|
Loan Category
|
|
LTV limit
|
|
|
|
|
|
|
|
Raw land
|
|
|
65
|
%
|
|
Land development
|
|
|
65
|
%
|
|
Construction:
|
|
|
|
|
|
Commercial, multifamily (includes condos and co-ops) and other nonresidential
|
|
|
80
|
%
|
|
Improved property
|
|
|
85
|
%
|
|
Owner occupied 1-4 family and home equity (without credit enhancements)
|
|
|
90
|
%
|
The guidelines provide exceptions to the LTV ratios for government-backed loans; loans facilitating the sale of real estate acquired by the lending institution in the normal course of business; loans where Royal Bank’s decision to lend is not based on the offer of real estate as collateral and such collateral is taken only out of an abundance of caution; and loans renewed, refinanced, or restructured by the original lender to the same borrower, without the advancement of new money. The regulation also allows institutions to make a limited amount of real estate loans that do not conform to the proposed LTV ratios. Under this exception, Royal Bank would be allowed to make real estate loans that do not conform to the LTV ratio limits, up to an amount not to exceed 100% of their total capital.
Other Legislation/Regulatory Requirements:
Congress and the federal banking agencies routinely propose new regulations. The Company cannot predict how any new legislation, or new rules adopted by the federal banking agencies, may affect its business or the business of Royal Bank in the future.
Monetary Policy
The earnings of Royal Bank are affected by the policies of regulatory authorities including the Federal Reserve Board. An important function of the Federal Reserve System is to influence the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities, changes in reserve requirements against member bank deposits and limitations on interest rates that member banks may pay on time and savings deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans and investments and deposits. Their use may also affect rates charged on loans or paid for deposits.
The policies and regulations of the Federal Reserve Board have had and will probably continue to have a significant effect on its reserve requirements, deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect Royal Bank’s operations in the future. The effect of such policies and regulations upon the future business and earnings of Royal Bank cannot be predicted.
Effects of Inflation
Inflation can impact the country’s overall economy, which in turn can impact the business and revenues of the Company and its subsidiaries. Inflation has some impact on the Company’s operating costs. Unlike many industrial companies, however, substantially all of the Company’s assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Company’s performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as prices of goods and services.
Available Information
Upon a shareholder’s written request, a copy of the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as required to be filed with the SEC pursuant to Exchange Act Rule 13a-1, may be obtained without charge from our Chief Executive Officer, Royal Bancshares of Pennsylvania, Inc. 732 Montgomery Avenue, Narberth, Pennsylvania 19072 or on our website
www.royalbankamerica.com
.
An investment in our common stock involves risks. Before making an investment decision, investors should carefully consider the risks described below in conjunction with the other information in this Report, including our consolidated financial statements and related notes. If any of the following risks or other risks, which have not been identified or which we may believe are immaterial or unlikely, actually occurs, our business, financial condition and results of operations could be harmed. In such a case, the trading price of our common stock could decline, and investors may lose all or part of their investment.
Risks Related to Our Business
Our business may be impacted by the existence of the FDIC informal agreement for Royal Bank and the informal agreement with the Federal Reserve Bank of Philadelphia.
Our success as a business is dependent upon pursuing various alternatives in not only achieving the growth and expansion of our banking franchise but also in managing our day to day operations. The existence of the informal agreements limits and impacts our ability to pursue all previously available alternatives in the management of the Company. Our ability to retain existing retail and commercial customers as well as the ability to attract potentially new customers may be impacted by the existence of the informal agreements. Our ability to obtain lines of credit, to receive attractive collateral treatment from funding sources, and to pursue all funding alternatives in this interest rate environment could be potentially impacted and thereby limit liquidity alternatives. Royal Bank’s ability to pay dividends to the Company, which provides funding for cash dividends to our shareholders, is subject to prior written consent of the FDIC and Department. Moreover, we are prohibited from paying cash dividends without the prior written approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System. Our ability to raise capital could be potentially limited or impacted as a result of the informal agreements. Attracting new management talent is critical to the success of our business and could be potentially impacted due to the existence of the informal agreements.
Under the MOU, Royal Bank must maintain a minimum leverage ratio and a minimum total risk-based capital ratio of 8% and 12%, respectively.
At December 31, 2013, based on capital levels calculated under
RAP
, Royal Bank’s leverage ratio and total risk-based capital ratio were 9.13% and 15.61%, respectively.
Our business is subject to the success of the local economies and real estate markets in which we operate.
Our earnings are significantly generated from net interest income which is heavily reliant on the interest and fees we earn on loans. If prevailing economic conditions locally or nationally are unfavorable, our business may be adversely affected. Unfavorable economic conditions in our targeted market areas, specifically depressed or declining real estate values could affect the ability of customers to repay their loans, impede our growth, and generally affect our financial condition and results of operations through potential increases in credit losses. We are less able than a larger institution to spread the risks of unfavorable local economic conditions across broader and more diverse economies.
Our concentration of commercial real estate and construction loans is subject to unique risks that could adversely affect our earnings.
Our commercial real estate and construction and land development loan portfolio held for investment was $193.6 million at December 31, 2013 comprising 53% of total loans. Commercial real estate and construction and development loans are often riskier and tend to have significantly larger balances than home equity loans or residential mortgage loans to individuals. While we believe that the commercial real estate concentration risk is mitigated by diversification among the types and characteristics of real estate collateral properties, sound underwriting practices, and ongoing portfolio monitoring and market analysis, the repayments of these loans usually depends on the successful operation of a business or the sale of the underlying property. As a result, these loans are more likely to be unfavorably affected by adverse conditions in the real estate market or the economy in general. Commercial and industrial loans comprise 22% of the loan portfolio. These loans are collateralized by various business assets the value of which may decline during adverse market and economic conditions. Adverse conditions in the real estate market and the economy may result in increasing levels of loan charge-offs and non-performing assets and the reduction of earnings. When we take collateral in foreclosures and similar proceedings, we are required to mark the related asset to the then fair market value of the collateral, which may ultimately result in a loss.
Further, under guidance adopted by the federal banking regulators, banks which have concentrations in construction, land development or commercial real estate loans (other than loans for majority owner occupied properties) would be expected to maintain higher levels of risk management and, potentially, higher levels of capital. It is possible that Royal Bank may be required to maintain higher levels of capital than it would be otherwise expected to maintain as a result of Royal Bank’s commercial real estate loans, which may require us to obtain additional capital sooner than we would otherwise seek it, which may reduce shareholder returns.
Our allowance for loan and lease losses may not be adequate to cover actual losses.
Like all financial institutions, we maintain an allowance for loan and lease losses to provide for loan and lease defaults and non-performance. Our allowance for loan and lease losses is based on our historical loss experience as well as an evaluation of the risks associated with our loan portfolio, including the size and composition of the loan portfolio, current economic conditions and geographic concentrations within the portfolio. Our allowance for loan and lease losses may not be adequate to cover actual loan and lease losses and future provisions for loan and lease losses could materially and adversely affect our financial results.
Our future growth may require us to raise additional capital but, that capital may not always be available.
We are required by regulatory authorities to maintain adequate capital levels to support our operations. We anticipate that our current capital will satisfy our regulatory requirements for the foreseeable future. However, in order to maintain our well-capitalized status and to support future growth we may need to raise capital. Our ability to raise additional capital will depend, in part, on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Under the informal agreement as described in “Regulatory Actions” under “Item 1 – Business” of this Report, Royal Bank is required to maintain a minimum Tier 1 leverage ratio of 8% and a Total risk-based capital ratio of 12% during the term of the informal agreement. Additionally, Basel III introduces new minimum capital requirements that are effective on January 1, 2015, with the capital conservation buffer requirements phased in over a three-year period beginning January 1, 2016. In addition, on February 20, 2009, we issued 30,407 shares of Fixed Rate Cumulative Preferred Stock, Series A, to the United States Department of Treasury under its TARP Capital Purchase Program, The Series A Preferred Stock issued to Treasury has a liquidation preference of $1,000 per share and contains other provisions, including restrictions on the payment of dividends on common stock and on repurchases of any shares of preferred stock ranking equal to or junior to the Series A Preferred Stock or common stock while the Series A Preferred Stock is outstanding, which provisions may make it more difficult to raise additional capital on favorable terms while the Series A Preferred Stock is outstanding. Therefore, we may be unable to raise additional capital, or to raise capital on terms acceptable to us. If we cannot raise additional capital when required, our ability to further expand operations through both internal growth and acquisitions could be materially impaired. In addition, if we decide to raise additional capital, the existing shareholders are subject to dilution and a potential capital raise could adversely impact the Company’s deferred tax asset.
We may not be successful in redeeming our Series A Preferred Stock.
We have raised approximately $14.0 million in a private placement with the sole use to partially redeem our Series A Preferred Stock through a bid at a future Treasury TARP auction. If we are not successful in the partial redemption of the Series A Preferred Stock then the money raised will be returned to the individual investors. As of December 31, 2013, the Series A Preferred stock dividend in arrears was $7.7 million and has not been recognized in the consolidated financial statements. In February 2014, the preferred cumulative dividend rate prospectively increased from 5% to 9% per annum.
We may suffer losses in our loan portfolio despite our underwriting practices.
We seek to mitigate the risks inherent in our loan portfolio by adhering to specific underwriting practices. These practices often include: analysis of a borrower’s credit history, financial statements, tax returns and cash flow projections; valuation of collateral based on reports of independent appraisers; and verification of liquid assets. Although we believe that our underwriting criteria are appropriate for the various kinds of loans we make, we may incur losses on loans that meet these criteria.
Holders of our Series A Preferred Stock have certain voting rights that may adversely affect our common shareholders, and the holders of the Series A Preferred Stock may have interests different from our common shareholders.
For as long as shares of the Series A Preferred Stock are outstanding, in addition to any other vote or consent of the shareholders required by law or our Articles of Incorporation, the vote or consent of holders of at least 66 2/3% of the shares of the Series A Preferred Stock outstanding is required for any authorization or issuance of shares ranking senior to the Series A Preferred Stock; any amendments to the rights of the Series A Preferred Stock so as to adversely affect the rights, privileges, or voting power of the Series A Preferred Stock; or initiation and completion of any merger, share exchange or similar transaction unless the shares of Series A Preferred Stock remain outstanding, or if we are not the surviving entity in such transaction, are converted into or exchanged for preference securities of the surviving entity and the shares of Series A Preferred Stock remaining outstanding or such preference securities have the rights, preferences, privileges and voting power of the Series A Preferred Stock.
The holders of our Series A Preferred Stock, including the Treasury, may have different interests from the holders of our common stock, and could vote to block the forgoing transactions, even when considered desirable by, or in the best interests of the holders of our common stock.
Our ability to pay dividends depends primarily on dividends from our banking subsidiary, which are subject to regulatory limits. Additionally, we are subject to other dividend limitations.
We are a bank holding company and our operations are conducted by direct and indirect subsidiaries, each of which is a separate and distinct legal entity. Substantially all of our assets are held by our direct and indirect subsidiaries. Our ability to pay dividends depends on our receipt of dividends from our direct and indirect subsidiaries. Royal Bank is our primary source of dividends. Dividend payments from Royal Bank are subject to legal and regulatory limitations, generally based on net profits and retained earnings, imposed by the various banking regulatory agencies. The ability of Royal Bank to pay dividends is also subject to its profitability, financial condition, capital expenditures and other cash flow requirements. At December 31, 2013, as a result of significant losses within Royal Bank, we had an accumulated deficit and therefore would not have been able to declare and pay any cash dividends. There is no assurance that our subsidiaries will be able to pay dividends in the future or that we will generate adequate cash flow to pay dividends in the future. Royal Bank must receive prior written approval from the FDIC and the Department before declaring and paying a dividend to the Company.
Under the terms of the TARP CPP, we are not permitted to declare or pay cash dividends on, or redeem or otherwise acquire, stock that is junior to or on parity with the Series A Preferred Stock issued to Treasury at any time when we have not declared and paid full dividends on the Series A Preferred Stock. We suspended regular quarterly cash dividends on the Series A Preferred Stock in August 2009 and, accordingly, are not permitted at this time to pay dividends on our Class A or Class B Common Stock. Additionally, under the terms of the informal agreement, we are prohibited from redeeming the Series A Preferred Stock, which includes participating in a TARP auction, or paying any dividends on shares of our stock without the prior written approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System. Failure to pay dividends on our stock could have a material adverse effect on the market price of our Class A Common Stock.
Competition from other financial institutions may adversely affect our profitability.
We face substantial competition in originating commercial and consumer loans. This competition comes principally from other banks, savings institutions, mortgage banking companies and other lenders. Many of our competitors enjoy advantages, including greater financial resources and higher lending limits, a wider geographic presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. This competition could reduce our net income by decreasing the number and size of loans that we originate and the interest rates we may charge on these loans.
In attracting business and consumer deposits, Royal Bank faces substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of our competitors enjoy advantages, including greater financial resources, more aggressive marketing campaigns, better brand recognition and more branch locations. These competitors may offer higher interest rates than we do, which could decrease the deposits that we attract or require us to increase our rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect our ability to generate the funds necessary for lending operations. As a result, we may need to seek other sources of funds that may be more expensive to obtain and could increase our cost of funds.
The Company’s banking and non-banking subsidiaries also compete with non-bank providers of financial services, such as brokerage firms, consumer finance companies, credit unions, insurance agencies, peer to peer lenders and governmental organizations which may offer more favorable terms. Some of our non-bank competitors are not subject to the same extensive regulations that govern our banking operations. As a result, such non-bank competitors may have advantages over the Company’s banking and non-banking subsidiaries in providing certain products and services. This competition may reduce or limit our margins on banking and non-banking services, reduce our market share, and adversely affect our earnings and financial condition.
Our ability to manage liquidity is always critical in our operation, but more so today given the uncertainty within the capital markets.
We monitor and manage our liquidity position on a regular basis to insure that adequate funds are in place to manage the day to day operations and to cover routine fluctuations in available funds. However, our funding decisions can be influenced by unplanned events. These unplanned events include, but are not limited to, the inability to fund asset growth, difficulty renewing or replacing funds that mature, the ability to maintain or draw down lines of credit with other financial institutions, significant customer withdrawals of deposits, and market disruptions. We have a liquidity contingency plan in the event liquidity falls below an acceptable level, however in today’s economic environment, we are not certain that those sources of liquid funds will be available in the future when required. As a result, loan growth may be curtailed to maintain adequate liquidity. Additionally, loans may need to be sold in the secondary market, investments may need to be sold or deposits may need to be raised at above market interest rates to maintain liquidity.
Negative publicity could damage our reputation and adversely impact our business and financial results.
Reputation risk, or the risk to our earnings and capital from negative publicity, is inherent in our business. Negative publicity can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, acquisitions, and actions taken by government regulators and community organizations in response to those activities. Negative publicity can adversely affect our ability to keep and attract customers and can expose us to litigation and regulatory action. Although we take steps to minimize reputation risk in dealing with customers and other constituencies, as a larger diversified financial services company with a high industry profile, we are inherently exposed to this risk.
We have identified a material weakness relating to accounting for net income tax receivables in connection with the preparation of our financial statements, and failure to develop and maintain adequate internal controls could cause us to have additional material weaknesses, which could adversely affect our operations and financial position.
In connection with the preparation of our consolidated financial statements for the years ended December 31, 2013 and 2012, we identified a material weakness in our accounting for net income tax receivables.
The tax receivables related to amended tax returns for 2005 through 2007, in which the Company carried back losses from 2008 through 2009. These amended returns were filed during the time period 2008 through 2011. During 2013 after an IRS joint committee concluded their review of the amended returns, management determined that the tax receivables would not be realized and recorded a $4.8 million reversal to accumulated deficit with the offsetting adjustment to other assets and other liabilities. There was no effect on net income or net loss for the periods presented herein as a result of the adjustment.
To remediate the weakness identified above with respect to internal controls related to the accounting for income taxes, we have engaged a nationally recognized independent public accounting firm to review and improve the Company’s accounting procedures related to income taxes. While we believe that the planned steps will remediate the material weakness in our internal control over financial reporting with respect to accounting for net income tax receivables, no assurances can be made that our remediation is effective until our remedial controls operate for a period of time.
We may in the future also discover additional material weaknesses that require remediation. In addition, an internal control system, no matter how well-designed, cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected. If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintain proper and effective internal controls, we might not be able to produce timely and accurate financial statements. If that were to happen, the market price of our stock could decline and we could be subject to sanctions or investigations by the stock exchange on which our common stock is listed, the SEC, or other regulatory authorities.
Risks Related to Our Industry
Difficult real estate market conditions and economic trends have adversely affected our industry and our business and may continue to adversely affect the Company.
We are exposed to downturns in commercial and residential real estate. Dramatic declines in the housing market over the past few years, with decreasing home prices and increasing delinquencies and foreclosures, have negatively impacted the credit performance of mortgage, consumer, commercial and construction loan portfolios resulting in significant write-downs of assets by many financial institutions. In addition, the values of real estate collateral supporting many loans have declined and may continue to decline. General downward economic trends, reduced availability of commercial credit and sustained unemployment may negatively impact the credit performance of commercial and consumer credit, resulting in additional write-downs. Concerns over the stability of the financial markets and the economy had resulted in decreased lending by financial institutions to their customers and to each other. This market turmoil and tightening of credit had led to increased commercial and consumer deficiencies, lack of customer confidence, increased market volatility and widespread reduction in general business activity. Financial institutions also experienced decreased access to borrowings.
While the economy and market conditions have improved, the current economic recovery has been slow. A decline in current economic conditions would likely put pressure on consumers and businesses and may adversely affect our business, financial condition, results of operations and stock price. In particular, as the result of a deteriorating economy we may face the following risks:
|
|
·
|
We could face increased regulation of our industry. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.
|
|
|
·
|
Our ability to assess the creditworthiness of customers and to accurately estimate the losses inherent in our credit portfolio could be more complex.
|
|
|
·
|
We may be required to pay higher Federal Deposit Insurance Corporation premiums because financial institution failures resulting from the depressed market conditions have depleted and may continue to deplete the deposit insurance fund and reduce its ratio of reserves to insured deposits.
|
|
|
·
|
Our ability to borrow from other financial institutions or the Federal Home Loan Bank on favorable terms or at all could be adversely affected by disruptions in the capital markets or other events.
|
|
|
·
|
We may experience increases in foreclosures, delinquencies and customer bankruptcies.
|
Our business is subject to interest rate risk and variations in interest rates may negatively affect our financial performance.
Changes in the interest rate environment may reduce profits. The primary source of our income is the differential or “spread” between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. As prevailing interest rates change, net interest spreads are affected by the difference between the maturities and re-pricing characteristics of interest-earning assets and interest-bearing liabilities. In addition, loan volume and yields are affected by market interest rates on loans, and rising interest rates generally are associated with a lower volume of loan originations. An increase in the general level of interest rates may also adversely affect the ability of certain borrowers to pay the interest on and principal of their obligations. Accordingly, changes in levels of market interest rates could materially adversely affect our net interest spread, asset quality, loan origination volume, pre-payment speeds and overall profitability.
Recent and future governmental regulation and legislation could limit our future growth.
As described under “Supervision and Regulation” we are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of our operations. These laws may change from time to time and are primarily intended for the protection of consumers, depositors, and the deposit insurance funds. Any changes to these laws may negatively affect our ability to expand our services and to increase the value of our business. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on our business, these changes could be materially adverse to shareholders.
Changes in consumers’ use of banks and changes in consumers’ spending and saving habits could adversely affect the
Company’s f
inancial results.
Technology and other changes now allow many consumers to complete financial transactions without using banks. For example, consumers can pay bills and transfer funds directly without going through a bank. This disintermediation could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits. In addition, changes in consumer spending and saving habits could adversely affect our operations, and we may be unable to timely develop competitive new products and services in response to these changes that are accepted by new and existing customers.
Our business is exposed to cyber-security risks, which may include denial of service, hacking and identity theft.
Cyber threats are increasing and rapidly changing. Therefore, we may not be able to prevent all cyber-attacks. Denial of service attacks are meant to disrupt our internet site by slowing it down or causing it to be temporarily unavailable. This type of attack is not intended to penetrate our firewall and steal customer financial information. Hacking and identity theft are meant to breach our security and steal corporate and customer information. While we believe we have the appropriate measures and safeguards in place to mitigate cyber-security risks, we cannot be certain that they are entirely protected from a cyber-attack. Successful cyber-attacks of any nature could have a material adverse impact on our business and results of operations through substantial reputational harm, remedial costs, loss of customers, increased regulatory scrutiny and potential financial liability.
Acts or threats of terrorism and political or military actions taken by the United States or other governments could adversely affect general economic or industry conditions.
Geopolitical conditions may also affect our earnings. Acts or threats or terrorism and political or military actions taken by the United States or other governments in response to terrorism, or similar activity, could adversely affect general economic or industry conditions.
Other Risks
Our directors, executive officers and principal shareholders own a significant portion of our common stock and can influence shareholder decisions
.
Our directors, executive officers and principal shareholders, as a group, beneficially owned approximately 56% of our Class A common stock and 84% of our Class B common stock outstanding as of February 28, 2014. As a result of their ownership, the directors, executive officers and principal shareholders will have the ability, by voting their shares in concert, to influence the outcome of any matter submitted to our shareholders for approval, including the election of directors. The directors and executive officers may vote to cause the Company to take actions with which the other shareholders do not agree or that are not beneficial to all shareholders.
|
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS
|
None.
At December 31, 2013, Royal Bank was headquartered and had a retail office at 732 Montgomery Avenue, Narberth, Pennsylvania. Royal Bank has twelve additional retail banking locations situated in Pennsylvania and New Jersey. Additionally, Royal Bank’s Customer Center, which includes a loan production office, is located in Bala Cynwyd, Pennsylvania.
Royal Bank currently owns seven of the branch properties. During 2013, the Company executed a facilities rationalization plan and sold four properties, which included two branch locations and recorded net gains of $2.5 million. Within the next six months, these two branches will be relocated to leased facilities within the same market area of their existing locations. Additionally two branches were consolidated into nearby retail offices with the majority of the deposits being retained. The remaining properties are leased with expiration dates between 2014 and 2024. During 2013, Royal Bank made aggregate lease payments of approximately $785,000. The Company believes that all of its properties are sufficiently insured, maintained and are adequate for Royal Bank’s purposes.
|
ITEM 3.
|
LEGAL PROCEEDINGS
|
As described under “Item 1 – Business” of this Report, Royal Bank held a 60% equity interest in each of CSC and RTL. CSC and RTL acquired, through public auction, delinquent tax liens in various jurisdictions thereby assuming a superior lien position to most other lien holders, including mortgage lien holders. On March 4, 2009, each of CSC and RTL received grand jury subpoenas issued by the U.S. District Court for New Jersey (“Court”) upon application of the Antitrust Division of the United States DOJ. On February 23, 2012, the former President of CSC and RTL entered a plea of guilty to one count of conspiring to rig bids at certain auctions for tax liens in New Jersey from 1998 until approximately the spring of 2009. On September 26, 2012, as a result of the former President’s guilty plea and pursuant to a plea agreement with the DOJ, CSC entered a guilty plea in the United States District Court for the District of New Jersey to one count of conspiracy to commit bid-rigging at certain auctions for tax liens in New Jersey. Under the terms of the Court accepted plea agreement, the DOJ agreed not to bring further criminal charges against CSC and not to bring criminal charges against RTL, or any current or former director, officer, or employee of CSC and/or RTL, for any act or offense committed prior to the date of the plea agreement that was in furtherance of any agreement to rig bids at municipal tax lien sales or auctions in the State of New Jersey. The former President of CSC and RTL and any person who bid at any time at a tax lien auction on behalf of CSC and/or RTL are excluded from this non-prosecution protection. At the sentencing hearing held in December 2012, the sentencing judge agreed with the DOJ’s recommendation and imposed a $2.0 million fine for CSC. After adjusting for the noncontrolling interest, the Company’s 60% share of the fine amounted to $1.2 million.
In 2012, the former President of CSC and RTL, CSC, RTL and the Company were named defendants, among others, in putative class action lawsuits filed in the U.S. District Court for the District of New Jersey (“Court”) on behalf of a proposed class of taxpayers who became delinquent in paying their municipal tax obligations which alleged a conspiracy to rig bids in municipal tax lien auctions. On June 12, 2012, the Court entered an Order consolidating for pretrial purposes the actions with all subsequently filed or transferred related actions, collectively referred to as
In re New Jersey Tax Sale Certificates Antitrust Litigation
. On October 22, 2012, the Court appointed two law firms as interim class counsel and another law firm as liaison class counsel and further ordered appointed counsel to a master complaint for the consolidated action. On December 21, 2012, plaintiffs filed a Consolidated Master Class Action Complaint (the “Complaint”) against numerous defendants, including the former President of CSC and RTL, Royal Bancshares of Pennsylvania, Inc., Royal Bank America, CSC and RTL. The Company filed a motion to dismiss the Complaint on March 8, 2013, which is currently pending before the Court.
During the second quarter of 2013, the Company accrued a loss contingency of $1.65 million for a potential settlement with the plaintiffs. After adjusting for the noncontrolling interest, the Company’s 60% share of the loss contingency amounted to $990,000 on a pre-tax basis. Subsequently, the Company, Royal Bank, CSC, and RTL reached a settlement agreement with plaintiffs to settle the litigation for $1.65 million and other terms and conditions, including an opportunity for members of the proposed settlement class whose tax liens are currently held by CSC or RTL to redeem those liens for a one-time cash payment equaling 85% of the redemption amount by making such payment within 35 days of the date of written notice. The proposed settlement class does not include, and therefore the offer to redeem does not apply to, tax liens acquired at 0% interest or at a premium. The settlement is subject to Court approval after notice and a hearing. Members of the proposed settlement class will have an opportunity to object to the proposed settlement or opt-out.
On or about March 15, 2012, CSC, RTL and the Company were named defendants, among others, in a complaint filed by Marina Bay Towers Urban Renewal II, LP (“MBT”) in the Superior Court of New Jersey, Law Division, Cape May County. The complaint alleges essentially the same claims as asserted in the Complaint. However MBT does not seek to represent a class and only seeks remedies related to itself. As of the date of this filing, the Company cannot reasonably estimate the possible loss or range of loss that may result from this proceeding.
|
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
Not applicable.
PART II
|
ITEM 5.
|
MARKET FOR REGISTRANT’S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
|
The Company’s Class A Common Stock trades on the NASDAQ Global Market under the symbol RBPAA. There is no market for the Company’s Class B Common Stock. The Class B shares may not be transferred in any manner except to the holder’s immediate family. Class B shares may be converted to Class A shares at the rate of 1.15 to 1.
The following table shows the range of high and low closing sale prices for the Company’s stock as reported by NASDAQ.
|
Closing Prices
|
|
|
2013
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
1.85
|
|
|
$
|
1.21
|
|
|
Second Quarter
|
|
|
1.54
|
|
|
|
1.20
|
|
|
Third Quarter
|
|
|
1.92
|
|
|
|
1.35
|
|
|
Fourth Quarter
|
|
|
1.75
|
|
|
|
1.34
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
1.65
|
|
|
$
|
1.25
|
|
|
Second Quarter
|
|
|
1.97
|
|
|
|
1.23
|
|
|
Third Quarter
|
|
|
3.03
|
|
|
|
1.70
|
|
|
Fourth Quarter
|
|
|
2.25
|
|
|
|
1.02
|
|
The approximate number of record holders of the Company’s Class A and Class B Common Stock, as of February 28, 2014, is shown below:
|
Title of Class
|
|
Number of record holders
|
|
|
Class A Common stock
|
|
|
246
|
|
|
Class B Common stock
|
|
|
130
|
|
Dividends
Subject to certain limitations imposed by law or the Company’s articles of incorporation, the Board of Directors of the Company may declare a dividend on shares of Class A or Class B Common Stock.
The Company did not pay cash dividends on its common stock in 2013 and 2012. Future dividends depend upon net income, capital requirements, and appropriate legal restrictions and other factors relevant at the time the Board of Directors of the Company considers dividend policy. Cash necessary to fund dividends available for dividend distributions to the shareholders of the Company must initially come primarily from dividends paid by its direct and indirect subsidiaries, including Royal Bank to the Company.
Under the Pennsylvania Business Corporation Law, the Company may pay dividends only if, after giving effect to the dividend payment, the total assets of the Company would exceed the total liabilities of the Company plus the amount necessary to satisfy preferential rights of holders of senior shareholders, and the Company is solvent and would not be rendered insolvent by the dividend payment. There are also restrictions set forth in the Pennsylvania Banking Code of 1965 (the “Code”), and in the Federal Deposit Insurance Act (“FDIC Act”) concerning the payment of dividends by Royal Bank. Under the Code, no dividends may be paid except from “accumulated net earnings” (generally retained earnings). Under the FDIC Act, no dividend may be paid if a bank is in arrears in the payment of any insurance assessment due to the FDIC. In addition, dividends paid by Royal Bank to the Company would be prohibited if the effect thereof would cause Royal Bank’s capital to be reduced below applicable minimum capital requirements. Therefore, the restrictions on Royal Bank’s dividend payments are directly applicable to the Company. See “Note 14 – Shareholder’s Equity” of the Notes to Consolidated Financial Statements in Item 8 of this Report.
On August 13, 2009, the Company’s board of directors suspended the regular quarterly cash dividends on the $30.4 million in Series A Preferred Stock. The Company’s board of directors took this action in consultation with the Federal Reserve Bank of Philadelphia as required by regulatory policy guidance. As of December 31, 2013, the Series A Preferred stock dividend in arrears was $7.7 million and has not been recognized in the consolidated financial statements. In the event the Company declared the preferred dividend the Company’s capital ratios would be negatively affected however, they would remain above the required minimum ratios. In February 2014, the preferred cumulative dividend rate prospectively increased from 5% to 9% per annum.
Under its MOU with the FDIC and the Department, Royal Bank must receive prior approval from the FDIC and the Department before declaring and paying a dividend to the Company. Under the Federal Reserve Bank MOU as described under “Regulatory Actions” in “Item 1 – Business” of this Report, the Company may not declare or pay any dividends without the prior written approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System.
COMMON STOCK PERFORMANCE GRAPH
The performance graph shows cumulative investment returns to shareholders based on the assumption that an investment of $100 was made on December 31, 2008, (with all dividends reinvested), in each of the following:
|
|
·
|
Royal Bancshares of Pennsylvania, Inc. Class A common stock;
|
|
|
·
|
The stock of all United States companies trading on the NASDAQ Global Market;
|
|
|
·
|
Common stock of a 2013 Peer Group consisting of 21 banks headquartered in the Mid-Atlantic region, that trade on a major exchange and have total assets between $700 million and $1.5 billion; and
|
|
|
·
|
SNL Bank and Thrift Index.
|
|
|
|
Period Ending
|
|
|
Index
|
|
12/31/08
|
|
|
12/31/09
|
|
|
12/31/10
|
|
|
12/31/11
|
|
|
12/31/12
|
|
|
12/31/13
|
|
|
Royal Bancshares of Pennsylvania, Inc.
|
|
|
100.00
|
|
|
|
39.04
|
|
|
|
42.04
|
|
|
|
37.54
|
|
|
|
36.03
|
|
|
|
41.44
|
|
|
NASDAQ Composite
|
|
|
100.00
|
|
|
|
145.36
|
|
|
|
171.74
|
|
|
|
170.38
|
|
|
|
200.63
|
|
|
|
281.22
|
|
|
SNL Bank and Thrift
|
|
|
100.00
|
|
|
|
98.66
|
|
|
|
110.14
|
|
|
|
85.64
|
|
|
|
115.00
|
|
|
|
157.46
|
|
|
RBPAA Peer Group Index*
|
|
|
100.00
|
|
|
|
85.31
|
|
|
|
94.90
|
|
|
|
83.17
|
|
|
|
99.56
|
|
|
|
131.72
|
|
|
ITEM 6.
|
SELECTED FINANCIAL DATA
|
The following selected consolidated financial and operating information for the Company should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and accompanying notes in Item 8 of this Report:
|
Statement of Operations Data
|
|
For the years ended December 31,
|
|
|
(In thousands, except share data)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Interest income
|
|
$
|
27,524
|
|
|
$
|
31,981
|
|
|
$
|
39,377
|
|
|
$
|
57,262
|
|
|
$
|
66,043
|
|
|
Interest expense
|
|
|
7,357
|
|
|
|
9,899
|
|
|
|
14,086
|
|
|
|
25,994
|
|
|
|
37,439
|
|
|
Net interest income
|
|
|
20,167
|
|
|
|
22,082
|
|
|
|
25,291
|
|
|
|
31,268
|
|
|
|
28,604
|
|
|
(Credit) Provision for loan and lease losses
|
|
|
(872
|
)
|
|
|
5,997
|
|
|
|
7,728
|
|
|
|
22,140
|
|
|
|
20,605
|
|
|
Net interest income after loan and lease losses
|
|
|
21,039
|
|
|
|
16,085
|
|
|
|
17,563
|
|
|
|
9,128
|
|
|
|
7,999
|
|
|
Non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of premises & equipment
|
|
|
2,524
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Net gains on sales of other real estate owned
|
|
|
1,427
|
|
|
|
363
|
|
|
|
1,638
|
|
|
|
1,019
|
|
|
|
294
|
|
|
Service charges and fees
|
|
|
1,323
|
|
|
|
1,218
|
|
|
|
1,128
|
|
|
|
1,266
|
|
|
|
1,419
|
|
|
Gains on sale of loans and leases
|
|
|
686
|
|
|
|
2,057
|
|
|
|
337
|
|
|
|
666
|
|
|
|
914
|
|
|
Income from bank owned life insurance
|
|
|
539
|
|
|
|
553
|
|
|
|
391
|
|
|
|
379
|
|
|
|
1,099
|
|
|
Net gains on investment securities
|
|
|
158
|
|
|
|
1,030
|
|
|
|
1,782
|
|
|
|
1,290
|
|
|
|
1,892
|
|
|
Gains on sales related to real estate joint ventures
|
|
|
-
|
|
|
|
-
|
|
|
|
1,750
|
|
|
|
-
|
|
|
|
-
|
|
|
Income related to real estate owned via equity investments
|
|
|
-
|
|
|
|
-
|
|
|
|
478
|
|
|
|
564
|
|
|
|
1,302
|
|
|
Gain on sale of security claim
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,656
|
|
|
|
-
|
|
|
Gain on sale of premises & equipment related to real estate owned via equity investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
667
|
|
|
|
1,817
|
|
|
Other income
|
|
|
207
|
|
|
|
747
|
|
|
|
1,110
|
|
|
|
737
|
|
|
|
578
|
|
|
Total other than-temporary-impairment losses on investment securities
|
|
|
-
|
|
|
|
(2,359
|
)
|
|
|
(1,796
|
)
|
|
|
(566
|
)
|
|
|
(13,431
|
)
|
|
Portion of loss recognized in other comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
87
|
|
|
|
2,390
|
|
|
Net impairment losses recognized in earnings
|
|
|
-
|
|
|
|
(2,359
|
)
|
|
|
(1,796
|
)
|
|
|
(479
|
)
|
|
|
(11,041
|
)
|
|
Total non-interest income (loss)
|
|
|
6,864
|
|
|
|
3,609
|
|
|
|
6,818
|
|
|
|
7,765
|
|
|
|
(1,726
|
)
|
|
Income before non-interest expenses & income taxes
|
|
|
27,903
|
|
|
|
19,694
|
|
|
|
24,381
|
|
|
|
16,893
|
|
|
|
6,273
|
|
|
Non-interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
10,276
|
|
|
|
11,576
|
|
|
|
11,013
|
|
|
|
11,626
|
|
|
|
12,235
|
|
|
Impairment related to OREO
|
|
|
1,517
|
|
|
|
6,741
|
|
|
|
5,522
|
|
|
|
7,374
|
|
|
|
4,537
|
|
|
Impairment related to real estate owned via equity investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,600
|
|
|
|
-
|
|
|
Expenses related to real estate owned via equity investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
529
|
|
|
|
907
|
|
|
Impairment related to real estate joint venture
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,552
|
|
|
|
-
|
|
|
Other expenses
|
|
|
14,537
|
|
|
|
18,007
|
|
|
|
15,534
|
|
|
|
17,062
|
|
|
|
19,977
|
|
|
Total non-interest expense
|
|
|
26,330
|
|
|
|
36,324
|
|
|
|
32,069
|
|
|
|
40,743
|
|
|
|
37,656
|
|
|
Income (loss) before tax expense
|
|
|
1,573
|
|
|
|
(16,630
|
)
|
|
|
(7,688
|
)
|
|
|
(23,850
|
)
|
|
|
(31,383
|
)
|
|
Income tax expense
|
|
|
42
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
474
|
|
|
Net income (loss)
|
|
$
|
1,531
|
|
|
$
|
(16,630
|
)
|
|
$
|
(7,688
|
)
|
|
$
|
(23,850
|
)
|
|
$
|
(31,857
|
)
|
|
Less net (loss) income attributable to noncontrolling interest
|
|
|
(578
|
)
|
|
|
(1,005
|
)
|
|
|
875
|
|
|
|
243
|
|
|
|
1,402
|
|
|
Net income (loss) attributable to Royal Bancshares
|
|
|
2,109
|
|
|
|
(15,625
|
)
|
|
|
(8,563
|
)
|
|
|
(24,093
|
)
|
|
|
(33,259
|
)
|
|
Less Series A Preferred stock accumulated dividend and accretion
|
|
|
2,075
|
|
|
|
2,038
|
|
|
|
2,003
|
|
|
|
1,970
|
|
|
|
1,672
|
|
|
Net income (loss) to common shareholders
|
|
|
34
|
|
|
|
(17,663
|
)
|
|
|
(10,566
|
)
|
|
|
(26,063
|
)
|
|
|
(34,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per common share
|
|
$
|
-
|
|
|
$
|
(1.33
|
)
|
|
$
|
(0.80
|
)
|
|
$
|
(1.97
|
)
|
|
$
|
(2.64
|
)
|
|
Balance Sheet Data
|
|
For the years ended December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Total assets
|
|
$
|
732,254
|
|
|
$
|
769,455
|
|
|
$
|
844,187
|
|
|
$
|
976,365
|
|
|
$
|
1,288,465
|
|
|
Total average assets (1)
|
|
|
740,324
|
|
|
|
819,211
|
|
|
|
902,241
|
|
|
|
1,173,661
|
|
|
|
1,290,865
|
|
|
Loans, net
|
|
|
352,810
|
|
|
|
326,904
|
|
|
|
397,863
|
|
|
|
475,725
|
|
|
|
656,533
|
|
|
Total deposits
|
|
|
528,964
|
|
|
|
554,917
|
|
|
|
575,916
|
|
|
|
693,913
|
|
|
|
881,755
|
|
|
Total average deposits
|
|
|
527,452
|
|
|
|
573,233
|
|
|
|
621,709
|
|
|
|
791,026
|
|
|
|
857,742
|
|
|
Total borrowings (2)
|
|
|
133,655
|
|
|
|
134,107
|
|
|
|
173,774
|
|
|
|
180,723
|
|
|
|
283,601
|
|
|
Total average borrowings (2)
|
|
|
133,261
|
|
|
|
149,416
|
|
|
|
177,517
|
|
|
|
256,688
|
|
|
|
307,225
|
|
|
Total shareholders' equity (3)
|
|
|
47,805
|
|
|
|
53,568
|
|
|
|
71,098
|
|
|
|
79,246
|
|
|
|
96,309
|
|
|
Total average shareholders' equity (3)
|
|
|
50,533
|
|
|
|
67,794
|
|
|
|
76,337
|
|
|
|
99,048
|
|
|
|
102,664
|
|
|
Return on average assets
|
|
|
0.28
|
%
|
|
|
(1.91
|
%)
|
|
|
(0.95
|
%)
|
|
|
(2.05
|
%)
|
|
|
(2.58
|
%)
|
|
Return on average equity
|
|
|
4.17
|
%
|
|
|
(23.05
|
%)
|
|
|
(11.22
|
%)
|
|
|
(24.32
|
%)
|
|
|
(32.40
|
%)
|
|
Average equity to average assets
|
|
|
6.83
|
%
|
|
|
8.28
|
%
|
|
|
7.89
|
%
|
|
|
6.76
|
%
|
|
|
7.46
|
%
|
|
(1)
|
Includes premises and equipment of VIE for years 2009 and 2010
|
|
(2)
|
Includes obligations through VIE equity investments and subordinated debt.
|
|
(3)
|
Excludes noncontrolling interest
|
|
ITEM 7.
|
MANAGEMENT’S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements of the Company and the related Notes in Item 8 of this Report.
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. Critical accounting policies, judgments and estimates relate to allowance for loan and lease losses, loans held for sale, the valuation of other real estate owned (“OREO”), the valuation of deferred tax assets, other-than-temporary impairment losses on investment securities, net periodic pension costs and the pension benefit obligation. The policies which significantly affect the determination of the Company’s financial position, results of operations and cash flows are summarized in “Note 1 - Summary of Significant Accounting Polices” to the Consolidated Financial Statements and are discussed in the section captioned “Recent Accounting Pronouncements” of Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in Items 7 and 8 of this Report, each of which is incorporated herein by reference.
Investment Securities
Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Investments in debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity securities and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized holding gains and losses included in earnings. Debt and equity securities not classified as trading securities, nor as held to maturity securities are classified as available for sale (“AFS”) securities. AFS Securities are reported at fair value, with unrealized holding gains or losses, net of deferred income taxes, reported in the accumulated other comprehensive income (loss) component of shareholders’ equity. The Company did not hold trading securities at December 31, 2013 and 2012. Discounts and premiums are accreted/amortized to income by use of the level-yield method. The gain or loss on sales of AFS securities is based on the specific identification method.
The Company evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis. The Company assesses whether OTTI is present when the fair value of a security is less than its amortized cost. All investment securities are evaluated for OTTI under FASB ASC Topic 320, “Investments-Debt & Equity Securities” (“ASC Topic 320”). Non-agency collateralized mortgage obligations that are rated below AA are evaluated under FASB ASC Topic 320 Subtopic 40, “Beneficial Interests in Securitized Financial Assets” under FASB ASC Topic 325, “Investments-Other”.
Under ASC Topic 320, OTTI is considered to have occurred with respect to debt securities (1) if an entity intends to sell the security; (2) if it is more likely than not an entity will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. In addition, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell or will more likely than not be required to sell the security. If an entity intends to sell the security or will be required to sell the security, the OTTI shall be recognized in earnings equal to the entire difference between the fair value and the amortized cost basis at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before the recovery of its amortized cost basis, the OTTI shall be separated into two amounts, the credit-related loss and the noncredit-related loss. The credit-related loss is based on the present value of the expected cash flows and is recognized in earnings.
For more information on the fair value of the Company’s investment securities and other financial instruments refer to “Note 3 - Investment Securities” and “Note 20
-
Fair Values of Financial Instruments” to the Consolidated Financial Statements included in Item 8 of this Report.
Allowance for Loan and Lease Losses
The Company considers that the determination of the allowance for loan and lease losses (“allowance”) involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, loss given default, expected commitment usage, the amounts of timing of expected future cash flows on impaired loans, mortgages, and general amounts for historical loss experience. The process also considers economic conditions, uncertainties in estimating losses and inherent risks in the loan portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan and lease losses may be required that would adversely impact earnings in future periods. See “Note 1 - Summary of Significant Accounting Policies” to the Consolidated Financial Statements included in Item 8 of this report.
Deferred Tax Assets
The Company recognizes deferred tax assets and liabilities for the future tax effects of temporary differences, net operating loss carry forwards and tax credits. Deferred tax assets are subject to management’s judgment based upon available evidence that future realization is more likely than not. If management determines that the Company may be unable to realize all or part of net deferred tax assets in the future, a direct charge to income tax expense may be required to reduce the recorded value of the net deferred tax asset to the expected realizable amount.
Recent Accounting Pronouncements
See “Note 1 - Summary Of Significant Accounting Policies” to the Consolidated Financial Statements included in Item 8 of this Report.
Results of Operations
Financial Highlights and Business Results
The Company’s results of operations depend primarily on net interest income, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Interest-earning assets consist principally of loans and investment securities, while interest-bearing liabilities consist primarily of deposits and borrowings. Net income is also affected by the provision for loan and lease losses and the level of non-interest income as well as by non-interest expenses, including salary and employee benefits, occupancy expenses and other operating expenses.
During the past few years, the Company recorded significant impairment charges on non-accrual loans, OREO and investment securities, which has weighed heavily on earnings and was the largest contributing factor to the Company’s losses. Also contributing to the losses were increased costs associated with the high level of non-performing assets, legal expenses related to credit quality issues and the DOJ tax lien investigation (for additional information see Item 3 “Legal Proceedings” of this Form 10-K). Finally, the establishment of a valuation allowance in 2008 and subsequent years that currently amounts to $37.2 million, has prevented the Company from utilizing tax credits on losses during the past five years.
The Company’s strategic plan included improving the overall level of credit quality, maintaining reduced credit risk within the investment portfolio, reducing the overall level of expenses, and returning to profitability. While the Company’s past deleveraging strategy improved the risk profile of the Company by shedding higher risk assets and paying off higher cost brokered CDs, it 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. While credit quality costs associated with non-performing assets negatively affect financial results, during 2013 their impact has lessened as the overall level of non-performing assets declined.
For 2013, the strategic plan evolved into transitioning Royal Bank into a community bank built on a solid commercial revenue and retail delivery foundation. During the first quarter of 2013, to support the strategic goals, management had announced a set of sweeping initiatives through the Company's "Profitability Improvement Plan" ("PIP") designed to enhance company-wide efficiency, productivity and modernization. During 2013, the Company realized a 22% reduction in the workforce, which included reorganizing and relocating certain personnel to improve departmental synergies and better align managers and staff so they can work together in cohesive teams to accomplish their objectives. The Company recorded a restructuring charge of $87,000 related to workforce reduction. The Company also finalized a unique opportunity to reduce employee expenses as eight individuals became employees of a local company that provides servicing of the remaining tax lien and non-performing assets portfolios. Those portfolios continue to diminish per the Company's strategic plan. This outsourcing arrangement enables the Company to focus on the expansion of its core banking products while de-emphasizing legacy non-core activity such as tax liens.
During 2013, pursuant to the real estate rationalization plan under PIP, two branches were consolidated and four Company-owned buildings were sold. Royal Bank consolidated the leased Henderson Road branch between the King of Prussia and Bridgeport branches and consolidated the 15
th
Street branch into the Walnut Street branch, which are both located in Center City Philadelphia. These branch consolidations had minimal effect on deposit levels. Included in the real estate sales were two buildings that are the sites of the Fairmount and Phoenixville retail branches. In refreshing our retail branch network, these two branches along with a third will be relocated to more attractive, convenient, high-traffic locations within the same markets over the next three to eight months. Additionally the Villanova branch was relocated in January 2014. The Company recorded restructuring charges of $274,000 related to the effective termination of two leases.
During 2013, the Company launched a completely redesigned website
which takes advantage of the latest technologies and trends in web development, including responsive design which reformats content to fit any screen, improving both aesthetics and user experience.
Visitors will also find a renewed emphasis on our most important products and services, including quick links to key revenue driving product lines and our secure home equity application. Complementing the launch of the new website was the
debut of our mobile banking solution, TouchBanking. With the addition of Lars Eller, as Chief Retail Banking Officer, to executive management the Company looks to grow its retail customer base with the deployment of new commercial and consumer solutions, enhancement of product offerings and further development of the retail sales teams. To support the marketing of these enhancements the Company began refreshing its brand with new advertising through billboards, online and print media. The expense reductions, revenue growth and planned additional improvements have repositioned the Company in 2013 and for the future.
Net Income
Net income for 2013 amounted to $2.1 million and basic and diluted earnings per share of $0.00 compared to a net loss of $15.6 million and basic and diluted loss per share of $1.33 for 2012.
The $17.7 million improvement for the year ended December 31, 2013 as compared to the year ended December 31, 2012 was mainly related to the following items:
|
|
·
|
Credit related expenses declined $7.4 million, or 67.8%, with non-performing assets now at 2.7% of total assets compared to 4.7% at December 31, 2012.
|
|
|
·
|
Provision for loan and lease losses dropped $6.9 million as a result of the loan portfolio’s improved credit quality.
|
|
|
·
|
Other-than-temporary investment impairment declined $2.4 million.
|
|
|
·
|
Gains on the sale of Company owned real estate were $2.5 million.
|
|
|
·
|
Salaries and benefits declined $1.3 million, or 11.2%, as a result of
a 22% reduction in the workforce.
|
|
|
·
|
Professional and legal fees decreased $1.2 million, or 29.3%.
|
|
|
·
|
Net gains on sales of other real estate owned (“OREO”) increased $1.1 million.
|
Partially offsetting these positive items was a $1.9 million decrease in net interest income, a $1.4 million decrease in gains on sales of loans and leases, and an $872,000 decline in gains on sale of investment securities. The Company's leasing subsidiary continued to positively contribute to the annual financial results.
Total non-performing loans at December 31, 2013 were $10.2 million and were classified as loans held for investment (“LHFI”), which amounted to an improvement of $12.8 million or 55.8%, from the level at December 31, 2012 and resulted from payments, payoffs, charge-offs and impairments, sales of loans, transfers to OREO and improved credit quality. Total non-performing loans at December 31, 2012 were $23.0 million and were comprised of $21.4 million in LHFI and $1.6 million in loans held for sale (“LHFS”). OREO at December 31, 2013, amounted to $9.6 million versus $13.4 million at year end 2012, which amounted to a decline of $3.8 million, or 28.4%. Impaired and non-accrual loans and OREO assets are reviewed in the “Credit Quality” section of this report.
Interest Income
The Company utilizes the effective yield interest method for recognizing interest income as required by ASC Subtopic 20, “Nonrefundable Fees and Other Costs” (“ASC Subtopic 20”) under FASB ASC Topic 310, “Receivables” (“ASC Topic 310”). ASC Subtopic 20 also guides our accounting for nonrefundable fees and costs associated with lending activities such as discounts, premiums, and loan origination fees. In the case of loan restructurings, if the terms of the new loan resulting from a loan refinancing or restructuring other than a troubled debt restructuring are at least as favorable to the Company as the terms for comparable loans to other customers with similar collection risks who are not refinancing or restructuring a loan with the Company, the refinanced loan is accounted for as a new loan. This condition is met if the new loan’s effective yield is at least equal to the effective yield for such loans. Any unamortized net fees or costs and any prepayment penalties from the original loan shall be recognized in interest income when the new loan is granted.
Total interest income of $27.5 million for 2013 declined $4.5 million, or 13.9%, from $32.0 million for 2012. The decrease was primarily driven by a decline in average loan balances year over year and a decline in the yield on investments. Average interest-earning assets were $690.3 million for 2013 compared to $751.9 million for 2012, resulting in a decline of $61.6 million, or 8.2%. Average loan balances of $367.2 million for 2013 decreased $17.2 million, or 4.5%, year over year and negatively impacted interest income by $3.5 million, of which $2.5 million was directly related to the tax lien portfolio. The decline in loan balances in 2013 was attributed to loan prepayments, loan pay downs, and transfers to OREO through foreclosure proceedings. Average investments of $312.1 million decreased $32.7 million, or 9.5%, from 2012 due to sales of investment securities to fund loan advances and principal payments received on the Company’s MBS and CMO investment securities. The decrease in average investments contributed to a $920,000 decline in interest income. Average loan and investment balances for 2012 were $384.4 million and $344.9 million, respectively.
For 2013, the yield on average interest-earning assets was 3.99% and declined 26 basis points from 4.25% for the comparable period of 2012. The yield reduction was comprised of a year over year decrease of 65 basis points for loans (5.92% in 2013 versus 6.57% in 2012) and a 10 basis point decline in the investment yield (1.84% in 2013 versus 1.94% in 2012). The drop in loan yield reflected a decline in the higher yielding tax certificates coupled with lower rates on new loan originations. The decrease in investment yield was due to the replacement of sold and called higher yielding investment securities during 2012 with lower yielding government agency securities.
Interest Expense
For 2013, total interest expense of $7.4 million decreased $2.5 million, or 25.7%, from $9.9 million for 2012. The decline in interest expense for 2013 was due to a $66.3 million, or 9.9%, decline in average interest-bearing liabilities and a 26 basis point decline in the interest rates paid on interest-bearing liabilities year over year. For 2013, average interest-bearing deposits of $467.5 million decreased $50.1 million, or 9.7%, year over year. The reduction was mainly associated with a decline in money market accounts and the intentional runoff of higher priced retail CDs. Average time deposits amounted to $239.6 million for 2013, which resulted in a decline of $36.4 million, or 13.2%, from 2012. Average NOW and money market deposits decreased $14.5 million, or 6.5%, year over year. Average borrowings of $107.5 million for 2013 declined $16.1 million, or 13.1%, from 2012 due to the pay down of FHLB advances. Average interest-bearing deposits and borrowings for 2012 were $517.6 million and $123.6 million, respectively.
The average interest rate paid on interest-bearing liabilities amounted to 1.22% for 2013 which represented a decline of 26 basis points from 1.48% for 2012. The average interest rate paid on interest-bearing deposits in 2013 amounted to 0.86%, which resulted in a decline of 28 basis points from 1.14% for 2012. Year over year lower average interest rates were paid on NOW and money market accounts (0.29% in 2013 versus 0.59% in 2012) and on CDs (1.41% in 2013 versus 1.64% in 2012). The average rate paid on borrowings amounted to 2.35% for 2013 compared to 2.68% for 2012. During the second quarter of 2013, a maturing $50.0 million FHLB advance with a rate of 2.64% was replaced with four separate FHLB advances and short-term borrowings which carry an average rate of 1.19%. This re-pricing opportunity has favorably impacted interest expense in subsequent quarters. Partially offsetting the decrease in the average interest rate paid on interest-bearing liabilities was a $174,000 penalty that was assessed when the interest payment in arrears on the trust preferred securities was paid in the third quarter of 2013.
Net Interest Income and Margin:
Net interest income is the Company’s primary source of income. Its level is a function of the average balance of interest-earning assets, the average balance of interest-bearing liabilities, and the spread between the yield on assets and liabilities. In turn, these factors are influenced by the pricing and mix of the Company’s interest-earning assets and funding sources. Additionally, net interest income is affected by market and economic conditions, which influence rates on loan and deposit growth.
Net interest income, which amounted to $20.2 million in 2013, decreased by $1.9 million, or 8.7%, from the prior year’s results of $22.1 million. The decrease was primarily attributed to a reduction in interest-earning assets coupled with a decline in the yield on loans and investments year over year. The decline in loan balances negatively impacted net interest income during the past year. The decline in loan balances was attributed to loan prepayments, loan pay downs and transfers to OREO. The decrease in the investment portfolio was primarily due to principal payments on the Company’s MBS and CMO investment securities. The decrease in loan yields reflects a $15.9 million decline in higher yielding tax liens, which negatively impacted interest income by $2.5 million year over year, and lower rates on new loan originations. The decline in the investment yield was due to the replacement of sold and called higher yielding investment securities during the past year with lower yielding government agency securities and the accelerated amortization of premiums due to prepayments of MBS and CMO securities due to mortgage re-financings. The decline in net interest income was partially offset by a reduction in the average balance of interest-bearing liabilities and the average interest rates paid on average interest-bearing deposits which primarily were associated with the redemption of maturing retail CDs and lower rates paid on renewing and new retail CDs and NOW and money market accounts.
Despite the decrease in net interest income, the net interest margin of 2.92% for 2013 declined only 2 basis points from 2.94% for 2012. The 26 basis point decrease in funding costs was matched by the overall decline of 26 basis points in the yield on interest-earning assets. The decline in the yield on interest-earning assets was driven by lower yields on average loan balances (5.92% in 2013 versus 6.57% in 2012) mainly due to the $15.9 million decline in higher yielding tax liens and investment securities (1.84% in 2013 versus 1.94% in 2012) year over year. The replacement of sold and called investment securities during the past year with lower yielding government agency securities and the accelerated amortization of premiums on investment securities also accounted for the decline in the yield on interest-earning assets. Interest rates paid on total interest-bearing liabilities for 2013 declined 26 basis points to 1.22% from 2012. The Company continued to redeem maturing retail CDs and was also able to lower retail deposit costs through the lower re-pricing of maturing CDs.
Average Balances
The following table represents the average daily balances of assets, liabilities and shareholders’ equity and the respective interest earned and paid on interest-bearing assets and interest-bearing liabilities, as well as average rates for the periods indicated:
|
|
|
For the years ended December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
(Dollars in thousands)
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield /
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield /
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield /
Rate
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning deposits
|
|
$
|
10,941
|
|
|
$
|
26
|
|
|
|
0.24
|
%
|
|
$
|
22,551
|
|
|
$
|
38
|
|
|
|
0.17
|
%
|
|
$
|
29,016
|
|
|
$
|
78
|
|
|
|
0.27
|
%
|
|
Federal funds
|
|
|
-
|
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
2,822
|
|
|
|
3
|
|
|
|
0.11
|
%
|
|
Investment securities-available for sale
|
|
|
312,127
|
|
|
|
5,757
|
|
|
|
1.84
|
%
|
|
|
344,862
|
|
|
|
6,677
|
|
|
|
1.94
|
%
|
|
|
320,362
|
|
|
|
9,645
|
|
|
|
3.01
|
%
|
|
Loans & Leases
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial demand loans
|
|
|
127,372
|
|
|
|
6,024
|
|
|
|
4.73
|
%
|
|
|
174,029
|
|
|
|
8,804
|
|
|
|
5.06
|
%
|
|
|
219,554
|
|
|
|
10,044
|
|
|
|
4.57
|
%
|
|
Real estate secured
|
|
|
199,705
|
|
|
|
12,261
|
|
|
|
6.14
|
%
|
|
|
168,079
|
|
|
|
13,143
|
|
|
|
7.82
|
%
|
|
|
213,737
|
|
|
|
16,268
|
|
|
|
7.61
|
%
|
|
Other loans and leases
|
|
|
40,142
|
|
|
|
3,456
|
|
|
|
8.61
|
%
|
|
|
42,332
|
|
|
|
3,319
|
|
|
|
7.84
|
%
|
|
|
41,756
|
|
|
|
3,339
|
|
|
|
8.00
|
%
|
|
Total loans
|
|
|
367,219
|
|
|
|
21,741
|
|
|
|
5.92
|
%
|
|
|
384,440
|
|
|
|
25,266
|
|
|
|
6.57
|
%
|
|
|
475,047
|
|
|
|
29,651
|
|
|
|
6.24
|
%
|
|
Total interest-earning assets
|
|
|
690,287
|
|
|
|
27,524
|
|
|
|
3.99
|
%
|
|
|
751,853
|
|
|
|
31,981
|
|
|
|
4.25
|
%
|
|
|
827,247
|
|
|
|
39,377
|
|
|
|
4.76
|
%
|
|
Non interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & due from banks
|
|
|
8,768
|
|
|
|
|
|
|
|
|
|
|
|
9,632
|
|
|
|
|
|
|
|
|
|
|
|
11,725
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
56,648
|
|
|
|
|
|
|
|
|
|
|
|
74,592
|
|
|
|
|
|
|
|
|
|
|
|
83,468
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss
|
|
|
(15,379
|
)
|
|
|
|
|
|
|
|
|
|
|
(16,308
|
)
|
|
|
|
|
|
|
|
|
|
|
(19,567
|
)
|
|
|
|
|
|
|
|
|
|
Unearned discount
(2)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
(558
|
)
|
|
|
|
|
|
|
|
|
|
|
(632
|
)
|
|
|
|
|
|
|
|
|
|
Total non interest-earning assets
|
|
|
50,037
|
|
|
|
|
|
|
|
|
|
|
|
67,358
|
|
|
|
|
|
|
|
|
|
|
|
74,994
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
740,324
|
|
|
|
|
|
|
|
|
|
|
$
|
819,211
|
|
|
|
|
|
|
|
|
|
|
$
|
902,241
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$
|
17,802
|
|
|
|
38
|
|
|
|
0.21
|
%
|
|
$
|
17,006
|
|
|
|
67
|
|
|
|
0.39
|
%
|
|
$
|
15,727
|
|
|
|
86
|
|
|
|
0.55
|
%
|
|
NOW and money markets
|
|
|
210,077
|
|
|
|
617
|
|
|
|
0.29
|
%
|
|
|
224,602
|
|
|
|
1,317
|
|
|
|
0.59
|
%
|
|
|
221,158
|
|
|
|
1,958
|
|
|
|
0.89
|
%
|
|
Time deposits
|
|
|
239,584
|
|
|
|
3,367
|
|
|
|
1.41
|
%
|
|
|
275,959
|
|
|
|
4,514
|
|
|
|
1.64
|
%
|
|
|
327,583
|
|
|
|
6,906
|
|
|
|
2.11
|
%
|
|
Total interest-bearing deposits
|
|
|
467,463
|
|
|
|
4,022
|
|
|
|
0.86
|
%
|
|
|
517,567
|
|
|
|
5,898
|
|
|
|
1.14
|
%
|
|
|
564,468
|
|
|
|
8,950
|
|
|
|
1.59
|
%
|
|
Borrowings
|
|
|
107,487
|
|
|
|
2,526
|
|
|
|
2.35
|
%
|
|
|
123,642
|
|
|
|
3,318
|
|
|
|
2.68
|
%
|
|
|
151,743
|
|
|
|
4,493
|
|
|
|
2.96
|
%
|
|
Subordinated debt
|
|
|
25,774
|
|
|
|
809
|
|
|
|
3.14
|
%
|
|
|
25,774
|
|
|
|
683
|
|
|
|
2.65
|
%
|
|
|
25,774
|
|
|
|
643
|
|
|
|
2.49
|
%
|
|
Total interest bearing liabilities
|
|
|
600,724
|
|
|
|
7,357
|
|
|
|
1.22
|
%
|
|
|
666,983
|
|
|
|
9,899
|
|
|
|
1.48
|
%
|
|
|
741,985
|
|
|
|
14,086
|
|
|
|
1.90
|
%
|
|
Non interest-bearing deposits
|
|
|
59,989
|
|
|
|
|
|
|
|
|
|
|
|
55,666
|
|
|
|
|
|
|
|
|
|
|
|
57,241
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
29,078
|
|
|
|
|
|
|
|
|
|
|
|
28,768
|
|
|
|
|
|
|
|
|
|
|
|
26,678
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
689,791
|
|
|
|
|
|
|
|
|
|
|
|
751,417
|
|
|
|
|
|
|
|
|
|
|
|
825,904
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
50,533
|
|
|
|
|
|
|
|
|
|
|
|
67,794
|
|
|
|
|
|
|
|
|
|
|
|
76,337
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
740,324
|
|
|
|
|
|
|
|
|
|
|
$
|
819,211
|
|
|
|
|
|
|
|
|
|
|
$
|
902,241
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
20,167
|
|
|
|
|
|
|
|
|
|
|
$
|
22,082
|
|
|
|
|
|
|
|
|
|
|
$
|
25,291
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
2.92
|
%
|
|
|
|
|
|
|
|
|
|
|
2.94
|
%
|
|
|
|
|
|
|
|
|
|
|
3.06
|
%
|
|
(1)
|
Non-accrual loans have been included in the appropriate average loan balance category, but interest on these loans has not been included.
|
|
(2)
|
For the 2013 period net deferred fees were allocated among the various loan types.
|
The following table sets forth a rate/volume analysis, which segregates in detail the major factors contributing to the change in net interest income for the years ended December 31, 2013 and 2012, as compared to respective previous periods, into amounts attributable to both rate and volume variances.
|
|
|
2013 versus 2012
|
|
|
2012 versus 2011
|
|
|
|
|
Changes due to:
|
|
|
Changes due to:
|
|
|
(In thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks
|
|
$
|
(27
|
)
|
|
$
|
16
|
|
|
$
|
(11
|
)
|
|
$
|
(11
|
)
|
|
$
|
(29
|
)
|
|
$
|
(40
|
)
|
|
Federal funds sold
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
Total short term earning assets
|
|
|
(27
|
)
|
|
|
16
|
|
|
|
(11
|
)
|
|
|
(11
|
)
|
|
|
(32
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments securities
|
|
|
(575
|
)
|
|
|
(345
|
)
|
|
|
(920
|
)
|
|
|
812
|
|
|
|
(3,780
|
)
|
|
|
(2,968
|
)
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial demand loans
|
|
|
(2,193
|
)
|
|
|
(218
|
)
|
|
|
(2,411
|
)
|
|
|
(2,075
|
)
|
|
|
1,539
|
|
|
|
(536
|
)
|
|
Commercial real estate
|
|
|
2,160
|
|
|
|
(709
|
)
|
|
|
1,451
|
|
|
|
(1,251
|
)
|
|
|
113
|
|
|
|
(1,138
|
)
|
|
Residential and home equity loans
|
|
|
378
|
|
|
|
(16
|
)
|
|
|
362
|
|
|
|
(23
|
)
|
|
|
(23
|
)
|
|
|
(46
|
)
|
|
Leases
|
|
|
(14
|
)
|
|
|
348
|
|
|
|
334
|
|
|
|
55
|
|
|
|
(135
|
)
|
|
|
(80
|
)
|
|
Tax certificates
|
|
|
(1,989
|
)
|
|
|
(525
|
)
|
|
|
(2,514
|
)
|
|
|
(3,251
|
)
|
|
|
891
|
|
|
|
(2,360
|
)
|
|
Other loans
|
|
|
(86
|
)
|
|
|
(23
|
)
|
|
|
(109
|
)
|
|
|
(8
|
)
|
|
|
(19
|
)
|
|
|
(27
|
)
|
|
Loan fees
|
|
|
(639
|
)
|
|
|
-
|
|
|
|
(639
|
)
|
|
|
(198
|
)
|
|
|
-
|
|
|
|
(198
|
)
|
|
Total loans
|
|
|
(2,383
|
)
|
|
|
(1,143
|
)
|
|
|
(3,526
|
)
|
|
|
(6,751
|
)
|
|
|
2,366
|
|
|
|
(4,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total decrease in interest income
|
|
$
|
(2,985
|
)
|
|
$
|
(1,472
|
)
|
|
$
|
(4,457
|
)
|
|
$
|
(5,950
|
)
|
|
$
|
(1,446
|
)
|
|
$
|
(7,396
|
)
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market
|
|
$
|
(81
|
)
|
|
$
|
(620
|
)
|
|
$
|
(701
|
)
|
|
$
|
30
|
|
|
$
|
(670
|
)
|
|
$
|
(640
|
)
|
|
Savings
|
|
|
3
|
|
|
|
(32
|
)
|
|
|
(29
|
)
|
|
|
6
|
|
|
|
(25
|
)
|
|
|
(19
|
)
|
|
Time deposits
|
|
|
(556
|
)
|
|
|
(590
|
)
|
|
|
(1,146
|
)
|
|
|
(989
|
)
|
|
|
(1,404
|
)
|
|
|
(2,393
|
)
|
|
Total deposits
|
|
|
(634
|
)
|
|
|
(1,242
|
)
|
|
|
(1,876
|
)
|
|
|
(953
|
)
|
|
|
(2,099
|
)
|
|
|
(3,052
|
)
|
|
Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
(406
|
)
|
|
|
(386
|
)
|
|
|
(792
|
)
|
|
|
(780
|
)
|
|
|
(395
|
)
|
|
|
(1,175
|
)
|
|
Trust preferred
|
|
|
-
|
|
|
|
126
|
|
|
|
126
|
|
|
|
-
|
|
|
|
40
|
|
|
|
40
|
|
|
Total Borrowings
|
|
|
(406
|
)
|
|
|
(260
|
)
|
|
|
(666
|
)
|
|
|
(780
|
)
|
|
|
(355
|
)
|
|
|
(1,135
|
)
|
|
Total decrease in interest expense
|
|
|
(1,040
|
)
|
|
|
(1,502
|
)
|
|
|
(2,542
|
)
|
|
|
(1,733
|
)
|
|
|
(2,454
|
)
|
|
|
(4,187
|
)
|
|
Total (decrease) increase in net interest income
|
|
$
|
(1,945
|
)
|
|
$
|
30
|
|
|
$
|
(1,915
|
)
|
|
$
|
(4,217
|
)
|
|
$
|
1,008
|
|
|
$
|
(3,209
|
)
|
Provision for Loan and Lease Losses
Due to the improved credit quality of the loan portfolio and the decline in non-accrual loan balances, the Company recorded a credit to the allowance of $872,000 in 2013. The provision for loan and lease losses was $6.0 million for 2012. During 2013, non-accrual LHFI decreased $11.3 million, or 52.6% from 2012. The Company recorded $2.7 million in net charge-offs in 2013, which were primarily related to specific reserves. Net charge-offs in 2012 were $5.1 million and also were primarily related to specific reserves.
Total Non-interest Income
Non-interest income includes service charges on depositors’ accounts, safe deposit rentals and fees for various services such as wire transfers and issuing Treasurers’ checks. In addition, other forms of non-interest income are derived from changes in the cash value of bank owned life insurance (“BOLI”). Most components of non-interest income are a modest and stable source of income, with exceptions of one-time gains and losses from the sale of investment securities, OREO, loans, and premises and equipment. From period to period these sources of income may vary considerably. Service charges on depositors’ accounts, safe deposit rentals and other fees are periodically reviewed by management to remain competitive with other local banks.
For 2013 and 2012, total non-interest income amounted to $6.9 million and $3.6 million, respectively. Positively impacting the 2013 results were gains on the sale of Company owned real estate of $2.5 million, an increase of $1.1 million in gains on the sale of OREO ($1.4 million in 2013 versus $363,000 in 2012) and a $2.4 million drop in OTTI ($0 in 2013 versus $2.4 million in 2012). The OTTI charges recorded in 2012 were related to two private equity funds and included the entire carrying value of one of the private equity funds in the amount of $1.5 million and credit related impairment charge of $859,000 on another private equity fund. As a component of PIP, management developed a facilities rationalization plan. The Company identified and sold four buildings to unlock the value in the real estate. Management had identified two attractive sites that were better locations for our retail branches than two of the buildings sold. These two branches will be relocated within the next six months to more convenient and high-traffic locations within the same market area. By leasing these new facilities, the Company is better positioned to manage our retail footprint in the future. Unfavorable items included a $1.4 million decline in gains on the sale of loans and leases ($686,000 in 2013 versus $2.1 million in 2012) and a decrease of $872,000 in gains on the sale of investment securities ($158,000 in 2013 versus $1.0 million in 2012).
Total Non-interest Expense
Non-interest expense plunged $10.0 million, or 27.5%, from $36.3 million for 2012 to $26.3 million for 2013. The improvement in non-interest expense was directly related to a $7.4 million, or 67.8% drop in credit related expenses ($3.5 million in 2013 versus $10.9 million in 2012), a $1.3 million, or 11.2%, decline in salaries and benefits ($10.3 million in 2013 versus $11.6 million in 2012), and a $1.2 million, or 29.3%, decrease in professional and legal fees ($3.0 million in 2013 versus $4.2 million in 2012). Credit related expenses are directly affected by the Company’s level of non-performing assets, which fell $16.7 million, or 45.7%, from $36.4 million at December 31, 2012 to $19.8 million at December 31, 2013. Non-performing assets were 2.7% of total assets at December 31, 2013 compared to 4.7% of total assets at December 31, 2012. The reduction in salaries and benefits was the result of a 22% contraction in the workforce and a phasing out of certain nonessential employee benefits. Professional and legal fees declined as a result of the decline in the Company’s non-performing assets and the resolution of the DOJ investigation. Additionally, the Company recorded a restructuring charge of $361,000 as a result of PIP.
In 2013 and 2012, the Company recorded loss contingencies related to the tax lien subsidiaries (for additional information see “Item 3. Legal Proceedings” of this Form 10-K). In 2013, the Company recorded a $1.65 million loss contingency accrual for a settlement of the class action lawsuit related to the Company’s tax lien subsidiaries. After adjusting for the noncontrolling interest, the Company’s 60% share of the loss contingency amounted to $990,000. Additionally, in 2012 the Company recorded a $2.0 million accrual for a DOJ fine related to the tax lien subsidiaries. After adjusting for the noncontrolling interest, the Company’s 60% share of the DOJ fine amounted to $1.2 million.
Accounting for Income Tax Expense
In 2013, the Company recorded $42,000 in tax expense compared to $0 for 2012. The Company did not record a tax benefit despite the net loss for 2012 since it concluded at December 31, 2012 that it was more likely than not that the Company would not generate sufficient taxable income to realize all of the deferred tax assets.
As of December 31, 2013 and December 31, 2012, management concluded that it was more likely than not that the Company would not generate sufficient future taxable income to realize all of the deferred tax assets. Management’s conclusion was based on consideration of the relative weight of the available evidence and the uncertainty of future market conditions on results of operations. During 2013 and 2012, the Company had valuation allowances on deferred tax assets which were a result of the net operating losses and the portion of the future tax benefit that more likely than not will not be utilized in the future. As of December 31, 2013 and December 31, 2012 the valuation allowance for deferred tax assets totaled $37.2 million and $39.6 million, respectively.
The Company’s effective tax rate is the provision for federal income taxes, excluding the tax effect of extraordinary items, expressed as a percentage of income or loss before federal income taxes. The effective tax rate for the twelve months ended December 31, 2013 and 2012 was 2% and 0%, respectively. In general our effective tax rate is different from the federal statutory rate primarily due to the establishment of a valuation allowance which was $37.2 million as of December 31, 2013.
Results of Operations by Business Segments
Under FASB ASC Topic 280, “Segment Reporting” (“ASC Topic 280”), management of the Company has identified two reportable operating segments, “Community Banking” and “Tax Liens”. Operating segments are components of an enterprise, which are evaluated regularly by the chief operating decision makers in deciding how to allocate and assess resources and performance. The Company’s chief operating decision makers are the Chief Executive Officer (“CEO”) and the Chief Administrative and Risk Officer (“CARO”).
|
|
§
|
Community Bank segment: At December 31, 2013, the Community Bank segment had total assets of $706.0 million, a decrease of $26.1 million, or 3.6%, from $732.1 million at December 31, 2012. Total deposits declined $25.9 million, or 4.7%, from $554.9 million at December 31, 2012 to $529.0 million at December 31, 2013. Net interest income for 2013 was $19.2 million compared to $19.8 million for 2012 representing a decrease of $556,000, or 2.8%. The decline in net interest income was primarily attributed to a reduction in average loan balances and investment securities coupled with lower yields on loans and investment securities. Mitigating the decline in net interest income was the re-pricing of time deposits at a lower rate as they matured and the payoff of a higher interest-bearing FHLB advance. The credit to the allowance for loan and lease losses was $1.5 million in 2013 compared to a provision of $5.2 million for 2012 as a result of the improved credit quality of the loan portfolio. For 2013, total non-interest income was $5.5 million compared to total non-interest income of $2.9 million for 2012. The growth is mostly attributed to $2.5 million in gains on the sale of Company owned real estate and a $2.4 million decline in OTTI on the investment portfolio. For 2013 and 2012, total non-interest expense was $21.9 million and $31.1 million, respectively. Credit related expenses, salaries and benefits, and professional and legal fees declined $7.4 million, $1.0 million, and $1.1 million, respectively. Net income for 2013 was $3.7 million compared to a net loss of $15.8 million for 2012.
|
|
|
§
|
Tax Lien segment: At December 31, 2013, the Tax Lien segment had total assets of $26.2 million compared to $37.3 million at December 31, 2012 representing a decrease of $11.1 million, or 29.7%. Net interest income decreased $1.3 million, or 58.4%, from $2.3 million in 2012 to $969,000 in 2013. The provision for lien losses decreased $233,000 from $820,000 in 2012 to $587,000 in 2013. The improvement in the 2013 provision was mostly related to the declining portfolio balance. Total non-interest income was $1.4 million in 2013 compared to $741,000 in 2012. Total non-interest income is derived mostly from the gains on sale of OREO property. Total non-interest expense decreased $835,000 from $5.2 million for 2012 to $4.4 million for 2013. In 2013 the Tax Lien segment recorded a $1.65 million loss contingency accrual for a settlement of a class action law suit. In 2012 the Tax Lien segment recorded a $2.0 million DOJ fine related to its investigation. Salaries and benefits declined $278,000 due to the outsourcing of the portfolio management to an unrelated third party in 2013. Additionally, professional and legal fees and credit related expenses decreased $148,000 and $31,000, respectively. Net loss was $1.6 million in 2013 compared to $1.8 million for 2012.
|
Financial Condition
Total assets decreased $37.2 million, or 4.8%, to $732.3 million at December 31, 2013 from $769.5 million at year-end 2012.
Cash and Cash Equivalents:
Cash and cash equivalents consist of cash on hand, and cash in interest bearing and non-interest bearing accounts in banks, in addition to federal funds sold. Cash and cash equivalents decreased $12.0 million from $28.8 million at December 31, 2012 to $16.8 million at December 31, 2013. The average balance of cash and cash equivalents was approximately $19.7 million for 2013 versus $32.2 million for 2012. The majority of this average balance was held in interest-bearing accounts with other financial institutions which were paying a higher interest rate than federal funds. The excess cash is invested daily in overnight and federal funds. The decline in cash and cash equivalents was mainly associated with the decline in deposits.
Investment Securities Available for Sale (“AFS”)
:
AFS investment securities represented 45.2% of average interest earning assets during 2013 and consisted of government secured agency bonds, government secured mortgage-backed securities, collateralized mortgage obligations (“CMOs”), municipal bonds, domestic corporate debt, and third party managed equity funds. At December 31, 2013, AFS investment securities were $308.7 million as compared to $349.2 million at December 31, 2012, a decrease of $40.5 million. The reduction was
partially due to the reinvestment of cash flows from principal payments and calls into loans.
Loans
:
The Company’s primary earning assets are loans, representing approximately 53.2% of average interest-earning assets during 2013. The loan portfolio consists primarily of commercial demand loans and commercial mortgages secured by real estate, tax liens, leases, and to a significantly lesser extent, residential loans comprised of one to four family residential and home equity loans. During 2013, total loans held for investment grew $22.3 million from $344.2 million at December 31, 2012 to $366.5 million at December 31, 2013. The growth was attributed to new loan originationns partially offset by balances being paid down, payoffs, charge-offs, and transfers to OREO.
Commercial real estate, and construction and land development loans make up a significant portion of our loan portfolio and represented 52.8% of total loans at December 31, 2013 compared to 59.3% of total loans at December 31, 2012. Management believes our current allowance for loan and lease losses is adequate at December 31, 2013 to cover losses arising from these loan categories as well as all others within the portfolio. We continue to monitor these loans as part of our loan review process to evaluate the impact these loans will have on our allowance.
Allowance for loan and lease losses:
The Company’s loan and lease portfolio (the “credit portfolio”) is subject to varying degrees of credit risk. The Company maintains an allowance to absorb losses in the loan and lease portfolio. The allowance is based on the review and evaluation of the loan and lease portfolio, along with ongoing, quarterly assessments of the probable losses inherent in that portfolio. The allowance represents an estimation made pursuant to FASB ASC Topic 450, “Contingencies” (“ASC Topic 450”) or FASB ASC Topic 310, “Receivables” (“ASC Topic 310”). The adequacy of the allowance is determined through evaluation of the credit portfolio, and involves consideration of a number of factors, as outlined below, to establish a prudent level. Determination of the allowance is inherently subjective and requires significant estimates, including estimated losses on pools of homogeneous loans and leases based on historical loss experience and consideration of current economic trends, which may be susceptible to significant change. Loans and leases deemed uncollectible are charged against the allowance, while recoveries are credited to the allowance. Management adjusts the level of the allowance through the provision for loan and lease losses, which is recorded as a current period expense. The Company’s systematic methodology for assessing the appropriateness of the allowance includes: (1) general reserves reflecting historical loss rates by loan type, (2) specific reserves for risk-rated credits based on probable losses on an individual or portfolio basis and (3) qualitative reserves based upon current economic conditions and other risk factors.
The loan portfolio is stratified into loan segments that have similar risk characteristics. The general allowance is based upon historical loss rates using a weighted three-year rolling average of the historical loss experienced within each loan segment. The qualitative factors used to adjust the historical loss experience address various risk characteristics of the Company’s loan and lease portfolio include evaluating: (1) trends in delinquencies and other non-performing loans, (2) changes in the risk profile related to large loans in the portfolio, (3) changes in the growth trends of categories of loans comprising the loan and lease portfolio, (4) concentrations of loans and leases to specific industry segments, and (5) changes in economic conditions on both a local and national level, (6) quality of loan review and board oversight, (7) changes in lending policies and procedures, and (8) changes in lending staff. Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a report accompanying the allowance calculation.
The specific reserves are determined utilizing standards required under ASC Topic 310. A loan is considered impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. Non-accrual loans and loans restructured under a troubled debt restructuring are evaluated for impairment on an individual basis considering all known relevant factors that may affect loan collectability such as the borrower’s overall financial condition, resources and payment record, support available from financial guarantors and the sufficiency of current collateral values (current appraisals or rent rolls for income producing properties), and risks inherent in different kinds of lending (such as source of repayment, quality of borrower and concentration of credit quality). Non-accrual loans that experience insignificant payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and industrial loans, commercial real estate loans and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral. The Company obtains third-party appraisals to establish the fair value of real estate collateral. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property. For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. A specific reserve is established for an impaired loan for the amount that the carrying value exceeds its estimated fair value. Once a loan is determined to be impaired it will be deducted from the portfolio balance and the net remaining balance will be used in the general and qualitative analysis.
The amount of the allowance is reviewed and approved by the Chief Lending Officer (“CLO”), Chief Financial Officer (“CFO”), Chief Credit Officer (“CCO”) and the CARO on at least a quarterly basis. Management believes that the allowance for loan and lease losses at December 31, 2013 is adequate. However, its determination requires significant judgment, and estimates of probable losses inherent in the credit portfolio can vary significantly from the amounts actually observed. While management uses available information to recognize probable losses, future changes to the allowance may be necessary. These changes could be based in the credits comprising the portfolio and changes in the financial condition of borrowers, as the result of changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the credit portfolio and the allowance. Such review may result in additional provisions based on their judgment of information available at the time of each examination.
Analysis of the Allowance for Loan and Lease Losses:
|
|
|
For the years ended December 31,
|
|
|
(Dollars in thousands)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Total Loans
|
|
$
|
366,481
|
|
|
$
|
344,165
|
|
|
$
|
414,243
|
|
|
$
|
496,854
|
|
|
$
|
686,864
|
|
|
Daily average loan balance
|
|
$
|
367,219
|
|
|
$
|
384,440
|
|
|
$
|
475,047
|
|
|
$
|
643,450
|
|
|
$
|
715,521
|
|
|
Allowance for loan and lease losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the year
|
|
$
|
17,261
|
|
|
$
|
16,380
|
|
|
$
|
21,129
|
|
|
$
|
30,331
|
|
|
$
|
28,908
|
|
|
Charge-offs by loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
1,684
|
|
|
|
1,313
|
|
|
|
1,685
|
|
|
|
7,352
|
|
|
|
7,404
|
|
|
Commercial real estate-mezzanine
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,132
|
|
|
Construction and land development
|
|
|
820
|
|
|
|
2,452
|
|
|
|
5,755
|
|
|
|
13,413
|
|
|
|
6,231
|
|
|
Construction and land develop-mezzanine
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,756
|
|
|
Commercial and industrial
|
|
|
383
|
|
|
|
586
|
|
|
|
2,901
|
|
|
|
5,930
|
|
|
|
258
|
|
|
Multi-family
|
|
|
-
|
|
|
|
542
|
|
|
|
328
|
|
|
|
787
|
|
|
|
-
|
|
|
Residential real estate
|
|
|
46
|
|
|
|
111
|
|
|
|
635
|
|
|
|
731
|
|
|
|
1,361
|
|
|
Residential real estate-mezzanine
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,480
|
|
|
|
-
|
|
|
Leases
|
|
|
382
|
|
|
|
465
|
|
|
|
868
|
|
|
|
972
|
|
|
|
676
|
|
|
Tax certificates
|
|
|
578
|
|
|
|
802
|
|
|
|
1,039
|
|
|
|
49
|
|
|
|
-
|
|
|
Total charge-offs
|
|
|
3,893
|
|
|
|
6,271
|
|
|
|
13,211
|
|
|
|
31,714
|
|
|
|
19,818
|
|
|
Recoveries by loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
600
|
|
|
|
3
|
|
|
|
357
|
|
|
|
684
|
|
|
|
431
|
|
|
Construction and land development
|
|
|
297
|
|
|
|
816
|
|
|
|
196
|
|
|
|
116
|
|
|
|
-
|
|
|
Commercial and industrial
|
|
|
17
|
|
|
|
67
|
|
|
|
22
|
|
|
|
81
|
|
|
|
15
|
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18
|
|
|
|
-
|
|
|
Residential real estate
|
|
|
158
|
|
|
|
208
|
|
|
|
153
|
|
|
|
313
|
|
|
|
190
|
|
|
Leases
|
|
|
29
|
|
|
|
32
|
|
|
|
6
|
|
|
|
51
|
|
|
|
-
|
|
|
Tax certificates
|
|
|
74
|
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37
|
|
|
|
-
|
|
|
Total recoveries
|
|
|
1,175
|
|
|
|
1,155
|
|
|
|
734
|
|
|
|
1,300
|
|
|
|
636
|
|
|
Net loan charge-offs
|
|
|
(2,718
|
)
|
|
|
(5,116
|
)
|
|
|
(12,477
|
)
|
|
|
(30,414
|
)
|
|
|
(19,182
|
)
|
|
(Credit) provision for loan and lease losses
|
|
|
(872
|
)
|
|
|
5,997
|
|
|
|
7,728
|
|
|
|
22,140
|
|
|
|
20,605
|
|
|
Allowance related to disposed assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(928
|
)
|
|
|
-
|
|
|
Balance at end of year
|
|
$
|
13,671
|
|
|
$
|
17,261
|
|
|
$
|
16,380
|
|
|
$
|
21,129
|
|
|
$
|
30,331
|
|
|
Net charge-offs to average loans
|
|
|
(0.74
|
%)
|
|
|
(1.33
|
%)
|
|
|
(2.63
|
%)
|
|
|
(4.73
|
%)
|
|
|
(2.68
|
%)
|
|
Allowance to total loans at year-end
|
|
|
3.73
|
%
|
|
|
5.02
|
%
|
|
|
3.95
|
%
|
|
|
4.25
|
%
|
|
|
4.42
|
%
|
Analysis of the Allowance for Loan and Lease Losses by Loan Type:
|
|
|
As of December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
(In thousands, except percentages)
|
|
Reserve
Amount
|
|
|
Percent of outstanding loans in
each
category to
total loans
|
|
|
Reserve
Amount
|
|
|
Percent of outstanding loans in
each
category to
total loans
|
|
|
Reserve
Amount
|
|
|
Percent of outstanding loans in
each
category to
total loans
|
|
|
Reserve
Amount
|
|
|
Percent of outstanding loans in
each
category to
total loans
|
|
|
Reserve
Amount
|
|
|
Percent of outstanding loans in
each
category to
total loans
|
|
|
Commercial real estate
|
|
$
|
5,498
|
|
|
|
40.5
|
%
|
|
$
|
8,750
|
|
|
|
48.5
|
%
|
|
$
|
7,744
|
|
|
|
44.0
|
%
|
|
$
|
9,534
|
|
|
|
39.0
|
%
|
|
$
|
9,824
|
|
|
|
40.3
|
%
|
|
Construction and land development
|
|
|
2,316
|
|
|
|
12.3
|
%
|
|
|
2,987
|
|
|
|
10.8
|
%
|
|
|
2,523
|
|
|
|
13.0
|
%
|
|
|
3,976
|
|
|
|
16.0
|
%
|
|
|
7,895
|
|
|
|
17.3
|
%
|
|
Commercial and industrial
|
|
|
3,006
|
|
|
|
21.7
|
%
|
|
|
1,924
|
|
|
|
11.8
|
%
|
|
|
2,331
|
|
|
|
13.1
|
%
|
|
|
3,797
|
|
|
|
14.9
|
%
|
|
|
6,542
|
|
|
|
15.1
|
%
|
|
Multi-family
|
|
|
402
|
|
|
|
3.2
|
%
|
|
|
654
|
|
|
|
3.4
|
%
|
|
|
531
|
|
|
|
2.8
|
%
|
|
|
652
|
|
|
|
2.1
|
%
|
|
|
215
|
|
|
|
3.2
|
%
|
|
Residential real estate
|
|
|
473
|
|
|
|
7.0
|
%
|
|
|
1,098
|
|
|
|
7.3
|
%
|
|
|
1,188
|
|
|
|
6.4
|
%
|
|
|
1,106
|
|
|
|
5.9
|
%
|
|
|
2,762
|
|
|
|
7.1
|
%
|
|
Residential real estate-mezzanine
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
1,000
|
|
|
|
0.4
|
%
|
|
Leases
|
|
|
1,223
|
|
|
|
11.6
|
%
|
|
|
1,108
|
|
|
|
10.8
|
%
|
|
|
1,311
|
|
|
|
8.7
|
%
|
|
|
1,670
|
|
|
|
7.8
|
%
|
|
|
1,757
|
|
|
|
5.7
|
%
|
|
Tax certificates
|
|
|
555
|
|
|
|
3.5
|
%
|
|
|
472
|
|
|
|
7.1
|
%
|
|
|
425
|
|
|
|
11.8
|
%
|
|
|
380
|
|
|
|
14.1
|
%
|
|
|
290
|
|
|
|
10.6
|
%
|
|
Consumer
|
|
|
15
|
|
|
|
0.2
|
%
|
|
|
29
|
|
|
|
0.3
|
%
|
|
|
20
|
|
|
|
0.2
|
%
|
|
|
12
|
|
|
|
0.2
|
%
|
|
|
25
|
|
|
|
0.3
|
%
|
|
Unallocated
|
|
|
183
|
|
|
|
0.0
|
%
|
|
|
239
|
|
|
|
0.0
|
%
|
|
|
307
|
|
|
|
0.0
|
%
|
|
|
2
|
|
|
|
0.0
|
%
|
|
|
21
|
|
|
|
0.0
|
%
|
|
Total
|
|
$
|
13,671
|
|
|
|
100.0
|
%
|
|
$
|
17,261
|
|
|
|
100.0
|
%
|
|
$
|
16,380
|
|
|
|
100.0
|
%
|
|
$
|
21,129
|
|
|
|
100.0
|
%
|
|
$
|
30,331
|
|
|
|
100.0
|
%
|
Due to the improved credit quality of the loan portfolio and the decline in non-accrual loan balances, the Company recorded a credit of $872,000 to the allowance in 2013. The provision for loan and lease losses was $6.0 million for 2012. During 2013 non-accrual LHFI decreased $11.3 million, or 52.6% from 2012. The Company recorded $2.7 million in net charge-offs in 2013, which were primarily related to specific reserves. Commercial, construction and land development, and commercial real estate loans represent 35.7%, 26.1%, and 22.9%, respectively, of the total $10.2 million in non-accrual loans at December 31, 2013. Total charge-offs recorded in 2013 related to construction and land development loans and commercial real estate loans were $2.5 million, or 64.3%, of total charge-offs in 2013.
The provision for loan and lease losses was $6.0 million in 2012 compared to $7.7 million in 2011. Commercial real estate, commercial loans, and construction and land loans represent 51.8%, 21.6%, and 18.6%, respectively, of the total $23.0 million in non-accrual loans at December 31, 2012. Total charge-offs recorded in 2012 related to construction and land development loans and commercial real estate loans were $3.8 million, or 60.0%, of total charge-offs in 2012.
Deposits:
The Company’s deposits are an important source of funding. Total deposits of $529.0 million at December 31, 2013 decreased $25.9 million, or 4.7%, from $554.9 million at December 31, 2012. Time deposit accounts of $240.8 million at December 31, 2013 decreased $14.8 million, or 5.8%, from $255.6 million at December 31, 2012 primarily as a result of the Company electing to partially run off the higher cost deposits. Money market accounts declined $14.7 million while demand and NOW accounts increased $1.9 million and $1.5 million, respectively.
FHLB Borrowings:
Borrowings consist of long-term borrowings (advances) and short-term borrowings (overnight borrowings, advances). Total FHLB borrowings were $65.0 million at December 31, 2013 and 2012. During the second quarter of 2013, a maturing $50.0 million FHLB advance with a rate of 2.64% was replaced with four separate FHLB advances and short-term borrowings which currently carry an average yield of 1.13%.
Other Borrowings:
The Company has a note payable with PNC Bank (“PNC”) at December 31, 2013 in the amount of $2.9 million with a maturity date of August 25, 2016. The note payable balance at December 31, 2012 was $3.3 million. The interest rate is a variable rate using a rate index of one month LIBOR + 15 basis points and adjusts monthly. The interest rate at December 31, 2013 and 2012 was 0.32% and 0.36%, respectively. At December 31, 2013 and 2012, the Company had other borrowings of $40.0 million from PNC which will mature on January 7, 2018. These borrowings are secured by government agencies and mortgaged-backed securities. These borrowings have a weighted average interest rate of 3.65%. As of December 31, 2013, investment securities with a market value of $49.7 million were pledged as collateral to secure all borrowings with PNC.
Subordinated Debentures:
The Company has outstanding $25.0 million of trust preferred securities which have a maturity date of October 2034. The interest rate resets quarterly at 3-month LIBOR plus 2.15% and was 2.39% at December 31, 2013. On August 13, 2009, the Company’s Board suspended the interest payments on the trust preferred securities. Under the Federal Reserve MOU as described in “Note 2 – Regulatory Matters and Significant Risks or Uncertainties” to the Consolidated Financial Statements, the Company and its non-bank subsidiaries may not make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without the prior written approval of the 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 third quarter of 2013, the Company received approval from the Federal Reserve Bank to pay the $3.1 million interest payment in arrears on the trust preferred securities. On September 16, 2013, the Company became current on the trust preferred interest payments which included an interest penalty of $174,000. The Company received approval and paid the fourth quarter interest payment in December 2013.
Other Liabilities:
At December 31, 2013, other liabilities of $20.9 million decreased $2.2 million from December 31, 2012. This was principally due to a decline of $2.4 million related to unfunded pension plan obligations.
Shareholders’ Equity
:
Shareholders’ equity decreased $5.8 million, or 10.8%, in 2013 to $47.8 million primarily due to a $6.0 million increase in accumulated other comprehensive loss due to declines in valuations in the bond markets that negatively impacted the investment portfolio and pension. Noncontrolling interest declined $3.5 million from $3.8 million at December 31, 2012 to $271,000 at December 31, 2013 due to the Company’s acquisition of an additional 20% interest in CSC and 40% interest of RTL. See “Item 1 Business” “Royal Bank America” of this Form 10-K for additional information regarding the acquisitions.
The Company has entered into binding commitments with Emerald Advisers, Inc., a group of institutional investors, certain directors and officers of Royal, and other private investors to issue and sell a total of 11,656,666 shares, or $14.0 million in proceeds, of Royal’s Class A common stock
in a private placement. Emerald and the group of institutional investors have each agreed to purchase up to 2,400,000 shares of Class A common stock in the private placement.
All shares issued in the private placement will be sold at a price of $1.20 per share. Royal’s obligation to issue such shares in the private placement, and the purchasers’ obligation to purchase such shares, is contingent on, among other things (i) Royal receiving approval from the Board of Governors of the Federal Reserve to bid to purchase shares of Royal’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A issued in 2009 to the United States Department of the Treasury in an auction of such shares to be conducted by the Treasury, and (ii) at least part of Royal’s bid to purchase such shares being accepted in such auction. The number of shares to be issued in the private placement is subject to adjustment based on the total purchase price of the Series A shares that Royal is successful in purchasing in the auction. In addition, no purchaser will be obligated to purchase, and Royal will not be obligated to issue shares to any purchaser, if after giving effect to the issuance of such shares such purchaser would own more than 9.9% of the Class A common stock outstanding. The date of the auction has not been scheduled
.
Asset Liability Management
The primary functions of asset-liability management are to ensure adequate liquidity and maintain an appropriate balance between interest earning assets and interest bearing liabilities. This process is overseen by the Asset-Liability Committee (“ALCO”) which monitors and controls, among other variables, the liquidity, balance sheet structure and interest rate risk of the consolidated company within policy parameters established and outlined in the ALCO Policy which are reviewed by the Board of Directors at least annually. Additionally, the ALCO committee meets periodically and reports on liquidity, interest rate sensitivity and projects financial performance in various interest rate scenarios.
Liquidity:
Liquidity is the ability of the financial institution to ensure that adequate funds will be available to meet its financial commitments as they become due. In managing its liquidity position, the financial institution evaluates all sources of funds, the largest of which is deposits. Also taken into consideration are securities maturing in one year or less, other short-term investments, and the repayment of loans. These sources provide the financial institution with alternatives to meet its short-term liquidity needs. Longer-term liquidity needs may be met by issuing longer-term deposits and by raising additional capital.
The Company generally targets liquidity ratios equal to or greater than 12% and 10% of total deposits and total liabilities, respectively. The liquidity ratios are specifically defined as the ratio of net cash, available FHLB and other lines of credit, and unpledged marketable securities relative to both total deposits and total liabilities. At December 31, 2013, liquidity as a percent of deposits was 72% and liquidity as a percent of total liabilities was 56%. At December 31, 2012, liquidity as a percent of deposits was 48% and liquidity as a percent of total liabilities was 38%. Management believes that the Company’s liquidity position continues to be adequate and meets or exceeds the liquidity target set forth in the Asset/Liability Management Policy. Management believes that due to its financial position, it will be able to raise deposits as needed to meet liquidity demands. However, any financial institution could have unmet liquidity demands at any time.
Our funding decisions can be influenced by unplanned events, which include, but are not limited to, the inability to fund asset growth, difficulty renewing or replacing funds that mature, the ability to maintain or draw down lines of credit with other financial institutions, significant customer withdrawals of deposits, and market disruptions. The Company has a liquidity contingency plan in the event liquidity falls below an acceptable level, however in today’s economic environment, events could arise that may render sources of liquid funds unavailable in the future when required. The Company’s ALCO meets monthly to monitor liquidity management.
Contractual Obligations and Other Commitments:
The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of December 31, 2013.
|
|
|
As of December 31, 2013
|
|
|
(In thousands)
|
|
Total
|
|
|
Less than
one year
|
|
|
One to
three years
|
|
|
Four to
five years
|
|
|
More than
five years
|
|
|
FHLB borrowings
|
|
$
|
65,000
|
|
|
$
|
10,000
|
|
|
$
|
20,000
|
|
|
$
|
35,000
|
|
|
$
|
-
|
|
|
Operating leases
|
|
|
6,367
|
|
|
|
858
|
|
|
|
1,760
|
|
|
|
1,679
|
|
|
|
2,070
|
|
|
PNC Bank
|
|
|
42,881
|
|
|
|
-
|
|
|
|
2,881
|
|
|
|
40,000
|
|
|
|
-
|
|
|
Benefit obligations
|
|
|
10,612
|
|
|
|
970
|
|
|
|
2,002
|
|
|
|
2,030
|
|
|
|
5,610
|
|
|
Standby letters of credit
|
|
|
2,679
|
|
|
|
2,679
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Subordinated debt
|
|
|
25,774
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,774
|
|
|
Non-interest bearing deposits
|
|
|
60,473
|
|
|
|
60,473
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Interest bearing deposits
|
|
|
227,646
|
|
|
|
99,605
|
|
|
|
128,041
|
|
|
|
-
|
|
|
|
-
|
|
|
Time deposits
|
|
|
240,845
|
|
|
|
117,181
|
|
|
|
100,945
|
|
|
|
8,577
|
|
|
|
14,142
|
|
|
Total
|
|
$
|
682,277
|
|
|
$
|
291,766
|
|
|
$
|
255,629
|
|
|
$
|
87,286
|
|
|
$
|
47,596
|
|
Capital Adequacy
In connection with a prior bank regulatory examination, the
FDIC concluded,
based upon its interpretation of the Consolidated Reports of Condition and Income (the “Call Report”) instructions and under regulatory accounting principles (“RAP”), that income from Royal Bank’s tax lien business should be recognized on a cash basis, not an accrual basis. Royal Bank’s current accrual method is in accordance with U.S. GAAP. Royal Bank disagrees with the FDIC’s conclusion and filed the Call Report for December 31, 2013 and the previous 13 quarters in accordance with U.S. GAAP. The change in the method of revenue recognition for the tax lien business for regulatory accounting purposes affects Royal Bank’s capital ratios as shown below. The resolution of this matter will be decided by additional joint regulatory agency guidance which includes the Federal Reserve Bank, the FDIC, and the office of the Controller of the Currency ("OCC").
The table below sets forth Royal Bank’s capital ratios under RAP, based on the FDIC’s interpretation of the Call Report instructions:
|
|
|
As of December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Leverage ratio
|
|
|
9.13
|
%
|
|
|
8.00
|
%
|
|
Tier 1 risk based capital ratio
|
|
|
14.34
|
%
|
|
|
13.94
|
%
|
|
Total risk based capital ratio
|
|
|
15.61
|
%
|
|
|
15.22
|
%
|
The tables below reflect the adjustments to the net loss as well as the capital ratios under U.S. GAAP:
|
|
|
For the years ended
December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
RAP net loss
|
|
$
|
(139
|
)
|
|
$
|
(17,974
|
)
|
|
Tax lien adjustment, net of noncontrolling interest
|
|
|
2,844
|
|
|
|
4,731
|
|
|
U.S. GAAP net income (loss)
|
|
$
|
2,705
|
|
|
$
|
(13,243
|
)
|
|
|
|
At December 31, 2013
|
|
|
At December 31, 2012
|
|
|
|
|
As reported
|
|
|
As adjusted
|
|
|
As reported
|
|
|
As adjusted
|
|
|
|
|
under RAP
|
|
|
for U.S. GAAP
|
|
|
under RAP
|
|
|
for U.S. GAAP
|
|
|
Total capital (to risk-weighted assets)
|
|
|
15.61
|
%
|
|
|
16.49
|
%
|
|
|
15.22
|
%
|
|
|
16.73
|
%
|
|
Tier I capital (to risk-weighted assets)
|
|
|
14.34
|
%
|
|
|
15.22
|
%
|
|
|
13.94
|
%
|
|
|
15.44
|
%
|
|
Tier I capital (to average assets, leverage)
|
|
|
9.13
|
%
|
|
|
9.73
|
%
|
|
|
8.00
|
%
|
|
|
8.93
|
%
|
The tables below reflect the Company’s capital ratios and the Company’s performance ratios:
|
|
|
As of December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Leverage ratio
|
|
|
9.79
|
%
|
|
|
9.05
|
%
|
|
Tier 1 risk based capital ratio
|
|
|
15.31
|
%
|
|
|
15.62
|
%
|
|
Total risk based capital ratio
|
|
|
18.09
|
%
|
|
|
18.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Capital performance
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
0.28
|
%
|
|
|
(1.91
|
%)
|
|
Return on average equity
|
|
|
4.17
|
%
|
|
|
(23.05
|
%)
|
The Company has filed the Consolidated Financial Statements for Bank Holding Companies-FR Y-9C (“FR Y-9C”) for December 31, 2013
consistent with U.S. GAAP and the FR Y-9C instructions. In the event that a similar adjustment for RAP purposes would be required by the Federal Reserve on the holding company level, the adjusted ratios are shown in the tables below.
|
|
|
For the years ended December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
U.S. GAAP net income (loss)
|
|
$
|
2,109
|
|
|
$
|
(15,625
|
)
|
|
Tax lien adjustment, net of noncontrolling interest
|
|
|
(2,844
|
)
|
|
|
(4,731
|
)
|
|
RAP net loss
|
|
$
|
(735
|
)
|
|
$
|
(20,356
|
)
|
|
|
|
At December 31, 2013
|
|
|
At December 31, 2012
|
|
|
|
|
As reported
|
|
|
As adjusted
|
|
|
As reported
|
|
|
As adjusted
|
|
|
|
|
under US GAAP
|
|
|
for RAP
|
|
|
under US GAAP
|
|
|
for RAP
|
|
|
Total capital (to risk-weighted assets)
|
|
|
18.09
|
%
|
|
|
17.24
|
%
|
|
|
18.46
|
%
|
|
|
17.01
|
%
|
|
Tier I capital (to risk-weighted assets)
|
|
|
15.31
|
%
|
|
|
14.10
|
%
|
|
|
15.62
|
%
|
|
|
13.55
|
%
|
|
Tier I capital (to average assets, leverage)
|
|
|
9.79
|
%
|
|
|
8.98
|
%
|
|
|
9.05
|
%
|
|
|
7.79
|
%
|
The capital ratios set forth above compare favorably to the minimum required amounts of Tier 1 and total capital to risk-weighted assets and the minimum Tier 1 leverage ratio, as defined by the banking regulators. At December 31, 2013, the Company was required to have minimum Tier 1 and total capital ratios of 4.0% and 8.0%, respectively, and a minimum Tier 1 leverage ratio of 4.0%. At December 31, 2013, the Company met the regulatory minimum capital requirements, and management believes that, under current regulations, the Company will continue to meet its minimum capital requirements in the foreseeable future. As described in “Regulatory Action” under “Item 1 – Business” in this Report, Royal Bank is required to maintain a minimum Tier 1 leverage ratio of 8% and a Total risk-based capital ratio of 12% as part of an informal agreement. Royal Bank met those requirements at December 31, 2013. See “Note 15 – Regulatory Capital Requirements” of the Notes to Consolidated Financial Statements in Item 8 of this Report. Royal Bank met the criteria for a well-capitalized institution which is a leverage ratio of 5%, a Tier 1 ratio of 8%, and a total capital ratio of 10%.
Management Options to Purchase Securities
The 2007 Long-Term Incentive Plan was approved by shareholders at the 2007 Annual Meeting. All employees and non-employee directors of the Company and its designated subsidiaries are eligible participants. The plan includes 1,000,000 shares of Class A common stock (of which 250,000 shares may be issued as restricted stock), subject to customary anti-dilution adjustments, or approximately 9.0% of total outstanding shares of the Class A common stock. As of December 31, 2013, options to purchase 206,072 shares from this plan have been granted. The option price is equal to the fair market value at the date of the grant. The options are exercisable based on the vesting schedule of the specific grant and begin one year after the date of grant. The options must be exercised within ten years of the grant. At December 31, 2013, 89,386 of the options that have been granted are outstanding. The restricted stock is granted with an estimated fair value equal to the market value of the Company closing stock price on the date of the grant. Restricted stock will vest three years from the grant date, if the Company achieves specific goals set by the Compensation Committee and approved by the Board of Directors. These goals include a three year average return on assets compared to peers, a three year average return on equity compared to peers and a minimum return on both assets and equity over the three year period.
The Company had a non-qualified outside directors’ stock option plan and a non-qualified employee stock option and appreciation right plan. The ability to grant new options under these two plans expired. At December 31, 2013, 25,670 of the options that have been granted under the outside directors’ stock option plan are outstanding and exercisable and 82,780 of the options that have been granted under employee stock option are outstanding and exercisable.
Loans and Lease Financing Receivables
The Company originates commercial and real estate loans, including construction and land development primarily in the greater Philadelphia metropolitan area as well as selected locations throughout the Mid-Atlantic region. The Company also has participated with other financial institutions in selected construction and land development loans outside these geographic areas. The Company has a concentration of credit risk in commercial real estate, construction and land development loans at December 31, 2013. A substantial portion of its debtors’ ability to honor these contracts is dependent upon the housing sector specifically and the economy in general.
The Company classifies its leases as finance leases, in accordance to FASB ASC Topic 840, “Leases”. The difference between the Company’s gross investment in the lease and the cost or carrying amount of the leased property, if different, is recorded as unearned income, which is amortized to income over the lease term by the interest method.
The Company has made loans to the officers and directors of the Company and to their associates. In accordance with Regulation O related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectability. The aggregate dollar amount of these loans was $234,000 and $1.4 million at December 31, 2013 and 2012. During 2013, there were no new related party loans. Total payments received on related party loans in 2013 were $1.2 million.
The following table reflects the composition of the loan portfolio and the percent of gross loans outstanding represented by each category at the dates indicated.
|
|
|
As of December 31,
|
|
|
(Dollars in thousands)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Commercial real estate
|
|
$
|
148,293
|
|
|
|
40.5
|
%
|
|
$
|
167,115
|
|
|
|
48.5
|
%
|
|
$
|
182,579
|
|
|
|
44.0
|
%
|
|
$
|
194,203
|
|
|
|
39.0
|
%
|
|
$
|
277,234
|
|
|
|
40.3
|
%
|
|
Construction and land development
|
|
|
45,261
|
|
|
|
12.3
|
%
|
|
|
37,215
|
|
|
|
10.8
|
%
|
|
|
54,120
|
|
|
|
13.0
|
%
|
|
|
79,638
|
|
|
|
16.0
|
%
|
|
|
119,074
|
|
|
|
17.3
|
%
|
|
Commercial and industrial
|
|
|
79,589
|
|
|
|
21.7
|
%
|
|
|
40,560
|
|
|
|
11.8
|
%
|
|
|
54,136
|
|
|
|
13.1
|
%
|
|
|
74,027
|
|
|
|
14.9
|
%
|
|
|
104,063
|
|
|
|
15.1
|
%
|
|
Multi-family
|
|
|
11,737
|
|
|
|
3.2
|
%
|
|
|
11,756
|
|
|
|
3.4
|
%
|
|
|
11,622
|
|
|
|
2.8
|
%
|
|
|
10,277
|
|
|
|
2.1
|
%
|
|
|
22,017
|
|
|
|
3.2
|
%
|
|
Residential real estate
|
|
|
25,535
|
|
|
|
7.0
|
%
|
|
|
24,981
|
|
|
|
7.3
|
%
|
|
|
26,637
|
|
|
|
6.4
|
%
|
|
|
29,299
|
|
|
|
5.9
|
%
|
|
|
48,498
|
|
|
|
7.1
|
%
|
|
Residential real estate-mezzanine
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
2,480
|
|
|
|
0.4
|
%
|
|
Leases
|
|
|
42,524
|
|
|
|
11.6
|
%
|
|
|
37,347
|
|
|
|
10.8
|
%
|
|
|
36,014
|
|
|
|
8.7
|
%
|
|
|
38,725
|
|
|
|
7.8
|
%
|
|
|
39,097
|
|
|
|
5.7
|
%
|
|
Tax certificates
|
|
|
12,716
|
|
|
|
3.5
|
%
|
|
|
24,569
|
|
|
|
7.1
|
%
|
|
|
48,809
|
|
|
|
11.8
|
%
|
|
|
70,443
|
|
|
|
14.1
|
%
|
|
|
73,106
|
|
|
|
10.6
|
%
|
|
Consumer
|
|
|
826
|
|
|
|
0.2
|
%
|
|
|
1,139
|
|
|
|
0.3
|
%
|
|
|
949
|
|
|
|
0.2
|
%
|
|
|
793
|
|
|
|
0.2
|
%
|
|
|
2,173
|
|
|
|
0.3
|
%
|
|
Total gross loans and leases
|
|
$
|
366,481
|
|
|
|
100
|
%
|
|
$
|
344,682
|
|
|
|
100
|
%
|
|
$
|
414,866
|
|
|
|
100
|
%
|
|
$
|
497,405
|
|
|
|
100
|
%
|
|
$
|
687,742
|
|
|
|
100
|
%
|
|
Unearned income*
|
|
|
-
|
|
|
|
|
|
|
|
(517
|
)
|
|
|
|
|
|
|
(623
|
)
|
|
|
|
|
|
|
(551
|
)
|
|
|
|
|
|
|
(878
|
)
|
|
|
|
|
|
|
|
$
|
366,481
|
|
|
|
|
|
|
$
|
344,165
|
|
|
|
|
|
|
$
|
414,243
|
|
|
|
|
|
|
$
|
496,854
|
|
|
|
|
|
|
$
|
686,864
|
|
|
|
|
|
|
Allowance for loan and lease losses
|
|
|
(13,671
|
)
|
|
|
|
|
|
|
(17,261
|
)
|
|
|
|
|
|
|
(16,380
|
)
|
|
|
|
|
|
|
(21,129
|
)
|
|
|
|
|
|
|
(30,331
|
)
|
|
|
|
|
|
Total net loans and leases
|
|
$
|
352,810
|
|
|
|
|
|
|
$
|
326,904
|
|
|
|
|
|
|
$
|
397,863
|
|
|
|
|
|
|
$
|
475,725
|
|
|
|
|
|
|
$
|
656,533
|
|
|
|
|
|
|
*
|
For the 2013 period net deferred fees were allocated among the various loan types.
|
Credit Classification Process
The loan review function is outsourced to a third party vendor which applies the Company’s loan rating system to specific credits. The Company uses a nine point grading risk classification system commonly used in the financial services industry. The first four classifications are rated Pass. The riskier classifications include Pass-Watch, Special Mention, Substandard, Doubtful and Loss. Upon completion of a loan review, a copy of any review receiving an adverse classification by the reviewer is presented to the Classified, Charge-off and Impairment Committee (“CCIC”) for discussion. The CCO is the primary bank officer dealing with the third party vendor during the reviews.
All loans are subject to initial loan review. Additional review is undertaken with respect to loans providing potentially greater exposure. This is accomplished by:
|
|
·
|
100% of loans with balances of $1.5 million or greater;
|
|
|
·
|
80% of loans with balances from $1.0 million up to $1.5 million;
|
|
|
·
|
25% of loans with balances from $500,000 up to $1 million;
|
|
|
·
|
5% of loans with balances below $500,000; and
|
|
|
·
|
Loans requested specifically by the Company’s management
|
Loans on the Company’s Special Assets Committee list are also subject to loan review even though they are receiving the daily attention of an assigned officer and monthly attention of the Special Assets Committee. A watch list is maintained and reviewed at each meeting of CCIC. CCIC was formed to formalize the process and documentation required to classify, remove from classification, impair or charge-off a loan. The CCIC, which is comprised of the CEO, CFO, CCO, CLO, CARO, and Chief Accounting Officer (“CAO”) meet as required and provide regular updated reports to the Board of Directors. Loans are added to the watch list, even though the loans may be current or less than 30 days delinquent if they exhibit elements of substandard creditworthiness. The watch list contains a statement for each loan as to why it merits special attention, and this list is distributed to the Board of Directors on a monthly basis. Loans may be removed from the watch list if the CCIC determines that exception items have been resolved or creditworthiness has improved. Additionally, if loans become serious collection matters and are listed on the Company’s monthly delinquent loan or Special Assets Committee lists, they may be removed from the watch list. Minutes outlining the CCIC’s findings and recommendations are issued after each meeting for follow-up by individual loan officers.
All loans, at the time of presentation to the appropriate loan committee, are given an initial loan “risk” rating by the CCO. From time to time, and at the general direction of any of the various loan committees, the ratings may be changed based on the findings of that committee. Items considered in assigning ratings include the financial strength of the borrower and/or guarantors, the type of collateral, the collateral lien position, the type of loan and loan structure, any potential risk inherent in the specific loan type, higher than normal monitoring of the loan or any other factor deemed appropriate by any of the various committees for changing the rating of the loan. Any such change in rating is reflected in the minutes of that committee.
Credit Quality
The following table presents the principal amounts of non-accrual loans held for investment and other real estate owned:
|
|
|
As of December 31,
|
|
|
(Dollars in thousands)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Non-accrual loans (1)
|
|
$
|
10,157
|
|
|
$
|
21,432
|
|
|
$
|
38,755
|
|
|
$
|
43,162
|
|
|
$
|
73,679
|
|
|
Other real estate owned
|
|
|
9,617
|
|
|
|
13,435
|
|
|
|
21,016
|
|
|
|
29,244
|
|
|
|
30,317
|
|
|
Total non-performing assets
|
|
$
|
19,774
|
|
|
$
|
34,867
|
|
|
$
|
59,771
|
|
|
$
|
72,406
|
|
|
$
|
103,996
|
|
|
Non-performing assets to total assets
|
|
|
2.70
|
%
|
|
|
4.53
|
%
|
|
|
7.08
|
%
|
|
|
7.42
|
%
|
|
|
8.07
|
%
|
|
Non-performing loans to total loans
|
|
|
2.77
|
%
|
|
|
6.23
|
%
|
|
|
9.36
|
%
|
|
|
8.69
|
%
|
|
|
10.73
|
%
|
|
Allowance for loan loss to non-accrual loans
|
|
|
134.60
|
%
|
|
|
80.54
|
%
|
|
|
42.27
|
%
|
|
|
48.95
|
%
|
|
|
41.17
|
%
|
|
|
(1)
|
Generally, a loan is placed in non-accrual status when it has been delinquent for a period of 90 days or more, unless the loan is both well secured and in the process of collection.
|
Non-accrual loan activity for each of the four quarters in 2013 is set forth below:
|
|
|
|
|
|
1st Quarter Activity
|
|
|
(In thousands)
|
|
Balance at
January 1, 2013
|
|
|
Additions
|
|
|
Payments
and other
decreases
|
|
|
Charge-offs/
Impairment*
|
|
|
Transfer to
OREO
|
|
|
Balance at
March 31, 2013
|
|
|
Non-accrual loans held for investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
10,345
|
|
|
$
|
-
|
|
|
$
|
(1,631
|
)
|
|
$
|
(835
|
)
|
|
$
|
-
|
|
|
$
|
7,879
|
|
|
Construction and land development
|
|
|
4,280
|
|
|
|
-
|
|
|
|
(418
|
)
|
|
|
(820
|
)
|
|
|
-
|
|
|
|
3,042
|
|
|
Commercial & industrial
|
|
|
4,961
|
|
|
|
141
|
|
|
|
(906
|
)
|
|
|
(173
|
)
|
|
|
-
|
|
|
|
4,023
|
|
|
Residential real estate
|
|
|
994
|
|
|
|
-
|
|
|
|
(462
|
)
|
|
|
-
|
|
|
|
(100
|
)
|
|
|
432
|
|
|
Leases
|
|
|
251
|
|
|
|
-
|
|
|
|
(84
|
)
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
157
|
|
|
Tax certificates
|
|
|
601
|
|
|
|
1,955
|
|
|
|
(3
|
)
|
|
|
(147
|
)
|
|
|
(1,855
|
)
|
|
|
551
|
|
|
Total non-accrual LHFI
|
|
$
|
21,432
|
|
|
$
|
2,096
|
|
|
$
|
(3,504
|
)
|
|
$
|
(1,985
|
)
|
|
$
|
(1,955
|
)
|
|
$
|
16,084
|
|
|
Non-accrual loans held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
1,572
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(100
|
)
|
|
$
|
-
|
|
|
$
|
1,472
|
|
|
Total non-accrual LHFS
|
|
$
|
1,572
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(100
|
)
|
|
$
|
-
|
|
|
$
|
1,472
|
|
|
Total non-accrual loans
|
|
$
|
23,004
|
|
|
$
|
2,096
|
|
|
$
|
(3,504
|
)
|
|
$
|
(2,085
|
)
|
|
$
|
(1,955
|
)
|
|
$
|
17,556
|
|
|
|
|
|
|
|
2nd Quarter Activity
|
|
|
(In thousands)
|
|
Balance at
April 1, 2013
|
|
|
Additions
|
|
|
Payments
and other
decreases
|
|
|
Charge-offs/
Impairment*
|
|
|
Transfer to
OREO
|
|
|
Balance at
June 30, 2013
|
|
|
Non-accrual loans held for investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
7,879
|
|
|
$
|
926
|
|
|
$
|
(121
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,684
|
|
|
Construction and land development
|
|
|
3,042
|
|
|
|
-
|
|
|
|
(287
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
2,755
|
|
|
Commercial & industrial
|
|
|
4,023
|
|
|
|
44
|
|
|
|
(364
|
)
|
|
|
(21
|
)
|
|
|
-
|
|
|
|
3,682
|
|
|
Residential real estate
|
|
|
432
|
|
|
|
59
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
491
|
|
|
Leases
|
|
|
157
|
|
|
|
197
|
|
|
|
(15
|
)
|
|
|
(99
|
)
|
|
|
-
|
|
|
|
240
|
|
|
Tax certificates
|
|
|
551
|
|
|
|
2,362
|
|
|
|
(39
|
)
|
|
|
(138
|
)
|
|
|
(2,252
|
)
|
|
|
484
|
|
|
Total non-accrual LHFI
|
|
$
|
16,084
|
|
|
$
|
3,588
|
|
|
$
|
(826
|
)
|
|
$
|
(258
|
)
|
|
$
|
(2,252
|
)
|
|
$
|
16,336
|
|
|
Non-accrual loans held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
1,472
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(53
|
)
|
|
$
|
-
|
|
|
$
|
1,419
|
|
|
Total non-accrual LHFS
|
|
$
|
1,472
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(53
|
)
|
|
$
|
-
|
|
|
$
|
1,419
|
|
|
Total non-accrual loans
|
|
$
|
17,556
|
|
|
$
|
3,588
|
|
|
$
|
(826
|
)
|
|
$
|
(311
|
)
|
|
$
|
(2,252
|
)
|
|
$
|
17,755
|
|
|
|
|
|
|
|
3rd Quarter Activity
|
|
|
(In thousands)
|
|
Balance at
July 1, 2013
|
|
|
Additions
|
|
|
Payments
and other
decreases
|
|
|
Charge-offs/
Impairment*
|
|
|
Transfer to
OREO
|
|
|
Balance at
September 30, 2013
|
|
|
Non-accrual loans held for investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
8,684
|
|
|
$
|
-
|
|
|
$
|
(2,602
|
)
|
|
$
|
(605
|
)
|
|
$
|
-
|
|
|
$
|
5,477
|
|
|
Construction and land development
|
|
|
2,755
|
|
|
|
-
|
|
|
|
(56
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
2,699
|
|
|
Commercial & industrial
|
|
|
3,682
|
|
|
|
275
|
|
|
|
(68
|
)
|
|
|
(34
|
)
|
|
|
-
|
|
|
|
3,855
|
|
|
Residential real estate
|
|
|
491
|
|
|
|
77
|
|
|
|
(16
|
)
|
|
|
(32
|
)
|
|
|
-
|
|
|
|
520
|
|
|
Leases
|
|
|
240
|
|
|
|
185
|
|
|
|
-
|
|
|
|
(40
|
)
|
|
|
-
|
|
|
|
385
|
|
|
Tax certificates
|
|
|
484
|
|
|
|
2,399
|
|
|
|
(5
|
)
|
|
|
(126
|
)
|
|
|
(2,220
|
)
|
|
|
532
|
|
|
Total non-accrual LHFI
|
|
$
|
16,336
|
|
|
$
|
2,936
|
|
|
$
|
(2,747
|
)
|
|
$
|
(837
|
)
|
|
$
|
(2,220
|
)
|
|
$
|
13,468
|
|
|
Non-accrual loans held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
1,419
|
|
|
$
|
-
|
|
|
$
|
(1,419
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Total non-accrual LHFS
|
|
$
|
1,419
|
|
|
$
|
-
|
|
|
$
|
(1,419
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Total non-accrual loans
|
|
$
|
17,755
|
|
|
$
|
2,936
|
|
|
$
|
(4,166
|
)
|
|
$
|
(837
|
)
|
|
$
|
(2,220
|
)
|
|
$
|
13,468
|
|
|
|
|
|
|
|
4th Quarter Activity
|
|
|
(In thousands)
|
|
Balance at
October 1, 2013
|
|
|
Additions
|
|
|
Payments
and other
decreases
|
|
|
Charge-offs/
Impairment*
|
|
|
Transfer to
OREO
|
|
|
Balance at
December 31, 2013
|
|
|
Non-accrual loans held for investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
5,477
|
|
|
$
|
1,643
|
|
|
$
|
(4,551
|
)
|
|
$
|
(244
|
)
|
|
$
|
-
|
|
|
$
|
2,325
|
|
|
Construction and land development
|
|
|
2,699
|
|
|
|
-
|
|
|
|
(49
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
2,650
|
|
|
Commercial & industrial
|
|
|
3,855
|
|
|
|
-
|
|
|
|
(71
|
)
|
|
|
(155
|
)
|
|
|
-
|
|
|
|
3,629
|
|
|
Residential real estate
|
|
|
520
|
|
|
|
149
|
|
|
|
(23
|
)
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
632
|
|
|
Leases
|
|
|
385
|
|
|
|
315
|
|
|
|
-
|
|
|
|
(233
|
)
|
|
|
-
|
|
|
|
467
|
|
|
Tax certificates
|
|
|
532
|
|
|
|
2,726
|
|
|
|
(13
|
)
|
|
|
(167
|
)
|
|
|
(2,624
|
)
|
|
|
454
|
|
|
Total non-accrual LHFI
|
|
$
|
13,468
|
|
|
$
|
4,833
|
|
|
$
|
(4,707
|
)
|
|
$
|
(813
|
)
|
|
$
|
(2,624
|
)
|
|
$
|
10,157
|
|
|
*
|
Charge-offs on LHFI were recorded in the allowance while impairment on LHFS was recorded in other expenses.
|
Total non-accrual loans at December 31, 2013 were $10.2 million in LHFI. Total non-accrual loans at December 31, 2012 were $23.0 million and were comprised of $21.4 million in LHFI and $1.6 million in LHFS. The $12.8 million decline in total non-accrual loans was the result of a $13.2 million reduction in existing non-accrual loan balances through payments or payoffs, $4.0 million in charge-offs and write downs related to impairment, and transfers to OREO of $9.1 million, which collectively were offset by $13.5 million in additions. The majority of the new non-accrual activity and transfers to OREO originated from the tax certificate portfolio. Commercial, construction and land, and commercial real estate loans represent 36%, 26%, and 23%, respectively, of the total $10.2 million in non-accrual loans at December 31, 2013.
Impaired Loans
The Company identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. Impaired loans include TDRs. The Company does not accrue interest income on impaired non-accrual loans. Excess proceeds received over the principal amounts due on impaired non-accrual loans are recognized as interest income on a cash basis. The Company recognizes interest income under the accrual basis when the principal payments on the loans become current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company. If these factors do not exist, the Company does not recognize interest income. If interest had been accrued, such interest income would have been approximately $1.7 million and $3.1 million for the years ended December 31, 2013 and 2012, respectively. At December 31, 2013, the Company had no loans past due 90 days or more on which interest continues to accrue.
The following is a summary of information pertaining to impaired loans and leases:
|
|
|
As of December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
Impaired LHFI with a valuation allowance
|
|
$
|
3,835
|
|
|
$
|
9,405
|
|
|
Impaired LHFI without a valuation allowance
|
|
|
14,671
|
|
|
|
19,423
|
|
|
Impaired LHFS
|
|
|
-
|
|
|
|
1,572
|
|
|
Total impaired loans and leases
|
|
$
|
18,506
|
|
|
$
|
32,412
|
|
|
Valuation allowance related to impaired LHFI
|
|
$
|
886
|
|
|
$
|
2,026
|
|
Total cash collected on impaired loans and leases during 2013 and 2012 was $16.1 million and $23.4 million, respectively, of which $15.3 million and $21.1 million was credited to the principal balance outstanding on such loans, respectively.
Troubled Debt Restructurings
A loan modification is deemed a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made by the Company that would not otherwise be considered for a borrower or collateral with similar credit risk characteristics. All loans classified as TDRs are considered to be impaired. TDRs are returned to an accrual status when the loan is brought current, has performed in accordance with the contractual restructured terms for a reasonable period of time (generally six months) and the ultimate collectibility of the total contractual restructured principal and interest is no longer in doubt. At December 31, 2013, the Company had twelve TDRs, of which five are on non-accrual status, with a total carrying value of $12.1 million. At the time of the modifications, five of the loans were already classified as impaired loans. At December 31, 2012, the Company had twelve TDRs, of which eight were on non-accrual status, with a total carrying value of $21.1 million. At the time of the modifications, eight of the loans were already classified as impaired loans. The Company’s policy for TDRs is to recognize income on currently performing restructured loans under the accrual method.
The following table details the Company’s TDRs that are on an accrual status and a non-accrual status at December 31, 2013.
|
|
|
As of December 31, 2013
|
|
|
(In thousands)
|
|
Number of
loans
|
|
|
Accrual
Status
|
|
|
Non-Accrual
Status
|
|
|
Total TDRs
|
|
|
Commercial real estate
|
|
|
3
|
|
|
$
|
3,847
|
|
|
$
|
-
|
|
|
$
|
3,847
|
|
|
Construction and land development
|
|
|
4
|
|
|
|
1,257
|
|
|
|
479
|
|
|
|
1,736
|
|
|
Commercial & industrial
|
|
|
3
|
|
|
|
4,420
|
|
|
|
1,960
|
|
|
|
6,380
|
|
|
Residential real estate
|
|
|
2
|
|
|
|
-
|
|
|
|
121
|
|
|
|
121
|
|
|
Total
|
|
|
12
|
|
|
$
|
9,524
|
|
|
$
|
2,560
|
|
|
$
|
12,084
|
|
The following table presents newly restructured loans that occurred during the year ended December 31, 2013.
|
|
|
Modifications by type for the year ended December 31, 2013
|
|
|
(Dollars in thousands)
|
|
Number of loans
|
|
|
Rate
|
|
|
Term
|
|
|
Payment
|
|
|
Combination of
types
|
|
|
Total
|
|
|
Pre-
Modification Outstanding
Recorded
Investment
|
|
|
Post-
Modification Outstanding
Recorded
Investment
|
|
|
Commercial real estate
|
|
|
2
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,705
|
|
|
$
|
3,705
|
|
|
$
|
3,761
|
|
|
$
|
3,761
|
|
|
Commercial & industrial
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
82
|
|
|
|
82
|
|
|
|
87
|
|
|
|
87
|
|
|
Total
|
|
|
3
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,787
|
|
|
$
|
3,787
|
|
|
$
|
3,848
|
|
|
$
|
3,848
|
|
At December 31, 2013, all of the TDRs were in compliance with their restructured terms.
Potential Problem Loans
Potential problem loans are loans not currently classified as non-performing loans, but for which management has doubts as to the borrowers’ ability to comply with present repayment terms. The loans are usually delinquent more than 30 days but less than 90 days. Potential problem loans amounted to approximately $9.1 million and $13.3 million at December 31, 2013 and December 31, 2012, respectively. Included in potential problem loans is one relationship with a carrying value of $4.9 million. While the loan relationship was not delinquent at December 31, 2013, management is concerned about the credit and has been monitoring it closely.
Other Real Estate Owned (“OREO”):
OREO declined $3.8 million from $13.4 million at December 31, 2012 to $9.6 million at December 31, 2013. During 2013 there was a shift in OREO composition from real estate acquired through, or in lieu of foreclosure in settlement of loans to real estate acquired through foreclosure related to tax liens. Set forth below is a table which details the changes in OREO from December 31, 2012 to December 31, 2013.
|
|
|
For the year ended December 31, 2013
|
|
|
(In thousands)
|
|
Loans
|
|
|
Tax Liens
|
|
|
Total
|
|
|
Beginning balance
|
|
$
|
11,365
|
|
|
$
|
2,070
|
|
|
$
|
13,435
|
|
|
Net proceeds from sales
|
|
|
(8,869
|
)
|
|
|
(3,910
|
)
|
|
|
(12,779
|
)
|
|
Net gain on sales
|
|
|
228
|
|
|
|
1,199
|
|
|
|
1,427
|
|
|
Assets acquired on non-accrual loans
|
|
|
100
|
|
|
|
8,951
|
|
|
|
9,051
|
|
|
Impairment charge
|
|
|
(1,099
|
)
|
|
|
(418
|
)
|
|
|
(1,517
|
)
|
|
Ending balance
|
|
$
|
1,725
|
|
|
$
|
7,892
|
|
|
$
|
9,617
|
|
At December 31, 2013, OREO was comprised of $7.9 million in tax liens, $769,000 in land, $521,000 in commercial real estate, and a residential condominium project with a fair value of $435,000. During 2013, the Company sold five separate land parcels and sold residential real estate properties related to five loan relationships. The Company received $6.0 million in net proceeds and recorded a net loss of $194,000 as a result of these sales. Additionally, the Company sold a commercial real estate property, which was a hotel
construction project in Minneapolis, Minnesota in which the Company was a participant. The Company received its pro rata share of net proceeds in the amount of $2.5 million and recorded a net gain of $262,000.
The Company also sold 42 condominiums related to the
construction project in Minneapolis, Minnesota. The Company received its pro rata share of net proceeds in the amount of $330,000 and recorded net gains of $160,000. During 2013, the Company recorded impairment charges
of $628,000 on three land properties. Due to the length of time that these properties have been classified as OREO and the inability to close on prior agreements of sales, the Company decided to a make a steep reduction in the selling prices of these three properties. In addition the Company recorded impairment charges of $325,000 and $146,000 related to commercial real estate and residential real estate properties due to updated annual appraisals or agreements of sale.
In 2013 as the composition of the OREO assets evolved to properties acquired through the tax lien portfolio, the Company transferred $9.0 million to OREO which represents 84 separate properties. During 2013, the Company sold 49 of the tax lien properties, received proceeds of $3.9 million, and recorded net gains of $1.2 million as a result of these sales. Additionally, the Company recorded impairment charges of $418,000 in 2013 related to the tax lien properties. At December 31, 2012, OREO assets acquired through the tax lien portfolio were $2.1 million and were comprised of 30 properties.
The Company is working to satisfactorily sell the remaining OREO properties. However the Company recognizes that the successful disposition of the properties, specifically the land, will likely take considerable time.
Investment Securities
The following tables present the consolidated amortized cost and approximate fair value at December 31, 2013 and 2012, respectively, for each major category of the Company’s AFS investment securities portfolio.
|
As of December 31, 2013
|
|
|
|
|
Included in AOCL*
|
|
|
|
|
|
(In thousands)
|
|
Amortized
cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair value
|
|
|
Investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
68,207
|
|
|
$
|
-
|
|
|
$
|
(6,171
|
)
|
|
$
|
62,036
|
|
|
Mortgage-backed securities-residential
|
|
|
32,769
|
|
|
|
210
|
|
|
|
(882
|
)
|
|
|
32,097
|
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies
|
|
|
188,194
|
|
|
|
2,887
|
|
|
|
(1,978
|
)
|
|
|
189,103
|
|
|
Non-agency
|
|
|
4,454
|
|
|
|
25
|
|
|
|
-
|
|
|
|
4,479
|
|
|
Corporate bonds
|
|
|
9,669
|
|
|
|
25
|
|
|
|
(256
|
)
|
|
|
9,438
|
|
|
Municipal bonds
|
|
|
7,163
|
|
|
|
-
|
|
|
|
(263
|
)
|
|
|
6,900
|
|
|
Common stocks
|
|
|
33
|
|
|
|
16
|
|
|
|
-
|
|
|
|
49
|
|
|
Other securities
|
|
|
3,363
|
|
|
|
1,405
|
|
|
|
(143
|
)
|
|
|
4,625
|
|
|
Total available-for-sale investment securities
|
|
$
|
313,852
|
|
|
$
|
4,568
|
|
|
$
|
(9,693
|
)
|
|
$
|
308,727
|
|
|
As of December 31, 2012
|
|
|
|
|
Included in AOCL*
|
|
|
|
|
|
(In thousands)
|
|
Amortized
cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair value
|
|
|
Investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
66,371
|
|
|
$
|
151
|
|
|
$
|
(78
|
)
|
|
$
|
66,444
|
|
|
Mortgage-backed securities-residential
|
|
|
30,038
|
|
|
|
518
|
|
|
|
(47
|
)
|
|
|
30,509
|
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies
|
|
|
229,556
|
|
|
|
5,031
|
|
|
|
(611
|
)
|
|
|
233,976
|
|
|
Non-agency
|
|
|
1,007
|
|
|
|
4
|
|
|
|
-
|
|
|
|
1,011
|
|
|
Corporate bonds
|
|
|
7,477
|
|
|
|
32
|
|
|
|
(72
|
)
|
|
|
7,437
|
|
|
Municipal bonds
|
|
|
5,645
|
|
|
|
-
|
|
|
|
(30
|
)
|
|
|
5,615
|
|
|
Common stocks
|
|
|
33
|
|
|
|
14
|
|
|
|
-
|
|
|
|
47
|
|
|
Other securities
|
|
|
3,752
|
|
|
|
520
|
|
|
|
(108
|
)
|
|
|
4,164
|
|
|
Total available-for-sale investment securities
|
|
$
|
343,879
|
|
|
$
|
6,270
|
|
|
$
|
(946
|
)
|
|
$
|
349,203
|
|
|
*
|
Accumulated other comprehensive loss
|
The contractual maturity distribution and weighted average rate of the Company’s AFS debt securities at December 31, 2013 are presented in the following table. Mortgage-backed securities and collateralized mortgage obligations are presented within the category that represents the total weighted average expected maturity.
|
|
|
As of December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
After one year, but
|
|
|
After five years, but
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
|
within five years
|
|
|
within ten years
|
|
|
After ten years
|
|
|
Total
|
|
|
(In thousands, except percentages)
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
U.S. government agencies
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
24,153
|
|
|
|
2.00
|
%
|
|
$
|
37,883
|
|
|
|
2.49
|
%
|
|
$
|
62,036
|
|
|
|
2.30
|
%
|
|
Mortgage-backed securities-residential
|
|
|
4
|
|
|
|
3.00
|
%
|
|
|
8,238
|
|
|
|
3.60
|
%
|
|
|
23,855
|
|
|
|
2.79
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
32,097
|
|
|
|
2.99
|
%
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies
|
|
|
2,291
|
|
|
|
4.14
|
%
|
|
|
115,163
|
|
|
|
3.79
|
%
|
|
|
71,649
|
|
|
|
3.39
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
189,103
|
|
|
|
3.64
|
%
|
|
Non-agency
|
|
|
-
|
|
|
|
-
|
|
|
|
4,479
|
|
|
|
3.32
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,479
|
|
|
|
3.32
|
%
|
|
Corporate bonds
|
|
|
100
|
|
|
|
1.40
|
%
|
|
|
3,661
|
|
|
|
2.91
|
%
|
|
|
3,858
|
|
|
|
2.58
|
%
|
|
|
1,819
|
|
|
|
4.00
|
%
|
|
|
9,438
|
|
|
|
2.98
|
%
|
|
Municipal bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
2,698
|
|
|
|
3.52
|
%
|
|
|
3,235
|
|
|
|
4.06
|
%
|
|
|
967
|
|
|
|
3.50
|
%
|
|
|
6,900
|
|
|
|
3.76
|
%
|
|
Total AFS debt securities
|
|
$
|
2,395
|
|
|
|
3.50
|
%
|
|
$
|
134,239
|
|
|
|
3.83
|
%
|
|
$
|
126,750
|
|
|
|
3.08
|
%
|
|
$
|
40,669
|
|
|
|
2.23
|
%
|
|
$
|
304,053
|
|
|
|
3.25
|
%
|
The Company assesses whether OTTI is present when the fair value of a security is less than its amortized cost. All investment securities are evaluated for OTTI under FASB ASC Topic 320, “Investments-Debt & Equity Securities” (“ASC Topic 320”). Non-agency collateralized mortgage obligations may be evaluated under FASB ASC Topic 320 Subtopic 40, “Beneficial Interests in Securitized Financial Assets” under FASB ASC Topic 325, “Investments-Other”. In determining whether OTTI exists, management considers numerous factors, including but not limited to: (1) the length of time and the extent to which the fair value is less than the amortized cost, (2) the Company’s intent to hold or sell the security, (3) the financial condition and results of the issuer including changes in capital, (4) the credit rating of the issuer, (5) analysts’ earnings estimate, (6) industry trends specific to the security, and (7) timing of debt maturity and status of debt payments. If the Company intends to sell a security or will be required to sell a security, the OTTI is recognized in earnings equal to the entire difference between the fair value and the amortized cost basis at the balance sheet date. If the Company does not intend to sell a security and it is not more likely than not that the entity will be required to sell a security before the recovery of its amortized cost basis, the OTTI is separated into two amounts, the credit related loss and the loss related to other factors. The credit related loss is based on the present value of the expected cash flows and is recognized in earnings. The noncredit-related loss is based on other factors such as illiquidity and is recognized in other comprehensive income.
At December 31, 2013 investment securities were $308.7 million with a net unrealized loss of $5.1 million compared to $349.2 million with a net unrealized gain of $5.3 million at December 31, 2012. The considerable swing to a net unrealized loss was directly impacted by increases of $6.1 million, $1.4 million and $835,000 in the gross unrealized loss on government agency debt securities, CMOs, and MBS, respectively. These securities carry lower coupons and their market value was negatively impacted by a 72.2% increase in the 10-year Treasury yield from 1.76% at December 31, 2012 to 3.03% at December 31, 2013. Refer to “Note 3- Investment Securities” to the Consolidated Financial Statements in Item 8 for more information.
Deposits
The average balance of the Company’s deposits by major classifications for each of the last three years is presented in the following table.
|
|
|
As of December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
(In thousands, except percentages)
|
|
Average Balance
|
|
|
Rate
|
|
|
Average Balance
|
|
|
Rate
|
|
|
Average Balance
|
|
|
Rate
|
|
|
Demand deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest bearing
|
|
$
|
59,989
|
|
|
|
-
|
|
|
$
|
55,666
|
|
|
|
-
|
|
|
$
|
57,241
|
|
|
|
-
|
|
|
Interest bearing (NOW)
|
|
|
42,576
|
|
|
|
0.11
|
%
|
|
|
42,305
|
|
|
|
0.33
|
%
|
|
|
42,488
|
|
|
|
0.56
|
%
|
|
Money market deposits
|
|
|
167,501
|
|
|
|
0.34
|
%
|
|
|
182,297
|
|
|
|
0.65
|
%
|
|
|
178,670
|
|
|
|
0.96
|
%
|
|
Savings deposits
|
|
|
17,802
|
|
|
|
0.21
|
%
|
|
|
17,006
|
|
|
|
0.39
|
%
|
|
|
15,727
|
|
|
|
0.55
|
%
|
|
Certificate of deposit
|
|
|
239,584
|
|
|
|
1.41
|
%
|
|
|
275,959
|
|
|
|
1.64
|
%
|
|
|
327,583
|
|
|
|
2.11
|
%
|
|
Total deposits
|
|
$
|
527,452
|
|
|
|
|
|
|
$
|
573,233
|
|
|
|
|
|
|
$
|
621,709
|
|
|
|
|
|
The remaining maturity of Certificates of Deposit of $100,000 or greater:
|
|
|
As of December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
Three months or less
|
|
$
|
13,598
|
|
|
$
|
23,418
|
|
|
Over three months through twelve months
|
|
|
30,724
|
|
|
|
34,655
|
|
|
Over twelve months through five years
|
|
|
43,464
|
|
|
|
22,425
|
|
|
Over five years
|
|
|
4,977
|
|
|
|
10,735
|
|
|
Total
|
|
$
|
92,763
|
|
|
$
|
91,233
|
|
Short and Long Term Borrowings
|
|
|
As of December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Short term borrowings
|
|
$
|
10,000
|
|
|
$
|
-
|
|
|
$
|
54,218
|
|
|
$
|
22,000
|
|
|
$
|
114,500
|
|
|
Long term borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other borrowings
|
|
|
42,881
|
|
|
|
43,333
|
|
|
|
43,782
|
|
|
|
44,230
|
|
|
|
44,674
|
|
|
Obligations through RE owned via equity invest(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,652
|
|
|
Subordinated debt
|
|
|
25,774
|
|
|
|
25,774
|
|
|
|
25,774
|
|
|
|
25,774
|
|
|
|
25,774
|
|
|
FHLB advances
|
|
|
55,000
|
|
|
|
65,000
|
|
|
|
50,000
|
|
|
|
88,719
|
|
|
|
95,001
|
|
|
Total borrowings
|
|
$
|
133,655
|
|
|
$
|
134,107
|
|
|
$
|
173,774
|
|
|
$
|
180,723
|
|
|
$
|
283,601
|
|
|
(1)
|
This obligation is consolidated from requirements under ASC Topic 810 of which $0 was guaranteed by the Company.
|
|
ITEM 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|
A simulation model is used to estimate the impact of various changes, both upward and downward, in market interest rates and volumes of assets and liabilities on net interest income and net income. This model produces an interest rate exposure report that forecasts changes in the economic value of equity (“EVE”) and net interest income under alternative interest rate environments. This model assumes that the change in interest rates occurs immediately. The EVE is the difference between the present value of the expected future cash flows from Royal Bank’s existing assets and the present value of the expected future cash flows from Royal Bank’s existing liabilities. The assumptions used in evaluating the vulnerability of earnings and capital to changes in interest rates are based on management’s considerations of past experience, current position and anticipated future economic conditions. The interest rate sensitivity of assets and liabilities as well as the estimated effect of changes in interest rates on the EVE and net interest income could vary substantially if different assumptions are used or actual experience differs from what the calculations may be based.
The simulation model indicates that the Company is outside of the Company’s policy limits in all increasing rate scenarios for the EVE but within policy limits for net interest income. The cause of the policy exceptions is primarily related to extension risk within the Company’s investment portfolio. In a rising interest rate environment general expectations are for prepayments of principal to slow down which cause the life of the Company’s mortgage-backed and CMO securities to extend. Management continues to work on changing the mix of interest-earning assets to mitigate this risk. The calculated estimates of changes in the EVE as of December 31, 2013 and net interest income for 2014 for Royal Bank are as follows:
|
(In thousands, except percentages)
|
|
As of December 31, 2013
|
|
|
Changes in Rates
|
|
Economic Value
of Equity
|
|
|
Percent of
Change
|
|
|
Policy
Limits
|
|
|
+ 400 basis points
|
|
$
|
25,825
|
|
|
|
(67.3
|
%)
|
|
|
+/- 45
|
%
|
|
+ 300 basis points
|
|
|
38,730
|
|
|
|
(51.0
|
%)
|
|
|
+/- 35
|
%
|
|
+ 200 basis points
|
|
|
53,417
|
|
|
|
(32.4
|
%)
|
|
|
+/- 25
|
%
|
|
+ 100 basis points
|
|
|
66,873
|
|
|
|
(15.4
|
%)
|
|
|
+/- 15
|
%
|
|
Flat rate
|
|
|
79,061
|
|
|
|
0.0
|
%
|
|
|
N/
|
A
|
|
- 100 basis points
|
|
|
86,480
|
|
|
|
9.4
|
%
|
|
|
+/- 15
|
%
|
|
- 200 basis points
|
|
|
81,905
|
|
|
|
3.6
|
%
|
|
|
+/- 25
|
%
|
|
(In thousands, except percentages)
|
|
Net Interest Income for 2014
|
|
|
Changes in Rates
|
|
Net Interest
Income
|
|
|
Percent of
Change
|
|
|
Policy
Limits
|
|
|
+ 400 basis points
|
|
$
|
18,911
|
|
|
|
(16.9
|
%)
|
|
|
+/- 40
|
%
|
|
+ 300 basis points
|
|
|
20,210
|
|
|
|
(11.2
|
%)
|
|
|
+/- 30
|
%
|
|
+ 200 basis points
|
|
|
21,364
|
|
|
|
(6.1
|
%)
|
|
|
+/- 20
|
%
|
|
+ 100 basis points
|
|
|
22,165
|
|
|
|
(2.6
|
%)
|
|
|
+/- 10
|
%
|
|
Flat rate
|
|
|
22,755
|
|
|
|
0.0
|
%
|
|
|
N/
|
A
|
|
- 100 basis points
|
|
|
22,257
|
|
|
|
(2.2
|
%)
|
|
|
+/- 10
|
%
|
|
- 200 basis points
|
|
|
21,042
|
|
|
|
(7.5
|
%)
|
|
|
+/- 20
|
%
|
Interest-Rate Sensitivity:
Interest rate sensitivity is a function of the re-pricing characteristics of the Company’s assets and liabilities. These include the volume of assets and liabilities re-pricing, the timing of re-pricing, and the interest rate sensitivity gaps which are a continual challenge in a changing rate environment. In managing its interest rate sensitivity positions, the Company seeks to develop and implement strategies to control exposure of net interest income to risks associated with interest rate movements. The interest rate sensitivity report examines the positioning of the interest rate risk exposure in a changing interest rate environment. Ideally, the rate sensitive assets and liabilities will be maintained in a matched position to minimize interest rate risk. The interest rate sensitivity analysis is an important management tool; however, it does have some inherent shortcomings. It is a “static” analysis. Although certain assets and liabilities may have similar maturities or re-pricing, they may react in different degrees to changes in market interest rates. Additionally, re-pricing characteristics of certain assets and liabilities may vary substantially within a given period.
The following table summarizes re-pricing intervals for interest earning assets and interest bearing liabilities as of December 31, 2013, and the difference or “GAP” between them on an actual and cumulative basis for the periods indicated. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. During a period of falling interest rates, a positive gap would tend to adversely affect net interest income, while a negative gap would tend to result in an increase in net interest income. During a period of rising interest rates, a positive gap would tend to result in an increase in net interest income while a negative gap would tend to affect net interest income adversely. At December 31, 2013, the Company is in a liability sensitive position of $19.7 million, which indicates that within one year the re-pricing of liabilities is sooner than the re-pricing of assets.
|
|
|
As of December 31, 2013
|
|
|
(In millions)
|
|
0 – 90 days
|
|
|
91 – 365
days
|
|
|
One to five
years
|
|
|
Over five
years
|
|
|
Non-rate
sensitive
|
|
|
Total
|
|
|
Assets (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits in banks
|
|
$
|
7.7
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9.2
|
|
|
$
|
16.9
|
|
|
Investment securities
|
|
|
13.5
|
|
|
|
26.4
|
|
|
|
151.6
|
|
|
|
122.3
|
|
|
|
(5.1
|
)
|
|
|
308.7
|
|
|
Loans: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
|
14.2
|
|
|
|
37.7
|
|
|
|
117.9
|
|
|
|
81.7
|
|
|
|
(13.5
|
)
|
|
|
238.0
|
|
|
Variable rate
|
|
|
49.2
|
|
|
|
65.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
114.8
|
|
|
Total loans
|
|
|
63.4
|
|
|
|
103.3
|
|
|
|
117.9
|
|
|
|
81.7
|
|
|
|
(13.5
|
)
|
|
|
352.8
|
|
|
Other assets (3)
|
|
|
-
|
|
|
|
21.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32.3
|
|
|
|
53.9
|
|
|
Total Assets
|
|
$
|
84.6
|
|
|
$
|
151.3
|
|
|
$
|
269.5
|
|
|
$
|
204.0
|
|
|
$
|
22.9
|
|
|
$
|
732.3
|
|
|
Liabilities & Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest bearing deposits
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
60.5
|
|
|
$
|
60.5
|
|
|
Interest bearing deposits
|
|
|
25.0
|
|
|
|
74.7
|
|
|
|
128.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
227.7
|
|
|
Certificate of deposits
|
|
|
36.1
|
|
|
|
81.1
|
|
|
|
109.5
|
|
|
|
14.1
|
|
|
|
-
|
|
|
|
240.8
|
|
|
Total deposits
|
|
|
61.1
|
|
|
|
155.8
|
|
|
|
237.5
|
|
|
|
14.1
|
|
|
|
60.5
|
|
|
|
529.0
|
|
|
Borrowings (1)
|
|
|
38.7
|
|
|
|
-
|
|
|
|
95.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
133.7
|
|
|
Other liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21.8
|
|
|
|
21.8
|
|
|
Capital
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
47.8
|
|
|
|
47.8
|
|
|
Total liabilities & capital
|
|
$
|
99.8
|
|
|
$
|
155.8
|
|
|
$
|
332.5
|
|
|
$
|
14.1
|
|
|
$
|
130.1
|
|
|
$
|
732.3
|
|
|
Net interest rate GAP
|
|
$
|
(15.2
|
)
|
|
$
|
(4.5
|
)
|
|
$
|
(63.0
|
)
|
|
$
|
189.9
|
|
|
$
|
(107.2
|
)
|
|
|
|
|
|
Cumulative interest rate GAP
|
|
$
|
(15.2
|
)
|
|
$
|
(19.7
|
)
|
|
$
|
(82.7
|
)
|
|
$
|
107.2
|
|
|
|
|
|
|
|
|
|
|
GAP to total assets
|
|
|
(2
|
%)
|
|
|
(1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAP to total equity
|
|
|
(32
|
%)
|
|
|
(9
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative GAP to total assets
|
|
|
(2
|
%)
|
|
|
(3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative GAP to total equity
|
|
|
(32
|
%)
|
|
|
(41
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Interest earning assets are included in the period in which the balances are expected to be repaid and/or re-priced as a result of anticipated prepayments, scheduled rate adjustments, and contractual maturities.
|
|
(2)
|
Reflects principal maturing within the specified periods for fixed and re-pricing for variable rate loans; includes non-performing loans.
|
The method of analysis of interest rate sensitivity in the table above has a number of limitations. Certain assets and liabilities may react differently to changes in interest rates even though they re-price or mature in the same time periods. The interest rates on certain assets and liabilities may change at different times than changes in market interest rates, with some changes in advance of changes in market rates and some lagging behind changes in market rates. Also, certain assets have provisions, which limit changes in interest rates each time the interest rate changes and for the entire term of the loan. Prepayments and withdrawals experienced in the event of a change in interest rates may deviate significantly from those assumed in the interest rate sensitivity table. Additionally, the ability of some borrowers to service their debt may decrease in the event of an interest rate increase.
|
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Royal Bancshares of Pennsylvania, Inc. and subsidiaries (“the Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive loss, changes in shareholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Royal Bancshares of Pennsylvania, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ ParenteBeard LLC
ParenteBeard LLC
Philadelphia, Pennsylvania
March 27, 2014
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
|
December 31,
|
|
|
ASSETS
|
|
2013
|
|
|
2012
|
|
|
|
|
(In thousands, except share data)
|
|
|
Cash and due from banks
|
|
$
|
9,154
|
|
|
$
|
10,621
|
|
|
Interest bearing deposits
|
|
|
7,690
|
|
|
|
18,181
|
|
|
Total cash and cash equivalents
|
|
|
16,844
|
|
|
|
28,802
|
|
|
Investment securities available-for-sale ("AFS”), at fair value
|
|
|
308,727
|
|
|
|
349,203
|
|
|
Other investment, at cost
|
|
|
2,250
|
|
|
|
2,250
|
|
|
Federal Home Loan Bank ("FHLB") stock, at cost
|
|
|
4,204
|
|
|
|
6,011
|
|
|
Loans and leases held for sale ("LHFS"), at lower of cost or fair market value
|
|
|
1,446
|
|
|
|
1,572
|
|
|
Loans and leases held for investment ("LHFI")
|
|
|
366,481
|
|
|
|
344,165
|
|
|
Less allowance for loan and lease losses
|
|
|
13,671
|
|
|
|
17,261
|
|
|
Net loans and leases
|
|
|
352,810
|
|
|
|
326,904
|
|
|
Bank owned life insurance
|
|
|
15,124
|
|
|
|
14,585
|
|
|
Accrued interest receivable
|
|
|
7,054
|
|
|
|
10,256
|
|
|
Other real estate owned ("OREO"), net
|
|
|
9,617
|
|
|
|
13,435
|
|
|
Premises and equipment, net
|
|
|
4,475
|
|
|
|
5,232
|
|
|
Other assets
|
|
|
9,703
|
|
|
|
11,205
|
|
|
Total assets
|
|
$
|
732,254
|
|
|
$
|
769,455
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
60,473
|
|
|
$
|
58,531
|
|
|
Interest bearing
|
|
|
468,491
|
|
|
|
496,386
|
|
|
Total deposits
|
|
|
528,964
|
|
|
|
554,917
|
|
|
Short-term borrowings
|
|
|
10,000
|
|
|
|
-
|
|
|
Long-term borrowings
|
|
|
97,881
|
|
|
|
108,333
|
|
|
Subordinated debentures
|
|
|
25,774
|
|
|
|
25,774
|
|
|
Accrued interest payable
|
|
|
965
|
|
|
|
3,760
|
|
|
Other liabilities
|
|
|
20,865
|
|
|
|
23,103
|
|
|
Total liabilities
|
|
|
684,449
|
|
|
|
715,887
|
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
|
Royal Bancshares of Pennsylvania, Inc. equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, Series A perpetual, $1,000 liquidation value, 500,000 shares authorized, 30,407 shares issued and outstanding at December 31, 2013 and 2012
|
|
|
29,950
|
|
|
|
29,396
|
|
|
Class A common stock, par value $2.00 per share, authorized 40,000,000 shares; issued,
11,469,940
and 11,431,638 at December 31, 2013 and December 31, 2012, respectively
|
|
|
22,940
|
|
|
|
22,863
|
|
|
Class B common stock, par value $0.10 per share; authorized 3,000,000 shares; issued,
1,987,142
and 2,020,449 at December 31, 2013 and December 31, 2012, respectively
|
|
|
199
|
|
|
|
202
|
|
|
Additional paid in capital
|
|
|
127,299
|
|
|
|
126,287
|
|
|
Accumulated deficit
|
|
|
(120,396
|
)
|
|
|
(121,877
|
)
|
|
Accumulated other comprehensive loss
|
|
|
(6,122
|
)
|
|
|
(142
|
)
|
|
Treasury stock - at cost, shares of Class A,
453,077 a
nd 498,488 at December 31, 2013 and 2012
|
|
|
(6,336
|
)
|
|
|
(6,971
|
)
|
|
Total Royal Bancshares of Pennsylvania, Inc. shareholders’ equity
|
|
|
47,534
|
|
|
|
49,758
|
|
|
Noncontrolling interest
|
|
|
271
|
|
|
|
3,810
|
|
|
Total shareholders’ equity
|
|
|
47,805
|
|
|
|
53,568
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
732,254
|
|
|
$
|
769,455
|
|
The accompanying notes are an integral part of these consolidated financial statements.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
|
|
|
For the years ended December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Interest income
|
|
|
|
|
|
|
|
Loans and leases, including fees
|
|
$
|
21,741
|
|
|
$
|
25,266
|
|
|
Investment securities available for sale
|
|
|
5,757
|
|
|
|
6,677
|
|
|
Deposits in banks
|
|
|
26
|
|
|
|
38
|
|
|
Total Interest Income
|
|
|
27,524
|
|
|
|
31,981
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
4,022
|
|
|
|
5,898
|
|
|
Short-term borrowings
|
|
|
22
|
|
|
|
309
|
|
|
Long-term borrowings
|
|
|
3,313
|
|
|
|
3,692
|
|
|
Total Interest Expense
|
|
|
7,357
|
|
|
|
9,899
|
|
|
Net Interest Income
|
|
|
20,167
|
|
|
|
22,082
|
|
|
(Credit) provision for loan and lease losses
|
|
|
(872
|
)
|
|
|
5,997
|
|
|
Net Interest Income after (Credit) Provision for Loan and Lease Losses
|
|
|
21,039
|
|
|
|
16,085
|
|
|
Non-interest income
|
|
|
|
|
|
|
|
|
|
Gains on sales of premises and equipment
|
|
|
2,524
|
|
|
|
-
|
|
|
Net gains on sales of other real estate owned
|
|
|
1,427
|
|
|
|
363
|
|
|
Service charges and fees
|
|
|
1,323
|
|
|
|
1,218
|
|
|
Gains on sales of loans and leases
|
|
|
686
|
|
|
|
2,057
|
|
|
Income from bank owned life insurance
|
|
|
539
|
|
|
|
553
|
|
|
Net gains on the sale of AFS investment securities
|
|
|
158
|
|
|
|
1,030
|
|
|
Other income
|
|
|
207
|
|
|
|
747
|
|
|
Total other-than-temporary impairment losses on investment securities
|
|
|
-
|
|
|
|
(2,359
|
)
|
|
Total Non-interest Income
|
|
|
6,864
|
|
|
|
3,609
|
|
|
Non-interest expense
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
10,276
|
|
|
|
11,576
|
|
|
Professional and legal fees
|
|
|
2,954
|
|
|
|
4,180
|
|
|
OREO expenses and impairment charges
|
|
|
2,785
|
|
|
|
8,401
|
|
|
Occupancy and equipment
|
|
|
2,281
|
|
|
|
2,192
|
|
|
Loss contingency
|
|
|
1,750
|
|
|
|
-
|
|
|
Pennsylvania shares tax
|
|
|
1,123
|
|
|
|
1,148
|
|
|
FDIC and state assessments
|
|
|
1,038
|
|
|
|
1,056
|
|
|
Loan collection expenses
|
|
|
557
|
|
|
|
465
|
|
|
Directors fees
|
|
|
490
|
|
|
|
401
|
|
|
Restructuring charges
|
|
|
361
|
|
|
|
-
|
|
|
Impairment of loans held for sale
|
|
|
153
|
|
|
|
2,002
|
|
|
Department of Justice fine
|
|
|
-
|
|
|
|
2,000
|
|
|
Other operating expenses
|
|
|
2,562
|
|
|
|
2,903
|
|
|
Total Non-interest Expense
|
|
|
26,330
|
|
|
|
36,324
|
|
|
Income (Loss) Before Income Taxes
|
|
|
1,573
|
|
|
|
(16,630
|
)
|
|
Income tax expense
|
|
|
42
|
|
|
|
-
|
|
|
Net Income (Loss)
|
|
$
|
1,531
|
|
|
$
|
(16,630
|
)
|
|
Less net loss attributable to noncontrolling interest
|
|
|
(578
|
)
|
|
|
(1,005
|
)
|
|
Net Income (Loss) Attributable to Royal Bancshares of Pennsylvania, Inc.
|
|
$
|
2,109
|
|
|
$
|
(15,625
|
)
|
|
Less Preferred stock Series A accumulated dividend and accretion
|
|
$
|
2,075
|
|
|
$
|
2,038
|
|
|
Net Income (Loss) to Common Shareholders
|
|
$
|
34
|
|
|
$
|
(17,663
|
)
|
|
Net Income (Loss) - basic and diluted
|
|
$
|
-
|
|
|
$
|
(1.33
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Statements of Consolidated Comprehensive Loss
|
|
|
For the years ended December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,531
|
|
|
$
|
(16,630
|
)
|
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
Unrealized losses on investment securities:
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses arising during period
|
|
|
(6,719
|
)
|
|
|
(1,038
|
)
|
|
Less adjustment for impaired investments
1
|
|
|
-
|
|
|
|
(1,557
|
)
|
|
Less reclassification adjustment for gains realized in net income (loss)
2
|
|
|
104
|
|
|
|
680
|
|
|
Unrealized losses on investment securities
|
|
|
(6,823
|
)
|
|
|
(161
|
)
|
|
Unrecognized benefit obligation expense:
|
|
|
|
|
|
|
|
|
|
Actuarial gain (loss)
|
|
|
627
|
|
|
|
(1,092
|
)
|
|
Less reclassification adjustment for amortization
3
|
|
|
(216
|
)
|
|
|
(311
|
)
|
|
Other comprehensive loss
|
|
|
(5,980
|
)
|
|
|
(942
|
)
|
|
Comprehensive loss
|
|
|
(4,449
|
)
|
|
|
(17,572
|
)
|
|
Less net loss attributable to noncontrolling interest
|
|
|
(578
|
)
|
|
|
(1,005
|
)
|
|
Comprehensive loss attributable to Royal Bancshares of Pennsylvania, Inc.
|
|
$
|
(3,871
|
)
|
|
$
|
(16,567
|
)
|
1
Amounts are included in total other-than-temporary impairment on investment securities on the Consolidated Statements of Operations in total noninterest income.
2
Amounts are included in net gains on the sale of available for sale investment securities on the Consolidated Statements of Operations in total noninterest income.
3
Amounts are included in salaries and benefits on the Consolidated Statements of Operations in noninterest expense.
The accompanying notes are an integral part of these consolidated financial statements.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity
|
|
|
Preferred stock
|
|
|
Class A common stock
|
|
|
Class B common stock
|
|
|
Additional
paid in
|
|
|
Accumulated
|
|
|
Accumulated other comprehensive
|
|
|
Treasury
|
|
|
Noncontrolling
|
|
|
Total Shareholders'
|
|
|
(In thousands)
|
|
Series A
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
deficit
|
|
|
income (loss)
|
|
|
stock
|
|
|
Interest
|
|
|
Equity
|
|
|
Balance January 1, 2012
|
|
$
|
28,878
|
|
|
|
11,362
|
|
|
$
|
22,723
|
|
|
|
2,081
|
|
|
$
|
208
|
|
|
$
|
126,245
|
|
|
$
|
(105,600
|
)
|
|
$
|
800
|
|
|
$
|
(6,971
|
)
|
|
$
|
4,815
|
|
|
$
|
71,098
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,625
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,005
|
)
|
|
|
(16,630
|
)
|
|
Other comprehensive loss, net of reclassifications and taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(942
|
)
|
|
|
|
|
|
|
|
|
|
|
(942
|
)
|
|
Common stock conversion from Class B to Class A
|
|
|
|
|
|
|
70
|
|
|
|
140
|
|
|
|
(61
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
(134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Accretion of discount on preferred stock
|
|
|
518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
Balance December 31, 2012
|
|
$
|
29,396
|
|
|
|
11,432
|
|
|
$
|
22,863
|
|
|
|
2,020
|
|
|
$
|
202
|
|
|
$
|
126,287
|
|
|
$
|
(121,877
|
)
|
|
$
|
(142
|
)
|
|
$
|
(6,971
|
)
|
|
$
|
3,810
|
|
|
$
|
53,568
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,109
|
|
|
|
|
|
|
|
|
|
|
|
(578
|
)
|
|
|
1,531
|
|
|
Other comprehensive loss, net of reclassifications and taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,980
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,980
|
)
|
|
Purchase of subsidiary shares from noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,409
|
)
|
|
|
(850
|
)
|
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(552
|
)
|
|
|
(552
|
)
|
|
Common stock conversion from Class B to Class A
|
|
|
|
|
|
|
38
|
|
|
|
77
|
|
|
|
(33
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Accretion of discount on preferred stock
|
|
|
554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Treasury shares issued for compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(569
|
)
|
|
|
|
|
|
|
|
|
|
|
635
|
|
|
|
|
|
|
|
66
|
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
Balance December 31, 2013
|
|
$
|
29,950
|
|
|
|
11,470
|
|
|
$
|
22,940
|
|
|
|
1,987
|
|
|
$
|
199
|
|
|
$
|
127,299
|
|
|
$
|
(120,396
|
)
|
|
$
|
(6,122
|
)
|
|
$
|
(6,336
|
)
|
|
$
|
271
|
|
|
$
|
47,805
|
|
The accompanying notes are an integral part of these consolidated financial statements.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
For the years ended December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,109
|
|
|
$
|
(15,625
|
)
|
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
451
|
|
|
|
417
|
|
|
Stock compensation expense
|
|
|
22
|
|
|
|
42
|
|
|
Net amortization of investment securities
|
|
|
4,183
|
|
|
|
6,423
|
|
|
Net accretion on loans
|
|
|
(382
|
)
|
|
|
(241
|
)
|
|
Impairment of AFS investment securities
|
|
|
-
|
|
|
|
2,359
|
|
|
Net gains on sales of AFS investment securities
|
|
|
(158
|
)
|
|
|
(1,030
|
)
|
|
(Credit) provision for loan and lease losses
|
|
|
(872
|
)
|
|
|
5,997
|
|
|
Impairment charge on loans held for sale
|
|
|
153
|
|
|
|
2,002
|
|
|
Proceeds from sales of loans and leases
|
|
|
3,919
|
|
|
|
11,052
|
|
|
Gains on sales of loans and leases
|
|
|
(686
|
)
|
|
|
(2,057
|
)
|
|
Impairment charge for other real estate owned
|
|
|
1,517
|
|
|
|
6,741
|
|
|
Net gains on sales of other real estate
|
|
|
(1,427
|
)
|
|
|
(363
|
)
|
|
Gains on sales of premises and equipment
|
|
|
(2,524
|
)
|
|
|
-
|
|
|
Income from equity investments
|
|
|
-
|
|
|
|
(75
|
)
|
|
Income from bank owned life insurance
|
|
|
(539
|
)
|
|
|
(553
|
)
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Decrease in accrued interest receivable
|
|
|
3,202
|
|
|
|
5,207
|
|
|
Decrease in other assets
|
|
|
1,502
|
|
|
|
3,121
|
|
|
(Decrease) increase in accrued interest payable
|
|
|
(2,795
|
)
|
|
|
310
|
|
|
(Decrease) increase in other liabilities
|
|
|
(2,238
|
)
|
|
|
3,154
|
|
|
Net cash provided by operating activities
|
|
|
5,437
|
|
|
|
26,881
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities, calls and paydowns of AFS investment securities
|
|
|
94,676
|
|
|
|
148,112
|
|
|
Proceeds from sales of AFS investment securities
|
|
|
31,046
|
|
|
|
28,246
|
|
|
Purchase of AFS investment securities
|
|
|
(99,720
|
)
|
|
|
(205,265
|
)
|
|
Net redemption of Federal Home Loan Bank stock
|
|
|
1,807
|
|
|
|
2,463
|
|
|
Net (increase) decrease in loans
|
|
|
(34,408
|
)
|
|
|
52,691
|
|
|
Proceeds from sales of real estate owned
|
|
|
12,779
|
|
|
|
12,014
|
|
|
Proceeds from sale of premises and equipment
|
|
|
3,267
|
|
|
|
-
|
|
|
Purchase of premises and equipment
|
|
|
(437
|
)
|
|
|
(255
|
)
|
|
Distribution from investments in real estate
|
|
|
-
|
|
|
|
75
|
|
|
Net cash provided by investing activities
|
|
|
9,010
|
|
|
|
38,081
|
|
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
|
|
|
For the years ended December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Increase (decrease) in demand and NOW accounts
|
|
|
3,397
|
|
|
|
4,745
|
|
|
(Decrease) increase in money market and savings accounts
|
|
|
(14,560
|
)
|
|
|
(2,262
|
)
|
|
Decrease in certificates of deposit
|
|
|
(14,790
|
)
|
|
|
(23,482
|
)
|
|
Change in short-term borrowings
|
|
|
10,000
|
|
|
|
(54,218
|
)
|
|
Repayments of long-term borrowings
|
|
|
(50,452
|
)
|
|
|
(449
|
)
|
|
Proceeds from long-term borrowings
|
|
|
40,000
|
|
|
|
15,000
|
|
|
Net cash used in financing activities
|
|
|
(26,405
|
)
|
|
|
(60,666
|
)
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(11,958
|
)
|
|
|
4,296
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
28,802
|
|
|
|
24,506
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
16,844
|
|
|
$
|
28,802
|
|
|
Supplemental Disclosure
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
10,152
|
|
|
$
|
9,589
|
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Transfers to other real estate owned
|
|
$
|
9,051
|
|
|
$
|
10,811
|
|
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1.
Basis of Financial Statement Presentation
Nature of Operations
Royal Bancshares of Pennsylvania, Inc. (the “Company”), 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.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Royal Investments of Delaware, Inc., Royal Captive Insurance Company, Royal Preferred, LLC, and Royal Bank, including Royal Bank’s subsidiaries, Royal Real Estate of Pennsylvania, Inc., Royal Investment America, LLC, RBA Property LLC, Narberth Property Acquisition LLC, and Rio Marina LLC. In addition, Royal Bank has a 60% ownership interest in Royal Bank America Leasing, LP. Royal Bank had a 60% ownership interest in Crusader Servicing Corporation (“CSC”) and Royal Tax Lien Services, LLC (“RTL”). Effective December 31, 2013, Royal Bank agreed to a $1.25 million cash settlement with the former President of CSC and RTL, in which Royal Bank acquired his 40% ownership interest in RTL for $850,000. The former President also relinquished his 20% ownership interest in CSC to Royal Bank. The combined value of the ownership interests was $2.6 million. The settlement resulted in a $1.5 million gain for Royal Bank which was recorded as an increase to Additional Paid in Capital within Stockholders Equity. As part of the cash settlement Royal Bank agreed to pay $400,000 for prior tax distributions. Additionally, the settlement agreement also includes a possible tax payment upon completion of the 2013 Forms K-1. Effective, December 31, 2013, Royal Bank is an 80% owner of CSC and 100% owner of RTL. 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.
Use of Estimates
In preparing the consolidated financial statements in accordance with United States generally accepted accounting principles (“U.S. GAAP”), management is required 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 principal estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan and lease losses, loans held for sale, the valuation of other real estate owned, the valuation of deferred tax assets, other-than-temporary impairment losses on investment securities, net periodic pension costs and the pension benefit obligation. In connection with the allowance for loan and lease losses estimate, management obtains independent appraisals for real estate collateral. However, future changes in real estate market conditions and the economy could affect the Company’s allowance for loan and lease losses.
In addition, regulatory agencies, as an integral part of their examination process, periodically review the credit portfolio and the allowance. Such review may result in additional provisions based on their judgment of information available at the time of each examination.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Significant Concentration of Credit Risk
Credit risk is one of the Company’s most significant risks. It is critical for consistent profitability that the Company effectively manages credit risk. Most of the Company’s activities are with customers located within the Mid-Atlantic region of the country. “Note 3 – Investment Securities” to the Consolidated Financial Statements discusses the types of securities in which the Company invests. “Note 4 – Loans and Leases” to the Consolidated Financial Statements discusses the types of lending in which the Company engages. The Company does not have any portion of its business dependent on a single or limited number of customers, the loss of which would have a material adverse effect on its business. The Company has 92% of its investment portfolio in securities issued by government sponsored entities. The Company’s tax lien portfolio has a geographic concentration in the State of New Jersey.
No substantial portion of loans is concentrated within a single industry or group of related industries, except a significant majority of loans are secured by real estate. There are numerous risks associated with commercial and consumer lending that could impact the borrower’s ability to repay on a timely basis. They include, but are not limited to: the owner’s business expertise, changes in local, national, and in some cases international economies, competition, governmental regulation, and the general financial stability of the borrowing entity. Over the last few years, the Company had been impacted by deterioration in economic conditions as it pertains to real estate loans. The Company’s commercial real estate, commercial and construction and development loans comprised 40%, 22% and 12%, respectively, of the loan portfolio.
The Company attempts to mitigate these risks through conservative underwriting policies and procedures which include an analysis of the borrower’s business and industry history, its financial position, as well as that of the business owner. The Company will also require the borrower to provide current financial information on the operation of the business periodically over the life of the loan. In addition, most commercial loans are secured by assets of the business or those of the business owner, which can be liquidated if the borrower defaults, along with the personal surety of the business owner.
U.S. GAAP RAP Difference
In connection with a prior bank regulatory examination, the
Federal Deposit Insurance Company (“FDIC”) concluded,
based upon its interpretation of the Consolidated Reports of Condition and Income (the “Call Report”) instructions and under regulatory accounting principles (“RAP”), that income from Royal Bank’s tax lien business should be recognized on a cash basis, not an accrual basis. Royal Bank’s current accrual method is in accordance with U.S. GAAP. Royal Bank disagrees with the FDIC’s conclusion and filed the Call Report for December 31, 2013 and the previous 13 quarters in accordance with U.S. GAAP. However, the change in the manner of revenue recognition for the tax lien business for regulatory accounting purposes affects Royal Bank’s and potentially the Company’s capital ratios as disclosed in “Note 2 - Regulatory Matters
and Significant Risks And Uncertainties
” and “Note 15 - Regulatory Capital Requirements” to the Consolidated Financial Statements. The resolution of this matter will be decided by additional joint regulatory agency guidance which includes the Federal Reserve Bank, the FDIC, and the office of the Controller of the Currency ("OCC").
Reclassifications
Certain items in the 2012 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 or net loss for the periods presented herein as a result of the reclassification.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Restatement
In the fourth quarter of 2013, the Company recorded an error correction in previously issued financial statements related to net income tax receivables. The tax receivables were related to amended tax returns for 2005 through 2007, in which the Company carried back losses from 2008 through 2009. These amended returns were filed during the time period 2008 through 2011. In the fourth quarter of 2013, after an IRS joint committee concluded their review of the amended returns, management determined that the tax receivables would not be realized. The Company recorded a cumulative effect adjustment of $4.8 million to accumulated deficit, a component of the consolidated statement of changes in shareholders' equity, as of January 1, 2012 with the offsetting adjustment recorded to other assets and other liabilities. There was no effect on net income, net loss, or earnings or loss per basic and diluted shares for the periods presented herein as a result of the restatement. Below are the consolidated balance sheets and changes in shareholder equity statements that show the previously issued financial statement, the error correction, and the restated balances.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Royal Bancshares of Pennsylvania, Inc and Subsidiaries
Restatement of the Consolidated Balance Sheet
|
At December 31, 2012
|
|
As
Originally
Reported
|
|
|
Adjustment
|
|
|
As Restated
|
|
|
|
|
(In thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
28,802
|
|
|
$
|
-
|
|
|
$
|
28,802
|
|
|
Investment securities AFS, at fair value
|
|
|
349,203
|
|
|
|
-
|
|
|
|
349,203
|
|
|
Other investment, at cost
|
|
|
2,250
|
|
|
|
-
|
|
|
|
2,250
|
|
|
FHLB stock, at cost
|
|
|
6,011
|
|
|
|
-
|
|
|
|
6,011
|
|
|
Loans and leases held for sale
|
|
|
1,572
|
|
|
|
-
|
|
|
|
1,572
|
|
|
Loans and leases, net
|
|
|
326,904
|
|
|
|
-
|
|
|
|
326,904
|
|
|
Bank owned life insurance
|
|
|
14,585
|
|
|
|
-
|
|
|
|
14,585
|
|
|
Accrued interest receivable
|
|
|
10,256
|
|
|
|
-
|
|
|
|
10,256
|
|
|
OREO, net
|
|
|
13,435
|
|
|
|
-
|
|
|
|
13,435
|
|
|
Premises and equipment, net
|
|
|
5,232
|
|
|
|
-
|
|
|
|
5,232
|
|
|
Other assets
|
|
|
15,466
|
|
|
|
(4,261
|
)
|
|
|
11,205
|
|
|
Total assets
|
|
$
|
773,716
|
|
|
$
|
(4,261
|
)
|
|
$
|
769,455
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
554,917
|
|
|
$
|
-
|
|
|
$
|
554,917
|
|
|
Long-term borrowings
|
|
|
108,333
|
|
|
|
-
|
|
|
|
108,333
|
|
|
Subordinated debentures
|
|
|
25,774
|
|
|
|
-
|
|
|
|
25,774
|
|
|
Accrued interest payable
|
|
|
3,760
|
|
|
|
-
|
|
|
|
3,760
|
|
|
Other liabilities
|
|
|
22,517
|
|
|
|
586
|
|
|
|
23,103
|
|
|
Total liabilities
|
|
|
715,301
|
|
|
|
586
|
|
|
|
715,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
29,396
|
|
|
|
-
|
|
|
|
29,396
|
|
|
Common stock
|
|
|
23,065
|
|
|
|
-
|
|
|
|
23,065
|
|
|
Additional paid in capital
|
|
|
126,287
|
|
|
|
-
|
|
|
|
126,287
|
|
|
Accumulated deficit
|
|
|
(117,080
|
)
|
|
|
(4,797
|
)
|
|
|
(121,877
|
)
|
|
Accumulated other comprehensive loss
|
|
|
(142
|
)
|
|
|
-
|
|
|
|
(142
|
)
|
|
Treasury stock
|
|
|
(6,971
|
)
|
|
|
-
|
|
|
|
(6,971
|
)
|
|
Noncontrolling interest
|
|
|
3,860
|
|
|
|
(50
|
)
|
|
|
3,810
|
|
|
Shareholders' equity
|
|
|
58,415
|
|
|
|
(4,847
|
)
|
|
|
53,568
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
773,716
|
|
|
$
|
(4,261
|
)
|
|
$
|
769,455
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Royal Bancshares of Pennsylvania, Inc and Subsidiaries
Restatement of Consolidated Statement of Changes in Shareholders' Equity
|
At January 1, 2012
|
|
As
Originally
Reported
|
|
|
Adjustment
|
|
|
As Restated
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
$
|
28,878
|
|
|
$
|
-
|
|
|
$
|
28,878
|
|
|
Class A common stock
|
|
|
22,723
|
|
|
|
-
|
|
|
|
22,723
|
|
|
Class B common stock
|
|
|
208
|
|
|
|
-
|
|
|
|
208
|
|
|
Additional paid in capital
|
|
|
126,245
|
|
|
|
-
|
|
|
|
126,245
|
|
|
Accumulated deficit
|
|
|
(100,803
|
)
|
|
|
(4,797
|
)
|
|
|
(105,600
|
)
|
|
Accumulated other comprehensive income
|
|
|
800
|
|
|
|
-
|
|
|
|
800
|
|
|
Treasury stock
|
|
|
(6,971
|
)
|
|
|
-
|
|
|
|
(6,971
|
)
|
|
Noncontrolling interest
|
|
|
4,865
|
|
|
|
(50
|
)
|
|
|
4,815
|
|
|
Total shareholders' equity
|
|
$
|
75,945
|
|
|
$
|
(4,847
|
)
|
|
$
|
71,098
|
|
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.
Investment Securities
Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Investments in debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity securities and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized holding gains and losses included in earnings. Debt and equity securities not classified as trading securities, nor as held to maturity securities are classified as available for sale securities and reported at fair value, with unrealized holding gains or losses, net of deferred income taxes (when applicable), reported in the accumulated other comprehensive income component of shareholders’ equity. The Company did not hold trading securities nor had securities classified as held to maturity at December 31, 2013 and 2012. Discounts and premiums are accreted/amortized to income by use of the level-yield method. Gain or loss on sales of securities available for sale is based on the specific identification method.
The Company evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis. The Company assesses whether OTTI is present when the fair value of a security is less than its amortized cost. All investment securities are evaluated for OTTI under FASB ASC Topic 320, “Investments-Debt & Equity Securities” (“ASC Topic 320”). Non-agency collateralized mortgage obligations that are rated below AA are evaluated under FASB ASC Topic 320 Subtopic 40, “Beneficial Interests in Securitized Financial Assets” or under FASB ASC Topic 325, “Investments-Other” when applicable. In determining whether OTTI exists, management considers numerous factors, including but not limited to: (1) the length of time and the extent to which the fair value is less than the amortized cost, (2) the Company’s intent to hold or sell the security, (3) the financial condition and results of the issuer including changes in capital, (4) the credit rating of the issuer, (5) analysts’ earnings estimate, (6) industry trends specific to the security, and (7) timing of debt maturity and status of debt payments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Under ASC Topic 320, OTTI is considered to have occurred with respect to debt securities (1) if an entity intends to sell the security; (2) if it is more likely than not an entity will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. In addition, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell or will more likely than not be required to sell the security. If an entity intends to sell the security or will be required to sell the security, the OTTI shall be recognized in earnings equal to the entire difference between the fair value and the amortized cost basis at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before the recovery of its amortized cost basis, the OTTI shall be separated into two amounts, the credit-related loss and the noncredit-related loss. The credit-related loss is based on the present value of the expected cash flows and is recognized in earnings. The noncredit-related loss is based on other factors such as illiquidity and is recognized in other comprehensive income.
Other Investment
This investment includes the Solomon Hess SBA Loan Fund, which the Company invested in to partially satisfy its community reinvestment requirement. Shares in this fund are not publicly traded and therefore have no readily determinable fair market value. An investor can have their investment in the Fund redeemed for the balance of their capital account at any quarter end with a 60-day notice to the Fund. The investment in this Fund is recorded at cost.
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”), the Company is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. The stock can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, there is no active market for the FHLB stock. As of December 31, 2013 and 2012, FHLB stock totaled $4.2 million and $6.0 million, respectively.
FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of the par value. The Company evaluates impairment quarterly. The decision of whether impairment exists is a matter of judgment that reflects management’s view of the FHLB’s long-term performance, which includes factors such as the following: (1) its operating performance, (2) the severity and duration of declines in the fair value of its net assets related to its capital stock amount, (3) its liquidity position, and (4) the impact of legislative and regulatory changes on the FHLB. Based on the capital adequacy and the liquidity position of the FHLB, management believes that the par value of its investment in FHLB stock will be realized. Accordingly, there is no other-than-temporary impairment related to the carrying amount of the Company’s FHLB stock as of December 31, 2013.
Loans Held for Sale
At December 31, 2013, the Company’s loans held for sale (“LHFS”) were comprised of three loans totaling $1.4 million. The loans were transferred from loans held for investment (“LHFI”) to LHFS at fair market value using expected net sales proceeds. At the time of transfer to LHFS, a gain of $429,000 was recorded in non-interest income. Generally any subsequent credit losses on LHFS are recorded as a component of non-interest expense. At December 31, 2012, LHFS were comprised of one $1.6 million non-accrual commercial real estate loan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Loans and Leases
Loans and leases are classified as LHFI when management has the intent and ability to hold the loan or lease for the foreseeable future or until maturity or payoff. LHFI are stated at their outstanding unpaid principal balances, net of an allowance for loan and leases losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is generally amortizing these amounts over the contractual life of the loan. The Company’s commercial and real estate loans, including construction and land development loans, are primarily in the greater Philadelphia metropolitan area as well as selected locations throughout the mid-Atlantic region. The Company also has participated with other financial institutions in selected construction and land development loans outside our geographic area. The Company has a concentration of credit risk in commercial real estate and construction and land development loans at December 31, 2013.
The Company classifies its leases as finance leases, in accordance with FASB ASC Topic 840, “Leases”. The difference between the Company’s gross investment in the lease and the cost or carrying amount of the leased property, if different, is recorded as unearned income, which is amortized to income over the lease term by the interest method.
For all classes of loans receivable, with the exception of tax certificates, the accrual of interest is discontinued on a loan when management believes that the borrower’s financial condition is such that collection of principal and interest is doubtful or when a loan becomes 90 days past due. When a loan is placed on non-accrual all unpaid interest is reversed from interest income. Interest payments received on impaired nonaccrual loans are normally applied against principal. Excess proceeds received over the principal amounts due on impaired loans are recognized as income on a cash basis. Generally, loans are restored to accrual status when the loan is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments. Tax certificates have no contractual maturity. Collection is dependent upon the tax payer’s redemption of the lien, which includes principal interest and fees.
A loan modification is deemed a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) a concession is made by the Company that would not otherwise be considered for a borrower with similar credit risk characteristics. If in modifying a loan the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession it would not normally consider then the loan modification is classified as a TDR. All loans classified as TDRs are considered to be impaired. TDRs are returned to an accrual status when the loan is brought current, has performed in accordance with the contractual restructured terms for a reasonable period of time (generally six months) and the ultimate collectibility of the total contractual restructured principal and interest is no longer in doubt. The Company’s policy for TDRs is to recognize interest income on currently performing restructured loans under the accrual method.
The Company accounts for guarantees in accordance with FASB ASC Topic 460 “Guarantees” (“ASC Topic 460”). ASC Topic 460 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company has financial and performance letters of credit. Financial letters of credit require the Company to make a payment if the customer’s condition deteriorates, as defined in agreements. Performance letters of credits require the Company to make payments if the customer fails to perform certain non-financial contractual obligations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Allowance for Loan and Lease Losses
The Company’s loan and lease portfolio (the “credit portfolio”) is subject to varying degrees of credit risk. The Company maintains an allowance for loan and lease losses (the “allowance”) to absorb losses in the loan and lease portfolio. The allowance is based on the review and evaluation of the loan and lease portfolio, along with ongoing, quarterly assessments of the probable losses inherent in that portfolio. The allowance represents an estimation made pursuant to FASB ASC Topic 450, “Contingencies” (“ASC Topic 450”) or FASB ASC Topic 310, “Receivables” (“ASC Topic 310”). The adequacy of the allowance is determined through evaluation of the credit portfolio, and involves consideration of a number of factors, as outlined below, to establish a prudent level.
Determination of the allowance is inherently subjective and requires significant estimates, including estimated losses on pools of homogeneous loans and leases based on historical loss experience and consideration of current economic trends, which may be susceptible to significant change. Loans and leases deemed uncollectible are charged against the allowance, while recoveries are credited to the allowance. Management adjusts the level of the allowance through the provision for loan and lease losses, which is recorded as a current period expense. The Company’s systematic methodology for assessing the appropriateness of the allowance includes: (1) general reserves reflecting historical loss rates by loan type, (2) specific reserves for risk-rated credits based on probable losses on an individual or portfolio basis and (3) qualitative reserves based upon current economic conditions and other risk factors.
The loan portfolio is stratified into loan segments that have similar risk characteristics. The general allowance is based upon historical loss rates using a three-year rolling average of the historical loss experienced within each loan segment. The qualitative factors used to adjust the historical loss experience address various risk characteristics of the Company’s loan and lease portfolio include evaluating: (1) trends in delinquencies and other non-performing loans, (2) changes in the risk profile related to large loans in the portfolio, (3) changes in the growth trends of categories of loans comprising the loan and lease portfolio, (4) concentrations of loans and leases to specific industry segments, (5) changes in economic conditions on both a local and national level, (6) quality of loan review and board oversight, (7) changes in lending policies and procedures, and (8) changes in lending staff. Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a report accompanying the allowance calculation.
The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
The specific reserves are determined utilizing standards required under ASC Topic 310. A loan is considered impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. Non-accrual loans and loans restructured under a TDR are evaluated for impairment on an individual basis considering all known relevant factors that may affect loan collectability such as the borrower’s overall financial condition, resources and payment record, support available from financial guarantors and the sufficiency of current collateral values (current appraisals or rent rolls for income producing properties), and risks inherent in different kinds of lending (such as source of repayment, quality of borrower and concentration of credit quality). Non-accrual loans that experience insignificant payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and industrial loans, commercial real estate loans and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral. The Company obtains third-party appraisals or real estate brokers’ opinions (“BPOs”) to establish the fair value of real estate collateral. Appraised values or BPOs are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property. For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. A specific reserve is established for an impaired loan for the amount that the carrying value exceeds its estimated fair value. Once a loan is determined to be impaired it will be deducted from the portfolio balance and the net remaining balance will be used in the general and qualitative analysis.
Based on management’s comprehensive analysis of the loan and lease portfolio, management believes the current level of the allowance is adequate at December 31, 2013. However, its determination requires significant judgment, and estimates of probable losses inherent in the credit portfolio can vary significantly from the amounts actually observed. While management uses available information to recognize probable losses, future changes to the allowance may be necessary. These changes could be based in the credits comprising the portfolio and changes in the financial condition of borrowers, as the result of changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the credit portfolio and the allowance. Such review may result in additional provisions based on their judgment of information available at the time of each examination, which may not be currently available to management.
Other Real Estate Owned
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure, establishing a new cost basis. Foreclosed real estate properties acquired through the tax certificate portfolio are transferred at the lower of cost or fair value principally due to uncertainty around the fair value of the foreclosed properties. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount recorded at acquisition date or fair value less costs to sell. Third-party appraisals or agreements of sale are utilized to determine fair value the loan collateral while BPOs, agreements of sale, or in some cases, third-party appraisals are utilized to value properties from the tax certificate portfolio. Revenue and expenses from operations and changes in the valuation allowance are included in other expenses. For fair value measurement, OREO is included in level 3 assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation, which is computed primarily using the modified accelerated cost recovery system (“MACRS”) over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of the estimated useful lives of the improvements or the terms of the related leases. Expected term includes lease options periods to the extent that the exercise of such options is reasonably assured.
Bank-Owned Life Insurance
Royal Bank has purchased life insurance policies on certain executives. These policies are reflected on the consolidated balance sheets at their cash surrender value, or the amount that can be realized. Income from these policies and changes in the cash surrender value are recorded in other income.
Advertising Costs
Advertising costs are expensed as incurred. The Company’s advertising costs were $209,000 and $127,000 for 2013 and 2012, respectively.
Benefit Plans
The Company has a noncontributory nonqualified, defined benefit pension plan covering certain eligible employees. The plan provides retirement benefits under pension trust agreements. The benefits are based on years of service and the employee’s compensation during the highest three consecutive years during the last 10 years of employment. Net pension expense consists of service costs and interest costs. The Company accrues pension costs as incurred.
The Company has a capital accumulation and salary reduction plan under Section 401(k) of the Internal Revenue Code of 1986, as amended. Under the plan, all employees are eligible to contribute up to the maximum allowed by Internal Revenue Service (“IRS”) regulation, with the Company matching 100% of any contribution between 1% and 5% subject to a $2,500 per employee annual limit. During 2013 and 2012, no matching contribution was made as a result of a management decision to reduce costs.
Stock Compensation
FASB ASC Topic 718, “Compensation-Stock Compensation” (“ASC Topic 718”) requires that the compensation cost relating to share-based payment transactions be recognized in consolidated financial statements. The costs are measured based on the fair value of the equity or liability instruments issued. ASC Topic 718 covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The effect of ASC Topic 718 is to require entities to measure the cost of employee services received in exchange for stock options based on the grant-date fair value of the award, and to recognize the cost over the period the employee is required to provide services for the award. ASC Topic 718 permits entities to use any option-pricing model that meets the fair value objective in the Statement. The Company recorded compensation expense relating to stock options and restricted stock of $22,000 and $42,000 during 2013 and 2012, respectively.
At December 31, 2013, the Company had a director stock-based plan, an employee stock-based plan, and a long-term incentive compensation plan, which are more fully described in “Note 17 – Stock Compensation Plans” to the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Trust Preferred Securities
Royal Bancshares Capital Trust I/II (“Trusts”) issued mandatory redeemable preferred stock to investors and loaned the proceeds to the Company. The Trusts hold, as their sole asset, subordinated debentures issued by the Company in 2004. The Company does not consolidate the Trusts as ASC Topic 810 precludes consideration of the call option embedded in the preferred stock when determining if the Company has the right to a majority of the Trusts expected returns. The non-consolidation results in the investment in common stock of the Trusts to be included in other assets with a corresponding increase in outstanding debt of $774,000. In addition, the income accrued on the Company’s common stock investments is included in other income. Refer to “Note 10 – Borrowings and Subordinated Debentures” to the Consolidated Financial Statements for more information.
Income Taxes
The Company accounts for income taxes in accordance with income tax accounting guidance (FASB ASC Topic 740,
Income Taxes),
which includes guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. The Company had no material unrecognized tax benefits or accrued interest and penalties as of December 31, 2013 and 2012. The Company’s policy is to account for interest as a component of interest expense and penalties as a component of other expense.
The Company and its subsidiaries file a consolidated federal income tax return. Income taxes are allocated to the Company and its subsidiaries based on the contribution of their income or use of their loss in the consolidated return. Separate state income tax returns are filed by the Company and its subsidiaries. The Company is subject to examination by taxing authorities for the years 2006, 2007 and 2009 through 2013.
Federal and state income taxes have been provided on the basis of reported income or loss. The amounts reflected on the tax returns differ from these provisions due principally to temporary differences in the reporting of certain items for financial reporting and income tax reporting purposes. The tax effect of these temporary differences is accounted for as deferred taxes applicable to future periods. Deferred income tax expense or benefit is determined by recognizing deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. The realization of deferred tax assets is assessed and a valuation allowance provided for the full amount which is not more likely than not to be realized.
Treasury Stock
Shares of common stock repurchased are recorded as treasury stock at cost.
Earnings (Losses) Per Share Information
Basic per share data excludes dilution and is computed by dividing income (loss) available to common shareholders by the weighted average common shares outstanding during the period. Diluted per share data takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock, using the treasury stock method.
The Class B shares of the Company may be converted to Class A shares at the rate of 1.15 to 1.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Comprehensive Income (Loss)
The Company
reports comprehensive income (loss) in accordance with FASB ASC Topic 220, “Comprehensive Income” (“ASC Topic 220”), which requires the reporting of all changes in equity during the reporting period except investments from and distributions to shareholders. Net income (loss) is a component of comprehensive income (loss) with all other components referred to in the aggregate as other comprehensive income (loss). Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on available for sale investment securities, non-credit related losses on other-than-temporarily impaired investment securities, and adjustment to net periodic pension cost.
Fair Value of Financial Instruments
For information on the fair value of the Company’s financial instruments refer to “Note 20 - Fair Value of Financial Instruments” to the Consolidated Financial Statements.
Restrictions on Cash and Amounts Due From Banks
Royal Bank is required to maintain average balances on hand with the Federal Reserve Bank. At December 31, 2013 and 2012, these reserve balances amounted to $100,000.
2.
Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). Because of the significant differences in requirements under U.S. GAAP and IFRS, FASB and the International Accounting Standards Board (“IASB”) are issuing joint requirements that will enhance current disclosures. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. ASU 2011-11 is effective for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. An entity should provide the disclosures required by these amendments retrospectively for all comparative periods presented. The adoption of ASU 2011-11 did not have a significant impact on the Company’s consolidated financial statements.
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”) to improve the reporting of reclassifications out of accumulated comprehensive income. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified
out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts.
ASU 2013-02 is
effective for reporting periods b
eginning after December 15, 2012. The adoption of ASU 2013-02 did not have a significant impact on the Company’s consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
In February 2013, the FASB issued ASU No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (ASU 2013-04). ASU 2013-04 provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements. ASU 2013-04 requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the following:
a. The amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors
b. Any additional amount the reporting entity expects to pay on behalf of its co-obligors.
ASU 2013-04 also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. For public companies ASU 2013-04 is
effective for reporting periods b
eginning after December 15, 2013. The adoption of ASU 2013-04 is not expected to have a significant impact on the Company’s consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). Currently there is diversity in practice in the presentation of unrecognized tax benefits. The aim of ASU 2013-11 is to provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except for circumstances outlined in ASU 2013-11. For public companies ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The adoption of ASU 2013-04 is not expected to have a significant impact on the Company’s consolidated financial statements.
In January 2014, FASB issued ASU No. 2014-04
Receivables (Topic 310): Troubled Debt Restructurings by Creditors (Subtopic 310-40) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (“ASU 2014-04”). ASC Topic 310 includes guidance that states that a creditor should reclassify a collateralized mortgage loan such that the loan should be derecognized and the collateral asset recognized when it determines that there has been
in substance a repossession or foreclosure
by the creditor, that is, the creditor receives
physical possession
of the debtor’s assets
regardless of whether formal foreclosure proceedings take place
. However, the terms
in substance a repossession or foreclosure
and
physical possession
are not defined in the accounting literature and there is diversity about when a creditor should derecognize the loan receivable and recognize the real estate property. That diversity has been highlighted by recent extended foreclosure timelines and processes related to residential real estate properties.
The objectives in ASU 2014-04 are intended to reduce diversity in practice by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate property recognized. Holding foreclosed real estate property presents different operational and economic risk to creditors compared with holding an impaired loan. Therefore, consistency in the timing of loan derecognition and presentation of foreclosed real estate properties is of qualitative significance to users of the creditor’s financial statements. Additionally, the disclosure of the amount of foreclosed residential real estate properties and of the recorded investment in consumer mortgage loans secured by residential real estate properties that are in the process of foreclosure is expected to provide decision-useful information to many users of the creditor’s financial statements.
The amendments in ASU 2014-04 are effective for public business entities for
annual periods, and interim periods within those annual periods, beginning after
December 15, 2014. An entity can elect to adopt the amendments in ASU 2014-04 using either a
modified retrospective transition method or a prospective transition method.
Early adoption is permitted. Early adoption is permitted. The adoption of ASU 2014-04 is not expected to have a significant impact on the Company’s consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – REGULATORY MATTERS and SIGNIFICANT RISKS and UNCERTAINTIES
FDIC and Department of Banking Memorandum of Understanding
During the fourth quarter of 2011, Royal Bank entered into an informal agreement, known as a memorandum of understanding (“MOU”) with each of the FDIC and the Pennsylvania Department of Banking (the “Department”). Included in the MOU is the requirement of maintaining a ratio of Tier 1 capital to total assets (“leverage ratio”) equal to or greater than 8% and a total risk-based capital ratio equal to or greater than 12%. At December 31, 2013, based on capital levels calculated under
RAP
, Royal Bank’s leverage and total risk-based capital ratios were 9.13% and 15.61%, respectively. Please refer to “Note 15 – Regulatory Capital Requirements” to the Consolidated Financial Statements.
Federal Reserve Memorandum of Understanding
As previously disclosed, in March 2010, the Company 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 Federal Reserve Agreement, and it was replaced with an informal non-public agreement, an MOU, with the Federal Reserve Bank, effective July 17, 2013. Included in the MOU are certain continued reporting requirements and a requirement that the Company receive the prior approval of the Federal Reserve Bank prior to declaring or paying any dividends on the Company’s common stock, making interest payments related to the Company’s 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 stayed, modified, terminated or suspended in writing by the Federal Reserve Bank.
Our success as a Company is dependent upon pursuing various alternatives in not only achieving the growth and expansion of our banking franchise but also in managing our day to day operations. The existence of the two MOUs may limit or impact our ability to pursue all previously available alternatives in the management of the Company. Our ability to retain existing retail and commercial customers as well as the ability to attract potentially new customers may be impacted by the existence of the MOUs. Additionally, the Company’s ability to raise capital in the current economic environment could be potentially limited or impacted as a result of the MOUs. Attracting new management talent is critical to the success of our business and could be potentially effected due to the existence of the MOUs.
2013 Net Income
For the five years prior to 2013, the Company had recorded significant losses totaling $118.2 million which were primarily related to charge-offs on the loan and lease portfolio, impairment charges on investment securities, impairment charges on OREO, credit related expenses and the establishment of a deferred tax valuation allowance. In addition to reducing the total shareholders’ equity, the accumulated deficit impacts the Company’s ability to pay cash dividends to its shareholders now and in future years. For 2013, the Company recorded net income of $2.1 million compared to a net loss of $15.6 million in 2012. Declines in credit related expenses, provision for loan and lease losses, OTTI on investment securities, salaries and benefits and professional and legal fees of $7.4 million, $6.9 million, $2.4 million, $1.3 million and $1.2 million, respectively, positively impacted 2013 results. Included in net income for 2013 were $2.5 million in gains on the sale of company owned real estate and an increase of $1.1 million in net gains on the sale of OREO properties.
Partially offsetting these positive items was a $1.9 million decrease in net interest income, a $1.4 million decrease in gains on sales of loans and leases, and an $872,000 decline in gains on sale of investment securities.
The Company’s deferred tax valuation allowance amounted to $37.2 million at the end of 2013. The deferred tax valuation allowance is a result of management’s conclusion that it was more likely than not that the Company would not generate sufficient future taxable income to realize all of the deferred tax assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – REGULATORY MATTERS and SIGNIFICANT RISKS and UNCERTAINTIES- Continued
Credit Quality
The
financial services and real estate industries were hit particularly hard during the “Great Recession” and as a result the Company’s loan and investment portfolios were directly affected. The Company’s commercial real estate loans, including construction and land development loans, saw a decline in the collateral values and a reduction in the borrowers’ ability to meet the payment terms of their loans due to reduced cash flow. Further declines in collateral values and borrowers’ liquidity with sustained unemployment at current levels may lead to additional
increases in foreclosures, delinquencies and customer bankruptcies. The Company is less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of more diverse economies.
The Company has been successful in reducing net classified loans, which includes LHFS, and OREO. Net classified loans were $32.2 million and $51.8 million at December 31, 2013 and 2012, respectively. The Company had total non-performing loans and recorded charge-offs of $10.2 million and $3.9 million at December 31, 2013, compared to $23.0 million and $6.3 million at December 31, 2012, respectively. OREO balances were $9.6 million and $13.4 million at December 31, 2013 and 2012, respectively. The Company’s delinquent loans held for investment (30 to 89 days) amounted to $2.6 million and $4.6 million at December 31, 2013 and 2012, respectively. No material advances were made on any classified or delinquent loan unless approved by the board of directors and determined to be in Royal Bank’s best interest.
The Company has restructured the investment portfolio to reduce credit risk by selling corporate debt securities and equity securities and replacing their maturities with U.S. government issued or sponsored securities. Other-than-temporary-impairment losses were $0 at December 31, 2013 compared to $2.4 million at December 31, 2012.
Liquidity and Funds Management
Royal Bank previously had limited capacity to borrow additional funds in the event it was needed for liquidity purposes. However, Royal Bank has continued to maintain liquidity measures that are in excess of the target levels. During the third quarter of 2013, the FHLB released Royal Bank from the over collateralized delivery requirement of 105% subject to reevaluation on a quarterly basis. Additionally during the fourth quarter of 2013 the FHLB released Royal Bank from loan-level listing status. As of December 31, 2013, Royal Bank had approximately $190.0 million of available borrowing capacity at the FHLB as a result of the two collateral restrictions being removed. Royal Bank also has availability to borrow from the Federal Reserve Discount Window, which was approximately $7.2 million at December 31, 2013, and was based on collateral pledged.
Borrowings were $107.9 million and $108.3 million at December 31, 2013 and 2012, respectively.
At December 31, 2013, the liquidity to deposits ratio was 72.2% compared to Royal Bank’s 12% policy target and the liquidity to total liabilities ratio was 55.8% compared to Royal Bank’s 10% policy target. The Company also has unfunded pension plan obligations of $14.5 million as of December 31, 2013 which potentially could impact liquidity. The Company plans to fund the pension plan obligations through existing Company owned life insurance policies.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – REGULATORY MATTERS and SIGNIFICANT RISKS and UNCERTAINTIES - Continued
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 $30.4 million in Series A Preferred Stock and the interest payments on the $25.8 million in trust preferred securities. As of December 31, 2013, the Series A Preferred stock dividend in arrears was $7.7 million and has not been recognized in the consolidated financial statements. The Company believes the decision to suspend the preferred cash dividends will better support the liquidity position of Royal Bank. During the third quarter of 2013, the Company received approval from the Federal Reserve Bank to pay the $3.1 million interest payment in arrears on the trust preferred securities. On September 16, 2013, the Company became current and is current on the interest payments on the trust preferred securities which included an interest penalty of $174,000. The Company received approval and paid the fourth quarter interest payment in December 2013.
At December 31, 2013 and 2012, as a result of significant losses within Royal Bank, the Company had an accumulated deficit and therefore would not have been able to declare and pay any cash dividends. Royal Bank must receive prior approval from the FDIC and the Department before declaring and paying a dividend to the Company. Under the Federal Reserve MOU the Company may not declare or pay any dividends or make interest payments related to the Company’s outstanding trust preferred securities or subordinate securities, without the prior written approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System.
Capital Adequacy
In connection with a prior bank regulatory examination, the
FDIC concluded,
based upon its interpretation of the Call Report instructions and under RAP, that income from Royal Bank’s tax lien business should be recognized on a cash basis, not an accrual basis. Royal Bank’s current accrual method is in accordance with U.S. GAAP. Royal Bank disagrees with the FDIC’s conclusion and filed the Call Report for December 31, 2013 and the previous 13 quarters in accordance with U.S. GAAP. However, the change in the manner of revenue recognition for the tax lien business for regulatory accounting purposes affects Royal Bank’s and potentially the Company’s capital ratios as disclosed in “Note 15 - Regulatory Capital Requirements” to the Consolidated Financial Statements. The resolution of this matter will be decided by additional joint regulatory agency guidance which includes the Federal Reserve Bank, the FDIC, and OCC.
Under the MOU, Royal Bank must maintain a minimum Tier 1 leverage ratio and a minimum total risk-based capital ratio of 8% and 12%, respectively. At December 31, 2013, based on capital levels calculated under RAP, Royal Bank’s leverage and total risk-based capital ratios were 9.13% and 15.61%, respectively.
Company Plans and Strategy
During the past few years, the Company recorded significant impairment charges and carrying costs on non-accrual loans and OREO which has weighed heavily on earnings and was the largest contributing factor to the Company’s losses. The Company’s strategic plan included improving the overall level of credit quality, maintaining reduced credit risk within the investment portfolio, reducing the overall level of expenses, and returning to profitability. The Board and management remain committed to meeting the capital level requirements for Royal Bank as set forth in the FDIC MOU. As a result, the Board and management developed a contingency plan to maintain capital ratios at required levels. This strategy also assisted in reducing the level of classified assets by giving management the ability to actively pursue exit strategies on loans and OREO which were at historically high levels.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – REGULATORY MATTERS and SIGNIFICANT RISKS and UNCERTAINTIES - Continued
While sustaining capital ratios above the required minimum, the Company has made progress in improving credit quality, reducing the CRE concentration, strengthening the Board and maintaining liquidity. As a result of the decline in level of classified assets, there has been a corresponding reduction in the provision for loan and lease losses and the overall carrying costs associated with classified assets. The deleveraging of the balance sheet has also reduced earning assets which has resulted in a decline in net interest income and has had a significant impact on overall earnings. To improve net interest margin and net interest income, management is diligently working on changing the mix of earning assets and interest-bearing liabilities. In the event further deleveraging is necessary to maintain the required capital levels, net interest income would be negatively impacted.
For 2013, the strategic plan evolved into transitioning Royal Bank into a community bank built on a solid commercial revenue and retail delivery foundation. During the first quarter of 2013, to support the strategic goals, management had announced a set of sweeping initiatives through the Company's "Profitability Improvement Plan" ("PIP") designed to enhance company-wide efficiency, productivity and modernization. During 2013, the Company realized a 22% reduction in the workforce, which included reorganizing and relocating certain personnel to improve departmental synergies and better align managers and staff so they can work together in cohesive teams to accomplish their objectives. The Company recorded a restructuring charge of $87,000 related to the reduction in workforce. The Company also finalized a unique opportunity to reduce employee expenses as eight individuals became employees of a local company that provides servicing of the remaining tax lien and non-performing assets portfolios. Those portfolios continue to diminish per the Company's strategic plan. This outsourcing arrangement enables the Company to focus on the expansion of its core banking products while de-emphasizing legacy non-core activity such as tax liens.
During 2013, pursuant to the real estate rationalization plan under PIP, two branches were consolidated and four Company-owned buildings were sold. Royal Bank consolidated the leased Henderson Road office between the King of Prussia and Bridgeport offices and consolidated the 15
th
Street branch office into the Walnut Street branch office, which are both located in Center City Philadelphia. These branch consolidations had minimal effect on deposit levels. Included in the real estate sales were two buildings that are the sites of the Fairmount and Phoenixville retail branches. In refreshing our retail branch network, these two branches along with a third will be relocated to more attractive, convenient, high-traffic locations within the same markets over the next three to eight months. Additionally the Villanova branch was relocated in January 2014.
During 2013, the Company launched a completely redesigned website
which takes advantage of the latest technologies and trends in web development, including responsive design which reformats content to fit any screen, improving both aesthetics and user experience.
Visitors will also find a renewed emphasis on our most important products and services, including quick links to key revenue driving product lines and our secure home equity application. Complementing the launch of the new website was the
debut of our mobile banking solution, TouchBanking. With the addition to executive management of Lars Eller, as Chief Retail Banking Officer, the Company looks to grow its retail customer base with the deployment of new commercial and consumer solutions, enhancement of product offerings and further development of the retail sales teams. To support the marketing of these enhancements the Company began refreshing its brand with new advertising through billboards and online and print media. The expense reductions, revenue growth and planned additional improvements have repositioned the Company in 2013 and for the future.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of the Company’s available-for-sale investment securities are summarized as follows:
|
As of December 31, 2013
|
|
|
|
|
Included in AOCL*
|
|
|
|
|
|
(In thousands)
|
|
Amortized
cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair value
|
|
|
Investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
68,207
|
|
|
$
|
-
|
|
|
$
|
(6,171
|
)
|
|
$
|
62,036
|
|
|
Mortgage-backed securities-residential
|
|
|
32,769
|
|
|
|
210
|
|
|
|
(882
|
)
|
|
|
32,097
|
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies
|
|
|
188,194
|
|
|
|
2,887
|
|
|
|
(1,978
|
)
|
|
|
189,103
|
|
|
Non-agency
|
|
|
4,454
|
|
|
|
25
|
|
|
|
-
|
|
|
|
4,479
|
|
|
Corporate bonds
|
|
|
9,669
|
|
|
|
25
|
|
|
|
(256
|
)
|
|
|
9,438
|
|
|
Municipal bonds
|
|
|
7,163
|
|
|
|
-
|
|
|
|
(263
|
)
|
|
|
6,900
|
|
|
Common stocks
|
|
|
33
|
|
|
|
16
|
|
|
|
-
|
|
|
|
49
|
|
|
Other securities
|
|
|
3,363
|
|
|
|
1,405
|
|
|
|
(143
|
)
|
|
|
4,625
|
|
|
Total available for sale
|
|
$
|
313,852
|
|
|
$
|
4,568
|
|
|
$
|
(9,693
|
)
|
|
$
|
308,727
|
|
|
As of December 31, 2012
|
|
|
|
|
Included in AOCL*
|
|
|
|
|
|
(In thousands)
|
|
Amortized
cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Fair value
|
|
|
Investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
66,371
|
|
|
$
|
151
|
|
|
$
|
(78
|
)
|
|
$
|
66,444
|
|
|
Mortgage-backed securities-residential
|
|
|
30,038
|
|
|
|
518
|
|
|
|
(47
|
)
|
|
|
30,509
|
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies
|
|
|
229,556
|
|
|
|
5,031
|
|
|
|
(611
|
)
|
|
|
233,976
|
|
|
Non-agency
|
|
|
1,007
|
|
|
|
4
|
|
|
|
-
|
|
|
|
1,011
|
|
|
Corporate bonds
|
|
|
7,477
|
|
|
|
32
|
|
|
|
(72
|
)
|
|
|
7,437
|
|
|
Municipal bonds
|
|
|
5,645
|
|
|
|
-
|
|
|
|
(30
|
)
|
|
|
5,615
|
|
|
Common stocks
|
|
|
33
|
|
|
|
14
|
|
|
|
-
|
|
|
|
47
|
|
|
Other securities
|
|
|
3,752
|
|
|
|
520
|
|
|
|
(108
|
)
|
|
|
4,164
|
|
|
Total available for sale
|
|
$
|
343,879
|
|
|
$
|
6,270
|
|
|
$
|
(946
|
)
|
|
$
|
349,203
|
|
|
*
|
Accumulated other comprehensive loss
|
The investment portfolio
declined $40.5 million
from $349.2 million at December 31, 2012 to $308.7 million at December 31, 2013.
The decline was partially due to the reinvestment of cash flows from principal payments and calls into loans and the $10.4 million change to a net unrealized loss of $5.1 million at December 31, 2013 from a net unrealized gain of $5.3 million at December 31, 2012.
NOTE 3 - INVESTMENT SECURITIES – Continued
The amortized cost and fair value of investment securities at December 31, 2013, 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 December 31, 2013
|
|
|
(In thousands)
|
|
Amortized
cost
|
|
|
Fair value
|
|
|
Within 1 year
|
|
$
|
11,806
|
|
|
$
|
10,257
|
|
|
After 1 but within 5 years
|
|
|
6,432
|
|
|
|
6,359
|
|
|
After 5 but within 10 years
|
|
|
33,519
|
|
|
|
31,246
|
|
|
After 10 years
|
|
|
33,282
|
|
|
|
30,512
|
|
|
Mortgage-backed securities-residential
|
|
|
32,769
|
|
|
|
32,097
|
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies
|
|
|
188,194
|
|
|
|
189,103
|
|
|
Non-agency
|
|
|
4,454
|
|
|
|
4,479
|
|
|
Total available for sale debt securities
|
|
|
310,456
|
|
|
|
304,053
|
|
|
No contractual maturity
|
|
|
3,396
|
|
|
|
4,674
|
|
|
Total available for sale securities
|
|
$
|
313,852
|
|
|
$
|
308,727
|
|
Proceeds from the sales of investments available for sale during 2013 and 2012 were $31.0 million and $28.2 million, respectively. The following table summarizes gross realized gains and losses realized on the sale of securities recognized in earnings in the periods indicated:
|
|
|
For the years ended December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
Gross realized gains
|
|
$
|
416
|
|
|
$
|
1,211
|
|
|
Gross realized losses
|
|
|
(258
|
)
|
|
|
(181
|
)
|
|
Net realized gains
|
|
$
|
158
|
|
|
$
|
1,030
|
|
As of December 31, 2013, investment securities with a market value of $70.4 million were pledged as collateral to secure advances with the FHLB.
The Company evaluates securities for OTTI at least on a quarterly basis. The Company assesses whether OTTI is present when the fair value of a security is less than its amortized cost. All investment securities are evaluated for OTTI under FASB ASC Topic 320, “Investments-Debt & Equity Securities” (“ASC Topic 320”). Non-agency collateralized mortgage obligations maybe evaluated under FASB ASC Topic 320 Subtopic 40, “Beneficial Interests in Securitized Financial Assets” or under FASB ASC Topic 325, “Investments-Other”. In determining whether OTTI exists, management considers numerous factors, including but not limited to: (1) the length of time and the extent to which the fair value is less than the amortized cost, (2) the Company’s intent to hold or sell the security, (3) the financial condition and results of the issuer including changes in capital, (4) the credit rating of the issuer, (5) analysts’ earnings estimate, (6) industry trends specific to the security, and (7) timing of debt maturity and status of debt payments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES – Continued
Under ASC Topic 320, OTTI is considered to have occurred with respect to debt securities (1) if an entity intends to sell the security; (2) if it is more likely than not an entity will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. In addition, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell or will more likely than not be required to sell the security. If an entity intends to sell the security or will be required to sell the security, the OTTI shall be recognized in earnings equal to the entire difference between the fair value and the amortized cost basis at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before the recovery of its amortized cost basis, the OTTI shall be separated into two amounts, the credit-related loss and the noncredit-related loss. The credit-related loss is based on the present value of the expected cash flows and is recognized in earnings. The noncredit-related loss is based on other factors such as illiquidity and is recognized in other comprehensive income (loss).
The tables below indicate the length of time individual securities have been in a continuous unrealized loss position at December 31, 2013 and 2012:
|
As of December 31, 2013
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
(In thousands)
|
|
Fair value
|
|
|
Gross
unrealized
losses
|
|
|
Number of
positions
|
|
|
Fair value
|
|
|
Gross
unrealized
losses
|
|
|
Number of
positions
|
|
|
Fair value
|
|
|
Gross
unrealized
losses
|
|
|
Number of
positions
|
|
|
Investment securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
48,919
|
|
|
$
|
(5,035
|
)
|
|
|
16
|
|
|
$
|
12,267
|
|
|
$
|
(1,136
|
)
|
|
|
5
|
|
|
$
|
61,186
|
|
|
$
|
(6,171
|
)
|
|
|
21
|
|
|
Mortgage-backed securities-residential
|
|
|
18,045
|
|
|
|
(518
|
)
|
|
|
7
|
|
|
|
6,276
|
|
|
|
(364
|
)
|
|
|
2
|
|
|
|
24,321
|
|
|
|
(882
|
)
|
|
|
9
|
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies
|
|
|
67,240
|
|
|
|
(1,446
|
)
|
|
|
21
|
|
|
|
9,974
|
|
|
|
(532
|
)
|
|
|
3
|
|
|
|
77,214
|
|
|
|
(1,978
|
)
|
|
|
24
|
|
|
Corporate bonds
|
|
|
4,848
|
|
|
|
(221
|
)
|
|
|
5
|
|
|
|
965
|
|
|
|
(35
|
)
|
|
|
1
|
|
|
|
5,813
|
|
|
|
(256
|
)
|
|
|
6
|
|
|
Municipal bonds
|
|
|
3,019
|
|
|
|
(102
|
)
|
|
|
5
|
|
|
|
3,881
|
|
|
|
(161
|
)
|
|
|
4
|
|
|
|
6,900
|
|
|
|
(263
|
)
|
|
|
9
|
|
|
Other securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
301
|
|
|
|
(143
|
)
|
|
|
2
|
|
|
|
301
|
|
|
|
(143
|
)
|
|
|
2
|
|
|
Total available for sale
|
|
$
|
142,071
|
|
|
$
|
(7,322
|
)
|
|
|
54
|
|
|
$
|
33,664
|
|
|
$
|
(2,371
|
)
|
|
|
17
|
|
|
$
|
175,735
|
|
|
$
|
(9,693
|
)
|
|
|
71
|
|
|
As of December 31, 2012
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
(In thousands)
|
|
Fair value
|
|
|
Gross
unrealized
losses
|
|
|
Number
of
positions
|
|
|
Fair value
|
|
|
Gross
unrealized
losses
|
|
|
Number of
positions
|
|
|
Fair value
|
|
|
Gross
unrealized
losses
|
|
|
Number
of
positions
|
|
|
Investment securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
23,818
|
|
|
$
|
(78
|
)
|
|
|
8
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
23,818
|
|
|
$
|
(78
|
)
|
|
|
8
|
|
|
Mortgage-backed securities-residential
|
|
|
7,280
|
|
|
|
(47
|
)
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,280
|
|
|
|
(47
|
)
|
|
|
2
|
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies
|
|
|
44,937
|
|
|
|
(592
|
)
|
|
|
15
|
|
|
|
3,975
|
|
|
|
(19
|
)
|
|
|
2
|
|
|
|
48,912
|
|
|
|
(611
|
)
|
|
|
17
|
|
|
Corporate bonds
|
|
|
2,165
|
|
|
|
(13
|
)
|
|
|
2
|
|
|
|
941
|
|
|
|
(59
|
)
|
|
|
1
|
|
|
|
3,106
|
|
|
|
(72
|
)
|
|
|
3
|
|
|
Municipal bonds
|
|
|
4,597
|
|
|
|
(21
|
)
|
|
|
5
|
|
|
|
882
|
|
|
|
(9
|
)
|
|
|
1
|
|
|
|
5,479
|
|
|
|
(30
|
)
|
|
|
6
|
|
|
Other securities
|
|
|
289
|
|
|
|
(38
|
)
|
|
|
1
|
|
|
|
255
|
|
|
|
(70
|
)
|
|
|
1
|
|
|
|
544
|
|
|
|
(108
|
)
|
|
|
2
|
|
|
Total available for sale
|
|
$
|
83,086
|
|
|
$
|
(789
|
)
|
|
|
33
|
|
|
$
|
6,053
|
|
|
$
|
(157
|
)
|
|
|
5
|
|
|
$
|
89,139
|
|
|
$
|
(946
|
)
|
|
|
38
|
|
The AFS portfolio had gross unrealized losses of $9.7 million and $946,000 at December 31, 2013 and 2012, respectively. The considerable increase in gross unrealized losses was directly impacted by increases of $6.2 million, $1.4 million and $835,000 in gross unrealized losses on government agency debt securities, Agency CMOs, and MBS, respectively. These securities carry lower coupons and their market value was negatively impacted by a 72% increase in the 10-year Treasury yield from 1.76% at December 31, 2012 to 3.03% at December 31, 2013. The Company did not record OTTI charges in 2013. In determining the Company’s intent not to sell and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, management considers the following factors: current liquidity and availability of other non-pledged assets that permits the investment to be held for an extended period of time but not necessarily until maturity, capital planning, and any specific investment committee goals or guidelines related to the disposition of specific investments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES – Continued
Common stocks:
As of December 31, 2013, the Company had two common stocks of financial institutions with a total fair value of $49,000 and an unrealized gain of $16,000. During 2012 the Company sold one common stock investment and recorded a gain of $112,000.
For all debt security types discussed below the fair value is based on prices provided by brokers and safekeeping custodians with the exception of trust preferred securities which is described below.
U.S. government-sponsored agencies (“US Agencies”):
As of December 31, 2013, the Company had 21 US Agency bonds, which are callable at par, with a fair value of $61.2 million and gross unrealized losses of $5.0 million. Sixteen of these US Agencies have been in an unrealized loss position for less than twelve months. The five bonds that have been in an unrealized loss position for more twelve months or longer had a fair market value of $12.3 million and unrealized losses of $1.2 million at December 31, 2013. Management believes that the unrealized loss on these debt securities is a function of changes in investment spreads. Management expects to recover the entire amortized cost basis of these securities. The Company does not intend to sell the securities before recovery of the cost basis and will not more likely than not be required to sell these securities before recovery of the cost basis. Therefore, management has determined that these securities are not other-than-temporarily impaired at December 31, 2013.
Mortgage-backed securities issued by U.S. government agencies and U.S. government sponsored enterprises:
As of December 31, 2013, the Company had nine mortgage-backed securities with a fair value of $24.3 million and gross unrealized losses of $882,000. Two of the mortgage-backed securities had been in an unrealized loss position of twelve months or longer and the remaining seven mortgage-backed securities have been in an unrealized loss position for less than twelve months. The unrealized loss is attributable to a combination of factors, including relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Based on its assessment of these factors, management believes that the unrealized losses on these debt securities are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. The Company does not intend to sell these securities before recovery of their cost basis and will not more likely than not be required to sell these securities before recovery of their cost basis. Therefore, management has determined that these securities are not other-than-temporarily impaired at December 31, 2013.
U.S. government issued or sponsored collateralized mortgage obligations (“Agency CMOs”):
As of December 31, 2013, the Company had 24 Agency CMOs with a fair value of $77.2 million and gross unrealized losses of $2.0 million. Three of the Agency CMOs had been in an unrealized loss position for twelve months or longer and the remaining 21 Agency CMOs have been in an unrealized loss position for less than twelve months. The unrealized loss is attributable to a combination of factors, including relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Based on its assessment of these factors, management believes that the unrealized losses on these debt securities are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. The Company does not intend to sell these securities before recovery of their cost basis and will not more likely than not be required to sell these securities before recovery of their cost basis. Therefore, management has determined that these securities are not other-than-temporarily impaired at December 31, 2013.
Non-agency collateralized mortgage obligations (“Non-agency CMOs”):
As of December 31, 2013, the Company had two non-agency CMOs with a fair value of $4.5 million and a gross unrealized gain of $25,000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES – Continued
Corporate bonds:
As of December 31, 2013, the Company had six corporate bonds with a fair value of $5.8 million and gross unrealized losses of $256,000. One of the corporate bonds had been in an unrealized loss position for more than twelve months and the remaining five bonds have been in an unrealized loss position for less than twelve months. All six bonds are investment grade. The Company’s unrealized losses in investments in corporate bonds represent interest rate risk and not credit risk of the underlying issuers. As previously mentioned management also considered (1) the length of time and the extent to which the fair value is less than the amortized cost, (2) the Company’s intent to hold or sell the security, (3) the financial condition and results of the issuer including changes in capital, (4) the credit rating of the issuer, (5) analysts’ earnings estimate, (6) industry trends specific to the security, and (7) timing of debt maturity and status of debt payments. Management utilized discounted cash flow analysis based upon the credit ratings of the securities, liquidity risk premiums, and the recent corporate spreads for similar securities as required under ASC Topic 320 to determine the credit risk component of the corporate bonds. Based on these analyses, there was no credit-related loss on the bonds. Because the Company does not intend to sell the corporate bonds and it is not more likely than not that the Company will be required to sell the bonds before recovery of their amortized cost basis, which may be maturity, the Company does not consider these bonds to be other-than-temporarily impaired at December 31, 2013.
Municipal bonds:
As of December 31, 2013, the Company had nine municipal bonds with a fair value $6.9 million and an unrealized loss of $263,000. Five of the municipal bonds have been in an unrealized loss position for less than twelve months and four municipal bonds have been in an unrealized loss position for more twelve months or longer. Because the Company does not intend to sell the bonds and it is not more likely than not that the Company will be required to sell the bonds before recovery of its amortized cost basis, which may be maturity, the Company does not consider the bonds to be other-than-temporarily impaired at December 31, 2013.
Other securities:
As of December 31, 2013, the Company had seven investments in private equity funds which were predominantly invested in real estate. In determining whether or not OTTI exists, the Company reviews the funds’ financials, asset values, and its near-term projections. At December 31, 2013, two of the private equity funds had a combined fair value of $301,000 and an unrealized loss of $143,000. OTTI charges were recorded in a prior period on these two funds. Management concluded that there was no additional impairment on these two funds in 2013. During 2012 the Company recorded impairment charges on two other private equity funds. The impairment charges included the entire carrying value of one of the private equity funds in the amount of $1.5 million and a credit related impairment charge of $859,000 on another private equity fund.
The Company will continue to monitor all of the above investments to determine if the discounted cash flow analysis, continued negative trends, market valuations or credit defaults result in impairment that is other-than-temporary.
The following table presents a roll-forward of the balance of credit-related impairment losses on debt securities held at December 31, 2013 and 2012 for which a portion of an other-than-temporary impairment was recognized in other comprehensive income:
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
Balance at January 1,
|
|
$
|
173
|
|
|
$
|
173
|
|
|
Reductions for securities sold during the period (realized)
|
|
|
(173
|
)
|
|
|
-
|
|
|
Balance at December 31,
|
|
$
|
-
|
|
|
$
|
173
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES – Continued
The following table summarizes other-than-temporary impairment losses on securities recognized in earnings in the periods indicated:
|
|
|
For the years ended December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
Other securities
|
|
$
|
-
|
|
|
$
|
2,359
|
|
|
Total OTTI recognized in earnings
|
|
$
|
-
|
|
|
$
|
2,359
|
|
During 2012, the Company recorded a total impairment charge to earnings of $2.4 million related to other securities. Management concluded that these investments were OTTI.
NOTE 4 – LOANS AND LEASES
Major classifications of LHFI are as follows:
|
|
|
As of December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
Commercial real estate
|
|
$
|
148,293
|
|
|
$
|
167,115
|
|
|
Construction and land development
|
|
|
45,261
|
|
|
|
37,215
|
|
|
Commercial and industrial
|
|
|
79,589
|
|
|
|
40,560
|
|
|
Multi-family
|
|
|
11,737
|
|
|
|
11,756
|
|
|
Residential real estate
|
|
|
25,535
|
|
|
|
24,981
|
|
|
Leases
|
|
|
42,524
|
|
|
|
37,347
|
|
|
Tax certificates
|
|
|
12,716
|
|
|
|
24,569
|
|
|
Consumer
|
|
|
826
|
|
|
|
1,139
|
|
|
|
|
|
366,481
|
|
|
|
344,682
|
|
|
Less: Deferred loan fees, net*
|
|
|
-
|
|
|
|
(517
|
)
|
|
Total LHFI, net of unearned income
|
|
$
|
366,481
|
|
|
$
|
344,165
|
|
*For the 2013 period net deferred fees were allocated among the various loan types.
The Company originates commercial and real estate loans, including construction and land development loans primarily in the greater Philadelphia metropolitan area as well as selected locations throughout the mid-Atlantic region. The Company also has participated with other financial institutions in selected construction and land development loans outside our geographic area. The Company has a concentration of credit risk in commercial real estate, construction and land development loans at December 31, 2013. A substantial portion of its debtors’ ability to honor their contracts is dependent upon the housing sector specifically and the economy in general.
The Company has originated loans to the officers and directors of the Company and to their associates. In accordance with Regulation O, related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectability. The aggregate dollar amount of these loans and commitments was $234,000 and $1.4 million at December 31, 2013 and 2012. During 2013 there were no new related party loans. Total payments received on related party loans in 2013 were $1.2 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – LOANS AND LEASES – Continued
The Company uses a nine point grading risk classification system commonly used in the financial services industry as the credit quality indicator. The first four classifications are rated Pass. The riskier classifications include Pass-Watch, Special Mention, Substandard, Doubtful and Loss. The risk rating is related to the underlying credit quality and probability of default. These risk ratings are used to calculate the historical loss component of the allowance.
|
|
·
|
Pass: includes credits that demonstrate a low probability of default;
|
|
|
·
|
Pass-Watch:
a warning classification which includes credits that are beginning to demonstrate above average risk through declining earnings, strained cash flows, increased leverage and/or weakening market fundamentals;
|
|
|
·
|
Special mention: includes credits that have potential weaknesses that if left uncorrected could weaken the credit or result in inadequate protection of the Company’s position at some future date. While potentially weak, credits in this classification are marginally acceptable and loss of principal or interest is not anticipated;
|
|
|
·
|
Substandard accrual: includes credits that exhibit a well-defined weakness which currently jeopardizes the repayment of debt and liquidation of collateral even though they are currently performing. These credits are characterized by the distinct possibility that the Company may incur a loss in the future if these weaknesses are not corrected;
|
|
|
·
|
Non-accrual: (substandard non-accrual, doubtful, loss): includes credits that demonstrate serious problems to the point that it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement.
|
All loans, at the time of presentation to the appropriate loan committee, are given an initial loan risk rating by the Chief Credit Officer (“CCO”). From time to time, and at the general direction of any of the various loan committees, the ratings may be changed based on the findings of that committee. Items considered in assigning ratings include the financial strength of the borrower and/or guarantors, the type of collateral, the collateral lien position, the type of loan and loan structure, any potential risk inherent in the specific loan type, higher than normal monitoring of the loan or any other factor deemed appropriate by any of the various committees for changing the rating of the loan. Any such change in rating is reflected in the minutes of that committee.
The following tables present risk ratings for each loan portfolio segment at December 31, 2013 and 2012, excluding LHFS.
|
As of December 31, 2013
|
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Pass
|
|
|
Pass-Watch
|
|
|
Mention
|
|
|
Substandard
|
|
|
Non-accrual
|
|
|
Total
|
|
|
Commercial real estate
|
|
$
|
99,525
|
|
|
$
|
32,267
|
|
|
$
|
11,572
|
|
|
$
|
2,604
|
|
|
$
|
2,325
|
|
|
$
|
148,293
|
|
|
Construction and land development
|
|
|
14,677
|
|
|
|
16,270
|
|
|
|
11,095
|
|
|
|
569
|
|
|
|
2,650
|
|
|
|
45,261
|
|
|
Commercial & industrial
|
|
|
50,478
|
|
|
|
10,508
|
|
|
|
5,735
|
|
|
|
9,239
|
|
|
|
3,629
|
|
|
|
79,589
|
|
|
Multi-family
|
|
|
10,792
|
|
|
|
410
|
|
|
|
535
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,737
|
|
|
Residential real estate
|
|
|
24,903
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
632
|
|
|
|
25,535
|
|
|
Leases
|
|
|
41,325
|
|
|
|
485
|
|
|
|
247
|
|
|
|
-
|
|
|
|
467
|
|
|
|
42,524
|
|
|
Tax certificates
|
|
|
12,262
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
454
|
|
|
|
12,716
|
|
|
Consumer
|
|
|
750
|
|
|
|
76
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
826
|
|
|
Total LHFI
|
|
$
|
254,712
|
|
|
$
|
60,016
|
|
|
$
|
29,184
|
|
|
$
|
12,412
|
|
|
$
|
10,157
|
|
|
$
|
366,481
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – LOANS AND LEASES – Continued
|
As of December 31, 2012
|
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Pass
|
|
|
Pass-Watch
|
|
|
Mention
|
|
|
Substandard
|
|
|
Non-accrual
|
|
|
Total
|
|
|
Commercial real estate
|
|
$
|
64,308
|
|
|
$
|
69,510
|
|
|
$
|
19,529
|
|
|
$
|
3,423
|
|
|
$
|
10,345
|
|
|
$
|
167,115
|
|
|
Construction and land development
|
|
|
2,139
|
|
|
|
13,872
|
|
|
|
16,343
|
|
|
|
581
|
|
|
|
4,280
|
|
|
|
37,215
|
|
|
Commercial & industrial
|
|
|
14,764
|
|
|
|
10,774
|
|
|
|
92
|
|
|
|
9,969
|
|
|
|
4,961
|
|
|
|
40,560
|
|
|
Multi-family
|
|
|
9,019
|
|
|
|
2,034
|
|
|
|
703
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,756
|
|
|
Residential real estate
|
|
|
15,125
|
|
|
|
6,634
|
|
|
|
602
|
|
|
|
1,626
|
|
|
|
994
|
|
|
|
24,981
|
|
|
Leases
|
|
|
36,755
|
|
|
|
325
|
|
|
|
16
|
|
|
|
-
|
|
|
|
251
|
|
|
|
37,347
|
|
|
Tax certificates
|
|
|
23,968
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
601
|
|
|
|
24,569
|
|
|
Consumer
|
|
|
926
|
|
|
|
213
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,139
|
|
|
Subtotal LHFI
|
|
|
167,004
|
|
|
|
103,362
|
|
|
|
37,285
|
|
|
|
15,599
|
|
|
|
21,432
|
|
|
|
344,682
|
|
|
Less: Deferred loan fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(517
|
)
|
|
Total LHFI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
344,165
|
|
The following tables are an aging analysis of past due payments for each loan portfolio segment at December 31, 2013 and 2012, excluding LHFS.
|
As of December 31, 2013
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
Accruing
|
|
|
Total
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Past Due
|
|
|
Past Due
|
|
|
90+ Days
|
|
|
Non-accrual
|
|
|
Current
|
|
|
Total
|
|
|
Commercial real estate
|
|
$
|
996
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,325
|
|
|
$
|
144,972
|
|
|
$
|
148,293
|
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,650
|
|
|
|
42,611
|
|
|
|
45,261
|
|
|
Commercial & industrial
|
|
|
115
|
|
|
|
49
|
|
|
|
-
|
|
|
|
3,629
|
|
|
|
75,796
|
|
|
|
79,589
|
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,737
|
|
|
|
11,737
|
|
|
Residential real estate
|
|
|
458
|
|
|
|
262
|
|
|
|
-
|
|
|
|
632
|
|
|
|
24,183
|
|
|
|
25,535
|
|
|
Leases
|
|
|
485
|
|
|
|
247
|
|
|
|
-
|
|
|
|
467
|
|
|
|
41,325
|
|
|
|
42,524
|
|
|
Tax certificates
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
454
|
|
|
|
12,262
|
|
|
|
12,716
|
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
826
|
|
|
|
826
|
|
|
Total LHFI
|
|
$
|
2,054
|
|
|
$
|
558
|
|
|
$
|
-
|
|
|
$
|
10,157
|
|
|
$
|
353,712
|
|
|
$
|
366,481
|
|
|
As of December 31, 2012
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
Accruing
|
|
|
Total
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Past Due
|
|
|
Past Due
|
|
|
90+ Days
|
|
|
Non-accrual
|
|
|
Current
|
|
|
Total
|
|
|
Commercial real estate
|
|
$
|
1,548
|
|
|
$
|
1,486
|
|
|
$
|
-
|
|
|
$
|
10,345
|
|
|
$
|
153,736
|
|
|
$
|
167,115
|
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,280
|
|
|
|
32,935
|
|
|
|
37,215
|
|
|
Commercial & industrial
|
|
|
200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,961
|
|
|
|
35,399
|
|
|
|
40,560
|
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,756
|
|
|
|
11,756
|
|
|
Residential real estate
|
|
|
562
|
|
|
|
486
|
|
|
|
-
|
|
|
|
994
|
|
|
|
22,939
|
|
|
|
24,981
|
|
|
Leases
|
|
|
325
|
|
|
|
16
|
|
|
|
-
|
|
|
|
251
|
|
|
|
36,755
|
|
|
|
37,347
|
|
|
Tax certificates
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
601
|
|
|
|
23,968
|
|
|
|
24,569
|
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,139
|
|
|
|
1,139
|
|
|
Subtotal LHFI
|
|
|
2,635
|
|
|
|
1,988
|
|
|
|
-
|
|
|
|
21,432
|
|
|
|
318,627
|
|
|
|
344,682
|
|
|
Less: Deferred loan fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(517
|
)
|
|
Total LHFI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
344,165
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – LOANS AND LEASES – Continued
The following table details the composition of the non-accrual loans.
|
|
|
As of December 31, 2013
|
|
|
As of December 31, 2012
|
|
|
(In thousands)
|
|
Loan
balance
|
|
|
Specific
reserves
|
|
|
Loan
balance
|
|
|
Specific
reserves
|
|
|
Non-accrual loans held for investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
2,325
|
|
|
$
|
331
|
|
|
$
|
10,345
|
|
|
$
|
835
|
|
|
Construction and land development
|
|
|
2,650
|
|
|
|
-
|
|
|
|
4,280
|
|
|
|
820
|
|
|
Commercial & industrial
|
|
|
3,629
|
|
|
|
452
|
|
|
|
4,961
|
|
|
|
255
|
|
|
Residential real estate
|
|
|
632
|
|
|
|
19
|
|
|
|
994
|
|
|
|
14
|
|
|
Leases
|
|
|
467
|
|
|
|
60
|
|
|
|
251
|
|
|
|
55
|
|
|
Tax certificates
|
|
|
454
|
|
|
|
24
|
|
|
|
601
|
|
|
|
47
|
|
|
Total non-accrual LHFI
|
|
$
|
10,157
|
|
|
$
|
886
|
|
|
$
|
21,432
|
|
|
$
|
2,026
|
|
|
Non-accrual loans held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,572
|
|
|
$
|
-
|
|
|
Total non-accrual LHFS
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,572
|
|
|
$
|
-
|
|
|
Total non-accrual loans
|
|
$
|
10,157
|
|
|
$
|
886
|
|
|
$
|
23,004
|
|
|
$
|
2,026
|
|
Total non-accrual loans at December 31, 2013 were $10.2 million in LHFI. Total non-accrual loans at December 31, 2012 were $23.0 million and were comprised of $21.4 million in LHFI and $1.6 million in LHFS. The $12.8 million decline in total non-accrual loans was the result of a $13.2 million reduction in existing non-accrual loan balances through payments or payoffs, $4.0 million in charge-offs and write downs related to impairment, and transfers to OREO of $9.1 million, which collectively were offset by $13.5 million in additions. The majority of the new non-accrual activity and transfers to OREO originated from the tax certificate portfolio. Commercial, construction and land development, and commercial real estate loans represent 36%, 26%, and 23%, respectively, of the total $10.2 million in non-accrual loans at December 31, 2013.
If interest had been accrued, such income would have been approximately $1.7 million and $3.1 million for the years ended December 31, 2013 and 2012, respectively. At December 31, 2013, the Company had no loans past due 90 days or more on which interest continues to accrue.
Impaired Loans
The Company identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. Impaired loans include TDRs. The Company does not accrue interest income on impaired non-accrual loans. Excess proceeds received over the principal amounts due on impaired non-accrual loans are recognized as income on a cash basis. The Company recognizes income under the accrual basis when the principal payments on the loans become current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company. If these factors do not exist, the Company does not recognize income.
Total cash collected on impaired loans and leases during 2013 and 2012 was $16.1 million and $23.4 million, respectively, of which $15.3 million and $21.1 million was credited to the principal balance outstanding on such loans, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – LOANS AND LEASES – Continued
The following is a summary of information pertaining to impaired loans:
|
|
|
As of December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
Impaired LHFI with a valuation allowance
|
|
$
|
3,835
|
|
|
$
|
9,405
|
|
|
Impaired LHFI without a valuation allowance
|
|
|
14,671
|
|
|
|
19,423
|
|
|
Impaired LHFS
|
|
|
-
|
|
|
|
1,572
|
|
|
Total impaired loans and leases
|
|
$
|
18,506
|
|
|
$
|
30,400
|
|
|
Valuation allowance related to impaired LHFI
|
|
$
|
886
|
|
|
$
|
2,026
|
|
|
|
|
For the years ended December 31,
|
|
|
(In thousands)
|
|
|
2013
|
|
|
|
2012
|
|
|
Average investment in impaired loans and leases
|
|
$
|
24,714
|
|
|
$
|
39,412
|
|
|
Interest income recognized on impaired loans and leases
|
|
$
|
559
|
|
|
$
|
366
|
|
|
Interest income recognized on a cash basis on impaired loans and leases
|
|
$
|
27
|
|
|
$
|
66
|
|
Troubled Debt Restructurings
At December 31, 2013, the Company had twelve TDRs, of which five are on non-accrual status, with a total carrying value of $12.1 million. At the time of the modifications, five of the loans were already classified as impaired loans. At December 31, 2012, the Company had twelve TDRs, of which eight were on non-accrual status, with a total carrying value of $21.1 million. At the time of the modifications, eight of the loans were already classified as impaired loans. The Company’s policy for TDRs is to recognize interest income on currently performing restructured loans under the accrual method. The TDR balances are included in the impaired loan totals presented above.
The following table details the Company’s TDRs that are on an accrual status and a non-accrual status at December 31, 2013 and 2012.
|
|
|
As of December 31, 2013
|
|
|
(In thousands)
|
|
Number of
loans
|
|
|
Accrual
Status
|
|
|
Non-Accrual
Status
|
|
|
Total TDRs
|
|
|
Commercial real estate
|
|
|
3
|
|
|
$
|
3,847
|
|
|
$
|
-
|
|
|
$
|
3,847
|
|
|
Construction and land development
|
|
|
4
|
|
|
|
1,257
|
|
|
|
479
|
|
|
|
1,736
|
|
|
Commercial & industrial
|
|
|
3
|
|
|
|
4,420
|
|
|
|
1,960
|
|
|
|
6,380
|
|
|
Residential real estate
|
|
|
2
|
|
|
|
-
|
|
|
|
121
|
|
|
|
121
|
|
|
Total
|
|
|
12
|
|
|
$
|
9,524
|
|
|
$
|
2,560
|
|
|
$
|
12,084
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – LOANS AND LEASES – Continued
|
|
|
As of December 31, 2012
|
|
|
(In thousands)
|
|
Number of
loans
|
|
|
Accrual
Status
|
|
|
Non-Accrual
Status
|
|
|
Total TDRs
|
|
|
Commercial real estate
|
|
|
4
|
|
|
$
|
1,664
|
|
|
$
|
854
|
|
|
$
|
2,518
|
|
|
Construction and land development
|
|
|
4
|
|
|
|
613
|
|
|
|
10,063
|
|
|
|
10,676
|
|
|
Commercial & industrial
|
|
|
2
|
|
|
|
5,290
|
|
|
|
2,457
|
|
|
|
7,747
|
|
|
Residential real estate
|
|
|
2
|
|
|
|
-
|
|
|
|
149
|
|
|
|
149
|
|
|
Total
|
|
|
12
|
|
|
$
|
7,567
|
|
|
$
|
13,523
|
|
|
$
|
21,090
|
|
At December 31, 2013, all of the TDRs were in compliance with their restructured terms.
The following table presents newly restructured loans that occurred during the years ended December 31, 2013 and 2012.
|
|
|
Modifications by type for the year ended December 31, 2013
|
|
|
(Dollars in thousands)
|
|
Number of
loans
|
|
|
Rate
|
|
|
Term
|
|
|
Payment
|
|
|
Combination
of types
|
|
|
Total
|
|
|
Pre-
Modification Outstanding
Recorded
Investment
|
|
|
Post-
Modification Outstanding
Recorded
Investment
|
|
|
Commercial real estate
|
|
|
2
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,705
|
|
|
$
|
3,705
|
|
|
$
|
3,761
|
|
|
$
|
3,761
|
|
|
Commercial & industrial
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
82
|
|
|
|
82
|
|
|
|
87
|
|
|
|
87
|
|
|
Total
|
|
|
3
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,787
|
|
|
$
|
3,787
|
|
|
$
|
3,848
|
|
|
$
|
3,848
|
|
|
|
|
Modifications by type for the year ended December 31, 2012
|
|
|
(Dollars in thousands)
|
|
Number of
loans
|
|
|
Rate
|
|
|
Term
|
|
|
Payment
|
|
|
Combination
of types
|
|
|
Total
|
|
|
Pre-
Modification Outstanding
Recorded
Investment
|
|
|
Post-
Modification Outstanding
Recorded
Investment
|
|
|
Commercial real estate
|
|
|
2
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,624
|
|
|
$
|
7,624
|
|
|
$
|
9,426
|
|
|
$
|
9,426
|
|
|
Construction and land development
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
282
|
|
|
|
282
|
|
|
|
290
|
|
|
|
290
|
|
|
Commercial & industrial
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,290
|
|
|
|
-
|
|
|
|
5,290
|
|
|
|
5,290
|
|
|
|
5,290
|
|
|
Total
|
|
|
4
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,290
|
|
|
$
|
7,906
|
|
|
$
|
13,196
|
|
|
$
|
15,006
|
|
|
$
|
15,006
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ALLOWANCE FOR LOAN AND LEASE LOSSES
The following table presents the detail of the allowance and the loan portfolio disaggregated by loan portfolio segment as of December 31, 2013 and 2012.
Allowance for Loan and Leases Losses and Loans Held for Investment
For the year ended December 31, 2013
|
(In thousands)
|
|
Commercial
real estate
|
|
|
Construction
and land development
|
|
|
Commercial & industrial
|
|
|
Multi-family
|
|
|
Residential
real estate
|
|
|
Leases
|
|
|
Tax
certificates
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
|
Allowance for Loan and Leases Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
8,750
|
|
|
$
|
2,987
|
|
|
$
|
1,924
|
|
|
$
|
654
|
|
|
$
|
1,098
|
|
|
$
|
1,108
|
|
|
$
|
472
|
|
|
$
|
29
|
|
|
$
|
239
|
|
|
$
|
17,261
|
|
|
Charge-offs
|
|
|
(1,684
|
)
|
|
|
(820
|
)
|
|
|
(383
|
)
|
|
|
-
|
|
|
|
(46
|
)
|
|
|
(382
|
)
|
|
|
(578
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,893
|
)
|
|
Recoveries
|
|
|
600
|
|
|
|
297
|
|
|
|
17
|
|
|
|
-
|
|
|
|
158
|
|
|
|
29
|
|
|
|
74
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,175
|
|
|
(Credit) provision
|
|
|
(2,168
|
)
|
|
|
(148
|
)
|
|
|
1,448
|
|
|
|
(252
|
)
|
|
|
(737
|
)
|
|
|
468
|
|
|
|
587
|
|
|
|
(14
|
)
|
|
|
(56
|
)
|
|
|
(872
|
)
|
|
Ending balance
|
|
$
|
5,498
|
|
|
$
|
2,316
|
|
|
$
|
3,006
|
|
|
$
|
402
|
|
|
$
|
473
|
|
|
$
|
1,223
|
|
|
$
|
555
|
|
|
$
|
15
|
|
|
$
|
183
|
|
|
$
|
13,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: related to loans individually evaluated for impairment
|
|
$
|
331
|
|
|
$
|
-
|
|
|
$
|
452
|
|
|
$
|
-
|
|
|
$
|
19
|
|
|
$
|
60
|
|
|
$
|
24
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: related to loans collectively evaluated for impairment
|
|
$
|
5,167
|
|
|
$
|
2,316
|
|
|
$
|
2,554
|
|
|
$
|
402
|
|
|
$
|
454
|
|
|
$
|
1,163
|
|
|
$
|
531
|
|
|
$
|
15
|
|
|
$
|
183
|
|
|
$
|
12,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LHFI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
148,293
|
|
|
$
|
45,261
|
|
|
$
|
79,589
|
|
|
$
|
11,737
|
|
|
$
|
25,535
|
|
|
$
|
42,524
|
|
|
$
|
12,716
|
|
|
$
|
826
|
|
|
$
|
-
|
|
|
$
|
366,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
5,325
|
|
|
$
|
3,907
|
|
|
$
|
8,049
|
|
|
$
|
-
|
|
|
$
|
632
|
|
|
$
|
139
|
|
|
$
|
454
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
18,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
142,968
|
|
|
$
|
41,354
|
|
|
$
|
71,540
|
|
|
$
|
11,737
|
|
|
$
|
24,903
|
|
|
$
|
42,385
|
|
|
$
|
12,262
|
|
|
$
|
826
|
|
|
$
|
-
|
|
|
$
|
347,975
|
|
Allowance for Loan and Leases Losses and Loans Held for Investment
For the year ended December 31, 2012
|
(In thousands)
|
|
Commercial real estate
|
|
|
Construction and land development
|
|
|
Commercial & industrial
|
|
|
Multi-family
|
|
|
Residential
real estate
|
|
|
Leases
|
|
|
Tax
certificates
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
|
Allowance for Loan and Leases Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
7,744
|
|
|
$
|
2,523
|
|
|
$
|
2,331
|
|
|
$
|
531
|
|
|
$
|
1,188
|
|
|
$
|
1,311
|
|
|
$
|
425
|
|
|
$
|
20
|
|
|
$
|
307
|
|
|
$
|
16,380
|
|
|
Charge-offs
|
|
|
(1,313
|
)
|
|
|
(2,452
|
)
|
|
|
(586
|
)
|
|
|
(542
|
)
|
|
|
(111
|
)
|
|
|
(465
|
)
|
|
|
(802
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,271
|
)
|
|
Recoveries
|
|
|
3
|
|
|
|
816
|
|
|
|
67
|
|
|
|
-
|
|
|
|
208
|
|
|
|
32
|
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,155
|
|
|
Provision (credit)
|
|
|
2,316
|
|
|
|
2,100
|
|
|
|
112
|
|
|
|
665
|
|
|
|
(187
|
)
|
|
|
230
|
|
|
|
820
|
|
|
|
9
|
|
|
|
(68
|
)
|
|
|
5,997
|
|
|
Ending balance
|
|
$
|
8,750
|
|
|
$
|
2,987
|
|
|
$
|
1,924
|
|
|
$
|
654
|
|
|
$
|
1,098
|
|
|
$
|
1,108
|
|
|
$
|
472
|
|
|
$
|
29
|
|
|
$
|
239
|
|
|
$
|
17,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: related to loans individually evaluated for impairment
|
|
$
|
835
|
|
|
$
|
820
|
|
|
$
|
255
|
|
|
$
|
-
|
|
|
$
|
14
|
|
|
$
|
55
|
|
|
$
|
47
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: related to loans collectively evaluated for impairment
|
|
$
|
7,915
|
|
|
$
|
2,167
|
|
|
$
|
1,669
|
|
|
$
|
654
|
|
|
$
|
1,084
|
|
|
$
|
1,053
|
|
|
$
|
425
|
|
|
$
|
29
|
|
|
$
|
239
|
|
|
$
|
15,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LHFI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
167,115
|
|
|
$
|
37,215
|
|
|
$
|
40,560
|
|
|
$
|
11,756
|
|
|
$
|
24,981
|
|
|
$
|
37,347
|
|
|
$
|
24,569
|
|
|
$
|
1,139
|
|
|
$
|
-
|
|
|
$
|
344,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
10,958
|
|
|
$
|
5,943
|
|
|
$
|
10,251
|
|
|
$
|
-
|
|
|
$
|
994
|
|
|
$
|
81
|
|
|
$
|
601
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
28,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
156,157
|
|
|
$
|
31,272
|
|
|
$
|
30,309
|
|
|
$
|
11,756
|
|
|
$
|
23,987
|
|
|
$
|
37,266
|
|
|
$
|
23,968
|
|
|
$
|
1,139
|
|
|
$
|
-
|
|
|
$
|
315,854
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ALLOWANCE FOR LOAN AND LEASE LOSSES – Continued
The following tables detail the impaired LHFI by loan segment.
|
|
|
As of December 31, 2013
|
|
|
(In thousands)
|
|
Unpaid
principal
balance
|
|
|
Recorded
investment
|
|
|
Related
allowance
|
|
|
Average
recorded investment
|
|
|
Interest
income
recognized
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
4,429
|
|
|
$
|
4,158
|
|
|
$
|
-
|
|
|
$
|
7,956
|
|
|
$
|
73
|
|
|
Construction and land development
|
|
|
9,850
|
|
|
|
3,907
|
|
|
|
-
|
|
|
|
3,933
|
|
|
|
209
|
|
|
Commercial and industrial
|
|
|
6,693
|
|
|
|
6,491
|
|
|
|
-
|
|
|
|
5,960
|
|
|
|
250
|
|
|
Residential real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
84
|
|
|
|
27
|
|
|
Tax certificates
|
|
|
179
|
|
|
|
115
|
|
|
|
-
|
|
|
|
167
|
|
|
|
-
|
|
|
Total:
|
|
$
|
21,151
|
|
|
$
|
14,671
|
|
|
$
|
-
|
|
|
$
|
18,100
|
|
|
$
|
559
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
1,435
|
|
|
$
|
1,435
|
|
|
$
|
331
|
|
|
$
|
1,879
|
|
|
$
|
-
|
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
381
|
|
|
|
-
|
|
|
Commercial and industrial
|
|
|
2,592
|
|
|
|
1,290
|
|
|
|
452
|
|
|
|
2,456
|
|
|
|
-
|
|
|
Residential real estate
|
|
|
827
|
|
|
|
631
|
|
|
|
19
|
|
|
|
492
|
|
|
|
-
|
|
|
Leases
|
|
|
139
|
|
|
|
139
|
|
|
|
60
|
|
|
|
106
|
|
|
|
-
|
|
|
Tax certificates
|
|
|
4,322
|
|
|
|
340
|
|
|
|
24
|
|
|
|
341
|
|
|
|
-
|
|
|
Total:
|
|
$
|
9,315
|
|
|
$
|
3,835
|
|
|
$
|
886
|
|
|
$
|
5,655
|
|
|
$
|
-
|
|
|
|
|
As of December 31, 2012
|
|
|
(In thousands)
|
|
Unpaid
principal
balance
|
|
|
Recorded
investment
|
|
|
Related
allowance
|
|
|
Average
recorded
investment
|
|
|
Interest
income
recognized
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
10,417
|
|
|
$
|
8,623
|
|
|
$
|
-
|
|
|
$
|
11,163
|
|
|
$
|
78
|
|
|
Construction and land development
|
|
|
6,250
|
|
|
|
3,464
|
|
|
|
-
|
|
|
|
10,059
|
|
|
|
187
|
|
|
Commercial and industrial
|
|
|
7,790
|
|
|
|
6,820
|
|
|
|
-
|
|
|
|
5,545
|
|
|
|
73
|
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
780
|
|
|
|
-
|
|
|
Residential real estate
|
|
|
572
|
|
|
|
516
|
|
|
|
-
|
|
|
|
490
|
|
|
|
21
|
|
|
Tax certificates
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
583
|
|
|
|
-
|
|
|
Total:
|
|
$
|
25,029
|
|
|
$
|
19,423
|
|
|
$
|
-
|
|
|
$
|
28,620
|
|
|
$
|
359
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
4,136
|
|
|
$
|
2,335
|
|
|
$
|
835
|
|
|
$
|
1,526
|
|
|
$
|
-
|
|
|
Construction and land development
|
|
|
6,180
|
|
|
|
2,479
|
|
|
|
820
|
|
|
|
923
|
|
|
|
-
|
|
|
Commercial and industrial
|
|
|
9,585
|
|
|
|
3,431
|
|
|
|
255
|
|
|
|
682
|
|
|
|
-
|
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
383
|
|
|
|
-
|
|
|
Residential real estate
|
|
|
685
|
|
|
|
478
|
|
|
|
14
|
|
|
|
714
|
|
|
|
7
|
|
|
Leases
|
|
|
81
|
|
|
|
81
|
|
|
|
55
|
|
|
|
86
|
|
|
|
-
|
|
|
Tax certificates
|
|
|
4,408
|
|
|
|
601
|
|
|
|
47
|
|
|
|
288
|
|
|
|
-
|
|
|
Total:
|
|
$
|
25,075
|
|
|
$
|
9,405
|
|
|
$
|
2,026
|
|
|
$
|
4,602
|
|
|
$
|
7
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – OTHER REAL ESTATE OWNED
OREO declined $3.8 million from $13.4 million at December 31, 2012 to $9.6 million at December 31, 2013. During 2013 there was a shift in OREO composition from real estate acquired through, or in lieu of foreclosure in settlement of loans to real estate acquired through foreclosure related to tax liens. Set forth below is a table which details the changes in OREO from December 31, 2012 to December 31, 2013.
|
|
|
For the year ended December 31, 2013
|
|
|
(In thousands)
|
|
Loans
|
|
|
Tax Liens
|
|
|
Total
|
|
|
Beginning balance
|
|
$
|
11,365
|
|
|
$
|
2,070
|
|
|
$
|
13,435
|
|
|
Net proceeds from sales
|
|
|
(8,869
|
)
|
|
|
(3,910
|
)
|
|
|
(12,779
|
)
|
|
Net gain on sales
|
|
|
228
|
|
|
|
1,199
|
|
|
|
1,427
|
|
|
Assets acquired on non-accrual loans
|
|
|
100
|
|
|
|
8,951
|
|
|
|
9,051
|
|
|
Impairment charge
|
|
|
(1,099
|
)
|
|
|
(418
|
)
|
|
|
(1,517
|
)
|
|
Ending balance
|
|
$
|
1,725
|
|
|
$
|
7,892
|
|
|
$
|
9,617
|
|
At December 31, 2013, OREO was comprised of $7.9 million in tax liens, $769,000 in land, $521,000 in commercial real estate, and a residential condominium project with a fair value of $435,000. During 2013 the Company sold five separate land parcels and sold residential real estate properties related to five loan relationships. The Company received $6.0 million in net proceeds and recorded a net loss of $194,000 as a result of these sales. Additionally, the Company sold a commercial real estate property, which was a hotel
construction project in Minneapolis, Minnesota in which the Company was a participant. The Company received its pro rata share of net proceeds in the amount of $2.5 million and recorded a net gain of $262,000.
The Company also sold 42 condominiums related to the
construction project in Minneapolis, Minnesota. The Company received its pro rata share of net proceeds in the amount of $330,000 and recorded net gains of $160,000. During 2013 the Company recorded impairment charges
of $628,000 on three land properties. Due to the length of time that these properties have been classified as OREO and the inability to close on prior agreements of sales, the Company decided to a make a steep reduction in the selling prices of these three properties. In addition the Company recorded impairment charges of $325,000 and $146,000 related to commercial real estate and residential real estate properties due to updated annual appraisals or agreements of sale.
In 2013 as the composition of the OREO assets evolved to properties acquired through the tax lien portfolio, the Company transferred $9.0 million to OREO which represents 84 separate properties. During 2013, the Company sold 49 of the tax lien properties, received proceeds of $3.9 million, and recorded net gains of $1.2 million as a result of these sales. Additionally, the Company recorded impairment charges of $418,000 in 2013 related to the tax lien properties. At December 31, 2012, OREO assets acquired through the tax lien portfolio were $2.1 million and were comprised of 30 properties.
The Company is working to satisfactorily sell the remaining OREO properties. However the Company recognizes that the successful disposition of the properties, specifically the land, will likely take considerable time.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - PREMISES AND EQUIPMENT
|
|
|
|
As of December 31,
|
|
|
(In thousands)
|
Estimated Useful Lives
|
|
2013
|
|
|
2012
|
|
|
Land
|
|
|
$
|
2,200
|
|
|
$
|
2,396
|
|
|
Buildings and leasehold improvements
|
5 - 39 years
|
|
|
6,225
|
|
|
|
7,554
|
|
|
Furniture, fixtures and equipment
|
3 - 7 years
|
|
|
7,006
|
|
|
|
6,667
|
|
|
|
|
|
|
15,431
|
|
|
|
16,617
|
|
|
Less accumulated depreciation and amortization
|
|
|
|
(10,956
|
)
|
|
|
(11,385
|
)
|
|
Premises and equipment, net
|
|
|
$
|
4,475
|
|
|
$
|
5,232
|
|
Depreciation and amortization expense related to premises and equipment was approximately $451,000 and $417,000, for the years ended 2013 and 2012, respectively. During 2013, pursuant to the real estate rationalization plan under PIP, the Company sold four Company owned properties with a carrying value of $674,000 and recorded $2.5 million in gains on the sales. See “Note 2 – Regulatory Matters and Significant Risks and Uncertainties” to the Consolidated Financial Statements for additional information on PIP.
NOTE 8 - LEASE COMMITMENTS
The Company leases various premises under operating lease agreements, which expire through 2024 and require minimum annual rentals. Some of these leases are cancelable. The approximate minimum rental commitments under the leases are as follows for the year ended December 31, 2013:
|
|
|
As of
|
|
|
(In thousands)
|
|
December 31, 2013
|
|
|
2014
|
|
$
|
858
|
|
|
2015
|
|
|
874
|
|
|
2016
|
|
|
886
|
|
|
2017
|
|
|
860
|
|
|
2018
|
|
|
818
|
|
|
Thereafter
|
|
|
2,070
|
|
|
Total lease commitments
|
|
$
|
6,366
|
|
The leases contain options to extend for periods from one to ten years. The cost of such lease extensions is not included in the above table. Rental expense for all leases was approximately $785,000 and $795,000 for the years ended December 31, 2013 and 2012, respectively. Lease expense will increase in 2014 due to the relocations of two retail offices from Company owned real estate to leased real estate.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – DEPOSITS
Deposits are summarized as follows:
|
|
|
As of December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
Demand
|
|
$
|
60,473
|
|
|
$
|
58,531
|
|
|
NOW
|
|
|
45,375
|
|
|
|
43,920
|
|
|
Money Market
|
|
|
164,678
|
|
|
|
179,359
|
|
|
Savings
|
|
|
17,593
|
|
|
|
17,472
|
|
|
Time deposits (over $100)
|
|
|
92,763
|
|
|
|
91,233
|
|
|
Time deposits (under $100)
|
|
|
148,082
|
|
|
|
164,402
|
|
|
Total deposits
|
|
$
|
528,964
|
|
|
$
|
554,917
|
|
Maturities of time deposits for the next five years and thereafter are as follows:
|
|
|
As of
|
|
|
(In thousands)
|
|
December 31, 2013
|
|
|
2014
|
|
$
|
117,181
|
|
|
2015
|
|
|
88,948
|
|
|
2016
|
|
|
11,997
|
|
|
2017
|
|
|
5,373
|
|
|
2018
|
|
|
3,204
|
|
|
Thereafter
|
|
|
14,142
|
|
|
Total certificates of deposit
|
|
$
|
240,845
|
|
NOTE 10 – BORROWINGS AND SUBORDINATED DEBENTURES
1.
Advances from the Federal Home Loan Bank
While Royal Bank has a $150 million line of credit with the FHLB, the available borrowing capacity with the FHLB is based on qualified collateral. During the third quarter, the FHLB released Royal Bank from the over collateralized delivery requirement of 105% subject to reevaluation on a quarterly basis. Additionally during the fourth quarter of 2013 the FHLB released Royal Bank from loan-level listing status. As of December 31, 2013, Royal Bank had approximately $190.0 million of available borrowing capacity at the FHLB as a result of the two collateral restrictions being removed. Total advances from the FHLB were $65.0 million at December 31, 2013 and 2012. The FHLB advances had a weighted average interest rate of 1.19%. The advances and the line of credit are collateralized by FHLB stock, government agencies and mortgage-backed securities. As of December 31, 2013, investment securities with a market value of $70.4 million were pledged as collateral to the FHLB. The average balance of advances with the FHLB during 2013 was $64.4 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – BORROWINGS AND SUBORDINATED DEBENTURES – Continued
At December 31, 2012, advances from FHLB totaled $65.0 million with maturities within five years. These advances had a weighted average interest rate of 2.35%. The average balance of advances with the FHLB during 2012 was $80.1 million.
Presented below are the Company’s FHLB borrowings allocated by the year in which they mature with their corresponding weighted average rates:
|
|
|
As of December 31,
|
|
|
(Dollars in thousands)
|
|
2013
|
|
|
2012
|
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Advances maturing in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
50,000
|
|
|
|
2.64
|
%
|
|
2014
|
|
|
10,000
|
|
|
|
0.24
|
%
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
10,000
|
|
|
|
0.71
|
%
|
|
|
-
|
|
|
|
-
|
|
|
2016
|
|
|
10,000
|
|
|
|
1.11
|
%
|
|
|
-
|
|
|
|
-
|
|
|
2017
|
|
|
25,000
|
|
|
|
1.46
|
%
|
|
|
15,000
|
|
|
|
1.39
|
%
|
|
2018
|
|
|
10,000
|
|
|
|
2.01
|
%
|
|
|
|
|
|
|
|
|
|
Total FHLB borrowings
|
|
$
|
65,000
|
|
|
|
|
|
|
$
|
65,000
|
|
|
|
|
|
2.
Other borrowings
The Company has a note payable with PNC Bank (“PNC”) at December 31, 2013 in the amount of $2.9 million with a maturity date of August 25, 2016. The note payable balance at December 31, 2012 was $3.3 million. The interest rate is a variable rate using rate index of one month LIBOR + 15 basis points and adjusts monthly. The interest rate at December 31, 2013 and 2012 was 0.32% and 0.36%, respectively.
At December 31, 2013 and 2012, the Company had other borrowings of $40.0 million from PNC which will mature on January 7, 2018. These borrowings are secured by government agencies and mortgaged-backed securities. These borrowings have a weighted average interest rate of 3.65%. As of December 31, 2013, investment securities with a market value of $49.7 million were pledged as collateral to secure all borrowings with PNC.
3.
Subordinated debentures
The Company has outstanding $25.0 million of Trust Preferred Securities issued through two Delaware trust affiliates, Royal Bancshares Capital Trust I (“Trust I”) and Royal Bancshares Capital Trust II (“Trust II”) (collectively, the “Trusts”). The Company issued an aggregate principal amount of $12.9 million of floating rate junior subordinated debt securities to Trust I and an aggregate principal amount of $12.9 million of fixed/floating rate junior subordinated deferrable interest to Trust II. Both debt securities bear an interest rate of 2.39% at December 31, 2013, and reset quarterly at 3-month LIBOR plus 2.15%.
Each of Trust I and Trust II issued an aggregate principal amount of $12.5 million of capital securities initially bearing fixed and/or fixed/floating interest rates corresponding to the debt securities held by each trust to an unaffiliated investment vehicle and an aggregate principal amount of $387,000 of common securities bearing fixed and/or fixed/floating interest rates corresponding to the debt securities held by each trust to the Company. The Company has fully and unconditionally guaranteed all of the obligations of the Trusts, including any distributions and payments on liquidation or redemption of the capital securities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – BORROWINGS AND SUBORDINATED DEBENTURES – Continued
On August 13, 2009, the Company’s Board suspended the interest payments on the trust preferred securities. Under the Federal Reserve MOU as described in “Note 2 – Regulatory Matters and Significant Risks or Uncertainties” to the Consolidated Financial Statements, the Company and its non-bank subsidiaries may not make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without the prior written approval of the 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 third quarter of 2013, the Company received approval from the Federal Reserve Bank to pay the $3.1 million interest payment in arrears on the trust preferred securities. On September 16, 2013, the Company became current on the trust preferred interest payments which included an interest penalty of $174,000. The Company received approval and paid the fourth quarter interest payment in December 2013.
NOTE 11 - INCOME TAXES
The components of income tax expense are stated below:
|
|
|
For the years ended December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
Current
|
|
$
|
42
|
|
|
$
|
-
|
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
Income tax expense
|
|
$
|
42
|
|
|
$
|
-
|
|
The difference between the applicable income tax expense and the amount computed by applying the statutory federal income tax rate of 34% in 2013 and 2012 is as follows:
|
|
|
For the years ended December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
Computed tax expense (benefit) at statutory rate
|
|
$
|
731
|
|
|
$
|
(5,313
|
)
|
|
Tax-exempt income
|
|
|
(22
|
)
|
|
|
(42
|
)
|
|
Department of Justice fine
|
|
|
-
|
|
|
|
680
|
|
|
Nondeductible expense
|
|
|
21
|
|
|
|
29
|
|
|
Bank owned life insurance
|
|
|
(183
|
)
|
|
|
(188
|
)
|
|
Adjustment to prior year items
|
|
|
1,933
|
|
|
|
-
|
|
|
(Decrease) increase in valuation allowance
|
|
|
(2,438
|
)
|
|
|
4,834
|
|
|
Applicable income tax expense
|
|
$
|
42
|
|
|
$
|
-
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - INCOME TAXES – Continued
Deferred tax assets and liabilities consist of the following:
|
|
|
As of December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
Allowance for loan and lease losses
|
|
$
|
4,648
|
|
|
$
|
5,863
|
|
|
Net operating loss carry forward
|
|
|
18,908
|
|
|
|
21,988
|
|
|
Asset valuation reserves
|
|
|
34
|
|
|
|
79
|
|
|
Escrow settlement reserves
|
|
|
561
|
|
|
|
-
|
|
|
Security writedowns
|
|
|
2,193
|
|
|
|
1,429
|
|
|
OREO writedowns
|
|
|
1,490
|
|
|
|
4,475
|
|
|
Investment in partnerships
|
|
|
1,805
|
|
|
|
34
|
|
|
Pension obligations
|
|
|
4,926
|
|
|
|
5,745
|
|
|
Unrealized losses on debt securities
|
|
|
2,171
|
|
|
|
-
|
|
|
Accrued stock-based compensation
|
|
|
143
|
|
|
|
804
|
|
|
Non-accrual interest
|
|
|
134
|
|
|
|
277
|
|
|
Capital loss carryovers
|
|
|
2,892
|
|
|
|
1,550
|
|
|
Charitable contribution carryovers
|
|
|
14
|
|
|
|
11
|
|
|
Other
|
|
|
77
|
|
|
|
139
|
|
|
Deferred tax assets before valuation allowance
|
|
|
39,996
|
|
|
|
42,394
|
|
|
Less valuation allowance
|
|
|
(37,159
|
)
|
|
|
(39,597
|
)
|
|
Total deferred tax assets
|
|
|
2,837
|
|
|
|
2,797
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
Penalties on delinquent tax certificates
|
|
|
39
|
|
|
|
224
|
|
|
Unrealized gains on AFS debt investment securities
|
|
|
-
|
|
|
|
1,665
|
|
|
Unrealized gains on AFS equity securities
|
|
|
429
|
|
|
|
145
|
|
|
Prepaid deductions
|
|
|
190
|
|
|
|
285
|
|
|
Other
|
|
|
8
|
|
|
|
64
|
|
|
Total deferred tax liabilities
|
|
|
666
|
|
|
|
2,383
|
|
|
Net deferred tax assets, included in other assets
|
|
$
|
2,171
|
|
|
$
|
414
|
|
As of December 31, 2013 the Company had net operating income tax loss carryforwards of approximately $51.6 million which are available to be carried forward to future tax years. These loss carryforwards will expire in varying amounts beginning in 2030 and ending in 2033 if not utilized.
The Company has approximately $4.0 million available to be utilized as of December 31, 2013 related to net operating loss carryovers from the acquisition of Knoblauch State Bank. The ability to utilize these carryovers will expire in 2015. The utilization of these losses is subject to limitation under Section 382 of the Internal Revenue Code.
As of December 31, 2013, the Company has capital loss carryforwards of approximately $8.5 million which will begin to expire as of December 31, 2014 if not utilized. The company also has charitable contribution carryovers of $42,000 that will begin to expire as of December 31, 2014 if not utilized. The company also has general business tax credit carryovers of $1,000 that will begin to expire as of December 31, 2030 if not utilized.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - INCOME TAXES – Continued
The Company recognizes deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax credits. The deferred tax assets, net of valuation allowances, totaled $2.2 million and $414,000 at December 31, 2013 and 2012, respectively. Management evaluated the deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including historical profitability and projections of future reversals of temporary differences and future taxable income. The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income or shareholders' equity if management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, the Company estimates future taxable income based on management approved business plans and ongoing tax planning strategies. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between projected operating performance, actual results and other factors. The Company did not establish a valuation allowance for the deferred tax asset amount of $2.2 million as of December 31, 2013. The $2.2 million net deferred tax asset as of December 31, 2013 relates to the portion attributable to unrealized losses on AFS debt securities recorded through accumulated other comprehensive loss since they do not require a source of future taxable income for realization. Management believes this deferred tax related to AFS debt securities is recoverable because the Company has the intent and ability to hold these securities until recovery of the amortized cost basis or the increase in value up to its amortized cost over the life. Management believes that these unrealized losses will reverse over time.
As of December 31, 2013, the Company was in a cumulative book loss position for the three-year period ended December 31, 2013. For purposes of establishing a deferred tax asset valuation allowance, this cumulative book loss position is considered significant objective evidence that the Company may not be able to realize some portion of the deferred tax assets in the future. The cumulative book loss position was caused by the negative impact on results from the banking operations, investment impairments and loan and lease losses over the past three years.
As of December 31, 2013, and 2012, management concluded that it was more likely than not that the Company would not generate sufficient future taxable income to realize all of the deferred tax assets. Management’s conclusion was based on consideration of the relative weight of the available evidence and the uncertainty of future market conditions on results of operations. As a result, the Company has recorded a cumulative non-cash charge of $37.2 million in the consolidated statements of operations that began in the period ended December 31, 2008 related to the establishment of a valuation allowance for the deferred tax asset for the portion of the future tax benefit that more likely than not will not be utilized in the future.
The Company is subject to income taxes in the U. S. and various state and local jurisdictions. As of December 31, 2013, tax years 2006 through 2007 and 2009 through 2013 are subject to examination by various taxing authorities. Tax regulations are subject to interpretation of the related tax laws and regulations and require significant judgment to apply.
The Company adopted new authoritative accounting guidance issued under FASB ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes” as of January 1, 2007, and had no material unrecognized tax benefits (UTB) or accrued interest and penalties as of December 31, 2013. We do not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months. We classify interest and penalties as an element of tax expense. We monitor changes in tax statutes and regulations to determine if significant changes will occur over the next 12 months. As of December 31, 2013 no significant changes to UTB are projected, however, tax audit examinations are possible.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of non-performance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
The contract amounts are as follows:
|
|
|
As of December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
Financial instruments whose contract amounts represent credit risk
|
|
|
|
|
|
|
|
Open-end lines of credit
|
|
$
|
21,182
|
|
|
$
|
20,515
|
|
|
Commitments to extend credit
|
|
|
200
|
|
|
|
24,030
|
|
|
Standby letters of credit and financial guarantees written
|
|
|
2,679
|
|
|
|
1,199
|
|
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, and others are for staged construction, the total commitment amounts do not necessarily represent immediate cash requirements.
The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory or equipment.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Most guarantees extend for one year and expire in decreasing amounts through August 2016. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds personal or commercial real estate, accounts receivable, inventory or equipment as collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held for those commitments is approximately 75%.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – LEGAL CONTINGENCIES
Royal Bank had a 60% equity interest in each of CSC and RTL. CSC and RTL acquired, through public auction, delinquent tax liens in various jurisdictions thereby assuming a superior lien position to most other lien holders, including mortgage lien holders. On March 4, 2009, each of CSC and RTL received grand jury subpoenas issued by the U.S. District Court for New Jersey (“Court”) upon application of the Antitrust Division of the United States DOJ. On February 23, 2012, the former President of CSC and RTL entered a plea of guilty to one count of conspiring to rig bids at certain auctions for tax liens in New Jersey from 1998 until approximately the spring of 2009. On September 26, 2012, as a result of the former President’s guilty plea and pursuant to a plea agreement with the DOJ, CSC entered a guilty plea in the United States District Court for the District of New Jersey to one count of conspiracy to commit bid-rigging at certain auctions for tax liens in New Jersey. Under the terms of the Court accepted plea agreement, the DOJ agreed not to bring further criminal charges against CSC and not to bring criminal charges against RTL, or any current or former director, officer, or employee of CSC and/or RTL, for any act or offense committed prior to the date of the plea agreement that was in furtherance of any agreement to rig bids at municipal tax lien sales or auctions in the State of New Jersey. The former President of CSC and RTL and any person who bid at any time at a tax lien auction on behalf of CSC and/or RTL are excluded from this non-prosecution protection. At the sentencing hearing held in December 2012, the sentencing judge agreed with the DOJ’s recommendation and imposed a $2.0 million fine for CSC. After adjusting for the noncontrolling interest, the Company’s 60% share of the fine amounted to $1.2 million.
In 2012, the former President of CSC and RTL, CSC, RTL and the Company were named defendants, among others, in putative class action lawsuits filed in the U.S. District Court for the District of New Jersey (“Court”) on behalf of a proposed class of taxpayers who became delinquent in paying their municipal tax obligations which alleged a conspiracy to rig bids in municipal tax lien auctions. On June 12, 2012, the Court entered an Order consolidating for pretrial purposes the actions with all subsequently filed or transferred related actions, collectively referred to as
In re New Jersey Tax Sale Certificates Antitrust Litigation
. On October 22, 2012, the Court appointed two law firms as interim class counsel and another law firm as liaison class counsel and further ordered appointed counsel to a master complaint for the consolidated action. On December 21, 2012, plaintiffs filed a Consolidated Master Class Action Complaint (the “Complaint”) against numerous defendants, including the former President of CSC and RTL, Royal Bancshares of Pennsylvania, Inc., Royal Bank America, CSC and RTL. The Company filed a motion to dismiss the Complaint on March 8, 2013, which is currently pending before the Court.
During the second quarter of 2013, the Company accrued a loss contingency of $1.65 million for a potential settlement with the plaintiffs. After adjusting for the noncontrolling interest, the Company’s 60% share of the loss contingency amounted to $990,000 on a pre-tax basis. Subsequently, the Company, Royal Bank, CSC, and RTL reached a settlement agreement with plaintiffs to settle the litigation for $1.65 million and other terms and conditions, including an opportunity for members of the proposed settlement class whose tax liens are currently held by CSC or RTL to redeem those liens for a one-time cash payment equaling 85% of the redemption amount by making such payment within 35 days of the date of written notice. The proposed settlement class does not include, and therefore the offer to redeem does not apply to, tax liens acquired at 0% interest or at a premium. The settlement is subject to Court approval after notice and a hearing. Members of the proposed settlement class will have an opportunity to object to the proposed settlement or opt-out.
On or about March 15, 2012, CSC, RTL and the Company were named defendants, among others, in a complaint filed by Marina Bay Towers Urban Renewal II, LP (“MBT”) in the Superior Court of New Jersey, Law Division, Cape May County. The complaint alleges essentially the same claims as asserted in the Complaint. However MBT does not seek to represent a class and only seeks remedies related to itself. As of the date of this filing, the Company cannot reasonably estimate the possible loss or range of loss that may result from this proceeding.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – LEGAL CONTINGENCIES – Continued
In 2005, the Company purchased $25.0 million in Class B-1 Notes of a collateralized debt obligation (“CDO”) offered by Lehman Brothers, Inc. Concurrently with the issuance of the notes, the issuer entered into a credit swap with Lehman Brothers Special Financing (“LBSF”). Lehman Brothers Holdings, Inc. (“LBHI”) guaranteed LBSF’s obligations to the issuer under the credit swap. When LBHI filed for bankruptcy in September 2008, an event of default under the indenture occurred, and the trustee declared the notes to be immediately due and payable. The Company was repaid its principal on the notes in September 2008. In September 2010, LBSF filed suit in the United States Bankruptcy court for the Southern District of New York against certain indenture trustees, certain special-purpose entities (issuers) and a class of noteholders and trust certificate holders who received distributions from the trustees, to recover funds that were allegedly improperly paid to the noteholders in forty-seven separate CDO transactions. In July 2012, LBSF added the Company as a defendant in the proceeding. In June 2013, LBSF voluntarily dismissed without prejudice and without costs all claims against the Company related to the CDO transaction.
NOTE 14 – SHAREHOLDERS’ EQUITY
1.
Preferred Stock
On February 20, 2009, as part of the Capital Purchase Program (“CPP”) established by the United States Department of Treasury (“Treasury”), the Company issued to Treasury 30,407 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, without par value per share (the “Series A Preferred Stock”),
and a liquidation preference of $1,000 per share. In conjunction with the purchase of the Series A Preferred Stock, Treasury received
a warrant to purchase 1,104,370 shares of the Company’s Class A common stock. The aggregate purchase price for the Series A Preferred Stock and warrant was $30.4 million in cash. The Series A Preferred Stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum commencing in February 2014. The Series A Preferred Stock may generally be redeemed by the Company at any time following consultation with its primary banking regulators. The warrant issued to Treasury has a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $4.13 per share of the common stock. The Company’s utilized the extra capital provided by the CPP funds to support its efforts to prudently and transparently provide lending and liquidity while also balancing the goal to remain well-capitalized.
2.
Common Stock
The Company’s Class A common stock trades on the NASDAQ Global Market under the symbol RBPAA. There is no market for the Company’s Class B common stock. The Class B shares may not be transferred in any manner except to the holder’s immediate family. Class B shares may be converted to Class A shares at the rate of 1.15 to 1. Class B common stock is entitled to one vote for each Class A share and ten votes for each Class B share held. Holders of either class of common stock are entitled to conversion equivalent per share dividends when declared.
3.
Payment of Dividends
Under the Pennsylvania Business Corporation Law, the Company may pay dividends only if it is solvent and would not be rendered insolvent by the dividend payment. There are also restrictions set forth in the Pennsylvania Banking Code of 1965 (the “Code”) and in the Federal Deposit Insurance Act (“FDIA”) affecting the payment of dividends to the Company by Royal Bank. Under the Code, no dividends may be paid by a bank except from “accumulated net earnings” (generally retained earnings). In addition, dividends paid by Royal Bank to the Company would be prohibited if the effect thereof would cause Royal Bank’s capital to be reduced below applicable minimum capital requirements. At December 31, 2013, the Company had negative retained earnings and therefore would not have been able to declare and pay any cash dividends. Royal Bank must receive prior approval from the FDIC and the Department before declaring and paying a dividend to the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – SHAREHOLDERS’ EQUITY - Continued
On August 13, 2009, the Company’s Board suspended the regular quarterly cash dividends on the $30.4 million in Series A Preferred Stock. The Company’s Board took this action in consultation with the Federal Reserve Bank of Philadelphia as required by regulatory policy guidance. As of December 31, 2013, the Series A Preferred stock dividend in arrears was $7.7 million and has not been recognized in the consolidated financial statements. In the event the Company declared the preferred dividend the Company’s capital ratios would be negatively affected however they would remain above the required minimum ratios. Under the Federal Reserve MOU as described in “Note 2 – Regulatory Matters and Significant Risks or Uncertainties” to the Consolidated Financial Statements, the Company may not declare or pay any dividends without the prior written approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System. In February 2014, the preferred cumulative dividend rate prospectively increased to 9% per annum.
4.
Change in Noncontrolling Interest
As mentioned in “Note 1 – Summary of Significant Accounting Policies” and “Note 13 - Legal Contingencies” to the Consolidated Financial Statements, Royal Bank had a 60% ownership interest in CSC and RTL. Effective December 31, 2013, Royal Bank agreed to a $1.25 million cash settlement with the former President of CSC and RTL, in which Royal Bank acquired his 40% ownership interest in RTL for $850,000. The former President also relinquished his 20% ownership interest in CSC to Royal Bank. The combined value of the ownership interests was $2.6 million. The settlement resulted in a $1.5 million gain for Royal Bank which was recorded as an increase to Additional Paid in Capital within Stockholders Equity. As part of the cash settlement Royal Bank agreed to pay $400,000 for prior tax distributions. Additionally, the settlement agreement also includes a possible tax payment upon completion of the 2013 Forms K-1. Effective, December 31, 2013, Royal Bank is an 80% owner of CSC and 100% owner of RTL.
NOTE 15 – REGULATORY CAPITAL REQUIREMENTS
The Company and Royal Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and Royal Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Under the informal agreement referenced in “Note 2 – Regulatory Matters and Significant Risks And Uncertainties” to the Consolidated Financial Statements, Royal Bank is required to maintain a minimum Tier 1 leverage ratio of 8% and a Total risk-based capital ratio of 12%. As of December 31, 2013, the Company and Royal Bank met all capital adequacy requirements to which it is subject and Royal Bank met the criteria for a well-capitalized institution.
In connection with a prior bank regulatory examination, the
FDIC concluded,
based upon its interpretation of the Call Report instructions and under RAP, that income from Royal Bank’s tax lien business should be recognized on a cash basis, not an accrual basis. Royal Bank’s current accrual method is in accordance with U.S. GAAP. Royal Bank disagrees with the FDIC’s conclusion and filed the Call Report for December 31, 2013 and the previous 13 quarters in accordance with U.S. GAAP. However, a change in the manner of revenue recognition for the tax lien business for regulatory accounting purposes affects Royal Bank’s and the Company’s capital ratios as shown below. The resolution of this matter will be decided by additional joint regulatory agency guidance which includes the Federal Reserve Bank, the FDIC, and the OCC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – REGULATORY CAPITAL REQUIREMENTS - Continued
The table below sets forth Royal Bank’s capital ratios under RAP based on the FDIC’s interpretation of the Call Report instructions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be well capitalized
|
|
|
|
|
|
|
|
|
|
|
For capital
|
|
|
capitalized under prompt
|
|
|
|
|
Actual
|
|
|
adequacy purposes
|
|
|
corrective action provision
|
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013
|
|
$
|
71,417
|
|
|
|
15.61
|
%
|
|
$
|
36,590
|
|
|
|
8.00
|
%
|
|
$
|
45,737
|
|
|
|
10.00
|
%
|
|
At December 31, 2012
|
|
$
|
67,338
|
|
|
|
15.22
|
%
|
|
$
|
35,386
|
|
|
|
8.00
|
%
|
|
$
|
44,233
|
|
|
|
10.00
|
%
|
|
Tier I capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013
|
|
$
|
65,602
|
|
|
|
14.34
|
%
|
|
$
|
18,295
|
|
|
|
4.00
|
%
|
|
$
|
27,442
|
|
|
|
6.00
|
%
|
|
At December 31, 2012
|
|
$
|
61,664
|
|
|
|
13.94
|
%
|
|
$
|
17,693
|
|
|
|
4.00
|
%
|
|
$
|
26,540
|
|
|
|
6.00
|
%
|
|
Tier I capital (to average assets, leverage)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013
|
|
$
|
65,602
|
|
|
|
9.13
|
%
|
|
$
|
28,739
|
|
|
|
4.00
|
%
|
|
$
|
35,924
|
|
|
|
5.00
|
%
|
|
At December 31, 2012
|
|
$
|
61,664
|
|
|
|
8.00
|
%
|
|
$
|
30,842
|
|
|
|
4.00
|
%
|
|
$
|
38,552
|
|
|
|
5.00
|
%
|
The tables below reflect the adjustments to the net loss as well as the capital ratios for Royal Bank under U.S. GAAP:
|
|
|
For the years ended December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
RAP net loss
|
|
$
|
(139
|
)
|
|
$
|
(17,974
|
)
|
|
Tax lien adjustment, net of noncontrolling interest
|
|
|
2,844
|
|
|
|
4,731
|
|
|
U.S. GAAP net income (loss)
|
|
$
|
2,705
|
|
|
$
|
(13,243
|
)
|
|
|
|
At December 31, 2013
|
|
|
At December 31, 2012
|
|
|
|
|
As reported
|
|
|
As adjusted
|
|
|
As reported
|
|
|
As adjusted
|
|
|
|
|
under RAP
|
|
|
for U.S. GAAP
|
|
|
under RAP
|
|
|
for U.S. GAAP
|
|
|
Total capital (to risk-weighted assets)
|
|
|
15.61
|
%
|
|
|
16.49
|
%
|
|
|
15.22
|
%
|
|
|
16.73
|
%
|
|
Tier I capital (to risk-weighted assets)
|
|
|
14.34
|
%
|
|
|
15.22
|
%
|
|
|
13.94
|
%
|
|
|
15.44
|
%
|
|
Tier I capital (to average assets, leverage)
|
|
|
9.13
|
%
|
|
|
9.73
|
%
|
|
|
8.00
|
%
|
|
|
8.93
|
%
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – REGULATORY CAPITAL REQUIREMENTS - Continued
The tables below reflect the Company’s capital ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be well capitalized
|
|
|
|
|
|
|
|
|
|
|
For capital
|
|
|
capitalized under prompt
|
|
|
|
|
Actual
|
|
|
adequacy purposes
|
|
|
corrective action provision
|
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013
|
|
$
|
84,384
|
|
|
|
18.09
|
%
|
|
$
|
37,315
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
At December 31, 2012
|
|
$
|
84,073
|
|
|
|
18.46
|
%
|
|
$
|
36,429
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Tier I capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013
|
|
$
|
71,432
|
|
|
|
15.31
|
%
|
|
$
|
18,658
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
At December 31, 2012
|
|
$
|
71,138
|
|
|
|
15.62
|
%
|
|
$
|
18,214
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Tier I Capital (to average assets, leverage)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013
|
|
$
|
71,432
|
|
|
|
9.79
|
%
|
|
$
|
29,178
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
At December 31, 2012
|
|
$
|
71,138
|
|
|
|
9.05
|
%
|
|
$
|
31,443
|
|
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
The Company has filed the Consolidated Financial Statements for Bank Holding Companies-FR Y-9C (“FR Y-9C”) as of December 31, 2013
consistent with U.S. GAAP and the FR Y-9C instructions. In the event a similar adjustment for RAP purposes would be required by the Federal Reserve on the holding company level, the adjusted ratios are shown in the tables below.
|
|
|
For the years ended December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
U.S. GAAP net income (loss)
|
|
$
|
2,109
|
|
|
$
|
(15,625
|
)
|
|
Tax lien adjustment, net of noncontrolling interest
|
|
|
(2,844
|
)
|
|
|
(4,731
|
)
|
|
RAP net loss
|
|
$
|
(735
|
)
|
|
$
|
(20,356
|
)
|
|
|
|
At December 31, 2013
|
|
|
At December 31, 2012
|
|
|
|
|
As reported
|
|
|
As adjusted
|
|
|
As reported
|
|
|
As adjusted
|
|
|
|
|
under U.S. GAAP
|
|
|
for RAP
|
|
|
under U.S. GAAP
|
|
|
for RAP
|
|
|
Total capital (to risk-weighted assets)
|
|
|
18.09
|
%
|
|
|
17.24
|
%
|
|
|
18.46
|
%
|
|
|
17.01
|
%
|
|
Tier I capital (to risk-weighted assets)
|
|
|
15.31
|
%
|
|
|
14.10
|
%
|
|
|
15.62
|
%
|
|
|
13.55
|
%
|
|
Tier I capital (to average assets, leverage)
|
|
|
9.79
|
%
|
|
|
8.98
|
%
|
|
|
9.05
|
%
|
|
|
7.79
|
%
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - PENSION PLANS
The Company has a noncontributory nonqualified defined benefit pension plan covering certain eligible employees. The Company-sponsored pension plan provides retirement benefits under pension trust agreements. The benefits are based on years of service and the employee’s compensation during the highest three consecutive years during the last 10 years of employment. The Company accounts for its pension in accordance with FASB ASC Topic 715 “Compensation-Retirement Benefits” (“ASC Topic 715”). ASC Topic 715 requires the recognition of a plan’s over-funded or under-funded status as an asset or liability with an offsetting adjustment to AOCI. ASC Topic 715 requires the determination of the fair values of plans assets at a company’s year-end and recognition of actuarial gains and losses, prior service costs or credits, and transition assets or obligations as a component of AOCI. These amounts will be subsequently recognized as components of net periodic benefits cost. Further, actuarial gains and losses that arise in subsequent periods that are not initially recognized as a component of net periodic benefit cost will be recognized as a component of AOCI. Those amounts will subsequently be recognized as a component of net periodic benefit cost as they are amortized during future periods.
The following table sets forth the plan’s funded status and amounts recognized in the Company’s consolidated balance sheets:
|
|
|
For the years ended December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
16,897
|
|
|
$
|
14,942
|
|
|
Service cost
|
|
|
81
|
|
|
|
272
|
|
|
Interest cost
|
|
|
623
|
|
|
|
584
|
|
|
Benefits paid
|
|
|
(981
|
)
|
|
|
(556
|
)
|
|
Actuarial (gain) loss
|
|
|
(2,132
|
)
|
|
|
1,655
|
|
|
Benefits obligation at end of year
|
|
$
|
14,488
|
|
|
$
|
16,897
|
|
|
Unrecognized prior service cost
|
|
|
179
|
|
|
|
269
|
|
|
Unrecognized actuarial loss
|
|
|
2,750
|
|
|
|
5,119
|
|
|
|
|
$
|
2,929
|
|
|
$
|
5,388
|
|
The accumulated benefit obligation at December 31, 2013 and 2012 was $14.5 million and $16.6 million, respectively.
The table below reflects the assumptions used to determine the benefit obligations:
|
|
|
As of December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Discount rate
|
|
|
4.37
|
%
|
|
|
3.25
|
%
|
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - PENSION PLANS – Continued
The table below reflects the assumptions used to determine the net periodic pension cost:
|
|
|
For the years ended December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Discount rate
|
|
|
4.37
|
%
|
|
|
4.00
|
%
|
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
Net pension cost included the following components:
|
|
|
For the years ended December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
Service cost
|
|
$
|
81
|
|
|
$
|
272
|
|
|
Interest cost
|
|
|
623
|
|
|
|
584
|
|
|
Amortization prior service cost
|
|
|
90
|
|
|
|
90
|
|
|
Amortization net actuarial loss
|
|
|
238
|
|
|
|
381
|
|
|
Net periodic benefit cost
|
|
$
|
1,032
|
|
|
$
|
1,327
|
|
Benefit payments to be made from the Non-qualified Pension Plan are as follows:
|
|
|
As of December 31, 2013
|
|
|
|
|
Non-Qualified
|
|
|
(In thousands)
|
|
Pension Plans
|
|
|
2014
|
|
$
|
970
|
|
|
2015
|
|
|
987
|
|
|
2016
|
|
|
1,015
|
|
|
2017
|
|
|
1,015
|
|
|
2018
|
|
|
1,015
|
|
|
Next five years thereafter
|
|
|
5,610
|
|
Benefit payments are expected to be made from insurance policies owned by the Company. The cash surrender value for these policies was approximately $3.4 million and $3.3 million as of December 31, 2013 and 2012, respectively.
Defined Contribution Plan
The Company has a capital accumulation and salary reduction plan under Section 401(k) of the Internal Revenue Code of 1986, as amended. Under the plan, all employees are eligible to contribute up to the maximum allowed by IRS regulation, with the Company matching dollar for dollar of any contribution up to 5%, which is subject to a $2,500 per employee annual limit. During 2013 and 2012, no matching contribution was made as a result of a management decision to reduce costs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - STOCK COMPENSATION PLANS
The Company recognized compensation expense for stock options in the amounts of $22,000 and $42,000 for December 31, 2013 and 2012, respectively. The Company granted 15,000 options to purchase common stock in 2013. The Company did not grant any options to purchase common stock in 2012.
1.
Outside Directors’ Stock Option Plan
The Company had a non-qualified outside Directors’ Stock Option Plan (the “Directors’ Plan”) which expired in 2006. At December 31, 2013 all outstanding shares are fully vested (exercisable). The ability to grant new options under this plan has expired.
A summary of the Directors’ Plan activity is presented below:
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
(1)
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
|
Exercise
|
|
|
|
|
Options
|
|
|
Price
|
|
|
Term (yrs)
|
|
|
Value
|
|
|
Options
|
|
|
Price
|
|
|
Options outstanding at beginning of year
|
|
|
58,306
|
|
|
$
|
21.15
|
|
|
|
1.2
|
|
|
|
|
|
|
|
68,620
|
|
|
$
|
20.66
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
(24,286
|
)
|
|
|
21.24
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Expired
|
|
|
(8,350
|
)
|
|
|
18.27
|
|
|
|
|
|
|
|
|
|
|
|
(10,314
|
)
|
|
|
17.91
|
|
|
Options outstanding at the end of the year
|
|
|
25,670
|
|
|
$
|
22.00
|
|
|
|
1.5
|
|
|
$
|
-
|
|
|
|
58,306
|
|
|
$
|
21.15
|
|
|
Options exercisable at the end of the year
|
|
|
25,670
|
|
|
$
|
22.00
|
|
|
|
1.5
|
|
|
$
|
-
|
|
|
|
58,306
|
|
|
$
|
21.15
|
|
(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had they exercised their options on December 31, 2013. The intrinsic value varies based on the changes in the market value in the Company’s stock. Because the exercise price exceeded the market value of the options, the average intrinsic value was $0 at December 31, 2013.
Information pertaining to options outstanding at December 31, 2013 is as follows:
|
|
|
|
Options outstanding and exercisable
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Range of
|
|
|
Number
|
|
|
Exercise
|
|
|
Remaining
|
|
|
exercise prices
|
|
|
Outstanding
|
|
|
Price
|
|
|
Term (yrs)
|
|
|
|
$21.00 - $23.00
|
|
|
|
25,670
|
|
|
$
|
22.00
|
|
|
|
1.5
|
|
|
|
|
|
|
|
25,670
|
|
|
$
|
22.00
|
|
|
|
1.5
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - STOCK COMPENSATION PLANS - Continued
2.
Employee Stock Option and Appreciation Right Plan
The Company had a Stock Option and Appreciation Right Plan (the “Plan”) which expired in 2006. At December 31, 2013 all outstanding shares are fully vested (exercisable). The ability to grant new options under this plan has expired.
A summary of the Plan activity is presented below:
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
(1)
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
|
Exercise
|
|
|
|
|
Options
|
|
|
Price
|
|
|
Term (yrs)
|
|
|
Value
|
|
|
Options
|
|
|
Price
|
|
|
Options outstanding at beginning of year
|
|
|
217,561
|
|
|
$
|
21.50
|
|
|
|
1.3
|
|
|
|
|
|
|
|
335,919
|
|
|
$
|
21.01
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
(119,137
|
)
|
|
|
21.53
|
|
|
|
|
|
|
|
|
|
|
|
(74,569
|
)
|
|
|
21.42
|
|
|
Expired
|
|
|
(15,644
|
)
|
|
|
18.27
|
|
|
|
|
|
|
|
|
|
|
|
(43,789
|
)
|
|
|
17.91
|
|
|
Options outstanding at the end of the year
|
|
|
82,780
|
|
|
$
|
22.06
|
|
|
|
1.1
|
|
|
$
|
-
|
|
|
|
217,561
|
|
|
$
|
21.50
|
|
|
Options exercisable at the end of the year
|
|
|
82,780
|
|
|
$
|
22.06
|
|
|
|
1.1
|
|
|
$
|
-
|
|
|
|
217,561
|
|
|
$
|
21.50
|
|
(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had they exercised their options on December 31, 2013. The intrinsic value varies based on the changes in the market value in the Company’s stock. Because the exercise price exceeded the market value of the options, the average intrinsic value was $0 at December 31, 2013.
Information pertaining to options outstanding at December 31, 2013 is as follows:
|
|
|
|
Options outstanding and exercisable
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Range of
|
|
|
Number
|
|
|
Exercise
|
|
|
Remaining
|
|
|
exercise prices
|
|
|
Outstanding
|
|
|
Price
|
|
|
Term (yrs)
|
|
|
|
$21.00 - $23.00
|
|
|
|
82,780
|
|
|
$
|
22.06
|
|
|
|
1.1
|
|
|
|
|
|
|
|
82,780
|
|
|
$
|
22.06
|
|
|
|
1.1
|
|
3.
Long-Term Incentive Plan
The 2007 Long-Term Incentive Plan was approved by Shareholders at the May 16, 2007 Annual Meeting. The plan consists of both a restricted and an unrestricted stock option plan. All employees and non-employee directors of the Company and its designated subsidiaries are eligible participants. The plan includes one million shares of Class A common stock, subject to customary anti-dilution adjustments, or approximately 9.0% of the total outstanding shares of the Class A common stock.
As of December 31, 2012, 187,390 shares from the unrestricted plan have been granted. The option price is equal to the fair market value at the date of the grant. The employee options are exercisable based on the grant’s vesting schedule beginning one year after the date of grant and must be exercised within ten years of the grant date. Directors’ options are exercisable on the one year anniversary of the date of grant and must be exercised within ten years of the grant date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - STOCK COMPENSATION PLANS - Continued
A summary of the status of the unrestricted portion of the Plan is presented below:
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
(1)
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
|
Exercise
|
|
|
|
|
Options
|
|
|
Price
|
|
|
Term (yrs)
|
|
|
Value
|
|
|
Options
|
|
|
Price
|
|
|
Options outstanding at beginning of year
|
|
|
86,226
|
|
|
$
|
9.22
|
|
|
|
5.4
|
|
|
|
|
|
|
|
116,440
|
|
|
$
|
9.73
|
|
|
Granted
|
|
|
15,000
|
|
|
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
(11,840
|
)
|
|
|
8.83
|
|
|
|
|
|
|
|
|
|
|
|
(30,214
|
)
|
|
|
11.19
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Options outstanding at the end of the year
|
|
|
89,386
|
|
|
$
|
7.95
|
|
|
|
4.9
|
|
|
$
|
-
|
|
|
|
86,226
|
|
|
$
|
9.22
|
|
|
Options exercisable at the end of the year
|
|
|
74,386
|
|
|
$
|
9.28
|
|
|
|
4.0
|
|
|
$
|
-
|
|
|
|
75,706
|
|
|
$
|
9.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of options granted during the year
|
|
|
|
|
|
$
|
0.98
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
-
|
|
(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had they exercised their options on December 31, 2013. The intrinsic value varies based on the changes in the market value in the Company’s stock. Because the exercise price exceeded the market value of the options, the average intrinsic value was $0 at December 31, 2013.
Information pertaining to options outstanding at December 31, 2013 is as follows:
|
|
|
|
Options issued and outstanding
|
|
|
Options exercisable
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Range of
|
|
|
Number
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Number
|
|
|
Exercise
|
|
|
exercise prices
|
|
|
Outstanding
|
|
|
Price
|
|
|
Term (yrs)
|
|
|
Outstanding
|
|
|
Price
|
|
|
$
|
1.36
|
|
|
|
15,000
|
|
|
$
|
1.36
|
|
|
|
9.3
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
4.50
|
|
|
|
51,550
|
|
|
|
4.50
|
|
|
|
4.3
|
|
|
|
51,550
|
|
|
|
4.50
|
|
|
$
|
20.08
|
|
|
|
22,836
|
|
|
|
20.08
|
|
|
|
3.3
|
|
|
|
22,836
|
|
|
|
20.08
|
|
|
|
|
|
|
|
89,386
|
|
|
$
|
7.95
|
|
|
|
4.9
|
|
|
|
74,386
|
|
|
$
|
9.28
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - STOCK COMPENSATION PLANS – Continued
The following table provides detail for non-vested shares under the Long-Term Incentive Plan as of December 31, 2013:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Number
|
|
|
Exercise
|
|
|
|
|
of shares
|
|
|
Price
|
|
|
Non-vested options December 31, 2012
|
|
|
10,520
|
|
|
$
|
4.50
|
|
|
Granted
|
|
|
15,000
|
|
|
|
1.36
|
|
|
Forfeited
|
|
|
(1,590
|
)
|
|
|
4.50
|
|
|
Vested
|
|
|
(8,930
|
)
|
|
|
4.50
|
|
|
Non-vested options December 31, 2013
|
|
|
15,000
|
|
|
$
|
1.36
|
|
Under the aforementioned Long-Term Incentive Plan, approved by shareholders in May 2007, the Company is authorized to grant share-based incentive compensation awards for corporate performance to employees. These awards may be granted in form of shares of the Company’s common stock, performance-restricted restricted stock.
The vesting of awards is contingent upon meeting certain return on asset and return on equity goals. The awards are not permitted to be transferred during the restricted time period from the date of the award and are subject to forfeiture to the extent that the performance restrictions are not satisfied. Awards are also forfeited if the employee terminates his or her service prior to the end of the restricted time period, unless such termination is in accordance with the Company’s mandatory retirement age. Vested awards are converted to shares of the Company’s common stock at the end of the restricted time period. The fair market value of each employee based award is estimated based on the fair market value of the Company’s common stock on the date of the grant and probable performance goals to be achieved and estimated forfeitures. If such goals are not met then no compensation cost would be recognized and any recognized compensation cost would be reversed. There were no shares of restricted stock outstanding at December 31, 2013.
NOTE 18 - EARNINGS PER COMMON SHARE (“EPS”)
Basic and diluted EPS are calculated as follows:
|
|
|
For the year ended December 31, 2013
|
|
|
|
|
Income
|
|
|
Average shares
|
|
|
Per share
|
|
|
(In thousands, except for per share data)
|
|
(numerator)
|
|
|
(denominator)
|
|
|
Amount
|
|
|
Basic and Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders
|
|
$
|
34
|
|
|
|
13,279
|
|
|
$
|
0.00
|
|
At December 31, 2013, 197,836 options to purchase shares of common stock and restricted stock awards were anti-dilutive in the computation of diluted EPS, as exercise price exceeded average market price. Additionally 30,407 warrants were also anti-dilutive.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - EARNINGS PER COMMON SHARE (“EPS”) – Continued
|
|
|
For the year ended December 31, 2012
|
|
|
|
|
Loss
|
|
|
Average shares
|
|
|
Per share
|
|
|
(In thousands, except for per share data)
|
|
(numerator)
|
|
|
(denominator)
|
|
|
Amount
|
|
|
Basic and Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
Loss available to common shareholders
|
|
$
|
(17,663
|
)
|
|
|
13,257
|
|
|
$
|
(1.33
|
)
|
At December 31, 2012, 362,093 options to purchase shares of common stock and restricted stock awards were anti-dilutive in the computation of diluted EPS, as exercise price exceeded average market price and as a result of the net loss for the year. Additionally 30,407 warrants were also anti-dilutive.
NOTE 19 – COMPREHENSIVE LOSS
ASC Topic 220 requires the reporting of all changes in equity during the reporting period except investments from and distributions to shareholders. Net income (loss) is a component of comprehensive income (loss) with all other components referred to in the aggregate as other comprehensive income (loss).
The components of other comprehensive (loss) income and the related tax effects for December 31, 2013 and 2012 are as follows:
|
|
|
For the year ended December 31, 2013
|
|
|
(In thousands)
|
|
Before tax
amount
|
|
|
Tax
expense
(benefit)
|
|
|
Net of tax
amount
|
|
|
Unrealized losses on investment securities:
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses arising during period
|
|
$
|
(10,291
|
)
|
|
$
|
(3,572
|
)
|
|
$
|
(6,719
|
)
|
|
Less reclassification adjustment for gains realized in net income
|
|
|
158
|
|
|
|
54
|
|
|
|
104
|
|
|
Unrealized losses on investment securities
|
|
|
(10,449
|
)
|
|
|
(3,626
|
)
|
|
|
(6,823
|
)
|
|
Unrecognized benefit obligation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial gain
|
|
|
950
|
|
|
|
323
|
|
|
|
627
|
|
|
Less reclassification adjustment for amortization
|
|
|
(328
|
)
|
|
|
(112
|
)
|
|
|
(216
|
)
|
|
|
|
|
1,278
|
|
|
|
435
|
|
|
|
843
|
|
|
Other comprehensive loss, net
|
|
$
|
(9,171
|
)
|
|
$
|
(3,191
|
)
|
|
$
|
(5,980
|
)
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 – COMPREHENSIVE LOSS – Continued
|
|
|
For the year ended December 31, 2012
|
|
|
(In thousands)
|
|
Before tax
amount
|
|
|
Tax
expense
(benefit)
|
|
|
Net of tax
amount
|
|
|
Unrealized losses on investment securities:
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses arising during period
|
|
$
|
(1,573
|
)
|
|
$
|
(535
|
)
|
|
$
|
(1,038
|
)
|
|
Less adjustment for impaired investments
|
|
|
(2,359
|
)
|
|
|
(802
|
)
|
|
|
(1,557
|
)
|
|
Less reclassification adjustment for gains realized in net loss
|
|
|
1,030
|
|
|
|
350
|
|
|
|
680
|
|
|
Unrealized losses on investment securities
|
|
|
(244
|
)
|
|
|
(83
|
)
|
|
|
(161
|
)
|
|
Unrecognized benefit obligation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss
|
|
|
(1,655
|
)
|
|
|
(563
|
)
|
|
|
(1,092
|
)
|
|
Less reclassification adjustment for amortization
|
|
|
(471
|
)
|
|
|
(160
|
)
|
|
|
(311
|
)
|
|
|
|
|
(1,184
|
)
|
|
|
(403
|
)
|
|
|
(781
|
)
|
|
Other comprehensive loss, net
|
|
$
|
(1,428
|
)
|
|
$
|
(486
|
)
|
|
$
|
(942
|
)
|
The other components of accumulated other comprehensive loss included in shareholders’ equity at December 31, 2013 and 2012 are as follows:
|
|
|
As of December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
Unrecognized benefit obligation
|
|
$
|
(2,929
|
)
|
|
$
|
(3,556
|
)
|
|
Unrealized gains on AFS investments
|
|
|
(3,193
|
)
|
|
|
3,414
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(6,122
|
)
|
|
$
|
(142
|
)
|
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Under FASB ASC Topic 820 “Fair Value Measurements” (“ASC Topic 820”), fair values are based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When available, management uses quoted market prices to determine fair value. If quoted prices are not available, fair value is based upon valuation techniques such as matrix pricing or other models that use, where possible, current market-based or independently sourced market parameters, such as interest rates. If observable market-based inputs are not available, the Company uses unobservable inputs to determine appropriate valuation adjustments using discounted cash flow methodologies.
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period end and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS – Continued
ASC Topic 820 provides guidance for estimating fair value when the volume and level of activity for an asset or liability has significantly declined and for identifying circumstances when a transaction is not orderly. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC Topic 820 are as follows:
|
|
Level 1
:
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
|
|
|
Level 2:
|
Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. Level 2 includes debt securities with quoted prices that are traded less frequently then exchange-traded instruments. Valuation techniques include matrix pricing which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.
|
|
|
Level 3:
|
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
|
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company did not have transfers of financial instruments within the fair value hierarchy during the three and twelve months ended December 31, 2013 and 2012.
Items Measured on a Recurring Basis
The Company’s available for sale investment securities are recorded at fair value on a recurring basis.
Fair value for Level 1 securities are determined by obtaining quoted market prices on nationally recognized securities exchanges. Level 1 securities include common stocks.
Level 2 securities include obligations of U.S. government-sponsored agencies, debt securities with quoted prices, which are traded less frequently than exchange-traded instruments, whose value is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. The prices were obtained from third party vendors. This category generally includes the Company’mortgage-backed securities and CMOs issued by U.S. government and government-sponsored agencies, non-agency CMOs, and corporate and municipal bonds.
Level 3 securities include investments in seven private equity funds which are predominantly invested in real estate. The value of the private equity funds are derived from the funds’ financials and K-1 filings. The Company also reviews the funds’ asset values and its near-term projections.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS – Continued
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2013 and 2012 are as follows:
|
As of December 31, 2013
|
|
Fair Value Measurements Using
|
|
|
|
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
-
|
|
|
$
|
62,036
|
|
|
$
|
-
|
|
|
$
|
62,036
|
|
|
Mortgage-backed securities-residential
|
|
|
-
|
|
|
|
32,097
|
|
|
|
-
|
|
|
|
32,097
|
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies
|
|
|
-
|
|
|
|
189,103
|
|
|
|
-
|
|
|
|
189,103
|
|
|
Non-agency
|
|
|
-
|
|
|
|
4,479
|
|
|
|
-
|
|
|
|
4,479
|
|
|
Corporate bonds
|
|
|
-
|
|
|
|
9,438
|
|
|
|
-
|
|
|
|
9,438
|
|
|
Municipal bonds
|
|
|
-
|
|
|
|
6,900
|
|
|
|
-
|
|
|
|
6,900
|
|
|
Other securities
|
|
|
-
|
|
|
|
-
|
|
|
|
4,625
|
|
|
|
4,625
|
|
|
Common stocks
|
|
|
49
|
|
|
|
-
|
|
|
|
-
|
|
|
|
49
|
|
|
Total available for sale
|
|
$
|
49
|
|
|
$
|
304,053
|
|
|
$
|
4,625
|
|
|
$
|
308,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
-
|
|
|
$
|
66,444
|
|
|
$
|
-
|
|
|
$
|
66,444
|
|
|
Mortgage-backed securities-residential
|
|
|
-
|
|
|
|
30,509
|
|
|
|
-
|
|
|
|
30,509
|
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies
|
|
|
-
|
|
|
|
233,976
|
|
|
|
-
|
|
|
|
233,976
|
|
|
Non-agency
|
|
|
-
|
|
|
|
1,011
|
|
|
|
-
|
|
|
|
1,011
|
|
|
Corporate bonds
|
|
|
-
|
|
|
|
7,437
|
|
|
|
-
|
|
|
|
7,437
|
|
|
Municipal bonds
|
|
|
-
|
|
|
|
5,615
|
|
|
|
-
|
|
|
|
5,615
|
|
|
Other securities
|
|
|
-
|
|
|
|
-
|
|
|
|
4,164
|
|
|
|
4,164
|
|
|
Common stocks
|
|
|
47
|
|
|
|
-
|
|
|
|
-
|
|
|
|
47
|
|
|
Total available for sale
|
|
$
|
47
|
|
|
$
|
344,992
|
|
|
$
|
4,164
|
|
|
$
|
349,203
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS – Continued
The following tables present additional information about assets measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value for the years ended December 31, 2013 and 2012:
|
(In thousands)
|
|
Other
|
|
|
Investment Securities Available for Sale
|
|
securities
|
|
|
|
|
|
|
|
Beginning balance January 1, 2013
|
|
$
|
4,164
|
|
|
Total gains/(losses) - (realized/unrealized):
|
|
|
|
|
|
Included in earnings
|
|
|
94
|
|
|
Included in other comprehensive income
|
|
|
850
|
|
|
Purchases
|
|
|
70
|
|
|
Sales and calls
|
|
|
(553
|
)
|
|
Transfers in and/or out of Level 3
|
|
|
-
|
|
|
Ending balance December 31, 2013
|
|
$
|
4,625
|
|
|
|
|
Trust
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
preferred
|
|
|
Other
|
|
|
|
|
|
Investment Securities Available for Sale
|
|
securities
|
|
|
securities
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance January 1, 2012
|
|
$
|
12,603
|
|
|
$
|
6,918
|
|
|
$
|
19,521
|
|
|
Total gains/(losses) - (realized/unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
126
|
|
|
|
(1,817
|
)
|
|
|
(1,691
|
)
|
|
Included in other comprehensive income
|
|
|
(1,938
|
)
|
|
|
79
|
|
|
|
(1,859
|
)
|
|
Purchases
|
|
|
-
|
|
|
|
788
|
|
|
|
788
|
|
|
Sales and calls
|
|
|
(10,773
|
)
|
|
|
(1,804
|
)
|
|
|
(12,577
|
)
|
|
Amortization of premium
|
|
|
(18
|
)
|
|
|
-
|
|
|
|
(18
|
)
|
|
Transfers in and/or out of Level 3
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Ending balance December 31, 2012
|
|
$
|
-
|
|
|
$
|
4,164
|
|
|
$
|
4,164
|
|
Items Measured on a Nonrecurring Basis
Non-accrual loans and TDRs are evaluated for impairment on an individual basis under FASB ASC Topic 310 “Receivables”. The impairment analysis includes current collateral values, known relevant factors that may affect loan collectability, and risks inherent in different kinds of lending. When the collateral value or discounted cash flows less costs to sell is less than the carrying value of the loan a specific reserve (valuation allowance) is established. Loans held for sale are carried at the lower of cost or fair value. OREO is carried at the lower of cost or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the real estate. Additionally, for collateral acquired from tax liens, fair value may be established using brokers opinions due to their lower carrying value. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS – Continued
For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2013 and 2012 are as follows:
|
As of December 31, 2013
|
|
Fair Value Measurements Using
|
|
|
|
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,073
|
|
|
$
|
4,073
|
|
|
Other real estate owned
|
|
|
-
|
|
|
|
-
|
|
|
|
9,182
|
|
|
|
9,182
|
|
|
Loans and leases held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
1,446
|
|
|
|
1,446
|
|
|
As of December 31, 2012
|
|
Fair Value Measurements Using
|
|
|
|
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,180
|
|
|
$
|
9,180
|
|
|
Other real estate owned
|
|
|
-
|
|
|
|
-
|
|
|
|
7,632
|
|
|
|
7,632
|
|
|
Loans and leases held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
1,572
|
|
|
|
1,572
|
|
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
|
|
|
Qualitative Information about Level 3 Fair Value Measurements
|
|
|
As of December 31, 2013
|
|
|
|
Valuation
|
Unobservable
|
|
Range (Weighted
|
|
|
(In thousands)
|
|
Fair Value
|
|
Techniques
|
Input
|
|
Average)
|
|
|
Impaired loans and leases
|
|
$
|
4,073
|
|
Appraisal of collateral (1)
|
Appraisal adjustments
|
|
0.0% to -25.0% (-2.0%)
|
|
|
|
|
|
|
|
|
Liquidation expenses
|
|
0.0% to -23.2% (-6.7%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salvageable value of
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
collateral (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
|
9,182
|
|
Appraisal of collateral (1)
|
Appraisal adjustments
|
|
0.0% to -62.5% (-11.2%)
|
|
|
|
|
|
|
|
Sales prices
|
Liquidation expenses
|
|
-2.8% to -6.8% (-5.0%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases held for sale
|
|
|
1,446
|
|
Sales prices (3)
|
|
|
|
|
|
|
|
(1)
|
Appraisals or brokers opinions of collateral values may be adjusted for qualitative factors such as interior condition of the property and liquidation expenses. Fair value may also be based on negotiated settlements with the borrower.
|
|
|
(2)
|
Leases are measured using the salvageable value of the collateral.
|
|
|
(3)
|
Fair value was based on agreement with specific buyer.
|
The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at December 31, 2013 and 2012. The tables below indicate the fair value of the Company’s financial instruments at December 31, 2013 and 2012. The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The methodologies for estimating the fair value of financial instruments that are measured on a recurring or nonrecurring basis are discussed above.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS – Continued
Cash and cash equivalents (carried at cost):
The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.
Securities:
Management uses quoted market prices to determine fair value of securities (level 1). If quoted prices are not available, fair value is based upon valuation techniques such as matrix pricing or other models that use, where possible, current market-based or independently sourced market parameters, such as interest rates (level 2). If observable market-based inputs are not available, the Company uses unobservable inputs to determine appropriate valuation adjustments by reviewing the private equities funds’ financials and K-1 filings and for trust preferred securities using discounted cash flow methodologies (level 3).
Other Investment (carried at cost):
This investment includes the Solomon Hess SBA Loan Fund, which the Company invested in to partially satisfy its community reinvestment requirement. Shares in this fund are not publicly traded and therefore have no readily determinable fair market value. An investor can have their investment in the Fund redeemed for the balance of their capital account at any quarter end with 60 days notice to the Fund. The investment in this Fund is recorded at cost. The Company does not record this investment at fair value on a recurring basis, as this investment’s carrying amount approximates fair value.
Restricted investment in bank stock (carried at cost):
The carrying amount of restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities.
Loans held for sale (carried at the lower of cost or fair market value):
The fair values of loans held for sale are estimated using expected net sales proceeds.
Loans receivable (carried at cost):
The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values.
Impaired loans (generally carried at fair value):
Impaired loans are accounted for under ASC Topic 310.
Impaired
loans are those in which the Company has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based on the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Accrued interest receivable and payable (carried at cost):
The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS – Continued
Deposit liabilities (carried at cost):
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Short-term borrowings (carried at cost):
The carrying amounts of short-term borrowings approximate their fair values.
Long-term debt (carried at cost):
Fair values of FHLB advances and other long-term borrowings are estimated using discounted cash flow analysis, based on current rates for FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.
Subordinated debt (carried at cost):
Fair values of junior subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk characteristics, terms and remaining maturity.
Off-balance sheet financial instruments (disclosed at cost):
Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing. They are not shown in the table because the amounts are immaterial.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS – Continued
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
(In thousands)
|
|
amount
|
|
|
fair value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,844
|
|
|
$
|
16,844
|
|
|
$
|
16,844
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
AFS investment securities
|
|
|
308,727
|
|
|
|
308,727
|
|
|
|
49
|
|
|
|
304,053
|
|
|
|
4,625
|
|
|
Other investment
|
|
|
2,250
|
|
|
|
2,250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,250
|
|
|
Federal Home Loan Bank stock
|
|
|
4,204
|
|
|
|
4,204
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,204
|
|
|
Loans held for sale
|
|
|
1,446
|
|
|
|
1,446
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,446
|
|
|
Loans, net
|
|
|
352,810
|
|
|
|
349,336
|
|
|
|
-
|
|
|
|
-
|
|
|
|
349,336
|
|
|
Accrued interest receivable
|
|
|
7,054
|
|
|
|
7,054
|
|
|
|
-
|
|
|
|
7,054
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
60,473
|
|
|
|
60,473
|
|
|
|
-
|
|
|
|
60,473
|
|
|
|
-
|
|
|
NOW and money markets
|
|
|
210,053
|
|
|
|
210,053
|
|
|
|
-
|
|
|
|
210,053
|
|
|
|
-
|
|
|
Savings
|
|
|
17,593
|
|
|
|
17,593
|
|
|
|
-
|
|
|
|
17,593
|
|
|
|
-
|
|
|
Time deposits
|
|
|
240,845
|
|
|
|
239,102
|
|
|
|
-
|
|
|
|
239,102
|
|
|
|
-
|
|
|
Short-term borrowings
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
-
|
|
|
|
-
|
|
|
Long-term borrowings
|
|
|
97,881
|
|
|
|
94,896
|
|
|
|
-
|
|
|
|
94,896
|
|
|
|
-
|
|
|
Subordinated debt
|
|
|
25,774
|
|
|
|
26,000
|
|
|
|
-
|
|
|
|
26,000
|
|
|
|
-
|
|
|
Accrued interest payable
|
|
|
965
|
|
|
|
965
|
|
|
|
-
|
|
|
|
965
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
(In thousands)
|
|
amount
|
|
|
fair value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
28,802
|
|
|
$
|
28,802
|
|
|
$
|
28,802
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
AFS investment securities
|
|
|
349,203
|
|
|
|
349,203
|
|
|
|
47
|
|
|
|
344,992
|
|
|
|
4,164
|
|
|
Other investment
|
|
|
2,250
|
|
|
|
2,250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,250
|
|
|
Federal Home Loan Bank stock
|
|
|
6,011
|
|
|
|
6,011
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,011
|
|
|
Loans held for sale
|
|
|
1,572
|
|
|
|
1,572
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,572
|
|
|
Loans, net
|
|
|
326,904
|
|
|
|
330,260
|
|
|
|
-
|
|
|
|
-
|
|
|
|
330,260
|
|
|
Accrued interest receivable
|
|
|
10,256
|
|
|
|
10,256
|
|
|
|
-
|
|
|
|
10,256
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
58,531
|
|
|
|
58,531
|
|
|
|
-
|
|
|
|
58,531
|
|
|
|
-
|
|
|
NOW and money markets
|
|
|
223,279
|
|
|
|
223,279
|
|
|
|
-
|
|
|
|
223,279
|
|
|
|
-
|
|
|
Savings
|
|
|
17,472
|
|
|
|
17,472
|
|
|
|
-
|
|
|
|
17,472
|
|
|
|
-
|
|
|
Time deposits
|
|
|
255,635
|
|
|
|
251,532
|
|
|
|
-
|
|
|
|
251,532
|
|
|
|
-
|
|
|
Long-term borrowings
|
|
|
108,333
|
|
|
|
102,824
|
|
|
|
-
|
|
|
|
102,824
|
|
|
|
-
|
|
|
Subordinated debt
|
|
|
25,774
|
|
|
|
23,837
|
|
|
|
-
|
|
|
|
23,837
|
|
|
|
-
|
|
|
Accrued interest payable
|
|
|
3,760
|
|
|
|
3,760
|
|
|
|
-
|
|
|
|
3,760
|
|
|
|
-
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 – SEGMENT INFORMATION
FASB ASC Topic 280, “Segment Reporting” (“ASC Topic 280”) established standards for public business enterprises to report information about operating segments in their annual financial statements and requires that those enterprises report selected information about operating segments in subsequent interim financial reports issued to shareholders. It also established standards for related disclosure about products and services, geographic areas, and major customers. Operating segments are components of an enterprise, which are evaluated regularly by the chief operating decision makers in deciding how to allocate and assess resources and performance. The Company’s chief operating decision makers are the Chief Executive Officer (“CEO”) and the Chief Administrative and Risk Officer (“CARO”). The Company has identified its reportable operating segments as “Community Banking” and “Tax Liens”.
Community banking
The Company’s Community Banking segment which includes Royal Bank consists of commercial and retail banking and leasing. The Community Banking business segment is managed as a single strategic unit which generates revenue from a variety of products and services provided by Royal Bank. For example, commercial lending is dependent upon the ability of Royal Bank to fund cash needed to make loans with retail deposits and other borrowings and to manage interest rate and credit risk.
Tax lien operation
The Company’s Tax Lien Operation consists of purchasing delinquent tax certificates from local municipalities at auction and then processing those liens to either encourage the property holder to pay off the lien, or to foreclose and sell the property. The tax lien operation earns income based on interest rates (determined at auction) and penalties assigned by the municipality, along with gains the on sale of foreclosed properties.
Selected segment information and reconciliations to consolidated financial information are as follows:
|
(In thousands)
|
|
Community
|
|
|
Tax Lien
|
|
|
|
|
|
December 31, 2013
|
|
Banking
|
|
|
Operation
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
707,022
|
|
|
$
|
26,228
|
|
|
$
|
733,250
|
|
|
Total deposits
|
|
|
528,964
|
|
|
|
-
|
|
|
|
528,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
25,097
|
|
|
$
|
2,427
|
|
|
$
|
27,524
|
|
|
Interest expense
|
|
|
5,899
|
|
|
|
1,458
|
|
|
|
7,357
|
|
|
Net interest income
|
|
|
19,198
|
|
|
|
969
|
|
|
|
20,167
|
|
|
(Credit) provision for loan and lease losses
|
|
|
(1,459
|
)
|
|
|
587
|
|
|
|
(872
|
)
|
|
Total non-interest income
|
|
|
5,476
|
|
|
|
1,388
|
|
|
|
6,864
|
|
|
Total non-interest expenses
|
|
|
21,959
|
|
|
|
4,371
|
|
|
|
26,330
|
|
|
Income tax (benefit) expense
|
|
|
42
|
|
|
|
-
|
|
|
|
42
|
|
|
Net income (loss)
|
|
$
|
4,132
|
|
|
$
|
(2,601
|
)
|
|
$
|
1,531
|
|
|
Noncontrolling interest
|
|
|
462
|
|
|
|
(1,040
|
)
|
|
|
(578
|
)
|
|
Net income (loss) attributable to Royal Bancshares
|
|
$
|
3,670
|
|
|
$
|
(1,561
|
)
|
|
$
|
2,109
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 – SEGMENT INFORMATION – Continued
|
(In thousands)
|
|
Community
|
|
|
Tax Lien
|
|
|
|
|
|
December 31, 2012
|
|
Banking
|
|
|
Operation
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
732,137
|
|
|
$
|
37,318
|
|
|
$
|
769,455
|
|
|
Total deposits
|
|
|
554,917
|
|
|
|
-
|
|
|
|
554,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
26,956
|
|
|
$
|
5,025
|
|
|
$
|
31,981
|
|
|
Interest expense
|
|
|
7,202
|
|
|
|
2,697
|
|
|
|
9,899
|
|
|
Net interest income
|
|
|
19,754
|
|
|
|
2,328
|
|
|
|
22,082
|
|
|
Provision for loan and lease losses
|
|
|
5,177
|
|
|
|
820
|
|
|
|
5,997
|
|
|
Total non-interest income
|
|
|
2,868
|
|
|
|
741
|
|
|
|
3,609
|
|
|
Total non-interest expenses
|
|
|
31,118
|
|
|
|
5,206
|
|
|
|
36,324
|
|
|
Income tax (benefit) expense
|
|
|
(28
|
)
|
|
|
28
|
|
|
|
-
|
|
|
Net loss
|
|
$
|
(13,645
|
)
|
|
$
|
(2,985
|
)
|
|
$
|
(16,630
|
)
|
|
Noncontrolling interest
|
|
|
189
|
|
|
|
(1,194
|
)
|
|
|
(1,005
|
)
|
|
Net loss attributable to Royal Bancshares
|
|
$
|
(13,834
|
)
|
|
$
|
(1,791
|
)
|
|
$
|
(15,625
|
)
|
Interest income earned by the Community Banking segment related to the Tax Lien Operation was approximately $1.5 million and $2.7 million for the years ended December 31, 2013 and 2012, respectively.
NOTE 22 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Condensed financial information for the parent company only follows.
CONDENSED BALANCE SHEETS
|
|
|
As of December 31,
|
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,333
|
|
|
$
|
4,739
|
|
|
Investment in non-bank subsidiaries
|
|
|
29,795
|
|
|
|
25,830
|
|
|
Investment in Royal Bank
|
|
|
42,165
|
|
|
|
44,725
|
|
|
Other assets
|
|
|
15
|
|
|
|
238
|
|
|
Total assets
|
|
$
|
73,308
|
|
|
$
|
75,532
|
|
|
Subordinated debentures
|
|
$
|
25,774
|
|
|
$
|
25,774
|
|
|
Stockholders' equity
|
|
|
47,534
|
|
|
|
49,758
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
73,308
|
|
|
$
|
75,532
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued