the reinvestment of increased payments received on cash flowing investment securities during 2011 and 2012 with lower yielding government agency securities during this continued lower interest rate environment coupled with accelerated amortization of premiums paid on investment securities within the MBS/CMO portfolio as a result of the historically sustained low interest rates. The increase in loan yield reflected a reduced concentration of non-performing loans within the loan portfolio, a higher concentration of higher yielding leases coupled with minimal interest reversals on new non-performing loans, which were partially offset by a reduced concentration of higher yielding tax liens.

For the nine months ended September 30, 2012, total interest income amounted to $25.0 million resulting in a decline of $5.6 million, or 18.4% year over year. The decrease was primarily driven by a decline in average loan balances year over year and a decline in the yield on investments, which were partially offset by the increased yield on loans. Average interest earning assets were $762.2 million for the first nine months of 2012 compared to $842.4 million for the comparable period of 2011 resulting in a decline of $80.2 million, or 9.5%. Average loan balances of $396.5 million for the first nine months of 2012 decreased $89.9 million, or 18.5%, year over year and accounted for the decline. The decline in loan balances for the first nine months of 2012 was consistent with the third quarter change and was attributed to minimal new loan growth, loan prepayments, loan pay downs including $24.0 million in higher yielding tax lien certificates, charge-offs and transfers to OREO through foreclosure proceedings. Average investments of $343.6 million increased $23.5 million, or 7.3%, from the first nine months of 2011 due to declining loan balances and a reduction in cash equivalents. Average cash equivalents of $22.1 million decreased $13.8 million, or 38.4%, from the first nine months of 2011 due to the strong liquidity levels.

- 49 -

The yield on average interest earning assets for the nine months ended September 30, 2012 of 4.38% declined by 48 basis points from 4.86% for the comparable period of 2011. The yield reduction was comprised of a year over year increase of 34 basis points for loans (6.66% versus 6.32%), which was more than offset by a 114 basis point decline in the investment yield (2.02% versus 3.16%). The improved loan yield was consistent with the third quarter results and reflected a higher concentration of higher yielding leases and a reduction in non-performing loans coupled with minimal interest reversals on new non-performing loans. The decrease in investment yield was due to the replacement of sold and called higher yielding investment securities and the replacement of increased payments received on cash flowing investment securities during 2012 with lower yielding government agency securities coupled with the accelerated amortization of premiums on investment securities during the first nine months of 2012.

Interest Expense

Total interest expense amounted to $2.4 million in the third quarter of 2012, which resulted in a decline of $838,000, or 26.1%, from the comparable quarter of 2011. The reduction in interest expense was mainly associated with a lower level of interest bearing liabilities and a decline in the interest rates paid on those liabilities. Average balances for interest bearing liabilities of $655.5 million for the third quarter of 2012 represented a decline of $63.0 million, or 8.8%, from the comparable quarter of 2011 primarily due to the runoff of maturing brokered CDs and payoff/pay down of FHLB advances. Average time deposits, which include retail and brokered CDs, amounted to $277.9 million during the third quarter of 2012, which resulted in a decline of $20.1 million, or 6.7%, from the level of the comparable quarter of 2011 due principally to the reduction in brokered CDs and the intentional runoff of higher priced retail CDs. As of September 30, 2012, Royal Bank no longer has any brokered CDs on the balance sheet. Management has redeemed $226.9 million in brokered CDs over the past few years as part of the deleveraging strategy and as part of the requirements of the previous Orders. Average NOW and money market deposits decreased $3.4 million, or 1.5%, year over year. Average balances for borrowings, primarily FHLB advances, amounted to $135.9 million for the third quarter of 2012, reflecting a decline of $40.8 million, or 23.1%, from the comparable period of 2011. During March of 2012 a maturing FHLB advance of $30.0 million at a rate of 4.32% was partially replaced with a five year FHLB advance of $15.0 million with a fixed rate of 1.39% to improve funding costs.

The yield on average interest bearing liabilities was 1.44% for the third quarter of 2012 down 34 basis points from 1.78% for the comparable quarter of 2011 as all interest bearing liabilities experienced interest rate declines year over year. The average interest rate paid on average interest bearing deposits for the third quarter of 2012 was 1.10% resulting in a decline of 31 basis points from the level of 1.41% during the comparable quarter of 2011. The average interest rate paid on CDs during the third quarter of 2012 was 1.62%, which declined 29 basis points, year over year, due to lower interest rates on new accounts and the re-pricing at lower interest rates on a significant portion of the maturing retail CDs. The yield on average NOW and money market deposits of 0.52% declined year over year by 31 basis points due to management's decision to lower interest rates being offered on deposit products as a result of the sustained low interest rate environment. The average interest rate paid on borrowings during the second quarter of 2012 was 2.75% resulting in a decline of 14 basis points year over year due to the redemption and partial replacement at more attractive interest rates of FHLB advances during 2012.

For the nine months ended September 30, 2012, total interest expense of $7.7 million decreased $3.4 million, or 30.4%, from the comparable period in 2011. The decline in interest expense for the first nine months of 2012 was due to an $80.1 million, or 10.6%, decline in average interest bearing liabilities relative to the comparable nine month period of 2011 and a 43 basis point decline in the interest rates paid on interest bearing liabilities year over year. For the first nine months of 2012, average interest bearing deposits of $523.1 million decreased $56.2 million, or 9.7%, year over year. The reduction was entirely associated with CDs, which was primarily due to the intentional runoff of brokered CDs as well as the intentional runoff of higher priced retail CDs and was partially offset by an increase in NOW and money market deposits and savings accounts. Average time deposits amounted to $279.2 million during the first nine months of 2012, which resulted in a decline of $65.2 million, or 18.9%, from the level during the comparable period in 2011 for the reasons previously noted. Average NOW and money market deposits increased $7.7 million, or 3.5%, year over year. Average borrowings of $154.5 million for the first nine months of 2012 declined $23.9 million, or 13.4%, from the first nine months of 2011 due to the redemption and pay down of FHLB advances. During March of 2012 a maturing FHLB advance of $30.0 million at a rate of 4.32% was partially replaced with a five year FHLB advance of $15.0 million with a fixed rate of 1.39%, which improved funding costs.

- 50 -

Consistent with the current quarter's results, the re-pricing of retail time deposits as well as other deposit categories, and the redemption/pay down and replacement of FHLB advances have resulted in sizable reductions on interest rates paid on interest bearing liabilities in the first nine months of 2012 relative to the comparable period of 2011. The average interest rate paid on interest bearing liabilities amounted to 1.52% for the first nine months of 2012 which represented a decline of 43 basis points year over year. The average interest rate paid on interest bearing deposits in the first nine months of 2012 amounted to 1.19%, which resulted in a year over year decline of 47 basis points. Year over year lower average interest rates were paid on NOW and money market accounts (0.66% in 2012 versus 0.92% in 2011) and on CDs (1.65% in 2012 . . .

  Add RBPAA to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for RBPAA - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.