The accompanying unaudited consolidated financial statements include the accounts of Royal Bancshares of Pennsylvania, Inc. (“Royal Bancshares” or the “Company”) and its wholly-owned subsidiaries, Royal Investments of Delaware, Inc., including Royal Investments of Delaware, Inc.’s wholly-owned subsidiary, Royal Preferred, LLC, and Royal Bank America (“Royal Bank”), including Royal Bank’s subsidiaries, Royal Real Estate of Pennsylvania, Inc., Royal Investments America, LLC, RBA Property LLC, Narberth Property Acquisition LLC, Rio Marina LLC, and its three 60% ownership interests in Crusader Servicing Corporation, Royal Tax Lien Services, LLC, and Royal Bank America Leasing, LP. 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.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Applications of the principles in the Company’s preparation of the consolidated financial statements in conformity with U.S. GAAP require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. These estimates and assumptions are based on information available as of the date of the consolidated financial statements; therefore, actual results could differ from those estimates. The interim financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary to present a fair statement of the results for the interim periods. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012. The results of operations for the three and six month periods ended June 30, 2013 are not necessarily indicative of the results to be expected for the full year.
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 loss for the periods presented herein as a result of reclassification.
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.
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.
On July 15, 2009, Royal Bank agreed to enter into a Stipulation and Consent to the Issuance of an Order to Cease and Desist (the “Orders”) with each of the Federal Deposit Insurance Corporation (“FDIC”) and the Pennsylvania Department of Banking (the “Department”). The material terms of the Orders were identical and required Royal Bank among other items to maintain, after establishing an adequate allowance for loan and lease losses, a ratio of Tier 1 capital to total assets (“leverage ratio”) equal to or greater than 8% and a ratio of qualifying total capital to risk-weighted assets (“total risk-based capital ratio”) equal to or greater than 12%. The FDIC and the Department replaced the Orders in the fourth quarter of 2011 with an informal agreement, known as a memorandum of understanding (“MOU”). Included in the MOU is the continued requirement of maintaining a leverage ratio equal to or greater than 8% and a total risk-based capital ratio equal to or greater than 12%. At June 30, 2013, based on capital levels calculated under regulatory accounting principles (“
RAP”)
, Royal Bank’s Tier 1 leverage and total risk-based capital ratios were 9.09% and 15.45%, respectively. Please refer to “Note 11 – Regulatory Capital Requirements” to the consolidated financial statements.
Following the issuance of the Orders, management implemented plans to address key areas that were noted in the Orders. Management has reduced classified assets, delinquencies, commercial real estate concentrations, reliance on non-core deposits and wholesale funding sources and maintained capital ratios above required minimums which were all factors that contributed to replacing the Orders with the MOU. Management has continued to improve in each of these areas since the Orders were replaced with the MOU.
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 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.
For the period 2008 through 2012, the Company has recorded significant losses totaling $119.6 million which were primarily related to charge-offs on the loan and lease portfolio, impairment charges on investment securities, impairment charges on other real estate owned (“OREO”), credit related expenses and the establishment of a deferred tax valuation allowance. For the second quarter of 2013, the Company recorded a net loss of $803,000 compared to a net loss of $2.0 million for the comparable period in 2012. The quarter over quarter decline in net loss was mainly related to a $1.7 million decline in provision for loan and lease losses, a $943,000 decrease in credit related expenses and an $859,000 decline in other-than-temporary impairment on investment securities. Partially offsetting these items was a $1.65 million loss contingency accrual for a settlement of the class action lawsuit related to the tax lien subsidiaries. After adjusting for the noncontrolling interest, the Company’s 60% share of the loss contingency amounted to $990,000 on a pre-tax basis. Additionally for the second quarter of 2013 net interest income declined $960,000 from the comparable quarter in 2012. For the six months ended June 30, 2013, the Company recorded a net loss of $685,000 compared to a net loss of $2.8 million for the same period in 2012. The decline in net loss was mainly related to a $2.0 million decline in provision for loan and lease losses and a $1.1 million decrease in credit related expenses and an $842,000 decline in professional and legal fees. Partially offsetting these items was a decrease in net interest income of $2.2 million. In addition to reducing the total shareholders’ equity, the continued losses and negative retained earnings impacts the Company’s ability to pay cash dividends to its shareholders now and in future years. The Company’s deferred tax valuation allowance amounted to $39.6 million at June 30, 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 asset which equaled $41.5 million at June 30, 2013.
Adverse economic conditions in our specific market areas and decreases in real estate property values due to the nature of our loan portfolio in particular have affected the ability of customers to repay their loans and generally impact our financial condition and results of operations. 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, have seen 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 had non-performing loans of $17.8 million and $23.0 million at June 30, 2013 and December 31, 2012, respectively. The Company recorded $311,000 and $2.4 million in charge-offs and write-downs for the three and six months ended June 30, 2013, respectively compared to $628,000 and $781,000 in charge-offs and write-downs for the comparable periods of 2012, respectively. OREO balances were $13.0 million at June 30, 2013 and $13.4 million at December 31, 2012.
Commercial real estate, multi-family and construction and land development loans held for investment were $227.0 million at June 30, 2013 comprising 62% of total loans compared to $216.1 million at December 31, 2012 comprising 63% of total loans.
Based on capital levels calculated under U.S. GAAP and RAP, Royal Bank does not have a concentration of commercial real estate loans as defined in the joint agency “Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” issued on December 12, 2006. Please see discussion in “Note 11 – Regulatory Capital Requirements” to the consolidated financial statements.
Royal Bank has limited capacity to borrow additional funds in the event it is needed for liquidity purposes. However, Royal Bank has continued to maintain liquidity measures that are well in excess of the target levels. As discussed in “Note 8 – Borrowings and Subordinated Debentures” to the consolidated financial statements, Royal Bank has an over collateralized delivery requirement of 105% with the FHLB as a result of the level of non-performing assets and the losses that have been experienced over the past five years. The ability to borrow additional funds is based on the amount of collateral that is available to be pledged. As of June 30, 2013, Royal Bank had $21.5 million of available borrowing capacity at the FHLB as a result of excess collateral that has been pledged. In addition at June 30, 2013, Royal Bank had $164.6 million in unpledged agency securities that were available to be pledged as collateral if needed and
$23.5 million in cash on hand
. Royal Bank also has limited availability to borrow from the Federal Reserve Discount Window, which was $7.9 million at June 30, 2013, and was based on collateral pledged.
At June 30, 2013, the liquidity to deposits ratio was 42.6% compared to Royal Bank’s 12% policy target and the liquidity to total liabilities ratio was 32.8% compared to Royal Bank’s 10% policy target. Borrowings were $108.1 million and $108.3 million at June 30, 2013and December 31, 2012, respectively.
The Company also has unfunded pension plan obligations, which potentially could impact liquidity, of $16.7 million as of June 30, 2013 compared to $16.9 million at December 31, 2012. The Company plans to fund the pension plan obligations through existing Company owned life insurance policies.
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 of Directors determined to suspend regular quarterly cash dividends on the $30.4 million in Series A Preferred Stock and to suspend interest payments on the $25.8 million in trust preferred securities. As of June 30, 2013, the Series A Preferred stock dividend in arrears was $6.8 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. Please read
“Note 11 - Regulatory Capital Requirements” to the consolidated financial statements.
As of June 30, 2013 the trust preferred interest payment in arrears was $2.8 million and has been recorded in interest expense and accrued interest payable. The Company believes the decision to suspend the preferred cash dividends and the trust preferred interest payments will better support the liquidity position of Royal Bank. The interest payment deferral period on the trust preferred securities ends after the second quarter of 2014. After the ending of the deferral period if the interest payments are not made then it would constitute an event of default which could impact the Company’s consolidated financial statements and liquidity.
At June 30, 2013, as a result of significant losses within Royal Bank, 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. Under the Federal Reserve MOU 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.
Under the FDIC MOU, Royal Bank must maintain a minimum total risk-based capital ratio and a minimum Tier 1 leverage ratio of 12% and 8%, respectively. At June 30, 2013, based on capital levels calculated under RAP, Royal Bank’s Tier 1 leverage and total risk-based capital ratios were 9.09% and 15.45%, respectively.
Royal Bank holds a 60% equity interest in each of CSC and RTL. The Company acquired its ownership interest in CSC in 2001. 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. The subpoenas sought certain documents and information relating to an ongoing investigation being conducted by the DOJ relating to alleged bid-rigging at tax lien auctions in New Jersey. 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. The former President’s employment with CSC and RTL was terminated in November 2010. Based on discussions with the DOJ and the plea entered by the former President of CSC and RTL, the Company believed that the outcome of the investigation would result in fines and penalties being assessed against CSC, RTL or both. As a result, the Company accrued $2.0 million during 2012 for a DOJ fine relating to the DOJ investigation. After adjusting for the noncontrolling interest, the Company’s 60% share of the fine amounted to $1.2 million. 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 plea agreement, which the Court accepted at the September 26, 2012 plea hearing, 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, which, as stated above, had been previously recognized in the Company’s consolidated financial statements. The Company is evaluating appropriate legal action against the former President of CSC and RTL to attempt to recover legal expenses and any fines or penalties ultimately levied against CSC.
Additionally a number of lawsuits have been filed in the Superior Court of New Jersey against the former President of CSC and RTL, CSC, RTL, Royal Bancshares of Pennsylvania and certain other parties on behalf of a proposed class of taxpayers who became delinquent in paying their municipal tax obligations. These lawsuits allege violations of the New Jersey Antitrust Act and unjust enrichment, and seek treble damages, attorney fees and injunctive relief. CSC, RTL and Royal Bancshares removed these cases to the U.S. District Court for the District of New Jersey. On June 12, 2012, the Court entered an Order consolidating for pretrial purposes the above 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 file 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. Subsequently, Royal Bancshares of Pennsylvania, Inc., Royal Bank America, CSC, and RTL reached an agreement in principle 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 contingent upon negotiation of a definitive settlement agreement and 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.
The Company has enhanced the Board through the addition of experienced directors with diverse backgrounds. The newer members are comprised of the following: a former banking regulator with consulting experience, a former Chief Executive Officer (“CEO”) of a much larger financial institution who has bank turnaround experience, a former President of the lead bank within a larger financial institution (Treasury appointee), a former executive within the financial services industry (Treasury appointee) and a former senior partner of a public accounting firm. During the first quarter of 2012, the Board elected a Lead Independent Director to further improve corporate governance by serving as a liaison between the Chairman of the Board, management, and the independent directors. During 2012, Royal Bank hired a new Chief Lending Officer (“CLO”) who has significant experience in commercial and consumer lending with a larger bank within the Philadelphia market. On December 18, 2012 the Company announced F. Kevin Tylus as President and CEO of Royal Bank. On February 20, 2013, the Company announced that Mr. Tylus was appointed President, CEO and a Class III member of the Board of Directors of the Company. Former CEO, Robert Tabas, remains as Chairman of the Board of Directors.
In order to meet the requirements in the previous Orders, the previous Federal Reserve Agreement, and the current MOUs, management adopted a strategy to deleverage the balance sheet in order to maintain capital ratios at required regulatory minimums. 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 have developed a contingency plan to maintain capital ratios at required levels which may include selling interest-earning assets. 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. The deleveraging was largely accomplished by the continued reduction of brokered deposits from $89.1 million at December 31, 2010 to $0 as of June 30, 2013. In addition, borrowings were reduced by $46.8 million during the same period. The Company’s strategic plan includes 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.
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. 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 earnings 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.
The Company is focused on transitioning Royal Bank into a more traditional community bank with the branches becoming selling centers and not just service centers. Traditional consumer products such as home equity loans and a new mobile banking application are part of the expanded product offerings. Recently the Company launched a
new 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, our newly launched secure home equity application and our powerful online and mobile banking tools.
With the recent retirement of Royal Bank’s Senior Vice President of Branch Administration, the Company has launched an executive search for a retail executive with prior experience in expanding retail sales capabilities, refreshing the branch footprint and achieving further penetration of its recently-expanded retail and web-based products.
The Company has developed a management Profitability Improvement Plan (the “Plan”) to generate steady revenue growth, expense management and gain operational efficiencies. Specific initiatives of the Plan effectuated in the first two quarters of 2013 focused on adjustments to personnel of the Company and discretionary expenses. These efforts, which included a 9% reduction in workforce and an annualized reduction of approximately 10% of discretionary expenses, were implemented and enhanced day-to-day operations and the ability of the Company to drive new revenue. The Company has reorganized and relocated certain personnel to improve departmental synergies and better align managers and staff so they can work together in cohesive teams to accomplish these objectives. Additionally, the Company is currently developing a facilities rationalization plan as part of the overall strategic goal to return to profitability. During the first quarter of 2013, the Company sold its storage facility site in Philadelphia and a building in Narberth that housed the training center. The Company recorded gains of $676,000 as a result of these sales. In January 2013, Royal Bank consolidated the leased Henderson Road office between the King of Prussia and Bridgeport offices and retained the majority of the deposits. Additionally, in April 2013, to achieve operational efficiencies, the tax lien subsidiaries relocated from their leased office space in Jenkintown, Pennsylvania to the corporate location in Narberth. As a result of the reduction in workforce and the vacating of leased real estate, the Company recorded $111,000 in restructuring charges directly related to one-time employee termination benefits and an effective termination of a lease. During the third quarter of 2013, the Company will consolidate the 15
th
Street branch office into the Walnut Street branch office, which are both located in Center City Philadelphia. The Company continues to review its retail footprint and will explore additional branch office relocations, consolidations or both. The Company also is implementing a unique opportunity to reduce employee expenses as certain individuals will become employees of a local company who in turn will provide 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 allows the Company to focus on the expansion of its core banking products while de-emphasizing legacy non-core activity such as tax liens.
The Company has targeted to have the Plan fully implemented by the end of 2013.
Through the reorganizing of the Lending and Credit departments during the last half of 2012, Royal Bank was able to increase LHFI $23.7 million from $344.2 million at December 31, 2012 to $367.9 million at June 30, 2013. All of these plans are focused on repositioning the Company for 2013 and beyond.
Note 3.
|
Investment Securities
|
The carrying value and fair value of investment securities AFS at June 30, 2013 are as follows:
|
|
|
|
|
Included in Accumulated Other
Comprehensive Loss (AOCL)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized losses
|
|
|
|
|
(In thousands)
|
|
Amortized cost
|
|
|
Gross unrealized gains
|
|
|
Non-OTTI in AOCL
|
|
|
Non-credit related OTTI in AOCL
|
|
|
Fair value
|
|
U.S. government agencies
|
|
$
|
74,354
|
|
|
|
18
|
|
|
|
(3,200
|
)
|
|
$
|
-
|
|
|
$
|
71,172
|
|
Mortgage-backed securities-residential
|
|
|
33,271
|
|
|
|
375
|
|
|
|
(724
|
)
|
|
|
-
|
|
|
|
32,922
|
|
Collateralized mortgage obligations-residential
|
|
|
178,476
|
|
|
|
2,958
|
|
|
|
(925
|
)
|
|
|
-
|
|
|
|
180,509
|
|
Corporate bonds
|
|
|
9,785
|
|
|
|
37
|
|
|
|
(92
|
)
|
|
|
-
|
|
|
|
9,730
|
|
Municipal bonds
|
|
|
5,519
|
|
|
|
-
|
|
|
|
(188
|
)
|
|
|
-
|
|
|
|
5,331
|
|
Other securities
|
|
|
3,676
|
|
|
|
880
|
|
|
|
(149
|
)
|
|
|
-
|
|
|
|
4,407
|
|
Common stocks
|
|
|
33
|
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
46
|
|
Total available for sale
|
|
$
|
305,114
|
|
|
$
|
4,281
|
|
|
$
|
(5,278
|
)
|
|
$
|
-
|
|
|
$
|
304,117
|
|
The carrying value and fair value of investment securities AFS at December 31, 2012 are as follows:
|
|
|
|
|
Included in Accumulated
Other Comprehensive Loss (AOCL)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized losses
|
|
|
|
|
(In thousands)
|
|
Amortized cost
|
|
|
Gross unrealized gains
|
|
|
Non-OTTI in AOCL
|
|
|
Non-credit related OTTI in AOCL
|
|
|
Fair value
|
|
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
|
|
Other securities
|
|
|
3,752
|
|
|
|
520
|
|
|
|
(108
|
)
|
|
|
-
|
|
|
|
4,164
|
|
Common stocks
|
|
|
33
|
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
47
|
|
Total available for sale
|
|
$
|
343,879
|
|
|
$
|
6,270
|
|
|
$
|
(946
|
)
|
|
$
|
-
|
|
|
$
|
349,203
|
|
The amortized cost and fair value of investment securities at June 30, 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 June 30, 2013
|
|
(In thousands)
|
|
Amortized
cost
|
|
|
Fair value
|
|
Within 1 year
|
|
$
|
15,906
|
|
|
$
|
15,301
|
|
After 1 but within 5 years
|
|
|
5,445
|
|
|
|
5,406
|
|
After 5 but within 10 years
|
|
|
35,874
|
|
|
|
34,413
|
|
After 10 years
|
|
|
32,433
|
|
|
|
31,113
|
|
Mortgage-backed securities-residential
|
|
|
33,271
|
|
|
|
32,922
|
|
Collateralized mortgage obligations-residential
|
|
|
178,476
|
|
|
|
180,509
|
|
Total available for sale debt securities
|
|
|
301,405
|
|
|
|
299,664
|
|
No contractual maturity
|
|
|
3,709
|
|
|
|
4,453
|
|
Total available for sale securities
|
|
$
|
305,114
|
|
|
$
|
304,117
|
|
Proceeds from the sales of investments AFS during the three months ended June 30, 2013 and 2012 were $8.3 million and $75,000, respectively. Proceeds from the sales of investments AFS for the six months ended June 30, 2013 and 2012 were $20.4 million and $11.9 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 three months
|
|
|
For the six months
|
|
|
|
ended June 30,
|
|
|
ended June 30,
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Gross realized gains
|
|
$
|
43
|
|
|
$
|
29
|
|
|
$
|
181
|
|
|
$
|
340
|
|
Gross realized losses
|
|
|
(18
|
)
|
|
|
(9
|
)
|
|
|
(111
|
)
|
|
|
(181
|
)
|
Net realized gains
|
|
$
|
25
|
|
|
$
|
20
|
|
|
$
|
70
|
|
|
$
|
159
|
|
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”). The 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”. 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.
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.
The following table summarizes OTTI losses on securities recognized in earnings in the periods indicated:
|
|
For the three months
|
|
|
For the six months
|
|
|
|
ended June 30,
|
|
|
ended June 30,
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Other securities
|
|
$
|
-
|
|
|
$
|
859
|
|
|
$
|
-
|
|
|
$
|
859
|
|
Total OTTI charges
|
|
$
|
-
|
|
|
$
|
859
|
|
|
$
|
-
|
|
|
$
|
859
|
|
The following table presents a roll-forward of the balance of credit-related impairment losses on debt securities held at June 30, 2013 and 2012 for which a portion of OTTI 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 June 30,
|
|
$
|
-
|
|
|
$
|
173
|
|
The tables below indicate the length of time individual securities have been in a continuous unrealized loss position at June 30, 2013 and December 31, 2012:
June 30, 2013
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
(In thousands)
|
|
Fair value
|
|
|
Gross unrealized losses
|
|
|
Fair value
|
|
|
Gross unrealized losses
|
|
|
Fair value
|
|
|
Gross unrealized losses
|
|
U.S. government agencies
|
|
$
|
58,159
|
|
|
$
|
(3,200
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
58,159
|
|
|
$
|
(3,200
|
)
|
Mortgage-backed securities-residential
|
|
|
19,201
|
|
|
|
(724
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
19,201
|
|
|
|
(724
|
)
|
Collateralized mortgage obligations-residential
|
|
|
39,185
|
|
|
|
(920
|
)
|
|
|
2,642
|
|
|
|
(5
|
)
|
|
|
41,827
|
|
|
|
(925
|
)
|
Corporate bonds
|
|
|
4,035
|
|
|
|
(50
|
)
|
|
|
958
|
|
|
|
(42
|
)
|
|
|
4,993
|
|
|
|
(92
|
)
|
Municipal bonds
|
|
|
5,331
|
|
|
|
(188
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
5,331
|
|
|
|
(188
|
)
|
Other securities
|
|
|
270
|
|
|
|
(50
|
)
|
|
|
205
|
|
|
|
(99
|
)
|
|
|
475
|
|
|
|
(149
|
)
|
Total available-for-sale
|
|
$
|
126,181
|
|
|
$
|
(5,132
|
)
|
|
$
|
3,805
|
|
|
$
|
(146
|
)
|
|
$
|
129,986
|
|
|
$
|
(5,278
|
)
|
December 31, 2012
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
(In thousands)
|
|
Fair value
|
|
|
Gross unrealized losses
|
|
|
Fair value
|
|
|
Gross unrealized losses
|
|
|
Fair value
|
|
|
Gross unrealized losses
|
|
U.S. government agencies
|
|
$
|
23,818
|
|
|
$
|
(78
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
23,818
|
|
|
$
|
(78
|
)
|
Mortgage-backed securities-residential
|
|
|
7,280
|
|
|
|
(47
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
7,280
|
|
|
|
(47
|
)
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued or guaranteed by U.S. government agencies
|
|
|
44,937
|
|
|
|
(592
|
)
|
|
|
3,975
|
|
|
|
(19
|
)
|
|
|
48,912
|
|
|
|
(611
|
)
|
Corporate bonds
|
|
|
2,165
|
|
|
|
(13
|
)
|
|
|
941
|
|
|
|
(59
|
)
|
|
|
3,106
|
|
|
|
(72
|
)
|
Municipal bonds
|
|
|
4,597
|
|
|
|
(21
|
)
|
|
|
882
|
|
|
|
(9
|
)
|
|
|
5,479
|
|
|
|
(30
|
)
|
Other securities
|
|
|
289
|
|
|
|
(38
|
)
|
|
|
255
|
|
|
|
(70
|
)
|
|
|
544
|
|
|
|
(108
|
)
|
Total available-for-sale
|
|
$
|
83,086
|
|
|
$
|
(789
|
)
|
|
$
|
6,053
|
|
|
$
|
(157
|
)
|
|
$
|
89,139
|
|
|
$
|
(946
|
)
|
The AFS portfolio had gross unrealized losses of $5.3 million and $946,000 at June 30, 2013 and December 31, 2012, respectively. The considerable increase in the gross unrealized loss was directly impacted by the $3.1 million increase in the gross unrealized loss on government agency debt securities. These securities carry lower coupons and their market value was negatively impacted by a 45% increase in the 10-year Treasury yield from 1.76% at December 31, 2012 to 2.55% at June 30, 2013. The Company did not record OTTI charges in 2013. For the three and six months ended June 30, 2012, the Company recorded $859,000 in OTTI on a private equity real estate fund due to the fund’s financial performance. 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.
Common stocks:
As of June 30, 2013, the Company had two common stocks of financial institutions with a total fair value of $46,000 and an unrealized gain of $13,000. During the first quarter of 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 are described below.
U.S. government-sponsored agencies (“U.S. Agencies”):
As of June 30, 2013, the Company had 20 callable U.S. Agencies with a fair value of $58.2 million and gross unrealized losses of $3.2 million. All of these U.S. Agencies have been in an unrealized loss position for twelve months or less. 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 June 30, 2013.
Mortgage-backed securities issued by U.S. government agencies and U.S. government sponsored enterprises:
As of June 30, 2013 the Company had seven mortgage-backed securities with a fair value of $19.2 million and gross unrealized losses of $724,000. All of these mortgage-backed securities have been in an unrealized loss position for twelve months or less. 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 June 30, 2013.
U.S. government issued or sponsored collateralized mortgage obligations (“Agency CMOs”):
As of June 30, 2013, the Company had 14 Agency CMOs with a fair value of $41.8 million and gross unrealized losses of $925,000. Twelve of the Agency CMOs have been in an unrealized loss position for twelve months or less. The two Agency CMOs that have been in an unrealized loss position for more than twelve months have a fair market value of $2.6 million and an unrealized loss of $5,000 at June 30, 2013. 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 June 30, 2013.
Corporate bonds:
As of June 30, 2013, the Company had five corporate bonds with a fair value of $5.0 million and gross unrealized losses of $92,000. Four bonds have been in an unrealized loss position for twelve months or less. The one bond that has been in an unrealized loss position for more than twelve months has a fair market value of $958,000 and an unrealized loss of $42,000 at June 30, 2013. All five bonds are above 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 utilizes 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 these 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 June 30, 2013.
Municipal bonds:
As of June 30, 2013, the Company had seven municipal bonds with a fair value of $5.3 million and gross unrealized losses of $188,000. The municipal bonds have been in an unrealized loss position for twelve months or less and are investment grade. 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 June 30, 2013.
Other securities:
As of June 30, 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 June 30, 2013, two of the private equity funds had a combined fair value of $475,000 and a gross unrealized loss of $149,000. OTTI charges were recorded in a prior period on these two funds. One of the private equity funds has been in an unrealized loss for more than twelve months. The Company receives capital distributions on this fund. Management concluded that there was no additional impairment on these two funds as of June 30, 2013.
The Company will continue to monitor these 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.
Major classifications of LHFI are as follows:
|
|
June 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
Commercial real estate
|
|
$
|
180,601
|
|
|
$
|
167,115
|
|
Construction and land development
|
|
|
34,696
|
|
|
|
37,215
|
|
Commercial and industrial
|
|
|
66,985
|
|
|
|
40,560
|
|
Multi-family
|
|
|
11,736
|
|
|
|
11,756
|
|
Residential real estate
|
|
|
15,873
|
|
|
|
24,981
|
|
Leases
|
|
|
38,497
|
|
|
|
37,347
|
|
Tax certificates
|
|
|
18,578
|
|
|
|
24,569
|
|
Consumer
|
|
|
901
|
|
|
|
1,139
|
|
Total gross loans
|
|
$
|
367,867
|
|
|
$
|
344,682
|
|
Deferred fees, net*
|
|
|
-
|
|
|
|
(517
|
)
|
Total loans and leases
|
|
$
|
367,867
|
|
|
$
|
344,165
|
|
*
For the 2013 period net deferred fees were allocated among the loan types.
The Company grants 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 June 30, 2013. A substantial portion of its debtors’ ability to honor their contracts is dependent upon the housing sector specifically and the economy in general.
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 (“ALLL”) 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.
At June 30, 2013 and December 31, 2012, the Company’s LHFS were $1.4 million and $1.6 million, respectively, and were comprised of one non-accrual commercial real estate loan. This loan was transferred from LHFI at the lower of cost or fair market value using expected net sales proceeds. For the three and six months ended June 30, 2013, the Company recorded additional impairment of $53,000 and $153,000, respectively.
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.
The Company uses a nine point grading risk classification system commonly used in the financial services industry as the credit quality indicator. The first five classifications are rated Pass. The riskier classifications include 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. 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 June 30, 2013 and December 31, 2012, excluding LHFS.
June 30, 2013
|
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Pass
|
|
|
Pass-Watch
|
|
|
Mention
|
|
|
Substandard
|
|
|
Non-accrual
|
|
|
Total
|
|
Commercial real estate
|
|
$
|
95,756
|
|
|
$
|
50,340
|
|
|
$
|
22,118
|
|
|
$
|
3,703
|
|
|
$
|
8,684
|
|
|
$
|
180,601
|
|
Construction and land development
|
|
|
5,235
|
|
|
|
13,910
|
|
|
|
12,221
|
|
|
|
575
|
|
|
|
2,755
|
|
|
|
34,696
|
|
Commercial and industrial
|
|
|
39,394
|
|
|
|
12,721
|
|
|
|
674
|
|
|
|
10,514
|
|
|
|
3,682
|
|
|
|
66,985
|
|
Multi-family
|
|
|
9,025
|
|
|
|
2,130
|
|
|
|
581
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,736
|
|
Residential real estate
|
|
|
15,382
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
491
|
|
|
|
15,873
|
|
Leases
|
|
|
38,050
|
|
|
|
195
|
|
|
|
12
|
|
|
|
-
|
|
|
|
240
|
|
|
|
38,497
|
|
Tax certificates
|
|
|
18,094
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
484
|
|
|
|
18,578
|
|
Consumer
|
|
|
831
|
|
|
|
70
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
901
|
|
Total LHFI
|
|
$
|
221,767
|
|
|
$
|
79,366
|
|
|
$
|
35,606
|
|
|
$
|
14,792
|
|
|
$
|
16,336
|
|
|
$
|
367,867
|
|
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 and 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 past due status of all classes of loans and leases receivable is determined based on contractual due dates for loan payments. Generally, a loan is placed on non-accruing status when it has been delinquent for a period of 90 days or more. The following tables present an aging analysis of past due payments for each loan portfolio segment at June 30, 2013 and December 31, 2012, excluding LHFS.
June 30, 2013
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
Accruing
|
|
|
Total
|
|
|
|
|
|
|
|
(In thousands)
|
|
Past Due
|
|
|
Past Due
|
|
|
90+ Days
|
|
|
Non-accrual
|
|
|
Current
|
|
|
Total
|
|
Commercial real estate
|
|
$
|
176
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,684
|
|
|
$
|
171,741
|
|
|
$
|
180,601
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,755
|
|
|
|
31,941
|
|
|
|
34,696
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,682
|
|
|
|
63,303
|
|
|
|
66,985
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,736
|
|
|
|
11,736
|
|
Residential real estate
|
|
|
595
|
|
|
|
299
|
|
|
|
-
|
|
|
|
491
|
|
|
|
14,488
|
|
|
|
15,873
|
|
Leases
|
|
|
194
|
|
|
|
12
|
|
|
|
-
|
|
|
|
240
|
|
|
|
38,051
|
|
|
|
38,497
|
|
Tax certificates
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
484
|
|
|
|
18,094
|
|
|
|
18,578
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
901
|
|
|
|
901
|
|
Total LHFI
|
|
$
|
965
|
|
|
$
|
311
|
|
|
$
|
-
|
|
|
$
|
16,336
|
|
|
$
|
350,255
|
|
|
$
|
367,867
|
|
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 and 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
|
|
The following tables detail the composition of the non-accrual loans at June 30, 2013 and December 31, 2012.
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
(In thousands)
|
|
Loan
balance
|
|
|
Specific reserves
|
|
|
Loan
balance
|
|
|
Specific reserves
|
|
Non-accrual loans held for investment
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
8,684
|
|
|
$
|
605
|
|
|
$
|
10,345
|
|
|
$
|
835
|
|
Construction and land development
|
|
|
2,755
|
|
|
|
-
|
|
|
|
4,280
|
|
|
|
820
|
|
Commercial and industrial
|
|
|
3,682
|
|
|
|
12
|
|
|
|
4,961
|
|
|
|
255
|
|
Residential real estate
|
|
|
491
|
|
|
|
15
|
|
|
|
994
|
|
|
|
14
|
|
Leases
|
|
|
240
|
|
|
|
67
|
|
|
|
251
|
|
|
|
55
|
|
Tax certificates
|
|
|
484
|
|
|
|
101
|
|
|
|
601
|
|
|
|
47
|
|
Total non-accrual LHFI
|
|
$
|
16,336
|
|
|
$
|
800
|
|
|
$
|
21,432
|
|
|
$
|
2,026
|
|
Non-accrual loans held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
1,419
|
|
|
$
|
-
|
|
|
$
|
1,572
|
|
|
$
|
-
|
|
Total non-accrual LHFS
|
|
$
|
1,419
|
|
|
$
|
-
|
|
|
$
|
1,572
|
|
|
$
|
-
|
|
Total non-accrual loans
|
|
$
|
17,755
|
|
|
$
|
800
|
|
|
$
|
23,004
|
|
|
$
|
2,026
|
|
Total non-accrual loans at June 30, 2013 were $17.8 million and were comprised of $16.4 million in LHFI and $1.4 million in LHFS. 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 $5.2 million decrease was the result of a $4.3 million reduction in existing non-accrual loan balances through payments and payoffs, $2.2 million in charge-offs related to specific reserves on LHFI, $153,000 write down on the LHFS and $100,000 in transfers to OREO, which were partially offset by additions of $1.6 million. If interest had been accrued, such income would have been approximately $453,000 and $979,000 for the three and six months ended June 30, 2013, respectively. The Company had no loans past due 90 days or more on which it has continued to accrue interest during the quarter. Typically, 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.
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 troubled debt restructurings (“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 during the six months ended June 30, 2013 and June 30, 2012 was $5.9 million and $17.8 million respectively, of which $5.6 million and $15.6 million was credited to the principal balance outstanding on such loans, respectively.
The following is a summary of information pertaining to impaired loans:
|
|
June 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
Impaired loans with a valuation allowance
|
|
$
|
8,401
|
|
|
$
|
9,405
|
|
Impaired loans without a valuation allowance
|
|
|
17,885
|
|
|
|
19,423
|
|
Impaired LHFS
|
|
|
1,419
|
|
|
|
1,572
|
|
Total impaired loans
|
|
$
|
27,705
|
|
|
$
|
30,400
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance related to impaired loans
|
|
$
|
800
|
|
|
$
|
2,026
|
|
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 June 30, 2013, the Company had 14 TDRs, of which seven are on non-accrual status, with a total carrying value of $20.4 million. At the time of the modifications, seven of the loans were already classified as impaired loans. At December 31, 2012, the Company had 12 TDRs with a total carrying value of $21.1 million. The Company’s policy for TDRs is to recognize income on currently performing restructured loans under the accrual method. During 2013, the Company received pay downs and payoffs of $3.4 million and recorded specific reserve charge-offs of $1.1 million.
The following table details the Company’s TDRs that are on an accrual status and a non-accrual status at June 30, 2013.
(In thousands)
|
|
Number of loans
|
|
|
Accrual Status
|
|
|
Non-Accrual Status
|
|
|
Total TDRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
4
|
|
|
$
|
1,328
|
|
|
$
|
512
|
|
|
$
|
1,840
|
|
Commercial real estate
|
|
|
5
|
|
|
|
4,338
|
|
|
|
7,483
|
|
|
|
11,821
|
|
Commercial and industrial
|
|
|
3
|
|
|
|
4,536
|
|
|
|
2,054
|
|
|
|
6,590
|
|
Residential real estate
|
|
|
2
|
|
|
|
-
|
|
|
|
134
|
|
|
|
134
|
|
Total
|
|
|
14
|
|
|
$
|
10,202
|
|
|
$
|
10,183
|
|
|
$
|
20,385
|
|
At June 30, 2013, all of the TDRs were in compliance with their restructured terms.
The following tables present the newly restructured loans that occurred during the three and six months ended June 30, 2013. There were no newly restructured loans for the comparable periods in 2012.
|
|
Modifications by type for the three months ended June 30, 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
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,741
|
|
|
$
|
3,741
|
|
|
$
|
3,761
|
|
|
$
|
3,761
|
|
Total
|
|
|
2
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,741
|
|
|
$
|
3,741
|
|
|
$
|
3,761
|
|
|
$
|
3,761
|
|
|
|
Modifications by type for the six months ended June 30, 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
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,741
|
|
|
$
|
3,741
|
|
|
$
|
3,761
|
|
|
$
|
3,761
|
|
Commercial and industrial
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
83
|
|
|
|
83
|
|
|
|
87
|
|
|
|
87
|
|
Total
|
|
|
3
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,824
|
|
|
$
|
3,824
|
|
|
$
|
3,848
|
|
|
$
|
3,848
|
|
Note 5.
|
Allowance for Loan and Lease Losses
|
The following tables present the detail of the ALLL and the loan portfolio disaggregated by loan portfolio segment for the three and six months ended June 30, 2013, the year ended December 31, 2012 and the three and six months ended June 30, 2012.
Allowance for Loan and Leases Losses
For the three months ended June 30, 2013
(In thousands)
|
|
Commercial real estate
|
|
|
Construction and land development
|
|
|
Commercial and industrial
|
|
|
Multi-family
|
|
|
Residential real estate
|
|
|
Leases
|
|
|
Tax certificates
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Beginning balance
|
|
$
|
8,103
|
|
|
$
|
2,078
|
|
|
$
|
2,713
|
|
|
$
|
658
|
|
|
$
|
168
|
|
|
$
|
1,061
|
|
|
$
|
384
|
|
|
$
|
18
|
|
|
$
|
206
|
|
|
$
|
15,389
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
(21
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(99
|
)
|
|
|
(138
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(258
|
)
|
Recoveries
|
|
|
23
|
|
|
|
95
|
|
|
|
6
|
|
|
|
-
|
|
|
|
5
|
|
|
|
10
|
|
|
|
72
|
|
|
|
-
|
|
|
|
-
|
|
|
|
211
|
|
Provision
|
|
|
(174
|
)
|
|
|
(156
|
)
|
|
|
(233
|
)
|
|
|
(70
|
)
|
|
|
180
|
|
|
|
27
|
|
|
|
268
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
(163
|
)
|
Ending balance
|
|
$
|
7,952
|
|
|
$
|
2,017
|
|
|
$
|
2,465
|
|
|
$
|
588
|
|
|
$
|
353
|
|
|
$
|
999
|
|
|
$
|
586
|
|
|
$
|
18
|
|
|
$
|
201
|
|
|
$
|
15,179
|
|
Ending balance: related to loans individually evaluated for impairment
|
|
$
|
605
|
|
|
$
|
-
|
|
|
$
|
12
|
|
|
$
|
-
|
|
|
$
|
15
|
|
|
$
|
67
|
|
|
$
|
101
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
800
|
|
Ending balance: related to loans collectively evaluated for impairment
|
|
$
|
7,347
|
|
|
$
|
2,017
|
|
|
$
|
2,453
|
|
|
$
|
588
|
|
|
$
|
338
|
|
|
$
|
932
|
|
|
$
|
485
|
|
|
$
|
18
|
|
|
$
|
201
|
|
|
$
|
14,379
|
|
Allowance for Loan and Leases Losses
For the six months ended June 30, 2013
(In thousands)
|
|
Commercial real estate
|
|
|
Construction and land development
|
|
|
Commercial and industrial
|
|
|
Multi-family
|
|
|
Residential real estate
|
|
|
Leases
|
|
|
Tax certificates
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Beginning balance
|
|
$
|
8,750
|
|
|
$
|
2,987
|
|
|
$
|
1,924
|
|
|
$
|
654
|
|
|
$
|
1,098
|
|
|
$
|
1,108
|
|
|
$
|
472
|
|
|
$
|
29
|
|
|
$
|
239
|
|
|
$
|
17,261
|
|
Charge-offs
|
|
|
(835
|
)
|
|
|
(820
|
)
|
|
|
(195
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(108
|
)
|
|
|
(285
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,243
|
)
|
Recoveries
|
|
|
127
|
|
|
|
191
|
|
|
|
9
|
|
|
|
-
|
|
|
|
156
|
|
|
|
20
|
|
|
|
72
|
|
|
|
-
|
|
|
|
-
|
|
|
|
575
|
|
Provision
|
|
|
(90
|
)
|
|
|
(341
|
)
|
|
|
727
|
|
|
|
(66
|
)
|
|
|
(901
|
)
|
|
|
(21
|
)
|
|
|
327
|
|
|
|
(11
|
)
|
|
|
(38
|
)
|
|
|
(414
|
)
|
Ending balance
|
|
$
|
7,952
|
|
|
$
|
2,017
|
|
|
$
|
2,465
|
|
|
$
|
588
|
|
|
$
|
353
|
|
|
$
|
999
|
|
|
$
|
586
|
|
|
$
|
18
|
|
|
$
|
201
|
|
|
$
|
15,179
|
|
Ending balance: related to loans individually evaluated for impairment
|
|
$
|
605
|
|
|
$
|
-
|
|
|
$
|
12
|
|
|
$
|
-
|
|
|
$
|
15
|
|
|
$
|
67
|
|
|
$
|
101
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
800
|
|
Ending balance: related to loans collectively evaluated for impairment
|
|
$
|
7,347
|
|
|
$
|
2,017
|
|
|
$
|
2,453
|
|
|
$
|
588
|
|
|
$
|
338
|
|
|
$
|
932
|
|
|
$
|
485
|
|
|
$
|
18
|
|
|
$
|
201
|
|
|
$
|
14,379
|
|
Loans Held for Investment and Evaluated for Impairment
For the three and six months ended June 30, 2013
(In thousands)
|
|
Commercial real estate
|
|
|
Construction and land development
|
|
|
Commercial and industrial
|
|
|
Multi-family
|
|
|
Residential real estate
|
|
|
Leases
|
|
|
Tax certificates
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
LHFI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
180,601
|
|
|
$
|
34,696
|
|
|
$
|
66,985
|
|
|
$
|
11,736
|
|
|
$
|
15,873
|
|
|
$
|
38,497
|
|
|
$
|
18,578
|
|
|
$
|
901
|
|
|
$
|
-
|
|
|
$
|
367,867
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
13,022
|
|
|
$
|
4,082
|
|
|
$
|
8,038
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
169
|
|
|
$
|
484
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
25,795
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
167,579
|
|
|
$
|
30,614
|
|
|
$
|
58,947
|
|
|
$
|
11,736
|
|
|
$
|
15,873
|
|
|
$
|
38,328
|
|
|
$
|
18,094
|
|
|
$
|
901
|
|
|
$
|
-
|
|
|
$
|
342,072
|
|
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 and 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
|
|
|
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
|
|
Allowance for Loan and Leases Losses
For the three months ended June 30, 2012
(In thousands)
|
|
Commercial real estate
|
|
|
Construction and land development
|
|
|
Commercial and industrial
|
|
|
Multi-family
|
|
|
Residential real estate
|
|
|
Leases
|
|
|
Tax certificates
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Beginning balance
|
|
$
|
7,896
|
|
|
$
|
2,449
|
|
|
$
|
2,354
|
|
|
$
|
615
|
|
|
$
|
1,194
|
|
|
$
|
1,295
|
|
|
$
|
406
|
|
|
$
|
20
|
|
|
$
|
225
|
|
|
$
|
16,454
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
(208
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(162
|
)
|
|
|
(258
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(628
|
)
|
Recoveries
|
|
|
-
|
|
|
|
87
|
|
|
|
55
|
|
|
|
-
|
|
|
|
1
|
|
|
|
7
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
154
|
|
Provision
|
|
|
(217
|
)
|
|
|
1,202
|
|
|
|
5
|
|
|
|
331
|
|
|
|
(70
|
)
|
|
|
72
|
|
|
|
180
|
|
|
|
-
|
|
|
|
12
|
|
|
|
1,515
|
|
Ending balance
|
|
$
|
7,679
|
|
|
$
|
3,738
|
|
|
$
|
2,206
|
|
|
$
|
946
|
|
|
$
|
1,125
|
|
|
$
|
1,212
|
|
|
$
|
332
|
|
|
$
|
20
|
|
|
$
|
237
|
|
|
$
|
17,495
|
|
Ending balance: related to loans individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
1,243
|
|
|
$
|
139
|
|
|
$
|
439
|
|
|
$
|
22
|
|
|
$
|
32
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,875
|
|
Ending balance: related to loans collectively evaluated for impairment
|
|
$
|
7,679
|
|
|
$
|
2,495
|
|
|
$
|
2,067
|
|
|
$
|
507
|
|
|
$
|
1,103
|
|
|
$
|
1,180
|
|
|
$
|
332
|
|
|
$
|
20
|
|
|
$
|
237
|
|
|
$
|
15,620
|
|
Allowance for Loan and Leases Losses
For the six months ended June 30, 2012
(In thousands)
|
|
Commercial real estate
|
|
|
Construction and land development
|
|
|
Commercial and industrial
|
|
|
Multi-family
|
|
|
Residential real estate
|
|
|
Leases
|
|
|
Tax certificates
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Beginning balance
|
|
$
|
7,744
|
|
|
$
|
2,523
|
|
|
$
|
2,331
|
|
|
$
|
531
|
|
|
$
|
1,188
|
|
|
$
|
1,311
|
|
|
$
|
425
|
|
|
$
|
20
|
|
|
$
|
307
|
|
|
$
|
16,380
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
(208
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(295
|
)
|
|
|
(278
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(781
|
)
|
Recoveries
|
|
|
3
|
|
|
|
191
|
|
|
|
57
|
|
|
|
-
|
|
|
|
2
|
|
|
|
15
|
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
297
|
|
Provision
|
|
|
(68
|
)
|
|
|
1,024
|
|
|
|
26
|
|
|
|
415
|
|
|
|
(65
|
)
|
|
|
181
|
|
|
|
156
|
|
|
|
-
|
|
|
|
(70
|
)
|
|
|
1,599
|
|
Ending balance
|
|
$
|
7,679
|
|
|
$
|
3,738
|
|
|
$
|
2,206
|
|
|
$
|
946
|
|
|
$
|
1,125
|
|
|
$
|
1,212
|
|
|
$
|
332
|
|
|
$
|
20
|
|
|
$
|
237
|
|
|
$
|
17,495
|
|
Ending balance: related to loans individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
1,243
|
|
|
$
|
139
|
|
|
$
|
439
|
|
|
$
|
22
|
|
|
$
|
32
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,875
|
|
Ending balance: related to loans collectively evaluated for impairment
|
|
$
|
7,679
|
|
|
$
|
2,495
|
|
|
$
|
2,067
|
|
|
$
|
507
|
|
|
$
|
1,103
|
|
|
$
|
1,180
|
|
|
$
|
332
|
|
|
$
|
20
|
|
|
$
|
237
|
|
|
$
|
15,620
|
|
Loans Held for Investment and Evaluated for Impairment
For the three and six months ended June 30, 2012
(In thousands)
|
|
Commercial real estate
|
|
|
Construction and land development
|
|
|
Commercial and industrial
|
|
|
Multi-family
|
|
|
Residential real estate
|
|
|
Leases
|
|
|
Tax certificates
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
LHFI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
166,315
|
|
|
$
|
46,548
|
|
|
$
|
47,567
|
|
|
$
|
13,008
|
|
|
$
|
26,556
|
|
|
$
|
37,775
|
|
|
$
|
34,094
|
|
|
$
|
973
|
|
|
$
|
-
|
|
|
$
|
372,836
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
12,674
|
|
|
$
|
10,712
|
|
|
$
|
5,643
|
|
|
$
|
1,673
|
|
|
$
|
1,325
|
|
|
$
|
35
|
|
|
$
|
893
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
32,955
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
153,641
|
|
|
$
|
35,836
|
|
|
$
|
41,924
|
|
|
$
|
11,335
|
|
|
$
|
25,231
|
|
|
$
|
37,740
|
|
|
$
|
33,201
|
|
|
$
|
973
|
|
|
$
|
-
|
|
|
$
|
339,881
|
|
The following tables detail the loans that were evaluated for impairment by loan segment at June 30, 2013 and December 31, 2012.
|
|
For the six months ended June 30, 2013
|
|
(In thousands)
|
|
Unpaid principal balance
|
|
|
Carrying value
|
|
|
Related allowance
|
|
|
Average recorded investment
|
|
|
Interest income recognized
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
$
|
11,196
|
|
|
$
|
4,082
|
|
|
$
|
-
|
|
|
$
|
3,469
|
|
|
$
|
27
|
|
Commercial real estate
|
|
|
10,090
|
|
|
|
7,822
|
|
|
|
-
|
|
|
|
7,443
|
|
|
|
70
|
|
Commercial and industrial
|
|
|
7,128
|
|
|
|
5,981
|
|
|
|
-
|
|
|
|
6,190
|
|
|
|
149
|
|
Residential real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
226
|
|
|
|
27
|
|
Leasing
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
Tax certificates
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
73
|
|
|
|
-
|
|
Total:
|
|
$
|
28,414
|
|
|
$
|
17,885
|
|
|
$
|
-
|
|
|
$
|
17,410
|
|
|
$
|
273
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
708
|
|
|
$
|
-
|
|
Commercial real estate
|
|
|
5,424
|
|
|
|
5,200
|
|
|
|
605
|
|
|
|
1,410
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
2,315
|
|
|
|
2,057
|
|
|
|
12
|
|
|
|
2,627
|
|
|
|
-
|
|
Residential real estate
|
|
|
667
|
|
|
|
491
|
|
|
|
15
|
|
|
|
446
|
|
|
|
-
|
|
Leasing
|
|
|
169
|
|
|
|
169
|
|
|
|
67
|
|
|
|
78
|
|
|
|
-
|
|
Tax certificates
|
|
|
4,364
|
|
|
|
484
|
|
|
|
101
|
|
|
|
407
|
|
|
|
-
|
|
Total:
|
|
$
|
12,939
|
|
|
$
|
8,401
|
|
|
$
|
800
|
|
|
$
|
5,676
|
|
|
$
|
-
|
|
|
|
For the year ended December 31, 2012
|
|
(In thousands)
|
|
Unpaid principal balance
|
|
|
Carrying value
|
|
|
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
|
|
Note 6.
|
Other Real Estate Owned
|
OREO decreased $433,000 from $13.4 million at December 31, 2012 to $13.0 million at June 30, 2013. Set forth below is a table which details the changes in OREO from December 31, 2012 to June 30, 2013.
|
|
2013
|
|
(In thousands)
|
|
First Quarter
|
|
|
Second Quarter
|
|
Beginning balance
|
|
$
|
13,435
|
|
|
$
|
13,264
|
|
Net proceeds from sales
|
|
|
(2,277
|
)
|
|
|
(2,603
|
)
|
Net gain on sales
|
|
|
162
|
|
|
|
418
|
|
Assets acquired on non-accrual loans
|
|
|
1,956
|
|
|
|
2,252
|
|
Impairment charge
|
|
|
(12
|
)
|
|
|
(329
|
)
|
Ending balance
|
|
$
|
13,264
|
|
|
$
|
13,002
|
|
At June 30, 2013, OREO was comprised of $4.6 million in tax liens, $4.5 million in land, $3.6 million in commercial real estate, and residential real estate with a fair value of $283,000. During the second quarter of 2013, the Company sold collateral related to land, received net proceeds of $765,000 and recorded a net gain of $12,000.The Company also sold nine condominiums related to a
construction project in Minneapolis, Minnesota in which the Company is a participant. The Company received its pro rata share of net proceeds in the amount of $99,000 and recorded a net gain of $37,000. T
he Company also sold collateral related to two residential real estate loans. The Company received net proceeds of $114,000 and recorded a small net gain of $5,000. In addition to these second quarter sales, the Company sold 15 properties acquired through the tax lien portfolio. The Company received proceeds of $1.6 million and recorded net gains of $364,000 as a result of these sales. During the second quarter of 2013, the Company recorded impairment charges of $146,000 related to residential real estate and $183,000 related to properties acquired through the tax lien portfolio. In addition the Company acquired collateral related to the tax lien portfolio and transferred $2.3 million to OREO.
D
uring the first quarter of 2013, the Company sold collateral related to land, received net proceeds of $1.8 million and recorded a loss of $38,000. The Company also sold three condominiums related to a
construction project mentioned above. The Company received its pro rata share of net proceeds in the amount of $24,000 and recorded a gain of $17,000.
Additionally the Company sold four single family homes related to two loans. The Company received net proceeds of $43,000 and recorded a small net gain of $3,000. In addition to these first quarter sales, the Company sold eleven properties acquired through the tax lien portfolio. The Company received proceeds of $367,000 and recorded a net gain of $180,000 as a result of these sales. During the first quarter of 2013, the Company acquired collateral related to a residential real estate loan and transferred $100,000 to OREO. In addition the Company acquired collateral related to the tax lien portfolio and transferred $1.9 million to OREO. The Company recorded impairment charges of $12,000 related to properties acquired through the tax lien portfolio.
Note 7.
Deposits
The Company’s deposit composition as of June 30, 2013 and December 31, 2012 is presented below:
|
|
June 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
Demand
|
|
$
|
66,121
|
|
|
$
|
58,531
|
|
NOW
|
|
|
42,201
|
|
|
|
43,920
|
|
Money Market
|
|
|
163,944
|
|
|
|
179,359
|
|
Savings
|
|
|
18,418
|
|
|
|
17,472
|
|
Time deposits (over $100)
|
|
|
84,795
|
|
|
|
91,233
|
|
Time deposits (under $100)
|
|
|
150,191
|
|
|
|
164,402
|
|
Total deposits
|
|
$
|
525,670
|
|
|
$
|
554,917
|
|
Note 8.
|
Borrowings and Subordinated Debentures
|
1.
Advances from the Federal Home Loan Bank
The available borrowing capacity with the FHLB is based on qualified collateral. Royal Bank has a collateralized delivery requirement of 105% with the FHLB due to the level of Royal Bank’s non-performing assets and net losses. The available amount for future borrowings will be based on the amount of collateral to be pledged. Royal Bank has a $150 million line of credit with the FHLB of which $0 was outstanding as of June 30, 2013 and December 31, 2012. Total borrowings from the FHLB were $65.0 million at June 30, 2013 and December 31, 2012. The advances and the line of credit are collateralized by FHLB stock, government agencies and mortgage-backed securities, residential loans, and commercial real estate loans. As of June 30, 2013, investment securities with a market value of $63.1 million and loans with a book value of $39.6 million were pledged as collateral to the FHLB.
Presented below are the Company’s FHLB borrowings allocated by the year in which they mature with their corresponding weighted average rates:
|
|
As of June 30,
|
|
|
As of December 31,
|
|
(Dollars in thousands)
|
|
2013
|
|
|
2012
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
Advances maturing in
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
$
|
10,000
|
|
|
|
0.25
|
%
|
|
|
50,000
|
|
|
|
2.64
|
%
|
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
|
|
|
|
|
|
As of June 30, 2013, there were no FHLB advances scheduled to mature in 2014.
2.
Other borrowings
The Company has a note payable with PNC Bank (“PNC”) at June 30, 2013 in the amount of $3.1 million compared to $3.3 million at December 31, 2012. The note’s maturity date is August 25, 2016. The interest rate is a variable rate using rate index of one month LIBOR + 15 basis points and adjusts monthly. The interest rate at June 30, 2013 was 0.35%.
At June 30, 2013 and December 31, 2012, the Company had additional borrowings of $40.0 million from PNC which will mature on January 7, 2018. These borrowings have a weighted average interest rate of 3.65%. The note payable and the borrowings are secured by government agencies and mortgage-backed securities.
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 2.42% at June 30, 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.
On August 13, 2009, the Company’s Board of Directors determined to suspend 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. As of June 30, 2013 the trust preferred interest payment in arrears was $2.8 million and has been recorded in interest expense and accrued interest payable. The interest payment deferral period on the trust preferred securities ends after the second quarter of 2014. After the ending of the deferral period if the interest payments are not made then it would constitute an event of default which could impact the Company’s consolidated financial statements and liquidity.
Note 9.
|
Commitments and Contingencies
|
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:
|
|
June 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
Financial instruments whose contract amounts represent credit risk:
|
|
|
|
|
Open-end lines of credit
|
|
$
|
23,609
|
|
|
$
|
20,515
|
|
Commitments to extend credit
|
|
|
10,748
|
|
|
|
24,030
|
|
Standby letters of credit and financial guarantees written
|
|
|
801
|
|
|
|
1,199
|
|
Litigation
From time to time, the Company is a party to routine legal proceedings within the normal course of business. Such routine legal proceedings in the aggregate are believed by management to be immaterial to the Company's financial condition or results of operations.
Royal Bank holds a 60% equity interest in each of CSC and RTL. The Company acquired its ownership interest in CSC in 2001. 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. The subpoenas sought certain documents and information relating to an ongoing investigation being conducted by the DOJ relating to alleged bid-rigging at tax lien auctions in New Jersey. 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. The former President’s employment with CSC and RTL was terminated in November 2010. Based on discussions with the DOJ and the plea entered by the former President of CSC and RTL, the Company believed that the outcome of the investigation would result in fines and penalties being assessed against CSC, RTL or both. As a result, the Company accrued $2.0 million during 2012 for a DOJ fine relating to the DOJ investigation. After adjusting for the noncontrolling interest, the Company’s 60% share of the fine amounted to $1.2 million. 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 plea agreement, which the Court accepted at the September 26, 2012 plea hearing, 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, which, as stated above, had been previously recognized in the Company’s consolidated financial statements. The Company is evaluating appropriate legal action against the former President of CSC and RTL to attempt to recover legal expenses and any fines or penalties ultimately levied against CSC.
On March 13, 2012, March 30, 2012, April 20, 2012, May 2, 2012, May 11, 2012, May 18, 2012, June 18, 2012 and June 29, 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:
Boyer v. Robert W. Stein, Crusader Servicing Corp. Royal Tax Lien Services LLC, Royal Bancshares of Pennsylvania, Inc., et al., Superior Court of New Jersey, Chancery Division
(“the Boyer Action”),
Contarino v Robert W. Stein, Crusader Servicing Corp. Royal Tax Lien Services LLC, Royal Bancshares of Pennsylvania, Inc., et al., U.S. District Court for the District of New Jersey; MSC LLC v Robert W. Stein, Crusader Servicing Corp. Royal Tax Lien Services LLC, Royal Bancshares of Pennsylvania, Inc., et al., U.S. District Court for the District of New Jersey; English v Robert W. Stein, Crusader Servicing Corp. Royal Tax Lien Services LLC, Royal Bancshares of Pennsylvania, Inc., et al., U.S. District Court for the District of New Jersey; Ledford v Robert W. Stein, Crusader Servicing Corp. Royal Tax Lien Services LLC, Royal Bancshares of Pennsylvania, Inc., et al., U.S. District Court for the District of New Jersey; T&B Associates v Robert W. Stein, Crusader Servicing Corp. Royal Tax Lien Services LLC, Royal Bancshares of Pennsylvania, Inc., et al., U.S. District Court for the District of New Jersey; Jacobs et al v Robert W. Stein, Crusader Servicing Corp. Royal Tax Lien Services LLC, Royal Bancshares of Pennsylvania, Inc., et al., U.S. District Court for the District of New Jersey; Senatore Builders, LLC v Robert W. Stein, Crusader Servicing Corp. Royal Tax Lien Services LLC, Royal Bancshares of Pennsylvania, Inc., et al., U.S. District Court for the District of New Jersey,
respectively alleging a conspiracy to rig bids in municipal tax lien auctions. On June 12, 2012, the Court entered an Order consolidating for pretrial purposes the above 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, Royal Bancshares of Pennsylvania, Inc., Royal Bank America, CSC, and RTL reached an agreement in principle 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 contingent upon negotiation of a definitive settlement agreement and 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.
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 10.
|
Shareholders’ Equity
|
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 thereafter. 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 has 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.
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. Each shareholder is entitled to one vote for each Class A share held 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.
C.
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 by the Company. Under the Code, no dividends may be paid by a bank except from “accumulated net earnings” (generally retained earnings). Under the FDIA, 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. At June 30, 2013, as a result of significant losses within Royal Bank, 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.
On August 13, 2009, the Company’s Board of Directors determined to suspend 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. The Company currently has sufficient liquidity to pay the scheduled dividends on the preferred stock; however, this decision better supports the capital position of Royal Bank, a wholly owned subsidiary of the Company. As of June 30, 2013, the Series A Preferred stock dividend in arrears was $6.8 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 will prospectively increase to 9% per annum.
Note 11.
|
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 June 30, 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 June 30, 2013 and the previous eleven 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 and the Company’s capital ratios as shown below. Royal Bank is in discussions with the FDIC to resolve the matter.
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 June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
$
|
72,511
|
|
|
|
15.45
|
%
|
|
$
|
37,536
|
|
|
|
8.00
|
%
|
|
$
|
46,919
|
|
|
|
10.00
|
%
|
Tier I capital (to risk-weighted assets)
|
|
$
|
66,531
|
|
|
|
14.18
|
%
|
|
$
|
18,768
|
|
|
|
4.00
|
%
|
|
$
|
28,152
|
|
|
|
6.00
|
%
|
Tier I capital (to average assets, leverage)
|
|
$
|
66,531
|
|
|
|
9.09
|
%
|
|
$
|
29,267
|
|
|
|
4.00
|
%
|
|
$
|
36,584
|
|
|
|
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 six
|
|
|
|
months ended
|
|
(In thousands)
|
|
June 30, 2013
|
|
RAP net loss
|
|
$
|
(4,377
|
)
|
Tax lien adjustment, net of noncontrolling interest
|
|
|
3,883
|
|
U.S. GAAP net loss
|
|
$
|
(494
|
)
|
|
|
At June 30, 2013
|
|
|
|
As reported
|
|
|
As adjusted
|
|
|
|
under RAP
|
|
|
for U.S. GAAP
|
|
Total capital (to risk-weighted assets)
|
|
|
15.45
|
%
|
|
|
16.62
|
%
|
Tier I capital (to risk-weighted assets)
|
|
|
14.18
|
%
|
|
|
15.35
|
%
|
Tier I capital (to average assets, leverage)
|
|
|
9.09
|
%
|
|
|
9.89
|
%
|
The tables below reflect the Company’s capital ratios:
|
|
As of June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
$
|
87,801
|
|
|
|
18.29
|
%
|
|
$
|
38,406
|
|
|
|
8.00
|
%
|
|
|
N/
|
A
|
|
|
N/
|
A
|
Tier I capital (to risk-weighted assets)
|
|
$
|
75,777
|
|
|
|
15.78
|
%
|
|
$
|
19,203
|
|
|
|
4.00
|
%
|
|
|
N/
|
A
|
|
|
N/
|
A
|
Tier I capital (to average assets, leverage)
|
|
$
|
75,777
|
|
|
|
10.17
|
%
|
|
$
|
29,801
|
|
|
|
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 June 30, 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 table below.
|
|
For the six
|
|
|
|
months ended
|
|
(In thousands)
|
|
June 30, 2013
|
|
U.S. GAAP net loss
|
|
$
|
(685
|
)
|
Tax lien adjustment, net of noncontrolling interest
|
|
|
(3,883
|
)
|
RAP net loss
|
|
$
|
(4,568
|
)
|
|
|
At June 30, 2013
|
|
|
|
As reported
|
|
|
As adjusted
|
|
|
|
under U.S. GAAP
|
|
|
for RAP
|
|
Total capital (to risk-weighted assets)
|
|
|
18.29
|
%
|
|
|
17.16
|
%
|
Tier I capital (to risk-weighted assets)
|
|
|
15.78
|
%
|
|
|
14.18
|
%
|
Tier I capital (to average assets, leverage)
|
|
|
10.17
|
%
|
|
|
9.09
|
%
|
The Company has a noncontributory nonqualified defined benefit pension plan (“Pension Plan”) covering certain eligible employees. The Company’s 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.
Net periodic defined benefit pension expense for the three and six month periods ended June 30, 2013 and 2012 included the following components:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Service cost
|
|
$
|
19
|
|
|
$
|
68
|
|
|
$
|
37
|
|
|
$
|
136
|
|
Interest cost
|
|
|
133
|
|
|
|
144
|
|
|
|
266
|
|
|
|
296
|
|
Amortization of prior service cost
|
|
|
22
|
|
|
|
22
|
|
|
|
45
|
|
|
|
44
|
|
Amortization of actuarial loss
|
|
|
123
|
|
|
|
95
|
|
|
|
245
|
|
|
|
191
|
|
Net periodic benefit cost
|
|
$
|
297
|
|
|
$
|
329
|
|
|
$
|
593
|
|
|
$
|
667
|
|
The Company has unfunded pension plan obligations of $16.7 million as of June 30, 2013 compared to $16.9 million at December 31, 2012. The Company plans to fund the pension plan obligations through existing Company owned life insurance policies.
Note 13.
|
Loss Per Common Share
|
The Company follows the provisions of FASB ASC Topic 260, “Earnings per Share” (“ASC Topic 260”). Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. The Company has two classes of common stock currently outstanding. The classes are A and B, of which one share of Class B is convertible into 1.15 shares of Class A. Diluted EPS 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. For the three months and six months ended June 30, 2013, 215,317 options to purchase shares of common stock, respectively, 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 three months and six months ended June 30, 2013. For the three months and six months ended June 30, 2012, 466,876 options to purchase shares of common stock, respectively, 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 three months and six months ended June 30, 2012. Additionally 30,407 warrants were also anti-dilutive for all periods presented below.
Basic and diluted EPS for the three and six months ended June 30, 2013 and 2012 are calculated as follows:
|
|
Three months ended June 30, 2013
|
|
|
|
Loss
|
|
|
Average shares
|
|
|
Per share
|
|
(In thousands, except for per share data)
|
|
(numerator)
|
|
|
(denominator)
|
|
|
Amount
|
|
Basic and Diluted EPS
|
|
|
|
|
|
|
|
|
|
Loss available to common shareholders
|
|
$
|
(1,321
|
)
|
|
|
13,257
|
|
|
$
|
(0.10
|
)
|
|
|
Three months ended June 30, 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
|
|
$
|
(2,458
|
)
|
|
|
13,257
|
|
|
$
|
(0.19
|
)
|
|
|
Six months ended June 30, 2013
|
|
|
|
Loss
|
|
|
Average shares
|
|
|
Per share
|
|
(In thousands, except for per share data)
|
|
(numerator)
|
|
|
(denominator)
|
|
|
Amount
|
|
Basic and Diluted EPS
|
|
|
|
|
|
|
|
|
|
Loss available to common shareholders
|
|
$
|
(1,718
|
)
|
|
|
13,257
|
|
|
$
|
(0.13
|
)
|
|
|
Six months ended June 30, 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
|
|
$
|
(3,833
|
)
|
|
|
13,257
|
|
|
$
|
(0.29
|
)
|
Note 14.
|
Comprehensive Income
|
FASB ASC Topic 220, “Comprehensive Income” (“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). Unrealized gains and losses on AFS securities is an example of an other comprehensive income component.
|
|
Six months ended June 30, 2013
|
|
(In thousands)
|
|
Before tax amount
|
|
|
Tax expense (benefit)
|
|
|
Net of tax amount
|
|
Unrealized losses on investment securities:
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses arising during period
|
|
$
|
(6,251
|
)
|
|
$
|
(2,233
|
)
|
|
$
|
(4,018
|
)
|
Less reclassification adjustment for gains realized in net loss
|
|
|
70
|
|
|
|
24
|
|
|
|
46
|
|
Unrealized losses on investment securities
|
|
|
(6,321
|
)
|
|
|
(2,257
|
)
|
|
|
(4,064
|
)
|
Unrecognized benefit obligation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Less reclassification adjustment for amortization
|
|
|
(287
|
)
|
|
|
(98
|
)
|
|
|
(189
|
)
|
Other comprehensive loss, net
|
|
$
|
(6,034
|
)
|
|
$
|
(2,159
|
)
|
|
$
|
(3,875
|
)
|
|
|
Six months ended June 30, 2012
|
|
(In thousands)
|
|
Before tax amount
|
|
|
Tax expense (benefit)
|
|
|
Net of tax amount
|
|
Unrealized gains on investment securities:
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses arising during period
|
|
$
|
(310
|
)
|
|
$
|
(81
|
)
|
|
$
|
(229
|
)
|
Less adjustment for impaired investments
|
|
|
(859
|
)
|
|
|
(301
|
)
|
|
|
(558
|
)
|
Less reclassification adjustment for gains realized in net loss
|
|
|
159
|
|
|
|
56
|
|
|
|
103
|
|
Unrealized gains on investment securities
|
|
|
390
|
|
|
|
164
|
|
|
|
226
|
|
Unrecognized benefit obligation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Less reclassification adjustment for amortization
|
|
|
(176
|
)
|
|
|
(62
|
)
|
|
|
(114
|
)
|
Other comprehensive income, net
|
|
$
|
566
|
|
|
$
|
226
|
|
|
$
|
340
|
|
Note 15.
|
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 sales transactions 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.
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 six months ended June 30, 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 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.
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2013 and December 31, 2012 are as follows:
|
|
Fair Value Measurements Using:
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
Balances as of June 30, 2013
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
Investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
-
|
|
|
$
|
71,172
|
|
|
$
|
-
|
|
|
$
|
71,172
|
|
Mortgage-backed securities-residential
|
|
|
-
|
|
|
|
32,921
|
|
|
|
-
|
|
|
|
32,921
|
|
Collateralized mortgage obligations-residential
|
|
|
-
|
|
|
|
180,509
|
|
|
|
-
|
|
|
|
180,509
|
|
Corporate bonds
|
|
|
-
|
|
|
|
9,730
|
|
|
|
-
|
|
|
|
9,730
|
|
Municipal bonds
|
|
|
-
|
|
|
|
5,331
|
|
|
|
-
|
|
|
|
5,331
|
|
Other securities
|
|
|
-
|
|
|
|
-
|
|
|
|
4,407
|
|
|
|
4,407
|
|
Common stocks
|
|
|
46
|
|
|
|
-
|
|
|
|
-
|
|
|
|
46
|
|
Total investment securities available-for-sale
|
|
$
|
46
|
|
|
$
|
299,664
|
|
|
$
|
4,407
|
|
|
$
|
304,117
|
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
Balances as of December 31, 2012
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
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 investment securities available-for-sale
|
|
$
|
47
|
|
|
$
|
344,992
|
|
|
$
|
4,164
|
|
|
$
|
349,203
|
|
The following table presents 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 six months ended June 30, 2013 and 2012:
(In thousands)
|
|
|
|
Investment Securities Available for Sale
|
|
Other securities
|
|
Beginning balance January 1, 2013
|
|
$
|
4,164
|
|
Total gains/(losses) - (realized/unrealized):
|
|
|
|
|
Included in earnings
|
|
|
5
|
|
Included in other comprehensive income
|
|
|
319
|
|
Purchases
|
|
|
32
|
|
Sales and calls
|
|
|
(113
|
)
|
Transfers in and/or out of Level 3
|
|
|
-
|
|
Ending balance June 30, 2013
|
|
$
|
4,407
|
|
|
|
Investment Securities Available for Sale
|
|
|
|
Trust
|
|
|
|
|
|
|
|
|
|
preferred
|
|
|
Other
|
|
|
|
|
(In thousands)
|
|
securities
|
|
|
securities
|
|
|
Total
|
|
Beginning balance January 1, 2012
|
|
$
|
12,603
|
|
|
$
|
6,918
|
|
|
$
|
19,521
|
|
Total gains/(losses) - (realized/unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
-
|
|
|
|
(818
|
)
|
|
|
(818
|
)
|
Included in other comprehensive income
|
|
|
(608
|
)
|
|
|
(151
|
)
|
|
|
(759
|
)
|
Purchases
|
|
|
-
|
|
|
|
499
|
|
|
|
499
|
|
Sales and calls
|
|
|
-
|
|
|
|
(530
|
)
|
|
|
(530
|
)
|
Amortization of premium
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
(13
|
)
|
Transfers in and/or out of Level 3
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Ending balance June 30, 2012
|
|
$
|
11,982
|
|
|
$
|
5,918
|
|
|
$
|
17,900
|
|
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 collateral. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2013 and December 31, 2012 are as follows:
|
|
Fair Value Measurements Using:
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
Balances as of June 30, 2013
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans and leases
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,601
|
|
|
$
|
7,601
|
|
Other real estate owned
|
|
|
-
|
|
|
|
-
|
|
|
|
4,585
|
|
|
|
4,585
|
|
Loans and leases held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
1,419
|
|
|
|
1,419
|
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
Balances as of December 31, 2012
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans and leases
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
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
|
|
Balances as of June 30, 2013
|
|
|
|
Valuation
|
|
Unobservable
|
|
Range (Weighted
|
|
(In thousands)
|
|
Fair Value
|
|
Techniques
|
|
Input
|
|
Average)
|
|
Impaired loans and leases
|
|
$
|
7,601
|
|
Appraisal of collateral (1)
|
|
Appraisal adjustments
|
|
0.0% to -15.8% (-11.9%)
|
|
|
|
|
|
|
|
|
Liquidation expenses
|
|
0.0% to -16.4% (-8.1%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salvageable value of
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
collateral (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
|
4,585
|
|
Appraisal of collateral (1)
|
|
Appraisal adjustments
|
|
0.0% to -81.1% (-5.4%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases held for sale
|
|
|
1,419
|
|
Sales prices
|
|
Liquidation expenses
|
|
|
-14.0
|
%
|
|
(1)
|
Appraisals 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.
|
The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at June 30, 2013 and December 31, 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.
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 (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 fair value is computed by applying the Company’s ownership percentage of the fund to the fund’s net asset value at year end.
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 lower of cost or fair value):
The fair values of loans held for sale are based upon appraised values of the collateral less costs to sell, management’s estimation of the value of the collateral or expected net sales 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.
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.Impairedloans 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.
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 quoted prices for new 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.
The tables below state the fair value of the Company’s financial instruments at June 30, 2013 and December 31, 2012.
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
At June 30, 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
|
|
$
|
24,782
|
|
|
$
|
24,782
|
|
|
$
|
24,782
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Investment securities available-for-sale
|
|
|
304,117
|
|
|
|
304,117
|
|
|
|
46
|
|
|
|
299,664
|
|
|
|
4,407
|
|
Other investment
|
|
|
2,250
|
|
|
|
2,250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,250
|
|
Federal Home Loan Bank stock
|
|
|
4,594
|
|
|
|
4,594
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,594
|
|
Loans held for sale
|
|
|
1,419
|
|
|
|
1,419
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,419
|
|
Loans, net
|
|
|
352,688
|
|
|
|
351,840
|
|
|
|
-
|
|
|
|
-
|
|
|
|
351,840
|
|
Accrued interest receivable
|
|
|
8,733
|
|
|
|
8,733
|
|
|
|
-
|
|
|
|
8,733
|
|
|
|
-
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
66,121
|
|
|
|
66,121
|
|
|
|
-
|
|
|
|
66,121
|
|
|
|
-
|
|
NOW and money markets
|
|
|
206,145
|
|
|
|
206,145
|
|
|
|
-
|
|
|
|
206,145
|
|
|
|
-
|
|
Savings
|
|
|
18,418
|
|
|
|
18,418
|
|
|
|
-
|
|
|
|
18,418
|
|
|
|
-
|
|
Time deposits
|
|
|
234,986
|
|
|
|
233,071
|
|
|
|
-
|
|
|
|
233,071
|
|
|
|
-
|
|
Short-term borrowings
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
-
|
|
|
|
-
|
|
Long-term borrowings
|
|
|
98,108
|
|
|
|
95,385
|
|
|
|
-
|
|
|
|
95,385
|
|
|
|
-
|
|
Subordinated debt
|
|
|
25,774
|
|
|
|
23,970
|
|
|
|
-
|
|
|
|
23,970
|
|
|
|
-
|
|
Accrued interest payable
|
|
|
4,917
|
|
|
|
4,917
|
|
|
|
-
|
|
|
|
4,917
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Investment securities available-for-sale
|
|
|
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
|
|
|
|
-
|
|
Limitations
The fair value estimates are made at a discrete point in time based on relevant market information and information about the financial instruments. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Further, the foregoing estimates may not reflect the actual amount that could be realized if all or substantially all of the financial instruments were offered for sale. This is due to the fact that no market exists for a sizable portion of the loan, deposit and off balance sheet instruments.
In addition, the fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to value anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets that are not considered financial assets include premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.
Finally, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies introduces a greater degree of subjectivity to these estimated fair values.
Note 16.
|
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 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 on sale of foreclosed properties.
The following tables present selected financial information for reportable business segments for the three and six month periods ended June 30, 2013 and 2012.
|
|
Three months ended June 30, 2013
|
|
|
|
Community
|
|
|
Tax Lien
|
|
|
|
|
(In thousands)
|
|
Banking
|
|
|
Operation
|
|
|
Consolidated
|
|
Total assets
|
|
$
|
717,220
|
|
|
$
|
31,381
|
|
|
$
|
748,601
|
|
Total deposits
|
|
$
|
525,670
|
|
|
$
|
-
|
|
|
$
|
525,670
|
|
Interest income
|
|
$
|
6,077
|
|
|
$
|
666
|
|
|
$
|
6,743
|
|
Interest expense
|
|
|
1,415
|
|
|
|
382
|
|
|
|
1,797
|
|
Net interest income
|
|
$
|
4,662
|
|
|
$
|
284
|
|
|
$
|
4,946
|
|
(Credit) provision for loan and lease losses
|
|
|
(431
|
)
|
|
|
268
|
|
|
|
(163
|
)
|
Total other income
|
|
|
550
|
|
|
|
411
|
|
|
|
961
|
|
Total other expenses
|
|
|
5,054
|
|
|
|
2,513
|
|
|
|
7,567
|
|
Income tax expense (benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income (loss )
|
|
$
|
589
|
|
|
$
|
(2,086
|
)
|
|
$
|
(1,497
|
)
|
Noncontrolling interest
|
|
$
|
140
|
|
|
$
|
(834
|
)
|
|
$
|
(694
|
)
|
Net income (loss) attributable to Royal Bancshares
|
|
$
|
449
|
|
|
$
|
(1,252
|
)
|
|
$
|
(803
|
)
|
|
|
Three months ended June 30, 2012
|
|
|
|
Community
|
|
|
Tax Lien
|
|
|
|
|
(In thousands)
|
|
Banking
|
|
|
Operation
|
|
|
Consolidated
|
|
Total assets
|
|
$
|
779,932
|
|
|
$
|
50,694
|
|
|
$
|
830,626
|
|
Total deposits
|
|
$
|
582,292
|
|
|
$
|
-
|
|
|
$
|
582,292
|
|
Interest income
|
|
$
|
7,074
|
|
|
$
|
1,349
|
|
|
$
|
8,423
|
|
Interest expense
|
|
|
1,811
|
|
|
|
706
|
|
|
|
2,517
|
|
Net interest income
|
|
$
|
5,263
|
|
|
$
|
643
|
|
|
$
|
5,906
|
|
Provision for loan and lease losses
|
|
|
1,334
|
|
|
|
181
|
|
|
|
1,515
|
|
Total other income
|
|
|
1,797
|
|
|
|
148
|
|
|
|
1,945
|
|
Total other expenses
|
|
|
6,811
|
|
|
|
1,781
|
|
|
|
8,592
|
|
Income tax expense (benefit)
|
|
|
306
|
|
|
|
(306
|
)
|
|
|
-
|
|
Net loss
|
|
$
|
(1,391
|
)
|
|
$
|
(865
|
)
|
|
$
|
(2,256
|
)
|
Noncontrolling interest
|
|
$
|
40
|
|
|
$
|
(346
|
)
|
|
$
|
(306
|
)
|
Net loss attributable to Royal Bancshares
|
|
$
|
(1,431
|
)
|
|
$
|
(519
|
)
|
|
$
|
(1,950
|
)
|
|
|
Six months ended June 30, 2013
|
|
|
|
Community
|
|
|
Tax Lien
|
|
|
|
|
(In thousands)
|
|
Banking
|
|
|
Operation
|
|
|
Consolidated
|
|
Total assets
|
|
$
|
717,220
|
|
|
$
|
31,381
|
|
|
$
|
748,601
|
|
Total deposits
|
|
$
|
525,670
|
|
|
$
|
-
|
|
|
$
|
525,670
|
|
Interest income
|
|
$
|
12,026
|
|
|
$
|
1,469
|
|
|
$
|
13,495
|
|
Interest expense
|
|
|
2,965
|
|
|
|
812
|
|
|
|
3,777
|
|
Net interest income
|
|
$
|
9,061
|
|
|
$
|
657
|
|
|
$
|
9,718
|
|
(Credit) provision for loan and lease losses
|
|
|
(741
|
)
|
|
|
327
|
|
|
|
(414
|
)
|
Total other income
|
|
|
1,712
|
|
|
|
657
|
|
|
|
2,369
|
|
Total other expenses
|
|
|
10,665
|
|
|
|
3,042
|
|
|
|
13,707
|
|
Income tax expense (benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income (loss )
|
|
$
|
849
|
|
|
$
|
(2,055
|
)
|
|
$
|
(1,206
|
)
|
Noncontrolling interest
|
|
$
|
301
|
|
|
$
|
(822
|
)
|
|
$
|
(521
|
)
|
Net income (loss) attributable to Royal Bancshares
|
|
$
|
548
|
|
|
$
|
(1,233
|
)
|
|
$
|
(685
|
)
|
|
|
Six months ended June 30, 2012
|
|
|
|
Community
|
|
|
Tax Lien
|
|
|
|
|
(In thousands)
|
|
Banking
|
|
|
Operation
|
|
|
Consolidated
|
|
Total assets
|
|
$
|
779,932
|
|
|
$
|
50,694
|
|
|
$
|
830,626
|
|
Total deposits
|
|
$
|
582,292
|
|
|
$
|
-
|
|
|
$
|
582,292
|
|
Interest income
|
|
$
|
14,291
|
|
|
$
|
2,938
|
|
|
$
|
17,229
|
|
Interest expense
|
|
|
3,712
|
|
|
|
1,618
|
|
|
|
5,330
|
|
Net interest income
|
|
$
|
10,579
|
|
|
$
|
1,320
|
|
|
$
|
11,899
|
|
Provision for loan and lease losses
|
|
|
1,443
|
|
|
|
156
|
|
|
|
1,599
|
|
Total other income
|
|
|
2,586
|
|
|
|
20
|
|
|
|
2,606
|
|
Total other expenses
|
|
|
12,583
|
|
|
|
4,076
|
|
|
|
16,659
|
|
Income tax expense (benefit)
|
|
|
357
|
|
|
|
(357
|
)
|
|
|
-
|
|
Net loss
|
|
$
|
(1,218
|
)
|
|
$
|
(2,535
|
)
|
|
$
|
(3,753
|
)
|
Noncontrolling interest
|
|
$
|
80
|
|
|
$
|
(1,014
|
)
|
|
$
|
(934
|
)
|
Net loss attributable to Royal Bancshares
|
|
$
|
(1,298
|
)
|
|
$
|
(1,521
|
)
|
|
$
|
(2,819
|
)
|
Interest income earned by the Community Banking segment related to the Tax Lien Operation was approximately $382,000 and $706,000 for the three month periods ended June 30, 2013 and 2012, respectively and $812,000 and $1.6 million for the six months ended June 30, 2013 and 2012, respectively.
Note 17.
|
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 June 30, 2013 and December 31, 2012, FHLB stock totaled $4.6 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 recovered. Accordingly, there is no other-than-temporary impairment related to the carrying amount of the Company’s FHLB stock as of June 30, 2013.