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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from ___________ to
___________
Commission File Number 0-26366
ROYAL BANCSHARES OF PENNSYLVANIA, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2812193
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
732 MONTGOMERY AVENUE, NARBERTH,
PENNSYLVANIA 19072
(Address of principal executive offices)
Registrant's telephone number, including area code (610) 668-4700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK ($2.00 PAR VALUE)
CLASS B COMMON STOCK ($.10 PAR VALUE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days . Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contended,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K . /X/
The aggregate market value of common shares of the Registrant held by
non-affiliates, based on the closing sale price as of February 29, 2000 was
$60,670,086.
As of February 29, 2000, the Registrant had 8,054,918 and 1,766,149
shares outstanding of Class A and Class B common stock, respectively.
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ITEM 1. BUSINESS.
THE COMPANY
Royal Bancshares of Pennsylvania, Inc. ("RBPA" or the "Registrant") is
a Pennsylvania business corporation and a bank holding company registered under
the federal Bank Holding Company Act of 1956, as amended (the "Holding Company
Act"), and is supervised by the Board of Governors of the Federal Reserve System
(Federal Reserve Board). Its legal headquarters is located at 732 Montgomery
Avenue, Narberth, PA. On June 29, 1995, pursuant to the plan of reorganization
approved by the shareholders of Royal Bank of Pennsylvania (the "Bank"), all of
the outstanding shares of common stock of the Bank were acquired by the RBPA and
were exchanged on a one-for-one basis for common stock of RBPA. The principal
activities of RBPA are owning and supervising the Bank, which engages in a
general banking business in Montgomery County, Pennsylvania. RBPA also has a
wholly owned nonbank subsidiary, Royal Investments of Delaware, Inc., which is
engaged in investment activities. At December 31, 1999, RBPA had consolidated
total assets of approximately $522.5 million, total deposits of approximately
$381.3 million and stockholders' equity of approximately $95.8 million.
From time to time, RBPA may include forward-looking statements relating
to such matters as anticipated financial performance, business prospects,
technological developments, new products, research and development activities
and similar matters in this and other filings with the Securities Exchange
Commission. The Private Securities Litigation Reform Act of 1995 provides safe
harbor for forward-looking statements. When we use words such as "believes", or
"expects," "anticipates" or similar expressions, we are making forward-looking
statements. In order to comply with the terms of the safe harbor, RBPA notes
that a variety of factors could cause RBPA's actual results and experience to
differ materially from the anticipated results or other expectations expressed
in RBPA's forward-looking statements. The risks and uncertainties that may
affect the operations, performance development and results of RBPA's business
include the following: general economic conditions, including their impact on
capital expenditures; business conditions in the banking industry; the
regulatory environment; rapidly changing technology and evolving banking
industry standards; competitive factors, including increased competition with
community, regional and national financial institutions; new service and product
offerings by competitors and price pressures and similar items.
THE BANK
The Bank was incorporated in the Commonwealth of Pennsylvania on July
30, 1963, and was chartered by the Commonwealth of Pennsylvania Department of
Banking and commenced operation as a Pennsylvania state-chartered bank on
October 22, 1963. The Bank is the successor of the Bank of King of Prussia, the
principal ownership of which was acquired by Daniel M. Tabas in 1980. Royal Bank
of Pennsylvania is an insured bank under the Federal Deposit Insurance
Corporation (the "FDIC").
The Bank derives its income principally from interest charged on loans
and interest on investment securities and fees received in connection with the
origination of loans and other services. The Bank's principal expenses are
interest expense on deposits and operating expenses. Funds for activities are
provided principally by operating revenues, deposit growth and the repayment of
outstanding loans.
Service Area. The Bank's primary service area includes Montgomery,
Chester, Bucks, Delaware, Berks and Philadelphia counties, southern New Jersey
and Delaware in the vicinity of Wilmington. This area includes residential areas
and industrial and commercial businesses of the type usually found within a
major metropolitan area. The Bank serves this area from thirteen offices located
throughout Montgomery,
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Philadelphia and Berks counties. The Bank also considers the states of
Pennsylvania, New Jersey, New York and Delaware to constitute its service area
for certain services. On occasion, the Bank will do business with clients
located outside of its service area. The Bank's legal headquarters are located
at 732 Montgomery Avenue, Narberth, PA.
The Bank conducts business operations as a commercial bank offering
checking accounts, savings and time deposits, and loans, including residential
mortgages, home equity and SBA loans. The Bank also offers safe deposit boxes,
collections, and other customary bank services (excluding trust) to its
customers. Drive-up, ATM, and night depository facilities are available.
Services may be added or deleted from time to time. The services offered and the
business of the Bank are not subject to significant seasonal fluctuations. The
Bank is a member of the Federal Reserve Fedline Wire Transfer System.
Competition. The Bank is subject to intense competition from commercial
banks, thrifts and other financial institutions. The Bank actively competes with
such banks and institutions for local deposits and local retail and commercial
accounts, and is also subject to competition from banks from areas outside its
service area for certain segments of its business. For a number of years,
competition has been increasing in the Bank's basic banking business because of
the growing number of financial service entities that have entered our local
market. This trend was accelerated by the passage of federal laws in the early
1980's, which sharply expanded the powers of thrifts and credit unions, giving
them most of the powers that were formerly reserved for commercial banks. While
attempting to equalize the competition among the depository institutions, these
statutes have little effect on less regulated entities such as money market
mutual funds and investment banking firms. Many of these competitors have
substantially greater financial resources and more extensive branch systems. To
be successful, smaller banks must find a competitive edge. The Bank prides
itself on giving its customers personalized service. The Bank has continued at
modest levels its research activities relating to the development of new
services and the improvement of existing bank services. Marketing activities
have continued that have allowed the Bank to remain competitive. These
activities include the review of existing services and the solicitation of new
users of banking services. The Bank is not dependent upon a single customer or a
small number of customers, the loss of which should have a material adverse
effect on the Bank or RBPA.
Employees. RBPA employed approximately 134 persons on a full-time
equivalent basis as of December 31, 1999.
Deposits. At December 31, 1999, total deposits of the Bank were
distributed among demand deposits (12%), money market deposit accounts, savings
and Super Now (29%) and time deposits (59%). At year end 1999, deposits
increased $89.7 million from year end 1998, or 28%, primarily due to an increase
in certificate of deposits and to a lesser extent, NOW and money market
deposits.
Lending. At December 31, 1999, the Bank had a total loan portfolio of
$351.8 million, representing 69% of total assets. The loan portfolio is
categorized into commercial, commercial mortgages, residential mortgages
(including home equity lines of credit), construction, and installment loans.
Current market and regulatory trends in banking are changing the basic
nature of the banking industry. The Bank intends to keep pace with the banking
industry by being competitive with respect to interest rates and new types or
classes of deposits insofar as it is practical to do so consistent with the
Bank's size, objective of profit maintenance and stable capital structure.
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NON-BANK SUBSIDIARY
On June 30, 1995, RBPA established a special purpose Delaware
investment company, Royal Investments of Delaware, Inc., ("RID") as a
wholly-owned subsidiary. Its legal headquarters is at 103 Springer Building,
3411 Silverside Road, Wilmington, DE. RID buys, holds and sells investment
securities. At December 31, 1999, total assets of RID were $29.5 million, of
which $20.7 million was held in cash and cash equivalents. Investment securities
were $5.8 million at December 31, 1999.
SUPERVISION AND REGULATION
Holding Company. RBPA, as a Pennsylvania business corporation, is
subject to the jurisdiction of the Securities and Exchange Commission (the
"SEC") and of state securities commissions for matters relating to the offering
and sale of its securities. Accordingly, if RBPA wishes to issue additional
shares of its Common Stock, in order, for example, to raise capital or to grant
stock options, RBPA will have to comply with the registration requirements of
the Securities Act of 1933 as amended, or find an applicable exemption from
registration.
RBPA is subject to the provisions of the Bank Holding Company Act of
1956, as amended (the "BHC Act"), and to supervision by the Federal Reserve
Board. The BHC Act requires RBPA to secure the prior approval of the Federal
Reserve Board before it owns or controls, directly or indirectly, more than 5%
of the voting shares of any corporation, including another bank. In addition,
the BHC Act prohibits RBPA from acquiring more than 5 % of the voting shares of,
or interest in, or all or substantially all of the assets of, any bank located
outside Pennsylvania, unless such an acquisition is specifically authorized by
laws of the state in which such bank is located.
A bank holding company also is prohibited from engaging in or acquiring
direct or indirect control of more than 5% of the voting shares of any such
company engaged in non-banking activities unless the Federal Reserve Board, by
order or regulation, has found such activities to be closely related to banking
or managing or controlling banks as to be a proper incident thereto. In making
this determination, the Federal Reserve Board considers whether the performance
of these activities by a bank holding company would offer benefits to the public
that outweigh possible adverse effects.
As a bank holding company, RBPA is required to file an annual report
with the Federal Reserve Board and any additional information that the Federal
Reserve Board may require pursuant to the BHC Act. The Federal Reserve Board may
also make examinations of the holding company and any or all of subsidiaries.
Further, under Section 106 of the 1970 amendments to the BHC Act and the Federal
Reserve Board's regulation, a bank holding company and its subsidiaries are
prohibited from engaging in certain tying arrangements in connection with any
extension of credit or provision of credit of any property or services. The so
called "anti-tying" provisions state generally that a bank may not extend
credit, lease, sell property or furnish any service to a customer on the
condition that the customer obtain additional credit or service from the bank,
its bank holding company or any other subsidiary of its bank holding company, or
on the condition that the customer not obtain other credit or services from a
competitor of the bank, its bank holding company or any subsidiary of its bank
holding company.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act and by state banking laws on any
extensions of credit to the bank holding company or any of its subsidiaries, on
investments in the stock or other securities of the bank holding company and on
taking of such stock or securities as collateral for loans to any borrower.
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Under Pennsylvania law, RBPA is permitted to control an unlimited
number of banks. However, RBPA would be required under the BHC Act to obtain the
prior approval of the Federal Reserve Board before acquiring all or
substantially all of the assets of any bank, or acquiring ownership or control
of any voting shares of any other than the Bank, if, after such acquisition,
would control more than 5% of the voting shares of such bank.
The Bank. The deposits of Royal Bank of Pennsylvania are insured by the
FDIC. The Bank is subject to supervision, regulation and examination by the
Pennsylvania Department of Banking and by the FDIC. In addition, the Bank is
subject to a variety of local, state and federal laws that affect its operation.
Under the Pennsylvania Banking Code of 1965, as amended, the ("Code"),
the Registrant has been permitted since March 4, 1990 to control an unlimited
number of banks. However, the Registrant would be required under the Bank
Holding Company Act to obtain the prior approval of the Federal Reserve Board
before it could acquire all or substantially all of the assets of any bank, or
acquiring ownership or control of any voting shares of any bank other than the
Bank, if, after such acquisition, the registrant would own or control more than
5 percent of the voting shares of such bank. The Bank Holding Company Act has
been amended by the Riegle-Neal Interstate Banking and Branching Act of 1994
which authorizes bank holding companies subject to certain limitations and
restrictions to acquire banks located in any state.
In 1995, the Code was amended to harmonize Pennsylvania law with the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 to enable
Pennsylvania institutions to participate fully in interstate banking and to
remove obstacles to the choice by banks from other states engaged in interstate
banking to select Pennsylvania as a head office location. Some of the more
salient features of the amendment are described below.
A bank holding company located in Pennsylvania, another state, the
District of Columbia or a territory or possession of the United States may
control one or more banks, bank and trust companies, national banks, interstate
banks and, with the prior written approval of the Pennsylvania Department of
Banking, may acquire control of a bank and trust company or a national bank
located in Pennsylvania. A Pennsylvania-chartered institution may maintain
branches in any other state, the District of Columbia, or a territory or
possession of the United States upon the written approval of the Pennsylvania
Department of Banking.
Finally, a banking institution existing under the laws of another
jurisdiction may establish a branch in Pennsylvania if the laws of the
jurisdiction in which it is located permit a Pennsylvania-chartered institution
or a national bank located in Pennsylvania to establish and maintain a branch in
such jurisdiction on substantially the same terms and conditions.
In 1995, the Pennsylvania General Assembly enacted the Economic
Development Agency, Fiduciary and Lender Environmental Liability Protection Act
which, among other things, provides protection to lenders from environmental
liability and remediation costs under the environmental laws for releases and
contamination caused by others. A lender who engages in activities involved in
the routine practices of commercial lending, including, but not limited to, the
providing of financial services, holding of security interests, workout
practices, foreclosure or the recovery of funds from the sale of property shall
not be liable under the environmental acts or common law equivalents to the
Pennsylvania Department of Environmental resources or to any other person by
virtue of the fact that the lender engages in such commercial lending practices.
A lender, however, will be liable if it, its employees or agents, directly cause
an immediate release or directly exacerbate a release of regulated substances on
or from the property, or knowingly and willfully compelled the borrower to
commit an action which caused such release or violation of an environmental act.
The Economic Development Agency, Fiduciary and Lender Environmental
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Liability Protection Act, however, does not limit federal liability which still
exists under certain circumstances.
A subsidiary bank of a holding company is subject to certain
restrictions imposed by the Federal Reserve Act, as amended, on any extensions
of credit to the bank holding company or its subsidiaries, on investments in the
stock or other securities of the bank holding company or its subsidiaries, and
on taking such stock or securities as collateral for loans. The Federal Reserve
Act, as amended, and Federal Reserve Board regulations also place certain
limitations and reporting requirements on extensions of credit by a bank to
principal shareholders of its parent holding company, among others, and to
related interests of such principal shareholders. In addition, such legislation
and regulations may affect the terms upon which any person who becomes a
principal shareholder of a holding company may obtain credit from banks with
which the subsidiary bank maintains a correspondent relationship.
Federal law also prohibits the acquisition of control of a bank holding
company without prior notice to certain federal bank regulators. Control is
defined for this purpose as the power, directly or indirectly, to direct the
management or policies of the bank or bank holding company or to vote 25% or
more of any class of voting securities of the bank holding company.
From time to time, various types of federal and state legislation have
been proposed that could result in additional regulation of, and restrictions
on, the business of the Bank. It cannot be predicted whether any such
legislation will be adopted or how such legislation would affect the business of
the Bank. As a consequence of the extensive regulation of commercial banking
activities in the United States, the Bank's business is particularly susceptible
to being affected by federal legislation and regulations that may increase the
costs of doing business.
Under the Federal Deposit Insurance Act ("FDIC Act"), the FDIC
possesses the power to prohibit institutions regulated by it (such as the Bank)
from engaging in any activity that would be an unsafe and unsound banking
practice or in violation of applicable law. Moreover, the FDIC Act: (i) empowers
the FDIC to issue cease-and-desist or civil money penalty orders against the
Bank or its executive officers, directors and/or principal shareholders based on
violations of law or unsafe and unsound banking practices; (ii) authorizes the
FDIC to remove executive officers who have participated in such violations or
unsound practices; (iii) restricts lending by the Bank to its executive
officers, directors, principal shareholders or related interests thereof; (iv)
restricts management personnel of a bank from serving as directors or in other
management positions with certain depository institutions whose assets exceed a
specified amount or which have an office within a specified geographic area.
Additionally, the FDIC Act provides that no person may acquire control of the
Bank unless the FDIC has been given 60-days prior written notice and within that
time has not disapproved the acquisition or extended the period for disapproval.
In April 1995, regulators revised the Community Reinvestment Act ("CRA") with an
emphasis on performance over process and documentation. Under the revised rules,
the five-point rating scale is still utilized by examiners to assign a numerical
score for a bank's performance in each of three areas:
lending, service and investment.
Under the CRA, the FDIC is required to: (i) assess the records of all
financial institutions regulated by it to determine if these institutions are
meeting the credit needs of the community (including low-and moderate-income
neighborhoods) which they serve, and (ii) take this record into account in its
evaluation of any application made by any such institutions for, among other
things, approval of a branch or other deposit facility, office relocation, a
merger or an acquisition of bank shares. The CRA also requires the federal
banking agencies to make public disclosures of their evaluation of each bank's
record of meeting the credit needs of its entire community, including low-and
moderate-income neighborhoods. This evaluation will include a descriptive rate
("outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance")
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and a statement describing the basis for the rating. After its most recent
examination of the Bank under CRA, the FDIC gave the Bank a CRA rating of
satisfactory.
Under the Bank Secrecy Act ("BSA"), banks and other financial
institutions are required to report to the Internal Revenue Service currency
transactions of more than $10,000 or multiple transactions in any one day of
which the Bank is aware that exceed $10,000 in the aggregate or other lesser
amounts. Civil and criminal penalties are provided under the BSA for failure to
file a required report, for failure to supply information required by the BSA or
for filing a false or fraudulent report.
RIEGLE-NEAL INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT OF 1994.
The Bank believes that further merger activity within Pennsylvania is likely to
occur in the future, resulting in increased concentration levels in banking
markets within Pennsylvania and other significant changes in the competitive
environment. The Riegle-Neal allows adequately capitalized and managed bank
holding companies to acquire banks in any state starting one year after
enactment (September 29, 1995). Another provision of the Riegle-Neal Act allows
interstate merger transactions beginning June 1, 1997. States are permitted,
however, to pass legislation providing for either earlier approval of mergers
with out-of-state banks, or "opting-out" of interstate mergers entirely. Through
interstate merger transactions, banks will be able to acquire branches of
out-of-state banks by converting their offices into branches of the resulting
bank. The Riegle-Neal Act provides that it will be the exclusive means for bank
holding companies to obtain interstate branches. Under the Riegle-Neal Act,
banks may establish and operate a "de novo branch" in any State that "opts-in"
to de novo branching. Foreign banks are allowed to operate branches, either de
novo or by merger. These branches can operate to the same extent that the
establishment and operation of such branches would be permitted if the foreign
bank were a national bank or state bank. All these changes are expected to
intensify competition in local, regional and national banking markets. The
Pennsylvania Banking Code has been amended to enable Pennsylvania institutions
to participate fully in interstate banking (see discussion above).
Management cannot anticipate what changes Congress may enact, or, if
enacted, their impact on RBPA's financial position and reported results of
operation. As a consequence of the extensive regulation of commercial banking
activities in the United States, RBPA's business is particularly susceptible to
being affected by federal and state legislation and regulations that may
increase the costs of doing business.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
GENERAL. The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDIC Improvement Act") includes several provisions that have a direct
impact on the Bank. The most significant of these provisions are discussed
below.
The FDIC is required to conduct periodic full-scope, on-site
examinations of the Bank. In order to minimize losses to the deposit insurance
funds, the FDIC Improvement Act establishes a format to more monitor
FDIC-insured institutions and to enable prompt corrective action by the
appropriate federal supervisory agency if an institution begins to experience
any difficulty. The FDIC Improvement Act establishes five "capital" categories.
They are: (1) well capitalized, (2) adequately capitalized, (3)
undercapitalized, (4) significantly undercapitalized, and (5) critically
undercapitalized. The overall goal of these new capital measures is to impose
more scrutiny and operational restrictions on banks as they descend the capital
categories from well capitalized to critically undercapitalized.
Under Current regulations, a "well-capitalized" institution would be
one that has at least a 10% total risk-based capital ratio, a 6% Tier 1
risk-based capital ratio, a 5% Tier 1 Leverage Ratio, and is not subject
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to any written order or final directive by the FDIC to meet and maintain a
specific capital level. The Bank is presently categorized as a
"well-capitalized" institution.
An "adequately capitalized" institution would be one that meets the
required minimum capital levels, but does not meet the definition of a
"well-capitalized" institution. The existing capital rules generally require
banks to maintain a Tier 1 Leverage Ratio of at least 4% and an 8% total
risk-based capital ratio. Since the risk-based capital requirement to be in the
form of Tier 1 capital, this also will mean that a bank would need to maintain
at least 4% Tier 1 risk-based capital ratio. An institution must meet each of
the required minimum capital levels in order to be deemed "adequately
capitalized."
An "undercapitalized" institution is one that fails to meet one or more
of the required minimum capital levels for an "adequately capitalized"
institution. Under the FDIC Improvement Act, an "undercapitalized" institution
must file a capital restoration plan and is automatically subject to
restrictions on dividends, management fees and asset growth. In addition, the
institution is prohibited from making acquisitions, opening new branches or
engaging in new lines of business without the prior approval of its primary
federal regulator. A number of other restrictions may be imposed.
A "critically undercapitalized" institution is one that has a tangible
equity (Tier 1 capital) ratio of 2% or less. In addition to the same
restrictions and prohibitions that apply to "undercapitalized" and
"significantly undercapitalized" institutions, any institution that becomes
"critically undercapitalized" is prohibited from taking the following actions
without the prior written approval of its primary federal supervisory agency:
engaging in any material transactions other than in the usual course of
business; extending credit for highly leveraged transactions; amending its
charter or bylaws; making any material changes in accounting methods; engaging
in certain transactions with affiliates; paying excessive compensation or
bonuses; and paying interest on liabilities exceeding the prevailing rates in
the institution's market area. In addition, a "critically undercapitalized"
institution is prohibited from paying interest or principal on its subordinated
debt and is subject to being placed in conservatorship or receivership if its
tangible equity capital level is not increased within certain mandated time
frames.
REAL ESTATE LENDING GUIDELINES. Pursuant to the FDIC Improvement Act,
the FDIC has issued real estate lending guidelines that establish loan-to-value
("LTV") ratios for different types of real estate loans. A LTV ratio is
generally defined as the total loan amount divided by the appraised value of the
property at the time the loan is originated. If a bank does not hold a first
lien position, the total loan amount would be combined with the amount of all
senior liens when calculating the ratio. In addition to establishing the LTV
ratios, the FDIC's real estate guidelines require all real estate loans to be
based upon proper loan documentation and a recent independent appraisal of the
property.
The FDIC's guidelines establish the following limits for LTV ratios:
<TABLE>
<CAPTION>
LTV
Loan Category Limit
------------- -----
<S> <C>
Raw Land 65%
Land Development
Construction:
Commercial, Multifamily (includes
condos and co-ops), and other
Nonresidential 80%
Improved Property 85%
Owner occupied 1-4 Family and Home Equity
(without credit enhancements) 90%
</TABLE>
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The guidelines provide exceptions to the LTV ratios for
government-backed loans; loans facilitating the sale of real estate acquired by
the lending institution in the normal course of business; loans where the Bank's
decision to lend is not based on the offer of real estate as collateral and such
collateral is taken only out of an abundance of caution; and loans renewed,
refinanced, or restructured by the original lender to the same borrower, without
the advancement of new money. The regulation also allows institutions to make a
limited amount of real estate loans that do not conform with the proposed LTV
ratios. Under this exception, the Bank would be allowed to make real estate
loans that do not conform with the LTV ratio limits, up to an amount not to
exceed 100% of the Bank's total capital.
TRUTH IN SAVINGS ACT. The FDIC Improvement Act also contains the Truth
in Savings Act. The purpose of this Act is to require the clear and uniform
disclosure of the rates of interest that are payable on deposit accounts by the
Bank and the fees that are assessable against deposit accounts, so that
consumers can make a meaningful comparison between the competing claims of banks
with regard to deposit accounts and products. This Act requires the Bank to
include, in a clear and conspicuous manner, the following information with each
periodic statement of a deposit account: (1) the annual percentage yield earned,
(2) the amount of interest earned, (3) the amount of any fee and charges imposed
and (4) the number of days in the reporting period. This Act allows for civil
lawsuits to be initiated by customers if the Bank violates any provision or
regulation under this Act.
GRAMM-LEACH-BLILEY ACT. On November 12, 1999, President Clinton signed
the Gramm-Leach-Bliley Act of 1999, the Financial services Modernization Act.
The Financial Services Modernization Act repeals the two affiliation provisions
of the Glass-Steagall Act:
- Section 20, which restricted the affiliation of Federal
Reserve Member Banks with firms "engaged principally" in
specified securities activities; and
- Section 32, which restricts officer, director, or employee
interlocks between a member bank and any company or person
"primarily engaged" in specified securities activities.
In addition, the Financial Services Modernization Act contains provisions that
expressly preempt any state insurance law. The law establishes a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers. It revises and expands
the framework of the Bank Holding Company Act framework to permit a holding
company system to engage in a full range of financial activities through a new
entity known as a Financial Holding Company. "Financial activities" is broadly
defined to include not only banking, insurance and securities activities, but
also merchant banking and additional activities that the Federal Reserve, in
consultation with the Secretary of the Treasury, determines to be financial in
nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally.
In general, the Financial Services Modernization Act:
- Repeals historical restrictions on, and eliminates many
federal and state law barriers to, affiliations among banks,
securities firms, insurance companies, and other financial
service providers;
- Provides a uniform framework for the functional regulation of
the activities of banks, savings institutions and their
holding companies;
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- Broadens the activities that may be conducted by national
banks, banking subsidiaries of bank holding companies, and
their financial subsidiaries;
- Provides an enhanced framework for protecting the privacy of
consumer information;
- Adopts a number of provisions related to the capitalization,
membership, corporate governance, and the other measures
designed to modernize the Federal Home Loan Bank system;
- Modifies the laws governing the implementation of the
Community Reinvestment Act; and
- Addresses a variety of other legal and regulatory issues
affecting both day-to-day operations and long-term activities
of financial institutions.
In order for the Registrant to take advantage of the ability
to affiliate with other financial service providers, the
Registrant must become a "Financial Holding Company" as
permitted under an amendment to the Bank Holding Company Act.
To become a Financial holding Company, a company must file a
declaration with the Federal Reserve, electing to engage in
activities permissible for Financial Holding Companies and
certifying that it is eligible to do so because all of its
insured depository institution subsidiaries are
well-capitalized and well-managed. In addition, the Federal
Reserve must determine that each insured depository
institution subsidiary of the company has at least a
satisfactory "CRA rating. The Registrant currently meets the
requirements to make an election to become a Financial Holding
Company. The Registrant's management has not determined at
this time whether it will seek an election to become a
Financial Holding Company. The Registrant is examining its
strategic business plan to determine whether, based on market
conditions, the relative financial conditions of the
Registrant and its subsidiaries, regulatory capital
requirements, general economic conditions, and other factors,
the Registrant desires to utilize any of its expanded powers
provided in the Financial Service Modernization Act.
The Financial Services Modernization Act also includes a new
section of the Federal Deposit Insurance Act governing
subsidiaries of state banks that engage in "activities as
principal that would only be permissible" for a national bank
to conduct in a financial subsidiary. It expressly preserves
the ability of a state bank to retain all existing
subsidiaries. Because Pennsylvania permits commercial banks
chartered by the state to engage in any activity permissible
for national banks, the Bank will be permitted to form
subsidiaries to engage in the activities authorized by the
Financial Services Modernization Act, to the same extent as a
national bank. In order to form a financial subsidiary, the
Bank must be well-capitalized, and the Bank would be subject
to the same capital deduction, risk management and affiliate
transaction rules as applicable to national banks.
The Registrant and the Bank do not believe that the Financial
Services Modernization Act will have a material adverse effect
on our operations in the near-term. However, to the extent
that it permits banks, securities firms, and insurance
companies to affiliate, the financial services industry may
experience further consolidation. The Financial Services
Modernization Act is intended to grant to community banks
certain powers as a matter of right that larger institutions
have accumulated on an ad hoc basis. Nevertheless, this act
may have the result of increasing the amount of competition
that the Registrant and the Bank face
<PAGE> 11
from larger institutions and other types of companies offering
financial products, many of which may have substantially more
financial resources than the Registrant and the Bank.
MONETARY POLICY
The earnings of the Bank are affected by the policies of regulatory
authorities including the Federal Reserve Board. An important function of the
Federal Reserve System is to influence the money supply and interest rates.
Among the instruments used to implement those objectives are open market
operations in United States government securities, changes in reserve
requirements against member bank deposits and limitations on interest rates that
member banks may pay on time and savings deposits. These instruments are used in
varying combinations to influence overall growth and distribution of bank loans,
investments and deposits, and their use may also affect rates charged on loans
or paid for deposits.
The policies and regulations of the Federal Reserve Board have had and
will probably continue to have a significant effect on its reserve requirements,
deposits, loans and investment growth, as well as the rate of interest earned
and paid, and are expected to affect the Bank's operations in the future. The
effect of such policies and regulations upon the future business and earnings of
the Bank cannot be predicted.
EFFECTS OF INFLATION
Inflation has some impact on RBPA's operating costs. Unlike many
industrial companies, however, substantially all of RBPA's assets and
liabilities are monetary in nature. As a result, interest rates have a more
significant impact on RBPA's performance than the general level of inflation.
Over short periods of time, interest rates may not necessarily move in the same
direction or in the same magnitude as prices of goods and services.
<PAGE> 12
ITEM 2. PROPERTIES
The Bank has fourteen banking offices, of which thirteen are located in
Pennsylvania. The Bank also has a business loan center located in Delaware.
Narberth Office (1)
732 Montgomery Ave
Narberth, Pa. 19072
Philadelphia Offices
- One Penn Square West
30 South 15th Street
Philadelphia, Pa 19102
- 1340 Walnut Street
Philadelphia, Pa. 19107
- 401 Fairmount Avenue (1)
Philadelphia, Pa. 19123
Jenkintown Office (1)
600 Old York Road
Jenkintown, Pa 19046
Villanova Office
801 East Lancaster Avenue
Villanova, Pa. 19085
Shillington Office
516 East Lancaster Avenue
Shillington. Pa 19607
Trooper Office(1)
Trooper & Egypt Roads
Trooper, Pa. 19401
Reading Office
501 Washington Street
Reading, Pa. 19601
Delaware Loan Office
The Rodney Square Club
1100 North Market Street
Wilmington, Delaware 19801
King of Prussia Office
Rt. 202 at Wilson Road
King of Prussia, Pa. 19406
Bridgeport Office (1)
105 W. 4th Street
Bridgeport, Pa. 19406
Upper Merion Office
Beidler & Henderson Roads
King of Prussia, Pa. 19406
Phoenixville Office (1)
808 Valley Forge Road
Phoenixville, Pa. 19460
- -------------
(1) Owned
The Bank owns six of the above properties, of which one property is
subject to a mortgage. The remaining seven properties are leased with expiration
dates between 1999 and 2004. The Bank also leases storage warehouse space in
Bridgeport, Pa. at an annual rate of $10 thousand. During 1999, the Bank made
aggregate lease payments of approximately $304 thousand. The Bank believes that
all of its properties are attractive, adequately insured, and well maintained
and are adequate for RBPA's purposes. The Bank also owns a property located at
144 Narberth Avenue, Narberth, PA, which may serve as a site for future
expansion.
ITEM 3. LEGAL PROCEEDINGS
Management, after consulting with RBPA's legal counsel, is not aware of
any litigation that would have a material adverse effect on the consolidated
financial position of RBPA. There are no proceedings pending other than routine
litigation incident to the business of RBPA. In addition, no material
proceedings are known to be contemplated by governmental authorities against
RBPA.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE> 13
ITEM 5. MARKET FOR THE BANK'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
On September 6, 1988 the Registrant's Class A Common Stock commenced
trading on the NASDAQ National Market System (NASDAQ/NMS). The Registrant's
NASDAQ Symbol is RBPAA and is included in the NASDAQ National Market Stock Table
which is published in most major newspapers. The following table presents the
high, low and closing transaction prices on all NASDAQ/NMS securities. The
market makers for the Registrant's stock are F. J. Morrissey & Co., Inc., Ryan
Beck & Co., Inc., Herzog, Heine, Geduld, Inc., Wheat First Union Securities
Inc., Ferris Baker Watts Inc., Sandler O'Neill, and Nash Weiss. There is no
market for the Class B Common Stock, as such is prohibited by the terms of the
Class B Common Stock. The following table shows the range of high, low-end and
closing bid prices for the Registrant's stock as reported by NASDAQ
BID PRICES
<TABLE>
<CAPTION>
1999 HIGH LOW CLOSE
---- ----------- ----------- -----------
<S> <C> <C> <C>
First Quarter ...... $ 15.339 $ 14.194 $ 15.110
Second Quarter ..... 15.655 13.507 15.119
Third Quarter ...... 15.595 14.048 14.345
Fourth Quarter ..... 14.702 13.500 14.438
1998 HIGH LOW CLOSE
---- ----------- ----------- -----------
First Quarter ...... $ 19.812 $ 16.730 $ 17.611
Second Quarter ..... 19.002 16.941 17.170
Third Quarter ...... 17.743 12.134 13.736
Fourth Quarter ..... 15.453 11.676 14.881
</TABLE>
(Source: This summary reflects information supplied by NASDAQ.)
The bid information shown above is derived from statistical reports of
the NASDAQ Stock Market and reflects inter-dealer prices without retail mark-up,
mark-down or commissions and may not necessarily represent actual transaction.
The NASDAQ Stock Market, Inc., is a wholly-owned subsidiary of National
Association of Securities Dealers, Inc.
The approximate number of recorded holders of the Registrant's Class A
and Class B Common Stock, as of February 29, 2000, is shown below:
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
<S> <C>
Class A Common Stock 413
Class B Common Stock 171
</TABLE>
Because substantially all of the holders of Class B Common Stock are also
holders of Class A Common stock the number of record holders of the two classes
on a combined basis was approximately 458 as of February 29, 2000.
<PAGE> 14
DIVIDENDS
Subject to certain limitations imposed by law, the Board of Directors
of the Registrant may declare a dividend on shares of common stock.
Stock Dividends. On April 24, 1997, the Board of Directors of the
Registrant declared a 4% stock dividend on both its Class A Common Stock and
Class B Common Stock shares payable May 8, 1997, to shareholders of record on
April 28, 1997. The stock dividend resulted in the issuance of 258,176
additional shares of Class A Common Stock and 61,859 additional shares of Class
B Common Stock. On April 22, 1998, the Board of Directors of the Registrant
declared a 4% stock dividend on both its Class A Common Stock and Class B Common
Stock shares payable May 8, 1998, to shareholders of record on May 1, 1998. The
stock dividend resulted in the issuance of 272,213 additional shares of Class A
Common Stock and 63,595 additional shares of Class B Common Stock. On April 21,
1999, the Board of Directors of the Registrant declared a 4% stock dividend on
both its Class A Common Stock and Class B Common Stock shares payable May 14,
1999, to Shareholders of record on May 3, 1999. The stock dividend resulted in
the issuance of 288,728 additional shares of Class A Common Stock and 65,296
additional shares of Class B Common Stock. On October 20, 1999, the board of
directors of the Registrant declared a 5% stock dividend on both its Class a
Common stock and Class B common stock shares payable on January 17, 2000, to
shareholders of record on January 3, 2000. The stock dividend resulted in the
issuance of 382,857 additional shares of Class A common stock and 84,241
additional shares of Class B common stock. Future stock dividends, if any, will
be at the discretion of the Board of Directors and will be dependent on the
level of earnings and compliance with regulatory requirements.
Cash Dividends. The Registrant paid cash dividends in each quarter of
1999 and 1998 for holders of Class A Common Stock and for holders of Class B
common stock. This resulted in a charge to retained earnings of approximately
$7.8 million and $7.2 million for 1999 and 1998, respectively. The following
table sets forth on a quarterly basis the dividend paid to holders of each Class
A and Class B common stock for 1999 and 1998.
<TABLE>
<CAPTION>
CASH DIVIDENDS PER SHARE
1999 CLASS A CLASS B
---- ---------- -------
<S> <C> <C>
First Quarter .......................... $ .21 $ .2415
Second Quarter ......................... $ .21 $ .2415
Third Quarter .......................... $ .21 $ .2415
Fourth Quarter ......................... $ .21 $ .2415
</TABLE>
<TABLE>
<CAPTION>
CASH DIVIDENDS PER SHARE
1998 CLASS A CLASS B
---- ---------- -------
<S> <C> <C>
First Quarter .......................... $ .20 $ .2300
Second Quarter ......................... $ .20 $ .2300
Third Quarter .......................... $ .20 $ .2300
Fourth Quarter ......................... $ .21 $ .2415
</TABLE>
Future dividends must necessarily depend upon net income, capital
requirements, appropriate legal restrictions and other factors relevant at the
time the Board of Directors of the Registrant considers dividend policy. Cash
dividends available for dividend distributions to the shareholders of the
Registrant must initially come from dividends paid by the Bank to the
Registrant. Therefore, the restrictions on the Bank's dividend payments are
directly applicable to the Registrant. Under the Pennsylvania Banking Code of
1965, as amended, a restriction is placed on the availability of capital surplus
for payment of dividends by the Bank.
<PAGE> 15
Under the Pennsylvania Business Corporation Law of 1988, as amended,
the Registrant may pay dividends only if after payment the Registrant would be
able to pay its debts as they become due in the usual course of business and the
total assets are greater than the sum of its total liabilities plus the amount
that would be needed if the Registrant were to be dissolved at the time of the
dividend to satisfy the preferential rights upon dissolution of shareholders
whose preferential rights are superior to those receiving the dividend. See Note
Q to the Consolidated Financial Statements in Item 8 of this report.
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial and operating information
for RBPA should be read in conjunction with ITEM 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and accompanying notes in ITEM 8.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
------------------------------------------------------------------
INCOME STATEMENT DATA 1999 1998 1997 1996 1995
- ----------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest income ........................... $ 44,682 $ 40,640 $ 33,372 $ 33,618 $ 29,755
Interest expense .......................... 15,922 13,163 10,048 10,054 9,592
-------- -------- -------- -------- --------
Net interest income ....................... 28,760 27,477 23,324 23,564 20,163
Increase (Decrease) Provision for loan
losses .................................... -- 4,770 (2,118) (1,488) --
-------- -------- -------- -------- --------
Net interest income after loan loss
provision ................................. 28,760 22,707 25,442 25,052 20,163
Gain on sale of loans ................. 45 4 29 427 86
Gain/Loss on real estate .............. 350 -- 1,204 2,016 870
Other income .......................... 1,644 3,570 1,392 1,788 1,098
-------- -------- -------- -------- --------
Total other income ........................ 2,039 3,574 2,625 4,231 2,054
Income before other expenses & income taxes 30,799 26,281 28,067 29,283 22,217
Non-interest expenses:
Salaries .............................. 7,265 5,028 9,546 9,602 4,850
Other ................................. 5,865 5,845 5,088 5,537 5,461
-------- -------- -------- -------- --------
Total other expenses ...................... 13,130 10,873 14,634 15,139 10,311
-------- -------- -------- -------- --------
Income before taxes ....................... 17,669 15,408 13,433 14,144 11,906
Income taxes .............................. 5,564 4,624 4,074 3,907 3,648
-------- -------- -------- -------- --------
Net income ................................ $ 12,105 $ 10,784 $ 9,359 $ 10,237 $ 8,258
======== ======== ======== ======== ========
Basic earnings per share (1) .............. $ 1.21 $ 1.09 $ .95 $ 1.06 $ .88
-------- -------- -------- -------- --------
Diluted earnings per share (1) ............ $ 1.19 $ 1.07 $ .94 $ 1.03 $ .85
-------- -------- -------- -------- --------
</TABLE>
(1) Earnings per share has the weighted average number of shares used in the
calculation adjusted to reflect a 5% stock dividend in 2000, a 4% stock dividend
in 1999, a 4% stock dividend in 1998, a 4% stock dividend in 1997, a 6% stock
dividend in 1996, and a 6% stock dividend in 1995.
<TABLE>
<CAPTION>
BALANCE SHEET DATA 1999 1998 1997 1996 1995
- ------------------------ -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Total assets $522,536 $427,622 $416,598 $355,149 $356,264
Total average assets 469,193 407,623 342,361 343,360 312,823
Loans, net 343,081 292,556 282,711 209,017 198,419
Total deposits 381,286 290,390 265,363 254,183 268,242
Total long term debt 30,000 30,365 31,063 4,814 2,984
Total stockholders' equity 95,835 94,069 89,505 84,581 77,189
Total average stockholders' equity 94,824 91,374 86,572 80,910 74,091
Return on average assets 2.6% 2.6% 2.7% 3.0% 2.6%
Return on average equity 12.8% 11.8% 10.8% 12.7% 11.1%
Average equity to average assets 20.3% 22.4% 25.3% 23.6% 23.7%
Cash dividend payout ratio 64.9% 66.6% 56.7% 19.2% 11.4%
</TABLE>
<PAGE> 17
AVERAGE BALANCES
The following table presents the average daily balances of assets,
liabilities and stockholders' equity and the respective interest paid on
interest bearing assets and interest bearing liabilities, as well as average
rates for the periods indicated:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------- ----------------------------- -----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
ASSETS (In thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- --------------------- ------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest bearing deposits in
banks ....................... $ 430 $ 16 3.72% $ 505 $ 24 4.75% $ 1,230 $ 87 7.10%
Federal funds ............... 11,345 558 4.92% 25,210 1,372 5.44% 17,921 1,012 5.64%
Investment securities:
Held to maturity:
Taxable ............ 78,251 5,726 7.32% 46,946 3,228 6.88% 84,399 5,604 6.64%
Nontaxable (1) ..... 694 82 11.82% 3,098 314 10.14% 1,455 169 11.63%
----------------------------- ----------------------------- -----------------------------
Total held
to maturity ...... 78,945 5,808 7.36% 50,044 3,542 7.08% 85,854 5,773 6.72%
Available for sale
Taxable ........... 51,617 4,512 8.74% 27,419 2,296 8.37% 12,212 991 8.12%
----------------------------- ----------------------------- -----------------------------
Total investment
securities ............ 130,562 10,320 7.90% 77,463 5,838 7.54% 98,066 6,764 6.90%
Loans: (2)
Commercial & industrial . 139,639 15,374 11.01% 116,823 13,783 11.80% 111,704 12,297 11.01%
Commercial mortgages .... 170,282 17,131 10.06% 170,690 18,279 10.71% 87,464 11,658 13.33%
Other loans (1) ......... 10,623 1,311 12.34% 12,403 1,451 11.70% 14,200 1,782 12.55%
----------------------------- ----------------------------- -----------------------------
Total loans ..... 320,544 33,816 10.55% 299,916 33,513 11.17% 213,368 25,737 12.06%
----------------------------- ----------------------------- -----------------------------
Total interest earning assets $462,881 $ 44,710 9.66% $403,094 $ 40,747 10.11% $330,585 $ 33,600 10.16%
Non interest earning assets
Cash & due from banks 8,775 8,717 6,636
Other assets 17,159 15,843 17,366
Allowance for loan loss (12,186) (10,313) (8,764)
Def income/unearned disc (7,436) (9,718) (3,462)
-------- -------- --------
Total non interest
Earning assets 6,312 4,529 11,776
-------- -------- --------
Total assets $469,193 $407,623 $342,361
======== ======== ========
LIABILITIES & STOCKHOLDERS'
EQUITY
Deposits:
Savings $ 19,932 538 2.70% $ 18,214 $ 514 2.82% $ 16,668 $ 454 2.72%
NOW & Money Market 75,289 2,123 2.82% 79,975 2,174 2.72% 69,077 2,171 3.14%
CDs & other time deposits 192,545 11,356 5.90% 142,206 8,479 5.96% 121,934 7,185 5.89%
----------------------------- ------------------------------ ------------------------------
Total interest bearing
deposits $287,766 14,017 4.87% $240,395 $11,167 4.65% $207,679 $ 9,810 4.72%
Federal funds 61 3 4.92% 90 4 4.44% 123 6 5.00%
Long term borrowings 30,869 1,902 6.16% 31,611 1,992 6.30% 3,066 231 7.54%
----------------------------- ------------------------------ ------------------------------
Total interest bearing
liabilities $318,696 15,922 5.00% $ 272,096 $13,163 4.84% $210,868 $ 10,047 4.76%
----------------------------- ------------------------------ ------------------------------
Non interest bearing
deposits 42,829 29,691 32,992
Other liabilities 12,844 14,462 11,929
-------- -------- --------
Total liabilities 374,369 316,249 255,789
Stockholders' equity 94,824 91,374 86,572
-------- -------- --------
Total liabilities and
Stockholders' equity $469,193 $407,623 $342,361
======== ======== =======
Net interest income $ 28,788 $ 27,584 $ 23,553
======== ======== ========
Net yield on interest earning 6.22% 6.84% 7.12%
assets ======== ======== ========
</TABLE>
(1) The indicated income and annual rate are presented in a taxable
equivalent basis using the federal tax rate of 34% for all periods.
(2) Nonaccruing loans have been included in the appropriate average loan
balance category, but interest on these loans has not been included.
<PAGE> 18
RATE VOLUME
The following table sets forth a rate/volume analysis, which segregates
in detail the major factors contributing to the change in net interest income
for the years ended, December 31, 1999 and 1998, as compared to respective
previous periods, into amounts attributable to both rate and volume variances.
<TABLE>
<CAPTION>
1999 VS 1998 1998 VS 1997
(IN THOUSANDS) (IN THOUSANDS)
------------------------------ --------------------------------
CHANGES DUE TO: CHANGES DUE TO:
--------------------- ----------------------
INTEREST INCOME VOLUME RATE TOTAL VOLUME RATE TOTAL
- --------------- ------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits in banks ..... $ (12) $ (12) $ (24) $ (40) $ (23) $ (63)
Federal funds sold ..................... (277) (521) (798) 689 (329) 360
Investment securities:
Held to maturity:
Taxable ....................... 2,279 220 2,499 (2,569) 193 (2,376)
Nontaxable .................... (276) 43 (233) 169 (24) 145
Available for sale
Taxable ...................... 2,111 105 2,216 1,272 33 1,305
------------------------------- -------------------------------
Total investment securities ...... 4,114 368 4,482 (1,128) 202 (926)
Loans:
Commercial & industrial ............ 2,558 967 1,591 579 907 1,486
Commercial mortgages ............... (44) (1,104) (1,148) 9,286 (2,665) 6,621
Other loans ........................ (217) 77 (140) (216) (115) (331)
------------------------------- -------------------------------
Total loans ................ 2,297 (1,994) 303 9,649 (1,873) 7,776
------------------------------- -------------------------------
Total increase (decrease) in interest
income ................................. $ 6,122 $(2,159) $ 3,963 $ 9,170 $(2,023) $(7,147)
INTEREST EXPENSE
Deposits:
Savings .............................. $ 47 $ (23) $ 24 $ 43 $ 17 $ 60
NOW & Money Market ................... (130) 79 (51) 318 (315) 3
CDs & other time deposits ............ 2,970 (93) 2,877 1,208 268 28
------------------------------- -------------------------------
Total interest bearing deposits 2,887 (212) 2,850 1,569 (212) 1,357
Federal funds purchased ................ (1) -- (1) (2) -- (2)
Mortgage payable and
long term borrowings ... (46) (44) (89) 1,805 (44) 1,761
------------------------------- -------------------------------
Total increase (decrease) in interest
expense ................................ 2,840 (80) 2,760 3,372 (256) 3,116
------------------------------- -------------------------------
Total increase (decrease) in
net interest income .............. $ 3,282 $(2,079) $ 1,203 $ 5,798 $(1,767) $ 4,031
=============================== ===============================
</TABLE>
<PAGE> 19
LOANS
The following table reflects the composition of the loan portfolio of
Royal Bank of Pennsylvania and the percent of gross outstandings represented by
each category at the dates indicated.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
(IN THOUSANDS)
--------------------------------------------------------------------------------------------------------
Loans 1999 1998 1997 1996 1995
- ----- -------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Comm'l & industrial $168,329 46% $127,972 42% $123,800 41% $116,616 55% $124,065 61%
Real estate 191,312 53% 182,595 57% 176,315 58% 93,925 44% 75,758 37%
Consumer 2,653 1% 2,033 1% 1,523 1% 2,097 1% 3,352 2%
-------- --- -------- --- -------- --- -------- --- -------- ---
Total gross loans 362,294 100% 312,600 100% 301,638 100% 212,638 100% 203,175 100%
Unearned income (2,154) (1,833) (1,498) (1,290) (1,160)
Disc on loans purchased (5,322) (6,291) (9,243) (2,331) (3,596)
-------- -------- -------- -------- --------
354,818 304,476 290,897 209,017 198,419
Allowance for loan loss (11,737) (11,920) (8,186) (9,084) (9,747)
-------- -------- -------- -------- --------
Total loans, net $343,081 $292,556 $282,711 $199,933 $188,672
======== ======== ======== ======== ========
</TABLE>
ANALYSIS OF ALLOWANCE FOR LOAN LOSS
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
(IN THOUSANDS)
---------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total Loans ........................... $ 354,818 $ 304,476 $ 290,897 $ 209,017 $ 198,419
========= ========= ========= ========= =========
Daily average loan balance ............ $ 320,544 $ 299,916 $ 213,368 $ 200,618 $ 185,734
========= ========= ========= ========= =========
Allowance for loan loss:
Balance at the beginning of the year $ 11,920 $ 8,186 $ 9,084 $ 9,747 $ 8,992
Charge offs by loan type:
Commercial .................... 1,062 1,501 762 843 292
Real estate .................. 13 135 -- 240 21
--------- --------- --------- --------- ---------
Total charge offs .................. 1,075 1,636 762 1,083 313
Recoveries by loan type:
Commercial ................... 850 540 1,934 1,790 125
Individual ................... 35 -- -- -- --
Real estate .................. 7 60 48 118 31
--------- --------- --------- --------- ---------
Total recoveries .................. 892 600 1,982 1,908 156
--------- --------- --------- --------- ---------
Net loan charge offs .............. 183 1,036 (1,220) (825) 157
Purchase of Knoblauch Bank ... -- -- -- -- 912
Increase (decrease) in
Provision for loan loss.. -- 4,770 (2,118) (1,488) --
--------- --------- --------- --------- ---------
Balance at end of year ................ $ 11,737 $ 11,920 $ 8,186 $ 9,084 $ 9,747
========= ========= ========= ========= =========
Net charge offs to average loans ...... .06% .35% (0.57%) (0.41%) 0.08%
========= ========= ========= ========= =========
Allowance to total loans at year end .. 3.31% 3.91% 4.35% 4.35% 4.91%
========= ========= ========= ========= =========
</TABLE>
The allowance for loan losses is established through provisions for
loan losses based on management's on-going evaluation of the risks inherent in
the Company's loan portfolio. Factors considered in the evaluation process
include growth of the loan portfolio, risk characteristics of the types of loans
in the portfolio, geographic and large borrower concentrations, current regional
economic and real estate market conditions that could affect the ability of
borrowers to pay, the value of underlying collateral, and trends in loan
delinquencies and charge-offs.
<PAGE> 20
The company utilizes an internal rating system to monitor and evaluate
the credit risk inherent in its loan portfolio. All loans approved by the loan
committee, executive board committee and the Board of Directors are initially
assigned a rating of pass. The loan review officer, Vice President of Special
Assets and the loan review committee are expected to recommend changes in loan
ratings when facts come to their attention that warrant an upgrade or downgrade
in a loan rating. Problem and potential problem assets are assigned the three
lowest ratings. Such ratings coincide with the "Substandard", "Doubtful" and
"Loss" classifications used by federal regulators in their examination of
financial institutions. Generally, an asset is considered Substandard if it is
inadequately protected by the current net worth and paying capacity of the
obligors and/or the collateral pledged. Substandard assets have a well-defined
weakness or weaknesses that jeopardize the liquidation of the debt. Assets
classified as Doubtful have all the weaknesses inherent in those classified
Substandard with the added characteristics that the weaknesses present make
collection or liquidation in full, on the basis of currently existing facts,
highly questionable and improbable. Assets classified as Loss are those
considered uncollectable and of such little value that their continuance as
assets is not warranted. On a regular basis, the Loan Review Officer and senior
management review the status of each loan.
While the Company believes that it has established an adequate
allowance for loan losses, there can be no assurance that the regulators, in
reviewing the Company's loan portfolio, will not request the company to
materially increase its allowances for loan losses. Although management believes
that adequate specific and general loan loss allowances have been established,
actual losses are dependant upon future events and, as such, further additions
to the level of specific and general loss allowances could become necessary.
<PAGE> 21
LOANS AND LEASE FINANCING RECEIVABLES
The following table summarizes the loan portfolio by loan category and
amount that corresponds to the appropriate regulatory definitions.
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
(IN THOUSANDS)
--------------- -- ----------------- ---- ---------------
1999 1998 1997
--------------- ----------------- ---------------
<S> <C> <C> <C>
Loans secured by real estate
Construction and land development $50,210 $35,571 $29,172
Secured by farmland (including farm residential and other
improvements) -- - - --
Secured by 1-4 family residential properties:
Revolving, open-end loans secured by 1-4 family residential
properties and extended under lines of credit 8,341 7,648 11,433
All other loans secured by 1-4 family residential properties:
Secured by first liens 15,458 17,836 23,139
Secured by junior liens 6,010 6,131 8,195
Secured by multi family (5 or more) residential properties 19,021 20,386 23,459
Secured by nonfarm nonresidential properties 237,247 198,225 177,196
Commercial and industrial loans to US addresses 21,090 24,362 25,820
Loans to individuals for household, family, and other personal
expenditures 4,252 1,206 1,478
Obligations of state and political subdivisions in the US 411 1,149 1,593
All other loans 254 87 154
Less: Any unearned income on loans listed above 7,476 8,125 10,742
--------------- ----------------- ---------------
Total loans and leases, net of unearned income $354,818 $304,476 $290,897
=============== ================= ===============
</TABLE>
CREDIT QUALITY
The following table presents the principal amounts of nonaccruing loans and
other real estate.
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
(IN THOUSANDS)
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Non-accruing loans (1)(2) $1,209 $3,419 $4,317 $4,653 $6,233
Past due loans over 90 days but still
accruing -- -- -- -- 391
------------ ------------ ------------ ------------ -------------
Total nonperforming loans 1,209 3,419 4,317 4,653 6,624
Other real estate 19 707 -- 504 612
------------ ------------ ------------ ------------ -------------
Total nonperforming assets $1,228 $4,126 $4,317 $5,157 $7,236
============ ============ ============ ============ =============
Nonperforming assets to total assets 0.23% 0.96% 1.04% 1.45% 2.03%
============ ============ ============ ============ =============
Nonperforming loans to total loans 0.33% 1.09% 1.43% 2.19% 3.34%
============ ============ ============ ============ =============
Allowance for loan loss
to nonperforming loans 970.80% 348.64% 189.62% 195.23% 147,15%
============ ============ ============ ============ =============
</TABLE>
(1) Generally a loan is placed on nonaccruing status when it has been delinquent
for a period of 90 days or more unless the loan is both well secured and in the
process of collection.
(2) If interest had been accrued on these nonaccruing loans, such income would
have approximated $108,832 for 1999, $307,744 for 1998, $388,517 for 1997,
$418,740 for 1996, and $1,889,000 for 1995.
<PAGE> 22
INVESTMENTS SECURITIES
The contractual maturity distribution and weighted average rate of the
investments held to maturity portfolio at December 31, 1999 are presented in the
following table. Weighted average rate on tax-exempt obligations have been
computed on a fully taxable equivalent basis assuming a tax rate of 34%.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
------------------------------------------------------------------------------------------------------------
AFTER 1 YEAR BUT AFTER 5 YEARS, BUT
SECURITIES HELD WITHIN 1 YEAR WITHIN 5 YEARS WITHIN 10 YEARS AFTER 10 YEARS TOTAL
TO MATURITY AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
- ------------ ------ ---- ------ ---- ------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
US Treasuries
and agencies $ 4,584 6.9% $ 601 5.6% $ 566 7.5% $ 862 7.0% $ 6,613 6.8%
Other securities 13,230 6.9% 48,162 7.5% 11,113 8.5% 3,947 6.4% 76,452 7.1%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total $17,814 6.9% $48,763 7.5% $11,679 8.5% $ 4,809 6.5% $83,065 7.1%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
The following tables presents the consolidated book values and
approximate market value at December 31, 1999, 1998, and 1997, respectively, for
each major category of RBPA's investment securities portfolio for held to
maturity securities and available for sale securities.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
(IN THOUSANDS)
1999 1998 1997
--------------------- --------------------- ---------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
SECURITIES HELD TO MATURITY COST VALUE COST VALUE COST VALUE
- --------------------------- ---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
State & political subdivisions $ -- $ -- $3,098 $3,128 $3,098 $3,152
US Treasuries & agencies 6,614 6,623 4,532 4,660 12,908 13,096
Other securities 76,451 74,871 54,264 54,372 48,365 48,737
------- ------- ------- ------- ------- -------
Total $83,065 $81,494 $61,894 $62,160 $64,371 $64,985
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
(IN THOUSANDS)
1999 1998 1997
--------------------- --------------------- ---------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
SECURITIES AVAILABLE FOR SALE COST VALUE COST VALUE COST VALUE
- ----------------------------- ---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Federal Home Loan Bank stock $3,170 $3,170 $3,170 $3,170 $3,174 $3,174
Preferred and common stock 3,727 3,537 2,867 2,919 2,944 2,977
Other securities 55,652 52,778 29,031 30,863 13,964 14,897
------- ------- ------- ------- ------- -------
Total $62,549 $59,485 $35,068 $36,952 $20,082 $21,048
======= ======= ======= ======= ======= =======
</TABLE>
<PAGE> 23
DEPOSITS
The average balance of deposits by major classifications for each of
the last three years is presented in the following table.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
(IN THOUSANDS)
1999 1998 1997
-------------------- ---------------------- ----------------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
<S> <C> <C> <C> <C> <C> <C>
Demand deposits:
Non interest bearing $42,829 -- $29,691 -- $32,992 --
Interest bearing (NOW) 31,480 2.22% 27,138 2.25% 24,539 2.50%
Money market deposits 43,809 3.25% 52,837 3.30% 44,538 3.50%
Savings deposits 19,932 2.70% 18,214 2.82% 16,668 2.72%
Certificate of deposit 192,545 5.90% 142,206 5.96% 121,934 5.89%
------- ---- ------- ---- ------- ----
Total deposits $330,595 $270,086 $240,671
======= ======= =======
</TABLE>
The remaining maturity of Certificates of Deposit of $100,000 or greater.
<TABLE>
<CAPTION>
AT DECEMBER 31,
(IN THOUSANDS)
MATURITY 1999 1998
---- ----
<S> <C> <C>
Three months or less $11,623 $4,607
Over three months through twelve months 10,360 7,465
Over twelve months through five years 85,311 20,909
Over five years 18,823 15,773
------- ------
Total $126,117 $48,754
======== =======
</TABLE>
SHORT AND LONG TERM BORROWINGS
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
(IN THOUSANDS)
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Short term borrowings (1) $ -- $ -- $15,000 $ -- $ --
Long term borrowings:
Mortgage payable (2) 480 527 571 613 652
FHLB advances (3) 30,000 30,365 31,063 4,201 2,332
------- ------- ------- ------- -------
Total long term borrowings $30,480 $30,892 $46,634 $ 4,814 $ 2,984
======= ======= ======= ======= =======
</TABLE>
(1) In 1997, short-term borrowings consisted of federal funds purchased which
matured within one to four days from the transaction date.
(2) The mortgage payable is payable to a bank at 65% of prime rate (5.525% at
December 31, 1999) and is guaranteed by an industrial development authority.
(3) Advances from the Federal Home Loan Bank of Pittsburgh consist of one
advance with an interest rates of 6.24%, and matures on December 23, 2002.
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and
results of operations should be read in conjunction with the Consolidated
Financial Statements of RBPA (see Item 8) and related notes included herein.
FINANCIAL CONDITION
Total assets increased $94.9 million, or 22%, to $522.5 million at
December 31, 1999 from $427.6 million at year end 1998, primarily due to growth
experienced in loans and investment securities during 1999 of $50.3 million and
$43.7 million, respectively, partially offset by a $1.5 million decrease in cash
and cash equivalents.
Cash and Cash Equivalents. Cash and cash equivalents are comprised of
cash on hand, and cash in interest bearing and non interest bearing accounts in
banks, in addition to federal funds sold. Cash and cash equivalents decreased
$1.5 million, or 8%, to $17.7 million at December 31, 1999, primarily due to
growth in loans and investment securities during 1999. The average balance of
cash and cash equivalents was $20.5 million for 1999 versus $34.4 million for
1998 which indicates that cash and cash equivalents were more efficiently
deployed in higher earning assets during 1999.
Investment Securities Held to Maturity. Held to maturity investment
securities ("HTM") represents approximately 17% of average earning assets during
1999 and are comprised of primarily corporate debt securities of investment
grade quality, at the time of purchase. During 1999, HTM securities increased
$21.2 million from $61.9 million at December 31, 1998 to $83.1 million at
December 31, 1999.
Investment Securities Available for Sale. Available for sale securities
("AFS") represent 11% of average earning assets during 1999 and are primarily
comprised of capital trust security issues of regional banks and foreign
corporate bonds. At December 31, 1999, AFS investment securities were $59.5
million while they were $37 million at December 31, 1998, an increase of $22.5
million.
Loans. RBPA's primary earning assets are loans, representing
approximately 69% of average earning assets during 1999. The loan portfolio has
historically been comprised primarily of business demand loans and commercial
mortgages in roughly equal amounts, and to a significantly lesser extent,
consumer loans comprised of one to four family residential and home equity
loans. This composition of loans did not change during 1999. During 1999, total
loans increased 16% from $304.5 million at December 31, 1998 to $354.8 million
at December 31, 1999 primarily due to internally generated loan growth and loan
purchases.
Deposits. RBPA's primary source of funding, deposits, increased $90.9
million, or 31%, from $290.4 million at December 31, 1998 to $381.3 million at
December 31, 1999. This increase in deposits is primarily due to an increase of
$86.1 million in certificates of deposits, or 56% from December 31, 1998. This
increase in certificate of deposits is primarily due to the increase in brokered
deposits during 1999. At December 31, 1999 brokered deposits were $107.7 million
as compared to $12.1 million at December 31, 1998. Other deposit categories
comprised of NOW and money market, and savings deposits increased .4% during
1999 over their levels at December 31, 1998.
<PAGE> 25
Borrowings. Borrowings are comprised of long term borrowings (advances,
mortgage) and short term borrowings (overnight borrowings). Long term borrowings
decreased $.4 million to $30.5 million at December 31, 1999 primarily due to a
scheduled maturity of a Federal Home Loan Bank ("FHLB") advance in December,
1999, and scheduled amortization of the mortgage payable. The average balance of
long term borrowings and mortgages during 1999 was $30.9 million versus $31.6
million for 1998.
Stockholders' Equity. Stockholders' equity increased $1.8 million or 2%
in 1999 to $95.8 million primarily due to net income of $12.1 million partially
offset by $7.8 million in cash dividends paid in 1999. Additionally,
stockholders equity was effected by the decline in market value of AFS
investment securities during 1999, which resulted in a downward adjustment of
$3.3 million.
RESULTS OF OPERATIONS
General. RBPA's results of operations depend primarily on net interest
income, which is the difference between interest income on interest earning
assets and interest expense on interest bearing liabilities. Interest earning
assets consist principally of loans and investment securities, while interest
bearing liabilities consist primarily of deposits. Net income is also effected
by the provision for loan losses and the level of non-interest income as well as
by non-interest expenses, including salary and employee benefits, occupancy
expenses and other operating expenses.
Net Income. Net income in 1999 was $12.1 million as compared to $10.8
million in 1998 and, $9.4 million in 1997. Basic earnings per share were $1.21,
$1.09 and $0.95 for 1999, 1998, and 1997, respectively. The $1.3 million
increase in net income for 1999 represents a 12% increase over the 1998 and is
primarily attributable to the increase in interest income relating to the
investment security portfolio. The increase in net income of $1.4 million or 15%
in 1998 over 1997 is primarily due to an increase in net interest income,
primarily attributable to the growth in average loans and the acquisition of
higher yielding investment securities during 1998.
Net Interest Income. Net interest income is affected by market and
economic conditions, which influence rates on loan and deposit growth. Net
interest income was $28.8 million in 1999, compared to $27.5 million in 1998,
and $23.3 million in 1997. This increase in net interest income is primarily due
to the increase in interest income relating to the increase in loans and
investment securities during 1999, while the yield on interest earning assets
decreased 45 basis points to 9.66% from 10.11% for 1998. In 1998, yields on
interest earning assets decreased slightly to 10.11% from 10.16% in 1997, a
difference of 5 basis points. In 1999, average interest earning assets increased
$59.8 million to $462.9 million from the 1998 level. This increase in average
interest earning assets in 1999 is due to growth in average investment
securities and loans of $53.1 million and $20.6 million, respectively. In 1998
average interest earning assets increased to $403.1 million from $330.6 million
in 1997, primarily due to the purchase of a $75 million loan portfolio in
December 1997. In 1999 rates on interest bearing liabilities increased to 5.00%
from 4.84% level in 1998 as overall rates increased during the year. Average
interest bearing liabilities increased to $318.7 million in 1999 from $272.1
million in 1998. This increase in the rates is primarily due to the increase in
higher costing brokered deposits in 1999. In 1998, rates on interest bearing
liabilities increased to 4.84% versus 4.76% in 1997. Rates on interest bearing
deposits increased primarily due to higher costing certificates of deposits in
1998. Additionally, other borrowings also contributed to this increase due to
the addition of a $30 million FHLB advance in December 1997 at an annual rate of
6.24% for a term of five years.
<PAGE> 26
LOANS AND MORTGAGES
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Average loan outstandings $320,544,000 $299,916,000 $213,368,000
Interest and fees on loans $ 33,816,000 $ 33,513,000 $ 25,737,000
Average Yield 10.55% 11.17% 12.06%
</TABLE>
RBPA continues to originate primarily five year fixed rate loans, while
a portion of the loan portfolio continues to be comprised of variable rate loans
which helps to a degree to maintain its interest spread when rates change. At
December 31, 1999 variable rate loans represented approximately 44% of loans.
In 1999, the average balance of loans increased $20.6 million to $320.5
million primarily due to purchases and internally generated loan growth.
However, the average yield on loans decreased 62 basis points in 1999 primarily
due to new loans generally repricing downwards as the Bank's average prime rate
for 1999 declined 21 basis points to 7.98% from the 8.19% average prime rate for
1998.
In 1998, RBPA's average prime rate decreased to 8.19% in 1998 from
8.43% in 1997, which contributed to the 89 basis point decline in the yield on
loans from a yield of 12.06% in 1997 to a yield of 11.17% for 1998. The average
balance of loans increased $86.5 million to $299.9 million in 1998 primarily due
to the purchase of the FDIC loan portfolio in December 1997 in addition to
internally generated loan growth during 1998.
INVESTMENTS SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Average HTM investment securities $78,945,000 $50,044,000 $85,854,000
Interest income $ 5,808,000 $ 3,542,000 $ 5,773,000
Average yield 7.36% 7.08% 6.72%
</TABLE>
HTM investment securities are comprised primarily of taxable corporate
debt issues and to a lesser extent, US Treasuries and agencies, and non-taxable
state and municipal investment securities. The corporate debt issues are
investment grade at the time of purchase, with maturities in the three to six
year range. It is RBPA's expressed intention to hold these securities to
maturity, as has been the established investment policy.
In 1999, the yield on HTM investment securities increased 28 basis
points to 7.36% from 7.08% for 1998. This increase is primarily due to the
purchase of higher yielding corporate debt securities primarily during the first
six months of 1999.
In 1998 the yield in HTM investment securities increased 35 basis
points to 7.08% from 6.73% in 1997. This increase is partially attributable to a
24 basis point increase in yield on taxable investment securities in 1998,
primarily due to the purchase of higher yielding corporate debt securities and
the maturity of lower yielding securities during the year. However, the average
balance of HTM investment securities decreased $35.8 million to $50 million in
1998 as scheduled maturities outpaced purchases.
<PAGE> 27
INVESTMENTS SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Average AFS investment securities $51,617,000 $27,419,000 $12,212,000
Interest and dividend income $ 4,512,000 $ 2,296,000 $ 991,000
Average yield 8.74% 8.37% 8.12%
</TABLE>
AFS investment securities are comprised primarily of non-rated capital
trust security issues of regional banks, rated foreign corporate debt
securities, and to a lesser extent preferred and common stock.
In 1999, the average balance of AFS investment securities increased
$24.2 million to $51.6 from the $27.4 million level in 1998, representing 11% of
average earning assets. This increase is due to the purchase of additional
capital trust investment securities, in addition to foreign corporate debt,
which lifted the overall yield of AFS investment securities 37 basis point to
8.74% for 1999.
In 1998, the average balance increased $15.2 million to $27.4 million,
primarily due to the purchase of capital trust securities. In 1997 the average
balance increased $8.5 million to $12.2 million, primarily due to the purchase
of capital trust securities, and an increase in the FHLB stock position.
INTEREST EXPENSE ON NOW AND MONEY MARKET DEPOSITS
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Average NOW & Money Market deposits $75,289,000 $79,975,000 $69,077,000
Interest expense $ 2,123,000 $ 2,174,000 $ 2,171,000
Average cost of funds 2.82% 2.72% 3.14%
</TABLE>
In 1999 the average cost of funds on NOW and money market deposits
increased 10 basis points to 2.82% from 2.72, as 1999 saw overall rates
increase. In 1998 the average cost of funds on NOW and money market deposits
decreased 42 basis points to 2.72% as interest rates decreased slightly in 1998
while the average balance increased $10.9 million.
INTEREST EXPENSE ON TIME DEPOSITS
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Average time deposits $192,545,000 $142,206,000 $121,934,000
Interest expense $ 11,356,286 $ 8,479,000 $ 7,185,000
Average cost of funds 5.90% 5.96% 5.89%
</TABLE>
In 1999, the average balance of time deposits increased $50.3 million
to $192.6 million. This growth in time deposits was due to the increase in the
use of higher costing brokered deposits in 1999 as compared to 1998. At December
31, 1999 brokered deposits was $107.7 million as compared to $12.1 million at
December 31, 1998, an increase of $95.5 million. In 1998, the average balance
and the cost of funds of time deposits increased $20.3 million and 7 basis
points, respectively, to $142.2 million and a rate of 5.96% primarily due to
addition of brokered deposits during the year.
Although rates in general started to move upward in 1999, the reaction
of deposits to rate changes (both increases and decreases) is slower than the
change in the prime rate because these time deposits must mature before a rate
adjustment would become effective. In 1999, 33% of time deposits were comprised
of certificates of deposits accounts with balances of $100,000 or more, while in
1998, 17% of time deposits were comprised of certificates of deposit accounts
with balances of $100,000 or more. These types of
<PAGE> 28
deposit have traditionally been considered more rate volatile than other types
of deposits, however at Royal Bank the penalty for early redemption somewhat
mitigates this volatility.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for loan losses is an amount charged to expense to
provide for future losses on existing loans. In order to determine the amount of
the provision for loan loss, RBPA conducts a quarterly review of the loan
portfolio to evaluate overall credit quality. This evaluation consists of an
analysis of individual loans and overall risk characteristics and size of the
loan, and takes into consideration current economic and market conditions,
changes in non-performing loans, the capability of specific borrowers to repay
loan obligations as well as current collateral values.
In 1999, no provision for loan losses was recorded as compared to $4.8
million in 1998 due to senior management deeming the level of loan loss reserve
to be adequate. Net charge-offs in 1999 were $.2 million as compared to $1
million for 1998, a decrease of $.8 million.
During 1998, RBPA recorded a provision for loan loss of $4.8 million,
as compared to a $2.1 million (credit) was recorded in 1997, an increase of $6.9
million. This increase can be attributed to the increase in loan growth during
1998, a $.9 million increase in charge-offs in 1998, and a negative provision
(credit) recorded in 1997, primarily due to recoveries exceeding charge-offs.
Net charge-offs were $1 million in 1998, an increase of $2.2 million from 1997
primarily due to recoveries exceeding charge-offs in 1997 by $1.2 million.
The allowance for possible loan loss at December 31, 1999 was $11.7
million, or 3.3% of net loans as compared to $11.9 million at December 31, 1998
or 3.9% of net loans, and $8.2 million at December 31, 1997, or 2.8% of net
loans.
NON-INTEREST INCOME
Non-interest income includes service charges on depositors' accounts,
safe deposit rentals and various services such as cashing checks, issuing money
orders and travelers checks, and redeeming US savings bonds and similar
activities. Most components of non-interest income are a modest and stable
source of income, with exceptions of one-time gains and losses from the sale of
other real estate owned, from period to period these sources of income may vary
considerably. Service charges on depositors' accounts, safe deposit rentals and
other fees are periodically reviewed by Management to remain competitive with
other local banks.
In 1999, non-interest income decreased $1.5 million to $2 million as
compared to $3.6 million for 1998. This decrease is primarily due to a one-time
$2.3 million income recorded in 1998, partially offset by receipt of $.5 million
income received in 1999 relating to the refund of Pennsylvania Shares tax from
the State of Pennsylvania. Additionally, gains on the sale of other real estate
was $.3 million as compared to $-0- for 1998.
Non-interest income increased $.9 million to $3.6 million in 1998 from
$2.6 million in 1997. This increase was primarily due to a $2.3 million increase
in other income, the result of a reversal of a legal accrual relating to the
settlement of litigation in 1998. This increase in other income was partially
offset by a $1.2 million decrease in gains on sale of other real estate in 1998,
and a $.2 million decrease in income relating to service charges.
<PAGE> 29
NON-INTEREST EXPENSE
Non-interest expense includes compensation and employee benefits,
occupancy, advertising, FDIC insurance, state taxes, depreciation, and other
expenses such as auditing, automatic teller machines (ATMs), data processing,
legal, outside service charges, postage, printing, and other expenses relating
to other real estate owned.
In 1999, non-interest expense increased $2.3 million to $13.1 million
from $10.9 million in 1998. This increase is primarily due to a $2.3 million
credit adjustment recorded in 1998, which is primarily attributable to the
accrual for the Stock Option and Appreciation Right Plan. Occupancy expense
decreased $.1 million in 1999 to $.6 million, while other operating expense
increased $.1 million, or 2% from $5.1 million in 1998 to $5.2 million in 1999.
Non-interest expense decreased $3.7 million in 1998 to $10.9 million
from $14.6 million for 1997. This decrease is primarily due to a $4.5 million
decrease in salaries and employee benefits, partially offset by $.8 million
increase in other operating expense. The decrease in salaries and employee
benefits is primarily related to fluctuation in the accrual for the Stock Option
and Appreciation Right Plan for 1998 and 1997.
RBPA has a Stock Option and Appreciation Right Plan, which provides
employees compensation in the form of options to purchase shares of the
Company's common stock. The reserve for future stock option expense is
reflective of the RBPA's stock price at December 31, of every year. Stock price
volatility can contribute to the volatility in the expense associated with the
Stock Option and Appreciation Right Plan. In 1998 RBPA's stock price decreased
to $16.00 at December 31 1998 from $23.50 at December 31, 1997. Accordingly,
RBPA recorded the difference between the current market values and the values at
the grant date of $1.4 million (credit) during 1998. The expense accrual for
1997 was $3.8 million relating to these stock appreciation rights as employee
benefits expense toward the difference between current market values and the
values at the grant date.
ACCOUNTING FOR INCOME TAXES
The provision for federal income taxes was $5.6 million in 1999 as
compared to $4.6 million for 1998 and $4.1 million for 1997 representing an
effective tax rate of 31.5%, 30%, and 30.3%, respectively. The $1 million
increase in the tax provision for 1999 and 1998 are primarily due to a higher
level of taxable income of $2.3 and $2 million, respectively, primarily related
to and increase in interest income on loans and investment securities.
ACCOUNTING FOR DEBT AND EQUITY SECURITIES
The Company accounts for investment securities in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
This standard requires investments in securities to be classified in one of
three categories; held to maturity, trading or available for sale. Debt
securities that the Bank has the positive intent and ability to hold to maturity
are classified as held to maturity and are reported at amortized cost. As the
Bank does not engage in security trading, the balance of its debt securities and
any equity securities are classified as available for sale. Net unrealized gains
and losses for such securities, net of tax effect, are required to be recognized
as a separate component of stockholders' equity and excluded from the
determination of net income.
<PAGE> 30
ASSET LIABILITY MANAGEMENT
The primary functions of asset-liability management are to assure
adequate liquidity and maintain an appropriate balance between interest earning
assets and interest bearing liabilities. This process is overseen by the
Asset-Liability Committee ("ALCO") which monitors and controls, among other
variables, the liquidity, balance sheet structure and interest rate risk of the
consolidated company within policy parameters established and outlined in the
Funds, Cash Flow and Liquidity Policies and Procedures which are reviewed by the
Board of Directors at least annually. Additionally, the ALCO committee meets
periodically and reports on liquidity, interest rate sensitivity and projects
financial performance in various interest rate scenarios.
Liquidity. Liquidity is the ability of the financial institution to
ensure that adequate funds will be available to meet its financial commitments
as they become due. In managing its liquidity position, the financial
institution evaluates all sources of funds, the largest of which is deposits.
Also taken into consideration is the repayment of loans. These sources provide
the financial institution with alternatives to meet its short-term liquidity
needs. Longer-term liquidity needs may be met by issuing longer-term deposits
and by raising additional capital.
RBPA generally maintains a liquidity ratio equal to or greater than 25%
of total deposits and short-term liabilities. Liquidity is specifically defined
as the ratio of net cash, short term and marketable assets to net deposits and
short-term liabilities. The liquidity ratio for the years ended December 31,
1999, 1998 and 1997 was 41%, 40%, and 39%, respectively. Management believes
that RBPA's liquidity position continues to be adequate, continues to be in
excess of its peer group level and meets or exceeds the liquidity target set
forth in the Funds, Cash Flow and Liquidity Policies and Procedures. Management
believes that due to its financial position, it will be able to raise deposits
as needed to meet liquidity demands. However, any financial institution could
have unmet liquidity demands at any time.
Interest Rate Sensitivity. Interest rate sensitivity is a function of
the repricing characteristics of the financial institution's assets and
liabilities. These include the volume of assets and liabilities repricing, the
timing of repricing, and the relative levels of repricing. Attempting to
minimize the interest rate sensitivity gaps is a continual challenge in a
changing rate environment. The interest sensitivity report examines the
positioning of the interest rate risk exposure in a changing interest rate
environment. Ideally the rate sensitive assets and liabilities will be
maintained in a matched position to minimize interest rate risk.
The interest rate sensitivity analysis is an important management tool,
however, it does have some inherent shortcomings. It is a "static" analysis.
Although certain assets and liabilities may have similar maturities or
repricing, they may react in different degrees to changes in market interest
rates. Additionally, repricing characteristics of certain assets and liabilities
may vary substantially within a given period.
The following table summarizes repricing intervals for interest earning
assets and interest bearing liabilities as of December 31, 1999, and the
difference or "gap" between them on an actual and cumulative basis for the
periods indicated. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities.
During a period of falling interest rates, a positive gap would tend to
adversely affect net interest income, while a negative gap would tend to result
in an increase in net interest income. During a period of rising interest rates,
a positive gap would tend to result in an increase in net interest income while
a negative gap would tend to affect net interest income adversely. At December
31, 1999, RBPA is in an asset sensitive position of $51.5 million, which
indicates assets will reprice somewhat faster than liabilities within one year.
<PAGE> 31
INTEREST RATE SENSITIVITY
(IN MILLIONS)
<TABLE>
<CAPTION>
DAYS
---------------------- 1 TO 5 OVER 5 NON-RATE
ASSETS (1) 0 - 90 91 - 365 YEARS YEARS SENSITIVE TOTAL
-------- -------- -------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits in banks $ 0.6 $-- $ -- $-- $-- $ 0.6
Federal funds sold 0.2 -- -- -- 0.2
Investment securities:
Available for sale 6.7 -- 11.8 41.0 -- 59.5
Held to maturity 11.3 6.5 48.8 16.5 -- 83.1
-------- ------- -------- ------- ------- --------
Total investment securities 18.0 6.5 60.6 57.5 -- 142.6
Loans:(2)
Fixed rate (3) 8.5 7.2 152.4 34.5 -- 202.6
Variable rate 138.9 1.9 11.9 6.9 -- 159.6
-------- ------- -------- ------- ------- --------
Total loans 147.4 9.1 164.3 41.4 -- 362.2
Other assets(4) -- -- -- -- 16.9 16.9
-------- ------- -------- ------- ------- --------
Total Assets $ 166.2 $ 15.6 $ 224.9 $ 98.9 $ 16.9 $ 522.5
======== ======= ======== ======= ======= ========
LIABILITIES & CAPITAL
Deposits:
Non interest bearing deposits $-- $-- $ -- $-- $ 45.5 $ 45.5
Interest bearing deposits(5) 58.0 -- 37.2 -- -- 95.2
Certificate of deposits 28.9 43.4 168.3 -- -- 240.6
-------- -------- -------- --------- ---------- --------
Total deposits 86.9 43.4 205.5 -- 45.5 381.3
Short term borrowings -- -- -- -- -- --
Mortgage and long term borrowings -- -- 30.5 -- -- 30.5
Other liabilities -- -- -- -- 14.9 14.9
Capital -- -- -- -- 95.8 95.8
-------- ------- -------- ------- ------- --------
Total liabilities & capital $ 86.9 $ 43.4 $ 236.0 $-- $ 156.2 $ 522.5
======== ======== ======== ========= ========== ========
Net interest rate GAP $ 79.3 $ (27.8) $ (11.1) $ 98.9 ($ 139.3)
======== ======== ======== ========= ==========
Cumulative interest rate GAP $ 79.3 $ 51.5 $ 40.4 $ 139.3 --
======== ======== ======== ========= ========
GAP to total assets 15% -5%
======== ========
GAP to total equity 83% -29%
======== ========
Cumulative GAP to total assets 15% 10%
======== ========
Cumulative GAP to total equity 83% 54%
======== ========
</TABLE>
(1) Interest earning assets are included in the period in which the balances are
expected to be repaid and/or repriced as a result of anticipated prepayments,
scheduled rate adjustments, and contractual maturities.
(2) Reflects principal maturing within the specified periods for fixed and
repricing for variable rate loans; includes nonperforming loans.
(3) Fixed rate loans include a portion of variable rate loans whose floors are
in effect at December 31, 1999.
(4) For purposes of gap analysis, other assets include the allowance for
possible loan loss; unamortized discount on purchased loans and deferred fees on
loans.
(5) Based on historical analysis, Money market and Savings deposits are assumed
to have rate sensitivity of 1 month; NOW account deposits are assumed to have a
rate sensitivity of 4 months.
The method to analyze interest rate sensitivity in the table above has
a number of limitations. Certain assets and liabilities may react differently to
changes in interest rates even though they reprice or mature in the same time
periods. The interest rates on certain assets and liabilities may change at
different times than changes in market interest rates, with some changing in
advance of changes in market rates and some lagging behind changes in market
rates. Also, certain assets have provisions, which limit changes in interest
rates each time the interest rate changes and for the entire term of the loan.
Additionally, prepayments and withdrawals experienced in the event of a change
in interest rates may deviate significantly from those assumed in the interest
rate sensitivity table. Additionally, the ability of some borrowers to service
their debt may decrease in the event of an interest rate increase.
<PAGE> 32
CAPITAL ADEQUACY
The table shown below sets forth RBPA's consolidated capital level and
performance ratios.
<TABLE>
<CAPTION>
REGULATORY
1999 1998 1997 MINIMUM
------ ------ ------ ----------
<S> <C> <C> <C> <C>
CAPITAL LEVEL
Leverage ratio 18.8% 22.1% 25.6% 3%
Risk based capital ratio:
Tier 1 20.4% 24.1% 25.1% 4%
Tier 2 21.6% 25.4% 26.4% 8%
CAPITAL PERFORMANCE
Return on average assets 2.6% 2.6% 2.7% --
Return on average equity 12.8% 11.8% 10.8% --
</TABLE>
RBPA's sources of capital have been derived from the issuance of stock
as well as retained earnings. While RBPA has not had a stock offering since
1986, total stockholder's equity has increased primarily due to steady increases
in retained earnings. At December 31, 1999, RBPA had an average capital to
average asset ratio of 20.2%. RBPA has no current plans to raise capital through
new stock offerings and indeed, seeks ways to leverage its existing capital,
which is considered excessive by industry standards.
In early 1989, each of the federal bank regulatory agencies issued
risk-based capital standards, which were phased in December 31, 1992. The new
standards place assets in various categories of risk with varying weights
assigned, and consider certain off-balance sheet activities, such as letters of
credit and loan commitments in the base for purposes of determining capital
adequacy. The principal objective of establishing the risk-based capital
framework is to achieve greater convergence in the measurement and assessment of
capital adequacy due to the divergence of asset mixes maintained from one
depository institution to the next. At December 31, 1999, RBPA's ratio using
these standards was 20.4%.
YEAR 2000 ISSUES
RBPA as with the financial industry as a whole, has experienced no
significant problems or irregularities with regard to the Y2K issue. The costs
associated with Y2K compliance in 1999 was immaterial. In 1999, the Clean
Management Committee was formed to ensure that all computer systems, programs
and technology remain Y2K compliant. However, while not expected, there can be
no assurance that the corporation, its suppliers and customers, or the financial
industry, will not experience any problems in the future. If any problems were
to occur in the future, RBPA intends to react according to its contingency plan.
MANAGEMENT OPTIONS TO PURCHASE SECURITIES
On June 27, 1990, the directors of the Bank approved the Royal Bank of
Pennsylvania Non-qualified Stock Option and Appreciation Right Plan (the Plan).
The Plan was reapproved by the shareholders in connection with the formation of
the holding company. The Plan is an incentive program under which Bank officers
and other key employees may be awarded additional compensation in the form of
options to purchase up to 1,000,000 shares of the Registrant's Class A common
stock (but not in excess of
<PAGE> 33
15% of outstanding shares). The option price is equal to the fair market value
at the date of the grant. At December 31, 1999, 377,247 options have been
granted (the fair market per share at the time of the grant was $14.75 in 1999
and $19.952 in 1998) which are exercisable at 20% per year. At December 31,
1998, options covering 263,647 shares were exercisable.
In 1990, the directors of the Bank approved a non-qualified Outside
Directors Stock Option Plan. The Plan was reapproved by the shareholders in
connection with the formation of the holding company. Under the terms of the
plan, 150,000 shares of Class A stock are authorized for grants. Each director
is entitled to 1,500 shares of stock annually, which is exercisable after one
year of service. The options were granted at the fair market value ($14.75 per
share in 1999 and $19.952 in 1998) at the date of the grant. Currently, the
strike price on the options ranges from $2.312 to $17.574 per share. During
1999, 11,241 options were exercised at strike prices from $2.426 to $12.761 per
share. At December 31, 1999, 69,424 options were outstanding and options
covering 35,954 shares were exercisable.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
A simulation model is therefore used to estimate the impact of various
changes, both upward and downward, in market interest rates and volumes of
assets and liabilities on the net income. This model produces an interest rate
exposure report that forecast changes in the market value of portfolio equity
under alternative interest rate environment. The market value of portfolio is
defined as the present value of existing assets and liabilities. The calculated
estimates of changes in the market value of portfolio value are as follows:
<TABLE>
<CAPTION>
At December 31, 1999 (Dollars in Thousands)
Market Value of Percent of
Changes in Rates Portfolio Equity Change
---------------- ---------------- ----------
<S> <C> <C>
+ 300 basis points $ 88,886 -20.0%
+ 200 basis points 96,186 -13.5%
+ 100 basis points 103,577 -6.8%
Flat rate 111,169 0
- 100 basis points 126,008 13.3%
- 200 basis points 139,477 25.5%
- 300 basis points 152,348 37.0%
</TABLE>
The assumptions used in evaluating the vulnerability of earnings and
capital to changes in interest rates are based on management's considerations of
past experience, current position and anticipated future economic conditions.
The interest rate sensitivity of assets and liabilities as well as the estimated
effect of changes in interest rates on the market value of portfolio equity
could vary substantially if different assumptions are used or actual experience
differs from the calculations were based.
<PAGE> 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ROYAL BANCSHARES OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
DECEMBER 31, 1999 AND 1998
<PAGE> 35
Report of Independent Certified Public Accountants
Board of Directors
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Royal Bancshares
of Pennsylvania, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in stockholders' equity and
comprehensive income and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Royal
Bancshares of Pennsylvania, Inc. and Subsidiaries as of December 31, 1999 and
1998, and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.
Philadelphia, Pennsylvania
January 26, 2000
<PAGE> 36
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
ASSETS 1999 1998
---- ----
<S> <C> <C>
Cash and due from banks $ 17,525,462 $ 5,692,654
Federal funds sold 200,000 13,550,000
------------ ------------
Total cash and cash equivalents 17,725,462 19,242,654
------------ ------------
Investment securities held to maturity (market value of $81,493,670
and $62,159,860 in 1999 and 1998, respectively) 83,064,914 61,894,538
Investment securities available for sale - at market value 59,485,027 36,951,162
Total loans 354,818,236 304,475,629
Less allowance for loan losses 11,737,337 11,919,545
------------ ------------
Net loans 343,080,899 292,556,084
Premises and equipment, net 5,784,708 5,452,765
Accrued interest and other assets 13,395,037 11,524,581
------------ ------------
$522,536,047 $427,621,784
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 45,541,164 $ 41,150,730
Interest bearing (includes certificates of deposit in excess
of $100,000 of $126,117,263 and $48,754,354 in 1999
and 1998, respectively) 335,744,854 249,238,955
------------ ------------
Total deposits 381,286,018 290,389,685
Accrued interest and other liabilities 14,935,932 12,271,111
Long-term borrowings 30,000,000 30,365,000
Mortgage payable 479,579 526,720
------------ ------------
Total liabilities 426,701,529 333,552,516
------------ ------------
Stockholders' equity
Common stock
Class A, par value $2.00 per share; authorized, 18,000,000
shares; issued, 7,879,349 and 7,429,689 shares in 1999 and
1998, respectively 15,758,698 14,859,378
Class B, par value $0.10 per share; authorized, 2,000,000 shares;
issued, 1,683,113 and 1,630,544 shares in 1999 and 1998, respectively 168,311 163,054
Capital surplus 50,865,395 45,392,659
Retained earnings 33,329,374 34,556,343
Accumulated other comprehensive (loss) income (2,022,053) 1,242,919
------------ ------------
98,099,725 96,214,353
Treasury stock - at cost, 215,388 Class A shares in 1999
and 207,516 in 1998 (2,265,207) (2,145,085)
------------ ------------
95,834,518 94,069,268
------------ ------------
$522,536,047 $427,621,784
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 37
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans, including fees $ 33,816,210 $ 33,513,439 $ 25,559,901
Investment securities held to maturity
Taxable 5,726,349 3,227,921 5,604,469
Tax-exempt 53,530 207,931 116,779
Investment securities available for sale
Taxable 4,268,333 2,121,921 893,447
Tax-exempt 243,590 173,199 97,937
Deposits in banks 15,682 24,251 112,294
Federal funds sold 558,416 1,371,643 986,552
------------ ------------ ------------
TOTAL INTEREST INCOME 44,682,110 40,640,305 33,371,379
------------ ------------ ------------
Interest expense
Deposits 14,016,747 11,167,451 9,810,104
Mortgage payable and other 1,902,432 1,995,750 231,252
Federal funds purchased 3,015 -- 6,148
------------ ------------ ------------
TOTAL INTEREST EXPENSE 15,922,194 13,163,201 10,047,504
------------ ------------ ------------
NET INTEREST INCOME 28,759,916 27,477,104 23,323,875
Increase (Decrease) in provision for loan losses -- 4,769,785 (2,118,281)
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 28,759,916 22,707,319 25,442,156
------------ ------------ ------------
Other income
Service charges and fees 856,230 830,932 981,111
Realized gains on sale of investment securities available for sale -- -- 13,643
Gain on other real estate 349,351 -- 1,204,443
Gain on sale of loans 44,773 3,831 28,585
Other income 787,614 2,739,602 397,194
------------ ------------ ------------
2,037,968 3,574,365 2,624,976
------------ ------------ ------------
Other expenses
Salaries, wages and employee benefits 7,264,824 5,028,428 9,545,799
Occupancy and equipment 637,624 706,320 756,202
Other operating expenses 5,227,171 5,138,734 4,332,119
------------ ------------ ------------
13,129,619 10,873,482 14,634,120
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 17,668,265 15,408,202 13,433,012
Income taxes 5,563,737 4,624,262 4,074,280
------------ ------------ ------------
NET INCOME $ 12,104,528 $ 10,783,940 $ 9,358,732
============ ============ ============
Per share data
Net income - basic $ 1.21 $ 1.09 $ .95
============ ============ ============
Net income - diluted $ 1.19 $ 1.07 $ .94
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE> 38
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Class A common stock Class B common stock
----------------------------- ---------------------------
Shares Amount Shares Amount
--------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 6,596,625 $ 13,193,250 1,592,091 $ 159,209
Net income for the year ended December 31, 1997 -- -- -- --
Conversion of Class B common stock to Class A
common stock 70,344 140,688 (61,091) (6,109)
4% stock dividends declared 258,176 516,352 61,859 6,186
Cash in lieu of fractional shares -- -- -- --
Purchase of treasury stock -- -- -- --
Stock options exercised 90,576 181,152 -- --
Cash dividends on common stock -- -- -- --
Other comprehensive income, net of
reclassifications and taxes -- -- -- --
--------- ------------ --------- -----------
Comprehensive income
Balance, December 31, 1997 7,015,721 $ 14,031,442 1,592,859 $ 159,286
Net income for the year ended December 31, 1998 - -- -- -- --
Conversion of Class B common stock to Class A
common stock 29,562 59,124 (25,910) (2,591)
4% stock dividends declared 272,313 544,626 63,595 6,359
Cash in lieu of fractional shares -- -- -- --
Stock options exercised 112,093 224,186 -- --
Cash dividends on common stock -- -- -- --
Other comprehensive income, net of
reclassifications and taxes -- -- -- --
--------- ------------ --------- -----------
Comprehensive income
</TABLE>
<TABLE>
<CAPTION>
Accumulated
other
Capital Retained comprehensive
surplus earnings income (loss)
------------ ------------ ---------------
<S> <C> <C> <C>
Balance, January 1, 1997 $ 34,827,443 $ 38,427,800 $ (1,158)
Net income for the year ended December 31, 1997 -- 9,358,732 --
Conversion of Class B common stock to Class A
common stock -- (134,579) --
4% stock dividends declared 3,799,706 (4,322,244) --
Cash in lieu of fractional shares -- (2,477) --
Purchase of treasury stock -- -- --
Stock options exercised 170,469 -- --
Cash dividends on common stock -- (5,303,873) --
Other comprehensive income, net of
reclassifications and taxes -- -- 639,300
------------ ------------ ---------------
Comprehensive income
Balance, December 31, 1997 $ 38,797,618 $ 38,023,359 $ 638,142
Net income for the year ended December 31, 1998 - -- 10,783,940 --
Conversion of Class B common stock to Class A
common stock -- (56,533) --
4% stock dividends declared 6,466,085 (7,017,070) --
Cash in lieu of fractional shares -- (2,023) --
Stock options exercised 128,956 -- --
Cash dividends on common stock -- (7,175,330) --
Other comprehensive income, net of
reclassifications and taxes -- -- 604,777
------------ ------------ ---------------
Comprehensive income
</TABLE>
<TABLE>
<CAPTION>
Treasury Comprehensive
stock income
--------------- ---------------
<S> <C> <C>
Balance, January 1, 1997 $ (2,025,874)
Net income for the year ended December 31, 1997 -- $ 9,358,732
Conversion of Class B common stock to Class A
common stock --
4% stock dividends declared --
Cash in lieu of fractional shares --
Purchase of treasury stock (119,211)
Stock options exercised --
Cash dividends on common stock --
Other comprehensive income, net of
reclassifications and taxes -- 639,300
------------ ------------
Comprehensive income $ 9,998,032
============
Balance, December 31, 1997 $ (2,145,085)
Net income for the year ended December 31, 1998 - $ 10,783,940
Conversion of Class B common stock to Class A
common stock --
4% stock dividends declared --
Cash in lieu of fractional shares --
Stock options exercised --
Cash dividends on common stock --
Other comprehensive income, net of
reclassifications and taxes -- 604,777
------------
Comprehensive income $ 11,388,717
============
</TABLE>
(Continued)
<PAGE> 39
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME - CONTINUED
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Class A common stock Class B common stock
-------------------------------- -----------------------------
Shares Amount Shares Amount
------------ ------------ --------- ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 7,429,689 $ 14,859,378 1,630,544 $ 163,054
Net income for the year ended December 31, 1999 -- -- -- --
Conversion of Class B common stock to Class A
common stock 14,630 29,260 (12,727) (1,273)
4% stock dividends declared 288,728 577,456 65,296 6,530
Cash in lieu of fractional shares -- -- -- --
Purchase of treasury stock -- -- -- --
Stock options exercised 146,302 292,604 -- --
Cash dividends on common stock -- -- -- --
Other comprehensive income, net of
reclassifications and taxes -- -- -- --
------------ ------------ --------- ------------
Comprehensive income
Balance, December 31, 1999 7,879,349 $ 15,758,698 1,683,113 $ 168,311
============ ============ ========= ============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
other
Capital Retained comprehensive
surplus earnings income (loss)
------------ ------------ ---------------
<S> <C> <C> <C>
Balance, December 31, 1998 $ 45,392,659 $ 34,556,343 $ 1,242,919
Net income for the year ended December 31, 1999 -- 12,104,528 --
Conversion of Class B common stock to Class A
common stock -- (27,987) --
4% stock dividends declared 4,867,469 (5,451,455) --
Cash in lieu of fractional shares -- (3,212) --
Purchase of treasury stock -- -- --
Stock options exercised 605,267 -- --
Cash dividends on common stock -- (7,848,843) --
Other comprehensive income, net of
reclassifications and taxes -- -- (3,264,972)
------------ ------------ ------------
Comprehensive income
Balance, December 31, 1999 $ 50,865,395 $ 33,329,374 $ (2,022,053)
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Treasury Comprehensive
stock income
------------ -------------
<S> <C> <C>
Balance, December 31, 1998 $ (2,145,085)
Net income for the year ended December 31, 1999 -- $ 12,104,528
Conversion of Class B common stock to Class A
common stock --
4% stock dividends declared --
Cash in lieu of fractional shares --
Purchase of treasury stock (120,122)
Stock options exercised --
Cash dividends on common stock --
Other comprehensive income, net of
reclassifications and taxes -- (3,264,972)
------------ ------------
Comprehensive income $ 8,839,556
============
Balance, December 31, 1999 $ (2,265,207)
============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 40
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 12,104,528 $ 10,783,940 $ 9,358,732
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 413,864 351,039 323,916
(Increase)Decrease in provision for loan losses -- 4,769,785 (2,118,281)
Accretion of investment securities discount (338,760) (75,116) (61,462)
Amortization of investment securities premium 896,332 294,699 697,987
Amortization of deferred loan fees (389,588) (278,215) (137,591)
Accretion of discount on loans purchased (1,848,658) (3,005,281) (1,849,384)
Provision (benefit) for deferred income taxes (1,257,494) 75,361 579,007
Gain on other real estate (349,351) -- (1,204,443)
Gain on sale of loans (44,773) (3,831) (28,585)
Realized gains on sale of investment securities
available for sale -- -- (13,643)
(Decrease)Increase in accrued interest receivable 62,692 99,146 (626,542)
Decrease in other assets (466,003) 1,915,737 1,648,874
Increase in accrued interest payable 569,898 1,288,379 952,653
Increase in unearned income on loans 1,589,739 613,025 345,443
(Decrease) increase in other liabilities 2,094,923 (4,113,266) 934,994
------------ ------------ ------------
Net cash provided by operating activities 13,037,349 12,715,402 8,801,675
------------ ------------ ------------
Cash flows from investing activities
Proceeds from calls and maturities of investment
securities held to maturity 13,797,967 43,508,610 58,516,144
Purchase of investment securities held to maturity (35,554,592) (41,251,689) (9,310,907)
Proceeds from sale of investment securities available
for sale -- -- 18,129
(Purchase) sales of Federal Home Loan Bank stock -- 5,000 (2,150,000)
Purchase of investment securities available for sale (25,770,160) (15,302,591) (14,276,725)
Net increase in loans (50,724,449) (12,593,341) (14,331,580)
Purchase of loan portfolio -- (66,740,249)
Purchase of premises and equipment (745,807) (1,014,883) (404,306)
Proceeds from sale and payments on other real estate 1,032,614 -- 1,708,547
------------ ------------ ------------
Net cash used in investing activities (97,964,427) (26,648,894) (46,970,947)
------------ ------------ ------------
</TABLE>
(Continued)
<PAGE> 41
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from financing activities
Net increase (decrease) in short-term borrowings $ -- $(15,000,000) $ 15,000,000
Net (decrease) increase in non-interest bearing and
interest bearing demand deposits and savings accounts 4,813,360 10,718,876 (6,135,112)
Net increase (decrease) in certificates of deposit 86,082,973 14,307,375 17,315,943
Mortgage payments (47,141) (44,165) (41,722)
Cash dividends in lieu of fractional shares (3,213) (2,023) (2,479)
Purchase of treasury stock (120,121) -- (119,211)
Net increase (decrease) in long-term borrowings (365,000) (698,000) 26,862,000
Issuance of common stock under stock option plans 897,871 353,141 1,987,986
Cash dividends (7,848,843) (7,175,330) (5,303,873)
------------ ------------ ------------
Net cash provided by financing activities 83,409,886 2,459,874 49,563,532
------------ ------------ ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (1,517,192) (11,473,618) 11,394,260
Cash and cash equivalents at beginning of year 19,242,654 30,716,272 19,322,012
------------ ------------ ------------
Cash and cash equivalents at end of year $ 17,725,462 $ 19,242,654 $ 30,716,272
============ ============ ============
Supplemental disclosure of cash flow information
Cash paid during the year for
Interest $ 15,352,296 $ 11,874,822 $ 9,094,851
============ ============ ============
Income taxes $ 4,044,000 $ 2,750,000 $ 3,750,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 42
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
Royal Bancshares of Pennsylvania, Inc. (the Company) and its wholly-owned
subsidiaries: Royal Investments of Delaware, Inc. and Royal Bank of
Pennsylvania (the Bank), including the Bank's wholly-owned subsidiary, Royal
Real Estate, Inc. On June 29, 1995, the Company was formed and acquired all
of the outstanding common stock of the Bank in a business combination
accounted for in a manner similar to a pooling of interests. In the
transaction, the Bank's shareholders exchanged common stock of the Bank for
common stock of the Company on a share-for-share basis. These financial
statements reflect the historical information of the Company. All
significant intercompany transactions and balances have been eliminated.
1. Business
The Company, through its subsidiary bank, offers a full range of banking
services to individual and corporate customers located in eastern
Pennsylvania. The Bank competes with other banking and financial
institutions in certain markets, including financial institutions with
resources substantially greater than its own. Commercial banks, savings
banks, savings and loan associations, credit unions and money market funds
actively compete for savings and time deposits and for various types of
loans. Such institutions, as well as consumer finance and insurance
companies, may be considered competitors of the Bank with respect to one or
more of the services it renders.
In addition to being subject to competition from other financial
institutions, the Company is subject to regulations of certain federal
agencies and, accordingly, it is periodically examined by those regulatory
authorities.
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 131, which redefines how operating segments are
determined and requires disclosures of certain financial and descriptive
information about the Company's operating segments. Management has
determined the Company operates in one business segment, community banking.
2. Use of Estimates
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the balance sheet and revenues and
expenditures for the period. Therefore, actual results could differ
significantly from those estimates.
The principal estimate that is particularly susceptible to significant
change in the near term relates to the allowance for loan losses. In
connection with this estimate, when circumstances warrant, management
obtains independent appraisals for significant properties. However, future
changes in real estate market conditions and the economy could affect the
Company's allowance for loan losses.
(Continued)
<PAGE> 43
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
3. Investment Securities
The Company accounts for investment securities in accordance with SFAS No.
115. This standard requires investments in securities to be classified in
one of three categories: held to maturity, trading or available for sale.
Debt securities that the Company has the positive intent and ability to hold
to maturity are classified as held to maturity and are reported at amortized
cost. As the Company does not engage in security trading, the balance of its
debt securities and any equity securities are classified as available for
sale. Net unrealized gains and losses for such securities, net of tax
effect, are required to be recognized as a separate component of
stockholders' equity and excluded from the determination of net income.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133. Subsequent to this statement, SFAS No. 137 was issued which amended
the effective date of SFAS No. 133 to be all fiscal quarters of all fiscal
years beginning after June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as a hedge. The accounting for changes in the
fair value of a derivative (gains and losses) depends on the intended use of
the derivative and resulting designation. The adoption of SFAS No. 133 is
not anticipated to have a material impact on the Company's financial
position or results of operations.
4. Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of
the portfolio, past loan loss experience, current economic conditions,
volume, growth, and composition of the loan portfolio, and other relevant
factors. The allowance is increased by provisions for loan losses charged
against income. Decreases in the allowance result from management's
determination that the allowance for loan losses exceeds their estimates of
potential loan loss.
The Company accounts for loans in accordance with SFAS No. 114, as amended
by SFAS No. 118, which requires that a creditor measure impairment based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor
may measure impairment based on a loan's observable market price, or the
fair value of the collateral if the loan is collateral-dependent. Regardless
of the measurement method, a creditor must measure impairment based on the
fair value of the collateral when the creditor determines that foreclosure
is probable.
(Continued)
<PAGE> 44
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
5. Loan Fees and Related Costs
Interest on loans is accrued and credited to operations based upon the
principal amount outstanding. Accretion of unearned discounts on loans has
been added to the related interest income. Accrual of interest is
discontinued on a loan when management believes that the borrower's
financial condition is such that collection of interest is doubtful and
generally when a loan becomes 90 days past due as to principal or interest.
When interest accruals are discontinued, interest credited to income in the
current year is reversed and interest accrued in the prior year is charged
to the allowance for loan losses.
6. Other Real Estate
Other real estate is recorded at the lower of the customer's loan balance or
the adjusted fair market value of the real estate securing the loan. The
adjusted fair market value is determined by reducing the fair market value
by estimated costs for the disposition of the property. Costs relating to
holding the property are expensed when incurred. Other real estate owned of
$19,314 and $707,397 at December 31, 1999 and 1998, respectively, is
included in accrued interest and other assets on the balance sheets.
7. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation,
which is computed principally on the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized on the
straight-line method over the shorter of the estimated useful lives of the
improvements or the terms of the related leases. The estimated useful lives
for buildings and leasehold improvements range from 15 to 31-1/2 years, and
for furniture and fixtures are 5 to 7 years.
8. Income Taxes
Under the liability method specified by SFAS No. 109, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the enacted
tax rates which will be in effect when these differences reverse. Deferred
tax expense is the result of changes in deferred tax assets and liabilities.
The principal types of differences between assets and liabilities for
financial statement and tax return purposes are the allowance for loan
losses, deferred loan fees and accumulated depreciation.
9. Profit-Sharing Plan
The Company has a contributory 401(k) plan covering substantially all
employees. The Company contributed $131,128, $127,788 and $135,650 for 1999,
1998 and 1997, respectively.
(Continued)
<PAGE> 45
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
10. Stock Option Plans
Under two stock option plans, the Company grants stock options to employees,
officers and directors.
The Company adopted SFAS No. 123, which allows an entity to use a fair
value-based method for valuing stock-based compensation which measures
compensation cost at the grant date based on the fair value of the award.
Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, the standard permits entities to continue
accounting for employee stock options and similar instruments under
Accounting Principles Board (APB) Opinion No. 25, and its related
Interpretations. Entities that continue to account for stock options using
APB Opinion No. 25 are required to make pro forma disclosures of net income
and earnings per share (EPS), as if the fair value-based method of
accounting defined in SFAS No. 123 had been applied.
The Company's stock option plans are accounted for under APB Opinion No. 25.
The adoption of SFAS No. 123 had no material effect on the Company's
consolidated financial position or results of operations.
11. Benefit Plan
During 1999, the Company implemented a noncontributory nonqualified, defined
benefit pension plan covering certain eligible employees. On January 1,
1999, the Company adopted SFAS No. 132, which revises employers' disclosures
about pension and other postretirement benefits plans. It eliminated certain
current disclosures and requires additional information about changes in the
benefit obligation and the fair values of plan assets. It also standardizes
the requirements for pensions and other postretirement benefit plans, to the
extent possible, and illustrates combined formats for the presentation of
pension plan and other postretirement benefit plans disclosures.
12. Per Share Information
During 1998, the Company adopted the provisions of SFAS No. 128, which
eliminates primary and fully diluted EPS and requires presentation of basic
and diluted EPS in conjunction with the disclosure of the methodology used
in computing such EPS. Basic EPS excludes dilution and is computed by
dividing income available to common shareholders by the weighted average
common shares outstanding during the period. 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.
(Continued)
<PAGE> 46
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Prior period EPS calculations have been restated to reflect the adoption of
SFAS No. 128. Basic and diluted EPS are calculated as follows:
<TABLE>
<CAPTION>
1999
Income Average shares Per share
(numerator) (denominator) amount
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $12,104,528 10,005,806 $ 1.21
Effect of dilutive securities
Stock options -- 182,674 --
----------- ----------- --------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $12,104,528 10,188,480 $ 1.19
=========== =========== ========
</TABLE>
<TABLE>
<CAPTION>
1998
Income Average shares Per share
(numerator) (denominator) amount
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $10,783,940 9,878,071 $ 1.09
Effect of dilutive securities
Stock options -- 197,408 --
----------- ----------- -------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $10,783,940 10,075,479 $ 1.07
=========== =========== =======
</TABLE>
<TABLE>
<CAPTION>
1997
Income Average shares Per share
(numerator) (denominator) amount
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $9,358,732 9,806,750 $ .95
Effect of dilutive securities
Stock options -- 178,217 --
---------- ---------- -------
Diluted EPS
Income available to common shareholders
plus assumed exercise of options $9,358,732 9,984,967 $ .94
========== ========== =======
</TABLE>
(Continued)
<PAGE> 47
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
EPS is calculated on the basis of the weighted average number of shares
outstanding of 10,005,806, 9,878,071 and 9,806,750 for the years ended
December 31, 1999, 1998 and 1997, respectively. Per share information and
weighted average shares outstanding have been restated to reflect the 5%
stock dividend of January 2000, the 4% stock dividend of May 1999, the 4%
stock dividend of May 1998, and the 4% stock dividend of May 1997.
13. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, short-term investments and federal funds
sold. Generally, federal funds are purchased and sold for one-day periods.
14. Financial Instruments
The Company follows the provisions of SFAS No. 107, which requires all
entities to disclose the estimated fair value of their assets and
liabilities considered to be financial instruments. Financial instruments
consist primarily of securities, loans and deposits.
15. Long-Lived Assets
The Company follows the provisions of SFAS No. 121, which provides
guidance on when to recognize and how to measure impairment losses of
long-lived assets and certain identifiable intangibles and how to value
long-lived assets to be disposed of.
16. Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
The Company accounts for financial assets in accordance with SFAS No.
125, as amended by SFAS No. 127, in 1998. SFAS No. 125 applies a
control-oriented, financial components approach to financial asset transfer
transactions whereby the Company: (1) recognizes the financial and servicing
assets it controls and the liabilities it has incurred; (2) derecognizes
financial assets when control has been surrendered; and (3) derecognizes
liabilities once they are extinguished. Under SFAS No. 125, control is
considered to have been surrendered only if: (i) the transferred assets have
been isolated from the transferor and its creditors, even in bankruptcy or
other receivership; (ii) the transferee has the right to pledge or exchange
the transferred assets or is a qualifying special-purpose entity (as
defined) and the holders of beneficial interests in that entity have the
right to pledge or exchange those interests; and (iii) the transferor does
not maintain effective control over the transferred assets through an
agreement which both entitles and obligates it to repurchase or redeem those
assets prior to maturity, or through an agreement which both entitles it to
repurchase or redeem those assets if they were not readily obtainable
elsewhere. If any of these conditions are not met, the Company accounts for
the transfer as a secured borrowing. SFAS No. 125 also requires that the
Company derecognize a liability if and when it is extinguished. A liability
is considered extinguished under SFAS No. 125 if: (1) the Company pays the
creditor and, thus, is relieved of its obligation for the liability; or (2)
is legally released from being the primary obligor under the liability,
either judicially or by the creditor. The adoption of SFAS No. 125 had no
material impact on the Company's consolidated financial position or results
of operations.
(Continued)
<PAGE> 48
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
17. Advertising Costs
The Company and the Bank expense advertising costs as incurred.
18. Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. This standard establishes new standards for reporting
comprehensive income which includes net income as well as certain other
items which result in a change to equity during the period. These financial
statements have been reclassified to reflect the provisions of SFAS No. 130.
The income tax effects allocated to comprehensive income is as follows:
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------
Net of
Before tax Tax tax
amount expense amount
----------- ------------ ------------
<S> <C> <C> <C>
Unrealized losses on securities
Unrealized holding losses arising
during period $(4,950,740) $(1,685,768) $(3,264,972)
Less reclassification adjustment for gains
realized in net income -- -- --
----------- ----------- -----------
Other comprehensive loss, net $(4,950,740) $(1,685,768) $(3,264,972)
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------------
Net of
Before tax Tax tax
amount expense amount
----------- ------------ ------------
<S> <C> <C> <C>
Unrealized gains on securities
Unrealized holding gains arising during period $916,330 $311,553 $604,777
Less reclassification adjustment for gains
realized in net income -- -- --
-------- -------- --------
Other comprehensive income, net $916,330 $311,553 $604,777
======== ======== ========
</TABLE>
(Continued)
<PAGE> 49
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------
Net of
Before tax Tax tax
amount expense amount
---------- ----------- ------------
<S> <C> <C> <C>
Unrealized gains on securities
Unrealized holding gains arising during period $ 982,280 $ 333,566 $ 648,714
Less reclassification adjustment for gains
realized in net income (13,643) (4,229) (9,414)
----------- ------------ ------------
Other comprehensive income, net $ 968,637 $ 329,337 $ 639,300
========== ========== ==========
</TABLE>
19. Reclassifications
Certain reclassifications of prior year amounts have been made to conform to
the 1999 presentation.
NOTE B - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
value of the Company's investment securities held to maturity and available
for sale are summarized as follows:
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment securities held to maturity
Obligations of states and political
subdivisions $ -- $ -- $ -- $ --
U.S. treasuries -- -- -- --
Corporate securities 76,451,151 144,767 1,724,979 74,870,939
U.S. agencies 6,613,763 37,714 28,746 6,622,731
----------- ----------- ----------- -----------
$83,064,914 $ 182,481 $ 1,753,725 $81,493,670
=========== =========== =========== ===========
Investment securities available for sale
Federal Home Loan Bank stock -
at cost $ 3,169,700 $ -- $ -- $ 3,169,700
Preferred and common stock 3,726,673 10,923 200,098 3,537,498
Other securities 55,652,348 444,300 3,318,819 52,777,829
----------- ----------- ----------- -----------
$62,548,721 $ 455,223 $ 3,518,917 $59,485,027
=========== =========== =========== ===========
</TABLE>
(Continued)
<PAGE> 50
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE B - INVESTMENT SECURITIES - Continued
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment securities held to maturity
Obligations of states and political
subdivisions $ 3,098,465 $ 29,178 $ -- $ 3,127,643
U.S. treasuries 250,000 1,769 -- 251,769
Corporate securities 54,264,311 550,849 442,851 54,372,309
U.S. agencies 4,281,762 126,478 101 4,408,139
----------- ----------- ----------- -----------
$61,894,538 $ 708,274 $ 442,952 $62,159,860
=========== =========== =========== ===========
Investment securities available for sale
Federal Home Loan Bank stock -
at cost $ 3,169,700 $ -- $ -- $ 3,169,700
Preferred and common stock 2,867,012 51,950 -- 2,918,962
Other securities 29,031,240 1,831,260 -- 30,862,500
----------- ----------- ----------- -----------
$35,067,952 $ 1,883,210 $ -- $36,951,162
=========== =========== =========== ===========
</TABLE>
The amortized cost and estimated fair value of investment securities at
December 31, 1999 and 1998, 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.
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------------------------
Held to maturity Available for sale
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Within 1 year $17,813,636 $17,783,276 $ -- $ --
After 1 but within 5 years 48,302,439 47,302,106 12,031,975 11,774,195
After 5 but within 10 years 11,482,381 11,443,482 8,630,955 8,522,014
After 10 years 5,006,458 4,964,806 34,989,418 33,481,620
----------- ----------- ----------- -----------
83,064,914 81,483,670 55,652,348 53,777,829
Federal Home Loan Bank stock -- -- 3,169,700 3,169,700
Preferred and common stock -- -- 3,726,673 3,537,498
----------- ----------- ----------- -----------
$83,064,914 $81,493,670 $62,548,721 $59,485,027
=========== =========== =========== ===========
</TABLE>
(Continued)
<PAGE> 51
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE B - INVESTMENT SECURITIES - Continued
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------------------
Held to maturity Available for sale
---------------------------------- ----------------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Within 1 year $12,228,163 $12,249,864 $ -- $ --
After 1 but within 5 years 36,656,386 37,073,862 -- --
After 5 but within 10 years 7,328,418 7,182,482 -- --
After 10 years 5,681,571 5,653,652 29,031,240 30,862,500
----------- ----------- ----------- -----------
61,894,538 62,159,860 29,031,240 30,862,500
Federal Home Loan Bank stock -- -- 3,169,700 3,169,700
Preferred and common stock -- -- 2,867,012 2,918,962
----------- ----------- ----------- -----------
$61,894,538 $62,159,860 $35,067,952 $36,951,162
=========== =========== =========== ===========
</TABLE>
Proceeds from the sale of investment securities available for sale during
1999, 1998 and 1997 were $-0-, $-0-, and $18,129, respectively, resulting in
gross realized gains of $-0-, $-0-, and $13,643 during 1999, 1998 and 1997,
respectively.
As of December 31, 1999 and 1998, investment securities with a book value of
$21,295,289 and $13,716,861, respectively, were pledged as collateral to
secure public deposits and for other purposes required or permitted by law.
NOTE C - LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Consumer $ 2,653,428 $ 2,032,878
Commercial and industrial 166,477,867 127,972,082
Real estate 193,162,959 182,595,194
------------- -------------
Total gross loans 362,294,254 312,600,154
Less
Unearned income (2,154,106) (1,833,236)
Unamortized discount on loans purchased (5,321,912) (6,291,289)
------------- -------------
Total loans $ 354,818,236 $ 304,475,629
============= =============
</TABLE>
(Continued)
<PAGE> 52
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE C - LOANS - Continued
Loans on which the accrual of interest has been discontinued or reduced
amounted to $1,209,242 and $3,419,378 at December 31, 1999 and 1998,
respectively. If interest had been accrued, such income would have been
$108,832 and $307,744 for the years ended December 31, 1999 and 1998,
respectively. Although the Company has non-performing loans of $1,209,242 at
December 31, 1999, management believes it has adequate collateral to limit
its credit risk.
The Company granted loans to the officers and directors of the Company and
to their associates. Related party loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with unrelated persons and do not involve
more than normal risk of collectibility. The aggregate dollar amount of
these loans was $13,975,279 and $14,415,902 at December 31, 1999 and 1998,
respectively. During 1999, $135,750 of new loans were made and repayments
totalled $576,373.
The balance of impaired loans was $42,097 at December 31, 1999. The Company
has identified a loan as impaired when it is probable that interest and
principal will not be collected according to the contractual terms of the
loan agreements. The income recognized on impaired loans during 1999 was
$5,360. Total cash collected on impaired loans during 1999 was $131,930, of
which $126,570 was credited to the principal balance outstanding on such
loans. Interest that would have been accrued on impaired loans during 1999
was $20,186. The Company's policy for interest income recognition on
impaired loans is to recognize income on currently performing restructured
loans under the accrual method. The Company recognizes income on non-accrual
loans under the cash 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.
NOTE D - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Balance at beginning of year $ 11,919,545 $ 8,186,237 $ 9,084,153
------------ ------------ ------------
Charge-offs (1,075,122) (1,635,919) (761,790)
Recoveries 892,914 599,442 1,982,155
------------ ------------ ------------
Net charge-offs and recoveries (182,208) (1,036,477) 1,220,365
Increase (decrease) in provision for loan losses -- 4,769,785 (2,118,281)
------------ ------------ ------------
Balance at end of year $ 11,737,337 $ 11,919,545 $ 8,186,237
============ ============ ============
</TABLE>
<PAGE> 53
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE E - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
Estimated
useful lives 1999 1998
<S> <C> <C> <C>
Land - $ 1,973,478 $ 1,973,478
Buildings and leasehold improvements 15 - 31.5 years 4,763,487 4,225,378
Furniture and fixtures 5 - 7 years 2,703,541 2,495,844
----------- ------------
9,440,506 8,694,700
Less accumulated depreciation and amortization 3,655,798 3,241,935
----------- -----------
$ 5,784,708 $ 5,452,765
=========== ===========
</TABLE>
NOTE F - DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Demand $ 45,541,164 $ 41,150,730
NOW and money market 75,983,512 75,348,561
Savings 19,193,298 19,405,323
Time, $100,000 and over 126,117,263 48,754,354
Other time 114,450,781 105,730,717
----------- -----------
$381,286,018 $290,389,685
============ ============
</TABLE>
Certificates of deposit of $100,000 or more consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Three months or less $ 11,622,167 $ 4,606,561
Over three months through twelve months 10,360,400 7,465,667
Over twelve months through five years 85,311,810 20,908,866
Over five years 18,822,886 15,773,260
------------ ----------
$126,117,263 $48,754,354
============ ==========
</TABLE>
(Continued)
<PAGE> 54
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE F - DEPOSITS - Continued
Maturities of certificates of deposit for the next five years and thereafter
are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 70,447,361
2001 22,914,069
2002 70,037,078
2003 21,046,240
2004 24,336,353
Thereafter 31,786,943
------------
$240,568,044
============
</TABLE>
NOTE G - MORTGAGE PAYABLE
The mortgage payable is payable to a bank at 65% of the prime rate (5.525%
at December 31, 1999) and is guaranteed by an industrial development
authority. A substantial portion of the land and building is pledged as
security under this mortgage.
Required principal payments for the next five years and thereafter are as
follows:
Year ending December 31,
<TABLE>
<CAPTION>
<S> <C>
2000 $ 48,986
2001 51,776
2002 54,725
2003 57,853
2004 61,137
Thereafter 205,102
-----------
$ 479,579
===========
</TABLE>
NOTE H - LONG-TERM BORROWINGS
Long-term borrowings consist of advances from the Federal Home Loan Bank at
December 31, 1999 and are as follows:
<TABLE>
<CAPTION>
Due date Interest rate Balance
<S> <C> <C>
December 23, 2002 6.24 $ 30,000,000
============
</TABLE>
The advances are collateralized by Federal Home Loan Bank stock,
investment securities and certain of the Company's first mortgage loans.
<PAGE> 55
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE I - LEASE COMMITMENTS
The Company leases various premises under non-cancellable agreements, which
expire through 2004 and require minimum annual rentals. The minimum rental
commitments under the leases are as follows:
Year ending December 31,
<TABLE>
<CAPTION>
<S> <C>
2000 $ 319,412
2001 316,935
2002 318,435
2003 270,709
2004 170,726
-----------
$ 1,396,217
===========
</TABLE>
Rental expense for all leases was approximately $304,000, $335,000 and
$343,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
NOTE J - COMMON STOCK
Each holder of Class A and Class B common stock is entitled to one vote for
each Class A share and ten votes for each Class B share held. Holders of
either class of common stock are entitled to equal per share dividends when
declared.
The Class B shares may not be transferred in any manner except to the
holder's immediate family. Class B shares have been converted to Class A
shares at the average rate of 1.15 to 1.
NOTE K - OTHER OPERATING EXPENSES
The following items which are greater than 1% of the aggregate of "Total
Interest Income" and "Total Other Income" are included in "Other Expenses"
for the respective years indicated:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Advertising $ 356,394 $ 214,813 $ 396,831
Pennsylvania bank shares tax 743,930 726,161 720,630
Professional fees 501,977 544,109 330,959
Loss on investment partnership 622,571 1,080,415 1,019,375
Travel 513,267 385,489 382,162
</TABLE>
<PAGE> 56
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE L - INCOME TAXES
The components of the income tax expense (benefit) included in the
consolidated statements of income are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Income tax expense (benefit)
Current $ 5,127,198 $ 4,055,012 $ 3,757,471
Deferred federal tax 177,400 310,111 57,670
Benefit applied to reduce goodwill 259,139 259,139 259,139
----------- ----------- -----------
$ 5,563,737 $ 4,624,262 $ 4,074,280
========== ========== ==========
</TABLE>
The difference between the applicable income tax expense and the amount
computed by applying the statutory federal income tax rate of 35% in 1999,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Computed tax expense at statutory rate $ 6,183,893 $ 5,392,871 $ 4,701,554
Tax-exempt income (98,256) (258,100) (178,469)
Low-income housing tax credit (544,939) (544,939) (309,580)
Other, net 123,039 (134,430) (39,225)
Effect of 34% rate bracket (100,000) (100,000) (100,000)
----------- ----------- -----------
Applicable income tax expense $ 5,563,737 $ 4,624,262 $ 4,074,280
========== ========== ==========
</TABLE>
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets
Allowance for doubtful accounts $ 1,263,028 $ 1,263,028
Accrued pension expenses 158,186 -
Accrued stock-based compensation 658,493 992,959
Asset valuation reserves 472,013 472,013
Goodwill 127,346 127,346
Unrealized loss on securities 1,041,656 -
Net operating loss carryovers from Knoblauch State Bank 7,790,916 7,961,948
---------- -----------
11,511,638 10,817,294
Less valuation allowance (7,790,916) (7,961,948)
---------- ----------
3,720,722 2,855,346
---------- -----------
Deferred tax liabilities
Unrealized gain on securities - 640,292
Depreciation 111,810 93,533
Accretion of discount 118,392 135,547
----------- -----------
230,202 869,372
----------- -----------
Net deferred tax asset $ 3,490,520 $ 1,985,974
========== ==========
</TABLE>
(Continued)
<PAGE> 57
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE L - INCOME TAXES - Continued
The Company has approximately $23,000,000 of net operating loss carryovers
from the acquisition of Knoblauch State Bank (KSB). These losses will fully
expire in 2019. The utilization of these losses is subject to limitation
under Section 382 of the Internal Revenue Code. As a result, a valuation
allowance has been established to eliminate the deferred tax asset
attributable to these net operating losses.
During 1999, the Company realized a tax benefit related to the net operating
loss carryovers from the acquisition of KSB. The deferred tax asset
associated with those loss carryovers is fully offset by a valuation
allowance. Accordingly, the realized tax benefit is reflected as a reduction
of the goodwill associated with the acquisition and a corresponding
reduction of deferred income tax benefit for the year.
NOTE M - STOCK OPTION PLANS
At December 31, 1999, the Company had two stock-based compensation plans
which are described below. The Company accounts for these plans under APB
Opinion No. 25.
1. Outside Directors' Stock Option Plan
The Company adopted a non-qualified outside Directors' Stock Option Plan in
1990 (the Director's Plan). Under the terms of the Director's Plan, 150,000
shares of Class A stock are authorized for grants. Each director is entitled
to 1,500 shares of stock annually which are exercisable after one year of
service. The options were granted at the fair market value ($14.75 in 1999,
$19.952 in 1998 and $13.75 in 1997) at the date of the grant. Currently, the
strike price on the options ranges from $2.312 to $17.574 per share. During
1999, 11,241 options were exercised at strike prices from $2.426 to $12.761
per share. At December 31, 1999, 69,424 options are outstanding, and options
covering 35,954 shares were exercisable.
2. Stock Option and Appreciation Right Plan
The Company adopted a Stock Option and Appreciation Right Plan (the Plan) on
June 27, 1990. The Plan is an incentive program under which Company officers
and other key employees may be awarded additional compensation in the form
of options to purchase up to 1,000,000 shares of the Company's Class A
common stock (but not in excess of 15% of outstanding shares). At the time a
stock option is issued, a stock appreciation right for an identical number
of shares may also be granted. The option price is equal to the fair market
value at the date of the grant. The options are exercisable at 20% per year
beginning one year after the date of grant and must be exercised within ten
years of the grant. As of December 31, 1999, options covering 263,647 shares
were exercisable by 66 employees.
(Continued)
<PAGE> 58
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE M - STOCK OPTION PLANS - Continued
Stock option transactions consist of the following:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------- ----------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 464,583 $ 8.133 519,277 $ 6.561 540,885 $ 5.917
Granted 89,627 13.518 61,641 14.861 63,487 11.080
Exercised (135,027) 5.943 (110,723) 3.100 (83,293) 4.091
Cancelled (41,936) 12.624 (5,612) 13.140 (1,802) 10.752
------- ----------- ------- ----------- ------- -----------
Outstanding at end of year 377,247 $ 6.798 464,583 $ 8.133 519,277 $ 6.561
======= =========== ======= =========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Option price per share
exercised $2.593 - $12.724 $2.59 - $13.000 $2.695 - $9.633
Outstanding at end
of year $2.373 - $17.584 $2.59 - $19.183 $2.695 - $13.225
</TABLE>
Had compensation cost for both plans been determined based on the fair value
of the options at the grant dates consistent with the method required by
SFAS No. 123, the Company's net income and EPS would have been reduced to
the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net income
As reported $ 12,105 $ 10,784 $ 9,359
Pro forma 12,035 10,737 9,337
EPS
As reported - basic $ 1.21 $ 1.09 $ .95
As reported - diluted 1.19 1.07 .94
Pro forma - basic 1.20 1.09 .95
Pro forma - diluted 1.18 1.07 .94
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes options-pricing model with the following weighted
average assumptions used for grants in 1999, 1998 and 1997: dividend yield
of 5.33%, 5.25% and 3.40% for 1999, 1998 and 1997, respectively; expected
volatility of 36.3%; and risk-free interest rate of 6.4% in 1999, 4.57% in
1998 and 5.71% in 1997. Expected lives are 10 years for 1999, 1998 and 1997.
<PAGE> 59
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE N - PENSION PLAN
Based upon actuarial computations, net periodic pension plan costs include
the following components:
<TABLE>
<CAPTION>
<S> <C>
Benefit obligation at December 31, 1999 $ 2,209,962
Fair value of plan assets at January 1, 1999 --
-----------
Funded status (2,209,962)
Accrued benefit cost recognized in the statement
of financial position 451,961
Weighted average assumptions as of December 31, 1999
Discount rate 7%
Expected return on plan assets N/A
Rate of compensation 4%
Benefit cost $ 451,961
Employer contribution 451,961
Benefits paid --
</TABLE>
NOTE O - CONCENTRATIONS OF CREDIT RISK
The Company primarily grants commercial and real estate loans in the greater
Philadelphia metropolitan area. Approximately 31% of loans are outside the
normal lending area. The Company has concentrations of credit risk in real
estate development loans (14%) at December 31, 1999. A substantial portion
of its debtors' ability to honor these contracts is dependent upon the
economic sector.
Approximately 54% of the Company's investment portfolio consist of corporate
securities.
NOTE P - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit and standby
letters of credit. Such financial instruments are recorded in the financial
statements when they become payable. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The contract amounts of those
instruments reflect the extent of involvement the Company has in particular
classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance by the
other party to commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. The Company uses
the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
(Continued)
<PAGE> 60
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE P - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued
Unless noted otherwise, the Company does not require collateral or other
security to support financial instruments with credit risk. The contract
amounts as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit $74,977,703
Standby letters of credit and financial guarantees written 3,111,203
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, and others are for staged
construction, the total commitment amounts do not necessarily represent
immediate cash requirements.
The Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Company
upon extension of credit, is based on management's credit evaluation.
Collateral held varies but may include personal or commercial real estate,
accounts receivable, inventory and equipment.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. Most guarantees extend for one year and expire in decreasing
amounts through 2000. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers. The Company holds personal or commercial real estate, accounts
receivable, inventory and equipment as collateral supporting those
commitments for which collateral is deemed necessary. The extent of
collateral held for those commitments is 80%.
NOTE Q - REGULATORY MATTERS
1. 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 Banking Code) and in the Federal Deposit Insurance
Act (FDIA) concerning the payment of dividends by the Company. Under the
Banking Code, no dividends may be paid except from "accumulated net
earnings" (generally undivided profits). Under the FDIA, no dividend may be
paid if a bank is in arrears in the payment of any insurance assessment due
to the Federal Deposit Insurance Corporation (FDIC).
(Continued)
<PAGE> 61
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE Q - REGULATORY MATTERS - Continued
2. Capital Ratios
The Bank is 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 Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings
and other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). As of December 31, 1999, management
believes that the Bank meets all capital adequacy requirements to which it
is subject.
As of March 31, 1999, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed the institution's
category.
The Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
1999
------------------------------------------------------------------------------------
To be well
Required capitalized under
for capital prompt corrective
Actual adequacy purposes action provisions
--------------------- ---------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets)
Company (consolidated) $102,678,179 21.64% $37,960,671 >8.00% N/A
-
Bank 71,914,673 15.35 37,484,002 >8.00 $46,855,003 >10.00%
- -
Tier I capital
(to risk-weighted assets)
Company (consolidated) 96,675,145 20.37 18,980,336 > 4.00 N/A
-
Bank 65,985,199 21.44 18,742,001 > 4.00 28,113,002 >6.00
- -
Tier I capital
(to average assets, leverage)
Company (consolidated) 96,675,145 18.75 15,467,565 > 3.00 N/A
-
Bank 65,985,199 13.00 15,223,609 > 3.00 25,372,682 >5.00
- -
</TABLE>
(Continued)
<PAGE> 62
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE Q - REGULATORY MATTERS - Continued
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------------------------------
To be well
Required capitalized under
for capital prompt corrective
Actual adequacy purposes action provisions
--------------------------- ---------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets)
Company (consolidated) $96,153,986 25.36% $30,328,567 > 8.00 N/A
-
Bank 66,995,778 17.90 29,936,382 > 8.00 $37,420,477 >10.00%
- -
Tier I capital
(to risk-weighted assets)
Company (consolidated) 91,326,497 24.09 15,164,283 > 4.00 N/A
-
Bank 62,228,811 16.63 14,968,191 > 4.00 $22,452,286 > 6.00
- -
Tier I capital
(to average assets, leverage)
Company (consolidated) 91,326,497 22.11 12,391,306 > 3.00 N/A
-
Bank 62,228,811 15.30 12,203,346 > 3.00 $20,338,910 > 5.00
- -
</TABLE>
NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an entity's
assets and liabilities considered to be financial instruments. For the
Company, as for most financial institutions, the majority of its assets and
liabilities are considered financial instruments as defined in SFAS No. 107.
However, many of such instruments lack an available trading market, as
characterized by a willing buyer and seller engaging in an exchange
transaction. Also, it is the Company's general practice and intent to hold
its financial instruments to maturity and not to engage in trading or sales
activities. Therefore, the Company had to use significant estimations and
present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair value may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the
wide range of permitted assumptions and methodologies in the absence of
active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair value.
Fair values have been estimated using data which management considered the
best available and estimation methodologies deemed suitable for the
pertinent category of financial instrument. The estimation methodologies,
resulting fair values and recorded carrying amounts at December 31, 1999 and
1998 were as follows:
Fair values of loans and deposits with floating interest rates are generally
presumed to approximate the recorded carrying amounts.
<PAGE> 63
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
Fair value of financial instruments actively traded in a secondary market
has been estimated using quoted market prices as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------- --------------------------
Estimated Estimated
fair Carrying fair Carrying
value amount value amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $17,725,462 $17,725,462 $19,142,624 $19,142,624
Investment securities held to maturity 81,493,670 83,064,914 62,159,860 61,894,538
Investment securities available for sale 59,485,027 59,485,027 36,951,162 36,951,162
</TABLE>
Fair value of financial instruments with stated maturities has been
estimated using present value cash flow, discounted at a rate approximating
current market for similar assets and liabilities, as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------- --------------------------
Estimated Estimated
fair Carrying fair Carrying
value amount value amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Deposits with stated maturities $240,188,294 $240,568,044 $155,837,473 $154,485,071
Mortgage payable 479,579 479,579 526,720 526,720
Long-term borrowings with stated
maturities 32,787,036 30,000,000 35,394,276 30,365,000
</TABLE>
Fair value of financial instrument liabilities with no stated maturities has
been estimated to equal the carrying amount (the amount payable on demand),
totalling $140,717,974 and $135,904,614 at December 31, 1999 and 1998,
respectively.
Fair value of the net loan portfolio has been estimated using present value
cash flow, discounted at the treasury rate adjusted for non-interest
operating costs and giving consideration to estimated prepayment risk and
credit loss factors, as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------- --------------------------
Estimated Estimated
fair Carrying fair Carrying
value amount value amount
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
Net loans $374,250,097 $343,080,899 $318,340,245 $292,556,084
</TABLE>
There is no material difference between the carrying amount and estimated
fair value of off-balance-sheet items totalling $78,078,906 and $48,673,501
at December 31, 1999 and 1998, respectively, which are primarily comprised
of unfunded loan commitments which are generally priced at market at the
time of funding.
The Company's remaining assets and liabilities are not considered financial
instruments. No disclosure of the relationship value of the Company's
deposits is required by SFAS No. 107.
<PAGE> 64
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE S - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
The Company was formed on June 29, 1995. Condensed financial information for
the parent company only follows. The balance sheets for December 31, 1999
and 1998 and the statements of income and cash flows for the years then
ended are presented below.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Assets
Cash $ 932,372 $ 193,823
Investment in Royal Investments of Delaware, Inc. - at equity 29,451,166 28,676,818
Investment in Royal Bank of Pennsylvania - at equity 65,201,409 64,939,271
Other assets 249,571 259,356
------------- ------------
$95,834,518 $94,069,268
------------- ------------
Stockholders' equity 95,834,518 94,069,268
------------- ------------
$95,834,518 $94,069,268
============= ============
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1999 1998
------------ -----------
<S> <C> <C>
Income
Equity in undistributed net earnings of subsidiaries $ 4,304,705 $ 4,985,119
Dividends from subsidiary bank 7,848,843 5,877,354
Other income 44,386 39,610
----------- -----------
Total income 12,197,934 10,902,083
----------- -----------
Expenses
Other expenses 119,801 160,430
Income tax (benefit) expense (26,395) (42,287)
----------- -----------
Total expenses 93,406 118,143
----------- -----------
Net income $12,104,528 $10,783,940
=========== ===========
</TABLE>
(Continued)
<PAGE> 65
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE S - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1999 1998
----------- ------------
<S> <C> <C>
Cash flows from operating activities
Net income $12,104,528 $10,783,940
Adjustments to reconcile net income to net cash provided
by operating activities
Undistributed earnings from subsidiaries (4,304,705) (4,985,119)
Operating expenses 119,801 160,430
Rental income (44,386) (39,610)
Non-cash income tax (benefit) expense (26,395) (42,287)
----------- -----------
Net cash provided by operating activities 7,848,843 5,877,354
----------- -----------
Cash flows from financing activities
Cash dividends paid (7,848,843) (7,177,353)
(Decrease) increase in other liabilities - (1,637,763)
Other, net 738,549 275,255
----------- ------------
Net cash (used in) provided by financing activities (7,110,294) (8,539,861)
----------- -----------
NET INCREASE (DECREASE) IN CASH 738,549 (2,662,507)
Cash at beginning of year 193,823 2,856,330
----------- -----------
Cash at end of year $ 932,372 $ 193,823
----------- -----------
</TABLE>
<PAGE> 66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required in this Item, relating to directors, executive
officers, control persons is set forth in the Registrant's Proxy Statement to be
used in connection with the 2000 Annual Meeting of Shareholders under the
heading "Remuneration of directors and Officers and Other Transactions", which
pages are incorporated herein by reference.
BENEFICIAL OWNERSHIP - COMPLIANCE. Section 16(a) of the Securities
Exchange Act of 1934, as amended, requires the Corporation's officers and
directors, and persons who own more than 10 percent of the registered class of
the Corporation's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Officers,
directors and greater than 10 percent shareholders are required by SEC
regulation to furnish the Corporation copies of all Section 16(a) forms they
file.
Based solely on its review of forms that were received from certain
reporting persons, the Corporation believes that during the period January 1,
1999 through December 31, 1999, its officers and directors were in compliance
with all filing requirements applicable to them.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item, relating to executive
compensation, is set forth in the Registrant's Proxy Statement to be used in
connection with the 2000 Annual Meeting of Shareholders, under the heading
"Remuneration of Directors and Officers and Other Transactions", which pages are
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item, relating to beneficial ownership
of the Registrant's Common Stock, is set forth in the Registrant's Proxy
Statement to be used in connection with the 2000 Annual Meeting of Shareholders,
under the heading "Information About Nominees, Continuing Directors and
Executive Officers", which pages are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item, relating to transactions with
management and others, certain business relationships and indebtedness of
management, is set forth in the Registrant's Proxy Statement to be used in
connection with the 2000 Annual Meeting of Shareholders, under the heading
"Interest of Management and Others in Certain Transactions", which page are
incorporated herein by reference.
<PAGE> 67
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. 1. Financial Statements
The following financial statements are included by reference in
Part II, Item 8 hereof.
Report of Independent Certified Public Accountants.
Consolidated Balance Sheets.
Consolidated Statements of Income.
Consolidated Statements of Changes in Stockholders' Equity.
Consolidated Statement of Cash Flows.
Notes To Consolidated Financial Statements.
2. Financial Statement Schedules
Financial Statement Schedules are omitted because the required
information is either not applicable, not required or is shown in the respective
financial statements or in the notes thereto.
3. The following Exhibits are files herewith or incorporated by
reference as a part of this Annual Report.
3(i) Articles of Incorporation. (Incorporated by reference to
Exhibit 3(i) to Registrant's Registration Statement No.
0-26366 on Form S-4.)
3(ii) By-laws. (Incorporated by reference to Exhibit 3(i) to
Registrant's Registration Statement No. 0-26366 on Form
S-4.)
10.1 Stock Option and Appreciation Right Plan. (Incorporated by
reference to the Registrant's Registration Statement N0.
333-25855, on form S-8 filed with the Commission on April
5, 1997).
10.2 Outside Directors' Stock Option Plan. (Incorporated by
reference to the Registrant's Registration Statement N0.
333-25855, on form S-8 filed with the Commission on April
5, 1997).
11. Statement Re: Computation of Earnings Per Share. Included
at Item 8, hereof, Note A, "Per Share Information".
12. Statement re: Computation of Ratios. (Included at Item 8
here of, Note Q, "Regulatory Matters.")
21. Subsidiaries of Registrant.
23. Consent of Independent Accountants.
27. Financial Data Schedule.
(b) No Current Report on Form 8-K was filed by the Registrant during the fourth
quarter of the fiscal year December 31, 1999.
(c) The exhibits required to be filed by this Item are listed under Item 14(a)3
above.
(d) Not applicable
<PAGE> 68
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of l934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ROYAL BANCSHARES OF PENNSYLVANIA, INC.
DATE TITLE SIGNATURE
---- ----- ---------
March 24, 2000 Chairman /s/ Daniel M. Tabas
Daniel M. Tabas
March 24, 2000 President/CEO /s/ Joseph P. Campbell
Director Joseph P. Campbell
March 24, 2000 Treasurer/CFO /s/ James J. McSwiggan
James J. McSwiggan
March 24, 2000 Director /s/ Albert Ominsky
Albert Ominsky
March 24, 2000 Director /s/ Anthony J. Micale
Anthony J. Micale
Vice Chairman/
March 24, 2000 Senior Vice President/ /s/ Robert R. Tabas
Director Robert R. Tabas
March 24, 2000 Director /s/ Gregory T. Reardon
Gregory T. Reardon
March 24, 2000 Director /s/ Carl M. Cousins
Carl M. Cousins
Continued...
<PAGE> 69
DATE TITLE SIGNATURE
---- ----- ---------
March 24, 2000 Director /s/ Lee E. Tabas
Lee E. Tabas
March 24, 2000 Director /s/ Howard Wurzak
Howard Wurzak
March 24, 2000 Senior Vice President/ /s/ John M. Decker
Director John M. Decker
March 24, 2000 Senior Vice President/ /s/ Murray Stempel
Director Murray Stempel
March 24, 2000 Director /s/ Jack R. Loew
Jack R. Loew
March 24, 2000 Director /s/ Edward B. Tepper
Edward B. Tepper
<PAGE> 70
ROYAL BANCSHARES OF PENNSYLVANIA, INC.
ANNUAL REPORT ON FORM 10-K
EXHIBIT INDEX
3(i) Articles of Incorporation. (Incorporated by reference to Exhibit 3(i)
to Registrant's Registration Statement No. 0-26366 on Form S-4.)
3(ii) By-laws. (Incorporated by reference to Exhibit 3(i) to Registrant's
Registration Statement No. 0-26366 on Form S-4.)
10.1 Stock Option and Appreciation Right Plan. (Incorporated by reference
to the Registrant's Registration Statement N0. 333-25855, on form S-8
filed with the Commission on April 5, 1997).
10.2 Outside Directors' Stock Option Plan. (Incorporated by reference to
the Registrant's Registration Statement N0. 333-25855, on form S-8
filed with the Commission on April 5, 1997).
11. Statement Re: Computation of Earnings Per Share. (Included at Item 8,
hereof, Note A, "Per Share Information".)
12. Statements re: Computation of Ratios. (Included at Item 8 here of,
Note Q, "Regulatory Matters.")
21. Subsidiaries of Registrant.
23. Consent of Independent Accountants.
27. Financial Data Schedule.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
Company State
<S> <C>
Royal Bank of Pennsylvania, Inc. Pennsylvania
Royal Investment of Delaware, Inc. Delaware
Royal Real Estate of Pennsylvania, Inc. Pennsylvania
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We issued our report dated January 26, 2000, accompanying the
consolidated financial statements included in the 1999 Annual Report to
Shareholders, which is incorporated by reference in the Annual Report of Royal
Bancshares of Pennsylvania, Inc. and Subsidiaries on Form 10-K for the year
ended December 31, 1999. We hereby consent to the incorporation by reference of
said report in the Company's Registration Statements on Form S-4 (File Nos.
33-78310 and 33-80616) and on Form S-8 (File No. 333-25855)
/s/ Grant Thornton, LLP
Philadelphia, Pennsylvania
March 24, 2000
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