-----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, E8O8oNQ9l2TGoKSajgJnZe0Ew6GxdQYQQquRA+nxdup1Jj5LdB71kW7gALWVlmee 9YHtlq+MWanAbIsKh8DmCw== 0000893220-99-000374.txt : 19990331 0000893220-99-000374.hdr.sgml : 19990331 ACCESSION NUMBER: 0000893220-99-000374 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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: 99577370 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, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ___________ to ___________ Commission File Number 0-26366 ROYAL BANCSHARES OF PENNSYLVANIA, INC. (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2812193 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 732 MONTGOMERY AVENUE, NARBERTH, PENNSYLVANIA 19072 (Address of principal executive offices) Registrant's telephone number, including area code (610) 668-4700 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: CLASS A COMMON STOCK ($2.00 PAR VALUE) CLASS B COMMON STOCK ($.10 PAR VALUE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contended, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of common shares of the Registrant held by non-affiliates, based on the closing sale price as of February 28, 1999 was $54,714,031. As of February 28, 1999, the Registrant had 7,224,883 and 1,630,517 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, 1998, RBPA had consolidated total assets of approximately $427.6 million, total deposits of approximately $290.4 million and stockholders' equity of approximately $94.1 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, Philadelphia and Berks counties. The Bank also considers the states of Pennsylvania, New Jersey, New 2 3 York and Delaware to constitute its service area for certain services. On occasion, the Bank will do business with clients located outside of its service area. The Bank's legal headquarters are located at 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 133 persons on a full-time equivalent basis as of December 31, 1998. Deposits. At December 31, 1998, total deposits of the Bank were distributed among demand deposits (14%), money market deposit accounts, savings and Super Now (33%) and time deposits (53%). At year end 1998, deposits increased $25.0 million from year end 1997, or 9.4%, primarily due to an increase in certificate of deposits and to a lesser extent, NOW and money market deposits. We note that the Bank or any bank could be financially stressed in the event a material number of the depositors elected to withdraw deposits from the institution within a short period of time. Conceivably, this could occur even though the FDIC insures each depositor for up to $100,000. Lending. At December 31, 1998, the Bank had a total loan portfolio of $304.5 million, representing 71% of total assets. The loan portfolio is categorized into commercial, commercial mortgages, residential mortgages (including home equity lines of credit), construction, and installment loans. Current market and regulatory trends in banking are changing the basic nature of the banking industry. The Bank intends to keep pace with the banking industry by being competitive with respect to interest rates and new types or classes of deposits insofar as it is practical to do so consistent with the Bank's size, objective of profit maintenance and stable capital structure. 3 4 NON-BANK SUBSIDIARY On June 30, 1995, RBPA established a special purpose Delaware investment company, Royal Investments of Delaware, Inc., ("RID") as a wholly-owned subsidiary. Its legal headquarters is at 103 Springer Building, 3411 Silverside Road, Wilmington, DE. RID buys, holds and sells investment securities. At December 31, 1998, total assets of RID were $28.7 million, of which $22.6 million was held in cash and cash equivalents. Investment securities were $6.1 million at December 31, 1998. SUPERVISION AND REGULATION Holding Company. RBPA, as a Pennsylvania business corporation, is subject to the jurisdiction of the Securities and Exchange Commission (the "SEC") and of state securities commissions for matters relating to the offering and sale of its securities. Accordingly, if RBPA wishes to issue additional shares of its Common Stock, in order, for example, to raise capital or to grant stock options, RBPA will have to comply with the registration requirements of the Securities Act of 1933 as amended, or find an applicable exemption from registration. RBPA is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and to supervision by the Federal Reserve Board. The BHC Act requires RBPA to secure the prior approval of the Federal Reserve Board before it owns or controls, directly or indirectly, more than 5% of the voting shares of any corporation, including another bank. In addition, the BHC Act prohibits RBPA from acquiring more than 5% of the voting shares of, or interest in, or all or substantially all of the assets of, any bank located outside Pennsylvania, unless such an acquisition is specifically authorized by laws of the state in which such bank is located. A bank holding company also is prohibited from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any such company engaged in non-banking activities unless the Federal Reserve Board, by order or regulation, has found such activities to be closely related to banking or managing or controlling banks as to be a proper incident thereto. In making this determination, the Federal Reserve Board considers whether the performance of these activities by a bank holding company would offer benefits to the public that outweigh possible adverse effects. As a bank holding company, RBPA is required to file an annual report with the Federal Reserve Board and any additional information that the Federal Reserve Board may require pursuant to the BHC Act. The Federal Reserve Board may also make examinations of the holding company and any or all of subsidiaries. Further, under Section 106 of the 1970 amendments to the BHC Act and the Federal Reserve Board's regulation, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit or provision of credit of any property or services. The so called "anti-tying" provisions state generally that a bank may not extend credit, lease, sell property or furnish any service to a customer on the condition that the customer obtain additional credit or service from the bank, its bank holding company or any other subsidiary of its bank holding company, or on the condition that the customer not obtain other credit or services from a competitor of the bank, its bank holding company or any subsidiary of its bank holding company. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act and by state banking laws on any extensions of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities of the bank holding company and on taking of such stock or securities as collateral for loans to any borrower. 4 5 Under Pennsylvania law, RBPA is permitted to control an unlimited number of banks. However, RBPA would be required under the BHC Act to obtain the prior approval of the Federal Reserve Board before acquiring all or substantially all of the assets of any bank, or acquiring ownership or control of any voting shares of any other than the Bank, if, after such acquisition, would control more than 5% of the voting shares of such bank. The Bank. The deposits of Royal Bank of Pennsylvania are insured by the FDIC. The Bank is subject to supervision, regulation and examination by the Pennsylvania Department of Banking and by the FDIC. In addition, the Bank is subject to a variety of local, state and federal laws that affect its operation. Under the Pennsylvania Banking Code of 1965, as amended, the ("Code"), the Registrant has been permitted since March 4, 1990 to control an unlimited number of banks. However, the Registrant would be required under the Bank Holding Company Act to obtain the prior approval of the Federal Reserve Board before it could acquire all or substantially all of the assets of any bank, or acquiring ownership or control of any voting shares of any bank other than the Bank, if, after such acquisition, the registrant would own or control more than 5 percent of the voting shares of such bank. The Bank Holding Company Act has been amended by the Riegle-Neal Interstate Banking and Branching Act of 1994 which authorizes bank holding companies subject to certain limitations and restrictions to acquire banks located in any state. In 1995, the Code was amended to harmonize Pennsylvania law with the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 to enable Pennsylvania institutions to participate fully in interstate banking and to remove obstacles to the choice by banks from other states engaged in interstate banking to select Pennsylvania as a head office location. Some of the more salient features of the amendment are described below. A bank holding company located in Pennsylvania, another state, the District of Columbia or a territory or possession of the United States may control one or more banks, bank and trust companies, national banks, interstate banks and, with the prior written approval of the Pennsylvania Department of Banking, may acquire control of a bank and trust company or a national bank located in Pennsylvania. A Pennsylvania-chartered institution may maintain branches in any other state, the District of Columbia, or a territory or possession of the United States upon the written approval of the Pennsylvania Department of Banking. Finally, a banking institution existing under the laws of another jurisdiction may establish a branch in Pennsylvania if the laws of the jurisdiction in which it is located permit a Pennsylvania-chartered institution or a national bank located in Pennsylvania to establish and maintain a branch in such jurisdiction on substantially the same terms and conditions. In 1995, the Pennsylvania General Assembly enacted the Economic Development Agency, Fiduciary and Lender Environmental Liability Protection Act which, among other things, provides protection to lenders from environmental liability and remediation costs under the environmental laws for releases and contamination caused by others. A lender who engages in activities involved in the routine practices of commercial lending, including, but not limited to, the providing of financial services, holding of security interests, workout practices, foreclosure or the recovery of funds from the sale of property shall not be liable under the environmental acts or common law equivalents to the Pennsylvania Department of Environmental resources or to any other person by virtue of the fact that the lender engages in such commercial lending practices. A lender, however, will be liable if it, its employees or agents, directly cause an immediate release or directly exacerbate a release of regulated substances on or from the property, or knowingly and willfully compelled the borrower to commit an action which caused such release or violation of an environmental act. The Economic Development Agency, Fiduciary and Lender Environmental 5 6 Liability Protection Act, however, does not limit federal liability which still exists under certain circumstances. A subsidiary bank of a holding company is subject to certain restrictions imposed by the Federal Reserve Act, as amended, on any extensions of credit to the bank holding company or its subsidiaries, on investments in the stock or other securities of the bank holding company or its subsidiaries, and on taking such stock or securities as collateral for loans. The Federal Reserve Act, as amended, and Federal Reserve Board regulations also place certain limitations and reporting requirements on extensions of credit by a bank to principal shareholders of its parent holding company, among others, and to related interests of such principal shareholders. In addition, such legislation and regulations may affect the terms upon which any person who becomes a principal shareholder of a holding company may obtain credit from banks with which the subsidiary bank maintains a correspondent relationship. Federal law also prohibits the acquisition of control of a bank holding company without prior notice to certain federal bank regulators. Control is defined for this purpose as the power, directly or indirectly, to direct the management or policies of the bank or bank holding company or to vote 25% or more of any class of voting securities of the bank holding company. From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restrictions on, the business of the Bank. It cannot be predicted whether any such legislation will be adopted or how such legislation would affect the business of the Bank. As a consequence of the extensive regulation of commercial banking activities in the United States, the Bank's business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business. Under the Federal Deposit Insurance Act ("FDIC Act"), the FDIC possesses the power to prohibit institutions regulated by it (such as the Bank) from engaging in any activity that would be an unsafe and unsound banking practice or in violation of applicable law. Moreover, the FDIC Act: (i) empowers the FDIC to issue cease-and-desist or civil money penalty orders against the Bank or its executive officers, directors and/or principal shareholders based on violations of law or unsafe and unsound banking practices; (ii) authorizes the FDIC to remove executive officers who have participated in such violations or unsound practices; (iii) restricts lending by the Bank to its executive officers, directors, principal shareholders or related interests thereof; (iv) restricts management personnel of a bank from serving as directors or in other management positions with certain depository institutions whose assets exceed a specified amount or which have an office within a specified geographic area. Additionally, the FDIC Act provides that no person may acquire control of the Bank unless the FDIC has been given 60-days prior written notice and within that time has not disapproved the acquisition or extended the period for disapproval. In April 1995, regulators revised the Community Reinvestment Act ("CRA") with an emphasis on performance over process and documentation. Under the revised rules, the five-point rating scale is still utilized by examiners to assign a numerical score for a bank's performance in each of three areas: lending, service and investment. Under the CRA, the FDIC is required to: (i) assess the records of all financial institutions regulated by it to determine if these institutions are meeting the credit needs of the community (including low-and moderate-income neighborhoods) which they serve, and (ii) take this record into account in its evaluation of any application made by any such institutions for, among other things, approval of a branch or other deposit facility, office relocation, a merger or an acquisition of bank shares. The CRA also requires the federal banking agencies to make public disclosures of their evaluation of each bank's record of meeting the credit needs of its entire community, including low-and moderate-income neighborhoods. This evaluation will include a descriptive rate ("outstanding," "satisfactory," "needs to improve" or "substantial noncompliance") 6 7 and a statement describing the basis for the rating. After its most recent examination of the Bank under CRA, the FDIC gave the Bank a CRA rating of satisfactory. Under the Bank Secrecy Act ("BSA"), banks and other financial institutions are required to report to the Internal Revenue Service currency transactions of more than $10,000 or multiple transactions in any one day of which the Bank is aware that exceed $10,000 in the aggregate or other lesser amounts. Civil and criminal penalties are provided under the BSA for failure to file a required report, for failure to supply information required by the BSA or for filing a false or fraudulent report. RIEGLE-NEAL INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT OF 1994. The Bank believes that further merger activity within Pennsylvania is likely to occur in the future, resulting in increased concentration levels in banking markets within Pennsylvania and other significant changes in the competitive environment. The Riegle-Neal allows adequately capitalized and managed bank holding companies to acquire banks in any state starting one year after enactment (September 29, 1995). Another provision of the Riegle-Neal Act allows interstate merger transactions beginning June 1, 1997. States are permitted, however, to pass legislation providing for either earlier approval of mergers with out-of-state banks, or "opting-out" of interstate mergers entirely. Through interstate merger transactions, banks will be able to acquire branches of out-of-state banks by converting their offices into branches of the resulting bank. The Riegle-Neal Act provides that it will be the exclusive means for bank holding companies to obtain interstate branches. Under the Riegle-Neal Act, banks may establish and operate a "de novo branch" in any State that "opts-in" to de novo branching. Foreign banks are allowed to operate branches, either de novo or by merger. These branches can operate to the same extent that the establishment and operation of such branches would be permitted if the foreign bank were a national bank or state bank. All these changes are expected to intensify competition in local, regional and national banking markets. The Pennsylvania Banking Code has been amended to enable Pennsylvania institutions to participate fully in interstate banking (see discussion above). 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 7 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%
8 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. 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. 9 10 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 Office The Rodney Square Club 1100 North Market Street Wilmington, Delaware 19801 King of Prussia Office Rt. 202 & Warner 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 2003. During 1998, the Bank made aggregate lease payments of approximately $335 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 ordinary 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 10 11 ITEM 5. MARKET FOR THE BANK'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS On September 6, 1988 the Registrant's Class A Common Stock commenced trading on the NASDAQ National Market System (NASDAQ/NMS). The Registrant's NASDAQ Symbol is RBPAA and is included in the NASDAQ National Market Stock Table which is published in most major newspapers. The following table presents the high, low and closing transaction prices on all NASDAQ/NMS securities. The market makers for the Registrant's stock are F. J. Morrissey & Co., Inc., Ryan Beck & Co., Inc., Herzog, Heine, Geduld, Inc., Wheat First Union Securities Inc., Ferris Baker Watts Inc., Sandler O'Neill, and Nash Weiss. There is no market for the Class B Common Stock, as such is prohibited by the terms of the Class B Common Stock. The following table shows the range of high, low-end and closing bid prices for the Registrant's stock as reported by NASDAQ BID PRICES
1998 HIGH LOW CLOSE ---- ---- --- ----- First Quarter ......... $22.500 $19.000 $ 20.00 Second Quarter ........ 21.000 18.500 18.750 Third Quarter ......... 19.375 13.125 15.000 Fourth Quarter ........ 16.875 12.750 16.125
1997 HIGH LOW CLOSE ---- ---- --- ----- First Quarter ......... $14.875 $11.500 $ 14.00 Second Quarter ........ 15.125 13.000 14.875 Third Quarter ......... 17.000 14.500 16.875 Fourth Quarter ........ 25.750 16.000 22.250
(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 March 25, 1999, is shown below:
TITLE OF CLASS NUMBER OF RECORD HOLDERS -------------- ------------------------ Class A Common Stock 408 Class B Common Stock 166
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 449 as of March 25, 1999. DIVIDENDS Subject to certain limitations imposed by law, the Board of Directors of the Registrant may declare a dividend on shares of common stock. 11 12 Stock Dividends. On March 14, 1996, the Board of Directors of the Registrant declared a 6% stock dividend on both its Class A Common Stock and Class B Common Stock shares payable May 10, 1996, to Shareholders of record on April 18, 1996. The stock dividend resulted in the issuance of 365,229 additional shares of Class A Common Stock and 91,641 additional shares of Class B Common Stock.. On April 24, 1997, the Board of Directors of the Registrant declared a 4% stock dividend on both its Class A Common Stock and Class B Common Stock shares payable May 8, 1997, to Shareholders of record on April 28, 1997. The stock dividend resulted in the issuance of 258,176 additional shares of Class A Common Stock and 61,859 additional shares of Class B Common Stock. 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 272,313 additional shares of Class A Common Stock and 63,595 additional shares of Class B Common Stock. Future dividends, if any, will be at the discretion of the Board of Directors and will be dependent on the level of earnings and compliance with regulatory requirements. Cash Dividends. The Registrant paid a cash dividends in each quarter of 1998 and 1997 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 $7.2 million and $5.3 million for 1998 and 1997, 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 1998 and 1997.
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
CASH DIVIDENDS PER SHARE ------------------------ 1997 CLASS A CLASS B ---- ------- ------- First Quarter ......... $.12 $.1380 Second Quarter ........ $.15 $.1725 Third Quarter ......... $.18 $.2070 Fourth Quarter ........ $.18 $.2070
Future dividends must necessarily depend upon net income, capital requirements, appropriate legal restrictions and other factors relevant at the time the Board of Directors of the Registrant considers dividend policy. Cash dividends available for dividend distributions to the shareholders of the Registrant must initially come from dividends paid by the Bank to the Registrant. Therefore, the restrictions on the Bank's dividend payments are directly applicable to the Registrant. Under the Pennsylvania Banking Code of 1965, as amended, a restriction is placed on the availability of capital surplus for payment of dividends by the Bank. Under the Pennsylvania Business Corporation Law of 1988, as amended, the Registrant may pay dividends only if after payment the Registrant would be able to pay its debts as they become due in the usual course of business and the total assets are greater than the sum of its total liabilities plus the amount that 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. 12 13 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 1998 1997 1996 1995 1994 - --------------------- -------- -------- -------- -------- -------- Interest income $ 40,640 $ 33,372 $ 33,618 $ 29,755 $ 29,021 Interest expense 13,163 10,048 10,054 9,592 8,244 -------- -------- -------- -------- -------- Net interest income 27,477 23,324 23,564 20,163 20,777 Increase (Decrease) Provision for loan losses 4,770 (2,118) (1,488) -- 2,500 -------- -------- -------- -------- -------- Net interest income after loan loss provision 22,707 25,442 25,052 20,163 18,277 Gain on sale of loans 4 29 427 86 71 Gain/Loss on real estate -- 1,204 2,016 870 1,435 Other income 3,570 1,392 1,788 1,098 947 -------- -------- -------- -------- -------- Total other income 3,574 2,625 4,231 2,054 2,453 Income before other expenses & income taxes 26,281 28,067 29,283 22,217 20,730 Non-interest expenses: Salaries 5,028 9,546 9,602 4,850 3,861 Other 5,845 5,088 5,537 5,461 5,791 -------- -------- -------- -------- -------- Total other expenses 10,873 14,634 15,139 10,311 9,652 -------- -------- -------- -------- -------- Income before taxes 15,408 13,433 14,144 11,906 11,078 Income taxes 4,624 4,074 3,907 3,648 3,066 -------- -------- -------- -------- -------- Net income $ 10,784 $ 9,359 $ 10,237 $ 8,258 $ 8,012 ======== ======== ======== ======== ======== Basic earnings per share (1) $ 1.19 $ 1.04 $ 1.16 $ 0.93 $ 0.88 -------- -------- -------- -------- -------- Diluted earnings per share (1) $ 1.15 $ 1.00 $ 1.13 $ 0.90 $ 0.86 -------- -------- -------- -------- --------
- ---------- (1) Earnings per share has the weighted average number of shares used in the calculation adjusted to reflect a 4% stock dividend in 1998, a 4% stock dividend in 1997, a 6% stock dividend in 1996, a 6% stock dividend in 1995 and, a 6% stock dividend in 1994.
BALANCE SHEET DATA 1998 1997 1996 1995 1994 - ------------------ ---- ---- ---- ---- ---- (in thousands) Total assets $427,622 $416,598 $355,149 $356,264 $312,956 Total average assets 407,623 342,361 343,360 312,823 282,162 Loans, net 292,556 282,711 209,017 198,419 162,739 Total deposits 290,390 265,363 254,183 268,242 211,965 Total long term debt 30,365 31,063 4,814 2,984 3,969 Total stockholders' equity 94,069 89,505 84,581 77,189 70,617 Total average stockholders' equity 91,374 86,572 80,910 74,091 66,398 Return on average assets 2.6% 2.7% 3.0% 2.6% 2.8% Return on average equity 11.8% 10.8% 12.7% 11.1% 12.1% Average equity to average assets 22.4% 25.3% 23.6% 23.7% 23.5% Cash dividend payout ratio 66.6% 56.7% 19.2% 11.4% --
13 14 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:
1998 1997 1996 ----------------------------- ----------------------------- ----------------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ ASSETS (In thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE - --------------------- ------- -------- ---- ------- -------- ---- ------- -------- ---- Interest bearing deposits in banks $ 505 $ 24 4.75% $ 1,230 $ 87 7.10% $ 1,758 $ 103 5.86% Federal funds 25,210 1,372 5.44% 17,921 1,012 5.64% 18,332 1,015 5.54% Investment securities: Held to maturity: Taxable 46,946 3,228 6.88% 84,399 5,604 6.64.% 109,522 7,006 6.40% Nontaxable (1) 3,098 314 10.14% 1,455 169 11.63% 497 88 17.71% --------- --------- ----- --------- --------- ----- --------- --------- ----- Total held to maturity 50,044 3,542 7.08% 85,854 5,773 6.72% 110,019 7,094 6.45% Available for sale Taxable 27,419 2,296 8.37% 12,212 991 8.12% 3,674 326 8.87% --------- --------- ----- --------- --------- ----- --------- --------- ----- Total investment securities 77,463 5,838 7.54% 98,066 6,764 6.90% 113,693 7,420 6.53% Loans: (2) Commercial & industrial (3) 116,823 13,783 11.80% 111,704 12,297 11.01% 113,543 15,553 13.70% Commercial mortgages 170,690 18,279 10.71% 87,464 11,658 13.33% 68,689 7,791 11.34% Other loans (1) 12,403 1,451 11.70% 14,200 1,782 12.55% 18,386 1,766 9.61% --------- --------- ----- --------- --------- ----- --------- --------- ----- Total loans 299,916 33,513 11.17% 213,368 25,737 12.06% 200,618 25,110 12.52% --------- --------- ----- --------- --------- ----- --------- --------- ----- Total interest earning assets $ 403,094 $ 40,747 10.11% $ 330,585 $ 33,600 10.16% $ 334,401 $ 33,648 10.06% Non interest earning assets Cash & due from banks 8,717 6,636 6,207 Other assets 15,843 17,366 16,401 Allowance for loan loss (10,313) (8,764) (9,672) Def income/unearned disc (9,718) (3,462) (3,977) --------- --------- --------- Total non interest Earning assets 4,529 11,776 8,959 --------- --------- --------- Total assets $ 407,623 $ 342,361 $ 343,360 ========= ========= ========= LIABILITIES & STOCKHOLDERS' EQUITY Deposits: Savings $ 18,214 514 2.82% $ 16,668 $ 454 2.72% $ 16,514 $ 425 2.57% NOW & Money Market 79,975 2,174 2.72% 69,077 2,171 3.14% 71,597 2,129 2.97% CDs & other time deposits 142,206 8,479 5.96% 121,934 7,185 5.89% 126,089 7,157 5.68% --------- --------- ----- --------- --------- ----- --------- --------- ----- Total interest bearing deposits $ 240,395 11,167 4.65% $ 207,679 $ 9,810 4.72% $ 214,200 $ 9,711 4.53% Federal funds 90 4 4.44% 123 6 5.00% -- -- -- Long term borrowings 31,611 1,992 6.30% 3,066 231 7.54% 4,909 343 6.99% --------- --------- ----- --------- --------- ----- --------- --------- ----- Total interest bearing liabilities $ 272,096 13,163 4.84% $ 210,868 $ 10,047 4.76% $ 219,109 $ 10,054 4.59% --------- --------- ----- --------- --------- ----- --------- --------- ----- Non interest bearing deposits 29,691 32,992 33,369 Other liabilities 14,462 11,929 9,972 --------- --------- --------- Total liabilities 316,249 255,789 262,450 Stockholders' equity 91,374 86,572 80,910 --------- --------- --------- Total liabilities and Stockholders' equity $ 407,623 $ 342,361 $ 343,360 ========= ========= ========= Net interest income $ 27,584 $ 23,553 $ 23,594 ========= ========= ========= Net yield on interest earning assets 6.84% 7.12% 7.06% ===== ===== =====
- ---------- (1) The indicated income and annual rate are presented in a taxable equivalent basis using the federal tax rate of 34% for all periods. (2) Nonaccruing loans have been included in the appropriate average loan balance category, but interest on these loans has not been included. (3) Interest income on commercial & industrial loans for 1996 include a one-time recovery of interest of $3.2 million. 14 15 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, 1998 and 1997, as compared to respective previous periods, into amounts attributable to both rate and volume variances.
1998 VS 1997 1997 VS 1996 (IN THOUSANDS) (IN THOUSANDS) ---------------------------------- ---------------------------------- CHANGES DUE TO: CHANGES DUE TO: --------------------- --------------------- INTEREST INCOME VOLUME RATE TOTAL VOLUME RATE TOTAL - --------------- ------ ---- ----- ------ ---- ----- Interest bearing deposits in banks $ (40) $ (23) $ (63) $ (35) $ 19 $ (16) Federal funds sold 689 (329) 360 -- (3) (3) Investment securities: Held to maturity: Taxable (2,569) 193 (2,376) (1,659) 257 (1,402) Nontaxable 169 (24) 145 120 (39) 81 Available for sale Taxable 1,272 33 1,305 695 (30) 665 ------- ------- ------- ------- ------- ------- Total investment securities (1,128) 202 (926) (844) 188 (656) Loans: Commercial & industrial 579 907 1,486 (248) (3,008) (3,256) Commercial mortgages 9,286 (2,665) 6,621 2,357 1,510 3,867 Other loans (216) (115) (331) (455) 471 16 ------- ------- ------- ------- ------- ------- Total loans 9,649 (1,873) 7,776 1,654 (1,027) 627 ------- ------- ------- ------- ------- ------- Total increase (decrease) in interest income $ 9,170 $(2,023) $ 7,147 $ 775 ($ 823) ($ 48) INTEREST EXPENSE Deposits: Savings $ 43 $ 17 $ 60 $ 4 $ 25 $ 29 NOW & Money Market 318 (315) 3 (77) 119 42 CDs & other time deposits 1,208 86 1,294 (240) 268 28 ------- ------- ------- ------- ------- ------- Total interest bearing deposits 1,569 (212) 1,357 (313) 412 99 Federal funds purchased (2) -- (2) 6 -- 6 Mortgage payable and long term borrowings 1,805 (44) 1,761 (137) 25 (112) ------- ------- ------- ------- ------- ------- Total increase (decrease) in interest expense 3,372 (256) 3,116 (444) 437 (7) ------- ------- ------- ------- ------- ------- Total increase (decrease) in net interest income $ 5,798 $(1,767) $ 4,031 $ 1,219 $(1,260) $ (41) ======= ======= ======= ======= ======= =======
15 16 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 1998 1997 1996 1995 1994 ---------------------------------------------------------------------------------------------------------- Comm'l & industrial $127,972 41% $ 123,800 41% $ 116,616 55% $ 124,065 61% $ 104,312 62% Real estate 182,595 58% 176,315 58% 93,925 44% 75,758 37% 64,357 38% Consumer 2,033 1% 1,523 1% 2,097 1% 3,352 2% -- -- -------- --- --------- --- --------- --- --------- --- --------- --- Total gross loans 312,600 100% 301,638 100% 212,638 100% 203,175 100% 168,669 100% Unearned income (1,833) (1,498) (1,290) (1,160) (1,006) Disc on loans purchased (6,291) (9,243) (2,331) (3,596) (4,924) -------- --------- --------- --------- --------- 304,476 290,897 209,017 198,419 162,739 Allowance for loan loss (11,920) (8,186) (9,084) (9,747) (8,992) -------- --------- --------- --------- --------- Total loans, net $292,556 $ 282,711 $ 199,933 $ 188,672 $ 153,747 ======== ========= ========= ========= =========
ANALYSIS OF ALLOWANCE FOR LOAN LOSS
YEAR ENDING DECEMBER 31, (IN THOUSANDS) --------------------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- Total Loans $ 304,476 $ 290,897 $ 209,017 $ 198,419 $ 162,739 ========= ========= ========= ========= ========= Daily average loan balance $ 299,916 $ 213,368 $ 200,618 $ 185,734 $ 165,702 ========= ========= ========= ========= ========= Allowance for loan loss: Balance at the beginning of the year $ 8,186 $ 9,084 $ 9,747 $ 8,992 $ 6,608 Charge offs by loan type: Commercial 1,501 762 843 292 273 Real estate 135 -- 240 21 17 --------- --------- --------- --------- --------- Total charge offs 1,636 762 1,083 313 290 Recoveries by loan type: Commercial 540 1,934 1,790 125 141 Real estate 60 48 118 31 33 --------- --------- --------- --------- --------- Total recoveries 600 1,982 1,908 156 174 --------- --------- --------- --------- --------- Net loan charge offs 1,036 (1,220) (825) 157 116 Purchase of Knoblauch Bank -- -- -- 912 -- Increase (decrease) in provision for loan loss 4,770 (2,118) (1,488) -- 2,500 --------- --------- --------- --------- --------- Balance at end of year $ 11,920 $ 8,186 $ 9,084 $ 9,747 $ 8,992 ========= ========= ========= ========= ========= Net charge offs to average loans .35% (0.57%) (0.41%) 0.08% 0.07% ========= ========= ========= ========= ========= Allowance to loans at year end 3.91% 2.81% 4.35% 4.91% 5.53% ========= ========= ========= ========= =========
The Bank utilizes the reserve method of accounting for possible loan losses. Under this method, provisions for possible loan losses are charged to operation and recognized loan losses are charged and loan recoveries are credited to the allowance. The allowance for possible loan loss represents the amount set aside to protect against the risk inherent in the Bank's portfolio. Management's periodic evaluation of the adequacy of the allowance takes into consideration the Bank's past loan loss experience, known and inherent risks in the loan portfolio, adverse situations which may affect the borrower's ability to repay, overall portfolio quality, and current economic conditions. Provisions for possible loan losses are charged to earnings to bring the allowance to a level considered by management to be appropriate in light of the foregoing considerations. However, since loan loss reserve adequacy is subjective, the loan loss reserve may be excessively funded or need additional funds from time to time. A loan review is performed quarterly by the Loan Review officer to determine the adequacy of the reserves. 16 17 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) ------------------------------ 1998 1997 1996 -------- -------- -------- Loans secured by real estate Construction and land development $ 35,571 $ 29,172 $ 5,057 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 7,648 11,433 11,655 All other loans secured by 1-4 family residential properties: Secured by first liens 17,836 23,139 21,843 Secured by junior liens 6,131 8,195 7,121 Secured by multi family (5 or more) residential properties 20,386 23,459 20,882 Secured by nonfarm nonresidential properties 198,225 177,196 117,559 Commercial and industrial loans to US addresses 24,362 25,820 24,559 Loans to individuals for household, family, and other personal expenditures 1,206 1,478 1,848 Obligations of state and political subdivisions in the US 1,149 1,593 1,903 All other loans 87 154 211 Less: Any unearned income on loans listed above 8,125 10,742 3,621 -------- -------- -------- Total loans and leases, net of unearned income $304,476 $290,897 $209,017 ======== ======== ========
CREDIT QUALITY The following table presents the principal amounts of nonaccruing loans and other real estate.
YEARS ENDING DECEMBER 31, (IN THOUSANDS) ------------------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- Non-accruing loans (1)(2) $ 3,419 $ 4,317 $ 4,653 $ 6,233 $ 1,703 Past due loans over 90 days but still accruing -- -- -- 391 391 ------- ------- ------- ------- ------- Total nonperforming loans 3,419 4,317 4,653 6,624 2,094 Other real estate 707 -- 504 612 4,492 ------- ------- ------- ------- ------- Total nonperforming assets $ 4,126 $ 4,317 $ 5,157 $ 7,236 $ 6,586 ======= ======= ======= ======= ======= Nonperforming assets to total assets 0.96% 1.04% 1.45% 2.03% 2.10% ======= ======= ======= ======= ======= Nonperforming loans to total loans 1.09% 1.43% 2.19% 3.34% 1.29% ======= ======= ======= ======= ======= Allowance for loan loss to nonperforming loans 348.64% 189.62% 195.23% 147.15% 429.42% ======= ======= ======= ======= =======
- ---------- (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 $307,744 for 1998, $388,517 for 1997, $418,740 for 1996, and $1,889,000 for 1995. 17 18 INVESTMENTS SECURITIES The contractual maturity distribution and weighted average rate of the investments held to maturity portfolio at December 31, 1998 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, 1998 (IN THOUSANDS) --------------------------------------------------------------------------------------------------------- AFTER 1 YEAR BUT AFTER 5 YEARS, BUT SECURITIES HELD WITHIN 1 YEAR WITHIN 5 YEARS WITHIN 10 YEARS AFTER 10 YEARS TOTAL - --------------- ----------------- ----------------- ----------------- ----------------- ----------------- TO MATURITY AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE - ------------ ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- State & political Subdivisions $ 2,700 10.5% $ -- -- $ -- -- $ 398 15.7% $ 3,098 11.1% US Treasuries and agencies 250 6.5% 1,954 5.6% 965 6.9% 1,363 7.0% 4,532 6.3% Other securities 9,278 6.4% 34,702 7.5% 6,363 8.5% 3,921 7.4% 54,264 6.9% ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- Total $12,228 7.3% $36,656 7.4% $ 7,328 8.3% $ 5,682 7.8% $61,894 7.1% ======= ==== ======= ==== ======= ==== ======= ==== ======= ====
The following tables presents the consolidated book values and approximate market value at December 31, 1998, 1997, and 1996, 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) ----------------------------------------------------------------------------------- 1998 1997 1996 ----------------------- ----------------------- ----------------------- 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 $ 499 $ 580 US Treasuries & agencies 4,532 4,660 12,908 13,096 15,183 15,321 Other securities 54,264 54,372 48,365 48,737 97,793 97,734 -------- -------- -------- -------- -------- -------- Total $ 61,894 $ 62,160 $ 64,371 $ 64,985 $113,475 $113,635 ======== ======== ======== ======== ======== ========
AS OF DECEMBER 31, (IN THOUSANDS) ------------------------------------------------------------------------------ 1998 1997 1996 ---------------------- ---------------------- ---------------------- 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 $ 3,174 $ 3,174 $ 1,024 $ 1,024 Preferred and common stock 2,867 2,919 2,944 2,977 3,703 3,701 Other securities 29,031 30,863 13,964 14,897 -- -- ------- ------- ------- ------- ------- ------- Total $35,068 $36,952 $20,082 $21,048 $ 4,727 $ 4,725 ======= ======= ======= ======= ======= =======
18 19 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) -------------------------------------------------------------------------- 1998 1997 1996 -------------------- -------------------- -------------------- AVERAGE AVERAGE AVERAGE BALANCE RATE BALANCE RATE BALANCE RATE ------- ---- ------- ---- ------- ---- Demand deposits: Non interest bearing $ 29,691 -- $ 32,992 -- $ 33,369 -- Interest bearing (NOW) 27,138 2.25% 24,539 2.50% 20,823 2.28% Money market deposits 52,837 3.30% 44,538 3.50% 50,774 3.26% Savings deposits 18,214 2.82% 16,668 2.72% 16,514 2.57% Certificate of deposit 142,206 5.96% 121,934 5.89% 126,089 5.68% -------- ---- -------- ---- -------- ---- Total deposits $270,086 $240,671 $247,569 ======== ======== ========
The remaining maturity of Certificates of Deposit of $100,000 or greater.
AT DECEMBER 31, (IN THOUSANDS) ----------------------- MATURITY 1998 1997 ------- ------- Three months or less $ 4,607 $ 5,433 Over three months through twelve months 7,465 8,850 Over twelve months through five years 20,909 14,052 Over five years 15,773 4,840 ------- ------- Total $48,754 $33,175 ======= =======
SHORT AND LONG TERM BORROWINGS
YEAR ENDING DECEMBER 31, (IN THOUSANDS) --------------------------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- Short term borrowings (1) $ -- $15,000 $ -- $ -- $21,000 Long term borrowings: Mortgage payable (2) 527 571 613 652 689 FHLB advances (3) 30,365 31,063 4,201 2,332 3,280 ------- ------- ------- ------- ------- Total long term borrowings $30,892 $46,634 $ 4,814 $ 2,984 $24,969 ======= ======= ======= ======= =======
- ---------- (1) In 1997 and 1994, short term borrowings consisted of federal funds purchased which matured within one to four days from the transaction date. (2) The mortgage payable is payable to a bank at 65% of prime rate (5.525% at December 31, 1998) and is guaranteed by an industrial development authority. (3) Advances from the Federal Home Loan Bank of Pittsburgh consist of two separate advances with interest rates of 8.20% and 6.24%, with maturities of December 27, 1999 and December 23, 2002, respectively. 19 20 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 $11.0 million, or 3%, to $427.6 million at December 31, 1998 from $416.6 million at year end 1997, primarily due to growth experienced in loans and investment securities of $9.9 million and $13.4 million, respectively, partially offset by a $11.3 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 $11.3 million, or 37%, to $19.1 million at December 31, 1998, primarily due to growth in loans and investment securities during 1998. The average balance of cash and cash equivalents was $34.4 million for 1998 versus $25.8 million for 1997. Investment Securities Held to Maturity. Held to maturity investment securities ("HTM") represents approximately 12% of average earning assets during 1998 and are comprised of primarily corporate debt securities of investment grade quality at the time of purchase. HTM investment securities declined $2.5 million, or 4%, from $64.4 million at December 31, 1997 to $61.9 million at December 31, 1998, primarily due to scheduled maturities exceeding purchases during 1998. Investment Securities Available for Sale. Available for sale securities ("AFS") represent 7% of average earning assets during 1998 and are primarily comprised of capital trust security issues of regional banks. AFS investment securities were $37 million at December 31, 1998, an increase of $15.9 million from $21 million at December 31, 1997. This increase is primarily due to the purchase of capital trust securities during 1998. Loans. RBPA's primary earning assets are loans, representing approximately 74% of average earning assets during 1998. The loan portfolio has historically been comprised primarily of business demand loans and commercial mortgages in roughly equal amounts, and to a significantly lesser extent one to four family residential and home equity loans. This composition of loans did not change during 1998. During 1998, total loans increased 5% from $290.9 million at December 31, 1997 to $304.5 million at December 31,1998, primarily due to internally generated loan growth. Deposits. RBPA's primary source of funding, deposits, increased $25 million, or 9%, from $265.4 million at December 31, 1997 to $290.4 million at December 31, 1998. This increase in deposits is primarily due to increases in certificates of deposits, NOW and money market, and savings deposits of $14.3 million, $5.3 million and $2.0 million, respectively, in addition to a $3.4 million increase in non-interest bearing deposits. The $14.3 million increase in certificates of deposits is primarily attributable to $20 million increase in brokered deposits during 1998. 20 21 Borrowings. Borrowings are comprised of long term borrowings (advances, mortgage) and short term borrowings (overnight borrowings). Long term borrowings decreased $.7 million to $30.9 million at December 31, 1998 primarily due to a scheduled maturity of a Federal Home Loan Bank ("FHLB") advance in December, 1998 and scheduled amortization of the mortgage payable. The average balance of long term borrowings and mortgages during 1998 was $31.6 million versus $3.1 million for 1997. Short-term borrowings decreased $15 million to $-0- at December 31, 1998 from $15 million at December 31, 1997. The average balance of short-term borrowings during 1998 and 1997 was $.1 million. Stockholders' Equity. Stockholders' equity increased $4.6 million or 5% in 1998 to $94.1 million primarily due to net income of $10.8 million partially offset by $7.2 million in cash dividends paid in 1998. RESULTS OF OPERATIONS General. RBPA's results of operations depend primarily on net interest income, which is the difference between interest income on interest earning assets and interest expense on interest bearing liabilities. Interest earning assets consist principally of loans and investment securities, while interest bearing liabilities consist primarily of deposits. Net income is also effected by the provision for loan losses and the level of non-interest income as well as by non-interest expenses, including salary and employee benefits, occupancy expenses and other operating expenses. Net Income. Net income was $10.8 million in 1998 compared to $9.4 million in 1997 and $10.2 million in 1996. Basic earnings per share were $1.19, $1.04 and $1.16 for 1998, 1997, and 1996, respectively. The increase in net income of $1.4 million in 1998, or 15%, 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. The $.8 million decrease in net income for 1997 from 1996 was primarily due to the receipt of nonrecurring income in 1996 relating to loan recoveries. 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 $27.5 million in 1998, compared to $23.3 million in 1997, and $23.6 million in 1996. Yields on interest earning assets decreased slightly to 10.11% for 1998 from 10.16% in 1997, a difference of 5 basis points. The yield on interest earning assets in 1997 increased 10 basis points from 10.06% for 1996. 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. Average interest earning assets decreased $3.8 million in 1997 from $334.4 million in 1996 to $330.6 million for 1997, primarily due to decreases in investment securities of $15.6 million, partially offset by an increase in the average balance of loans of $12.8 million. Yields on interest bearing liabilities increased to 4.84% in 1998 versus 4.76% in 1997 and, 4.59% for 1996. Yields 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. Average interest bearing liabilities increased to $272.1 million from $210.9 million for 1997, primarily due to increases of certificates of deposit and the FHLB borrowing of $20.3 million and $28.5 million, respectively. 21 22 LOANS AND MORTGAGES
1998 1997 1996 ------------ ------------ ------------ Average loan outstandings $299,916,000 $213,368,000 $200,618,000 Interest and fees on loans $ 33,513,000 $ 25,737,000 $ 25,110,000 Average Yield 11.17% 12.06% 12.52%
RBPA continues to originate five year fixed rate loans, a portion of the loan portfolio continues to be comprised of variable rate loans which helps to maintain its interest spread when rates change. RBPA's 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. In 1997, while RBPA's average prime rate increased to 8.43% from 8.29% in 1996, the yield on loans decreased 46 basis points in 1997 from 12.52% in 1996 to 12.06% in 1997 primarily due to interest recoveries in 1996 relating to loan payoffs in 1996. Average loans increased to $12.8 million to $213.4 million in 1997 primarily due to internally generated loan growth. INVESTMENTS SECURITIES HELD TO MATURITY
1998 1997 1996 ------------ ------------ ------------ Average HTM investment securities $ 50,044,000 $ 85,854,000 $110,019,000 Interest income $ 3,542,000 $ 5,773,000 $ 7,094,000 Average yield 7.08% 6.72% 6.45%
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 of 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 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. In 1997, the yield in HTM investment securities increased 28 basis points to 6.73% from 6.45% in 1996. This increase is partially attributable to an increase in yield on taxable investment securities of 24 basis points in 1997, in addition to an increase in the average balance of the nontaxable investment securities, which have a higher effective yield. The average balance of HTM investment securities decreased $24.2 million in 1997 as scheduled maturities outpaced purchases. 22 23 INVESTMENTS SECURITIES AVAILABLE FOR SALE
1998 1997 1996 ----------- ----------- ----------- Average AFS investment securities $27,419,000 $12,212,000 $ 3,674,000 Interest and dividend income $ 2,296,000 $ 991,000 $ 326,000 Average yield 8.37% 8.12% 8.87%
AFS investment securities are comprised primarily of capital trust security issues of regional banks and to a lesser extent preferred and common stock. Some of these securities are rated while others are not. The average balance increased $15.2 million during 1998 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
1998 1997 1996 ----------- ----------- ----------- Average NOW & Money Market deposits $79,975,000 $69,077,000 $71,597,000 Interest expense $ 2,174,000 $ 2,171,000 $ 2,129,000 Average cost of funds 2.72% 3.14% 2.97%
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. In 1997, the average balance decreased $2.5 million to $69.1 million while the average cost of funds on NOW and money market deposits increased 17 basis points to 3.14% as interest rates increased slightly in 1997. INTEREST EXPENSE ON TIME DEPOSITS
1998 1997 1996 ------------ ------------ ------------ Average time deposits $142,206,000 $121,934,000 $126,089,000 Interest expense $ 8,479,000 $ 7,185,000 $ 7,157,000 Average cost of funds 5.96% 5.89% 5.68%
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. In 1997 the average balance of time deposits decreased $4.2 million to $121.9 million while the average cost of funds increased 21 basis points from 5.68% in 1996 to 5.89% in 1997. Although rates in general started to move downward, 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 1998, seventeen percent of time deposits were comprised of certificates of deposit accounts with balances of $100,000 or more, which have traditionally been considered more rate volatile than lower balance deposits, however at Royal Bank the penalty for early redemption somewhat mitigates this volatility. 23 24 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. During 1998, RBPA recorded a provision for loan loss of $4.8 million, as compared to a $2.1 million (credit) 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. Due to recoveries exceeding charge offs for 1997 and 1996, a recovery from the allowance for loan loss of $2.1 million (credit) and $1.5 million (credit), respectively was recorded in 1997 and 1996. These recoveries in 1997 and 1996 were primarily due to Management's assessment that the overall level of loan loss reserves was adequate. Charge offs in 1997 were $.8 million as compared to $1.1 million for 1996. Recoveries in 1997 were $2 million as compared to $1.9 million in 1996. The allowance for possible loan loss at December 31, 1998 was $11.9 million, or 3.9% of loans as compared to $8.2 million at December 31, 1997 or 2.8% of loans, and $9.1 million at December 31, 1996, or 4.3% of 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. 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. In 1997, non-interest income decreased $1.6 million to $2.6 million in 1997 from $4.2 million in 1996. This decrease primarily due to the decrease in gains associated with the sale of other real estate owned in 1997. In 1997, these gains were $1.2 million as compared to $2 million in 1996. Additionally, gains on sale of loans decreased $.4 million in 1997 primarily due to a decrease in total dollar volume of residential mortgage loans closed and sold in 1997 versus 1996. Loans are transferred into Other Real Estate when the Bank forecloses on the real estate collateralizing a non-performing loan, or when the borrower abandons the property and the Bank elects to assume control of the property. When this occurs 24 25 the Bank will transfer the loan to Other Real Estate at the lower of the book value of the loan or the fair market value, less disposal costs, of the real estate held as collateral. NON-INTEREST EXPENSE Non-interest expense includes compensation and employee benefits, occupancy, advertising, FDIC insurance, state taxes, depreciation, and other expenses such as auditing, automatic teller machines (ATMs), data processing, legal, outside service charges, postage, printing, and other expenses relating to other real estate owned. 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 and 1996 were $3.8 million and $2.5 million, respectively, relating to these stock appreciation rights as employee benefits expense toward the difference between current market values and the values at the grant date. In 1997, total non-interest expense decreased $.5 million to $14.6 million as compared to $15.1 million for 1996. This decrease is primarily due to various decreases in other operating expenses of $.5 million. While salaries and employee benefits expense of $9.5 million represents the largest component of non-interest expense, it decreased slightly from the $9.6 million recorded in 1996. These decreases were partially offset by a $.1 million increase in occupancy expense relating to a settlement of a lease obligation assumed from the Knoblauch State Bank acquisition. ACCOUNTING FOR INCOME TAXES The provision for federal income taxes was $4.6 million in 1998 as compared to $4.1 million for 1997 and $3.9 million for 1996 representing an effective tax rate of 30%, 30.3% and 27.6%, respectively. The $.5 million increase in the tax provision for 1998 is primarily due to a higher level of taxable income for 1998 of $2 million, primarily related to interest income on loans. The increase in the tax provision for 1997 was due to a change in the deferred tax asset in 1997 from 1996. ACCOUNTING FOR DEBT AND EQUITY SECURITIES The Bank adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," at January 1, 1994. This standard requires investments in securities to be classified in one of three categories; held to maturity, trading or available for sale. Debt securities that the Bank has the positive intent and ability to hold to maturity are classified as held to maturity and are reported at amortized cost. As the Bank does not engage in security trading, the balance of its debt securities and any equity securities are 25 26 classified as available for sale. Net unrealized gains and losses for such securities, net of tax effect, are required to be recognized as a separate component of stockholders' equity and excluded from the determination of net income. Since the majority of the Bank's investments are classified as held to maturity, the adoption of SFAS No. 115 did not have a significant effect on stockholders' equity at January 1, 1994 and December 31, 1994. ASSET LIABILITY MANAGEMENT The primary functions of asset-liability management are to assure adequate liquidity and maintain an appropriate balance between interest earning assets and interest bearing liabilities. This process is overseen by the Asset-Liability Committee ("ALCO") which monitors and controls, among other variables, the liquidity, balance sheet structure and interest rate risk of the consolidated company within policy parameters established and outlined in the Funds, Cash Flow and Liquidity Policies and Procedures which are reviewed by the Board of Directors at least annually. Additionally, the ALCO committee meets 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, 1998, 1997 and 1996 was 40%, 39%, 49%, 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. 26 27 The following table summarizes repricing intervals for interest earning assets and interest bearing liabilities as of December 31, 1998, 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, 1998, RBPA is in an asset sensitive position of $11.7 million, which indicates assets will reprice somewhat faster than liabilities within one year. 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 $ 0.4 $ -- $ -- $ -- $ -- $ 0.4 Federal funds sold 13.6 -- -- -- 13.6 Investment securities: Available for sale 37.0 -- -- -- -- 37.0 Held to maturity 5.2 7.0 36.1 13.5 -- 61.8 ------ ------ ------ ------ ------ ------ Total investment securities 42.2 7.0 36.1 13.5 -- 98.8 Loans:(2) Fixed rate (3) 13.6 6.1 113.0 28.0 -- 160.7 Variable rate 33.0 32.9 58.9 27.0 -- 151.8 ------ ------ ------ ------ ------ ------ Total loans 46.6 39.0 171.9 55.0 -- 312.5 Other assets(4) -- -- -- -- 2.3 2.3 ------ ------ ------ ------ ------ ------ Total Assets $102.8 $ 46.0 $208.0 $ 68.5 $ 2.3 $427.6 ====== ====== ====== ====== ====== ====== LIABILITIES & CAPITAL - --------------------- Deposits: Non interest bearing deposits $ -- $ -- $ -- $ -- $ 36.9 $ 36.9 Interest bearing deposits(5) 70.1 -- 28.9 -- -- 99.0 Certificate of deposits 23.4 42.7 88.4 -- -- 154.5 ------ ------ ------ ------ ------ ------ Total deposits 93.5 42.7 117.3 -- 36.9 290.4 Short term borrowings -- -- -- -- -- -- Mortgage and long term borrowings -- 30.0 -- -- 30.9 0.9 Other liabilities -- -- -- -- 12.2 12.2 Capital -- -- -- -- 94.1 94.1 ------ ------ ------ ------ ------ ------ Total liabilities & capital $ 93.5 $ 43.6 $147.3 $ -- $143.2 $427.6 ====== ====== ====== ====== ====== ====== Net interest rate GAP $ 9.3 $ 2.4 $ 60.7 $ 68.5 ($141.0) ====== ====== ====== ====== ====== Cumulative interest rate GAP $ 9.3 $ 11.7 $ 72.4 $141.0 -- ====== ====== ====== ====== ====== GAP to total assets 2% 1% ====== ====== GAP to total equity 14% 4% ====== ====== Cumulative GAP to total assets 2% 3% ====== ====== Cumulative GAP to total equity 14% 18% ====== ======
(1) Interest earning assets are included in the period in which the balances are expected to be repaid and/or repriced as a result of anticipated prepayments, scheduled rate adjustments, and contractual maturities. (2) Reflects principal maturing within the specified periods for fixed and variable rate loans and includes nonperforming loans. (3) Fixed rate loans include a portion of variable rate loans whose floors are in effect at December 31, 1998. (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. 27 28 The method to analyze interest rate sensitivity in the table above has a number of limitations. Certain assets and liabilities may react differently to changes in interest rates even though they reprice or mature in the same time periods. The interest rates on certain assets and liabilities may change at different times than changes in market interest rates, with some changing in advance of changes in market rates and some lagging behind changes in market rates. Also, certain assets have provisions, which limit changes in interest rates each time the interest rate changes and for the entire term of the loan. Additionally, prepayments and withdrawals experienced in the event of a change in interest rates may deviate significantly from those assumed in the interest rate sensitivity table. Additionally, the ability of some borrowers to service their debt may decrease in the event of an interest rate increase. CAPITAL ADEQUACY The table shown below sets forth RBPA's consolidated capital level and performance ratios.
REGULATORY 1998 1997 1996 MINIMUM ---- ---- ---- ------- CAPITAL LEVEL Leverage ratio 22.1% 25.6% 24.2% 3% Risk based capital ratio: Tier 1 24.1% 25.1% 28.9% 4% Tier 2 25.4% 26.4% 30.2% 8% CAPITAL PERFORMANCE Return on average assets 2.6% 2.7% 3.0% -- Return on average equity 11.8% 10.8% 12.7% --
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, 1998, RBPA had an average capital to average asset ratio of 22.4%. 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, 1998, RBPA's ratio using these standards was 24.1%. YEAR 2000 Management has initiated a company wide program to prepare RBPA's computer systems and applications for the year 2000. The year 2000 problem is pervasive and complex as virtually every computer system will be affected in some way by the rollover of the two-digit year value to 00. Through a special committee, RBPA has conducted a comprehensive review of its computer systems and third party vendors providing hardware and software services and has identified systems and vendors that could be 28 29 affected by the year 2000 issue. The Bank subsidiary will replace or cause third party vendors to replace all software and hardware that is not year 200 compliant. All year 200 replacement software and hardware will be fully tested by March 31, 1999. As much of RBPA's data processing is outsourced to third party vendors, RBPA does not expect the costs associated with year 2000 compliance over the next three years to have a material effect on its financial position or results of operations. The amount expensed in 1998 was immaterial. MANAGEMENT OPTIONS TO PURCHASE SECURITIES On June 27, 1990, the directors of the Bank approved the Royal Bank of Pennsylvania Non-qualified Stock Option and Appreciation Right Plan (the Plan). The Plan was reapproved by the shareholders in connection with the formation of the holding company. The Plan is an incentive program under which Bank officers and other key employees may be awarded additional compensation in the form of options to purchase up to 1,000,000 shares of the Registrant's Class A common stock (but not in excess of 15% of outstanding shares). The option price is equal to the fair market value at the date of the grant. At December 31, 1998, 464,583 options have been granted (the fair market per share at the time of the grant was $19.95 in 1998 and $13.75 in 1997) which are exercisable at 20% per year. At December 31, 1998, options covering 304,258 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 ($19.952 per share in 1998 and $13.75 in 1997) at the date of the grant. Currently, the strike price on the options ranges from $2.608 to $19.952 per share. During 1998, 1,404 options were exercised at strike prices of $7.345 per share. At December 31, 1998, 63,992 options were outstanding and options covering 49,952 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, 1998 (Dollars in Thousands)
Market Value of Percent of Changes in Rates Portfolio Equity Change ---------------- ---------------- ------ + 300 basis points $ 97,860 (10.3) + 200 basis points 101,614 (6.9) + 100 basis points 105,367 (3.4) Flat rate 109,120 -- - 100 basis points 116,626 6.9 - 200 basis points 124,134 13.8 - 300 basis points 131,640 20.6
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 29 30 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. 30 31 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, 1998 AND 1997 31 32 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Grant Thornton, LLP - -------------------------- Philadelphia, Pennsylvania January 22, 1999 32 33 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31,
ASSETS 1998 1997 ------------- ------------- Cash and due from banks $ 5,592,624 $ 7,491,242 Federal funds sold 13,550,000 22,925,000 ------------- ------------- Total cash and cash equivalents 19,142,624 30,416,242 ------------- ------------- Interest bearing deposits in banks 100,030 300,030 Investment securities held to maturity (market value of $62,159,860 and $64,984,987 in 1998 and 1997, respectively) 61,894,538 64,371,042 Investment securities available for sale - at market value 36,951,162 21,048,793 Total loans 304,475,629 290,897,048 Less allowance for loan losses 11,919,545 8,186,237 ------------- ------------- Net loans 292,556,084 282,710,811 Other real estate, net 707,397 -- Premises and equipment, net 5,452,765 4,788,921 Accrued interest and other assets 10,817,184 12,962,240 ------------- ------------- $ 427,621,784 $ 416,598,079 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits Non-interest bearing $ 41,150,730 $ 37,712,928 Interest bearing (includes certificates of deposit in excess of $100,000 of $48,754,354 and $33,175,135 in 1998 and 1997, respectively) 249,238,955 227,650,506 ------------- ------------- Total deposits 290,389,685 265,363,434 Federal funds purchased -- 15,000,000 Accrued interest and other liabilities 12,271,111 15,095,998 Long-term borrowings 30,365,000 31,063,000 Mortgage payable 526,720 570,885 ------------- ------------- Total liabilities 333,552,516 327,093,317 ------------- ------------- Stockholders' equity Common stock Class A, par value $2.00 per share; authorized, 18,000,000 shares; issued, 7,429,689 and 7,015,721 shares in 1998 and 1997, respectively 14,859,378 14,031,442 Class B, par value $0.10 per share; authorized, 2,000,000 shares; issued, 1,630,544 and 1,592,859 shares in 1998 and 1997, respectively 163,054 159,286 Capital surplus 45,392,659 38,797,618 Retained earnings 34,556,343 38,023,359 Accumulated other comprehensive income 1,242,919 638,142 ------------- ------------- 96,214,353 91,649,847 Treasury stock - at cost, 207,516 Class A shares in 1998 and 1997, respectively (2,145,085) (2,145,085) ------------- ------------- 94,069,268 89,504,762 ------------- ------------- $ 427,621,784 $ 416,598,079 ============= =============
The accompanying notes are an integral part of these statements. 33 34 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME Year ended December 31,
1998 1997 1996 ------------ ------------ ------------ Interest income Loans, including fees $ 33,513,439 $ 25,559,901 $ 25,109,566 Investment securities held to maturity Taxable 3,227,921 5,604,469 7,005,539 Tax-exempt 207,931 116,779 58,488 Investment securities available for sale Taxable 2,121,921 893,447 64,293 Tax-exempt 173,199 97,937 261,443 Deposits in banks 24,251 112,294 131,005 Federal funds sold 1,371,643 986,552 987,370 ------------ ------------ ------------ TOTAL INTEREST INCOME 40,640,305 33,371,379 33,617,704 ------------ ------------ ------------ Interest expense Deposits 11,167,451 9,810,104 9,711,456 Mortgage payable and other 1,995,750 231,252 342,819 Federal funds purchased -- 6,148 -- ------------ ------------ ------------ TOTAL INTEREST EXPENSE 13,163,201 10,047,504 10,054,275 ------------ ------------ ------------ NET INTEREST INCOME 27,477,104 23,323,875 23,563,429 Increase (Decrease) in provision for loan losses 4,769,785 (2,118,281) (1,487,734) ------------ ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 22,707,319 25,442,156 25,051,163 ------------ ------------ ------------ Other income Service charges and fees 830,932 981,111 1,008,054 Realized gains on sale of investment securities available for sale -- 13,643 -- Gain on other real estate -- 1,204,443 2,015,994 Gain on sale of loans 3,831 28,585 427,023 Other income 2,739,602 397,194 780,333 ------------ ------------ ------------ 3,574,365 2,624,976 4,231,404 ------------ ------------ ------------ Other expenses Salaries, wages and employee benefits 5,028,428 9,545,799 9,601,628 Occupancy and equipment 706,320 756,202 660,219 Other operating expenses 5,138,734 4,332,119 4,876,719 ------------ ------------ ------------ 10,873,482 14,634,120 15,138,566 ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 15,408,202 13,433,012 14,144,001 Income taxes 4,624,262 4,074,280 3,907,111 ------------ ------------ ------------ NET INCOME $ 10,783,940 $ 9,358,732 $ 10,236,890 ============ ============ ============ Per share data Net income - basic $ 1.19 $ 1.04 $ 1.16 ============ ============ ============ Net income - diluted $ 1.15 $ 1.00 $ 1.13 ============ ============ ============
The accompanying notes are an integral part of these statements. 34 35 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME Years ended December 31, 1998, 1997 and 1996
Class A common stock Class B common stock ----------------------- ---------------------- Capital Shares Amount Shares Amount surplus --------- ----------- --------- --------- ----------- Balance, January 1, 1996 6,086,554 $12,173,108 1,529,100 $ 152,910 $29,871,868 Net income for the year ended December 31, 1996 -- -- -- -- -- Conversion of Class B common stock to Class A common stock 32,851 65,702 (28,650) (2,865) -- 6% stock dividends declared 365,229 730,458 91,641 9,164 4,025,365 Cash in lieu of fractional shares -- -- -- -- -- Purchase of treasury stock -- -- -- -- -- Stock options exercised 111,991 223,982 -- -- 930,210 Cash dividends on common stock -- -- -- -- -- Other comprehensive income, net of reclassifications and taxes -- -- -- -- -- --------- ----------- --------- --------- ----------- Comprehensive income Balance, December 31, 1996 6,596,625 13,193,250 1,592,091 159,209 34,827,443 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 3,799,706 Cash in lieu of fractional shares -- -- -- -- -- Purchase of treasury stock -- -- -- -- -- Stock options exercised 90,576 181,152 -- -- 170,469 Cash dividends on common stock -- -- -- -- -- Other comprehensive income, net of reclassifications and taxes -- -- -- -- -- --------- ----------- --------- --------- ----------- Comprehensive income
Accumulated other Retained comprehensive Treasury Comprehensive earnings income (loss) stock income ------------ ------------- ----------- ------------- Balance, January 1, 1996 $ 34,991,338 $ (564) $ -- Net income for the year ended December 31, 1996 10,236,890 -- -- $ 10,236,890 Conversion of Class B common stock to Class A common stock (62,837) -- -- 6% stock dividends declared (4,764,987) -- -- Cash in lieu of fractional shares (2,099) -- -- Purchase of treasury stock -- -- (2,025,874) Stock options exercised -- -- -- Cash dividends on common stock (1,970,505) -- -- Other comprehensive income, net of reclassifications and taxes -- (594) -- (594) ------------ --------- ----------- ------------ Comprehensive income $ 10,236,296 ============ Balance, December 31, 1996 38,427,800 (1,158) (2,025,874) Net income for the year ended December 31, 1997 9,358,732 -- -- 9,358,732 Conversion of Class B common stock to Class A common stock (134,579) -- -- 4% stock dividends declared (4,322,244) -- -- Cash in lieu of fractional shares (2,477) -- -- Purchase of treasury stock -- -- (119,211) Stock options exercised -- -- -- Cash dividends on common stock (5,303,873) -- -- Other comprehensive income, net of reclassifications and taxes -- 639,300 -- 639,300 ------------ --------- ----------- ------------ Comprehensive income $ 9,998,032 ============
(Continued) 35 36 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - CONTINUED Years ended December 31, 1998, 1997 and 1996
Class A common stock Class B common stock ----------------------- ---------------------- Capital Shares Amount Shares Amount surplus --------- ----------- --------- --------- ----------- Balance, December 31, 1997 7,015,721 $14,031,442 1,592,859 $ 159,286 $38,797,618 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 6,466,085 Cash in lieu of fractional shares Stock options exercised 112,093 224,186 128,956 Cash dividends on common stock Other comprehensive income, net of reclassifications and taxes --------- ----------- --------- --------- ---------- Comprehensive income Balance, December 31, 1998 7,429,689 $14,859,378 1,630,544 $ 163,054 $45,392,659 ========= =========== ========= ========= ===========
Accumulated other Retained comprehensive Treasury Comprehensive earnings income (loss) stock income ------------ ------------- ----------- ------------- Balance, December 31, 1997 $38,023,359 $ 638,142 $(2,145,085) Net income for the year ended December 31, 1998 10,783,940 $10,783,940 Conversion of Class B common stock to Class A common stock (56,533) 4% stock dividends declared (7,017,070) Cash in lieu of fractional shares (2,023) Stock options exercised Cash dividends on common stock (7,175,330) Other comprehensive income, net of reclassifications and taxes 604,777 604,777 ----------- ---------- ----------- ----------- Comprehensive income $11,388,717 =========== Balance, December 31, 1998 $34,556,343 $1,242,919 $(2,145,085) =========== ========== ===========
The accompanying notes are an integral part of this statement. 36 37 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31,
1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities Net income $ 10,783,940 $ 9,358,732 $ 10,236,890 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 351,039 323,916 412,395 (Increase)Decrease in provision for loan losses 4,769,785 (2,118,281) (1,487,734) Accretion of investment securities discount (75,116) (61,462) (70,938) Amortization of investment securities premium 294,699 697,987 722,147 Amortization of deferred loan fees (278,215) (137,591) (130,272) Accretion of discount on loans purchased (3,005,281) (1,849,384) (1,265,330) Provision (benefit) for deferred income taxes 75,361 579,007 (912,654) Gain on other real estate -- (1,204,443) (2,015,994) Gain on sale of loans (3,831) (28,585) (427,023) Realized gains on sale of investment securities available for sale -- (13,643) -- (Decrease)Increase in accrued interest receivable 99,146 (626,542) (301,024) Decrease in other assets 1,915,737 1,648,874 1,394,977 Increase in accrued interest payable 1,288,379 952,653 768,127 Increase in unearned income on loans 613,025 345,443 261,203 (Decrease) increase in other liabilities (4,113,266) 934,994 2,954,589 ------------ ------------ ------------ Net cash provided by operating activities 12,715,402 8,801,675 10,139,359 ------------ ------------ ------------ Cash flows from investing activities Net increase (decrease) in interest bearing balances in banks 200,000 652,970 (234,249) Proceeds from calls and maturities of investment securities held to maturity 43,508,610 58,516,144 18,554,228 Purchase of investment securities held to maturity (41,251,689) (9,310,907) (29,217,548) 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 (15,302,591) (14,276,725) (3,755,408) Net increase in loans (12,593,341) (14,331,580) (10,118,860) Purchase of loan portfolio -- (66,740,249) -- Purchase of premises and equipment (1,014,883) (404,306) (693,677) Proceeds from sale and payments on other real estate -- 1,708,547 2,124,138 ------------ ------------ ------------ Net cash used in investing activities (26,448,894) (46,317,977) (23,341,376) ------------ ------------ ------------
(Continued) 37 38 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Year ended December 31,
1998 1997 1996 ------------ ------------ ------------ 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 10,718,876 (6,135,112) (4,275,541) Net increase (decrease) in certificates of deposit 14,307,375 17,315,943 (9,783,396) Mortgage payments (44,165) (41,722) (39,760) Cash dividends in lieu of fractional shares (2,023) (2,479) (2,099) Purchase of treasury stock -- (119,211) (2,025,874) Net increase (decrease) in long-term borrowings (698,000) 26,862,000 1,869,000 Issuance of common stock under stock option plans 353,141 1,987,986 1,154,192 Cash dividends (7,175,330) (5,303,873) (1,970,505) ------------ ------------ ------------ Net cash provided by (used in) financing activities 2,459,874 49,563,532 (15,073,983) ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11,273,618) 12,047,230 (28,276,000) Cash and cash equivalents at beginning of year 30,416,242 18,369,012 46,645,012 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 19,142,624 $ 30,416,242 $ 18,369,012 ============ ============ ============ Supplemental disclosure of cash flow information Cash paid during the year for Interest $ 11,874,822 $ 9,094,851 $ 9,286,149 ============ ============ ============ Income taxes $ 2,750,000 $ 3,750,000 $ 4,850,000 ============ ============ ============
The accompanying notes are an integral part of these statements. 38 39 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 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, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 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) 39 40 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 3. Investment Securities The Company accounts for investment securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This standard requires investments in securities to be classified in one of three categories: held to maturity, trading or available for sale. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and are reported at amortized cost. As the Company does not engage in security trading, the balance of its debt securities and any equity securities are classified as available for sale. Net unrealized gains and losses for such securities, net of tax effect, are required to be recognized as a separate component of stockholders' equity and excluded from the determination of net income. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity. 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. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Earlier application is permitted only as of the beginning of any fiscal quarter. 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 adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," on October 1, 1995. This new standard requires that a creditor measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral-dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. The adoption of SFAS No. 114, as amended by SFAS No. 118, had no material impact on the Company's consolidated financial position or results of operations. (Continued) 40 41 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 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. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balance and accrued interest. 6. Other Real Estate Other real estate is recorded at the lower of the customer's loan balance or the adjusted fair market value of the real estate securing the loan. The adjusted fair market value is determined by reducing the fair market value by estimated costs for the disposition of the property. Costs relating to holding the property are expensed when incurred. 7. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation, which is computed principally on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on the straight-line method over the shorter of the estimated useful lives of the improvements or the terms of the related leases. The estimated useful lives for buildings and leasehold improvements range from 15 to 31-1/2 years, and for furniture and fixtures are 5 to 7 years. 8. Income Taxes The Company follows the provisions of SFAS No. 109, "Accounting for Income Taxes." Under the liability method specified by SFAS No. 109, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. The principal types of differences between assets and liabilities for financial statement and tax return purposes are the allowance for loan losses, deferred loan fees and accumulated depreciation. 9. Profit-Sharing Plan The Company has a contributory 401(k) plan covering substantially all employees. The Company contributed $127,788, $135,650 and $125,964 for 1998, 1997 and 1996, respectively. (Continued) 41 42 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 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. On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which allows an entity to use a fair value-based method for valuing stock-based compensation which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the standard permits entities to continue accounting for employee stock options and similar instruments under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and its related Interpretations. Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net income and earnings per share (EPS), as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. The Company's stock option plans are accounted for under APB Opinion No. 25. The adoption of SFAS No. 123 had no material effect on the Company's consolidated financial position or results of operations. 11. Per Share Information During 1997, the Company adopted the provisions of SFAS No. 128, "Earnings Per Share," which eliminates primary and fully diluted EPS and requires presentation of basic and diluted EPS in conjunction with the disclosure of the methodology used in computing such EPS. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted EPS takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Prior period EPS calculations have been restated to reflect the adoption of SFAS No. 128. Basic and diluted EPS are calculated as follows:
1998 -------------------------------------------- Income Average shares Per share (numerator) (denominator) amount ----------- ------------- ------ Basic EPS Income available to common shareholders $10,783,940 9,030,657 $ 1.19 Effect of dilutive securities Stock options 333,016 ----------- --------- --------- Diluted EPS Income available to common shareholders plus assumed exercise of options $10,783,940 9,363,673 $ 1.15 =========== ========= =========
(Continued) 42 43 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
1997 ----------------------------------------------------- Income Average shares Per share (numerator) (denominator) amount ---------- -------------- --------- Basic EPS Income available to common shareholders $9,358,732 9,000,989 $ 1.04 Effect of dilutive securities Stock options -- 312,923 -- ---------- ---------- -------- Diluted EPS Income available to common shareholders plus assumed exercise of options $9,358,732 9,313,912 $ 1.00 ========== ========== ========
1996 ----------------------------------------------------- Income Average shares Per share (numerator) (denominator) amount ----------- -------------- --------- Basic EPS Income available to common shareholders $10,236,890 8,827,197 $1.16 Effect of dilutive securities Stock options -- 231,678 -- ----------- ----------- ----- Diluted EPS Income available to common shareholders plus assumed exercise of options $10,236,890 9,058,875 $1.13 =========== =========== =====
EPS is calculated on the basis of the weighted average number of shares outstanding of 9,030,657, 9,000,989 and 8,827,197 for the years ended December 31, 1998, 1997 and 1996, respectively. Per share information and weighted average shares outstanding have been restated to reflect the 4% stock dividend of May 1998, the 4% stock dividend of May 1997 and the 6% stock dividend of May 1996. 12. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, short-term investments and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. (Continued) 43 44 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 13. Financial Instruments The Company follows the provisions of SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," which requires all entities to disclose the estimated fair value of their assets and liabilities considered to be financial instruments. Financial instruments consist primarily of securities, loans and deposits. The Company has provided these disclosures in note R. 14. Long-Lived Assets On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which provides guidance on when to recognize and how to measure impairment losses of long-lived assets and certain identifiable intangibles and how to value long-lived assets to be disposed of. The adoption of SFAS No. 121 had no material impact on the Company's consolidated financial position or results of operations. 15. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities The Company adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," as amended by SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125," in 1997. SFAS No. 125 applies a control-oriented, financial components approach to financial asset transfer transactions whereby the Company: (1) recognizes the financial and servicing assets it controls and the liabilities it has incurred; (2) derecognizes financial assets when control has been surrendered; and (3) derecognizes liabilities once they are extinguished. Under SFAS No. 125, control is considered to have been surrendered only if: (i) the transferred assets have been isolated from the transferor and its creditors, even in bankruptcy or other receivership; (ii) the transferee has the right to pledge or exchange the transferred assets or is a qualifying special-purpose entity (as defined) and the holders of beneficial interests in that entity have the right to pledge or exchange those interests; and (iii) the transferor does not maintain effective control over the transferred assets through an agreement which both entitles and obligates it to repurchase or redeem those assets prior to maturity, or through an agreement which both entitles it to repurchase or redeem those assets if they were not readily obtainable elsewhere. If any of these conditions are not met, the Company accounts for the transfer as a secured borrowing. SFAS No. 125 also requires that the Company derecognize a liability if and when it is extinguished. A liability is considered extinguished under SFAS No. 125 if: (1) the Company pays the creditor and, thus, is relieved of its obligation for the liability; or (2) is legally released from being the primary obligor under the liability, either judicially or by the creditor. The adoption of SFAS No. 125 had no material impact on the Company's consolidated financial position or results of operations. (Continued) 44 45 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 16. Advertising Costs The Company and the Bank expense advertising costs as incurred. 17. 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, 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 ======== ======== ========
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 ========= ========= =========
(Continued) 45 46 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
December 31, 1997 -------------------------------------------- Net of Before tax Tax tax amount expense amount ---------- ------- ------ Unrealized losses on securities Unrealized holding losses arising during period $(898) $(304) $(594) Less reclassification adjustment for gains realized in net income -- -- -- ----- ----- ----- Other comprehensive loss, net $(898) $(304) $(594) ===== ===== =====
18. Reclassifications Certain reclassifications of prior year amounts have been made to conform to the 1998 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:
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 =========== =========== =========== ===========
(Continued) 46 47 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE B - INVESTMENT SECURITIES - Continued
1998 -------------------------------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ----------- ----------- ----------- ----------- 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 =========== =========== =========== ===========
1997 -------------------------------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ----------- ----------- ----------- ----------- Investment securities held to maturity Obligations of states and political subdivisions $ 3,098,465 $ 53,187 $ -- $ 3,151,652 U.S. treasuries 5,620,004 32,529 -- 5,652,533 Corporate securities 48,364,507 392,135 19,217 48,737,425 U.S. agencies 7,288,066 155,346 36 7,443,377 ----------- ----------- ----------- ----------- $64,371,042 $ 633,197 $ 19,253 $64,984,987 =========== =========== =========== =========== Investment securities available for sale Federal Home Loan Bank stock - at cost $ 3,174,200 $ -- $ -- $ 3,174,200 Preferred and common stock 2,944,209 33,180 -- 2,977,389 Other securities 13,963,503 933,701 -- 14,897,204 ----------- ----------- ----------- ----------- $20,081,912 $ 966,881 $ -- $21,048,793 =========== =========== =========== ===========
(Continued) 47 48 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE B - INVESTMENT SECURITIES - Continued The amortized cost and estimated fair value of investment securities at December 31, 1998 and 1997, 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.
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 =========== =========== =========== ===========
1997 -------------------------------------------------------------------------------- Held to maturity Available for sale ---------------------------------- ---------------------------------- Estimated Estimated Amortized fair Amortized fair cost value cost value ----------- ----------- ----------- ----------- Within 1 year $40,619,909 $40,710,209 $ -- $ -- After 1 but within 5 years 12,834,561 12,991,167 -- -- After 5 but within 10 years 7,140,579 7,374,922 -- -- After 10 years 3,775,993 3,908,689 13,963,503 14,897,204 ----------- ----------- ----------- ----------- 64,371,042 64,984,987 13,963,503 14,897,204 Federal Home Loan Bank stock -- -- 3,174,200 3,174,200 Preferred and common stock -- -- 2,944,209 2,977,389 ----------- ----------- ----------- $64,371,042 $64,984,987 $20,081,912 $21,048,793 =========== =========== =========== ===========
Proceeds from the sale of investment securities available for sale during 1998, 1997 and 1996 were $-0-, $18,129 and $-0-, respectively, resulting in gross realized gains of $-0-, $13,643 and $-0- during 1998, 1997 and 1996, respectively. As of December 31, 1998 and 1997, investment securities with a book value of $13,716,861 and $25,354,865, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law. 48 49 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE C - LOANS Major classifications of loans are as follows:
1998 1997 ------------- ------------- Consumer $ 2,032,878 $ 1,523,410 Commercial and industrial 127,972,082 123,800,129 Real estate 182,595,194 176,315,363 ------------- ------------- Total gross loans 312,600,154 301,638,902 Less Unearned income (1,833,236) (1,498,426) Unamortized discount on loans purchased (6,291,289) (9,243,428) ------------- ------------- Total loans $ 304,475,629 $ 290,897,048 ============= =============
Loans on which the accrual of interest has been discontinued or reduced amounted to $3,419,378 and $4,316,852 at December 31, 1998 and 1997, respectively. If interest had been accrued, such income would have been $307,744 and $388,517 for the years ended December 31, 1998 and 1997, respectively. Although the Company has non-performing loans of $3,419,378 at December 31, 1998, management believes it has adequate collateral to limit its credit risk. The Company granted loans to the officers and directors of the Company and to their associates. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility. The aggregate dollar amount of these loans was $14,393,830 and $14,651,598 at December 31, 1998 and 1997, respectively. During 1998, $1,224,204 of new loans were made and repayments totalled $1,481,972. The balance of impaired loans was $1,324,829 at December 31, 1998. 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 1998 was $2,753. Total cash collected on impaired loans during 1998 was $148,175, of which $145,422 was credited to the principal balance outstanding on such loans. Interest that would have been accrued on impaired loans during 1998 was $56,376. 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. 49 50 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE D - ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses were as follows:
1998 1997 1997 ------------ ------------ ------------ Balance at beginning of year $ 8,186,237 $ 9,084,153 $ 9,746,559 ------------ ------------ ------------ Charge-offs (1,635,919) (761,790) (1,082,865) Recoveries 599,442 1,982,155 1,908,193 ------------ ------------ ------------ Net charge-offs and recoveries (1,036,477) 1,220,365 825,328 Increase (Decrease) in provision for loan losses 4,769,785 (2,118,281) (1,487,734) ------------ ------------ ------------ Balance at end of year $ 11,919,545 $ 8,186,237 $ 9,084,153 ============ ============ ============
NOTE E - PREMISES AND EQUIPMENT Premises and equipment are summarized as follows:
Estimated useful lives 1997 1997 ------------------- --------------- --------------- Land - $ 1,373,478 $ 1,373,478 Buildings and leasehold improvements 15 - 31.5 years 4,825,378 4,001,994 Furniture and fixtures 5 - 7 years 2,495,844 2,306,038 ----------- ----------- 8,694,700 7,681,510 Less accumulated depreciation and amortization 3,241,935 2,892,589 ----------- ----------- $ 5,452,765 $ 4,788,921 =========== ===========
50 51 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE F - DEPOSITS Deposits are summarized as follows:
1997 1997 ------------ ------------ Demand $ 41,150,730 $ 37,712,928 NOW and money market 75,348,561 70,026,150 Savings 19,405,323 17,446,660 Time, $100,000 and over 48,754,354 33,175,135 Other time 105,730,717 107,002,561 ------------ ------------ $290,389,685 $265,363,434 ============ ============ Certificates of deposit of $100,000 or more consist of the following: 1997 1997 ------------ ------------ Three months or less $ 4,606,561 $ 5,433,089 Over three months through twelve months 7,465,667 8,850,440 Over twelve months through five years 20,908,866 14,051,924 Over five years 15,773,260 4,839,682 ------------ ------------ $ 48,754,354 $ 33,175,135 ============ ============ Maturities of certificates of deposit for the next five years and thereafter are as follows: 1999 $ 64,421,641 2000 21,561,236 2001 14,893,365 2002 10,178,476 2003 19,197,099 Thereafter 24,233,254 ------------ $154,485,071 ============
NOTE G - SHORT-TERM BORROWINGS Short-term borrowings consist of federal funds purchased and generally mature within one to four days from the transaction date. The balance outstanding at December 31, 1998 was $-0-. Average federal funds purchased during the year amounted $94,501 with a weighted average rate of 4.35%. The maximum balance at the end of one month was $-0-. 51 52 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE H - MORTGAGE PAYABLE The mortgage payable is payable to a bank at 65% of the prime rate (5.525% at December 31, 1998) 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, ------------------------ 1999 $ 41,574 2000 43,717 2001 45,971 2002 48,341 2003 50,833 Thereafter 296,284 ----------- $ 526,720 ============
NOTE I - LONG-TERM BORROWINGS Long-term borrowings consist of advances from the Federal Home Loan Bank at December 31, 1998 and are as follows:
Due date Interest rate ----------------- December 27, 1999 8.20 $ 365,000 December 23, 2002 6.24 30,000,000 ----------- $30,365,000 ===========
The advances are collateralized by Federal Home Loan Bank stock and certain of the Company's first mortgage loans. 52 53 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE J - 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, ------------------------ 1999 $ 308,178 2000 302,556 2001 181,601 2002 181,601 2003 140,772 Thereafter 4,138 ----------- $ 1,118,846 ===========
Rental expense for all leases was approximately $335,000 and $343,000 and $339,000 for the years ended December 31, 1998, 1997 and 1996, respectively. NOTE K - COMMON STOCK Each holder of Class A and Class B common stock is entitled to one vote for each Class A share and ten votes for each Class B share held. Holders of either class of common stock are entitled to equal per share dividends when declared. The Class B shares may not be transferred in any manner except to the holder's immediate family. Class B shares have been converted to Class A shares at the average rate of 1.15 to 1. NOTE L - OTHER OPERATING EXPENSES The following items which are greater than 1% of the aggregate of "Total Interest Income" and "Total Other Income" are included in "Other Expenses" for the respective years indicated:
1998 1997 1996 -------------- -------------- -------------- Advertising $ 214,813 $ 396,831 $ 248,017 Pennsylvania bank shares tax 726,161 720,630 707,442 FDIC assessments 33,133 31,794 2,000 Professional fees 544,109 330,959 1,595,248 Other real estate expense 9,387 32,668 141,040 Loss on investment partnership 1,080,415 1,019,375 28,918
53 54 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE M - INCOME TAXES The components of the income tax expense (benefit) included in the consolidated statements of income are as follows:
1998 1997 1996 ----------- ----------- ----------- Income tax expense (benefit) Current $ 4,055,012 $ 3,757,471 $ 4,445,217 Deferred federal tax 310,111 57,670 (912,654) Benefit applied to reduce goodwill 259,139 259,139 374,548 ----------- ----------- ----------- $ 4,624,262 $ 4,074,280 $ 3,907,111 =========== =========== ===========
The difference between the applicable income tax expense and the amount computed by applying the statutory federal income tax rate of 35% in 1998, 1997 and 1996 is as follows:
1998 1997 1996 -------------- -------------- -------------- Computed tax expense at statutory rate $ 5,392,871 $ 4,701,554 $ 4,950,400 Tax-exempt income (258,100) (178,469) (223,053) Low-income housing tax credit (544,939) (309,580) (310,615) Other, net 134,430 (39,225) (409,621) Effect of 34% rate bracket (100,000) (100,000) (100,000) ----------- ----------- ----------- Applicable income tax expense $ 4,624,262 $ 4,074,280 $ 3,907,111 =========== =========== ===========
Deferred tax assets and liabilities consist of the following:
1998 1997 ------------ ------------- Deferred tax assets Allowance for doubtful accounts $ 1,263,028 $ -- Accrued legal expenses -- 846,857 Accrued stock-based compensation 992,959 1,986,842 Asset valuation reserves 472,013 472,013 Goodwill 127,346 127,346 Net operating loss carryovers from Knoblauch State Bank 7,961,948 6,021,989 ------------ ------------ 10,817,294 9,455,047 Less valuation allowance (7,961,948) 6,021,989 ------------ ------------ 2,855,346 3,433,058 ------------ ------------ Deferred tax liabilities Allowance for doubtful accounts -- 351,796 Unrealized gain on securities 640,292 328,739 Depreciation 93,533 75,256 Accretion of discount 135,547 69,629 ------------ ------------ 869,372 825,420 ------------ ------------ Net deferred tax asset $ 1,985,974 $ 2,607,638 ============ ============
(Continued) 54 55 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE M - 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 2018. 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 1998, the Company realized a tax benefit related to the net operating loss carryovers from the acquisition of KSB. The deferred tax asset associated with those loss carryovers is fully offset by a valuation allowance. Accordingly, the realized tax benefit is reflected as a reduction of the goodwill associated with the acquisition and a corresponding reduction of deferred income tax benefit for the year. NOTE N - STOCK OPTION PLANS At December 31, 1998, 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 ($19.952 in 1998, $13.75 in 1997 and $10.00 in 1996) at the date of the grant. Currently, the strike price on the options ranges from $2.608 to $19.952 per share. During 1998, 1,404 options were exercised at a strike price of $7.345 per share. At December 31, 1998, 63,992 options are outstanding, and options covering 49,952 shares were exercisable. (Continued) 55 56 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE N - STOCK OPTION PLANS - Continued 2. Stock Option and Appreciation Right Plan The Company adopted a Stock Option and Appreciation Right Plan (the Plan) on June 27, 1990. The Plan is an incentive program under which Company officers and other key employees may be awarded additional compensation in the form of options to purchase up to 1,000,000 shares of the Company's Class A common stock (but not in excess of 15% of outstanding shares). At the time a stock option is issued, a stock appreciation right for an identical number of shares may also be granted. The option price is equal to the fair market value at the date of the grant. The options are exercisable at 20% per year beginning one year after the date of grant and must be exercised within ten years of the grant. As of December 31, 1998, options covering 304,258 shares were exercisable by 22 employees. Stock option transactions consist of the following:
1998 1997 1996 -------------------- -------------------- -------------------- Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price -------- -------- -------- -------- -------- -------- Outstanding at beginning of year 519,277 $ 6.561 540,885 $ 5.917 552,150 $ 5.248 Granted 61,641 14.861 63,487 11.080 100,404 8.430 Exercised (110,723) 3.100 (83,293) 4.091 (107,888) 3.328 Cancelled (5,612) 13.140 (1,802) 10.752 (3,781) 5.624 -------- ------- -------- ------- -------- ------- Outstanding at end of year 464,583 $ 8.133 519,277 $ 6.561 540,885 $ 5.917 ======== ======= ======== ======= ======== ======= Option price per share exercised $2.59 - $13.000 $2.695 - $ 9.633 $2.801 - $ 3.919 Outstanding at end of year $2.59 - $19.183 $2.695 - $13.225 $2.801 - $ 10.00
(Continued) 56 57 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE N - STOCK OPTION PLANS - Continued Had compensation cost for both plans been determined based on the fair value of the options at the grant dates consistent with the method required by SFAS No. 123, the Company's net income and EPS would have been reduced to the pro forma amounts indicated below.
1998 1997 1996 --------- --------- --------- (in thousands, except per share amounts) Net income As reported $10,784 $ 9,359 $10,237 Pro forma 10,713 9,312 10,212 EPS As reported - basic $ 1.19 $ 1.04 $ 1.16 As reported - diluted 1.15 1.00 1.13 Pro forma - basic 1.19 1.04 1.16 Pro forma - diluted 1.15 1.00 1.13
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 1998, 1997 and 1996: dividend yield of 5.25%, 3.40% and 4.17% for 1998, 1997 and 1996, respectively; expected volatility of 37.8%; and risk-free interest rate of 4.57% in 1998 and 5.71% in 1997 and 1996. Expected lives are 10 years for 1998, 1997 and 1996. NOTE O - CONCENTRATIONS OF CREDIT RISK The Company primarily grants commercial and real estate loans in the greater Philadelphia metropolitan area. Approximately 20% of loans are outside the normal lending area. The Company has concentrations of credit risk in real estate development loans (12%) at December 31, 1998. A substantial portion of its debtors' ability to honor these contracts is dependent upon the economic sector. Approximately 55% of the Company's investment portfolio consists of corporate securities. NOTE P - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. (Continued) 57 58 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE P - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued The Company's exposure to credit loss in the event of non-performance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Unless noted otherwise, the Company does not require collateral or other security to support financial instruments with credit risk. The contract amounts as of December 31, 1998 are as follows:
Financial instruments whose contract amounts represent credit risk Commitments to extend credit $42,863,552 Standby letters of credit and financial guarantees written 5,809,949
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 1999. 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%. 58 59 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE Q - REGULATORY MATTERS 1. Payment of Dividends Under the Pennsylvania Business Corporation Law, the Company may pay dividends only if it is solvent and would not be rendered insolvent by the dividend payment. There are also restrictions set forth in the Pennsylvania Banking Code of 1965 (the Banking Code) and in the Federal Deposit Insurance Act (FDIA) concerning the payment of dividends by the Company. Under the Banking Code, no dividends may be paid except from "accumulated net earnings" (generally undivided profits). Under the FDIA, no dividend may be paid if a bank is in arrears in the payment of any insurance assessment due to the Federal Deposit Insurance Corporation (FDIC). 2. Capital Ratios The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possible additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulations to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). As of December 31, 1998, management believes that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. (Continued) 59 60 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE Q - REGULATORY MATTERS - Continued The Bank's actual capital amounts and ratios are also presented in the table.
1998 ------------------------------------------------------------------------------ To be well Required capitalized under for capital prompt corrective Actual adequacy purposes action provisions ------------------ --------------------------- -------------------------- Amount Ratio Amount Ratio Amount Ratio ----------- ----- ----------- ------------ ----------- ------------ greater than greater than or equal to or equal to 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
1997 ------------------------------------------------------------------------------------------------ To be well Required capitalized under for capital prompt corrective Actual adequacy purposes action provisions ------------------------ ----------------------------- --------------------------- Amount Ratio Amount Ratio Amount Ratio ----------- ------ ----------- ------------ ----------- ------------ greater than greater than or equal to or equal to Total capital (to risk-weighted assets) Company (consolidated) $91,292,866 26.41% $27,658,652 8.00% N/A Bank 61,751,238 18.68 26,450,990 8.00 $33,063,737 10.00% Tier I capital (to risk-weighted assets) Company (consolidated) 86,923,491 25.14 13,829,326 4.00 N/A Bank 57,568,231 17.41 13,225,495 4.00 19,838,242 6.00 Tier I capital (to average assets, leverage) Company (consolidated) 86,923,491 25.59 10,192,200 3.00 N/A Bank 57,568,231 17.62 9,800,581 3.00 16,334,302 5.00
60 61 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 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, 1998 and 1997 were as follows: Fair values of loans and deposits with floating interest rates are generally presumed to approximate the recorded carrying amounts. Fair value of financial instruments actively traded in a secondary market has been estimated using quoted market prices as follows:
1998 1997 ----------------------------- --------------------------- Estimated Estimated fair Carrying fair Carrying value amount value amount ----------- ------------ ----------- ----------- Cash and cash equivalents $19,142,624 $ 19,142,624 $30,416,242 $30,416,242 Interest bearing deposits in banks 100,030 100,030 300,030 300,030 Investment securities held to maturity 62,159,860 61,894,538 64,984,987 64,371,042 Investment securities available for sale 36,951,162 36,951,162 21,048,793 21,048,793
(Continued) 61 62 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued Fair value of financial instruments with stated maturities has been estimated using present value cash flow, discounted at a rate approximating current market for similar assets and liabilities, as follows:
1998 1997 ------------------------------------ ------------------------------------ Estimated Estimated fair Carrying fair Carrying value amount value amount ------------ ------------ ------------ ------------ Deposits with stated maturities $155,837,473 $154,485,071 $148,725,232 $140,177,697 Mortgage payable 526,720 526,720 570,885 570,885 Long-term borrowings with stated maturities 35,394,276 30,365,000 35,885,229 31,063,000
Fair value of financial instrument liabilities with no stated maturities has been estimated to equal the carrying amount (the amount payable on demand), totalling $135,904,614 and $125,185,737 at December 31, 1998 and 1997, 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:
1998 1997 ------------------------------------ ------------------------------------ Estimated Estimated fair Carrying fair Carrying value amount value amount ------------ ------------ ------------ ------------ Net loans $318,340,245 $292,556,084 $296,130,317 $282,710,811
There is no material difference between the carrying amount and estimated fair value of off-balance-sheet items totalling $48,673,501 and $31,652,524 at December 31, 1998 and 1997, 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. 62 63 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 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, 1998 and 1997 and the statements of income and cash flows for the years then ended are presented below. CONDENSED BALANCE SHEETS
December 31, ---------------------------------- 1998 1997 ----------- ----------- Assets Cash $ 193,823 $ 2,856,330 Investment in Royal Investments of Delaware, Inc. - at equity 28,676,818 27,897,306 Investment in Royal Bank of Pennsylvania - at equity 64,939,271 60,128,889 Other assets 259,356 260,000 ----------- ----------- $94,069,268 $91,142,525 =========== =========== Liabilities -- $ 1,637,763 Stockholders' equity 94,069,268 89,504,762 ----------- ----------- $94,069,268 $91,142,525 =========== ===========
CONDENSED STATEMENTS OF INCOME
Year ended December 31, ---------------------------------- 1998 1997 ------------ ----------- Income Equity in undistributed net earnings of subsidiaries $ 4,985,119 $ 4,077,026 Dividends from subsidiary bank 5,877,354 5,301,396 Other income 39,610 31,907 ------------ ----------- Total income 10,902,083 9,410,329 ------------ ----------- Expenses Other expenses 160,430 62,198 Income tax (benefit) expense (42,287) (10,601) ------------ ----------- Total expenses 118,143 51,597 ------------ ----------- Net income $ 10,783,940 $ 9,358,732 ============ ===========
(Continued) 63 64 Royal Bancshares of Pennsylvania, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1998 and 1997 NOTE S - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31, ------------------------------------ 1998 1997 ------------ ----------- Cash flows from operating activities Net income $ 10,783,940 $ 9,358,732 Adjustments to reconcile net income to net cash provided by operating activities Undistributed earnings from subsidiaries (4,985,119) (4,077,026) Operating expenses 160,430 62,196 Rental income (39,610) (31,907) Non-cash income tax (benefit) expense (42,287) (10,601) ------------ ----------- Net cash provided by operating activities 5,877,354 5,301,394 ------------ ----------- Cash flows from financing activities Cash dividends paid (7,177,353) (5,306,350) Dividends from subsidiary bank -- 2,100,000 (Decrease) increase in other liabilities (1,637,763) 544,177 Other, net 275,255 217,109 ------------ ----------- Net cash (used in) provided by financing activities (8,539,861) (2,445,064) ------------ ----------- NET INCREASE (DECREASE) IN CASH (2,662,507) 2,856,330 Cash at beginning of year 2,856,330 -- ------------ ----------- Cash at end of year $ 193,823 $ 2,856,330 ============ ===========
64 65 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information required in this Item 10 is set forth in Item 12, Security Ownership of Beneficial Owners and Management, herein. ITEM 11. EXECUTIVE COMPENSATION The following Summary Compensation Table sets forth all compensation paid by the Registrant for services rendered during the past three fiscal years by the Chief Executive Officer and each of the most highly compensated executive officers whose total annual salary and bonus exceeded $100,000 in 1998. SUMMARY COMPENSATION TABLE
OTHER RESTRICTED SECURITIES ALL ANNUAL STOCK UNDERLYING OTHER COMPENSATION AWARD(S) OPTIONS COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS ($)(2) ($) ($) SARS(#) ($)(1) - --------------------------- ---- --------- ------------ ------------ ---------- ---------- ------------ Daniel M. Tabas 1998 324,007 130,413 32,000 7,800 2,550 Chairman of the Board 1997 318,200 130,463 32,000 -- 7,800 2,550 1996 308,112 129,509 30,800 -- 21,589 2,550 Lee E. Tabas 1998 255,795 95,603 19,000 7,800 2,550 President and CEO 1997 251,210 95,640 18,900 -- 7,800 2,550 1996 243,247 94,941 17,800 -- 17,044 2,550 Joseph P. Campbell 1998 162,213 37,309 6,000 2,439 2,550 Managing Director 1997 159,305 37,323 6,000 -- 3,480 2,550 1996 154,256 37,050 4,800 -- 4,632 2,550 James J. McSwiggan 1998 124,375 28,606 -- 1,870 2,550 Treasurer and CFO 1997 122,146 28,617 -- -- 2,668 2,550 1996 118,274 28,408 -- -- 3,078 2,550 Richard S. Hannye 1998 161,681 -- 1,020 -- 1,621 2,550 Corporate Counsel 1997 158,783 -- 1,020 -- 2,312 2,550 1996 153,750 -- 780 -- 3,552 2,550
- ---------------- (1) Consists of Bank's contribution to its Employee 401(k) Pension Plan, under which the Board of Directors has an obligation to match 100 percent of the total employee contributions up to an annual maximum of $2,550. The Plan is administered by J. M. Singley Associates, Inc. Each employee participant is entitled to contribute up to 15% of his gross salary. Senior management executives are asked to refrain from contributing to the plan in the event the administrator determines such contributions would make the Plan top heavy. Each participant in the Plan will have credited to his Participant's Benefit Account his proportionate share of all appropriate amounts. Future benefits are based on future contributions. (2) Bonuses of Messrs. Tabas, Campbell and McSwiggan are performance based and tied to goals set by the Stock Option, SARS and Compensation Committee. 65 66 EMPLOYEE OPTIONS/SAR GRANTS IN FISCAL YEAR 1998
POTENTIAL REALIZED VALUE AT ASSUMED ANNUAL NUMBER OF % OF TOTAL RATES OF STOCK PRICE SECURITIES OPTIONS/SARS EXERCISE APPRECIATION FOR UNDERLYING GRANTED TO OR BASE OPTION TERM OPTIONS/SARS EMPLOYEES PRICE EXPIRATION -------------------- NAME GRANTED (#)(1) IN FISCAL YEARS ($/SH) DATE 5% 10% - ------------------- -------------- --------------- -------- ---------- ------ ------- Daniel M. Tabas 7,800 19.574% 19.95 4/20/08 97,872 248,027 Lee E. Tabas 7,800 19.574% 19.95 4/20/08 97,872 248,027 Joseph P. Campbell 2,439 6.121% 19.95 4/20/08 30,604 77,556 James J. McSwiggan 1,870 4.693% 19.95 4/20/08 23,464 59,463 Richard S. Hannye 1,621 4.068% 19.95 4/20/08 20,340 51,545
- -------------- (1) Pursuant to the employee stock option plan, the options are exercisable at 20% per year after the date of grant and must be exercised within ten years of the grant (April 20, 1998). AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND 1998 OPTION/SAR VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF OPTIONS/SARS UNEXERCISED IN-THE MONEY SHARES AT OPTIONS/SARS AT ACQUIRED DECEMBER 31, 1998 DECEMBER 31, 1998 ON VALUE ----------------------------- -------------------------------- NAME EXERCISE (#) REALIZED ($) EXERCISABLE(#) UNEXERCISABLE EXERCISABLE($) UNEXERCISABLE($) - --------------------- ------------ ------------ -------------- ------------- -------------- ---------------- Daniel M. Tabas -- -- 97,137 46,369 1,810,116 540,645 Lee E. Tabas 104,284 2,921,398 103,759 39,615 2,033,523 431,309 Joseph P. Campbell -- -- 14,023 10,948 244,917 94,334 James J. McSwiggan -- -- 11,905 8,465 208,707 73,615 Richard S. Hannye -- -- 2,091 7,407 27,606 65,402
- -------------- (1) Value of unexercised options/SARS is based used the closing stock price at December 31, 1998. 66 67 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table shows the amount of outstanding common stock beneficially owned by each stockholder (including any "group" as the term is used in Section 3(d)(3) of the Securities Exchange Act of 1934) known by the Registrant to be the beneficial owner of more than 5% of such stock, and all directors and officers as a group. The information is furnished as February 28, 1999 on which, 7,224,883 Class A shares and 1,630,517 Class B shares were outstanding (net of treasury stock of 207,516 Class A shares).
NAME AND ADDRESS OF SHARES BENEFICIALLY PERCENT OF BENEFICIAL OWNER OWNED CLASS (5) - ------------------- ------------------- ---------- Daniel M. Tabas (4) 3,774,898(Class A) 51.56% 543 Mulberry Lane 1,178,156(Class B) 72.26% Haverford, PA 19041 Lee E. Tabas (4) 648,572(Class A) 8.85% 1 Dove Lane 107,274(Class B) 6.58% Haverford, PA 19041 Richard Tabas 57(Class A) --% 1309 Lafayette Road 111,761(Class B) 6.85% Gladwyne, PA 19035
EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information, furnished by each such person, concerning the present directors and executive officers of the Registrant, including their beneficial ownership of the Registrant's common stock as of February 28, 1999.
DIRECTOR SHARES PERCENT OR OFFICER BENEFICIALLY OF NAME AGE SINCE OWNED(1)(3) STOCK(2) - ------------------- --- ---------- ------------ -------- Daniel M. Tabas (4) 75 1980 3,774,898(A) 55.78% 1,178,156(B) Lee E. Tabas (4) 49 1980 648,572(A) 8.39% 107,274(B) Joseph P. Campbell 52 1982 75,224(A) .83% Richard S. Hannye 41 1993 2,091(A) .02% James J. McSwiggan 43 1993 14,968(A) .16% Robert R. Tabas (4) 43 1988 189,688(A) 2.83% 59,269(B)
(continued.....) 67 68 John Decker 38 1998 15,225(A) .17% Terri N. Gelberg 50 1998 100(A) .01% Anthony J. Micale 61 1997 500(A) .01% Albert Ominsky 65 1982 24,203(A) .63% 28,713(B) Carl M. Cousins 66 1993 8,346(A) .09% Gregory T. Reardon 45 1997 390(A) .01% Howard Wurzak (4) 43 1985 50,571(A) .56% Edward B.Tepper 59 1986 22,343(A) .55% 24,085(B) , Jack Loew 51 1997 4,622(A) .05% Murray Stempel, III (4) 43 1998 907(A) .01% ------------------- PERCENT OF CLASS(5) ALL DIRECTORS AND ------------------- EXECUTIVE OFFICERS AS -- -- 4,832,705(A) 64.23% A GROUP (16 PERSONS) 1,509,258(B) 92.56%
- ------------------------- (1) Based on information furnished by beneficial owners or their representatives. Includes direct and indirect ownership and, unless otherwise indicated, also includes sole voting and investment power with respect to reported holdings. (2) Assumes full conversion of Class B Common Stock to Class A Common Stock at the conversion factor of 1.15 Class A shares for each Class B share. Stock options currently excercisable are included with total shares outstanding in determining percentage of ownership for each respective director or executive officer. (3) Includes stock options unexercised, but currently excercisable, in addition to stock beneficially owned. (4) Daniel M. Tabas, Lee Tabas, Robert Tabas, Murray Stempel, and Howard Wurzak, members of their immediate families and their affiliates and associates, in the aggregate, own 4,664,636 shares of Class A Common Stock (66.53% assuming full conversion of Class B Common Stock to Class A Common Stock at a conversion factor of 1.15 Class A shares for each Class B share) and 1,344,699 shares of Class B common stock. Messr. Tabas, Murray Stempel, and Howard Wurzak have unexercised but exercisable options to purchase 235,922 shares of Class A common stock. In calculating the tabulated percent of class, an additional 235,922 shares were added to the shares of common stock beneficially owned to the total outstanding shares of common stock assuming all excercisable options were exercised. (5) The percent of class assumes all outstanding exercisable options issued to directors and officers have been exercised and therefore, on a pro-forma basis, 7,523,803 shares of Class A common stock would be outstanding. The following paragraphs indicate full time positions and offices held by the directors and executive officers and sets forth information furnished by each such person as to his principal occupation for the last five years. EXECUTIVE OFFICERS Daniel M. Tabas is the Chairman of the Board and a DIRECTOR of the Registrant. His other principal occupation is Chief Executive Officer for Tabas Enterprises, which consists of various entities in the restaurant, hotel, real estate and entertainment businesses in the Philadelphia and Downingtown, Pennsylvania areas. He is the father of Lee E. Tabas and Robert R. Tabas, and the father-in-law of Murray Stempel and Howard Wurzak. 68 69 Lee E. Tabas is the President, Chief Executive Officer and a DIRECTOR of the Registrant. He is the son of Daniel M. Tabas, brother of Robert R. Tabas, and brother in law of Murray Stempel and Howard Wurzak. Joseph P. Campbell is Managing Director and a DIRECTOR of the Registrant. Mr. Campbell is employed by Tabas Enterprises on a part time basis. Richard S. Hannye is the Secretary and Corporate Counsel of the Registrant. Mr. Hannye was previously associated with the law firm of Hecker Brown Sherry and Johnson in Philadelphia. James J. McSwiggan is the Chief Financial Officer and Treasurer of the Registrant. Mr. McSwiggan is employed by Tabas Enterprises on a part time basis. DIRECTORS Terri N. Gelberg, a DIRECTOR of the Registrant, is an attorney with Gelberg & Associates and was formerly an attorney with Bolger, Picker, Hankin & Tannebaum in Philadelphia, Pennsylvania. Gregory T. Reardon, a DIRECTOR of the Registrant, is the Managing Shareholder of a public accounting firm Weiss, Toub, Reardon & Company, P.C. in Philadelphia Pennsylvania, and President and owner of Valuation Advisors, Inc., a business appraisal firm in Philadelphia Pennsylvania. Albert Ominsky, a DIRECTOR of the Registrant, is an attorney and President of the law firm of Ominsky & Messa, P.C. in Philadelphia, Pennsylvania. Robert R. Tabas is a Senior Vice President, Senior Lender and DIRECTOR of the Registrant. Mr. Tabas is a Vice President with Tabas Enterprises. He is the son of Daniel M. Tabas, and brother of Lee E. Tabas and Susan Tabas Tepper, and brother in law of Howard Wurzak. Edward Tepper, a DIRECTOR of the Registrant, is the Chairman of the Philadelphia Kixx, a professional indoor soccer team, and the President of Tepper Properties, a real estate investment company in Villanova, Pennsylvania. Anthony J. Micale, a DIRECTOR of the Registrant, is an executive with MacDonalds' Restaurants in Cherry Hill, New Jersey. Murray Stempel, is a Vice President and a DIRECTOR of the Registrant. He is the son-in-law of Daniel M. Tabas and the brother-in-law of Lee E. Tabas, Robert R. Tabas and Howard Wurzak. Mr. Stempel was a Director, Executive Vice President and General Manager of Ajax Adhesives Industries Inc. Howard Wurzak, a DIRECTOR of the Registrant, is President of Hospitality Management Group, Inc. and the President of the Twelve Caesars Banquet Facility in Philadelphia, Pennsylvania. He is the son-in-law of Daniel M. Tabas and the brother-in-law of Lee E. Tabas, Robert R. Tabas and Murray Stempel. Carl M. Cousins, a DIRECTOR of the Registrant, is the owner and principal veterinarian of Haverford Animal Hospital in Haverford, Pennsylvania. Jack Loew, a DIRECTOR of the Registrant since January, 1997, is president and treasurer of Hough/Loew Associates, a design/build construction and development firm specializing in office, industrial and retail properties. John Decker, is a Senior Vice President, Senior Lender and a DIRECTOR of the Registrant. 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. 69 70 Based solely on its review of forms that were received from certain reporting persons, the Corporation believes that during the period January 1, 1998 through December 31, 1998, its officers and directors were in compliance with all filing requirements applicable to them. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In the ordinary course of business, RBPA has had, and expects to have in the future, banking transactions with directors, officers, principal shareholders and their associates which involve substantially the same terms, including interest rates, collateral and repayment terms as those prevailing at the time for comparable transactions with others and no more than the normal risk of collectability or other unfavorable features. No transaction during the three years ended December 31, 1998 of the above nature exceeded $9,000,000 or 10% of the equity capital accounts to the Registrant. The largest aggregate amount of indebtedness during the year l998 of all Directors and Officers to the Company as a group, and to their associates was $14,393,830. The total of such outstanding loans at December 3l, 1998 was $14,393,830. Interest rates ranged for fixed rates from 7.5% to 10.5%. Floating rates ranged from prime to prime plus 2.5 points. In March 1999, RBPA purchased as an investment a $3 million capital trust security issued by USA Bancshares. The president of USA Bancshares is Mr. Kenneth Tepper. He is the son-in-law of Daniel M. Tabas, chairman of the board of RBPA, son of Director Edward Tepper, and brother-in-law of Directors' Lee Tabas, Robert Tabas, Murray Stempel, and Howard Wurzak. The Registrant has had and intends to have business transactions in the ordinary course of business with Directors and associates on comparable terms as those prevailing from time to time for other nonaffiliated vendors of the Registrant. In particular, the Registrant has used hospitality services of directors, Howard Wurzak, and Daniel Tabas. Director Albert Ominsky's law firm has provided legal services to the Bank. Director Edward Tepper has provided construction supervision and property inspection services to the Bank. 70 71 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, 1998. (c) The exhibits required to be filed by this Item are listed under Item 14(a)3 above. (d) Not applicable 71 72 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 17, 1999 Chairman /s/ Daniel M. Tabas - --------------- ---------------------- Daniel M. Tabas March 17, 1999 President/CEO/ /s/ Lee E. Tabas - --------------- Director ---------------------- Lee E. Tabas March 17, 1999 Managing Director/ /s/ Joseph P. Campbell - --------------- Director ---------------------- Joseph P. Campbell March 17, 1999 Treasurer/CFO /s/ James J. McSwiggan - --------------- ---------------------- James J. McSwiggan March 17, 1999 Director /s/ Albert Ominsky - --------------- ---------------------- Albert Ominsky March 17, 1999 Director /s/ Anthony Micale - --------------- ---------------------- Anthony Micale March 17, 1999 Senior Vice President/ /s/ Robert R. Tabas - --------------- Director ---------------------- Robert R. Tabas March 17, 1999 Director /s/ Gregory T. Reardon - --------------- ---------------------- Gregory T. Reardon March 17, 1999 Director /s/ Carl Cousins - --------------- ---------------------- Carl Cousins Continued... 72 73 DATE TITLE SIGNATURE March 17, 1999 Director /s/ Howard Wurzak - -------------- --------------------- Howard Wurzak March 17, 1999 Senior Vice President/ /s/ John Decker - -------------- Director --------------------- John Decker March 17, 1999 Vice President/ /s/ Murray Stempel - -------------- Director --------------------- Murray Stempel March 17, 1999 Director /s/ Jack Loew - -------------- --------------------- Jack Loew March 17, 1999 Director /s/ Terri N. Gelberg - -------------- --------------------- Terri N. Gelberg March 17, 1999 Director /s/ Edward Tepper - -------------- --------------------- Edward Tepper 73 74 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. 74 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 75 EX-23 3 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We issued our report dated January 22, 1999, accompanying the consolidated financial statements included in the 1998 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, 1998. 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 26, 1999 76 EX-27 4 FINANCIAL DATA SCHEDULE
9 1 YEAR DEC-31-1998 DEC-31-1998 5,592,624 100,030 13,550,000 0 36,951,162 61,894,538 62,159,860 304,475,629 11,919,545 427,621,784 290,389,685 365,000 12,271,111 30,526,720 15,022,432 0 0 79,046,836 427,621,784 33,513,439 7,126,866 0 40,640,305 11,167,451 13,163,201 27,477,104 4,769,785 0 12,271,111 15,408,202 0 0 0 10,783,940 1.19 1.15 6.84 3,419,378 0 631,075 1,324,829 8,186,237 1,635,919 599,442 11,919,545 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----