-----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, MPaEaxrOsyPesNNiwaCG6cKj0LlEwggjNVc9gYYG9IayJpACOt/JxUqvJTOkXQ38 ii/9NN4sQfSEj3Yeb5k1yQ== 0000893220-00-000347.txt : 20000328 0000893220-00-000347.hdr.sgml : 20000328 ACCESSION NUMBER: 0000893220-00-000347 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROYAL BANCSHARES OF PENNSYLVANIA INC CENTRAL INDEX KEY: 0000922487 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [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: 579560 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 FORM 10-K405 ROYAL BANCSHARES OF PENNSYLVANIA, INC 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, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ___________ to ___________ Commission File Number 0-26366 ROYAL BANCSHARES OF PENNSYLVANIA, INC. (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2812193 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 732 MONTGOMERY AVENUE, NARBERTH, PENNSYLVANIA 19072 (Address of principal executive offices) Registrant's telephone number, including area code (610) 668-4700 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: CLASS A COMMON STOCK ($2.00 PAR VALUE) CLASS B COMMON STOCK ($.10 PAR VALUE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days . Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contended, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K . /X/ The aggregate market value of common shares of the Registrant held by non-affiliates, based on the closing sale price as of February 29, 2000 was $60,670,086. As of February 29, 2000, the Registrant had 8,054,918 and 1,766,149 shares outstanding of Class A and Class B common stock, respectively. 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, 1999, RBPA had consolidated total assets of approximately $522.5 million, total deposits of approximately $381.3 million and stockholders' equity of approximately $95.8 million. From time to time, RBPA may include forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters in this and other filings with the Securities Exchange Commission. The Private Securities Litigation Reform Act of 1995 provides safe harbor for forward-looking statements. When we use words such as "believes", or "expects," "anticipates" or similar expressions, we are making forward-looking statements. In order to comply with the terms of the safe harbor, RBPA notes that a variety of factors could cause RBPA's actual results and experience to differ materially from the anticipated results or other expectations expressed in RBPA's forward-looking statements. The risks and uncertainties that may affect the operations, performance development and results of RBPA's business include the following: general economic conditions, including their impact on capital expenditures; business conditions in the banking industry; the regulatory environment; rapidly changing technology and evolving banking industry standards; competitive factors, including increased competition with community, regional and national financial institutions; new service and product offerings by competitors and price pressures and similar items. THE BANK The Bank was incorporated in the Commonwealth of Pennsylvania on July 30, 1963, and was chartered by the Commonwealth of Pennsylvania Department of Banking and commenced operation as a Pennsylvania state-chartered bank on October 22, 1963. The Bank is the successor of the Bank of King of Prussia, the principal ownership of which was acquired by Daniel M. Tabas in 1980. Royal Bank of Pennsylvania is an insured bank under the Federal Deposit Insurance Corporation (the "FDIC"). The Bank derives its income principally from interest charged on loans and interest on investment securities and fees received in connection with the origination of loans and other services. The Bank's principal expenses are interest expense on deposits and operating expenses. Funds for activities are provided principally by operating revenues, deposit growth and the repayment of outstanding loans. Service Area. The Bank's primary service area includes Montgomery, Chester, Bucks, Delaware, Berks and Philadelphia counties, southern New Jersey and Delaware in the vicinity of Wilmington. This area includes residential areas and industrial and commercial businesses of the type usually found within a major metropolitan area. The Bank serves this area from thirteen offices located throughout Montgomery, 3 Philadelphia and Berks counties. The Bank also considers the states of Pennsylvania, New Jersey, New York and Delaware to constitute its service area for certain services. On occasion, the Bank will do business with clients located outside of its service area. The Bank's legal headquarters are located at 732 Montgomery Avenue, Narberth, PA. The Bank conducts business operations as a commercial bank offering checking accounts, savings and time deposits, and loans, including residential mortgages, home equity and SBA loans. The Bank also offers safe deposit boxes, collections, and other customary bank services (excluding trust) to its customers. Drive-up, ATM, and night depository facilities are available. Services may be added or deleted from time to time. The services offered and the business of the Bank are not subject to significant seasonal fluctuations. The Bank is a member of the Federal Reserve Fedline Wire Transfer System. Competition. The Bank is subject to intense competition from commercial banks, thrifts and other financial institutions. The Bank actively competes with such banks and institutions for local deposits and local retail and commercial accounts, and is also subject to competition from banks from areas outside its service area for certain segments of its business. For a number of years, competition has been increasing in the Bank's basic banking business because of the growing number of financial service entities that have entered our local market. This trend was accelerated by the passage of federal laws in the early 1980's, which sharply expanded the powers of thrifts and credit unions, giving them most of the powers that were formerly reserved for commercial banks. While attempting to equalize the competition among the depository institutions, these statutes have little effect on less regulated entities such as money market mutual funds and investment banking firms. Many of these competitors have substantially greater financial resources and more extensive branch systems. To be successful, smaller banks must find a competitive edge. The Bank prides itself on giving its customers personalized service. The Bank has continued at modest levels its research activities relating to the development of new services and the improvement of existing bank services. Marketing activities have continued that have allowed the Bank to remain competitive. These activities include the review of existing services and the solicitation of new users of banking services. The Bank is not dependent upon a single customer or a small number of customers, the loss of which should have a material adverse effect on the Bank or RBPA. Employees. RBPA employed approximately 134 persons on a full-time equivalent basis as of December 31, 1999. Deposits. At December 31, 1999, total deposits of the Bank were distributed among demand deposits (12%), money market deposit accounts, savings and Super Now (29%) and time deposits (59%). At year end 1999, deposits increased $89.7 million from year end 1998, or 28%, primarily due to an increase in certificate of deposits and to a lesser extent, NOW and money market deposits. Lending. At December 31, 1999, the Bank had a total loan portfolio of $351.8 million, representing 69% of total assets. The loan portfolio is categorized into commercial, commercial mortgages, residential mortgages (including home equity lines of credit), construction, and installment loans. Current market and regulatory trends in banking are changing the basic nature of the banking industry. The Bank intends to keep pace with the banking industry by being competitive with respect to interest rates and new types or classes of deposits insofar as it is practical to do so consistent with the Bank's size, objective of profit maintenance and stable capital structure. 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, 1999, total assets of RID were $29.5 million, of which $20.7 million was held in cash and cash equivalents. Investment securities were $5.8 million at December 31, 1999. SUPERVISION AND REGULATION Holding Company. RBPA, as a Pennsylvania business corporation, is subject to the jurisdiction of the Securities and Exchange Commission (the "SEC") and of state securities commissions for matters relating to the offering and sale of its securities. Accordingly, if RBPA wishes to issue additional shares of its Common Stock, in order, for example, to raise capital or to grant stock options, RBPA will have to comply with the registration requirements of the Securities Act of 1933 as amended, or find an applicable exemption from registration. RBPA is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and to supervision by the Federal Reserve Board. The BHC Act requires RBPA to secure the prior approval of the Federal Reserve Board before it owns or controls, directly or indirectly, more than 5% of the voting shares of any corporation, including another bank. In addition, the BHC Act prohibits RBPA from acquiring more than 5 % of the voting shares of, or interest in, or all or substantially all of the assets of, any bank located outside Pennsylvania, unless such an acquisition is specifically authorized by laws of the state in which such bank is located. A bank holding company also is prohibited from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any such company engaged in non-banking activities unless the Federal Reserve Board, by order or regulation, has found such activities to be closely related to banking or managing or controlling banks as to be a proper incident thereto. In making this determination, the Federal Reserve Board considers whether the performance of these activities by a bank holding company would offer benefits to the public that outweigh possible adverse effects. As a bank holding company, RBPA is required to file an annual report with the Federal Reserve Board and any additional information that the Federal Reserve Board may require pursuant to the BHC Act. The Federal Reserve Board may also make examinations of the holding company and any or all of subsidiaries. Further, under Section 106 of the 1970 amendments to the BHC Act and the Federal Reserve Board's regulation, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit or provision of credit of any property or services. The so called "anti-tying" provisions state generally that a bank may not extend credit, lease, sell property or furnish any service to a customer on the condition that the customer obtain additional credit or service from the bank, its bank holding company or any other subsidiary of its bank holding company, or on the condition that the customer not obtain other credit or services from a competitor of the bank, its bank holding company or any subsidiary of its bank holding company. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act and by state banking laws on any extensions of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities of the bank holding company and on taking of such stock or securities as collateral for loans to any borrower. 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 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") 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). Management cannot anticipate what changes Congress may enact, or, if enacted, their impact on RBPA's financial position and reported results of operation. As a consequence of the extensive regulation of commercial banking activities in the United States, RBPA's business is particularly susceptible to being affected by federal and state legislation and regulations that may increase the costs of doing business. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 GENERAL. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDIC Improvement Act") includes several provisions that have a direct impact on the Bank. The most significant of these provisions are discussed below. The FDIC is required to conduct periodic full-scope, on-site examinations of the Bank. In order to minimize losses to the deposit insurance funds, the FDIC Improvement Act establishes a format to more monitor FDIC-insured institutions and to enable prompt corrective action by the appropriate federal supervisory agency if an institution begins to experience any difficulty. The FDIC Improvement Act establishes five "capital" categories. They are: (1) well capitalized, (2) adequately capitalized, (3) undercapitalized, (4) significantly undercapitalized, and (5) critically undercapitalized. The overall goal of these new capital measures is to impose more scrutiny and operational restrictions on banks as they descend the capital categories from well capitalized to critically undercapitalized. Under Current regulations, a "well-capitalized" institution would be one that has at least a 10% total risk-based capital ratio, a 6% Tier 1 risk-based capital ratio, a 5% Tier 1 Leverage Ratio, and is not subject 8 to any written order or final directive by the FDIC to meet and maintain a specific capital level. The Bank is presently categorized as a "well-capitalized" institution. An "adequately capitalized" institution would be one that meets the required minimum capital levels, but does not meet the definition of a "well-capitalized" institution. The existing capital rules generally require banks to maintain a Tier 1 Leverage Ratio of at least 4% and an 8% total risk-based capital ratio. Since the risk-based capital requirement to be in the form of Tier 1 capital, this also will mean that a bank would need to maintain at least 4% Tier 1 risk-based capital ratio. An institution must meet each of the required minimum capital levels in order to be deemed "adequately capitalized." An "undercapitalized" institution is one that fails to meet one or more of the required minimum capital levels for an "adequately capitalized" institution. Under the FDIC Improvement Act, an "undercapitalized" institution must file a capital restoration plan and is automatically subject to restrictions on dividends, management fees and asset growth. In addition, the institution is prohibited from making acquisitions, opening new branches or engaging in new lines of business without the prior approval of its primary federal regulator. A number of other restrictions may be imposed. A "critically undercapitalized" institution is one that has a tangible equity (Tier 1 capital) ratio of 2% or less. In addition to the same restrictions and prohibitions that apply to "undercapitalized" and "significantly undercapitalized" institutions, any institution that becomes "critically undercapitalized" is prohibited from taking the following actions without the prior written approval of its primary federal supervisory agency: engaging in any material transactions other than in the usual course of business; extending credit for highly leveraged transactions; amending its charter or bylaws; making any material changes in accounting methods; engaging in certain transactions with affiliates; paying excessive compensation or bonuses; and paying interest on liabilities exceeding the prevailing rates in the institution's market area. In addition, a "critically undercapitalized" institution is prohibited from paying interest or principal on its subordinated debt and is subject to being placed in conservatorship or receivership if its tangible equity capital level is not increased within certain mandated time frames. REAL ESTATE LENDING GUIDELINES. Pursuant to the FDIC Improvement Act, the FDIC has issued real estate lending guidelines that establish loan-to-value ("LTV") ratios for different types of real estate loans. A LTV ratio is generally defined as the total loan amount divided by the appraised value of the property at the time the loan is originated. If a bank does not hold a first lien position, the total loan amount would be combined with the amount of all senior liens when calculating the ratio. In addition to establishing the LTV ratios, the FDIC's real estate guidelines require all real estate loans to be based upon proper loan documentation and a recent independent appraisal of the property. The FDIC's guidelines establish the following limits for LTV ratios:
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%
9 The guidelines provide exceptions to the LTV ratios for government-backed loans; loans facilitating the sale of real estate acquired by the lending institution in the normal course of business; loans where the Bank's decision to lend is not based on the offer of real estate as collateral and such collateral is taken only out of an abundance of caution; and loans renewed, refinanced, or restructured by the original lender to the same borrower, without the advancement of new money. The regulation also allows institutions to make a limited amount of real estate loans that do not conform with the proposed LTV ratios. Under this exception, the Bank would be allowed to make real estate loans that do not conform with the LTV ratio limits, up to an amount not to exceed 100% of the Bank's total capital. TRUTH IN SAVINGS ACT. The FDIC Improvement Act also contains the Truth in Savings Act. The purpose of this Act is to require the clear and uniform disclosure of the rates of interest that are payable on deposit accounts by the Bank and the fees that are assessable against deposit accounts, so that consumers can make a meaningful comparison between the competing claims of banks with regard to deposit accounts and products. This Act requires the Bank to include, in a clear and conspicuous manner, the following information with each periodic statement of a deposit account: (1) the annual percentage yield earned, (2) the amount of interest earned, (3) the amount of any fee and charges imposed and (4) the number of days in the reporting period. This Act allows for civil lawsuits to be initiated by customers if the Bank violates any provision or regulation under this Act. GRAMM-LEACH-BLILEY ACT. On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act of 1999, the Financial services Modernization Act. The Financial Services Modernization Act repeals the two affiliation provisions of the Glass-Steagall Act: - Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms "engaged principally" in specified securities activities; and - Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person "primarily engaged" in specified securities activities. In addition, the Financial Services Modernization Act contains provisions that expressly preempt any state insurance law. The law establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers. It revises and expands the framework of the Bank Holding Company Act framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a Financial Holding Company. "Financial activities" is broadly defined to include not only banking, insurance and securities activities, but also merchant banking and additional activities that the Federal Reserve, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. In general, the Financial Services Modernization Act: - Repeals historical restrictions on, and eliminates many federal and state law barriers to, affiliations among banks, securities firms, insurance companies, and other financial service providers; - Provides a uniform framework for the functional regulation of the activities of banks, savings institutions and their holding companies; 10 - Broadens the activities that may be conducted by national banks, banking subsidiaries of bank holding companies, and their financial subsidiaries; - Provides an enhanced framework for protecting the privacy of consumer information; - Adopts a number of provisions related to the capitalization, membership, corporate governance, and the other measures designed to modernize the Federal Home Loan Bank system; - Modifies the laws governing the implementation of the Community Reinvestment Act; and - Addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. In order for the Registrant to take advantage of the ability to affiliate with other financial service providers, the Registrant must become a "Financial Holding Company" as permitted under an amendment to the Bank Holding Company Act. To become a Financial holding Company, a company must file a declaration with the Federal Reserve, electing to engage in activities permissible for Financial Holding Companies and certifying that it is eligible to do so because all of its insured depository institution subsidiaries are well-capitalized and well-managed. In addition, the Federal Reserve must determine that each insured depository institution subsidiary of the company has at least a satisfactory "CRA rating. The Registrant currently meets the requirements to make an election to become a Financial Holding Company. The Registrant's management has not determined at this time whether it will seek an election to become a Financial Holding Company. The Registrant is examining its strategic business plan to determine whether, based on market conditions, the relative financial conditions of the Registrant and its subsidiaries, regulatory capital requirements, general economic conditions, and other factors, the Registrant desires to utilize any of its expanded powers provided in the Financial Service Modernization Act. The Financial Services Modernization Act also includes a new section of the Federal Deposit Insurance Act governing subsidiaries of state banks that engage in "activities as principal that would only be permissible" for a national bank to conduct in a financial subsidiary. It expressly preserves the ability of a state bank to retain all existing subsidiaries. Because Pennsylvania permits commercial banks chartered by the state to engage in any activity permissible for national banks, the Bank will be permitted to form subsidiaries to engage in the activities authorized by the Financial Services Modernization Act, to the same extent as a national bank. In order to form a financial subsidiary, the Bank must be well-capitalized, and the Bank would be subject to the same capital deduction, risk management and affiliate transaction rules as applicable to national banks. The Registrant and the Bank do not believe that the Financial Services Modernization Act will have a material adverse effect on our operations in the near-term. However, to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result of increasing the amount of competition that the Registrant and the Bank face 11 from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than the Registrant and the Bank. MONETARY POLICY The earnings of the Bank are affected by the policies of regulatory authorities including the Federal Reserve Board. An important function of the Federal Reserve System is to influence the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities, changes in reserve requirements against member bank deposits and limitations on interest rates that member banks may pay on time and savings deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may also affect rates charged on loans or paid for deposits. The policies and regulations of the Federal Reserve Board have had and will probably continue to have a significant effect on its reserve requirements, deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Bank's operations in the future. The effect of such policies and regulations upon the future business and earnings of the Bank cannot be predicted. EFFECTS OF INFLATION Inflation has some impact on RBPA's operating costs. Unlike many industrial companies, however, substantially all of RBPA's assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on RBPA's performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as prices of goods and services. 12 ITEM 2. PROPERTIES The Bank has fourteen banking offices, of which thirteen are located in Pennsylvania. The Bank also has a business loan center located in Delaware. Narberth Office (1) 732 Montgomery Ave Narberth, Pa. 19072 Philadelphia Offices - One Penn Square West 30 South 15th Street Philadelphia, Pa 19102 - 1340 Walnut Street Philadelphia, Pa. 19107 - 401 Fairmount Avenue (1) Philadelphia, Pa. 19123 Jenkintown Office (1) 600 Old York Road Jenkintown, Pa 19046 Villanova Office 801 East Lancaster Avenue Villanova, Pa. 19085 Shillington Office 516 East Lancaster Avenue Shillington. Pa 19607 Trooper Office(1) Trooper & Egypt Roads Trooper, Pa. 19401 Reading Office 501 Washington Street Reading, Pa. 19601 Delaware Loan Office The Rodney Square Club 1100 North Market Street Wilmington, Delaware 19801 King of Prussia Office Rt. 202 at Wilson Road King of Prussia, Pa. 19406 Bridgeport Office (1) 105 W. 4th Street Bridgeport, Pa. 19406 Upper Merion Office Beidler & Henderson Roads King of Prussia, Pa. 19406 Phoenixville Office (1) 808 Valley Forge Road Phoenixville, Pa. 19460 - ------------- (1) Owned The Bank owns six of the above properties, of which one property is subject to a mortgage. The remaining seven properties are leased with expiration dates between 1999 and 2004. The Bank also leases storage warehouse space in Bridgeport, Pa. at an annual rate of $10 thousand. During 1999, the Bank made aggregate lease payments of approximately $304 thousand. The Bank believes that all of its properties are attractive, adequately insured, and well maintained and are adequate for RBPA's purposes. The Bank also owns a property located at 144 Narberth Avenue, Narberth, PA, which may serve as a site for future expansion. ITEM 3. LEGAL PROCEEDINGS Management, after consulting with RBPA's legal counsel, is not aware of any litigation that would have a material adverse effect on the consolidated financial position of RBPA. There are no proceedings pending other than routine litigation incident to the business of RBPA. In addition, no material proceedings are known to be contemplated by governmental authorities against RBPA. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 13 ITEM 5. MARKET FOR THE BANK'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS On September 6, 1988 the Registrant's Class A Common Stock commenced trading on the NASDAQ National Market System (NASDAQ/NMS). The Registrant's NASDAQ Symbol is RBPAA and is included in the NASDAQ National Market Stock Table which is published in most major newspapers. The following table presents the high, low and closing transaction prices on all NASDAQ/NMS securities. The market makers for the Registrant's stock are F. J. Morrissey & Co., Inc., Ryan Beck & Co., Inc., Herzog, Heine, Geduld, Inc., Wheat First Union Securities Inc., Ferris Baker Watts Inc., Sandler O'Neill, and Nash Weiss. There is no market for the Class B Common Stock, as such is prohibited by the terms of the Class B Common Stock. The following table shows the range of high, low-end and closing bid prices for the Registrant's stock as reported by NASDAQ BID PRICES
1999 HIGH LOW CLOSE ---- ----------- ----------- ----------- First Quarter ...... $ 15.339 $ 14.194 $ 15.110 Second Quarter ..... 15.655 13.507 15.119 Third Quarter ...... 15.595 14.048 14.345 Fourth Quarter ..... 14.702 13.500 14.438 1998 HIGH LOW CLOSE ---- ----------- ----------- ----------- First Quarter ...... $ 19.812 $ 16.730 $ 17.611 Second Quarter ..... 19.002 16.941 17.170 Third Quarter ...... 17.743 12.134 13.736 Fourth Quarter ..... 15.453 11.676 14.881
(Source: This summary reflects information supplied by NASDAQ.) The bid information shown above is derived from statistical reports of the NASDAQ Stock Market and reflects inter-dealer prices without retail mark-up, mark-down or commissions and may not necessarily represent actual transaction. The NASDAQ Stock Market, Inc., is a wholly-owned subsidiary of National Association of Securities Dealers, Inc. The approximate number of recorded holders of the Registrant's Class A and Class B Common Stock, as of February 29, 2000, is shown below:
TITLE OF CLASS NUMBER OF RECORD HOLDERS -------------- ------------------------ Class A Common Stock 413 Class B Common Stock 171
Because substantially all of the holders of Class B Common Stock are also holders of Class A Common stock the number of record holders of the two classes on a combined basis was approximately 458 as of February 29, 2000. 14 DIVIDENDS Subject to certain limitations imposed by law, the Board of Directors of the Registrant may declare a dividend on shares of common stock. Stock Dividends. On April 24, 1997, the Board of Directors of the Registrant declared a 4% stock dividend on both its Class A Common Stock and Class B Common Stock shares payable May 8, 1997, to shareholders of record on April 28, 1997. The stock dividend resulted in the issuance of 258,176 additional shares of Class A Common Stock and 61,859 additional shares of Class B Common Stock. On April 22, 1998, the Board of Directors of the Registrant declared a 4% stock dividend on both its Class A Common Stock and Class B Common Stock shares payable May 8, 1998, to shareholders of record on May 1, 1998. The stock dividend resulted in the issuance of 272,213 additional shares of Class A Common Stock and 63,595 additional shares of Class B Common Stock. On April 21, 1999, the Board of Directors of the Registrant declared a 4% stock dividend on both its Class A Common Stock and Class B Common Stock shares payable May 14, 1999, to Shareholders of record on May 3, 1999. The stock dividend resulted in the issuance of 288,728 additional shares of Class A Common Stock and 65,296 additional shares of Class B Common Stock. On October 20, 1999, the board of directors of the Registrant declared a 5% stock dividend on both its Class a Common stock and Class B common stock shares payable on January 17, 2000, to shareholders of record on January 3, 2000. The stock dividend resulted in the issuance of 382,857 additional shares of Class A common stock and 84,241 additional shares of Class B common stock. Future stock dividends, if any, will be at the discretion of the Board of Directors and will be dependent on the level of earnings and compliance with regulatory requirements. Cash Dividends. The Registrant paid cash dividends in each quarter of 1999 and 1998 for holders of Class A Common Stock and for holders of Class B common stock. This resulted in a charge to retained earnings of approximately $7.8 million and $7.2 million for 1999 and 1998, respectively. The following table sets forth on a quarterly basis the dividend paid to holders of each Class A and Class B common stock for 1999 and 1998.
CASH DIVIDENDS PER SHARE 1999 CLASS A CLASS B ---- ---------- ------- First Quarter .......................... $ .21 $ .2415 Second Quarter ......................... $ .21 $ .2415 Third Quarter .......................... $ .21 $ .2415 Fourth Quarter ......................... $ .21 $ .2415
CASH DIVIDENDS PER SHARE 1998 CLASS A CLASS B ---- ---------- ------- First Quarter .......................... $ .20 $ .2300 Second Quarter ......................... $ .20 $ .2300 Third Quarter .......................... $ .20 $ .2300 Fourth Quarter ......................... $ .21 $ .2415
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. 15 Under the Pennsylvania Business Corporation Law of 1988, as amended, the Registrant may pay dividends only if after payment the Registrant would be able to pay its debts as they become due in the usual course of business and the total assets are greater than the sum of its total liabilities plus the amount that would be needed if the Registrant were to be dissolved at the time of the dividend to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the dividend. See Note Q to the Consolidated Financial Statements in Item 8 of this report. 16 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial and operating information for RBPA should be read in conjunction with ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and accompanying notes in ITEM 8.
YEARS ENDED DECEMBER 31, (IN THOUSANDS) ------------------------------------------------------------------ INCOME STATEMENT DATA 1999 1998 1997 1996 1995 - ----------------------- -------- -------- -------- -------- -------- Interest income ........................... $ 44,682 $ 40,640 $ 33,372 $ 33,618 $ 29,755 Interest expense .......................... 15,922 13,163 10,048 10,054 9,592 -------- -------- -------- -------- -------- Net interest income ....................... 28,760 27,477 23,324 23,564 20,163 Increase (Decrease) Provision for loan losses .................................... -- 4,770 (2,118) (1,488) -- -------- -------- -------- -------- -------- Net interest income after loan loss provision ................................. 28,760 22,707 25,442 25,052 20,163 Gain on sale of loans ................. 45 4 29 427 86 Gain/Loss on real estate .............. 350 -- 1,204 2,016 870 Other income .......................... 1,644 3,570 1,392 1,788 1,098 -------- -------- -------- -------- -------- Total other income ........................ 2,039 3,574 2,625 4,231 2,054 Income before other expenses & income taxes 30,799 26,281 28,067 29,283 22,217 Non-interest expenses: Salaries .............................. 7,265 5,028 9,546 9,602 4,850 Other ................................. 5,865 5,845 5,088 5,537 5,461 -------- -------- -------- -------- -------- Total other expenses ...................... 13,130 10,873 14,634 15,139 10,311 -------- -------- -------- -------- -------- Income before taxes ....................... 17,669 15,408 13,433 14,144 11,906 Income taxes .............................. 5,564 4,624 4,074 3,907 3,648 -------- -------- -------- -------- -------- Net income ................................ $ 12,105 $ 10,784 $ 9,359 $ 10,237 $ 8,258 ======== ======== ======== ======== ======== Basic earnings per share (1) .............. $ 1.21 $ 1.09 $ .95 $ 1.06 $ .88 -------- -------- -------- -------- -------- Diluted earnings per share (1) ............ $ 1.19 $ 1.07 $ .94 $ 1.03 $ .85 -------- -------- -------- -------- --------
(1) Earnings per share has the weighted average number of shares used in the calculation adjusted to reflect a 5% stock dividend in 2000, a 4% stock dividend in 1999, a 4% stock dividend in 1998, a 4% stock dividend in 1997, a 6% stock dividend in 1996, and a 6% stock dividend in 1995.
BALANCE SHEET DATA 1999 1998 1997 1996 1995 - ------------------------ -------- -------- -------- -------- -------- (in thousands) Total assets $522,536 $427,622 $416,598 $355,149 $356,264 Total average assets 469,193 407,623 342,361 343,360 312,823 Loans, net 343,081 292,556 282,711 209,017 198,419 Total deposits 381,286 290,390 265,363 254,183 268,242 Total long term debt 30,000 30,365 31,063 4,814 2,984 Total stockholders' equity 95,835 94,069 89,505 84,581 77,189 Total average stockholders' equity 94,824 91,374 86,572 80,910 74,091 Return on average assets 2.6% 2.6% 2.7% 3.0% 2.6% Return on average equity 12.8% 11.8% 10.8% 12.7% 11.1% Average equity to average assets 20.3% 22.4% 25.3% 23.6% 23.7% Cash dividend payout ratio 64.9% 66.6% 56.7% 19.2% 11.4%
17 AVERAGE BALANCES The following table presents the average daily balances of assets, liabilities and stockholders' equity and the respective interest paid on interest bearing assets and interest bearing liabilities, as well as average rates for the periods indicated:
1999 1998 1997 ------------------------------- ----------------------------- ----------------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ ASSETS (In thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE - --------------------- ------- -------- ---- ------- -------- ---- ------- -------- ---- Interest bearing deposits in banks ....................... $ 430 $ 16 3.72% $ 505 $ 24 4.75% $ 1,230 $ 87 7.10% Federal funds ............... 11,345 558 4.92% 25,210 1,372 5.44% 17,921 1,012 5.64% Investment securities: Held to maturity: Taxable ............ 78,251 5,726 7.32% 46,946 3,228 6.88% 84,399 5,604 6.64% Nontaxable (1) ..... 694 82 11.82% 3,098 314 10.14% 1,455 169 11.63% ----------------------------- ----------------------------- ----------------------------- Total held to maturity ...... 78,945 5,808 7.36% 50,044 3,542 7.08% 85,854 5,773 6.72% Available for sale Taxable ........... 51,617 4,512 8.74% 27,419 2,296 8.37% 12,212 991 8.12% ----------------------------- ----------------------------- ----------------------------- Total investment securities ............ 130,562 10,320 7.90% 77,463 5,838 7.54% 98,066 6,764 6.90% Loans: (2) Commercial & industrial . 139,639 15,374 11.01% 116,823 13,783 11.80% 111,704 12,297 11.01% Commercial mortgages .... 170,282 17,131 10.06% 170,690 18,279 10.71% 87,464 11,658 13.33% Other loans (1) ......... 10,623 1,311 12.34% 12,403 1,451 11.70% 14,200 1,782 12.55% ----------------------------- ----------------------------- ----------------------------- Total loans ..... 320,544 33,816 10.55% 299,916 33,513 11.17% 213,368 25,737 12.06% ----------------------------- ----------------------------- ----------------------------- Total interest earning assets $462,881 $ 44,710 9.66% $403,094 $ 40,747 10.11% $330,585 $ 33,600 10.16% Non interest earning assets Cash & due from banks 8,775 8,717 6,636 Other assets 17,159 15,843 17,366 Allowance for loan loss (12,186) (10,313) (8,764) Def income/unearned disc (7,436) (9,718) (3,462) -------- -------- -------- Total non interest Earning assets 6,312 4,529 11,776 -------- -------- -------- Total assets $469,193 $407,623 $342,361 ======== ======== ======== LIABILITIES & STOCKHOLDERS' EQUITY Deposits: Savings $ 19,932 538 2.70% $ 18,214 $ 514 2.82% $ 16,668 $ 454 2.72% NOW & Money Market 75,289 2,123 2.82% 79,975 2,174 2.72% 69,077 2,171 3.14% CDs & other time deposits 192,545 11,356 5.90% 142,206 8,479 5.96% 121,934 7,185 5.89% ----------------------------- ------------------------------ ------------------------------ Total interest bearing deposits $287,766 14,017 4.87% $240,395 $11,167 4.65% $207,679 $ 9,810 4.72% Federal funds 61 3 4.92% 90 4 4.44% 123 6 5.00% Long term borrowings 30,869 1,902 6.16% 31,611 1,992 6.30% 3,066 231 7.54% ----------------------------- ------------------------------ ------------------------------ Total interest bearing liabilities $318,696 15,922 5.00% $ 272,096 $13,163 4.84% $210,868 $ 10,047 4.76% ----------------------------- ------------------------------ ------------------------------ Non interest bearing deposits 42,829 29,691 32,992 Other liabilities 12,844 14,462 11,929 -------- -------- -------- Total liabilities 374,369 316,249 255,789 Stockholders' equity 94,824 91,374 86,572 -------- -------- -------- Total liabilities and Stockholders' equity $469,193 $407,623 $342,361 ======== ======== ======= Net interest income $ 28,788 $ 27,584 $ 23,553 ======== ======== ======== Net yield on interest earning 6.22% 6.84% 7.12% assets ======== ======== ========
(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. 18 RATE VOLUME The following table sets forth a rate/volume analysis, which segregates in detail the major factors contributing to the change in net interest income for the years ended, December 31, 1999 and 1998, as compared to respective previous periods, into amounts attributable to both rate and volume variances.
1999 VS 1998 1998 VS 1997 (IN THOUSANDS) (IN THOUSANDS) ------------------------------ -------------------------------- CHANGES DUE TO: CHANGES DUE TO: --------------------- ---------------------- INTEREST INCOME VOLUME RATE TOTAL VOLUME RATE TOTAL - --------------- ------ ---- ----- ------ ---- ----- Interest bearing deposits in banks ..... $ (12) $ (12) $ (24) $ (40) $ (23) $ (63) Federal funds sold ..................... (277) (521) (798) 689 (329) 360 Investment securities: Held to maturity: Taxable ....................... 2,279 220 2,499 (2,569) 193 (2,376) Nontaxable .................... (276) 43 (233) 169 (24) 145 Available for sale Taxable ...................... 2,111 105 2,216 1,272 33 1,305 ------------------------------- ------------------------------- Total investment securities ...... 4,114 368 4,482 (1,128) 202 (926) Loans: Commercial & industrial ............ 2,558 967 1,591 579 907 1,486 Commercial mortgages ............... (44) (1,104) (1,148) 9,286 (2,665) 6,621 Other loans ........................ (217) 77 (140) (216) (115) (331) ------------------------------- ------------------------------- Total loans ................ 2,297 (1,994) 303 9,649 (1,873) 7,776 ------------------------------- ------------------------------- Total increase (decrease) in interest income ................................. $ 6,122 $(2,159) $ 3,963 $ 9,170 $(2,023) $(7,147) INTEREST EXPENSE Deposits: Savings .............................. $ 47 $ (23) $ 24 $ 43 $ 17 $ 60 NOW & Money Market ................... (130) 79 (51) 318 (315) 3 CDs & other time deposits ............ 2,970 (93) 2,877 1,208 268 28 ------------------------------- ------------------------------- Total interest bearing deposits 2,887 (212) 2,850 1,569 (212) 1,357 Federal funds purchased ................ (1) -- (1) (2) -- (2) Mortgage payable and long term borrowings ... (46) (44) (89) 1,805 (44) 1,761 ------------------------------- ------------------------------- Total increase (decrease) in interest expense ................................ 2,840 (80) 2,760 3,372 (256) 3,116 ------------------------------- ------------------------------- Total increase (decrease) in net interest income .............. $ 3,282 $(2,079) $ 1,203 $ 5,798 $(1,767) $ 4,031 =============================== ===============================
19 LOANS The following table reflects the composition of the loan portfolio of Royal Bank of Pennsylvania and the percent of gross outstandings represented by each category at the dates indicated.
YEAR ENDING DECEMBER 31, (IN THOUSANDS) -------------------------------------------------------------------------------------------------------- Loans 1999 1998 1997 1996 1995 - ----- -------------------- -------------------- -------------------- -------------------- -------------------- Comm'l & industrial $168,329 46% $127,972 42% $123,800 41% $116,616 55% $124,065 61% Real estate 191,312 53% 182,595 57% 176,315 58% 93,925 44% 75,758 37% Consumer 2,653 1% 2,033 1% 1,523 1% 2,097 1% 3,352 2% -------- --- -------- --- -------- --- -------- --- -------- --- Total gross loans 362,294 100% 312,600 100% 301,638 100% 212,638 100% 203,175 100% Unearned income (2,154) (1,833) (1,498) (1,290) (1,160) Disc on loans purchased (5,322) (6,291) (9,243) (2,331) (3,596) -------- -------- -------- -------- -------- 354,818 304,476 290,897 209,017 198,419 Allowance for loan loss (11,737) (11,920) (8,186) (9,084) (9,747) -------- -------- -------- -------- -------- Total loans, net $343,081 $292,556 $282,711 $199,933 $188,672 ======== ======== ======== ======== ========
ANALYSIS OF ALLOWANCE FOR LOAN LOSS
YEAR ENDING DECEMBER 31, (IN THOUSANDS) --------------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------- ---------- --------- --------- --------- Total Loans ........................... $ 354,818 $ 304,476 $ 290,897 $ 209,017 $ 198,419 ========= ========= ========= ========= ========= Daily average loan balance ............ $ 320,544 $ 299,916 $ 213,368 $ 200,618 $ 185,734 ========= ========= ========= ========= ========= Allowance for loan loss: Balance at the beginning of the year $ 11,920 $ 8,186 $ 9,084 $ 9,747 $ 8,992 Charge offs by loan type: Commercial .................... 1,062 1,501 762 843 292 Real estate .................. 13 135 -- 240 21 --------- --------- --------- --------- --------- Total charge offs .................. 1,075 1,636 762 1,083 313 Recoveries by loan type: Commercial ................... 850 540 1,934 1,790 125 Individual ................... 35 -- -- -- -- Real estate .................. 7 60 48 118 31 --------- --------- --------- --------- --------- Total recoveries .................. 892 600 1,982 1,908 156 --------- --------- --------- --------- --------- Net loan charge offs .............. 183 1,036 (1,220) (825) 157 Purchase of Knoblauch Bank ... -- -- -- -- 912 Increase (decrease) in Provision for loan loss.. -- 4,770 (2,118) (1,488) -- --------- --------- --------- --------- --------- Balance at end of year ................ $ 11,737 $ 11,920 $ 8,186 $ 9,084 $ 9,747 ========= ========= ========= ========= ========= Net charge offs to average loans ...... .06% .35% (0.57%) (0.41%) 0.08% ========= ========= ========= ========= ========= Allowance to total loans at year end .. 3.31% 3.91% 4.35% 4.35% 4.91% ========= ========= ========= ========= =========
The allowance for loan losses is established through provisions for loan losses based on management's on-going evaluation of the risks inherent in the Company's loan portfolio. Factors considered in the evaluation process include growth of the loan portfolio, risk characteristics of the types of loans in the portfolio, geographic and large borrower concentrations, current regional economic and real estate market conditions that could affect the ability of borrowers to pay, the value of underlying collateral, and trends in loan delinquencies and charge-offs. 20 The company utilizes an internal rating system to monitor and evaluate the credit risk inherent in its loan portfolio. All loans approved by the loan committee, executive board committee and the Board of Directors are initially assigned a rating of pass. The loan review officer, Vice President of Special Assets and the loan review committee are expected to recommend changes in loan ratings when facts come to their attention that warrant an upgrade or downgrade in a loan rating. Problem and potential problem assets are assigned the three lowest ratings. Such ratings coincide with the "Substandard", "Doubtful" and "Loss" classifications used by federal regulators in their examination of financial institutions. Generally, an asset is considered Substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. Substandard assets have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Assets classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristics that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. Assets classified as Loss are those considered uncollectable and of such little value that their continuance as assets is not warranted. On a regular basis, the Loan Review Officer and senior management review the status of each loan. While the Company believes that it has established an adequate allowance for loan losses, there can be no assurance that the regulators, in reviewing the Company's loan portfolio, will not request the company to materially increase its allowances for loan losses. Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependant upon future events and, as such, further additions to the level of specific and general loss allowances could become necessary. 21 LOANS AND LEASE FINANCING RECEIVABLES The following table summarizes the loan portfolio by loan category and amount that corresponds to the appropriate regulatory definitions.
YEAR ENDING DECEMBER 31, (IN THOUSANDS) --------------- -- ----------------- ---- --------------- 1999 1998 1997 --------------- ----------------- --------------- Loans secured by real estate Construction and land development $50,210 $35,571 $29,172 Secured by farmland (including farm residential and other improvements) -- - - -- Secured by 1-4 family residential properties: Revolving, open-end loans secured by 1-4 family residential properties and extended under lines of credit 8,341 7,648 11,433 All other loans secured by 1-4 family residential properties: Secured by first liens 15,458 17,836 23,139 Secured by junior liens 6,010 6,131 8,195 Secured by multi family (5 or more) residential properties 19,021 20,386 23,459 Secured by nonfarm nonresidential properties 237,247 198,225 177,196 Commercial and industrial loans to US addresses 21,090 24,362 25,820 Loans to individuals for household, family, and other personal expenditures 4,252 1,206 1,478 Obligations of state and political subdivisions in the US 411 1,149 1,593 All other loans 254 87 154 Less: Any unearned income on loans listed above 7,476 8,125 10,742 --------------- ----------------- --------------- Total loans and leases, net of unearned income $354,818 $304,476 $290,897 =============== ================= ===============
CREDIT QUALITY The following table presents the principal amounts of nonaccruing loans and other real estate.
YEARS ENDING DECEMBER 31, (IN THOUSANDS) ---------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------ ------------ ------------ ------------ ------------- Non-accruing loans (1)(2) $1,209 $3,419 $4,317 $4,653 $6,233 Past due loans over 90 days but still accruing -- -- -- -- 391 ------------ ------------ ------------ ------------ ------------- Total nonperforming loans 1,209 3,419 4,317 4,653 6,624 Other real estate 19 707 -- 504 612 ------------ ------------ ------------ ------------ ------------- Total nonperforming assets $1,228 $4,126 $4,317 $5,157 $7,236 ============ ============ ============ ============ ============= Nonperforming assets to total assets 0.23% 0.96% 1.04% 1.45% 2.03% ============ ============ ============ ============ ============= Nonperforming loans to total loans 0.33% 1.09% 1.43% 2.19% 3.34% ============ ============ ============ ============ ============= Allowance for loan loss to nonperforming loans 970.80% 348.64% 189.62% 195.23% 147,15% ============ ============ ============ ============ =============
(1) Generally a loan is placed on nonaccruing status when it has been delinquent for a period of 90 days or more unless the loan is both well secured and in the process of collection. (2) If interest had been accrued on these nonaccruing loans, such income would have approximated $108,832 for 1999, $307,744 for 1998, $388,517 for 1997, $418,740 for 1996, and $1,889,000 for 1995. 22 INVESTMENTS SECURITIES The contractual maturity distribution and weighted average rate of the investments held to maturity portfolio at December 31, 1999 are presented in the following table. Weighted average rate on tax-exempt obligations have been computed on a fully taxable equivalent basis assuming a tax rate of 34%.
AS OF DECEMBER 31, 1999 (IN THOUSANDS) ------------------------------------------------------------------------------------------------------------ AFTER 1 YEAR BUT AFTER 5 YEARS, BUT SECURITIES HELD WITHIN 1 YEAR WITHIN 5 YEARS WITHIN 10 YEARS AFTER 10 YEARS TOTAL TO MATURITY AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE - ------------ ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- US Treasuries and agencies $ 4,584 6.9% $ 601 5.6% $ 566 7.5% $ 862 7.0% $ 6,613 6.8% Other securities 13,230 6.9% 48,162 7.5% 11,113 8.5% 3,947 6.4% 76,452 7.1% ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total $17,814 6.9% $48,763 7.5% $11,679 8.5% $ 4,809 6.5% $83,065 7.1% ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
The following tables presents the consolidated book values and approximate market value at December 31, 1999, 1998, and 1997, respectively, for each major category of RBPA's investment securities portfolio for held to maturity securities and available for sale securities.
AS OF DECEMBER 31, (IN THOUSANDS) 1999 1998 1997 --------------------- --------------------- --------------------- AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET SECURITIES HELD TO MATURITY COST VALUE COST VALUE COST VALUE - --------------------------- ---- ----- ---- ----- ---- ----- State & political subdivisions $ -- $ -- $3,098 $3,128 $3,098 $3,152 US Treasuries & agencies 6,614 6,623 4,532 4,660 12,908 13,096 Other securities 76,451 74,871 54,264 54,372 48,365 48,737 ------- ------- ------- ------- ------- ------- Total $83,065 $81,494 $61,894 $62,160 $64,371 $64,985 ======= ======= ======= ======= ======= =======
AS OF DECEMBER 31, (IN THOUSANDS) 1999 1998 1997 --------------------- --------------------- --------------------- AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET SECURITIES AVAILABLE FOR SALE COST VALUE COST VALUE COST VALUE - ----------------------------- ---- ----- ---- ----- ---- ----- Federal Home Loan Bank stock $3,170 $3,170 $3,170 $3,170 $3,174 $3,174 Preferred and common stock 3,727 3,537 2,867 2,919 2,944 2,977 Other securities 55,652 52,778 29,031 30,863 13,964 14,897 ------- ------- ------- ------- ------- ------- Total $62,549 $59,485 $35,068 $36,952 $20,082 $21,048 ======= ======= ======= ======= ======= =======
23 DEPOSITS The average balance of deposits by major classifications for each of the last three years is presented in the following table.
AS OF DECEMBER 31, (IN THOUSANDS) 1999 1998 1997 -------------------- ---------------------- ---------------------- AVERAGE AVERAGE AVERAGE BALANCE RATE BALANCE RATE BALANCE RATE Demand deposits: Non interest bearing $42,829 -- $29,691 -- $32,992 -- Interest bearing (NOW) 31,480 2.22% 27,138 2.25% 24,539 2.50% Money market deposits 43,809 3.25% 52,837 3.30% 44,538 3.50% Savings deposits 19,932 2.70% 18,214 2.82% 16,668 2.72% Certificate of deposit 192,545 5.90% 142,206 5.96% 121,934 5.89% ------- ---- ------- ---- ------- ---- Total deposits $330,595 $270,086 $240,671 ======= ======= =======
The remaining maturity of Certificates of Deposit of $100,000 or greater.
AT DECEMBER 31, (IN THOUSANDS) MATURITY 1999 1998 ---- ---- Three months or less $11,623 $4,607 Over three months through twelve months 10,360 7,465 Over twelve months through five years 85,311 20,909 Over five years 18,823 15,773 ------- ------ Total $126,117 $48,754 ======== =======
SHORT AND LONG TERM BORROWINGS
YEAR ENDING DECEMBER 31, (IN THOUSANDS) 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- Short term borrowings (1) $ -- $ -- $15,000 $ -- $ -- Long term borrowings: Mortgage payable (2) 480 527 571 613 652 FHLB advances (3) 30,000 30,365 31,063 4,201 2,332 ------- ------- ------- ------- ------- Total long term borrowings $30,480 $30,892 $46,634 $ 4,814 $ 2,984 ======= ======= ======= ======= =======
(1) In 1997, short-term borrowings consisted of federal funds purchased which matured within one to four days from the transaction date. (2) The mortgage payable is payable to a bank at 65% of prime rate (5.525% at December 31, 1999) and is guaranteed by an industrial development authority. (3) Advances from the Federal Home Loan Bank of Pittsburgh consist of one advance with an interest rates of 6.24%, and matures on December 23, 2002. 24 ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements of RBPA (see Item 8) and related notes included herein. FINANCIAL CONDITION Total assets increased $94.9 million, or 22%, to $522.5 million at December 31, 1999 from $427.6 million at year end 1998, primarily due to growth experienced in loans and investment securities during 1999 of $50.3 million and $43.7 million, respectively, partially offset by a $1.5 million decrease in cash and cash equivalents. Cash and Cash Equivalents. Cash and cash equivalents are comprised of cash on hand, and cash in interest bearing and non interest bearing accounts in banks, in addition to federal funds sold. Cash and cash equivalents decreased $1.5 million, or 8%, to $17.7 million at December 31, 1999, primarily due to growth in loans and investment securities during 1999. The average balance of cash and cash equivalents was $20.5 million for 1999 versus $34.4 million for 1998 which indicates that cash and cash equivalents were more efficiently deployed in higher earning assets during 1999. Investment Securities Held to Maturity. Held to maturity investment securities ("HTM") represents approximately 17% of average earning assets during 1999 and are comprised of primarily corporate debt securities of investment grade quality, at the time of purchase. During 1999, HTM securities increased $21.2 million from $61.9 million at December 31, 1998 to $83.1 million at December 31, 1999. Investment Securities Available for Sale. Available for sale securities ("AFS") represent 11% of average earning assets during 1999 and are primarily comprised of capital trust security issues of regional banks and foreign corporate bonds. At December 31, 1999, AFS investment securities were $59.5 million while they were $37 million at December 31, 1998, an increase of $22.5 million. Loans. RBPA's primary earning assets are loans, representing approximately 69% of average earning assets during 1999. The loan portfolio has historically been comprised primarily of business demand loans and commercial mortgages in roughly equal amounts, and to a significantly lesser extent, consumer loans comprised of one to four family residential and home equity loans. This composition of loans did not change during 1999. During 1999, total loans increased 16% from $304.5 million at December 31, 1998 to $354.8 million at December 31, 1999 primarily due to internally generated loan growth and loan purchases. Deposits. RBPA's primary source of funding, deposits, increased $90.9 million, or 31%, from $290.4 million at December 31, 1998 to $381.3 million at December 31, 1999. This increase in deposits is primarily due to an increase of $86.1 million in certificates of deposits, or 56% from December 31, 1998. This increase in certificate of deposits is primarily due to the increase in brokered deposits during 1999. At December 31, 1999 brokered deposits were $107.7 million as compared to $12.1 million at December 31, 1998. Other deposit categories comprised of NOW and money market, and savings deposits increased .4% during 1999 over their levels at December 31, 1998. 25 Borrowings. Borrowings are comprised of long term borrowings (advances, mortgage) and short term borrowings (overnight borrowings). Long term borrowings decreased $.4 million to $30.5 million at December 31, 1999 primarily due to a scheduled maturity of a Federal Home Loan Bank ("FHLB") advance in December, 1999, and scheduled amortization of the mortgage payable. The average balance of long term borrowings and mortgages during 1999 was $30.9 million versus $31.6 million for 1998. Stockholders' Equity. Stockholders' equity increased $1.8 million or 2% in 1999 to $95.8 million primarily due to net income of $12.1 million partially offset by $7.8 million in cash dividends paid in 1999. Additionally, stockholders equity was effected by the decline in market value of AFS investment securities during 1999, which resulted in a downward adjustment of $3.3 million. RESULTS OF OPERATIONS General. RBPA's results of operations depend primarily on net interest income, which is the difference between interest income on interest earning assets and interest expense on interest bearing liabilities. Interest earning assets consist principally of loans and investment securities, while interest bearing liabilities consist primarily of deposits. Net income is also effected by the provision for loan losses and the level of non-interest income as well as by non-interest expenses, including salary and employee benefits, occupancy expenses and other operating expenses. Net Income. Net income in 1999 was $12.1 million as compared to $10.8 million in 1998 and, $9.4 million in 1997. Basic earnings per share were $1.21, $1.09 and $0.95 for 1999, 1998, and 1997, respectively. The $1.3 million increase in net income for 1999 represents a 12% increase over the 1998 and is primarily attributable to the increase in interest income relating to the investment security portfolio. The increase in net income of $1.4 million or 15% in 1998 over 1997 is primarily due to an increase in net interest income, primarily attributable to the growth in average loans and the acquisition of higher yielding investment securities during 1998. Net Interest Income. Net interest income is affected by market and economic conditions, which influence rates on loan and deposit growth. Net interest income was $28.8 million in 1999, compared to $27.5 million in 1998, and $23.3 million in 1997. This increase in net interest income is primarily due to the increase in interest income relating to the increase in loans and investment securities during 1999, while the yield on interest earning assets decreased 45 basis points to 9.66% from 10.11% for 1998. In 1998, yields on interest earning assets decreased slightly to 10.11% from 10.16% in 1997, a difference of 5 basis points. In 1999, average interest earning assets increased $59.8 million to $462.9 million from the 1998 level. This increase in average interest earning assets in 1999 is due to growth in average investment securities and loans of $53.1 million and $20.6 million, respectively. In 1998 average interest earning assets increased to $403.1 million from $330.6 million in 1997, primarily due to the purchase of a $75 million loan portfolio in December 1997. In 1999 rates on interest bearing liabilities increased to 5.00% from 4.84% level in 1998 as overall rates increased during the year. Average interest bearing liabilities increased to $318.7 million in 1999 from $272.1 million in 1998. This increase in the rates is primarily due to the increase in higher costing brokered deposits in 1999. In 1998, rates on interest bearing liabilities increased to 4.84% versus 4.76% in 1997. Rates on interest bearing deposits increased primarily due to higher costing certificates of deposits in 1998. Additionally, other borrowings also contributed to this increase due to the addition of a $30 million FHLB advance in December 1997 at an annual rate of 6.24% for a term of five years. 26 LOANS AND MORTGAGES
1999 1998 1997 ---- ---- ---- Average loan outstandings $320,544,000 $299,916,000 $213,368,000 Interest and fees on loans $ 33,816,000 $ 33,513,000 $ 25,737,000 Average Yield 10.55% 11.17% 12.06%
RBPA continues to originate primarily five year fixed rate loans, while a portion of the loan portfolio continues to be comprised of variable rate loans which helps to a degree to maintain its interest spread when rates change. At December 31, 1999 variable rate loans represented approximately 44% of loans. In 1999, the average balance of loans increased $20.6 million to $320.5 million primarily due to purchases and internally generated loan growth. However, the average yield on loans decreased 62 basis points in 1999 primarily due to new loans generally repricing downwards as the Bank's average prime rate for 1999 declined 21 basis points to 7.98% from the 8.19% average prime rate for 1998. In 1998, RBPA's average prime rate decreased to 8.19% in 1998 from 8.43% in 1997, which contributed to the 89 basis point decline in the yield on loans from a yield of 12.06% in 1997 to a yield of 11.17% for 1998. The average balance of loans increased $86.5 million to $299.9 million in 1998 primarily due to the purchase of the FDIC loan portfolio in December 1997 in addition to internally generated loan growth during 1998. INVESTMENTS SECURITIES HELD TO MATURITY
1999 1998 1997 ---- ---- ---- Average HTM investment securities $78,945,000 $50,044,000 $85,854,000 Interest income $ 5,808,000 $ 3,542,000 $ 5,773,000 Average yield 7.36% 7.08% 6.72%
HTM investment securities are comprised primarily of taxable corporate debt issues and to a lesser extent, US Treasuries and agencies, and non-taxable state and municipal investment securities. The corporate debt issues are investment grade at the time of purchase, with maturities in the three to six year range. It is RBPA's expressed intention to hold these securities to maturity, as has been the established investment policy. In 1999, the yield on HTM investment securities increased 28 basis points to 7.36% from 7.08% for 1998. This increase is primarily due to the purchase of higher yielding corporate debt securities primarily during the first six months of 1999. In 1998 the yield in HTM investment securities increased 35 basis points to 7.08% from 6.73% in 1997. This increase is partially attributable to a 24 basis point increase in yield on taxable investment securities in 1998, primarily due to the purchase of higher yielding corporate debt securities and the maturity of lower yielding securities during the year. However, the average balance of HTM investment securities decreased $35.8 million to $50 million in 1998 as scheduled maturities outpaced purchases. 27 INVESTMENTS SECURITIES AVAILABLE FOR SALE
1999 1998 1997 ---- ---- ---- Average AFS investment securities $51,617,000 $27,419,000 $12,212,000 Interest and dividend income $ 4,512,000 $ 2,296,000 $ 991,000 Average yield 8.74% 8.37% 8.12%
AFS investment securities are comprised primarily of non-rated capital trust security issues of regional banks, rated foreign corporate debt securities, and to a lesser extent preferred and common stock. In 1999, the average balance of AFS investment securities increased $24.2 million to $51.6 from the $27.4 million level in 1998, representing 11% of average earning assets. This increase is due to the purchase of additional capital trust investment securities, in addition to foreign corporate debt, which lifted the overall yield of AFS investment securities 37 basis point to 8.74% for 1999. In 1998, the average balance increased $15.2 million to $27.4 million, primarily due to the purchase of capital trust securities. In 1997 the average balance increased $8.5 million to $12.2 million, primarily due to the purchase of capital trust securities, and an increase in the FHLB stock position. INTEREST EXPENSE ON NOW AND MONEY MARKET DEPOSITS
1999 1998 1997 ---- ---- ---- Average NOW & Money Market deposits $75,289,000 $79,975,000 $69,077,000 Interest expense $ 2,123,000 $ 2,174,000 $ 2,171,000 Average cost of funds 2.82% 2.72% 3.14%
In 1999 the average cost of funds on NOW and money market deposits increased 10 basis points to 2.82% from 2.72, as 1999 saw overall rates increase. In 1998 the average cost of funds on NOW and money market deposits decreased 42 basis points to 2.72% as interest rates decreased slightly in 1998 while the average balance increased $10.9 million. INTEREST EXPENSE ON TIME DEPOSITS
1999 1998 1997 ---- ---- ---- Average time deposits $192,545,000 $142,206,000 $121,934,000 Interest expense $ 11,356,286 $ 8,479,000 $ 7,185,000 Average cost of funds 5.90% 5.96% 5.89%
In 1999, the average balance of time deposits increased $50.3 million to $192.6 million. This growth in time deposits was due to the increase in the use of higher costing brokered deposits in 1999 as compared to 1998. At December 31, 1999 brokered deposits was $107.7 million as compared to $12.1 million at December 31, 1998, an increase of $95.5 million. In 1998, the average balance and the cost of funds of time deposits increased $20.3 million and 7 basis points, respectively, to $142.2 million and a rate of 5.96% primarily due to addition of brokered deposits during the year. Although rates in general started to move upward in 1999, the reaction of deposits to rate changes (both increases and decreases) is slower than the change in the prime rate because these time deposits must mature before a rate adjustment would become effective. In 1999, 33% of time deposits were comprised of certificates of deposits accounts with balances of $100,000 or more, while in 1998, 17% of time deposits were comprised of certificates of deposit accounts with balances of $100,000 or more. These types of 28 deposit have traditionally been considered more rate volatile than other types of deposits, however at Royal Bank the penalty for early redemption somewhat mitigates this volatility. PROVISION FOR POSSIBLE LOAN LOSSES The provision for loan losses is an amount charged to expense to provide for future losses on existing loans. In order to determine the amount of the provision for loan loss, RBPA conducts a quarterly review of the loan portfolio to evaluate overall credit quality. This evaluation consists of an analysis of individual loans and overall risk characteristics and size of the loan, and takes into consideration current economic and market conditions, changes in non-performing loans, the capability of specific borrowers to repay loan obligations as well as current collateral values. In 1999, no provision for loan losses was recorded as compared to $4.8 million in 1998 due to senior management deeming the level of loan loss reserve to be adequate. Net charge-offs in 1999 were $.2 million as compared to $1 million for 1998, a decrease of $.8 million. During 1998, RBPA recorded a provision for loan loss of $4.8 million, as compared to a $2.1 million (credit) was recorded in 1997, an increase of $6.9 million. This increase can be attributed to the increase in loan growth during 1998, a $.9 million increase in charge-offs in 1998, and a negative provision (credit) recorded in 1997, primarily due to recoveries exceeding charge-offs. Net charge-offs were $1 million in 1998, an increase of $2.2 million from 1997 primarily due to recoveries exceeding charge-offs in 1997 by $1.2 million. The allowance for possible loan loss at December 31, 1999 was $11.7 million, or 3.3% of net loans as compared to $11.9 million at December 31, 1998 or 3.9% of net loans, and $8.2 million at December 31, 1997, or 2.8% of net loans. NON-INTEREST INCOME Non-interest income includes service charges on depositors' accounts, safe deposit rentals and various services such as cashing checks, issuing money orders and travelers checks, and redeeming US savings bonds and similar activities. Most components of non-interest income are a modest and stable source of income, with exceptions of one-time gains and losses from the sale of other real estate owned, from period to period these sources of income may vary considerably. Service charges on depositors' accounts, safe deposit rentals and other fees are periodically reviewed by Management to remain competitive with other local banks. In 1999, non-interest income decreased $1.5 million to $2 million as compared to $3.6 million for 1998. This decrease is primarily due to a one-time $2.3 million income recorded in 1998, partially offset by receipt of $.5 million income received in 1999 relating to the refund of Pennsylvania Shares tax from the State of Pennsylvania. Additionally, gains on the sale of other real estate was $.3 million as compared to $-0- for 1998. Non-interest income increased $.9 million to $3.6 million in 1998 from $2.6 million in 1997. This increase was primarily due to a $2.3 million increase in other income, the result of a reversal of a legal accrual relating to the settlement of litigation in 1998. This increase in other income was partially offset by a $1.2 million decrease in gains on sale of other real estate in 1998, and a $.2 million decrease in income relating to service charges. 29 NON-INTEREST EXPENSE Non-interest expense includes compensation and employee benefits, occupancy, advertising, FDIC insurance, state taxes, depreciation, and other expenses such as auditing, automatic teller machines (ATMs), data processing, legal, outside service charges, postage, printing, and other expenses relating to other real estate owned. In 1999, non-interest expense increased $2.3 million to $13.1 million from $10.9 million in 1998. This increase is primarily due to a $2.3 million credit adjustment recorded in 1998, which is primarily attributable to the accrual for the Stock Option and Appreciation Right Plan. Occupancy expense decreased $.1 million in 1999 to $.6 million, while other operating expense increased $.1 million, or 2% from $5.1 million in 1998 to $5.2 million in 1999. Non-interest expense decreased $3.7 million in 1998 to $10.9 million from $14.6 million for 1997. This decrease is primarily due to a $4.5 million decrease in salaries and employee benefits, partially offset by $.8 million increase in other operating expense. The decrease in salaries and employee benefits is primarily related to fluctuation in the accrual for the Stock Option and Appreciation Right Plan for 1998 and 1997. RBPA has a Stock Option and Appreciation Right Plan, which provides employees compensation in the form of options to purchase shares of the Company's common stock. The reserve for future stock option expense is reflective of the RBPA's stock price at December 31, of every year. Stock price volatility can contribute to the volatility in the expense associated with the Stock Option and Appreciation Right Plan. In 1998 RBPA's stock price decreased to $16.00 at December 31 1998 from $23.50 at December 31, 1997. Accordingly, RBPA recorded the difference between the current market values and the values at the grant date of $1.4 million (credit) during 1998. The expense accrual for 1997 was $3.8 million relating to these stock appreciation rights as employee benefits expense toward the difference between current market values and the values at the grant date. ACCOUNTING FOR INCOME TAXES The provision for federal income taxes was $5.6 million in 1999 as compared to $4.6 million for 1998 and $4.1 million for 1997 representing an effective tax rate of 31.5%, 30%, and 30.3%, respectively. The $1 million increase in the tax provision for 1999 and 1998 are primarily due to a higher level of taxable income of $2.3 and $2 million, respectively, primarily related to and increase in interest income on loans and investment securities. ACCOUNTING FOR DEBT AND EQUITY SECURITIES The Company accounts for investment securities in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This standard requires investments in securities to be classified in one of three categories; held to maturity, trading or available for sale. Debt securities that the Bank has the positive intent and ability to hold to maturity are classified as held to maturity and are reported at amortized cost. As the Bank does not engage in security trading, the balance of its debt securities and any equity securities are classified as available for sale. Net unrealized gains and losses for such securities, net of tax effect, are required to be recognized as a separate component of stockholders' equity and excluded from the determination of net income. 30 ASSET LIABILITY MANAGEMENT The primary functions of asset-liability management are to assure adequate liquidity and maintain an appropriate balance between interest earning assets and interest bearing liabilities. This process is overseen by the Asset-Liability Committee ("ALCO") which monitors and controls, among other variables, the liquidity, balance sheet structure and interest rate risk of the consolidated company within policy parameters established and outlined in the Funds, Cash Flow and Liquidity Policies and Procedures which are reviewed by the Board of Directors at least annually. Additionally, the ALCO committee meets periodically and reports on liquidity, interest rate sensitivity and projects financial performance in various interest rate scenarios. Liquidity. Liquidity is the ability of the financial institution to ensure that adequate funds will be available to meet its financial commitments as they become due. In managing its liquidity position, the financial institution evaluates all sources of funds, the largest of which is deposits. Also taken into consideration is the repayment of loans. These sources provide the financial institution with alternatives to meet its short-term liquidity needs. Longer-term liquidity needs may be met by issuing longer-term deposits and by raising additional capital. RBPA generally maintains a liquidity ratio equal to or greater than 25% of total deposits and short-term liabilities. Liquidity is specifically defined as the ratio of net cash, short term and marketable assets to net deposits and short-term liabilities. The liquidity ratio for the years ended December 31, 1999, 1998 and 1997 was 41%, 40%, and 39%, respectively. Management believes that RBPA's liquidity position continues to be adequate, continues to be in excess of its peer group level and meets or exceeds the liquidity target set forth in the Funds, Cash Flow and Liquidity Policies and Procedures. Management believes that due to its financial position, it will be able to raise deposits as needed to meet liquidity demands. However, any financial institution could have unmet liquidity demands at any time. Interest Rate Sensitivity. Interest rate sensitivity is a function of the repricing characteristics of the financial institution's assets and liabilities. These include the volume of assets and liabilities repricing, the timing of repricing, and the relative levels of repricing. Attempting to minimize the interest rate sensitivity gaps is a continual challenge in a changing rate environment. The interest sensitivity report examines the positioning of the interest rate risk exposure in a changing interest rate environment. Ideally the rate sensitive assets and liabilities will be maintained in a matched position to minimize interest rate risk. The interest rate sensitivity analysis is an important management tool, however, it does have some inherent shortcomings. It is a "static" analysis. Although certain assets and liabilities may have similar maturities or repricing, they may react in different degrees to changes in market interest rates. Additionally, repricing characteristics of certain assets and liabilities may vary substantially within a given period. The following table summarizes repricing intervals for interest earning assets and interest bearing liabilities as of December 31, 1999, and the difference or "gap" between them on an actual and cumulative basis for the periods indicated. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. During a period of falling interest rates, a positive gap would tend to adversely affect net interest income, while a negative gap would tend to result in an increase in net interest income. During a period of rising interest rates, a positive gap would tend to result in an increase in net interest income while a negative gap would tend to affect net interest income adversely. At December 31, 1999, RBPA is in an asset sensitive position of $51.5 million, which indicates assets will reprice somewhat faster than liabilities within one year. 31 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 $ 0.6 $-- $ -- $-- $-- $ 0.6 Federal funds sold 0.2 -- -- -- 0.2 Investment securities: Available for sale 6.7 -- 11.8 41.0 -- 59.5 Held to maturity 11.3 6.5 48.8 16.5 -- 83.1 -------- ------- -------- ------- ------- -------- Total investment securities 18.0 6.5 60.6 57.5 -- 142.6 Loans:(2) Fixed rate (3) 8.5 7.2 152.4 34.5 -- 202.6 Variable rate 138.9 1.9 11.9 6.9 -- 159.6 -------- ------- -------- ------- ------- -------- Total loans 147.4 9.1 164.3 41.4 -- 362.2 Other assets(4) -- -- -- -- 16.9 16.9 -------- ------- -------- ------- ------- -------- Total Assets $ 166.2 $ 15.6 $ 224.9 $ 98.9 $ 16.9 $ 522.5 ======== ======= ======== ======= ======= ======== LIABILITIES & CAPITAL Deposits: Non interest bearing deposits $-- $-- $ -- $-- $ 45.5 $ 45.5 Interest bearing deposits(5) 58.0 -- 37.2 -- -- 95.2 Certificate of deposits 28.9 43.4 168.3 -- -- 240.6 -------- -------- -------- --------- ---------- -------- Total deposits 86.9 43.4 205.5 -- 45.5 381.3 Short term borrowings -- -- -- -- -- -- Mortgage and long term borrowings -- -- 30.5 -- -- 30.5 Other liabilities -- -- -- -- 14.9 14.9 Capital -- -- -- -- 95.8 95.8 -------- ------- -------- ------- ------- -------- Total liabilities & capital $ 86.9 $ 43.4 $ 236.0 $-- $ 156.2 $ 522.5 ======== ======== ======== ========= ========== ======== Net interest rate GAP $ 79.3 $ (27.8) $ (11.1) $ 98.9 ($ 139.3) ======== ======== ======== ========= ========== Cumulative interest rate GAP $ 79.3 $ 51.5 $ 40.4 $ 139.3 -- ======== ======== ======== ========= ======== GAP to total assets 15% -5% ======== ======== GAP to total equity 83% -29% ======== ======== Cumulative GAP to total assets 15% 10% ======== ======== Cumulative GAP to total equity 83% 54% ======== ========
(1) Interest earning assets are included in the period in which the balances are expected to be repaid and/or repriced as a result of anticipated prepayments, scheduled rate adjustments, and contractual maturities. (2) Reflects principal maturing within the specified periods for fixed and repricing for variable rate loans; includes nonperforming loans. (3) Fixed rate loans include a portion of variable rate loans whose floors are in effect at December 31, 1999. (4) For purposes of gap analysis, other assets include the allowance for possible loan loss; unamortized discount on purchased loans and deferred fees on loans. (5) Based on historical analysis, Money market and Savings deposits are assumed to have rate sensitivity of 1 month; NOW account deposits are assumed to have a rate sensitivity of 4 months. The method to analyze interest rate sensitivity in the table above has a number of limitations. Certain assets and liabilities may react differently to changes in interest rates even though they reprice or mature in the same time periods. The interest rates on certain assets and liabilities may change at different times than changes in market interest rates, with some changing in advance of changes in market rates and some lagging behind changes in market rates. Also, certain assets have provisions, which limit changes in interest rates each time the interest rate changes and for the entire term of the loan. Additionally, prepayments and withdrawals experienced in the event of a change in interest rates may deviate significantly from those assumed in the interest rate sensitivity table. Additionally, the ability of some borrowers to service their debt may decrease in the event of an interest rate increase. 32 CAPITAL ADEQUACY The table shown below sets forth RBPA's consolidated capital level and performance ratios.
REGULATORY 1999 1998 1997 MINIMUM ------ ------ ------ ---------- CAPITAL LEVEL Leverage ratio 18.8% 22.1% 25.6% 3% Risk based capital ratio: Tier 1 20.4% 24.1% 25.1% 4% Tier 2 21.6% 25.4% 26.4% 8% CAPITAL PERFORMANCE Return on average assets 2.6% 2.6% 2.7% -- Return on average equity 12.8% 11.8% 10.8% --
RBPA's sources of capital have been derived from the issuance of stock as well as retained earnings. While RBPA has not had a stock offering since 1986, total stockholder's equity has increased primarily due to steady increases in retained earnings. At December 31, 1999, RBPA had an average capital to average asset ratio of 20.2%. RBPA has no current plans to raise capital through new stock offerings and indeed, seeks ways to leverage its existing capital, which is considered excessive by industry standards. In early 1989, each of the federal bank regulatory agencies issued risk-based capital standards, which were phased in December 31, 1992. The new standards place assets in various categories of risk with varying weights assigned, and consider certain off-balance sheet activities, such as letters of credit and loan commitments in the base for purposes of determining capital adequacy. The principal objective of establishing the risk-based capital framework is to achieve greater convergence in the measurement and assessment of capital adequacy due to the divergence of asset mixes maintained from one depository institution to the next. At December 31, 1999, RBPA's ratio using these standards was 20.4%. YEAR 2000 ISSUES RBPA as with the financial industry as a whole, has experienced no significant problems or irregularities with regard to the Y2K issue. The costs associated with Y2K compliance in 1999 was immaterial. In 1999, the Clean Management Committee was formed to ensure that all computer systems, programs and technology remain Y2K compliant. However, while not expected, there can be no assurance that the corporation, its suppliers and customers, or the financial industry, will not experience any problems in the future. If any problems were to occur in the future, RBPA intends to react according to its contingency plan. MANAGEMENT OPTIONS TO PURCHASE SECURITIES On June 27, 1990, the directors of the Bank approved the Royal Bank of Pennsylvania Non-qualified Stock Option and Appreciation Right Plan (the Plan). The Plan was reapproved by the shareholders in connection with the formation of the holding company. The Plan is an incentive program under which Bank officers and other key employees may be awarded additional compensation in the form of options to purchase up to 1,000,000 shares of the Registrant's Class A common stock (but not in excess of 33 15% of outstanding shares). The option price is equal to the fair market value at the date of the grant. At December 31, 1999, 377,247 options have been granted (the fair market per share at the time of the grant was $14.75 in 1999 and $19.952 in 1998) which are exercisable at 20% per year. At December 31, 1998, options covering 263,647 shares were exercisable. In 1990, the directors of the Bank approved a non-qualified Outside Directors Stock Option Plan. The Plan was reapproved by the shareholders in connection with the formation of the holding company. Under the terms of the plan, 150,000 shares of Class A stock are authorized for grants. Each director is entitled to 1,500 shares of stock annually, which is exercisable after one year of service. The options were granted at the fair market value ($14.75 per share in 1999 and $19.952 in 1998) at the date of the grant. Currently, the strike price on the options ranges from $2.312 to $17.574 per share. During 1999, 11,241 options were exercised at strike prices from $2.426 to $12.761 per share. At December 31, 1999, 69,424 options were outstanding and options covering 35,954 shares were exercisable. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK A simulation model is therefore used to estimate the impact of various changes, both upward and downward, in market interest rates and volumes of assets and liabilities on the net income. This model produces an interest rate exposure report that forecast changes in the market value of portfolio equity under alternative interest rate environment. The market value of portfolio is defined as the present value of existing assets and liabilities. The calculated estimates of changes in the market value of portfolio value are as follows:
At December 31, 1999 (Dollars in Thousands) Market Value of Percent of Changes in Rates Portfolio Equity Change ---------------- ---------------- ---------- + 300 basis points $ 88,886 -20.0% + 200 basis points 96,186 -13.5% + 100 basis points 103,577 -6.8% Flat rate 111,169 0 - 100 basis points 126,008 13.3% - 200 basis points 139,477 25.5% - 300 basis points 152,348 37.0%
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. 34 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES DECEMBER 31, 1999 AND 1998 35 Report of Independent Certified Public Accountants Board of Directors Royal Bancshares of Pennsylvania, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Royal Bancshares of Pennsylvania, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in stockholders' equity and comprehensive income and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Royal Bancshares of Pennsylvania, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. Philadelphia, Pennsylvania January 26, 2000 36 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31,
ASSETS 1999 1998 ---- ---- Cash and due from banks $ 17,525,462 $ 5,692,654 Federal funds sold 200,000 13,550,000 ------------ ------------ Total cash and cash equivalents 17,725,462 19,242,654 ------------ ------------ Investment securities held to maturity (market value of $81,493,670 and $62,159,860 in 1999 and 1998, respectively) 83,064,914 61,894,538 Investment securities available for sale - at market value 59,485,027 36,951,162 Total loans 354,818,236 304,475,629 Less allowance for loan losses 11,737,337 11,919,545 ------------ ------------ Net loans 343,080,899 292,556,084 Premises and equipment, net 5,784,708 5,452,765 Accrued interest and other assets 13,395,037 11,524,581 ------------ ------------ $522,536,047 $427,621,784 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits Non-interest bearing $ 45,541,164 $ 41,150,730 Interest bearing (includes certificates of deposit in excess of $100,000 of $126,117,263 and $48,754,354 in 1999 and 1998, respectively) 335,744,854 249,238,955 ------------ ------------ Total deposits 381,286,018 290,389,685 Accrued interest and other liabilities 14,935,932 12,271,111 Long-term borrowings 30,000,000 30,365,000 Mortgage payable 479,579 526,720 ------------ ------------ Total liabilities 426,701,529 333,552,516 ------------ ------------ Stockholders' equity Common stock Class A, par value $2.00 per share; authorized, 18,000,000 shares; issued, 7,879,349 and 7,429,689 shares in 1999 and 1998, respectively 15,758,698 14,859,378 Class B, par value $0.10 per share; authorized, 2,000,000 shares; issued, 1,683,113 and 1,630,544 shares in 1999 and 1998, respectively 168,311 163,054 Capital surplus 50,865,395 45,392,659 Retained earnings 33,329,374 34,556,343 Accumulated other comprehensive (loss) income (2,022,053) 1,242,919 ------------ ------------ 98,099,725 96,214,353 Treasury stock - at cost, 215,388 Class A shares in 1999 and 207,516 in 1998 (2,265,207) (2,145,085) ------------ ------------ 95,834,518 94,069,268 ------------ ------------ $522,536,047 $427,621,784 ============ ============
The accompanying notes are an integral part of these statements. 37 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME Year ended December 31,
1999 1998 1997 ---- ---- ---- Interest income Loans, including fees $ 33,816,210 $ 33,513,439 $ 25,559,901 Investment securities held to maturity Taxable 5,726,349 3,227,921 5,604,469 Tax-exempt 53,530 207,931 116,779 Investment securities available for sale Taxable 4,268,333 2,121,921 893,447 Tax-exempt 243,590 173,199 97,937 Deposits in banks 15,682 24,251 112,294 Federal funds sold 558,416 1,371,643 986,552 ------------ ------------ ------------ TOTAL INTEREST INCOME 44,682,110 40,640,305 33,371,379 ------------ ------------ ------------ Interest expense Deposits 14,016,747 11,167,451 9,810,104 Mortgage payable and other 1,902,432 1,995,750 231,252 Federal funds purchased 3,015 -- 6,148 ------------ ------------ ------------ TOTAL INTEREST EXPENSE 15,922,194 13,163,201 10,047,504 ------------ ------------ ------------ NET INTEREST INCOME 28,759,916 27,477,104 23,323,875 Increase (Decrease) in provision for loan losses -- 4,769,785 (2,118,281) ------------ ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 28,759,916 22,707,319 25,442,156 ------------ ------------ ------------ Other income Service charges and fees 856,230 830,932 981,111 Realized gains on sale of investment securities available for sale -- -- 13,643 Gain on other real estate 349,351 -- 1,204,443 Gain on sale of loans 44,773 3,831 28,585 Other income 787,614 2,739,602 397,194 ------------ ------------ ------------ 2,037,968 3,574,365 2,624,976 ------------ ------------ ------------ Other expenses Salaries, wages and employee benefits 7,264,824 5,028,428 9,545,799 Occupancy and equipment 637,624 706,320 756,202 Other operating expenses 5,227,171 5,138,734 4,332,119 ------------ ------------ ------------ 13,129,619 10,873,482 14,634,120 ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 17,668,265 15,408,202 13,433,012 Income taxes 5,563,737 4,624,262 4,074,280 ------------ ------------ ------------ NET INCOME $ 12,104,528 $ 10,783,940 $ 9,358,732 ============ ============ ============ Per share data Net income - basic $ 1.21 $ 1.09 $ .95 ============ ============ ============ Net income - diluted $ 1.19 $ 1.07 $ .94 ============ ============ ============
The accompanying notes are an integral part of these statements 38 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME Years ended December 31, 1999, 1998 and 1997
Class A common stock Class B common stock ----------------------------- --------------------------- Shares Amount Shares Amount --------- ------------ --------- ----------- Balance, January 1, 1997 6,596,625 $ 13,193,250 1,592,091 $ 159,209 Net income for the year ended December 31, 1997 -- -- -- -- Conversion of Class B common stock to Class A common stock 70,344 140,688 (61,091) (6,109) 4% stock dividends declared 258,176 516,352 61,859 6,186 Cash in lieu of fractional shares -- -- -- -- Purchase of treasury stock -- -- -- -- Stock options exercised 90,576 181,152 -- -- Cash dividends on common stock -- -- -- -- Other comprehensive income, net of reclassifications and taxes -- -- -- -- --------- ------------ --------- ----------- Comprehensive income Balance, December 31, 1997 7,015,721 $ 14,031,442 1,592,859 $ 159,286 Net income for the year ended December 31, 1998 - -- -- -- -- Conversion of Class B common stock to Class A common stock 29,562 59,124 (25,910) (2,591) 4% stock dividends declared 272,313 544,626 63,595 6,359 Cash in lieu of fractional shares -- -- -- -- Stock options exercised 112,093 224,186 -- -- Cash dividends on common stock -- -- -- -- Other comprehensive income, net of reclassifications and taxes -- -- -- -- --------- ------------ --------- ----------- Comprehensive income
Accumulated other Capital Retained comprehensive surplus earnings income (loss) ------------ ------------ --------------- Balance, January 1, 1997 $ 34,827,443 $ 38,427,800 $ (1,158) Net income for the year ended December 31, 1997 -- 9,358,732 -- Conversion of Class B common stock to Class A common stock -- (134,579) -- 4% stock dividends declared 3,799,706 (4,322,244) -- Cash in lieu of fractional shares -- (2,477) -- Purchase of treasury stock -- -- -- Stock options exercised 170,469 -- -- Cash dividends on common stock -- (5,303,873) -- Other comprehensive income, net of reclassifications and taxes -- -- 639,300 ------------ ------------ --------------- Comprehensive income Balance, December 31, 1997 $ 38,797,618 $ 38,023,359 $ 638,142 Net income for the year ended December 31, 1998 - -- 10,783,940 -- Conversion of Class B common stock to Class A common stock -- (56,533) -- 4% stock dividends declared 6,466,085 (7,017,070) -- Cash in lieu of fractional shares -- (2,023) -- Stock options exercised 128,956 -- -- Cash dividends on common stock -- (7,175,330) -- Other comprehensive income, net of reclassifications and taxes -- -- 604,777 ------------ ------------ --------------- Comprehensive income
Treasury Comprehensive stock income --------------- --------------- Balance, January 1, 1997 $ (2,025,874) Net income for the year ended December 31, 1997 -- $ 9,358,732 Conversion of Class B common stock to Class A common stock -- 4% stock dividends declared -- Cash in lieu of fractional shares -- Purchase of treasury stock (119,211) Stock options exercised -- Cash dividends on common stock -- Other comprehensive income, net of reclassifications and taxes -- 639,300 ------------ ------------ Comprehensive income $ 9,998,032 ============ Balance, December 31, 1997 $ (2,145,085) Net income for the year ended December 31, 1998 - $ 10,783,940 Conversion of Class B common stock to Class A common stock -- 4% stock dividends declared -- Cash in lieu of fractional shares -- Stock options exercised -- Cash dividends on common stock -- Other comprehensive income, net of reclassifications and taxes -- 604,777 ------------ Comprehensive income $ 11,388,717 ============
(Continued) 39 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - CONTINUED Years ended December 31, 1999, 1998 and 1997
Class A common stock Class B common stock -------------------------------- ----------------------------- Shares Amount Shares Amount ------------ ------------ --------- ------------ Balance, December 31, 1998 7,429,689 $ 14,859,378 1,630,544 $ 163,054 Net income for the year ended December 31, 1999 -- -- -- -- Conversion of Class B common stock to Class A common stock 14,630 29,260 (12,727) (1,273) 4% stock dividends declared 288,728 577,456 65,296 6,530 Cash in lieu of fractional shares -- -- -- -- Purchase of treasury stock -- -- -- -- Stock options exercised 146,302 292,604 -- -- Cash dividends on common stock -- -- -- -- Other comprehensive income, net of reclassifications and taxes -- -- -- -- ------------ ------------ --------- ------------ Comprehensive income Balance, December 31, 1999 7,879,349 $ 15,758,698 1,683,113 $ 168,311 ============ ============ ========= ============
Accumulated other Capital Retained comprehensive surplus earnings income (loss) ------------ ------------ --------------- Balance, December 31, 1998 $ 45,392,659 $ 34,556,343 $ 1,242,919 Net income for the year ended December 31, 1999 -- 12,104,528 -- Conversion of Class B common stock to Class A common stock -- (27,987) -- 4% stock dividends declared 4,867,469 (5,451,455) -- Cash in lieu of fractional shares -- (3,212) -- Purchase of treasury stock -- -- -- Stock options exercised 605,267 -- -- Cash dividends on common stock -- (7,848,843) -- Other comprehensive income, net of reclassifications and taxes -- -- (3,264,972) ------------ ------------ ------------ Comprehensive income Balance, December 31, 1999 $ 50,865,395 $ 33,329,374 $ (2,022,053) ============ ============ ============
Treasury Comprehensive stock income ------------ ------------- Balance, December 31, 1998 $ (2,145,085) Net income for the year ended December 31, 1999 -- $ 12,104,528 Conversion of Class B common stock to Class A common stock -- 4% stock dividends declared -- Cash in lieu of fractional shares -- Purchase of treasury stock (120,122) Stock options exercised -- Cash dividends on common stock -- Other comprehensive income, net of reclassifications and taxes -- (3,264,972) ------------ ------------ Comprehensive income $ 8,839,556 ============ Balance, December 31, 1999 $ (2,265,207) ============
The accompanying notes are an integral part of this statement. 40 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31,
1999 1998 1997 ------------ ------------ ------------ Cash flows from operating activities Net income $ 12,104,528 $ 10,783,940 $ 9,358,732 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 413,864 351,039 323,916 (Increase)Decrease in provision for loan losses -- 4,769,785 (2,118,281) Accretion of investment securities discount (338,760) (75,116) (61,462) Amortization of investment securities premium 896,332 294,699 697,987 Amortization of deferred loan fees (389,588) (278,215) (137,591) Accretion of discount on loans purchased (1,848,658) (3,005,281) (1,849,384) Provision (benefit) for deferred income taxes (1,257,494) 75,361 579,007 Gain on other real estate (349,351) -- (1,204,443) Gain on sale of loans (44,773) (3,831) (28,585) Realized gains on sale of investment securities available for sale -- -- (13,643) (Decrease)Increase in accrued interest receivable 62,692 99,146 (626,542) Decrease in other assets (466,003) 1,915,737 1,648,874 Increase in accrued interest payable 569,898 1,288,379 952,653 Increase in unearned income on loans 1,589,739 613,025 345,443 (Decrease) increase in other liabilities 2,094,923 (4,113,266) 934,994 ------------ ------------ ------------ Net cash provided by operating activities 13,037,349 12,715,402 8,801,675 ------------ ------------ ------------ Cash flows from investing activities Proceeds from calls and maturities of investment securities held to maturity 13,797,967 43,508,610 58,516,144 Purchase of investment securities held to maturity (35,554,592) (41,251,689) (9,310,907) Proceeds from sale of investment securities available for sale -- -- 18,129 (Purchase) sales of Federal Home Loan Bank stock -- 5,000 (2,150,000) Purchase of investment securities available for sale (25,770,160) (15,302,591) (14,276,725) Net increase in loans (50,724,449) (12,593,341) (14,331,580) Purchase of loan portfolio -- (66,740,249) Purchase of premises and equipment (745,807) (1,014,883) (404,306) Proceeds from sale and payments on other real estate 1,032,614 -- 1,708,547 ------------ ------------ ------------ Net cash used in investing activities (97,964,427) (26,648,894) (46,970,947) ------------ ------------ ------------
(Continued) 41 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Year ended December 31,
1999 1998 1997 ------------- ------------- ------------ Cash flows from financing activities Net increase (decrease) in short-term borrowings $ -- $(15,000,000) $ 15,000,000 Net (decrease) increase in non-interest bearing and interest bearing demand deposits and savings accounts 4,813,360 10,718,876 (6,135,112) Net increase (decrease) in certificates of deposit 86,082,973 14,307,375 17,315,943 Mortgage payments (47,141) (44,165) (41,722) Cash dividends in lieu of fractional shares (3,213) (2,023) (2,479) Purchase of treasury stock (120,121) -- (119,211) Net increase (decrease) in long-term borrowings (365,000) (698,000) 26,862,000 Issuance of common stock under stock option plans 897,871 353,141 1,987,986 Cash dividends (7,848,843) (7,175,330) (5,303,873) ------------ ------------ ------------ Net cash provided by financing activities 83,409,886 2,459,874 49,563,532 ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,517,192) (11,473,618) 11,394,260 Cash and cash equivalents at beginning of year 19,242,654 30,716,272 19,322,012 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 17,725,462 $ 19,242,654 $ 30,716,272 ============ ============ ============ Supplemental disclosure of cash flow information Cash paid during the year for Interest $ 15,352,296 $ 11,874,822 $ 9,094,851 ============ ============ ============ Income taxes $ 4,044,000 $ 2,750,000 $ 3,750,000 ============ ============ ============
The accompanying notes are an integral part of these statements. 42 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements include the accounts of Royal Bancshares of Pennsylvania, Inc. (the Company) and its wholly-owned subsidiaries: Royal Investments of Delaware, Inc. and Royal Bank of Pennsylvania (the Bank), including the Bank's wholly-owned subsidiary, Royal Real Estate, Inc. On June 29, 1995, the Company was formed and acquired all of the outstanding common stock of the Bank in a business combination accounted for in a manner similar to a pooling of interests. In the transaction, the Bank's shareholders exchanged common stock of the Bank for common stock of the Company on a share-for-share basis. These financial statements reflect the historical information of the Company. All significant intercompany transactions and balances have been eliminated. 1. Business The Company, through its subsidiary bank, offers a full range of banking services to individual and corporate customers located in eastern Pennsylvania. The Bank competes with other banking and financial institutions in certain markets, including financial institutions with resources substantially greater than its own. Commercial banks, savings banks, savings and loan associations, credit unions and money market funds actively compete for savings and time deposits and for various types of loans. Such institutions, as well as consumer finance and insurance companies, may be considered competitors of the Bank with respect to one or more of the services it renders. In addition to being subject to competition from other financial institutions, the Company is subject to regulations of certain federal agencies and, accordingly, it is periodically examined by those regulatory authorities. On January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 131, which redefines how operating segments are determined and requires disclosures of certain financial and descriptive information about the Company's operating segments. Management has determined the Company operates in one business segment, community banking. 2. Use of Estimates In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenditures for the period. Therefore, actual results could differ significantly from those estimates. The principal estimate that is particularly susceptible to significant change in the near term relates to the allowance for loan losses. In connection with this estimate, when circumstances warrant, management obtains independent appraisals for significant properties. However, future changes in real estate market conditions and the economy could affect the Company's allowance for loan losses. (Continued) 43 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 3. Investment Securities The Company accounts for investment securities in accordance with SFAS No. 115. This standard requires investments in securities to be classified in one of three categories: held to maturity, trading or available for sale. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and are reported at amortized cost. As the Company does not engage in security trading, the balance of its debt securities and any equity securities are classified as available for sale. Net unrealized gains and losses for such securities, net of tax effect, are required to be recognized as a separate component of stockholders' equity and excluded from the determination of net income. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133. Subsequent to this statement, SFAS No. 137 was issued which amended the effective date of SFAS No. 133 to be all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments imbedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge. The accounting for changes in the fair value of a derivative (gains and losses) depends on the intended use of the derivative and resulting designation. The adoption of SFAS No. 133 is not anticipated to have a material impact on the Company's financial position or results of operations. 4. Allowance for Loan Losses The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses in the loan portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loan loss experience, current economic conditions, volume, growth, and composition of the loan portfolio, and other relevant factors. The allowance is increased by provisions for loan losses charged against income. Decreases in the allowance result from management's determination that the allowance for loan losses exceeds their estimates of potential loan loss. The Company accounts for loans in accordance with SFAS No. 114, as amended by SFAS No. 118, which requires that a creditor measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral-dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. (Continued) 44 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 5. Loan Fees and Related Costs Interest on loans is accrued and credited to operations based upon the principal amount outstanding. Accretion of unearned discounts on loans has been added to the related interest income. Accrual of interest is discontinued on a loan when management believes that the borrower's financial condition is such that collection of interest is doubtful and generally when a loan becomes 90 days past due as to principal or interest. When interest accruals are discontinued, interest credited to income in the current year is reversed and interest accrued in the prior year is charged to the allowance for loan losses. 6. Other Real Estate Other real estate is recorded at the lower of the customer's loan balance or the adjusted fair market value of the real estate securing the loan. The adjusted fair market value is determined by reducing the fair market value by estimated costs for the disposition of the property. Costs relating to holding the property are expensed when incurred. Other real estate owned of $19,314 and $707,397 at December 31, 1999 and 1998, respectively, is included in accrued interest and other assets on the balance sheets. 7. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation, which is computed principally on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on the straight-line method over the shorter of the estimated useful lives of the improvements or the terms of the related leases. The estimated useful lives for buildings and leasehold improvements range from 15 to 31-1/2 years, and for furniture and fixtures are 5 to 7 years. 8. Income Taxes Under the liability method specified by SFAS No. 109, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. The principal types of differences between assets and liabilities for financial statement and tax return purposes are the allowance for loan losses, deferred loan fees and accumulated depreciation. 9. Profit-Sharing Plan The Company has a contributory 401(k) plan covering substantially all employees. The Company contributed $131,128, $127,788 and $135,650 for 1999, 1998 and 1997, respectively. (Continued) 45 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999 and 1998 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 10. Stock Option Plans Under two stock option plans, the Company grants stock options to employees, officers and directors. The Company adopted SFAS No. 123, which allows an entity to use a fair value-based method for valuing stock-based compensation which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the standard permits entities to continue accounting for employee stock options and similar instruments under Accounting Principles Board (APB) Opinion No. 25, and its related Interpretations. Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net income and earnings per share (EPS), as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. The Company's stock option plans are accounted for under APB Opinion No. 25. The adoption of SFAS No. 123 had no material effect on the Company's consolidated financial position or results of operations. 11. Benefit Plan During 1999, the Company implemented a noncontributory nonqualified, defined benefit pension plan covering certain eligible employees. On January 1, 1999, the Company adopted SFAS No. 132, which revises employers' disclosures about pension and other postretirement benefits plans. It eliminated certain current disclosures and requires additional information about changes in the benefit obligation and the fair values of plan assets. It also standardizes the requirements for pensions and other postretirement benefit plans, to the extent possible, and illustrates combined formats for the presentation of pension plan and other postretirement benefit plans disclosures. 12. Per Share Information During 1998, the Company adopted the provisions of SFAS No. 128, which eliminates primary and fully diluted EPS and requires presentation of basic and diluted EPS in conjunction with the disclosure of the methodology used in computing such EPS. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted EPS takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. (Continued) 46 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999 and 1998 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Prior period EPS calculations have been restated to reflect the adoption of SFAS No. 128. Basic and diluted EPS are calculated as follows:
1999 Income Average shares Per share (numerator) (denominator) amount Basic EPS Income available to common shareholders $12,104,528 10,005,806 $ 1.21 Effect of dilutive securities Stock options -- 182,674 -- ----------- ----------- -------- Diluted EPS Income available to common shareholders plus assumed exercise of options $12,104,528 10,188,480 $ 1.19 =========== =========== ========
1998 Income Average shares Per share (numerator) (denominator) amount Basic EPS Income available to common shareholders $10,783,940 9,878,071 $ 1.09 Effect of dilutive securities Stock options -- 197,408 -- ----------- ----------- ------- Diluted EPS Income available to common shareholders plus assumed exercise of options $10,783,940 10,075,479 $ 1.07 =========== =========== =======
1997 Income Average shares Per share (numerator) (denominator) amount Basic EPS Income available to common shareholders $9,358,732 9,806,750 $ .95 Effect of dilutive securities Stock options -- 178,217 -- ---------- ---------- ------- Diluted EPS Income available to common shareholders plus assumed exercise of options $9,358,732 9,984,967 $ .94 ========== ========== =======
(Continued) 47 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999 and 1998 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued EPS is calculated on the basis of the weighted average number of shares outstanding of 10,005,806, 9,878,071 and 9,806,750 for the years ended December 31, 1999, 1998 and 1997, respectively. Per share information and weighted average shares outstanding have been restated to reflect the 5% stock dividend of January 2000, the 4% stock dividend of May 1999, the 4% stock dividend of May 1998, and the 4% stock dividend of May 1997. 13. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, short-term investments and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. 14. Financial Instruments The Company follows the provisions of SFAS No. 107, which requires all entities to disclose the estimated fair value of their assets and liabilities considered to be financial instruments. Financial instruments consist primarily of securities, loans and deposits. 15. Long-Lived Assets The Company follows the provisions of SFAS No. 121, which provides guidance on when to recognize and how to measure impairment losses of long-lived assets and certain identifiable intangibles and how to value long-lived assets to be disposed of. 16. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities The Company accounts for financial assets in accordance with SFAS No. 125, as amended by SFAS No. 127, in 1998. SFAS No. 125 applies a control-oriented, financial components approach to financial asset transfer transactions whereby the Company: (1) recognizes the financial and servicing assets it controls and the liabilities it has incurred; (2) derecognizes financial assets when control has been surrendered; and (3) derecognizes liabilities once they are extinguished. Under SFAS No. 125, control is considered to have been surrendered only if: (i) the transferred assets have been isolated from the transferor and its creditors, even in bankruptcy or other receivership; (ii) the transferee has the right to pledge or exchange the transferred assets or is a qualifying special-purpose entity (as defined) and the holders of beneficial interests in that entity have the right to pledge or exchange those interests; and (iii) the transferor does not maintain effective control over the transferred assets through an agreement which both entitles and obligates it to repurchase or redeem those assets prior to maturity, or through an agreement which both entitles it to repurchase or redeem those assets if they were not readily obtainable elsewhere. If any of these conditions are not met, the Company accounts for the transfer as a secured borrowing. SFAS No. 125 also requires that the Company derecognize a liability if and when it is extinguished. A liability is considered extinguished under SFAS No. 125 if: (1) the Company pays the creditor and, thus, is relieved of its obligation for the liability; or (2) is legally released from being the primary obligor under the liability, either judicially or by the creditor. The adoption of SFAS No. 125 had no material impact on the Company's consolidated financial position or results of operations. (Continued) 48 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999 and 1998 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 17. Advertising Costs The Company and the Bank expense advertising costs as incurred. 18. Comprehensive Income On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. This standard establishes new standards for reporting comprehensive income which includes net income as well as certain other items which result in a change to equity during the period. These financial statements have been reclassified to reflect the provisions of SFAS No. 130. The income tax effects allocated to comprehensive income is as follows:
December 31, 1999 ------------------------------------------------------------ Net of Before tax Tax tax amount expense amount ----------- ------------ ------------ Unrealized losses on securities Unrealized holding losses arising during period $(4,950,740) $(1,685,768) $(3,264,972) Less reclassification adjustment for gains realized in net income -- -- -- ----------- ----------- ----------- Other comprehensive loss, net $(4,950,740) $(1,685,768) $(3,264,972) =========== =========== ===========
December 31, 1998 ------------------------------------------------------------ Net of Before tax Tax tax amount expense amount ----------- ------------ ------------ Unrealized gains on securities Unrealized holding gains arising during period $916,330 $311,553 $604,777 Less reclassification adjustment for gains realized in net income -- -- -- -------- -------- -------- Other comprehensive income, net $916,330 $311,553 $604,777 ======== ======== ========
(Continued) 49 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999 and 1998 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
December 31, 1997 ---------------------------------------------- Net of Before tax Tax tax amount expense amount ---------- ----------- ------------ Unrealized gains on securities Unrealized holding gains arising during period $ 982,280 $ 333,566 $ 648,714 Less reclassification adjustment for gains realized in net income (13,643) (4,229) (9,414) ----------- ------------ ------------ Other comprehensive income, net $ 968,637 $ 329,337 $ 639,300 ========== ========== ==========
19. Reclassifications Certain reclassifications of prior year amounts have been made to conform to the 1999 presentation. NOTE B - INVESTMENT SECURITIES The amortized cost, gross unrealized gains and losses, and estimated fair value of the Company's investment securities held to maturity and available for sale are summarized as follows:
1999 --------------------------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ----------- ----------- ----------- ----------- Investment securities held to maturity Obligations of states and political subdivisions $ -- $ -- $ -- $ -- U.S. treasuries -- -- -- -- Corporate securities 76,451,151 144,767 1,724,979 74,870,939 U.S. agencies 6,613,763 37,714 28,746 6,622,731 ----------- ----------- ----------- ----------- $83,064,914 $ 182,481 $ 1,753,725 $81,493,670 =========== =========== =========== =========== Investment securities available for sale Federal Home Loan Bank stock - at cost $ 3,169,700 $ -- $ -- $ 3,169,700 Preferred and common stock 3,726,673 10,923 200,098 3,537,498 Other securities 55,652,348 444,300 3,318,819 52,777,829 ----------- ----------- ----------- ----------- $62,548,721 $ 455,223 $ 3,518,917 $59,485,027 =========== =========== =========== ===========
(Continued) 50 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999 and 1998 NOTE B - INVESTMENT SECURITIES - Continued
1998 -------------------------------------------------------------------------- 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 $ 29,178 $ -- $ 3,127,643 U.S. treasuries 250,000 1,769 -- 251,769 Corporate securities 54,264,311 550,849 442,851 54,372,309 U.S. agencies 4,281,762 126,478 101 4,408,139 ----------- ----------- ----------- ----------- $61,894,538 $ 708,274 $ 442,952 $62,159,860 =========== =========== =========== =========== Investment securities available for sale Federal Home Loan Bank stock - at cost $ 3,169,700 $ -- $ -- $ 3,169,700 Preferred and common stock 2,867,012 51,950 -- 2,918,962 Other securities 29,031,240 1,831,260 -- 30,862,500 ----------- ----------- ----------- ----------- $35,067,952 $ 1,883,210 $ -- $36,951,162 =========== =========== =========== ===========
The amortized cost and estimated fair value of investment securities at December 31, 1999 and 1998, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
1999 -------------------------------------------------------------------------------- Held to maturity Available for sale Estimated Estimated Amortized fair Amortized fair cost value cost value ----------- ----------- ----------- ----------- Within 1 year $17,813,636 $17,783,276 $ -- $ -- After 1 but within 5 years 48,302,439 47,302,106 12,031,975 11,774,195 After 5 but within 10 years 11,482,381 11,443,482 8,630,955 8,522,014 After 10 years 5,006,458 4,964,806 34,989,418 33,481,620 ----------- ----------- ----------- ----------- 83,064,914 81,483,670 55,652,348 53,777,829 Federal Home Loan Bank stock -- -- 3,169,700 3,169,700 Preferred and common stock -- -- 3,726,673 3,537,498 ----------- ----------- ----------- ----------- $83,064,914 $81,493,670 $62,548,721 $59,485,027 =========== =========== =========== ===========
(Continued) 51 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999 and 1998 NOTE B - INVESTMENT SECURITIES - Continued
1998 -------------------------------------------------------------------------------- Held to maturity Available for sale ---------------------------------- ---------------------------------- Estimated Estimated Amortized fair Amortized fair cost value cost value ----------- ----------- ----------- ----------- Within 1 year $12,228,163 $12,249,864 $ -- $ -- After 1 but within 5 years 36,656,386 37,073,862 -- -- After 5 but within 10 years 7,328,418 7,182,482 -- -- After 10 years 5,681,571 5,653,652 29,031,240 30,862,500 ----------- ----------- ----------- ----------- 61,894,538 62,159,860 29,031,240 30,862,500 Federal Home Loan Bank stock -- -- 3,169,700 3,169,700 Preferred and common stock -- -- 2,867,012 2,918,962 ----------- ----------- ----------- ----------- $61,894,538 $62,159,860 $35,067,952 $36,951,162 =========== =========== =========== ===========
Proceeds from the sale of investment securities available for sale during 1999, 1998 and 1997 were $-0-, $-0-, and $18,129, respectively, resulting in gross realized gains of $-0-, $-0-, and $13,643 during 1999, 1998 and 1997, respectively. As of December 31, 1999 and 1998, investment securities with a book value of $21,295,289 and $13,716,861, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law. NOTE C - LOANS Major classifications of loans are as follows:
1999 1998 Consumer $ 2,653,428 $ 2,032,878 Commercial and industrial 166,477,867 127,972,082 Real estate 193,162,959 182,595,194 ------------- ------------- Total gross loans 362,294,254 312,600,154 Less Unearned income (2,154,106) (1,833,236) Unamortized discount on loans purchased (5,321,912) (6,291,289) ------------- ------------- Total loans $ 354,818,236 $ 304,475,629 ============= =============
(Continued) 52 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999 and 1998 NOTE C - LOANS - Continued Loans on which the accrual of interest has been discontinued or reduced amounted to $1,209,242 and $3,419,378 at December 31, 1999 and 1998, respectively. If interest had been accrued, such income would have been $108,832 and $307,744 for the years ended December 31, 1999 and 1998, respectively. Although the Company has non-performing loans of $1,209,242 at December 31, 1999, management believes it has adequate collateral to limit its credit risk. The Company granted loans to the officers and directors of the Company and to their associates. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility. The aggregate dollar amount of these loans was $13,975,279 and $14,415,902 at December 31, 1999 and 1998, respectively. During 1999, $135,750 of new loans were made and repayments totalled $576,373. The balance of impaired loans was $42,097 at December 31, 1999. The Company has identified a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreements. The income recognized on impaired loans during 1999 was $5,360. Total cash collected on impaired loans during 1999 was $131,930, of which $126,570 was credited to the principal balance outstanding on such loans. Interest that would have been accrued on impaired loans during 1999 was $20,186. The Company's policy for interest income recognition on impaired loans is to recognize income on currently performing restructured loans under the accrual method. The Company recognizes income on non-accrual loans under the cash basis when the principal payments on the loans become current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company. If these factors do not exist, the Company does not recognize income. NOTE D - ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses were as follows:
1999 1998 1997 Balance at beginning of year $ 11,919,545 $ 8,186,237 $ 9,084,153 ------------ ------------ ------------ Charge-offs (1,075,122) (1,635,919) (761,790) Recoveries 892,914 599,442 1,982,155 ------------ ------------ ------------ Net charge-offs and recoveries (182,208) (1,036,477) 1,220,365 Increase (decrease) in provision for loan losses -- 4,769,785 (2,118,281) ------------ ------------ ------------ Balance at end of year $ 11,737,337 $ 11,919,545 $ 8,186,237 ============ ============ ============
53 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999 and 1998 NOTE E - PREMISES AND EQUIPMENT Premises and equipment are summarized as follows:
Estimated useful lives 1999 1998 Land - $ 1,973,478 $ 1,973,478 Buildings and leasehold improvements 15 - 31.5 years 4,763,487 4,225,378 Furniture and fixtures 5 - 7 years 2,703,541 2,495,844 ----------- ------------ 9,440,506 8,694,700 Less accumulated depreciation and amortization 3,655,798 3,241,935 ----------- ----------- $ 5,784,708 $ 5,452,765 =========== ===========
NOTE F - DEPOSITS Deposits are summarized as follows:
1999 1998 Demand $ 45,541,164 $ 41,150,730 NOW and money market 75,983,512 75,348,561 Savings 19,193,298 19,405,323 Time, $100,000 and over 126,117,263 48,754,354 Other time 114,450,781 105,730,717 ----------- ----------- $381,286,018 $290,389,685 ============ ============
Certificates of deposit of $100,000 or more consist of the following:
1999 1998 Three months or less $ 11,622,167 $ 4,606,561 Over three months through twelve months 10,360,400 7,465,667 Over twelve months through five years 85,311,810 20,908,866 Over five years 18,822,886 15,773,260 ------------ ---------- $126,117,263 $48,754,354 ============ ==========
(Continued) 54 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999 and 1998 NOTE F - DEPOSITS - Continued Maturities of certificates of deposit for the next five years and thereafter are as follows:
2000 $ 70,447,361 2001 22,914,069 2002 70,037,078 2003 21,046,240 2004 24,336,353 Thereafter 31,786,943 ------------ $240,568,044 ============
NOTE G - MORTGAGE PAYABLE The mortgage payable is payable to a bank at 65% of the prime rate (5.525% at December 31, 1999) and is guaranteed by an industrial development authority. A substantial portion of the land and building is pledged as security under this mortgage. Required principal payments for the next five years and thereafter are as follows: Year ending December 31,
2000 $ 48,986 2001 51,776 2002 54,725 2003 57,853 2004 61,137 Thereafter 205,102 ----------- $ 479,579 ===========
NOTE H - LONG-TERM BORROWINGS Long-term borrowings consist of advances from the Federal Home Loan Bank at December 31, 1999 and are as follows:
Due date Interest rate Balance December 23, 2002 6.24 $ 30,000,000 ============
The advances are collateralized by Federal Home Loan Bank stock, investment securities and certain of the Company's first mortgage loans. 55 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999 and 1998 NOTE I - LEASE COMMITMENTS The Company leases various premises under non-cancellable agreements, which expire through 2004 and require minimum annual rentals. The minimum rental commitments under the leases are as follows: Year ending December 31,
2000 $ 319,412 2001 316,935 2002 318,435 2003 270,709 2004 170,726 ----------- $ 1,396,217 ===========
Rental expense for all leases was approximately $304,000, $335,000 and $343,000 for the years ended December 31, 1999, 1998 and 1997, respectively. NOTE J - COMMON STOCK Each holder of Class A and Class B common stock is entitled to one vote for each Class A share and ten votes for each Class B share held. Holders of either class of common stock are entitled to equal per share dividends when declared. The Class B shares may not be transferred in any manner except to the holder's immediate family. Class B shares have been converted to Class A shares at the average rate of 1.15 to 1. NOTE K - OTHER OPERATING EXPENSES The following items which are greater than 1% of the aggregate of "Total Interest Income" and "Total Other Income" are included in "Other Expenses" for the respective years indicated:
1999 1998 1997 Advertising $ 356,394 $ 214,813 $ 396,831 Pennsylvania bank shares tax 743,930 726,161 720,630 Professional fees 501,977 544,109 330,959 Loss on investment partnership 622,571 1,080,415 1,019,375 Travel 513,267 385,489 382,162
56 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999 and 1998 NOTE L - INCOME TAXES The components of the income tax expense (benefit) included in the consolidated statements of income are as follows:
1999 1998 1997 Income tax expense (benefit) Current $ 5,127,198 $ 4,055,012 $ 3,757,471 Deferred federal tax 177,400 310,111 57,670 Benefit applied to reduce goodwill 259,139 259,139 259,139 ----------- ----------- ----------- $ 5,563,737 $ 4,624,262 $ 4,074,280 ========== ========== ==========
The difference between the applicable income tax expense and the amount computed by applying the statutory federal income tax rate of 35% in 1999, 1998 and 1997 is as follows:
1999 1998 1997 Computed tax expense at statutory rate $ 6,183,893 $ 5,392,871 $ 4,701,554 Tax-exempt income (98,256) (258,100) (178,469) Low-income housing tax credit (544,939) (544,939) (309,580) Other, net 123,039 (134,430) (39,225) Effect of 34% rate bracket (100,000) (100,000) (100,000) ----------- ----------- ----------- Applicable income tax expense $ 5,563,737 $ 4,624,262 $ 4,074,280 ========== ========== ==========
Deferred tax assets and liabilities consist of the following:
1999 1998 Deferred tax assets Allowance for doubtful accounts $ 1,263,028 $ 1,263,028 Accrued pension expenses 158,186 - Accrued stock-based compensation 658,493 992,959 Asset valuation reserves 472,013 472,013 Goodwill 127,346 127,346 Unrealized loss on securities 1,041,656 - Net operating loss carryovers from Knoblauch State Bank 7,790,916 7,961,948 ---------- ----------- 11,511,638 10,817,294 Less valuation allowance (7,790,916) (7,961,948) ---------- ---------- 3,720,722 2,855,346 ---------- ----------- Deferred tax liabilities Unrealized gain on securities - 640,292 Depreciation 111,810 93,533 Accretion of discount 118,392 135,547 ----------- ----------- 230,202 869,372 ----------- ----------- Net deferred tax asset $ 3,490,520 $ 1,985,974 ========== ==========
(Continued) 57 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999 and 1998 NOTE L - INCOME TAXES - Continued The Company has approximately $23,000,000 of net operating loss carryovers from the acquisition of Knoblauch State Bank (KSB). These losses will fully expire in 2019. The utilization of these losses is subject to limitation under Section 382 of the Internal Revenue Code. As a result, a valuation allowance has been established to eliminate the deferred tax asset attributable to these net operating losses. During 1999, the Company realized a tax benefit related to the net operating loss carryovers from the acquisition of KSB. The deferred tax asset associated with those loss carryovers is fully offset by a valuation allowance. Accordingly, the realized tax benefit is reflected as a reduction of the goodwill associated with the acquisition and a corresponding reduction of deferred income tax benefit for the year. NOTE M - STOCK OPTION PLANS At December 31, 1999, the Company had two stock-based compensation plans which are described below. The Company accounts for these plans under APB Opinion No. 25. 1. Outside Directors' Stock Option Plan The Company adopted a non-qualified outside Directors' Stock Option Plan in 1990 (the Director's Plan). Under the terms of the Director's Plan, 150,000 shares of Class A stock are authorized for grants. Each director is entitled to 1,500 shares of stock annually which are exercisable after one year of service. The options were granted at the fair market value ($14.75 in 1999, $19.952 in 1998 and $13.75 in 1997) at the date of the grant. Currently, the strike price on the options ranges from $2.312 to $17.574 per share. During 1999, 11,241 options were exercised at strike prices from $2.426 to $12.761 per share. At December 31, 1999, 69,424 options are outstanding, and options covering 35,954 shares were exercisable. 2. Stock Option and Appreciation Right Plan The Company adopted a Stock Option and Appreciation Right Plan (the Plan) on June 27, 1990. The Plan is an incentive program under which Company officers and other key employees may be awarded additional compensation in the form of options to purchase up to 1,000,000 shares of the Company's Class A common stock (but not in excess of 15% of outstanding shares). At the time a stock option is issued, a stock appreciation right for an identical number of shares may also be granted. The option price is equal to the fair market value at the date of the grant. The options are exercisable at 20% per year beginning one year after the date of grant and must be exercised within ten years of the grant. As of December 31, 1999, options covering 263,647 shares were exercisable by 66 employees. (Continued) 58 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999 and 1998 NOTE M - STOCK OPTION PLANS - Continued Stock option transactions consist of the following:
1999 1998 1997 --------------------------- --------------------------- --------------------------- Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price ------- ----------- ------- ----------- ------- ----------- Outstanding at beginning of year 464,583 $ 8.133 519,277 $ 6.561 540,885 $ 5.917 Granted 89,627 13.518 61,641 14.861 63,487 11.080 Exercised (135,027) 5.943 (110,723) 3.100 (83,293) 4.091 Cancelled (41,936) 12.624 (5,612) 13.140 (1,802) 10.752 ------- ----------- ------- ----------- ------- ----------- Outstanding at end of year 377,247 $ 6.798 464,583 $ 8.133 519,277 $ 6.561 ======= =========== ======= =========== ======= ===========
Option price per share exercised $2.593 - $12.724 $2.59 - $13.000 $2.695 - $9.633 Outstanding at end of year $2.373 - $17.584 $2.59 - $19.183 $2.695 - $13.225
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.
1999 1998 1997 (in thousands, except per share amounts) Net income As reported $ 12,105 $ 10,784 $ 9,359 Pro forma 12,035 10,737 9,337 EPS As reported - basic $ 1.21 $ 1.09 $ .95 As reported - diluted 1.19 1.07 .94 Pro forma - basic 1.20 1.09 .95 Pro forma - diluted 1.18 1.07 .94
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in 1999, 1998 and 1997: dividend yield of 5.33%, 5.25% and 3.40% for 1999, 1998 and 1997, respectively; expected volatility of 36.3%; and risk-free interest rate of 6.4% in 1999, 4.57% in 1998 and 5.71% in 1997. Expected lives are 10 years for 1999, 1998 and 1997. 59 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999 and 1998 NOTE N - PENSION PLAN Based upon actuarial computations, net periodic pension plan costs include the following components:
Benefit obligation at December 31, 1999 $ 2,209,962 Fair value of plan assets at January 1, 1999 -- ----------- Funded status (2,209,962) Accrued benefit cost recognized in the statement of financial position 451,961 Weighted average assumptions as of December 31, 1999 Discount rate 7% Expected return on plan assets N/A Rate of compensation 4% Benefit cost $ 451,961 Employer contribution 451,961 Benefits paid --
NOTE O - CONCENTRATIONS OF CREDIT RISK The Company primarily grants commercial and real estate loans in the greater Philadelphia metropolitan area. Approximately 31% of loans are outside the normal lending area. The Company has concentrations of credit risk in real estate development loans (14%) at December 31, 1999. A substantial portion of its debtors' ability to honor these contracts is dependent upon the economic sector. Approximately 54% of the Company's investment portfolio consist of corporate securities. NOTE P - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of non-performance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. (Continued) 60 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999 and 1998 NOTE P - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued Unless noted otherwise, the Company does not require collateral or other security to support financial instruments with credit risk. The contract amounts as of December 31, 1999 are as follows:
Financial instruments whose contract amounts represent credit risk Commitments to extend credit $74,977,703 Standby letters of credit and financial guarantees written 3,111,203
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, and others are for staged construction, the total commitment amounts do not necessarily represent immediate cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Most guarantees extend for one year and expire in decreasing amounts through 2000. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds personal or commercial real estate, accounts receivable, inventory and equipment as collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held for those commitments is 80%. NOTE Q - REGULATORY MATTERS 1. Payment of Dividends Under the Pennsylvania Business Corporation Law, the Company may pay dividends only if it is solvent and would not be rendered insolvent by the dividend payment. There are also restrictions set forth in the Pennsylvania Banking Code of 1965 (the Banking Code) and in the Federal Deposit Insurance Act (FDIA) concerning the payment of dividends by the Company. Under the Banking Code, no dividends may be paid except from "accumulated net earnings" (generally undivided profits). Under the FDIA, no dividend may be paid if a bank is in arrears in the payment of any insurance assessment due to the Federal Deposit Insurance Corporation (FDIC). (Continued) 61 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999 and 1998 NOTE Q - REGULATORY MATTERS - Continued 2. Capital Ratios The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possible additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulations to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). As of December 31, 1999, management believes that the Bank meets all capital adequacy requirements to which it is subject. As of March 31, 1999, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The Bank's actual capital amounts and ratios are also presented in the table.
1999 ------------------------------------------------------------------------------------ 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) $102,678,179 21.64% $37,960,671 >8.00% N/A - Bank 71,914,673 15.35 37,484,002 >8.00 $46,855,003 >10.00% - - Tier I capital (to risk-weighted assets) Company (consolidated) 96,675,145 20.37 18,980,336 > 4.00 N/A - Bank 65,985,199 21.44 18,742,001 > 4.00 28,113,002 >6.00 - - Tier I capital (to average assets, leverage) Company (consolidated) 96,675,145 18.75 15,467,565 > 3.00 N/A - Bank 65,985,199 13.00 15,223,609 > 3.00 25,372,682 >5.00 - -
(Continued) 62 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999 and 1998 NOTE Q - REGULATORY MATTERS - Continued
1998 ------------------------------------------------------------------------------------------- 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) $96,153,986 25.36% $30,328,567 > 8.00 N/A - Bank 66,995,778 17.90 29,936,382 > 8.00 $37,420,477 >10.00% - - Tier I capital (to risk-weighted assets) Company (consolidated) 91,326,497 24.09 15,164,283 > 4.00 N/A - Bank 62,228,811 16.63 14,968,191 > 4.00 $22,452,286 > 6.00 - - Tier I capital (to average assets, leverage) Company (consolidated) 91,326,497 22.11 12,391,306 > 3.00 N/A - Bank 62,228,811 15.30 12,203,346 > 3.00 $20,338,910 > 5.00 - -
NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107 requires disclosure of the estimated fair value of an entity's assets and liabilities considered to be financial instruments. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in SFAS No. 107. However, many of such instruments lack an available trading market, as characterized by a willing buyer and seller engaging in an exchange transaction. Also, it is the Company's general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities. Therefore, the Company had to use significant estimations and present value calculations to prepare this disclosure. Changes in the assumptions or methodologies used to estimate fair value may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair value. Fair values have been estimated using data which management considered the best available and estimation methodologies deemed suitable for the pertinent category of financial instrument. The estimation methodologies, resulting fair values and recorded carrying amounts at December 31, 1999 and 1998 were as follows: Fair values of loans and deposits with floating interest rates are generally presumed to approximate the recorded carrying amounts. 63 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999 and 1998 NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued Fair value of financial instruments actively traded in a secondary market has been estimated using quoted market prices as follows:
1999 1998 ---------------------------- -------------------------- Estimated Estimated fair Carrying fair Carrying value amount value amount ----------- ----------- ----------- ----------- Cash and cash equivalents $17,725,462 $17,725,462 $19,142,624 $19,142,624 Investment securities held to maturity 81,493,670 83,064,914 62,159,860 61,894,538 Investment securities available for sale 59,485,027 59,485,027 36,951,162 36,951,162
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:
1999 1998 ---------------------------- -------------------------- Estimated Estimated fair Carrying fair Carrying value amount value amount ------------ ------------ ------------ ------------ Deposits with stated maturities $240,188,294 $240,568,044 $155,837,473 $154,485,071 Mortgage payable 479,579 479,579 526,720 526,720 Long-term borrowings with stated maturities 32,787,036 30,000,000 35,394,276 30,365,000
Fair value of financial instrument liabilities with no stated maturities has been estimated to equal the carrying amount (the amount payable on demand), totalling $140,717,974 and $135,904,614 at December 31, 1999 and 1998, respectively. Fair value of the net loan portfolio has been estimated using present value cash flow, discounted at the treasury rate adjusted for non-interest operating costs and giving consideration to estimated prepayment risk and credit loss factors, as follows:
1999 1998 ---------------------------- -------------------------- Estimated Estimated fair Carrying fair Carrying value amount value amount ------------ ------------- ------------ ----------- Net loans $374,250,097 $343,080,899 $318,340,245 $292,556,084
There is no material difference between the carrying amount and estimated fair value of off-balance-sheet items totalling $78,078,906 and $48,673,501 at December 31, 1999 and 1998, respectively, which are primarily comprised of unfunded loan commitments which are generally priced at market at the time of funding. The Company's remaining assets and liabilities are not considered financial instruments. No disclosure of the relationship value of the Company's deposits is required by SFAS No. 107. 64 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999 and 1998 NOTE S - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY The Company was formed on June 29, 1995. Condensed financial information for the parent company only follows. The balance sheets for December 31, 1999 and 1998 and the statements of income and cash flows for the years then ended are presented below. CONDENSED BALANCE SHEETS
December 31, -------------------------------- 1999 1998 ------------- -------------- Assets Cash $ 932,372 $ 193,823 Investment in Royal Investments of Delaware, Inc. - at equity 29,451,166 28,676,818 Investment in Royal Bank of Pennsylvania - at equity 65,201,409 64,939,271 Other assets 249,571 259,356 ------------- ------------ $95,834,518 $94,069,268 ------------- ------------ Stockholders' equity 95,834,518 94,069,268 ------------- ------------ $95,834,518 $94,069,268 ============= ============
CONDENSED STATEMENTS OF INCOME
Year ended December 31, ----------------------------- 1999 1998 ------------ ----------- Income Equity in undistributed net earnings of subsidiaries $ 4,304,705 $ 4,985,119 Dividends from subsidiary bank 7,848,843 5,877,354 Other income 44,386 39,610 ----------- ----------- Total income 12,197,934 10,902,083 ----------- ----------- Expenses Other expenses 119,801 160,430 Income tax (benefit) expense (26,395) (42,287) ----------- ----------- Total expenses 93,406 118,143 ----------- ----------- Net income $12,104,528 $10,783,940 =========== ===========
(Continued) 65 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1999 and 1998 NOTE S - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31, ----------------------------- 1999 1998 ----------- ------------ Cash flows from operating activities Net income $12,104,528 $10,783,940 Adjustments to reconcile net income to net cash provided by operating activities Undistributed earnings from subsidiaries (4,304,705) (4,985,119) Operating expenses 119,801 160,430 Rental income (44,386) (39,610) Non-cash income tax (benefit) expense (26,395) (42,287) ----------- ----------- Net cash provided by operating activities 7,848,843 5,877,354 ----------- ----------- Cash flows from financing activities Cash dividends paid (7,848,843) (7,177,353) (Decrease) increase in other liabilities - (1,637,763) Other, net 738,549 275,255 ----------- ------------ Net cash (used in) provided by financing activities (7,110,294) (8,539,861) ----------- ----------- NET INCREASE (DECREASE) IN CASH 738,549 (2,662,507) Cash at beginning of year 193,823 2,856,330 ----------- ----------- Cash at end of year $ 932,372 $ 193,823 ----------- -----------
66 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information required in this Item, relating to directors, executive officers, control persons is set forth in the Registrant's Proxy Statement to be used in connection with the 2000 Annual Meeting of Shareholders under the heading "Remuneration of directors and Officers and Other Transactions", which pages are incorporated herein by reference. BENEFICIAL OWNERSHIP - COMPLIANCE. Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Corporation's officers and directors, and persons who own more than 10 percent of the registered class of the Corporation's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Officers, directors and greater than 10 percent shareholders are required by SEC regulation to furnish the Corporation copies of all Section 16(a) forms they file. Based solely on its review of forms that were received from certain reporting persons, the Corporation believes that during the period January 1, 1999 through December 31, 1999, its officers and directors were in compliance with all filing requirements applicable to them. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item, relating to executive compensation, is set forth in the Registrant's Proxy Statement to be used in connection with the 2000 Annual Meeting of Shareholders, under the heading "Remuneration of Directors and Officers and Other Transactions", which pages are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item, relating to beneficial ownership of the Registrant's Common Stock, is set forth in the Registrant's Proxy Statement to be used in connection with the 2000 Annual Meeting of Shareholders, under the heading "Information About Nominees, Continuing Directors and Executive Officers", which pages are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item, relating to transactions with management and others, certain business relationships and indebtedness of management, is set forth in the Registrant's Proxy Statement to be used in connection with the 2000 Annual Meeting of Shareholders, under the heading "Interest of Management and Others in Certain Transactions", which page are incorporated herein by reference. 67 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K a. 1. Financial Statements The following financial statements are included by reference in Part II, Item 8 hereof. Report of Independent Certified Public Accountants. Consolidated Balance Sheets. Consolidated Statements of Income. Consolidated Statements of Changes in Stockholders' Equity. Consolidated Statement of Cash Flows. Notes To Consolidated Financial Statements. 2. Financial Statement Schedules Financial Statement Schedules are omitted because the required information is either not applicable, not required or is shown in the respective financial statements or in the notes thereto. 3. The following Exhibits are files herewith or incorporated by reference as a part of this Annual Report. 3(i) Articles of Incorporation. (Incorporated by reference to Exhibit 3(i) to Registrant's Registration Statement No. 0-26366 on Form S-4.) 3(ii) By-laws. (Incorporated by reference to Exhibit 3(i) to Registrant's Registration Statement No. 0-26366 on Form S-4.) 10.1 Stock Option and Appreciation Right Plan. (Incorporated by reference to the Registrant's Registration Statement N0. 333-25855, on form S-8 filed with the Commission on April 5, 1997). 10.2 Outside Directors' Stock Option Plan. (Incorporated by reference to the Registrant's Registration Statement N0. 333-25855, on form S-8 filed with the Commission on April 5, 1997). 11. Statement Re: Computation of Earnings Per Share. Included at Item 8, hereof, Note A, "Per Share Information". 12. Statement re: Computation of Ratios. (Included at Item 8 here of, Note Q, "Regulatory Matters.") 21. Subsidiaries of Registrant. 23. Consent of Independent Accountants. 27. Financial Data Schedule. (b) No Current Report on Form 8-K was filed by the Registrant during the fourth quarter of the fiscal year December 31, 1999. (c) The exhibits required to be filed by this Item are listed under Item 14(a)3 above. (d) Not applicable 68 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of l934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ROYAL BANCSHARES OF PENNSYLVANIA, INC. DATE TITLE SIGNATURE ---- ----- --------- March 24, 2000 Chairman /s/ Daniel M. Tabas Daniel M. Tabas March 24, 2000 President/CEO /s/ Joseph P. Campbell Director Joseph P. Campbell March 24, 2000 Treasurer/CFO /s/ James J. McSwiggan James J. McSwiggan March 24, 2000 Director /s/ Albert Ominsky Albert Ominsky March 24, 2000 Director /s/ Anthony J. Micale Anthony J. Micale Vice Chairman/ March 24, 2000 Senior Vice President/ /s/ Robert R. Tabas Director Robert R. Tabas March 24, 2000 Director /s/ Gregory T. Reardon Gregory T. Reardon March 24, 2000 Director /s/ Carl M. Cousins Carl M. Cousins Continued... 69 DATE TITLE SIGNATURE ---- ----- --------- March 24, 2000 Director /s/ Lee E. Tabas Lee E. Tabas March 24, 2000 Director /s/ Howard Wurzak Howard Wurzak March 24, 2000 Senior Vice President/ /s/ John M. Decker Director John M. Decker March 24, 2000 Senior Vice President/ /s/ Murray Stempel Director Murray Stempel March 24, 2000 Director /s/ Jack R. Loew Jack R. Loew March 24, 2000 Director /s/ Edward B. Tepper Edward B. Tepper 70 ROYAL BANCSHARES OF PENNSYLVANIA, INC. ANNUAL REPORT ON FORM 10-K EXHIBIT INDEX 3(i) Articles of Incorporation. (Incorporated by reference to Exhibit 3(i) to Registrant's Registration Statement No. 0-26366 on Form S-4.) 3(ii) By-laws. (Incorporated by reference to Exhibit 3(i) to Registrant's Registration Statement No. 0-26366 on Form S-4.) 10.1 Stock Option and Appreciation Right Plan. (Incorporated by reference to the Registrant's Registration Statement N0. 333-25855, on form S-8 filed with the Commission on April 5, 1997). 10.2 Outside Directors' Stock Option Plan. (Incorporated by reference to the Registrant's Registration Statement N0. 333-25855, on form S-8 filed with the Commission on April 5, 1997). 11. Statement Re: Computation of Earnings Per Share. (Included at Item 8, hereof, Note A, "Per Share Information".) 12. Statements re: Computation of Ratios. (Included at Item 8 here of, Note Q, "Regulatory Matters.") 21. Subsidiaries of Registrant. 23. Consent of Independent Accountants. 27. Financial Data Schedule. 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 issued our report dated January 26, 2000, accompanying the consolidated financial statements included in the 1999 Annual Report to Shareholders, which is incorporated by reference in the Annual Report of Royal Bancshares of Pennsylvania, Inc. and Subsidiaries on Form 10-K for the year ended December 31, 1999. We hereby consent to the incorporation by reference of said report in the Company's Registration Statements on Form S-4 (File Nos. 33-78310 and 33-80616) and on Form S-8 (File No. 333-25855) /s/ Grant Thornton, LLP Philadelphia, Pennsylvania March 24, 2000 EX-27 4 FINANCIAL DATA SCHEDULE
9 1 YEAR DEC-31-1999 DEC-31-1999 17,425,432 100,030 200,000 0 59,485,027 83,064,914 81,493,670 354,818,236 11,737,337 522,536,047 381,286,018 0 14,935,932 30,479,579 15,927,009 0 0 79,907,509 522,536,047 33,816,210 10,865,900 0 44,682,110 14,016,747 15,922,194 28,759,916 0 0 13,129,619 17,668,265 0 0 0 12,104,528 1.21 1.19 6.84 1,209,242 0 23,087 42,097 11,919,545 1,075,122 892,914 11,737,337 0 0 0
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