-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SAF52HdHA2uJRFxV8HOZyLdOLlIMzQFiBChdDTr6K7/yUZv7pexJIBuVW29EGlRN 7eVwxxf/44d1IP5qPQavrw== 0000893220-98-000608.txt : 19980407 0000893220-98-000608.hdr.sgml : 19980407 ACCESSION NUMBER: 0000893220-98-000608 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROYAL BANCSHARES OF PENNSYLVANIA INC CENTRAL INDEX KEY: 0000922487 STANDARD INDUSTRIAL CLASSIFICATION: 6022 IRS NUMBER: 231627866 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-26366 FILM NUMBER: 98577628 BUSINESS ADDRESS: STREET 1: 732 MONTGOMERY AVE CITY: NARBERTH STATE: PA ZIP: 19072 BUSINESS PHONE: 6106684700 MAIL ADDRESS: STREET 1: 732 MONGTOMERY AVENUE CITY: NARBERTH STATE: PA ZIP: 19072 10-K405 1 ROYAL BANCSHARES OF PENNSYLVANIA, INC. FORM 10-K 1 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, 1997 [ ] 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 of (IRS Employer 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 28, 1998 was $78,357,352. As of February 28, 1998, the Registrant had 7,021,161 and 1,587,921 shares outstanding of Class A and Class B common stock, respectively. 1 2 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, 1997, RBPA had consolidated total assets of approximately $416.6 million, total deposits of approximately $265.4 million and stockholders' equity of approximately $89.6 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. 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 to a lesser extent, 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, Philadelphia and Berks counties. The Bank also considers the states of Pennsylvania, New Jersey, New 2 3 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 Route 202 and Warner Road, King of Prussia, 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, small 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 125 persons on a full-time equivalent basis as of December 31, 1997. Deposits. At December 31, 1997, total deposits of the Bank were distributed among demand deposits (14%), money market deposit accounts, savings and Super Now (32%) and time deposits (53%). At year end 1997, deposits decreased $11.2 million from year end 1996, or 4.4%, primarily due to decreases experienced in certificate of deposits and to a lesser extent, NOW and money market deposits. We note that the Bank or any bank could be financially stressed in the event a material number of the depositors elected to withdraw deposits from the institution within a short period of time. Conceivably, this could occur even though the FDIC insures each depositor for up to $100,000. Lending. At December 31, 1996, the Bank had a total loan portfolio of $291 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. 3 4 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, 1997, total assets of RID were $27.9 million, of which $18 million was held in investment securities comprised primarily of corporate debt and equity securities. 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. 4 5 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 5 6 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") 6 7 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). 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 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 7 8 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:
LTV Loan Category Limit --------------- ----- 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%
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 8 9 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. 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. 9 10 ITEM 2. PROPERTIES The Bank has thirteen banking offices, all of which are located in Pennsylvania, at the following locations: Narberth Office(1) Villanova Office King of Prussia Office - - ------------------- ---------------- ---------------------- 732 Montgomery Ave 801 East Lancaster Avenue Rt. 202 & Warner Road Narberth, Pa. 19072 Villanova, Pa. 19085 King of Prussia, Pa. 19406 Philadelphia Offices Shillington Office Bridgeport Office (1) - - ------------------- ------------------ ---------------------- - - -One Penn Square West 516 East Lancaster Avenue 105 W. 4th Street 30 South 15th Street Shillington. Pa 19607 Bridgeport, Pa. 19406 Philadelphia, Pa 19102 Trooper Office(1) Upper Merion Office ---------------- ---------------------- - - -1340 Walnut Street Trooper & Egypt Roads Beidler & Henderson Roads Philadelphia, Pa. 19107 Trooper, Pa. 19401 King of Prussia, Pa. 19406 - - -401 Fairmount Avenue(1) Reading Office Phoenixville Office (1) -------------- ---------------------- Philadelphia, Pa. 19123 501 Washington Street 808 Valley Forge Road Reading, Pa. 19601 Phoenixville, Pa. 19460 Jenkintown Office(1) - - -------------------- ------------------------- 600 Old York Road (1) owned Jenkintown, Pa 19046 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 1998 and 2003. During 1997, the Bank made aggregate lease payments of approximately $385 thousand. The Bank believes that all of its properties are attractive, adequately insured, and well maintained. 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 Other than litigation incidental to RBPA's business, there are no material legal proceedings pending to which RBPA or any of its subsidiaries is a party or which any of their property is the subject. In management's opinion, resolution of any pending litigation will not have a material adverse effect on RBPA's financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 10 11 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 Registrant's stock prices and cash dividend per share for each class, for the last eight quarters.
1997 HIGH LOW LAST First Quarter .................................. $14.904 $11.058 $13.462 Second Quarter ................................. 15.750 12.500 15.000 Third Quarter .................................. 17.625 14.750 16.875 Fourth Quarter ................................. 26.250 16.500 23.500
1996 HIGH LOW LAST First Quarter .................................. $10.377 $ 8.255 $10.142 Second Quarter ................................. 11.000 9.500 10.125 Third Quarter .................................. 11.000 9.500 10.375 Fourth Quarter ................................. 12.000 10.375 11.500
(Source: This summary reflects information supplied by NASDAQ.) "The NASDAQ Stock Market" or "NASDAQ" is a highly-regulated electronic securities market comprised of competing Market Makers whose trading is supported by a communications network linking them to quotation dissemination, trade reporting, and order execution systems. The market also provides specialized automation services for screen-based negotiations of transactions, on-line comparison of transactions, and a range of informational services tailored to the needs of the securities industry, investors and issuers. The NASDAQ Stock Market consists of two distinct market tiers: the NASDAQ National Market and The NASDAQ SmallCap Market. 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 December 31, 1997, is shown below:
TITLE OF CLASS NUMBER OF RECORD HOLDERS Class A Common Stock 446 Class B Common Stock 173
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 491 as of December 31, 1997. 11 12 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 March 20, 1995 the Board of Directors of the Registrant declared a 6% stock dividend on both its Class A Common Stock and Class B Common Stock shares payable on May 12, 1995 to Shareholders of record on April 20, 1995. The stock dividend resulted in the issuance of 347,661 additional shares of Class A Common Stock and 87,359 additional shares of Class B Common Stock . On March 14, 1996, the Board of Directors of the Registrant declared a 6% stock dividend on both its Class A Common Stock and Class B Common Stock shares payable May 10, 1996, to Shareholders of record on April 18, 1996. The stock dividend resulted in the issuance of 365,229 additional shares of Class A Common Stock and 91,641 additional shares of Class B Common Stock.. 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. Future 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 a cash dividends in each quarter of 1997 and 1996 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 $5.3 and $2 million for 1997 and 1996, 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 1997 and 1996.
CASH DIVIDENDS PER SHARE ------------------------- 1997 CLASS A CLASS B - - ---- ------- ------- First Quarter $.12 $.1380 Second Quarter $.15 $.1725 Third Quarter $.18 $.2070 Fourth Quarter $.18 $.2070
CASH DIVIDENDS PER SHARE ------------------------- 1996 CLASS A CLASS B - - ---- ------- ------- First Quarter $.06 $.0690 Second Quarter $.06 $.0690 Third Quarter $.06 $.0690 Fourth Quarter $.06 $.0690
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. 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 12 13 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. 13 14 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.
YEARS ENDED DECEMBER 31, (IN THOUSANDS) -------------------------------------------------------------------- INCOME STATEMENT DATA 1997 1996 1995 1994 1993 - - --------------------- -------- -------- ------- ------- -------- Interest income $ 33,372 $ 33,618 $29,755 $29,021 $ 27,636 Interest expense 10,048 10,054 9,592 8,244 9,290 -------- -------- ------- ------- -------- Net interest income 23,324 23,564 20,163 20,777 18,346 Increase (Decrease) Provision for loan losses (2,118) (1,488) -- 2,500 811 -------- -------- ------- ------- -------- Net interest income after loan loss provision 25,442 25,052 20,163 18,277 17,535 Gain on sale of loans 29 427 86 71 1,500 Gain/Loss on real estate 1,204 2,016 870 1,435 (3,008) Other income 1,392 1,759 1,098 947 1,298 -------- -------- ------- ------- -------- Total other income 2,625 4,202 2,054 2,453 (210) Income before other expenses & income taxes 28,067 29,283 22,217 20,730 17,325 Non interest expenses: Salaries 9,546 9,602 4,850 3,861 3,483 Other 5,088 5,508 5,461 5,791 4,675 -------- -------- ------- ------- -------- Total other expenses 14,634 15,110 10,311 9,652 8,158 Income before taxes and cumulative effect of change in accounting principle 13,433 14,144 11,906 11,078 9,167 Income taxes 4,074 3,907 3,648 3,066 2,543 -------- -------- ------- ------- -------- Income and cumulative effect of a change in accounting principle 9,359 10,237 8,258 8,012 6,624 Effect of a change in accounting principle -- -- -- -- 500 -------- -------- ------- ------- -------- Net income $ 9,359 $ 10,237 $ 8,258 $ 8,012 $ 7,124 ======== ======== ======= ======= ======== Basic earnings per share (1) $ 1.09 $ 1.20 $ 0.96 $ 0.92 $ 0.81 -------- -------- ------- ------- -------- Diluted earnings per share (1) $ 1.05 $ 1.17 $ 0.94 $ 0.90 $ 0.80 -------- -------- ------- ------- --------
- - --------------------------------------- (1) Earnings per share has the weighted average number of shares used in the calculation adjusted to reflect a 4% stock dividend in 1997, a 6% stock dividend in 1996, a 6% stock dividend in 1995, a 6% stock dividend in 1994, and a 5% stock dividend in 1993.
BALANCE SHEET DATA 1997 1996 1995 1994 1993 - - ------------------ -------- -------- -------- -------- -------- (in thousands) Total assets $416,598 $355,149 $356,264 $312,956 $304,574 Total average assets 342,361 343,360 312,823 282,162 282,730 Loans, net of unearned income 282,711 209,017 198,419 162,739 167,680 Total deposits 265,363 254,183 268,242 211,965 226,062 Total long term debt 31,063 4,814 2,984 3,969 727 Total stockholders' equity 89,505 84,581 77,189 70,617 62,652 Total average stockholders' equity 86,572 80,910 74,091 66,398 58,927 Return on average assets 2.7% 3.0% 2.6% 2.8% 2.5% Return on average equity 10.8% 12.7% 11.1% 12.1% 12.1% Average equity to average assets 25.3% 23.6% 23.7% 23.5% 20.8% Cash dividend payout ratio 56.7% 19.2% 11.4% -- --
14 15 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:
1997 1996 1995 ------------------------------ ----------------------------- ----------------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ ASSETS (In thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE - - ---------------------------------- -------- -------- ----- -------- -------- ----- -------- -------- ------ Interest bearing deposits in banks $ 1,230 $ 87 7.10% $ 1,758 $ 103 5.86% $ 2,018 $ 106 5.25% Federal funds 17,921 1,012 5.64% 18,332 1,015 5.54% 19,519 1,121 5.74% Investment securities: Held to maturity: Taxable 84,399 5,604 6.64% 109,522 7,006 6.40% 92,821 6,048 6.52% Nontaxable(1) 1,455 169 11.63% 497 88 17.68% 6,103 1,003 16.44% -------- -------- ----- -------- -------- ----- -------- -------- ----- Total held to maturity 85,854 5,774 6.73% 110,019 7,094 6.45% 98,924 7,051 7.13% Available for sale Taxable 12,212 991 8.12% 3,674 326 8.87% 940 66 7.02% -------- -------- ----- -------- -------- ----- -------- -------- ----- Total investment securities 98,066 6,765 6.90% 113,693 7,390 6.50% 99,864 7,117 7.13% Loans:(2) Commercial & industrial(3) 111,704 12,297 11.01% 113,543 15,553 13.70% 111,002 12,964 11.68% Commercial mortgages 87,464 11,658 13.33% 68,689 7,791 11.34% 61,446 7,234 11.77% Other loans(1) 14,200 1,782 12.55% 18,386 1,766 9.61% 13,286 1,809 13.62% -------- -------- ----- -------- -------- ----- -------- -------- ----- Total loans 213,368 25,737 12.06% 200,618 25,110 12.52% 185,734 22,007 11.85% -------- -------- ----- -------- -------- ----- -------- -------- ----- Total interest earning assets $330,585 $ 33,600 10.16% $334,401 $ 33,648 10.06% $307,135 $ 30,351 9.88% Non interest earning assets Cash & due from banks 6,636 6,207 6,164 Other assets 17,366 16,401 14,571 Allowance for loan loss (8,764) (9,672) (9,376) Def income/unearned disc (3,462) (3,977) (5,671) -------- -------- -------- Total non interest earning assets 11,776 8,959 5,688 -------- -------- -------- Total assets $342,361 $343,360 $312,823 ======== ======== ======== LIABILITIES & STOCKHOLDERS' EQUITY Deposits: Savings $ 16,668 $ 454 2.72% $ 16,514 $ 425 2.57% $ 12,319 $ 337 2.74% NOW & Money Market 69,077 2,171 3.14% 71,597 2,129 2.97% 60,349 2,023 3.35% CDs & other time deposits 121,934 7,185 5.89% 126,089 7,157 5.68% 122,826 6,948 5.66% -------- -------- ----- -------- -------- ----- -------- -------- ----- Total interest bearing deposits $207,679 $ 9,810 4.72% $214,200 $ 9,711 4.53% $195,494 $ 9,308 4.76% Federal funds 123 6 5.00% -- -- -- 116 5 4.31% Long term borrowings 3,066 231 7.54% 4,909 343 6.99% 3,918 280 7.15% -------- -------- ----- -------- -------- ----- -------- -------- ----- Total interest bearing liabilities $210,868 $ 10,048 4.76% $219,109 $ 10,054 4.59% $199,528 $ 9,593 4.81% -------- -------- ----- -------- -------- ----- -------- -------- ----- Non interest bearing deposits 32,992 33,369 32,319 Other liabilities 11,929 9,972 6,885 -------- -------- -------- Total liabilities 255,789 262,450 238,732 Stockholders' equity 86,572 80,910 74,091 -------- -------- -------- Total liabilities and stockholders' equity $342,361 $343,360 $312,823 ======== ======== ======== Net interest income $ 23,553 $ 23,594 $ 20,758 ======== ======== ======== Net yield on interest earning assets 7.12% 7.06% 6.76% ===== ===== =====
- - ---------------------------- (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. (3) Interest income on commercial & industrial loans for 1996 include a one-time recovery of interest of $3.2 million. 15 16 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, 1997 and 1996, as compared to respective previous periods, into amounts attributable to both rate and volume variances.
1997 VS 1996 1996 VS 1995 (IN THOUSANDS) (IN THOUSANDS) ------------------------------- ------------------------------- CHANGES DUE TO: CHANGES DUE TO: ------------------- ------------------- INTEREST INCOME VOLUME RATE TOTAL VOLUME RATE TOTAL - - --------------------------------------------- ------- ------- ------- ------- ------- ------- Interest bearing deposits in banks $ (35) $ 19 $ 16 $ (14) $ 14 $ -- Federal funds sold -- (3) (3) (6) (100) (106) Investment securities: Held to maturity: Taxable (1,659) 257 (1,402) 1,070 (112) 958 Nontaxable 120 (39) 81 (835) 262 (573) Available for sale Taxable 695 (30) 665 238 22 260 ------- ------- ------- ------- ------- ------- Total investment securities (844) 188 (656) 657 (43) 614 Loans: Commercial & industrial (248) (3,008) (3,256) 303 2,286 2,589 Commercial mortgages 2,357 1,510 3,867 829 (272) 557 Other loans (455) 471 16 524 (315) 209 ------- ------- ------- ------- ------- ------- Total loans 1,654 (1,027) 627 1,656 1,699 3,355 ------- ------- ------- ------- ------- ------- Total increase (decrease) in interest income $ 775 $ (823) $ (48) $ 2,109 $ 1,785 $ 3,893 INTEREST EXPENSE Deposits: Savings $ 4 $ 25 $ 29 $ 109 $ (21) $ 88 NOW & Money Market (77) 119 42 351 (245) 106 CDs & other time deposits 240 268 28 185 24 209 ------- ------- ------- ------- ------- ------- Total interest bearing deposits (313) 412 100 645 (242) 403 Federal funds purchased 6 -- 6 (5) -- (5) Mortgage payable and long term borrowings (137) 25 (112) 69 (6) 63 ------- ------- ------- ------- ------- ------- Total increase (decrease) in interest expense (444) 437 (6) 709 (248) 461 ------- ------- ------- ------- ------- ------- Total increase (decrease) in net interest income $ 1,219 $(1,261) $ (42) $ 1,400 $ 2,033 $ 3,433 ======= ======= ======= ======= ======= =======
16 17 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.
YEAR ENDING DECEMBER 31, (IN THOUSANDS) ----------------------------------------------------------------------------------------------------- Loans 1997 1996 1995 1994 1993 ----------------------------------------------------------------------------------------------------- Comm'l & industrial $ 123,956 41% $ 116,616 55% $ 124,065 61% $104,312 62% $104,991 59% Real estate 176,315 58% 93,925 44% 75,758 37% 64,357 38% 73,157 41% Consumer 1,367 1% 2,097 1% 3,352 2% -- -- -- --------- --- --------- --- --------- --- -------- --- -------- --- Total gross loans 301,638 100% 212,638 100% 203,175 100% 168,689 100% 178,148 100% Unearned income (1,498) (1,290) (1,160) (1,006) (616) Disc on loans purchased (9,243) (2,331) (3,596) (4,924) (9,852) Allowance for loan loss (8,816) (9,084) (9,747) (8,992) (6,608) --------- --------- --------- -------- -------- Total loans, net $ 282,711 $ 199,933 $ 188,672 $153,747 $161,072 ========= ========= ========= ======== ========
ANALYSIS OF ALLOWANCE FOR LOAN LOSS
YEAR ENDING DECEMBER 31, (IN THOUSANDS) ---------------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- -------- -------- -------- Total Loans $ 290,897 $ 209,017 $198,419 $162,739 $167,680 ========= ========= ======== ======== ======== Daily average loan balance $ 213,368 $ 200,618 $185,734 $165,702 $190,222 ========= ========= ======== ======== ======== Allowance for loan loss: Balance at the beginning of the year $ 9,084 $ 9,747 $ 8,992 $ 6,608 $ 10,889 Charge offs by loan type: Commercial 762 843 292 273 1,711 Real estate -- 240 21 17 4,068 --------- --------- -------- -------- -------- Total charge offs 762 1,083 313 290 5,779 Recoveries by loan type: Commercial 1,934 1,790 125 141 629 Real estate 48 118 31 33 58 -------- --------- -------- -------- -------- Total recoveries 1,982 1,908 156 174 687 --------- --------- -------- -------- -------- Net loan charge offs (1,220) (825) 157 116 5,092 Purchase of Knoblauch Bank -- -- 912 -- -- Increase (decrease) in provision for loan loss (2,118) (1,488) -- 2,500 811 --------- --------- -------- -------- -------- Balance at end of year $ 8,186 $ 9,084 $ 9,747 $ 8,992 $ 6,608 ========= ========= ======== ======== ======== Net charge offs to average loans (0.57%) (0.41%) 0.08% 0.07% 2.68% ========= ========= ======== ======== ======== Allowance to loans at year end 2.81% 4.35% 4.91% 5.53% 3.94% ========= ========= ======== ======== ========
The Bank utilizes the reserve method of accounting for possible loan losses. Under this method, provisions for possible loan losses are charged to operation and recognized loan losses are charged and loan recoveries are credited to the allowance. The allowance for possible loan loss represents the amount set aside to protect against the risk inherent in the Bank's portfolio. Management's periodic evaluation of the adequacy of the allowance takes into consideration the Bank's past loan loss experience, known and inherent risks in the loan portfolio, adverse situations which may affect the borrower's ability to repay, overall portfolio quality, and current economic conditions. Provisions for possible loan losses are charged to earnings to bring the allowance to a level considered by management to be appropriate in light of the foregoing considerations. However, since loan loss reserve adequacy is subjective, the loan loss reserve may be excessively funded or need additional funds from time to time. A loan review is performed quarterly by the Loan Review officer to determine the adequacy of the reserves. 18 LOANS AND LEASE FINANCING RECEIVABLES The following table summarizes the loan portfolio by loan category and amount that corresponds to the appropriate regulatory definitions.
YEAR ENDING DECEMBER 31, (IN THOUSANDS) -------------------------------- 1997 1996 1995 -------- -------- -------- Loans secured by real estate Construction and land development $ 29,172 $ 5,057 $ 6,845 Secured by farmland (including farm residential and other improvements) -- -- 355 Secured by 1-4 family residential properties: Revolving, open-end loans secured by 1-4 family residential properties and extended under lines of credit 11,433 11,655 11,319 All other loans secured by 1-4 family residential properties: Secured by first liens 23,139 21,843 24,580 Secured by junior liens 8,195 7,121 7,428 Secured by multi family (5 or more) residential properties 23,459 20,882 23,853 Secured by nonfarm nonresidential properties 177,196 117,559 97,607 Commercial and industrial loans to US addresses 25,820 24,559 26,122 Loans to individuals for household, family, and other personal expenditures 1,478 1,848 3,358 Obligations of state and political subdivisions in the US 1,593 1,903 1,391 All other loans 154 211 317 Less: Any unearned income on loans listed above 10,742 3,621 4,756 -------- -------- -------- Total loans and leases, net of unearned income $290,897 $209,017 $198,419 ======== ======== ========
CREDIT QUALITY The following table presents the principal amounts of nonaccruing loans and other real estate.
YEARS ENDING DECEMBER 31, (IN THOUSANDS) --------------------------------------------------- 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------- Non-accruing loans (1)(2) $4,317 $4,653 $6,233 $1,703 $ 7,726 Past due loans over 90 days but still accruing -- -- 391 391 391 ------ ------ ------ ------ ------- Total nonperforming loans 4,317 4,653 6,624 2,094 8,117 Other real estate -- 504 612 4,492 6,505 ------ ------ ------ ------ ------- Total nonperforming assets $4,317 $5,157 $7,236 $6,586 $14,622 ====== ====== ====== ====== ======= Nonperforming assets to total assets 1.22% 1.45% 2.03% 2.10% 4.80% ====== ====== ====== ====== ======= Nonperforming loans to total loans 2.03% 2.23% 3.34% 1.29% 4.84% ====== ====== ====== ====== ======= Allowance for loan loss to nonperforming loans 210.42% 195.23% 147.15% 429.42% 81.40% ====== ====== ====== ====== =======
(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 $388,517 for 1997, $418,740 for 1996, $1,889,000 for 1995, $115,000 for 1994, and $1,380,000 for 1993. 19 INVESTMENTS SECURITIES The contractual maturity distribution and weighted average rate of the investments held to maturity portfolio at December 31, 1997 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%.
AS OF DECEMBER 31, 1997 (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 - - ------------ ------- ------ ------- ------- ------ ------ ------ ------ ------ ---- State & political subdivisions $ -- -- $ 2,700 10.5% $ -- -- $ 399 15.7% $ 3,099 11.1% US Treasuries 5,369 5.6% 2,574 5.7% 1,588 6.6% 3,378 7.2% 12,908 6.2% Other securities 35,250 6.5% 7,561 7.2% 5,553 7.8% -- -- 48,364 6.8% ------- --- ------- ---- ------ --- ------ ---- ------- ---- Total $40,619 6.4% $12,835 7.6% $7,141 7.5% $3,777 8.1% $64,371 6.8% ======= === ======= ==== ====== === ====== ==== ======= ====
The following tables presents the consolidated book values and approximate market value at December 31, 1997, 1996, and 1995, respectively, for each major category of RBPA's investment securities portfolio for held to maturity securities and available for sale securities.
AS OF DECEMBER 31, (IN THOUSANDS) ----------------------------------------------------------------------- 1997 1996 1995 ---------------------- -------------------- -------------------- AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET SECURITIES AVAILABLE MATURITY COST VALUE COST VALUE COST VALUE - - ------------------------------------------ --------- -------- --------- -------- --------- -------- State & political subdivisions $ 3,098 $ 3,152 $ 499 $ 580 $ 499 $ 612 US Treasuries & agencies 12,908 13,096 15,183 15,321 20,810 21,166 Other securities 48,365 48,737 97,793 97,734 82,154 82,858 --------- -------- -------- -------- -------- -------- Total $ 64,371 $64,985 $113,475 $113,635 $103,463 $104,636 ========= ======== ======== ======== ======== ========
AS OF DECEMBER 31, (IN THOUSANDS) ----------------------------------------------------------------------- 1997 1996 1995 ---------------------- -------------------- -------------------- AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET SECURITIES AVAILABLE FOR SALE COST VALUE COST VALUE COST VALUE - - ------------------------------------------ --------- -------- --------- -------- --------- -------- Federal Home Loan Bank stock $ 3,174 $ 3,174 $ 1,024 $ 1,024 $ 938 $ 938 Preferred and common stock 2,944 2,977 3,703 3,701 32 32 Other securities 13,964 14,897 -- -- -- -- -------- -------- -------- -------- -------- -------- Total $ 20,082 $ 21,048 $ 4,727 $ 4,725 $ 970 $ 970 ======== ======== ======== ======== ======== ========
20 DEPOSITS The average balance of deposits by major classifications for each of the last three years are presented in the following table.
AS OF DECEMBER 31, (IN THOUSANDS) ----------------------------------------------------------- 1997 1996 1995 --------------- ----------------- ---------------- AVERAGE AVERAGE AVERAGE RATE RATE RATE RATE RATE RATE -------- ---- -------- ---- -------- ---- Demand deposits: Non interest bearing $ 32,992 -- $ 33,369 -- $ 32,319 -- Interest bearing (NOW) 24,539 2.50% 20,823 2.28% 16,007 2.59% Money market deposits 44,538 3.50% 50,774 3.26% 44,342 3.63% Savings deposits 16,668 2.72% 16,514 2.57% 12,319 1.80% Certificate of deposit 121,934 5.89% 126,089 5.68% 122,826 5.66% -------- ---- -------- ---- -------- ---- Total deposits $240,671 $247,569 $227,813 ======== ======== ========
The remaining maturity of Certificates of Deposit of $100,000 or greater.
AT DECEMBER 31, (IN THOUSANDS) ----------------------- MATURITY 1997 1996 --------- --------- Three months or less $ 5,433 $ 7,678 Over three months through twelve months 8,850 9,330 Over twelve months through five years 14,052 6,212 Over five years 4,840 438 --------- --------- Total $33,175 $23,658 ========= =========
SHORT AND LONG TERM BORROWINGS
YEAR ENDING DECEMBER 31, (IN THOUSANDS) -------------------------------------------------- 1997 1996 1995 1994 1993 ------- ------ ------ ------- ------- Short term borrowings (1) $15,000 $ -- $ -- $21,000 $10,060 Long term borrowings: Mortgage payable (2) 571 613 652 689 727 FHLB advances (3) 31,063 4,201 2,332 3,280 -- ------- ------ ------ ------- ------- Total long term borrowings $46,634 $4,814 $2,984 $24,969 $10,787 ======= ====== ====== ======= =======
(1) In 1997 and 1994, 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 (5.25% at December 31, 1997) and is guaranteed by an industrial development authority. (3) Advances from the Federal Home Loan Bank of Pittsburgh consist of three separate advances with interest rates of 6.24% to 8.20%, with maturities from December 31, 1997 thru 2002. 21 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 $61.4 million, or 17.3%, to $416.6 million at December 31, 1997 from $355.1 million at year end 1996, primarily due to significant growth experienced in loans and an increase in cash and cash equivalents of $81.9 million and $12.0 million, respectively, in addition to an increase in available for sale investment securities of $16.3 million. These increases were partially offset by a $32.8 million decline in investment securities held to maturity. 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 increased $12 million, or 7%, to $30.4 million at December 31, 1997, primarily due to maturities from the investment portfolio. The average balance of cash and cash equivalents was $25.8 million for 1997 versus $26.3 million for 1996. Investment Securities Held to Maturity. Held to maturity investment securities ("HTM") represent approximately 26% of average earning assets during 1997. HTM investment securities declined $49.1 million, or 43%, from $113.5 million at December 31, 1996 to $64.4 million at December 31, 1997, primarily due to scheduled maturities exceeding purchases. Investment Securities Available for Sale. Available for sale securities ("AFS") was $21 million at December 31, 1997, an increase of $16.3 million from $4.7 million at December 31, 1996. This increase is primarily due to the purchase of capital trust preferred securities of three local banks during 1997. Loans. RBPA's primary earning assets are loans, representing approximately 65% of average earning assets during 1997. 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 one to four family residential and home equity loans. This composition of loans did not change during 1997. During 1997, total loans increased 39% from $209 million at December 31, 1996 to $290.9 million at December 31, 1997, primarily due to the purchase of a $75.4 million loan portfolio from the FDIC on December 23, 1997, in addition to internally generated loan growth of approximately 9%. This $75.4 million portfolio was purchased at a discount of $66.7 million and is comprised of approximately 175 commercial loans secured primarily by land, retail and office properties in the midatlantic and northeast regions. Aside from this loan purchase, net loans increased $17.9 million or, 9% during 1997 due to internal loan growth exceeding maturities and payoffs. Deposits. RBPA's primary source of funding, deposits, increased $11.2 million, or 4.3%, from $254.2 million at December 31, 1996 to $265.4 million at December 31, 1997. This increase in deposits is primarily due to increases in certificates of deposits and savings deposits of $17.3 and $1.1 million, respectively, partially offset by runoff experienced in money market deposits and non interest deposits of $6.6 and $.6 million, respectively. The $17.3 million increase in certificates of deposits is partially related 22 to the funding of the FDIC loan purchase in December 1997. This $17.3 million increase includes $10.1 million in brokered deposits. Borrowings. Long term borrowings increased $26.9 million to $31.1 million at December 31, 1997 primarily due to a new $30 million Federal Home Loan Bank ("FHLB") advance taken in December 1997 to help fund the purchase of the FDIC loan portfolio, partially offset by the payoff of a $2.5 million FHLB advance in January 1997, in addition to a scheduled maturity of a $.6 million FHLB advance in December. The average balance of long term borrowings during 1997 was $2.5 million. Federal funds purchased was $15 million at December 31, 1997 and was paid down in full on January 2, 1998. The average balance of Federal funds purchased during 1997 was $.1 million. The mortgage payable balance at December 31, 1997 was $.6 million. Stockholders' Equity. Stockholders' equity increased $4.9 million or 6% in 1997 to $89.5 million primarily due to net income of $9.4 million partially offset by $5.3 million in cash dividends paid in 1997. During 1997, RBPA repurchased 9,403 shares of Class A common stock at an average cost of $12.68 per share totaling $119 thousand in accordance with a stock buyback program. 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 was $9.4 million in 1997 compared to $10.2 million in 1996 and $8.3 million in 1995. Basic earnings per share was $1.09, $1.20 and $.96 for 1997, 1996, and 1995, respectively. The decrease in net income of $.8 million in 1997, or 8%, is primarily due to the receipt of nonrecurring income in 1996 relating to loan recoveries which significantly contributed to the increase in net income in 1996 from 1995. 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 $23.3 million in 1997, compared to $23.6 million in 1996 and $20.2 million in 1995. Yields on interest earning assets increased slightly to 10.16% from 10.06% in 1996, a difference of 10 basis points. The yield on interest earning assets in 1996 increased 18 basis points from 9.88% for 1995 primarily due to an increase in the yield on loans in 1996. Average interest earning assets decreased $3.8 million from $334.4 million in 1996 to $330.6 million for 1997, primarily due to decreases in investment securities of $15.6 million, partially offset by an increase in the average balance of loans of $12.8 million. Average interest earning assets increased $27.3 million in 1996 from $307.1 million in 1995 primarily due the acquisition of Knoblauch State Bank in July 1995. Yields on interest bearing deposits increased to 4.76% in 1997 from 4.59% in 1996 primarily due to higher costing certificates of deposits, while in 1996 the yield on interest bearing liabilities decreased 22 basis points from 4.81% in 1995 primarily due to lower costing yield on NOW and money market deposits in 1996. Average interest bearing liabilities decreased to $210.9 million from $219.1 million for 1996, primarily due to a decrease in average deposits in 1997. Average interest bearing liabilities increased $19.6 million in 1996 from $199.5 million in 1995. 23 LOANS AND MORTGAGES
1997 1996 1995 ------------ ------------ ------------ Average loan outstandings $213,368,000 $200,618,000 $185,734,000 Interest and fees on loans $ 25,737,000 $ 25,110,000 $ 22,007,000 Average Yield 12.06% 12.52% 11.85%
Although RBPA continues to originate five year fixed rate loans, a portion of the loan portfolio continues to be comprised of variable rate loans which helps to maintain its interest spread when rates change. RBPA's yields tend to have less of a downward fluctuation when interest rates decline as a portion of RBPA's loans have interest rate minimums associated with them. While RBPA's average prime rate increased to 8.43% in 1997 from 8.29% in 1996, the yield on loans deceased 46 basis points in 1997 from 12.52% in 1996 to 12.06% primarily due to interest recoveries in 1996 relating to a loan payoff in 1996. Average loans increased $12.8 million to $213.4 million in 1997 primarily due to internally generated loan growth. Yields on loans increased 67 basis points in 1996 to 12.52% from 11.85% in 1995, partially due to an interest recovery relating to a loan payoff in 1996. Average loans increased $14.9 million, or 8% in 1996 primarily due to an increase in loan originations. The Bank's average prime rate for 1996 was 8.29% versus 8.80% for 1995. INVESTMENTS SECURITIES HELD TO MATURITY
1997 1996 1995 ----------- ------------ ----------- Average HTM investment securities $85,854,000 $110,019,000 $98,924,000 Interest income $ 5,774,000 $ 7,094,000 $ 7,051,000 Average yield 6.73% 6.45% 7.13%
HTM investment securities are comprised primarily of taxable corporate debt issues, US Treasuries and agencies and to a lesser extent, non taxable state and municipal investment securities. The yield in HTM investment securities increased 28 basis points to 6.73% from 6.45% in 1996. This increase is partially attributable to an increase in yield on taxable investment securities of 24 basis points in 1997, in addition to an increase in the average balance of the nontaxable investment securities which have a higher effective yield. The average balance of HTM investment securities decreased $24.2 million in 1997 as scheduled maturities outpaced purchases. The yield on HTM investment securities decreased 68 basis points in 1996 to 6.45% from 7.13% in 1995 primarily due to scheduled maturities of higher yielding taxable bonds which were ultimately replaced by lower yielding taxable bonds. The average balance of HTM investment securities increased $14.8 million, or 15.0%. These purchases in corporate issues were "A" rated or better by Moody or Standard & Poor, with maturities in the three to five year ranges. It is RBPA's expressed intention to hold these securities to maturity, as has been the established investment policy. INVESTMENTS SECURITIES AVAILABLE FOR SALE
1997 1996 1995 ----------- ---------- -------- Average AFS investment securities $12,212,000 $3,674,000 $940,000 Interest and dividend income $ 991,000 $ 326,000 $ 66,000 Average yield 8.12% 8.87% 7.02%
24 AFS investment securities are comprised primarily of capital trust securities and to a lesser extent preferred and common stock.. The average balance increased $8.5 million during 1997 to $12.2 million, primarily due to the purchase of capital trust securities, and an increase in the FHLB stock position. The average balance increased $2.7 million in 1996 to $3.7 million from $.9 million in 1995, primarily due to the purchase of preferred stock in 1996. INTEREST EXPENSE ON NOW AND MONEY MARKET DEPOSITS
1997 1996 1995 ----------- ----------- ----------- Average NOW & Money Market deposits $69,077,000 $71,597,000 $60,349,000 Interest expense $ 2,171,000 $ 2,129,000 $ 2,023,000 Average cost of funds 3.14% 2.97% 3.35%
In 1997 the average cost of funds on NOW and money market deposits increased 17 basis points to 3.14% as interest rates increased slightly in 1997. The average balance decreased $2.5 million to $69.1 million in 1997. In 1996, the average cost of funds decreased 38 basis points to 2.97% from 3.35% in 1995 as interest rates declined during 1996. The average balance of these deposits increased to $71.6 million in 1996 from $60.3 million in 1995, primarily due to the acquisition of KSB in July 1995. INTEREST EXPENSE ON TIME DEPOSITS
1997 1996 1995 ------------ ------------ ------------ Average time deposits $121,934,000 $126,089,000 $122,826,000 Interest expense $ 7,185,000 $ 7,157,000 $ 6,948,000 Average cost of funds 5.89% 5.68% 5.66%
The average balance of time deposits decreased $4.2 million in 1997 to $121.9 million while the average cost of funds increased 21 basis points from 5.68% in 1996 to 5.89% in 1997. In 1996 the average balance increased $3.3 million from $122.8 million in 1995, while the average cost of funds increased 2 basis points from 5.66% in 1995. Although rates in general started to move downward in 1995 and trend higher in 1997, 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 1996, nineteen percent of time deposits are comprised of certificates of deposit accounts with balances of $100,000 or more, which are traditionally been considered more rate volatile than lower balance deposits; however, 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. Due to recoveries exceeding charge offs in 1997 and 1996, a recovery from the allowance for loan loss of $2.1 and $1.2 million (credit) was recorded in 1997 and 1996, respectively. These recoveries in 25 1997 and 1996 were primarily due to Management's assessment that the overall level of loan loss reserves was adequate. Charge offs in 1997 were $.8 million as compared to $1.1 million for 1996. Recoveries in 1997 were $2 million as compared to $1.9 million in 1996. The allowance for possible loan loss at December 31, 1997 was $8.2 million or 2.8% of net loans as compared to $9.1 million at December 31, 1996, or 4.3% of total loans and $9.7 million at December 31, 1995, or 4.9% of total loans. These percentage decreases in the allowance to net loans are primarily due to an increase in the level of loans outstanding for each respective period. 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, 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. Non interest income decreased $1.6 million to $2.6 million in 1997 from $4.2 million in 1996. This decrease is primarily due to the decrease in gains associated with the sale of other real estate owned in 1997. In 1997, these gains were $1.2 million as compared to $2 million in 1996. Additionally, gains on sale of loans decreased $.4 million in 1997 primarily due to a decrease in total dollar volume of residential mortgage loans closed and sold in 1997 versus 1996. Non interest income increased $2.1 million in 1996 to $4.2 million as compared to $2.1 million in 1995. This increase is primarily due to gains experienced on the sale of other real estate owned of $1.1 million. This activity is primarily due to the management aggressively concentrating on the disposal of its portfolio of Other Real Estate during 1996 and 1995. Loans are transferred into Other Real Estate when the Bank forecloses on the real estate collateralizing a non-performing loan, or when the borrower abandons the property and the Bank elects to assume control of the property. When this occurs the Bank will transfer the loan to Other Real Estate at the lower of the book value of the loan or the fair market value, less disposal costs, of the real estate held as collateral. 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 1997, total non interest expense decreased $.5 million to $14.6 million as compared to $15.1 million for 1996. This decrease is primarily due to various decreases in other operating expenses of $.5 million. While salaries and employee benefits expense of $9.5 million represents the largest component of non interest expense, it decreased slightly from the $9.6 million recorded in 1996. These decreases were partially offset by a $.1 million increase in occupancy expense relating to a settlement of a lease obligation assumed from the Knoblauch State Bank acquisition in 1995, which will expire in 1998. 26 Total non interest expense increased $4.8 million in 1996 to $15.1 million primarily due to an increase in salaries, wages and employee benefits of $4.8 million, reflecting the addition of new employees relating to the KSB acquisition in addition to an expense recorded relating to the establishment of a liability for the Stock Option and Appreciation Right Plan. The Company 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. Accordingly, the Company accrued $3.8 and $2.5 million relating to these stock appreciation rights as employee benefits expense in 1997 and 1996, respectively, toward the difference between current market values and the values at the grant date. Additional increases in total non interest expense in 1996 from 1995 were attributable to increases in occupancy expense, primarily the result of operating four additional banking offices due to the acquisition of KSB in 1995. Salary expenses increased $.6 million in 1996 primarily due to an increase in staffing expense associated with the acquisition of KSB. ACCOUNTING FOR INCOME TAXES The provision for federal income taxes was $4.1 million in 1997 as compared to $3.9 million for 1996 and $3.6 million for 1995. The increases in the tax provision for 1997 was due to a change in the deferred tax asset in 1997 from 1996. The increase in tax provision for 1996 and 1995 are due to higher taxable income of approximately $2.3 million and $.8 million, respectively, in addition to lower levels of tax-exempt income for both years, as the tax free investment securities portfolio continues to shrink due to bond calls. ACCOUNTING FOR DEBT AND EQUITY SECURITIES The Bank adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," at January 1, 1994. 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. Since the majority of the Bank's investments are classified as held to maturity, the adoption of SFAS No. 115 did not have a significant effect on stockholders' equity at January 1, 1994 and December 31, 1994. 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 27 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, 1997, 1996 and 1995 was 39%, 49%, 54%, 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. 28 The following table summarizes repricing intervals for interest earning assets and interest bearing liabilities as of December 31, 1997, 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, 1997, RBPA is in a slightly liability sensitive position which indicates liabilities will reprice somewhat more than assets. INTEREST RATE SENSITIVITY (IN MILLIONS)
DAYS ------------------- 1 TO 5 OVER 5 NON-RATE ASSETS (1) 0 - 90 91 - 365 YEARS YEARS SENSITIVE TOTAL - - ------- ------------------------------------------------------------ Interest-bearing deposits in banks $ 0.9 $ -- $ -- $ -- $ -- $ 0.9 Federal funds sold 22.9 -- -- -- 22.9 Investment securities: Available for sale 21.0 -- -- -- -- 21.0 Held to maturity 11.9 31.6 12.1 8.7 -- 64.3 ------ ------ ------ ------ ------ ------ Total investment securities 32.9 31.6 12.1 8.7 -- 85.3 Loans:(2) Fixed rate (3) 10.9 10.5 102.1 39.1 -- 162.6 Variable rate 33.5 18.3 62.5 24.8 -- 139.1 ------ ------ ------ ------ ------ ------ Total loans 44.4 28.8 164.6 63.9 -- 301.7 Other assets(4) -- -- -- -- 5.8 5.8 ------ ------ ------ ------ ------ ------ Total Assets $101.1 $ 60.4 $176.7 $ 72.6 $ 5.8 $416.6 ====== ====== ====== ====== ====== ====== LIABILITIES & CAPITAL Deposits: Non interest bearing deposits $ -- $ -- $ -- $ -- $ 37.7 $ 37.7 Interest bearing deposits(5) 60.9 26.7 -- -- -- 87.6 Certificate of deposits 19.0 43.4 46.4 31.4 -- 140.2 ------ ------ ------ ------ ------ ------ Total deposits 79.9 70.1 46.4 31.4 37.7 265.5 Short term borrowings 15.0 -- -- -- -- 15.0 Mortgage and long term borrowings 0.6 0.6 30.4 -- -- 31.6 Other liabilities -- -- -- -- 15.0 15.0 Capital -- -- -- -- 89.5 89.5 ------ ------ ------ ------ ------ ------ Total liabilities & capital $ 95.5 $ 70.7 $ 76.8 $ 31.4 $142.2 $416.6 ====== ====== ====== ====== ====== ====== Net interest rate GAP $ 5.6 ($10.3) $ 99.9 $ 41.2 ($136.0) ====== ====== ====== ====== ====== Cumulative interest rate GAP $ 5.6 ($ 4.7) $ 95.2 $136.0 -- ====== ====== ====== ====== ====== GAP to total assets 1% (3%) ====== ====== GAP to total equity 9% (17%) ====== ====== Cumulative GAP to total assets 1% (1%) ====== ====== Cumulative GAP to total equity 9% (8%) ====== ======
(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 variable rate loans and includes nonperforming loans. (3) Fixed rate loans include a portion of variable rate loans whose floors are in effect at December 31, 1997. (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. 29 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. CAPITAL ADEQUACY The table shown below sets forth RBPA's consolidated capital level and performance ratios.
REGULATORY 1997 1996 1995 MINIMUM ------ ------ ------ ---------- CAPITAL LEVEL Leverage ratio 25.6% 24.2% 22.2% 3% Risk based capital ratio: Tier 1 25.1% 28.9% 27.7% 4% Tier 2 26.4% 30.2% 29.0% 8% CAPITAL PERFORMANCE Return on average assets 2.7% 3.0% 2.6% -- Return on average equity 10.8% 12.7% 11.1% --
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, 1997, RBPA had an average capital to average asset ratio of 25.3 %. 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, 1997, RBPA's ratio using these standards was 26.4%. YEAR 2000 Management has initiated a company wide program to prepare RBPA's computer systems and applications for the year 2000. The year 2000 problem is pervasive and complex as virtually every computer system will be affected in some way by the rollover of the two digit year value to 00. Through a special committee and outside consultants, RBPA is conducting a comprehensive review of its computer systems and third party vendors providing hardware and software services to identify systems and vendors that could be affected by the year 2000 issue. As much of RBPA's data processing is outsourced to third 30 party vendors, RBPA does not expect the costs associated with year 2000 compliance over the next three years to have a material effect on its financial position or results of operations. The amount expensed in 1997 was immaterial. 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 15% of outstanding shares). The option price is equal to the fair market value at the date of the grant. At December 31, 1997, 519,277 options have been granted (the fair market per share at the time of the grant was $13.75 in 1997 and $10.00 in 1996) which are exercisable at 20% per year. At December 31, 1997, options covering 325,036 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 ($13.75 per share in 1997 and $10.00 in 1996) at the date of the grant. Currently, the strike price on the options ranges from $2.695 to $13.225 per share. During 1997, 7,284 options were exercised at strike prices ranging from $2.709 to $9.615 per share. At December 31, 1997, 51,175 options were outstanding and options covering 37,135 shares were exercisable. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK A simulation model is used to estimate the impact of various changes, both upward and downward, in market interest rates and volumes of assets and liabilities on net income. This model produces an interest rate exposure report that forecasts changes in the market value of portfolio equity under alternative interest rate environments. 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: At December 31, 1997 (Dollars in Thousands)
Market Value of Percent of Changes in Rates Portfolio Equity Change + 400 basis points $ 74,739 (20.6)% + 300 basis points 77,784 (15.9) + 200 basis points 81,167 (11.1) + 100 basis points 84,921 (6.2) Flat rate 90,169 -- - 100 basis points 100,903 10.7 - 200 basis points 116,463 22.6 - 300 basis points 135,271 33.3 - 400 basis points 158,532 43.1
31 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. 32 ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES DECEMBER 31, 1997 AND 1996 33 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, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /S/ Grant Thornton LLP Philadelphia, Pennsylvania January 23, 1998 34 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31,
ASSETS 1997 1996 Cash and due from banks $ 7,491,242 $ 7,744,012 Federal funds sold 22,925,000 10,625,000 ------------ ------------ Total cash and cash equivalents 30,416,242 18,369,012 ------------ ------------ Interest bearing deposits in banks 300,030 953,000 Investment securities held to maturity (market value of $64,984,987 and $113,635,320 in 1997 and 1996, respectively) 64,371,042 113,474,908 Investment securities available for sale - at market value 21,048,793 4,725,151 Total loans 290,897,048 209,016,895 Less allowance for loan losses 8,186,237 9,084,153 ------------ ------------ Net loans 282,710,811 199,932,742 Other real estate, net -- 504,104 Premises and equipment, net 4,788,921 4,708,531 Accrued interest and other assets 12,962,240 12,481,420 ------------ ------------ $416,598,079 $355,148,868 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits Non-interest bearing $ 37,712,928 $ 38,327,081 Interest bearing (includes certificates of deposit in excess of $100,000 of $33,175,135 and $23,657,679 in 1997 and 1996, respectively) 227,650,506 215,855,522 ------------ ------------ Total deposits 265,363,434 254,182,603 Federal funds purchased 15,000,000 -- Accrued interest and other liabilities 15,095,998 11,571,988 Long-term borrowings 31,063,000 4,201,000 Mortgage payable 570,885 612,607 ------------ ------------ Total liabilities 327,093,317 270,568,198 ------------ ------------ Stockholders' equity Common stock Class A, par value $2.00 per share; authorized, 18,000,000 shares; issued, 7,015,721 and 6,596,625 shares in 1997 and 1996, respectively 14,031,442 13,193,250 Class B, par value $0.10 per share; authorized, 2,000,000 shares; issued, 1,592,859 and 1,592,091 shares in 1997 and 1996, respectively 159,286 159,209 Capital surplus 38,797,618 34,827,443 Retained earnings 38,023,359 38,427,800 Accumulated unrealized gain (loss) on investment securities available for sale 638,142 (1,158) ------------ ------------ 91,649,847 86,606,544 Treasury stock - at cost, 207,516 and 198,113 Class A shares in 1997 and 1996, respectively (2,145,085) (2,025,874) ------------ ------------ 89,504,762 84,580,670 $416,598,079 $355,148,868 ============ ============
35 The accompanying notes are an integral part of these statements. 36 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME Year ended December 31,
1997 1996 1995 ------------ ------------ ----------- Interest income Loans, including fees $ 25,559,901 $ 25,109,566 $21,754,636 Investment securities held to maturity Taxable 5,604,469 6,858,222 6,048,002 Tax-exempt 116,779 58,488 661,588 Investment securities available for sale Taxable 99,847 64,293 65,786 Tax-exempt 891,537 261,443 -- Deposits in banks 112,294 131,005 103,510 Federal funds sold 986,552 1,134,687 1,121,163 ------------ ------------ ----------- TOTAL INTEREST INCOME 33,371,379 33,617,704 29,754,685 ------------ ------------ ----------- Interest expense Deposits 9,810,104 9,711,456 9,308,218 Mortgage payable and other 231,252 342,819 279,273 Federal funds purchased 6,148 -- 4,876 ------------ ----------- TOTAL INTEREST EXPENSE 10,047,504 10,054,275 9,592,367 ------------ ------------ ----------- NET INTEREST INCOME 23,323,875 23,563,429 20,162,318 Decrease in provision for loan losses (2,118,281) (1,487,734) -- ------------ ------------ ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 25,442,156 25,051,163 20,162,318 ------------ ------------ ----------- Other income Service charges and fees 981,111 1,008,054 780,245 Realized gains on sale of investment securities available for sale 13,643 -- 13,147 Gain on other real estate 1,204,443 2,015,994 870,313 Gain on sale of loans 28,585 427,023 85,791 Other income 397,194 780,333 305,747 ------------ ------------ ----------- 2,624,976 4,231,404 2,055,243 ------------ ------------ ----------- Other expenses Salaries, wages and employee benefits 9,545,799 9,601,628 4,849,409 Occupancy and equipment 756,202 660,219 557,825 Other operating expenses 4,332,119 4,876,719 4,904,129 ------------ ------------ ----------- 14,634,120 15,138,566 10,311,363 ------------ ------------ ----------- INCOME BEFORE INCOME TAXES 13,433,012 14,144,001 11,906,198 Income taxes 4,074,280 3,907,111 3,647,702 ------------ ------------ ----------- NET INCOME $ 9,358,732 $ 10,236,890 $ 8,258,496 ============ ============ =========== Per share data Net income - basic $ 1.09 $ 1.20 $ 0.96 ============ ============ =========== Net income - diluted $ 1.05 $ 1.17 $ 0.94 ============ ============ ===========
The accompanying notes are an integral part of these statements. 37 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Years ended December 31, 1997, 1996 and 1995
Class A common stock Class B common stock ------------------------ ----------------------- Shares Amount Shares Amount --------- ----------- ---------- -------- Balance, January 1, 1995 6,260,920 $12,521,840 $1,466,737 $146,674 Net income for the year ended December 31, 1995 -- -- -- -- Conversion of Class B common stock to Class A common stock 27,234 54,468 (24,424) (2,443) 6% stock dividends declared 347,661 695,322 87,359 8,736 Cash in lieu of fractional shares -- -- -- -- Purchase of treasury stock -- -- -- -- Retirement of treasury stock (560,265) (1,120,530) (572) (57) Stock options exercised 11,004 22,008 -- -- Cash dividends on common stock -- -- -- -- Transfer of capital in formation of holding company -- -- -- -- Net unrealized loss on investment securities available for sale -- -- -- -- --------- ----------- ---------- -------- Balance, December 31, 1995 6,086,554 12,173,108 1,529,100 152,910 Net income for the year ended December 31, 1996 -- -- -- -- Conversion of Class B common stock to Class A common stock 32,851 65,702 (28,650) (2,865) 6% stock dividends declared 365,229 730,458 91,641 9,164 Cash in lieu of fractional shares -- -- -- -- Purchase of treasury stock -- -- -- -- Stock options exercised 111,991 223,982 -- -- Cash dividends on common stock -- -- -- -- Net unrealized loss on investment securities available for sale -- -- -- -- --------- ----------- ---------- --------
Net unrealized gain (loss) on investment Capital Retained securities Treasury surplus earnings available for sale stock ----------- ----------- ------------------ ------------ Balance, January 1, 1995 $27,517,173 $32,812,755 $ -- $(2,381,643) Net income for the year ended December 31, 1995 -- 8,258,496 -- -- Conversion of Class B common stock to Class A common stock -- (52,026) -- -- 6% stock dividends declared 2,880,934 (3,584,992) -- -- Cash in lieu of fractional shares -- (2,069) -- -- Purchase of treasury stock -- -- -- (843,986) Retirement of treasury stock (2,105,045) -- -- 3,225,629 Stock options exercised 78,806 -- -- -- Cash dividends on common stock -- (940,826) -- -- Transfer of capital in formation of holding company 1,500,000 (1,500,000) -- -- Net unrealized loss on investment securities available for sale -- -- (564) -- ----------- ----------- ------- ----------- Balance, December 31, 1995 29,871,868 34,991,338 (564) -- Net income for the year ended December 31, 1996 -- 10,236,890 -- -- Conversion of Class B common stock to Class A common stock -- (62,837) -- -- 6% stock dividends declared 4,025,365 (4,764,987) -- -- Cash in lieu of fractional shares -- (2,099) -- -- Purchase of treasury stock -- -- -- (2,025,874) Stock options exercised 930,210 -- -- -- Cash dividends on common stock -- (1,970,505) -- -- Net unrealized loss on investment securities available for sale -- -- (594) -- ----------- ----------- ------- -----------
(Continued) 38 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED Years ended December 31, 1997, 1996 and 1995
Class A common stock Class B common stock ----------------------- -------------------- Shares Amount Shares Amount --------- ----------- --------- -------- Balance, December 31, 1996 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 -- -- -- -- Net unrealized gain on investment securities available for sale -- -- -- -- --------- ---------- -------- ------- Balance, December 31, 1997 7,015,721 $14,031,442 1,592,859 $159,286 ========= ========== ========= ========
Net unrealized gain (loss) on investment Capital Retained securities Treasury surplus earnings available for sale stock ----------- ------------ ------------------ ------------ Balance, December 31, 1996 $34,827,443 $ 38,427,800 $ (1,158) $(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 -- (134,579) -- -- 4% stock dividends declared 3,799,706 (4,322,244) -- -- Cash in lieu of fractional shares -- (2,477) -- -- Purchase of treasury stock -- -- -- (119,211) Stock options exercised 170,469 -- -- -- Cash dividends on common stock -- (5,303,873) -- -- Net unrealized gain on investment securities available for sale -- -- 639,300 -- ----------- ------------ -------- ---------- Balance, December 31, 1997 $38,797,618 $ 38,023,359 $ 638,142 $(2,145,085) =========== ============ ========= ===========
The accompanying notes are an integral part of this statement. 39 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31,
1997 1996 1995 ------------ ------------ ------------ Cash flows from operating activities Net income $ 9,358,732 $ 10,236,890 $ 8,258,496 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 323,916 412,395 264,920 Decrease in provision for loan losses (2,118,281) (1,487,734) -- Accretion of investment securities discount (61,462) (70,938) (137,114) Amortization of investment securities premium 697,987 722,147 205,236 Amortization of deferred loan fees (137,591) (130,272) (107,578) Accretion of discount on loans purchased (1,849,384) (1,265,330) (1,397,740) Provision (benefit) for deferred income taxes 579,007 (912,654) (11,005) Loss on sale of equipment -- -- 4,101 Gain on other real estate (1,204,443) (2,015,994) (870,313) Gain on sale of loans (28,585) (427,023) (85,791) Realized gains on sale of investment securities available for sale (13,643) -- (13,147) Increase in accrued interest receivable (626,542) (301,024) (872,930) Decrease (increase) in other assets 1,648,874 1,394,977 (2,466,059) Increase in accrued interest payable 952,653 768,127 788,815 Increase in unearned income on loans 345,443 261,203 260,583 Increase in other liabilities 934,994 2,954,589 1,655,439 ------------ ------------ ------------ Net cash provided by operating activities 8,801,675 10,139,359 5,475,913 ------------ ------------ ------------ Cash flows from investing activities Net increase (decrease) in interest bearing balances in banks 652,970 (234,249) 279,000 Proceeds from calls and maturities of investment securities held to maturity 58,516,144 18,554,228 16,101,561 Purchase of investment securities held to maturity (9,310,907) (29,217,548) (37,040,063) Proceeds from sale of investment securities available for sale 18,129 -- 11,908,594 (Purchase) sales of Federal Home Loan Bank stock (2,150,000) -- 786,200 Purchase of investment securities available for sale (14,276,725) (3,755,408) (29,359) Net (increase) decrease in loans (14,331,580) (10,118,860) 17,002,492 Purchase of loan portfolio (66,740,249) -- (51,493,946) Proceeds from sale of premises and equipment -- -- 8,241 Purchase of premises and equipment (404,306) (693,677) (847,404) Proceeds from sale and payments on other real estate 1,708,547 2,124,138 4,750,670 ------------ ------------ ------------ Net cash used in investing activities (46,317,977) (23,341,376) (38,574,014) ------------ ------------ ------------
(Continued) 40 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Year ended December 31,
1997 1996 1995 ------------ ------------ ------------ Cash flows from financing activities Net increase (decrease) in short-term borrowings $ 15,000,000 $ -- $(21,000,000) Net (decrease) increase in non-interest bearing and interest bearing demand deposits and savings accounts (6,135,112) (4,275,541) 30,592,932 Net increase (decrease) in certificates of deposit 17,315,943 (9,783,396) 25,683,709 Mortgage payments (41,722) (39,760) (36,781) Cash dividends in lieu of fractional shares (2,479) (2,099) (2,069) Purchase of treasury stock (119,211) (2,025,874) (843,986) Net increase (decrease) in long-term borrowings 26,862,000 1,869,000 (948,000) Issuance of common stock under stock option plans 1,987,986 1,154,192 100,814 Cash dividends (5,303,873) (1,970,505) (940,826) ------------ ------------ ------------ Net cash provided by (used in) financing activities 49,563,532 (15,073,983) 32,605,793 ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,047,230 (28,276,000) (492,308) Cash and cash equivalents at beginning of year 18,369,012 46,645,012 47,137,320 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 30,416,242 $ 18,369,012 $ 46,645,012 ============ ============ ============ Supplemental disclosure of cash flow information Cash paid during the year for Interest $ 9,094,851 $ 9,286,149 $ 8,803,552 ============ ============ ============ Income taxes $ 3,750,000 $ 4,850,000 $ 3,050,000 ============ ============ ============
The accompanying notes are an integral part of these statements. 41 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 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. 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) 42 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 3. Investment Securities The Company accounts for investment securities in accordance with Statement of Financial Accounting Standards (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 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. 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 adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," on October 1, 1995. This new standard 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. The adoption of SFAS No. 114, as amended by SFAS No. 118, had no material impact on the Company's consolidated financial position or results of operations. 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. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balance and accrued interest. (Continued) 43 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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. 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 The Company follows the provisions of SFAS No. 109, "Accounting for 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 $135,650, $125,964 and $95,604 for 1997, 1996 and 1995, respectively. 10. Stock Option Plans Under two stock option plans, the Company grants stock options to employees, officers and directors. On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," 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, "Accounting for Stock Issued to Employees," 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. (Continued) 44 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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. Per Share Information During 1997, the Company adopted the provisions of SFAS No. 128, "Earnings Per Share," 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. Prior period EPS calculations have been restated to reflect the adoption of SFAS No. 128. Basic and diluted EPS are calculated as follows:
1997 ------------------------------------------ Income Average shares Per share (numerator) (denominator) amount ----------- -------------- ---------- Basic EPS Income available to common shareholders $9,358,732 8,572,854 $1.09 Effect of dilutive securities Stock options -- 312,923 -- ---------- ---------- ----- Diluted EPS Income available to common shareholders plus assumed exercise of options $9,358,732 8,885,777 $1.05 ========== ========== =====
1996 ------------------------------------------ Income Average shares Per share (numerator) (denominator) amount ----------- -------------- ---------- Basic EPS Income available to common shareholders $10,236,890 8,509,374 $1.20 Effect of dilutive securities Stock options -- 231,678 -- ----------- --------- ----- Diluted EPS Income available to common shareholders plus assumed exercise of options $10,236,890 8,741,052 $1.17 =========== ========= =====
(Continued) 45 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
1995 ------------------------------------------ Income Average shares Per share (numerator) (denominator) amount ----------- -------------- ---------- Basic EPS Income available to common shareholders $ 8,258,496 8,580,496 $0.96 Effect of dilutive securities Stock options -- 206,759 -- ----------- --------- ----- Diluted EPS Income available to common shareholders plus assumed exercise of options $ 8,258,496 8,787,255 $0.94 =========== ========= =====
EPS is calculated on the basis of the weighted average number of shares outstanding of 8,572,854, 8,509,374 and 8,580,496 for the years ended December 31, 1997, 1996 and 1995, respectively. Per share information and weighted average shares outstanding have been restated to reflect the 4% stock dividend of May 1997 and 6% stock dividend of May 1996 and 1995. 12. 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. 13. Financial Instruments The Company follows the provisions of SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," 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. The Company has provided these disclosures in note R. 14. Long-Lived Assets On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," 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. The adoption of SFAS No. 121 had no material impact on the Company's consolidated financial position or results of operations. (Continued) 46 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 15. Goodwill Goodwill, which represents the excess of the cost of acquired companies over the fair value of the companies' net assets at the date of acquisition, is being amortized on the straight-line method over a period of 15 years. 16. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities The Company adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," as amended by SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125," in 1997. 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. 17. Advertising Costs The Company and the Bank expense advertising costs as incurred. (Continued) 47 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 18. New Accounting Standards In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for years beginning after December 15, 1997. SFAS No. 130 requires entities presenting a complete set of financial statements to include details of comprehensive income. Comprehensive income consists of net income or loss for the current period, and income, expenses, gains, and losses that bypass the income statement and are reported directly in a separate component of equity. The effect of adopting SFAS No. 130 is not expected to be material. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for all periods beginning after December 15, 1997. SFAS No. 131 requires that public business enterprises report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires that public business enterprises report certain information about their products and services, the geographic areas in which they operate, and their major customers. Management is currently evaluating the disclosure impact of SFAS No. 131 on its financial statements. 19. Reclassifications Certain reclassifications of prior year amounts have been made to conform to the 1997 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:
1997 ----------------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ----------- ----------- ----------- ----------- Investment securities held to maturity Obligations of states and political subdivisions $ 3,098,465 $ 53,187 $ -- $ 3,151,652 U.S. treasuries 5,620,004 32,529 -- 5,652,533 Corporate securities 48,364,507 392,135 19,217 48,737,425 U.S. agencies 7,288,066 155,346 36 7,443,377 ----------- ----------- ----------- ----------- $64,371,042 $ 633,197 $ 19,253 $64,984,987 =========== =========== =========== ===========
(Continued) 48 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 NOTE B - INVESTMENT SECURITIES - Continued
1997 ----------------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ----------- ----------- ----------- ----------- Investment securities available for sale Federal Home Loan Bank stock - at cost $ 3,174,200 $ -- $ -- $ 3,174,200 Preferred and common stock 2,944,209 33,180 -- 2,977,389 Other securities 13,963,503 933,701 -- 14,897,204 ----------- ----------- ----------- ----------- $20,081,912 $ 966,881 $ -- $21,048,793 =========== =========== =========== ===========
1996 ----------------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ----------- ----------- ----------- ----------- Investment securities held to maturity Obligations of states and political subdivisions $ 498,465 $ 81,135 $ -- $ 579,600 U.S. treasuries 7,967,376 9,410 2,686 7,974,100 Corporate securities 97,793,198 297,720 356,787 97,734,131 U.S. agencies 7,215,869 134,429 2,809 7,347,489 ------------ ----------- ----------- ------------ $113,474,908 $ 522,694 $ 362,282 $113,635,320 ============ =========== =========== ============ Investment securities available for sale Federal Home Loan Bank stock - at cost $ 1,024,200 $ -- $ -- $ 1,024,200 Corporate securities 3,702,707 -- 1,756 3,700,951 ------------ ----------- ----------- ------------ $ 4,726,907 $ -- $ 1,756 $ 4,725,151 ============ ========= =========== ============
(Continued) 49 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 NOTE B - INVESTMENT SECURITIES - Continued The amortized cost and estimated fair value of investment securities at December 31, 1997 and 1996, 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.
1997 --------------------------------------------------------------------- Held to maturity Available for sale ------------------------------- ------------------------------- Estimated Estimated Amortized fair Amortized fair cost value cost value ------------ ------------ ------------ ------------ Within 1 year $ 40,619,909 $ 40,710,209 $ -- $ -- After 1 but within 5 years 12,834,561 12,991,167 -- -- After 5 but within 10 years 7,140,579 7,374,922 -- -- After 10 years 3,775,993 3,908,689 13,963,503 14,897,204 ------------ ------------ ------------ ------------ 64,371,042 64,984,987 13,963,503 14,987,204 Federal Home Loan Bank stock -- -- 3,174,200 3,174,200 Preferred and common stock -- -- 2,944,209 2,977,389 ------------ ------------ ------------ ------------ $ 64,371,042 $ 64,984,987 $ 20,081,912 $ 21,048,793 ============ ============ ============ ============ 1996 --------------------------------------------------------------------- Held to maturity Available for sale ------------------------------- ------------------------------- Estimated Estimated Amortized fair Amortized fair cost value cost value ------------ ------------ ------------ ------------ Within 1 year $ 56,158,831 $ 55,185,780 $ -- $ -- After 1 but within 5 years 45,927,095 47,008,635 -- -- After 5 but within 10 years 8,218,383 8,110,658 -- -- After 10 years 3,170,599 3,330,247 -- -- ------------ ------------ ------------ ------------ 113,474,908 113,635,320 -- -- Federal Home Loan Bank stock -- -- 1,024,200 1,024,200 Preferred and common stock -- -- 3,702,707 3,700,951 ------------ ------------ ------------ ------------ $113,474,908 $113,635,320 $ 4,726,907 $ 4,725,151 ============ ============ ============ ============
Proceeds from the sale of investment securities available for sale during 1997, 1996 and 1995 were $18,129, $-0- and $11,908,594, respectively, resulting in gross realized gains of $13,643, $-0- and $13,174 during 1997, 1996 and 1995, respectively. As of December 31, 1997 and 1996, investment securities with a book value of $25,354,865 and $18,263,840, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law. 50 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 NOTE C - LOANS Major classifications of loans are as follows:
1997 1996 ------------- ------------- Consumer $ 1,523,410 $ 2,097,746 Commercial and industrial 123,800,129 116,616,587 Real estate 176,315,363 93,923,890 ------------- ------------- Total gross loans 301,638,902 212,638,223 Less Unearned income (1,498,426) (1,290,574) Unamortized discount on loans purchased (9,243,428) (2,330,754) ------------- ------------- Total loans $ 290,897,048 $ 209,016,895 ============= =============
Loans on which the accrual of interest has been discontinued or reduced amounted to $4,316,852 and $4,652,669 at December 31, 1997 and 1996, respectively. If interest had been accrued, such income would have been $388,517 and $418,740 for the years ended December 31, 1997 and 1996, respectively. Although the Company has non-performing loans of $4,316,852 at December 31, 1997, 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 $14,651,598 and $12,165,936 at December 31, 1997 and 1996, respectively. During 1997, $3,176,494 of new loans were made and repayments totaled $690,832. The balance of impaired loans was $1,418,348 at December 31, 1997. 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 1997 was $1,401. Total cash collected on impaired loans during 1997 was $30,299, of which $28,899 was credited to the principal balance outstanding on such loans. Interest that would have been accrued on impaired loans during 1997 was $34,615. 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. 51 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 NOTE D - ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses were as follows:
1997 1996 1995 ----------- ----------- ----------- Balance at beginning of year $ 9,084,153 $ 9,746,559 $ 8,991,618 ----------- ----------- ----------- Charge-offs (761,790) (1,082,865) (313,028) Recoveries 1,982,155 1,908,193 155,719 ----------- ----------- ----------- Net charge-offs and recoveries 1,220,365 825,328 (157,309) Additions due to Knoblauch State Bank merger -- -- 912,250 Decrease in provision for loan losses (2,118,281) (1,487,734) -- ----------- ----------- ----------- Balance at end of year $ 8,186,237 $ 9,084,153 $ 9,746,559 =========== =========== ===========
NOTE E - PREMISES AND EQUIPMENT Premises and equipment are summarized as follows:
Estimated useful lives 1997 1996 --------------- ----------- ----------- Land -- $ 1,373,478 $ 1,373,478 Buildings and leasehold improvements 15 - 31.5 years 4,001,994 3,802,047 Furniture and fixtures 5 - 7 years 2,306,038 2,113,000 ----------- ----------- 7,681,510 7,288,525 Less accumulated depreciation and amortization 2,892,589 2,579,994 ----------- ----------- $ 4,788,921 $ 4,708,531 =========== ===========
52 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 NOTE F - DEPOSITS Deposits are summarized as follows:
1997 1996 ------------ ------------ Demand $ 37,712,928 $ 38,327,081 NOW and money market 70,026,150 76,648,603 Savings 17,446,660 16,345,166 Time, $100,000 and over 33,175,135 23,657,679 Other time 107,002,561 99,204,074 ------------ ------------ $265,363,434 $254,182,603 ============ ============
Certificates of deposit of $100,000 or more consist of the following:
1997 1996 ----------- ----------- Three months or less $ 5,433,089 $ 7,678,131 Over three months through twelve months 8,850,440 9,329,628 Over twelve months through five years 14,051,924 6,211,785 Over five years 4,839,682 438,135 ----------- ----------- $33,175,135 $23,657,679 =========== ===========
Maturities of certificates of deposit for the next five years and thereafter are as follows: 1998 $ 59,678,728 1999 31,637,348 2000 14,876,184 2001 11,802,143 2002 9,340,423 Thereafter 12,842,870 ------------ $140,177,696 ============
NOTE G - SHORT-TERM BORROWINGS Short-term borrowings consist of federal funds purchased and generally mature within one to four days from the transaction date. The balance outstanding at December 31, 1997 was $15,000,000 at a rate of 5%. Average federal funds purchased during the year amounted $67,745 with a weighted average rate of 5%. The maximum balance at the end of one month was $15,000,000. 53 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 NOTE H - MORTGAGE PAYABLE The mortgage payable is payable to a bank at 65% of the prime rate (5.525% at December 31, 1997) 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, ------------------------ 1998 $ 44,264 1999 46,773 2000 49,424 2001 52,224 2002 55,184 Thereafter 323,016 -------- $570,885 ========
NOTE I - LONG-TERM BORROWINGS Long-term borrowings consist of advances from the Federal Home Loan Bank at December 31, 1997 and are as follows:
Due date Interest rate -------- ------------- December 27, 1998 8.12% $ 698,000 December 27, 1999 8.20 365,000 December 23, 2002 6.24 30,000,000 ----------- $31,063,000 ===========
The advances are collateralized by Federal Home Loan Bank stock and certain of the Company's first mortgage loans. 54 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 NOTE J - LEASE COMMITMENTS The Company leases various premises under non-cancelable agreements which expire through 2002 and require minimum annual rentals. The minimum rental commitments under the leases are as follows: Year ending December 31, 1998 $ 350,442 1999 218,056 2000 219,033 2001 46,000 2002 46,000 Thereafter 46,000 ----------- $ 925,531 ===========
Rental expense for all leases was approximately $343,000, $339,000 and $274,000 for the years ended December 31, 1997, 1996 and 1995, respectively. NOTE K - 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 L - 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:
1997 1996 1995 ------------- ------------- --------- Advertising $ 396,831 $ 248,017 $ 216,348 Pennsylvania bank shares tax 720,630 707,442 688,498 FDIC assessments 31,794 2,000 321,082 Professional fees 330,959 1,595,248 1,595,701 Other real estate expense 32,668 141,040 481,318 Loss on investment partnership 1,019,375 28,918 --
55 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 NOTE M - INCOME TAXES The components of the income tax expense (benefit) included in the consolidated statements of income are as follows:
1997 1996 1995 ----------- ----------- ----------- Income tax expense (benefit) Current $ 3,757,471 $ 4,445,217 $ 3,658,707 Deferred federal tax 57,670 (912,654) (11,005) Benefit applied to reduce goodwill 259,139 374,548 -- ----------- ----------- ----------- $ 4,074,280 $ 3,907,111 $ 3,647,702 =========== =========== ===========
The difference between the applicable income tax expense and the amount computed by applying the statutory federal income tax rate of 35% in 1997, 1996 and 1995 is as follows:
1997 1996 1995 ----------- ----------- ----------- Computed tax expense at statutory rate $ 4,701,554 $ 4,950,400 $ 4,167,169 Tax-exempt income (178,469) (223,053) (364,854) Low-income housing tax credit (309,580) (310,615) -- Net operating loss carryover from Knoblauch State Bank -- -- (78,410) Other, net (39,225) (409,621) (76,203) Effect of 34% rate bracket (100,000) (100,000) -- ----------- ----------- ----------- Applicable income tax expense $ 4,074,280 $ 3,907,111 $ 3,647,702 =========== =========== ===========
Deferred tax assets and liabilities consist of the following:
1997 1996 ----------- ----------- Deferred tax assets Allowance for doubtful accounts $ -- $ 361,517 Accrued legal expenses 846,857 1,084,848 Accrued stock-based compensation 1,986,842 864,879 Asset valuation reserves 472,013 708,260 Goodwill 127,346 127,346 Net operating loss carryovers from Knoblauch State Bank 6,021,989 7,330,965 ----------- ----------- 9,455,047 10,447,815 Less valuation allowance 6,021,989 7,330,965 ----------- ----------- 3,433,058 3,146,850 ----------- ----------- Deferred tax liabilities Allowance for doubtful accounts 351,796 -- Unrealized gain on securities 328,739 -- Depreciation 75,256 56,802 Accretion of discount 69,629 96,001 ----------- ----------- 825,420 152,803 ----------- ----------- Net deferred tax asset $ 2,607,638 $ 2,994,047 =========== ===========
(Continued) 56 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 NOTE M - INCOME TAXES - Continued The Company has approximately $21,000,000 of net operating loss carryovers from the acquisition of Knoblauch State Bank (KSB). These losses will fully expire in 2009. 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 1997, 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 N - STOCK OPTION PLANS At December 31, 1997, 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 ($13.75 in 1997, $10.00 in 1996, and $8.25 in 1995) at the date of the grant. Currently, the strike price on the options ranges from $2.695 to $13.225 per share. During 1997, 7,284 options were exercised at strike prices ranging from $2.709 to $9.615 per share. At December 31, 1997, 51,175 options are outstanding, and options covering 37,135 shares were exercisable. (Continued) 57 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 NOTE N - STOCK OPTION PLANS - Continued 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, 1997, options covering 325,036 shares were exercisable by 22 employees. Stock option transactions consist of the following:
1997 1996 1995 ----------------------- --------------------------- ----------------------- Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price -------- ------- -------- ------- -------- ------- Outstanding at beginning of year 540,885 $ 5.917 552,150 $ 5.248 454,826 $ 5.127 Granted 63,487 11.080 100,404 8.430 104,722 7.440 Exercised (83,293) 4.091 (107,888) 3.328 (5,265) 4.387 Canceled (1,802) 10.752 (3,781) 5.624 (2,133) 6.399 -------- ------- -------- ------- -------- ------- Outstanding at end of year 519,277 $ 6.561 540,885 $ 5.917 552,150 5.248 ======== ======= ======== ======= ======== ======= Option price per share exercised $2.695 - $9.633 $2.801 - $3.919 $2.972 - $7.152 Outstanding at end of year 2.695 - 13.225 2.801 - 10.00 2.972 - 8.068
(Continued) 58 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 NOTE N - STOCK OPTION PLANS - Continued 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.
1997 1996 1995 ---------- ---------- ---------- (in thousands, except per share amounts) Net income As reported $ 9,359 $ 10,237 $ 8,258 Pro forma 9,281 10,180 8,226 EPS As reported - basic $ 1.09 $ 1.20 $ 0.96 As reported - diluted 1.05 1.18 0.94 Pro forma - basic 1.08 1.20 0.94 Pro forma - diluted 1.05 1.18 0.94
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 1997, 1996 and 1995: dividend yield of 3.40%, 4.17% and 2.46% for 1997, 1996 and 1995, respectively; expected volatility of 30.6%; and risk-free interest rate of 5.71% in 1997 and 1996, and 6.58% in 1995. Expected lives are 10 years for 1997, 1996 and 1995. NOTE O - CONCENTRATIONS OF CREDIT RISK The Company primarily grants commercial and real estate loans in the greater Philadelphia metropolitan area. Approximately 21% of loans are outside the normal lending area. The Company has concentrations of credit risk in real estate development loans (10%) at December 31, 1997. A substantial portion of its debtors' ability to honor these contracts is dependent upon the economic sector. Approximately 77% of the Company's investment portfolio consists 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. (Continued) 59 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 NOTE P - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued 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. 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, 1997 are as follows: Financial instruments whose contract amounts represent credit risk Commitments to extend credit $27,108,550 Standby letters of credit and financial guarantees written 4,543,974
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, the total commitment amounts do not necessarily represent future 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 1998. 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%. 60 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 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). 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, 1997, management believes that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1997, 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. (Continued) 61 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 NOTE Q - REGULATORY MATTERS - Continued The Bank's actual capital amounts and ratios are also presented in the table.
1997 ---------------------------------------------------------------------------------- To be well Required capitalized under for capital prompt corrective Actual adequacy purposes action provisions --------------------- ------------------------- --------------------------- Amount Ratio Amount Ratio Amount Ratio ----------- ----- ------------- ------- ------------- -------- Total capital (to risk-weighted assets) Company (consolidated) $91,292,866 26.41% =>$27,658,652 =>8.00% N/A Bank 61,751,238 18.68 => 26,450,990 =>8.00 =>$33,063,737 =>10.00% Tier I capital (to risk-weighted assets) Company (consolidated) 86,923,491 25.14 => 13,829,326 =>4.00 N/A Bank 57,568,231 17.41 => 13,225,495 =>4.00 => 19,838,242 => 6.00 Tier I capital (to average assets, leverage) Company (consolidated) 86,923,491 25.59 => 10,192,200 =>3.00 N/A Bank 57,568,231 17.62 => 9,800,581 =>3.00 => 16,334,302 => 5.00
1996 ---------------------------------------------------------------------------------- To be well Required capitalized under for capital prompt corrective Actual adequacy purposes action provisions --------------------- ------------------------- --------------------------- Amount Ratio Amount Ratio Amount Ratio ----------- ----- ------------- ------- ------------- -------- Total capital (to risk-weighted assets) Company (consolidated) $86,009,159 30.17% =>$22,807,987 =>8.00% N/A Bank 59,493,377 22.77 => 20,902,755 =>8.00 =>$26,128,444 =>10.00% Tier I capital (to risk-weighted assets) Company (consolidated) 82,377,244 28.89 => 11,403,993 =>4.00 N/A Bank 56,155,493 21.49 => 10,451,377 =>4.00 => 15,677,066 => 6.00 Tier I capital (to average assets, leverage) Company (consolidated) 82,377,244 24.15 => 10,234,667 =>3.00 N/A Bank 56,155,493 17.26 => 9,758,242 =>3.00 => 16,263,736 => 5.00
62 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 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, 1997 were as follows: Fair values of loans and deposits with floating interest rates are generally presumed to approximate the recorded carrying amounts. Fair value of financial instruments actively traded in a secondary market has been estimated using quoted market prices as follows:
1997 1996 ----------------------------- ----------------------------- Estimated Estimated fair Carrying fair Carrying value amount value amount ------------ ------------ ------------ ------------ Cash and cash equivalents $ 30,416,242 $ 30,416,242 $ 18,369,012 $ 18,369,012 Interest bearing deposits in banks 301,001 300,030 1,047,744 953,000 Investment securities held to maturity 64,984,987 64,371,042 113,635,320 113,474,908 Investment securities available for sale 21,048,793 21,048,793 4,725,151 4,725,151
(Continued) 63 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued 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:
1997 1996 ------------------------------- ------------------------------- Estimated Estimated fair Carrying fair Carrying value amount value amount ------------ ------------ ------------ ------------ Deposits with stated maturities $148,725,232 $140,177,697 $128,903,194 $122,861,753 Mortgage payable 570,885 570,885 612,607 612,607 Long-term borrowings with stated maturities 35,885,229 31,063,000 4,768,305 4,201,000
Fair value of financial instrument liabilities with no stated maturities has been estimated to equal the carrying amount (the amount payable on demand), totaling $125,185,737 and $131,320,850 at December 31, 1997 and 1996, 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:
1997 1996 ------------------------------ ----------------------------- Estimated Estimated fair Carrying fair Carrying value amount value amount ------------ ------------ ------------ ------------ Net loans $296,130,317 $282,710,811 $214,217,901 $199,932,742
There is no material difference between the carrying amount and estimated fair value of off-balance-sheet items totaling $31,652,524 and $13,023,225 at December 31, 1997 and 1996, 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. 64 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 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 sheet for December 31, 1997 and the statements of income and cash flows for the period (since inception) then ended are presented below. CONDENSED BALANCE SHEETS
December 31, --------------------------- 1997 1996 ----------- ----------- Assets Cash $ 2,856,330 $ -- Investment in Royal Investments of Delaware, Inc. - at equity 27,897,306 27,055,328 Investment in Royal Bank of Pennsylvania - at equity 60,128,889 58,358,928 Other assets 260,000 260,000 ----------- ----------- $91,142,525 $85,674,256 =========== =========== Liabilities $ 1,637,763 $ 1,093,586 Stockholders' equity 89,504,762 84,580,670 ----------- ----------- $91,142,525 $85,674,256 =========== ===========
CONDENSED STATEMENTS OF INCOME
Year ended December 31, ----------------------------- 1997 1996 ----------- ----------- Income Equity in undistributed net earnings of subsidiaries $ 4,077,026 $ 8,257,413 Dividends from subsidiary bank 5,301,396 1,972,600 Other income 31,907 10,581 ----------- ----------- Total income 9,410,329 10,240,594 ----------- ----------- Expenses Other expenses 62,198 -- Income tax (benefit) expense (10,601) 3,704 ----------- ----------- Total expenses 51,597 3,704 ----------- ----------- Net income $ 9,358,732 $10,236,890 =========== ===========
(Continued) 65 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1997 and 1996 NOTE S - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31, ------------------------------ 1997 1996 ------------ ------------ Cash flows from operating activities Net income $ 9,358,732 $ 10,236,890 Adjustments to reconcile net income to net cash provided by operating activities Undistributed earnings from subsidiaries (4,077,026) (8,257,413) Operating expenses 62,196 -- Rental income (31,907) (10,581) Non-cash income tax (benefit) expense (10,601) 3,704 ------------ ------------ Net cash provided by operating activities 5,301,394 1,972,600 ------------ ------------ Cash flows from investing activities Investment in subsidiary -- (5,000,000) ------------ ------------ Net cash used in investing activities -- (5,000,000) ------------ ------------ Cash flows from financing activities Cash dividends paid (5,306,350) (1,972,600) Dividends from subsidiary bank 2,100,000 5,000,000 Increase in other liabilities 544,177 -- Other, net 217,109 -- ------------ ------------ Net cash (used in) provided by financing activities (2,445,064) 3,027,400 ------------ ------------ NET INCREASE IN CASH 2,856,330 -- Cash at beginning of year -- -- ------------ ------------ Cash at end of year $ 2,856,330 $ -- ============ ============
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 10 is set forth in Item 12, Security Ownership of Beneficial Owners and Management, herein. ITEM 11. EXECUTIVE COMPENSATION The following Summary Compensation Table sets forth all compensation paid by the Registrant for services rendered during the past three fiscal years by the Chief Executive Officer and each of the most highly compensated executive officers whose total annual salary and bonus exceeded $100,000 in 1997. SUMMARY COMPENSATION TABLE
OTHER RESTRICTED SECURITIES ALL ANNUAL STOCK UNDERLYING OTHER COMPENSATION AWARD(S) OPTIONS COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS ($)(2) ($) ($) SARS(#) ($)(1) - - ---------------------------------------------------------------------------------------------------------------------------------- Daniel M. Tabas 1997 318,200 130,463 32,000 -- 7,800 2,550 Chairman of the Board 1996 308,112 129,509 30,800 -- 21,589 2,550 1995 300,597 132,564 30,800 -- 25,505 2,550 Lee E. Tabas 1997 251,210 95,640 18,900 -- 7,800 2,550 President and CEO 1996 243,247 94,941 17,800 -- 17,044 2,550 1995 237,314 97,180 17,800 -- 20,136 2,550 Joseph P. Campbell 1997 159,305 37,323 6,000 -- 3,480 2,550 Managing Director 1996 154,256 37,050 4,800 -- 4,632 2,550 1995 150,493 37,924 4,800 -- 3,648 2,550 James J. McSwiggan 1997 122,146 28,617 -- -- 2,668 2,550 Treasurer and CFO 1996 118,274 28,408 -- -- 3,078 2,550 1995 115,390 29,078 -- -- 2,797 2,550 Richard S. Hannye 1997 158,783 -- 1,020 -- 2,312 2,550 Corporate Counsel 1996 153,750 -- 780 -- 3,552 2,550 1995 150,000 -- 720 -- 3,636 2,550
- - -------------------------------------------------------------------------------- (1) Consists of Bank's contribution to its Employee 401(k) Pension Plan, under which the Board of Directors has an obligation to match 100 percent of the total employee contributions up to an annual maximum of $2,550. The Plan is administered by J. M. Singley Associates, Inc. Each employee participant is entitled to contribute up to 15% of his gross salary. Senior management executives are asked to refrain from contributing to the plan in the event the administrator determines such contributions would make the Plan top heavy. Each participant in the Plan will have credited to his Participant's Benefit Account his proportionate share of all appropriate amounts. Future benefits are based on future contributions. (2) Bonuses of Messrs. Tabas, Campbell and McSwiggan are performance based and tied to goals set by the Stock Option, SARS and Compensation Committee. 67 EMPLOYEE OPTIONS/SAR GRANTS IN FISCAL YEAR 1997
POTENTIAL REALIZED VALUE AT ASSUMED ANNUAL NUMBER OF % OF TOTAL RATES OF STOCK PRICE SECURITIES OPTIONS/SARS EXERCISE APPRECIATION FOR UNDERLYING GRANTED TO OR BASE OPTION TERM OPTIONS/SARS EMPLOYEES PRICE EXPIRATION -------------------- NAME GRANTED (#)(1) IN FISCAL YEARS ($/SH) DATE 5% 10% - - --------------------------------------------------------------------------------------------------------------------------- Daniel M. Tabas 7,800 19.195% 13.75 4/20/07 67,489 170,929 Lee E. Tabas 7,800 19.195% 13.75 4/20/07 67,449 170,929 Joseph P. Campbell 3,480 8.564% 13.75 4/20/07 30,093 76,261 James J. McSwiggan 2,668 6.566% 13.75 4/20/07 23,071 58,466 Richard S. Hannye 2,312 5.690% 13.75 4/20/07 19,993 50,665
- - -------------------- (1) Pursuant to the employee stock option plan, the options are exercisable at 20% per year after the date of grant and must be exercised within ten years of the grant (April 20, 1997). AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND 1997 OPTION/SAR VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF OPTIONS/SARS UNEXERCISED IN-THE MONEY SHARES AT OPTIONS/SARS AT ACQUIRED DECEMBER 31, 1997 DECEMBER 31, 1997 ON VALUE --------------------------------- ------------------------------------- NAME EXERCISE (#) REALIZED ($) EXERCISABLE(#) UNEXERCISABLE EXERCISABLE($) UNEXERCISABLE($) - - ------------------ ------------ ------------ --------------------------------- ------------------------------------- Daniel M. Tabas 47,373 1,933,110 67,799 62,689 2,264,956 1,822,609 Lee E. Tabas -- -- 179,503 51,132 6,645,576 1,455,736 Joseph P. Campbell 2,224 64,437 9,446 12,130 300,313 300,545 James J. McSwiggan 1,779 51,544 8,182 9,540 258,193 238,701 Richard S. Hannye 2,339 45,274 -- 7,514 -- 179,623
- - ---------- (1) Value of unexercised options/SARS is based used the closing stock price at December 31, 1997. 68 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table shows the amount of outstanding common stock beneficially owned by each stockholder (including any "group" as the term is used in Section 3(d)(3) of the Securities Exchange Act of 1934) known by the Registrant to be the beneficial owner of more than 5% of such stock, and all directors and officers as a group. The information is furnished as February 28, 1998 on which, 6,813,645 Class A shares and 1,587,921 Class B shares were outstanding (net of treasury stock of 207,516 Class A shares).
NAME AND ADDRESS OF SHARES BENEFICIALLY PERCENT OF BENEFICIAL OWNER OWNED CLASS (5) ---------------- ----- --------- Daniel M. Tabas (4) 3,477,860(Class A) 50.54% 543 Mulberry Lane 1,106,787(Class B) 69.71% Haverford, PA 19041 Lee E. Tabas (4) 617,517(Class A) 8.83% 1 Dove Lane 101,427(Class B) 6.39% Haverford, PA 19041 Richard Tabas 55(Class A) --% 1309 Lafayette Road 107,963(Class B) 6.80% Gladwyne, PA 19035
EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information, furnished by each such person, concerning the present directors and executive officers of the Registrant, including their beneficial ownership of the Registrant's common stock as of February 28, 1998.
DIRECTOR SHARES PERCENT OR OFFICER BENEFICIALLY OF NAME AGE SINCE OWNED (1) (3) STOCK (2) ------------------- --- ----------- ------------- --------- Daniel M. Tabas (4) 74 1980 3,477,860(A) 54.56% 1,106,878(B) Lee E. Tabas (4) 48 1980 617,517(A) 8.32% 101,427(B) Joseph P. Campbell 51 1982 61,682(A) .90% 14,110(B) Richard S. Hannye 40 1993 1,170(A) .01% James J. McSwiggan 42 1993 11,129(A) .13% Robert R. Tabas (4) 42 1988 155,729(A) 2.47% 50,733(B)
(continued.....) 69 Terri N. Gelberg 49 1998 -- -- Anthony J. Micale 60 1997 -- -- Albert Ominsky 64 1982 23,278(A) .64% 27,608(B) Carl M. Cousins 65 1993 7,981(A) .09% Gregory T. Reardon 44 1997 500(A) .01% Howard Wurzak (4) 42 1985 50,222(A) .58% Edward B.Tepper 58 1986 22,953(A) .59% 24,085(B) Jack Loew 50 1997 1,560(A) .02% Susan Tabas Tepper (4) 35 1996 196,377(A) 3.03% 56,968(B)
PERCENT OF CLASS(5) ------------------- ALL DIRECTORS AND EXECUTIVE OFFICERS AS -- -- 4,628,013(A) 64.89% A GROUP (15 PERSONS) 1,489,772(B) 93.82%
- - -------------------- (1) Based on information furnished by beneficial owners or their representatives. Includes direct and indirect ownership and, unless otherwise indicated, also includes sole voting and investment power with respect to reported holdings. (2) Assumes full conversion of Class B Common Stock to Class A Common Stock at the conversion factor of 1.15 Class A shares for each Class B share. Stock options currently exercisable are included with total shares outstanding in determining percentage of ownership for each respective director or executive officer. (3) Includes stock options unexercised, but currently exercisable, in addition to stock beneficially owned. (4) Daniel M. Tabas, Lee Tabas, Robert Tabas, Susan Tabas Tepper, and Howard Wurzak, members of their immediate families and their affiliates and associates, in the aggregate, own 4,497,705 shares of Class A Common Stock (67.44% assuming full conversion of Class B Common Stock to Class A Common Stock at a conversion factor of 1.15 Class A shares for each Class B share) and 1,316,006 shares of Class B common stock. Messr. Tabas, Susan Tabas Tepper, and Howard Wurzak have unexercised but exercisable options to purchase 274,059 shares of Class A common stock. In calculating the tabulated percent of class, an additional 274,059 shares were added to the shares of common stock beneficially owned to the total outstanding shares of common stock assuming all exercisable options were exercised. (5) The percent of class assumes all outstanding exercisable options issued to directors and officers have been exercised and therefore, on a pro-forma basis, 7,132,541 shares of Class A common stock would be outstanding. The following paragraphs indicate full time positions and offices held by the directors and executive officers and sets forth information furnished by each such person as to his principal occupation for the last five years. EXECUTIVE OFFICERS Daniel M. Tabas is the Chairman of the Board and a DIRECTOR of the Registrant. His other principal occupation is Chief Executive Officer for Tabas Enterprises, which consists of various entities in the restaurant, hotel, real estate and entertainment businesses in the Philadelphia and Downingtown, Pennsylvania areas. He is the father of Lee E. Tabas, Robert R. Tabas, Susan Tabas Tepper, and the father-in-law of Howard Wurzak. Lee Evan Tabas is the President, Chief Executive Officer and a DIRECTOR of the Registrant. He is the son of Daniel M. Tabas, brother of Robert R. Tabas and Susan Tabas Tepper, brother in law of Howard Wurzak. Joseph Campbell is Managing Director and a DIRECTOR of the Registrant. Mr. Campbell is employed by Tabas Enterprises on a part time basis. 70 Richard S. Hannye is the Secretary and Corporate Counsel of the Registrant. Mr. Hannye was previously associated with the law firm of Hecker Brown Sherry and Johnson in Philadelphia. James McSwiggan is the Chief Financial Officer and Treasurer of the Registrant. Mr. McSwiggan is employed by Tabas Enterprises on a part time basis. DIRECTORS Terri N. Gelberg, a DIRECTOR of the Registrant, is an attorney with Gelberg & Associates and was formerly an attorney with Bolger, Picker, Hankin & Tannebaum in Philadelphia, Pennsylvania. Gregory T. Reardon, a DIRECTOR of the Registrant, is the Managing Shareholder of a public accounting firm Weiss, Toub, Reardon & Company, P.C. in Philadelphia Pennsylvania, and President and owner of Valuation Advisors, Inc., a business appraisal firm in Philadelphia Pennsylvania. Albert Ominsky, a DIRECTOR of the Registrant, is an attorney and President of the law firm of Ominsky & Welsh, P.C. in Philadelphia, Pennsylvania. Robert R. Tabas is a Vice President, Senior Lender and DIRECTOR of the Registrant. Mr. Tabas is a Vice President with Tabas Enterprises. He is the son of Daniel M. Tabas, and brother of Lee E. Tabas and Susan Tabas Tepper, and brother in law of Howard Wurzak. Edward Tepper, a DIRECTOR of the Registrant, is the Chairman of the Philadelphia Kixx, a professional indoor soccer team, and the President of Tepper Properties, a real estate investment company in Villanova, Pennsylvania. He is the father-in-law of Susan Tabas Tepper. Anthony J. Micale, a DIRECTOR of the Registrant, is an executive with MacDonalds' Restaurants in Cherry Hill, New Jersey. Howard Wurzak, a DIRECTOR of the Registrant, is President of Hospitality Management Group, Inc. and the President of the Twelve Caesars Banquet Facility in Philadelphia, Pennsylvania. He is the son-in-law of Daniel M. Tabas and the brother-in-law of Lee E. Tabas, Robert R. Tabas and Susan Tabas Tepper. Carl M. Cousins, a DIRECTOR of the Registrant, is the owner and principal veterinarian of Haverford Animal Hospital in Haverford, Pennsylvania. Jack Loew, a DIRECTOR of the Registrant since January, 1997, is president and treasurer of Hough/Loew Associates, a design/build construction and development firm specializing in office, industrial and retail properties. Susan Tabas Tepper, a DIRECTOR of the Registrant, does consulting and public relations work for Tabas Enterprises. She is the daughter of Daniel M. Tabas, the daughter-in-law of Edward Tepper, the sister of Lee E. Tabas and Robert R. Tabas, and the sister-in-law of Howard Wurzak. 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, 1997 through December 31, 1997, its officers and directors were in compliance with all filing requirements applicable to them. 71 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In the ordinary course of business, RBPA has had, and expects to have in the future, banking transactions with directors, officers, principal shareholders and their associates which involve substantially the same terms, including interest rates, collateral and repayment terms as those prevailing at the time for comparable transactions with others and no more than the normal risk of collectability or other unfavorable features. No transaction during the three years ended December 31, 1997 of the above nature exceeded $8,000,000 or 10% of the equity capital accounts to the Registrant. The largest aggregate amount of indebtedness during the year l997 of all Directors and Officers to the Bank as a group, and to their associates was $14,651,598. The total of such outstanding loans at December 3l, 1997 was $14,651,598. Interest rates ranged for fixed rates from 7.5% to 10.5%. Floating rates ranged from prime to prime plus 2.5 points. The Registrant has had and intends to have business transactions in the ordinary course of business with Directors and associates on comparable terms as those prevailing from time to time for other nonaffiliated vendors of the Registrant. In particular, the Registrant has used hospitality services of director's, Howard Wurzak, and Daniel Tabas. Director Albert Ominsky's firm has provided legal services to the Bank. Director Edward Tepper provides construction supervision and property inspection services to the Bank. 72 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 No. 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 No. 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. 27.2 Financial Data Schedules. Periods: Annual Form 10-K for December 1996, Form 10-Q for June 30, 1996, September 30, 1996, March 31, 1997, and June 30, 1997. 27.3 Financial Data Schedule. Form 10-Q for September 30, 1997 (b) No Current Report on Form 8-K was filed by the Registrant during the fourth quarter of the fiscal year December 31, 1997. 73 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 18, 1998 Chairman /s/ Daniel M. Tabas - - -------------- ---------------------- Daniel M. Tabas March 18, 1998 President/CEO/ /s/ Lee E. Tabas - - -------------- ---------------------- Director Lee E. Tabas March 18, 1998 Managing Director/ /s/ Joseph P. Campbell - - -------------- ---------------------- Director Joseph P. Campbell March 18, 1998 Treasurer/CFO /s/ James J. McSwiggan - - -------------- ---------------------- James J. McSwiggan March 18, 1998 Director /s/ Albert Ominsky - - -------------- ---------------------- Albert Ominsky Director - - -------------- ---------------------- Anthony Micale March 18, 1998 Senior Vice President/ /s/ Robert R. Tabas - - -------------- ---------------------- Director Robert R. Tabas March 18, 1998 Director /s/ Gregory T. Reardon - - -------------- ---------------------- Gregory T. Reardon March 18, 1998 Director /s/ Carl Cousins - - -------------- ---------------------- Carl Cousins
74
DATE TITLE SIGNATURE ---- ----- --------- March 18, 1998 Director /s/ Howard Wurzak - - -------------- ---------------------- Howard Wurzak March 18, 1998 Director /s/ Terri N. Gelberg - - -------------- ---------------------- Terri N. Gelberg March 18, 1998 Director /s/ Edward Tepper - - -------------- ---------------------- Edward Tepper March 18, 1998 Director /s/ Jack Loew - - -------------- ---------------------- Jack Loew March 18, 1998 Director /s/ Susan Tabas Tepper - - -------------- ---------------------- Susan Tabas Tepper
75 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 No. 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 No. 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. 27.2 Financial Data Schedules. Periods: Annual Form 10-K 1996, Form 10-Q for June 30, 1996, September 30, 1996, March 31, 1997, and June 30, 1997. 27.3 Financial Data Schedule. Form 10-Q for September 30, 1997 EX-21 2 SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT
Company State - - ------- ----- Royal Bank of Pennsylvania, Inc. Pennsylvania Royal Investment of Delaware, Inc. Delaware Royal Real Estate of Pennsylvania, Inc. Pennsylvania
EX-23 3 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We have issued our report dated January 23, 1998 accompanying the consolidated financial statements included in the 1997 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, 1997. We hereby consent to the incorporation by reference of said report in the Company's Registration Statements on Form S-4 (No. 33-78310 and 33-80616) and on Form S-8 (File No. 333-25855). /s/ Grant Thornton LLP March 25, 1998 Philadelphia, Pennsylvania EX-27 4 FINANCIAL DATA SCHEDULE
9 1 YEAR DEC-31-1997 DEC-31-1997 7,491,242 300,030 22,925,000 0 21,048,793 64,371,042 64,984,987 290,897,048 8,186,237 416,598,079 265,363,434 15,698,000 15,095,998 30,365,000 0 0 14,190,728 75,314,034 416,598,079 25,559,901 7,811,478 0 33,713,379 9,810,104 10,047,504 23,323,875 (2,118,281) 0 14,634,120 13,433,012 0 0 0 9,358,732 1.09 1.05 7.12 4,317,000 0 1,125,580 1,418,348 9,084,153 761,790 1,982,155 8,186,237 0 0 0
EX-27.2 5 FDS ANNUAL FORM 10-K 1996, 6/30/96 THRU 6/30/97
9 1 YEAR 6-MOS 9-MOS 3-MOS 6-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1997 DEC-31-1997 DEC-31-1996 JUN-30-1996 SEP-30-1996 MAR-31-1997 JUN-30-1997 7,744,012 11,171,425 8,305,483 7,785,246 7,765,269 953,000 1,213,752 1,023,752 953,000 1,850,000 10,625,000 22,825,000 17,600,000 24,375,000 21,275,000 0 0 0 0 0 4,725,151 3,620,426 3,623,507 4,697,773 15,015,024 113,474,908 110,972,422 111,915,025 91,176,193 85,132,655 113,635,320 110,601,039 111,842,746 91,003,036 85,315,109 209,016,895 188,112,825 197,099,994 205,768,921 205,831,617 9,084,153 9,655,867 9,751,911 9,123,373 8,552,792 355,148,868 345,329,516 346,355,659 344,355,659 346,497,318 254,182,603 249,486,527 245,287,302 244,096,810 245,298,439 638,000 631,000 631,000 638,000 638,000 11,571,988 10,473,924 12,849,847 12,015,335 12,022,403 4,175,000 4,206,084 4,192,700 1,665,318 1,654,984 0 0 0 0 0 0 0 0 0 0 13,352,459 13,089,600 13,334,672 13,451,202 14,013,956 71,228,211 66,811,381 69,429,078 72,171,353 72,869,536 355,148,868 345,329,516 346,355,659 344,038,018 346,497,318 25,109,566 11,177,174 19,663,500 5,483,171 11,516,464 8,508,138 4,310,303 6,450,747 1,951,570 4,081,545 0 0 0 0 0 33,617,704 15,487,477 26,114,247 7,434,741 15,598,009 9,711,456 4,864,428 7,254,955 2,406,459 4,900,154 10,054,275 5,005,377 7,497,659 2,463,617 5,00,469 23,563,429 10,482,100 18,616,588 4,971,124 10,597,540 (1,487,734) 0 (1,000,000) 0 (101,108) 0 0 0 0 13,643 15,109,648 4,321,169 11,653,579 2,607,766 5,678,464 14,144,001 6,160,931 10,850,728 2,864,361 6,058,137 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 10,236,890 4,312,652 7,418,485 2,114,124 4,355,800 1.23 .54 .92 .26 .52 1.20 .52 .89 .25 .50 7.05 6.70 7.32 5.10 5.09 4,653,000 4,856,210 4,052,681 4,368,704 3,948,936 0 0 0 0 0 1,063,000 216,000 702,000 588,013 963,496 1,928,415 0 1,928,415 1,686,456 1,177,067 9,747,000 9,746,559 9,746,559 9,084,153 9,084,153 1,083,000 266,481 471,104 36,336 601,568 1,908,000 175,789 1,476,456 75,556 95,758 9,084,000 9,655,867 9,751,911 9,123,373 8,552,792 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
EX-27.3 6 FINANCIAL DATA SCHEDULES. SEPTEMBER 30, 1997
9 1 9-MOS SEP-30-1997 DEC-31-1997 12,398,62 798,471 18,775,000 0 18,556,597 74,872,259 75,474,256 214,281,803 8,398,058 349,037,191 245,711,245 638,000 12,847,941 1,644,503 0 0 14,036,857 74,158,645 349,037,191 17,515,762 5,919,848 0 23,435,610 7,332,955 7,475,996 15,959,614 (1,674,909) 13,643 8,940,095 9,440,302 0 0 0 6,783,683 .79 .76 5.09 3,286,976 1,255,645 1,142,100 1,142,100 0 761,790 1,750,603 8,398,058 0 0 0
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