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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 1996
[ ] 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 or 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, 1997 was
$42,058,204.
As of February 28, 1997, the Registrant had 6,434,844 and 1,555,363
shares outstanding of Class A and Class B common stock, respectively.
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, 1996, RBPA had consolidated
total assets of approximately $355 million, total deposits of approximately $254
million and stockholders' equity of approximately $85 million. In 1996, the
holding company acquired a property located at 3836 Spring Garden Avenue in
Philadelphia, PA as a potential site for future banking operations of the Bank.
The Bank
The Bank was incorporated in the Commonwealth of Pennsylvania on July
30, 1963, and was chartered by the Commonwealth of Pennsylvania Department of
Banking and commenced operation as a Pennsylvania state-chartered bank on
October 22, 1963. The Bank is the successor of the Bank of King of Prussia, the
principal ownership of which was acquired by Daniel M. Tabas in 1980. Royal Bank
of Pennsylvania is an insured bank under the Federal Deposit Insurance
Corporation (the "FDIC").
The Bank derives its income principally from interest charged on loans
and to a lesser extent, interest on investment securities and fees received in
connection with the origination of loans and other services. The Bank's
principal expenses are interest expense on deposits and operating expenses.
Funds for activities are provided principally by operating revenues, deposit
growth and the repayment of outstanding loans.
Service Area. The Bank's primary service area includes Montgomery,
Chester, Bucks, Delaware, Berks and Philadelphia counties, southern New Jersey
and Delaware in the vicinity of Wilmington. This area includes residential areas
and industrial and commercial businesses of the type usually found within a
major metropolitan area. The Bank serves this area from thirteen offices located
throughout Montgomery, Philadelphia and Berks counties. The Bank also considers
the states of Pennsylvania, New Jersey, New York and Delaware to constitute its
service area for certain services. On occasion, the Bank will do business with
clients located outside of its service area. The Bank's legal headquarters are
located at Route 202 and Warner Road, King of Prussia, PA.
The Bank conducts business operations as a commercial bank offering
checking accounts, savings and time deposits, and loans, including residential
mortgages, home equity and SBA loans. The Bank also offers safe deposit boxes,
collections, and other customary bank services (excluding trust) to its
customers. Drive-up, ATM, and night depository facilities are available.
Services may be added or deleted from time to time. The services offered and the
business of the Bank are not subject to significant seasonal fluctuations. The
Bank is a member of the Federal Reserve 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
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banking business because of the growing number of financial service entities
that have entered our local market. This trend was accelerated by the passage of
federal laws in the early 1980's which sharply expanded the powers of thrifts
and credit unions, giving them most of the powers that were formerly reserved
for commercial banks. While attempting to equalize the competition among the
depository institutions, these statutes have little effect on less regulated
entities such as money market mutual funds and investment banking firms. Many of
these competitors have substantially greater financial resources and more
extensive branch systems. To be successful, small banks must find a competitive
edge. The Bank prides itself on giving its customers personalized service. The
Bank has continued at modest levels its research activities relating to the
development of new services and the improvement of existing bank services.
Marketing activities have continued that have allowed the Bank to remain
competitive. These activities include the review of existing services and the
solicitation of new users of banking services.
Employees. Royal Bancshares and its subsidiaries employed 116 persons
on full-time equivalent basis as of December 31, 1996.
Deposits. At December 31, 1996, total deposits of the Bank were
distributed among demand deposits (15%), money market deposit accounts, savings
and Super Now (37%) and time deposits (48%). At year end 1996, deposits
decreased $14.1 million from year end 1995, or 5%, primarily due to decreases
experienced in certificate of deposits and to a lesser extent, NOW and money
market deposits. We note that the Bank or any bank could be financially stressed
in the event a material number of the depositors elected to withdraw deposits
from the institution within a short period of time. Conceivably, this could
occur even though the FDIC insures each depositor for up to $100,000.
Lending. At December 31, 1996, the Bank had a total loan portfolio of
$209 million, representing 59% 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.
Recent Acquisitions
On July 21, 1995, Knoblauch State Bank merged with, into and under the
charter of the Bank as all of the outstanding stock of Knoblauch State Bank
("KSB") was acquired by the Bank in a purchase transaction for approximately
$8.2 million in cash. KSB was a state-chartered non-member bank with five
offices engaged in commercial and retail banking in Philadelphia, Montgomery
County and the Reading area of Berks County. At June 30, 1995, KSB had total
assets of approximately $95.9 million and deposits of approximately $87 million.
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, 1996, total assets of RID were $27.4 million, of
which $17.7 million was held in investment securities comprised primarily of
corporate debt and equity securities. In 1996, Royal Investments of Delaware
acquired a property located at 814 Montgomery Avenue, Narberth, PA.
2
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.
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 or control more than 5% of the voting shares of such bank.
3
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 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.
4
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. The rule became effective July 1, 1995.
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") 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.
5
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.
The Bank believes that further merger activity within Pennsylvania is likely to
occur in the future, resulting in increased concentration levels in banking
markets within Pennsylvania and other significant changes in the competitive
environment. The Riegle-Neal allows adequately capitalized and managed bank
holding companies to acquire banks in any state starting one year after
enactment (September 29, 1995). Another provision of the Riegle-Neal Act allows
interstate merger transactions beginning June 1, 1997. States are permitted,
however, to pass legislation providing for either earlier approval of mergers
with out-of-state banks, or "opting-out" of interstate mergers entirely. Through
interstate merger transactions, banks will be able to acquire branches of
out-of-state banks by converting their offices into branches of the resulting
bank. The Riegle-Neal Act provides that it will be the exclusive means for bank
holding companies to obtain interstate branches. Under the Riegle-Neal Act,
banks may establish and operate a "de novo branch" in any State that "opts-in"
to de novo branching. Foreign banks are allowed to operate branches, either de
novo or by merger. These branches can operate to the same extent that the
establishment and operation of such branches would be permitted if the foreign
bank were a national bank or state bank. All these changes are expected to
intensify competition in local, regional and national banking markets. The
Pennsylvania Banking Code has been amended to enable Pennsylvania institutions
to participate fully in interstate banking (see discussion above).
Federal Deposit Insurance Corporation Improvement Act of 1991
General. The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDIC Improvement Act") includes several provisions that have a direct
impact on the Bank. The most significant of these provisions are discussed
below.
Examinations; Prompt Corrective Action. The FDIC is required to conduct
periodic full-scope, on-site examinations of the Bank. In order to minimize
losses to the deposit insurance funds, the FDIC Improvement Act establishes a
format to more monitor FDIC-insured institutions and to enable prompt corrective
action by the appropriate federal supervisory agency if an institution begins to
experience any difficulty. The FDIC Improvement Act establishes five "capital"
categories. They are: (1) well capitalized, (2) adequately capitalized,
(3) undercapitalized, (4) significantly undercapitalized, and (5) critically
undercapitalized. The overall goal of these new capital measures is to impose
more scrutiny and operational restrictions on banks as they descend the capital
categories from well capitalized to critically undercapitalized.
Under Current regulations, a "well-capitalized" institution would be
one that has at least a 10% total risk-based capital ratio, a 6% Tier 1
risk-based capital ratio, a 5% Tier 1 Leverage Ratio, and is not subject to any
written order or final directive by the FDIC to meet and maintain a specific
capital level. The Bank is presently categorized as a "well-capitalized"
institution.
An "adequately capitalized" institution would be one that meets the
required minimum capital levels, but does not meet the definition of a
"well-capitalized" institution. The existing capital rules 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.
6
A "critically undercapitalized" institution is one that has a tangible
equity (Tier 1 capital) ratio of 2% or less. In addition to the same
restrictions and prohibitions that apply to "undercapitalized" and
"significantly undercapitalized" institutions, any institution that becomes
"critically undercapitalized" is prohibited from taking the following actions
without the prior written approval of its primary federal supervisory agency:
engaging in any material transactions other than in the usual course of
business; extending credit for highly leveraged transactions; amending its
charter or bylaws; making any material changes in accounting methods; engaging
in certain transactions with affiliates; paying excessive compensation or
bonuses; and paying interest on liabilities exceeding the prevailing rates in
the institution's market area. In addition, a "critically undercapitalized"
institution is prohibited from paying interest or principal on its subordinated
debt and is subject to being placed in conservatorship or receivership if its
tangible equity capital level is not increased within certain mandated time
frames.
Real Estate Lending Guidelines. Pursuant to the FDIC Improvement Act,
the FDIC has issued real estate lending guidelines that establish loan-to-value
("LTV") ratios for different types of real estate loans. A LTV ratio is
generally defined as the total loan amount divided by the appraised value of the
property at the time the loan is originated. If a bank does not hold a first
lien position, the total loan amount would be combined with the amount of all
senior liens when calculating the ratio. In addition to establishing the LTV
ratios, the FDIC's real estate guidelines require all real estate loans to be
based upon proper loan documentation and a recent independent appraisal of the
property. The FDIC's guidelines establish the following limits for LTV ratios:
LTV
Loan Category Limit
Raw Land 65%
Land Development
Construction:
Commercial, Multifamily (includes
condos and co-ops), and other
Nonresidential 80%
Improved Property 85%
Owner occupied 1-4 Family and Home Equity
(without credit enhancements) 90%
The guidelines provide exceptions to the LTV ratios for
government-backed loans; loans facilitating the sale of real estate acquired by
the lending institution in the normal course of business; loans where the Bank's
decision to lend is not based on the offer of real estate as collateral and such
collateral is taken only 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.
7
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.
ITEM 2. PROPERTIES
The Bank has thirteen banking offices, all of which are located in
Pennsylvania, at the following locations:
Narberth Office (1) Villanova Office King of Prussia Office
- ------------------- ---------------- ----------------------
732 Montgomery Ave 801 East Lancaster Avenue Rt. 202 & Warner Road
Narberth, Pa. 19072 Villanova, Pa. 19085 King of Prussia, Pa. 19406
Philadelphia Offices Shillington Office Bridgeport Office (1)
- --------------------- ------------------ ---------------------
- - One Penn Square West 516 East Lancaster Avenue 105 W. 4th Street
30 South 15th Street Shillington. Pa 19607 Bridgeport, Pa. 19406
Philadelphia, Pa 19102
Trooper Office Upper Merion Office
-------------- -------------------
- - 1340 Walnut Street Trooper & Egypt Roads Beidler & Henderson Roads
Philadelphia, Pa. 19107 Trooper, Pa. 19401 King of Prussia, Pa. 19406
- - 401 Fairmount Avenue (1) Reading Office Phoenixville Office (1)
-------------- ----------------------
Philadelphia, Pa. 19123 501 Washington Street 808 Valley Forge Road
Reading, Pa. 19601 Phoenixville, Pa. 19460
Jenkintown Office (1)
- --------------------- ---------------------------------- -----------------------------------
600 Old York Road (1) owned
Jenkintown, Pa 19046
The Bank owns five of the above properties, of which one property is
subject to a mortgage. The remaining eight properties are leased with expiration
dates between 1997 and 2001. During 1996, the Bank made aggregate lease payments
of approximately $339 thousand. The Bank believes that all of its properties are
attractive, adequately insured, and well maintained. The Bank also owns a
property located at 144 Narberth Avenue, Narberth, Pa. which may serve as a site
for future expansion.
8
ITEM 3. LEGAL PROCEEDINGS
A description of all material pending legal proceedings, other than
ordinary routine litigation incidental to business of the Registrant is set
forth below.
On August 28, 1990, a civil action Complaint was filed against the Bank
by David J. Ackerman and Joyce G. Ackerman in the Court of Common Pleas,
Montgomery County, Commonwealth of Pennsylvania ("Complaint"). The Complaint
arises out of the Ackermans purchase of two (2) certificates of deposit from
Royal Bank of Pennsylvania on November 25, 1983 for purposes of a marital IRA
investment. Specifically, Joyce Ackerman purchased a $2,000 five year CD and
David Ackerman purchased a $250 five year CD "with interest at the rate of 12
percent per annum". In sum and substance, the Ackermans' Complaint alleges that
they were not informed that the CDs purchased from Royal Bank of Pennsylvania on
November 25, 1983 were simple interest CDs and assumed that the interest on the
CDs was compounded annually; and that the Bank thereby violated the Pennsylvania
Unfair Trade Practices And Consumer Protection Law ("UTPCPL"). The Ackermans
seek actual monetary damages of $388.80 representing the difference between
simple interest and annually compounded interest on the CDs purchased from Royal
Bank. The Ackermans also seek treble damages, which may be awarded in the
discretion of the Court under the UTPCPL. The damages sought by the Ackermans
individually are clearly not material. However, the Ackermans also filed their
Complaint as a Class Action on behalf of all persons who purchased or redeemed
simple interest certificates of deposit on or after August 28, 1984. On March 7,
1994, the Honorable Marjorie C. Lawrence, Judge of the Montgomery County Court
of Common Pleas entered an Order certifying this Class. Management believes that
there are substantial defenses against these claims and that it is unlikely that
any potential loss would have a material adverse effect on the Bank's
consolidated financial position, liquidity or results of operations.
Prior to the acquisition of KSB, KSB had been engaged in various
litigation relating to the propriety of the Secretary of Banking's seizure of
the Knoblauch Private Bank and The Marian Bank, and the transfer of certain of
their assets to KSB. At the time of the acquisition, settlement of this
litigation had been substantially completed; however, certain litigation
remained outstanding. As a result, RBPA's consideration for the purchase of
KSB's outstanding shares was placed in escrow pending resolution of the seizure
litigation. Should the seizure litigation be settled adversely to KSB, the
escrowed funds will be used to satisfy any judgments against KSB. RBPA could be
liable for any judgments in excess of the escrowed funds. Management believes
that the possibility that judgments would exceed the escrowed funds is remote.
On October 6, 1995, RBPA was named in a lawsuit filed by Catherine
Baker Knoll, Pennsylvania State Treasurer, alleging the State Workers' Insurance
Fund (SWIF) board acted improperly in approving the sale of KSB to RBPA and
seeking to break the escrow and have the escrowed funds paid to the Treasury of
the Commonwealth of Pennsylvania. If the escrow is broken, RBPA may be at risk
for any unsettled seizure litigation. Management believes the likelihood of an
adverse outcome is slight, and in any event, there will be no material adverse
effect on the liquidity, results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
9
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 Securities Inc., and
Ferris Baker Watts Inc. There is no market for the Class B Common Stock, as such
is prohibited by the terms of the Class B Common Stock. The following table
shows the Registrant's stock prices for the last eight quarters.
1996 High Low Last
- ---- ---- --- ----
First Quarter 10.377 8.255 10.142
Second Quarter 11.000 9.500 10.125
Third Quarter 11.000 9.500 10.375
Fourth Quarter 12.000 10.375 11.500
1995 High Low Last
- ---- ---- --- ----
First Quarter 8.232 6.675 7.342
Second Quarter 8.491 6.897 7.547
Third Quarter 10.142 7.429 10.142
Fourth Quarter 10.142 8.491 9.198
(Source: This summary reflects information supplied by NASDAQ.)
"The NASDAQ Stock Market" or "NASDAQ" is a highly-regulated electronic
securities market comprised of competing Market Makers whose trading is
supported by a communications network linking them to quotation dissemination,
trade reporting, and order execution systems. The market also provides
specialized automation services for screen-based negotiations of transactions,
on-line comparison of transactions, and a range of informational services
tailored to the needs of the securities industry, investors and issuers. The
NASDAQ Stock Market consists of two distinct market tiers: the NASDAQ National
Market and The NASDAQ SmallCap Market. The NASDAQ Stock Market, Inc., is a
wholly-owned subsidiary of National Association of Securities Dealers, Inc.
The approximate number of recorded holders of the Registrant's Class A
and Class B Common Stock, as of December 31, 1996, is shown below:
Title of Class Number of Record Holders
Class A Common Stock 437
Class B Common Stock 189
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 471 as of December 31, 1996.
10
Dividends
Subject to certain limitations imposed by law, the Board of Directors
of the Registrant may declare a dividend on shares of common stock.
Stock Dividends. On March 17, 1994, 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 13, 1994 to shareholders of record on
April 20, 1994. The stock dividend resulted in the issuance of 352,475
additional shares of Class A Common Stock and 84,005 additional shares of Class
B Common Stock. On March 20, 1995 the Board of Directors of the Registrant
declared a 6% stock dividend on both its Class A Common Stock and Class B Common
Stock shares payable on May 12, 1995 to Shareholders of record on April 20,
1995. The stock dividend resulted in the issuance of 347,661 additional shares
of Class A Common Stock and 87,359 additional shares of Class B Common Stock.
On March 14, 1996, the Board of Directors of the Registrant declared a 6% stock
dividend on both its Class A Common Stock and Class B Common Stock shares
payable May 10, 1996, to Shareholders of record on April 18, 1996. The stock
dividend resulted in the issuance of 365,229 additional shares of Class A Common
Stock and 91,641 additional shares of Class B Common Stock. 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 dividend of $.06 per share for
holders of Class A Common Stock and $.069 per share for holders of Class B
common stock in each quarter of 1996. This resulted in a charge to retained
earnings of approximately $2.0 million. 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 R to the Consolidated Financial Statements in Item 8 of this report.
11
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,
--------------------------------------------------------------------
Income Statement Data 1996 1995 1994 1993 1992
- --------------------- ----------- ----------- ----------- ---------- -----------
(in thousands)
Interest income $ 33,618 $ 29,755 $ 29,021 $ 27,636 $ 26,828
Interest expense 10,054 9,592 8,244 9,290 10,020
----------- ----------- ----------- ----------- -----------
Net interest income 23,564 20,163 20,777 18,346 16,808
Increase (Decrease) Provision for loan
losses (1,488) -- 2,500 811 4,250
----------- ----------- ----------- ----------- -----------
Net interest income after loan loss
provision 25,052 20,163 18,277 17,535 12,558
Gain on sale of loans 427 86 71 1,500 (1,550)
Gain/Loss on real estate 2,016 870 1,435 (3,008) --
Other income 1,759 1,098 947 1,298 1,691
----------- ----------- ----------- ----------- -----------
Total other income 4,202 2,054 2,453 (210) 141
Income before other expenses & income taxes 29,254 22,217 20,730 17,325 12,699
Non interest expenses:
Salaries 9,602 4,850 3,861 3,483 3,158
Other 5,508 5,461 5,791 4,675 3,906
----------- ----------- ----------- ----------- -----------
Total other expenses 15,110 10,311 9,652 8,158 7,064
Income before taxes and cumulative effect
of change in accounting principle 14,144 11,906 11,078 9,167 5,635
Income taxes 3,907 3,648 3,066 2,543 977
----------- ----------- ----------- ----------- -----------
Income and cumulative effect of a
change in accounting principle 10,237 8,258 8,012 6,624 4,658
Effect of a change in accounting principle -- -- -- 500 --
----------- ----------- ----------- ----------- -----------
Net income $ 10,237 $ 8,258 $ 8,012 $ 7,124 $ 4,648
=========== =========== =========== =========== ===========
Earnings per share (1) $ 1.23 $ 1.01 $ 0.97 $ 0.85 $ 0.57
----------- ----------- ----------- ----------- -----------
Weighted average number of shares 8,291,056 8,199,605 8,260,121 8,412,801 8,104,128
=========== =========== =========== =========== ===========
- -------------------------------------------------------------------------------
(1) Earnings per share and the weighted average number of shares used in the
calculation have been adjusted to reflect a 6% stock dividend in 1996, a 6%
stock dividend in 1995, a 6% stock dividend in 1994, a 5% stock dividend in
1993, and a 3.5% stock dividend in 1992.
Balance Sheet Data 1996 1995 1994 1993 1992
- ------------------ -------- ------- -------- -------- --------
(in thousands)
Total assets $355,149 $356,264 $312,956 $304,574 $322,988
Total average assets 343,360 312,823 282,162 282,730 274,229
Loans, net of unearned income 209,017 198,419 162,739 167,680 190,770
Total deposits 254,183 268,242 211,965 226,062 260,861
Total long term debt 4,814 2,984 3,969 727 765
Total stockholders' equity 84,581 77,189 70,617 62,652 55,977
Total average stockholders' equity 80,910 74,091 66,398 58,927 54,312
Return on average assets 3.0% 2.6% 2.8% 2.5% 1.7%
Return on average equity 12.7% 11.1% 12.1% 12.1% 8.6%
Average equity to average assets 23.6% 23.7% 23.5% 20.8% 19.8%
Cash dividend payout ratio 19.2% 11.4% -- -- --
12
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:
1996 1995
-------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Assets (In thousands) Balance Interest Rate Balance Interest Rate
- --------------------- ------- -------- ------ ------- -------- ------
Interest bearing deposits in banks $ 1,758 $ 103 5.86% $ 2,018 $ 106 5.25%
Federal funds 18,332 1,015 5.54% 19,519 1,121 5.74%
Other short term investments -- -- -- -- -- --
Investment securities:
Held to maturity:
Taxable 109,522 7,006 6.40% 92,821 6,048 6.52%
Nontaxable (1) 497 88 17.68% 6,103 1,003 16.44%
Available for sale
Taxable 3,674 326 8.87% 940 66 7.02%
Total investment securities 113,693 7,390 6.50% 99,864 7,117 7.13%
Loans: (2)
Commercial & industrial(3) 113,543 15,553 13.70% 111,002 12,964 11.68%
Commercial mortgages(4) 68,689 7,791 11.34% 61,446 7,234 11.77%
Other loans(1) 18,386 1,766 9.61% 13,286 1,809 13.62%
-------- -------- ----- --------- ------- -----
Total loans 200,618 25,110 12.52% 185,734 22,007 11.85%
-------- -------- ----- --------- ------- -----
Total interest earning assets $334,401 $33,648 10.06% $307,135 $30,351 9.88%
Non interest earning assets
Cash & due from banks 6,207 6,164
Other assets 16,401 14,571
Allowance for loan loss (9,672) (9,376)
Def income/unearned disc (3,977) (5,671)
-------- --------
Total non interest
earning assets 8,959 5,688
-------- --------
Total assets $343,360 $312,823
======== ========
Liabilities & Stockholders' Equity
Deposits:
Savings $ 16,514 $ 425 2.57% $ 12,319 $ 337 2.74%
NOW & Money Market 71,597 2,129 2.97% 60,349 2,023 3.35%
CDs & other time deposits 126,089 7,157 5.68% 122,826 6,948 5.66%
-------- -------- ----- --------- ------- -----
Total interest bearing deposits $214,200 $ 9,711 4.53% $195,494 $ 9,308 4.76%
Federal funds -- -- -- 116 5 4.31%
Long term borrowings 4,909 343 6.99% 3,918 280 7.15%
-------- -------- ----- --------- ------- -----
Total interest bearing liabilities $219,109 $10,054 4.59% $199,528 $ 9,593 4.81%
-------- -------- ----- --------- ------- -----
Non interest bearing deposits 33,369 32,319
Other liabilities 9,972 6,885
-------- --------
Total liabilities 262,450 238,732
Stockholders' equity 80,910 74,091
-------- --------
Total liabilities and
stockholders' equity $343,360 $312,823
======== ========
Net interest income $23,594 $20,758
======= =======
Net yield on
interest earning assets 7.06% 6.76%
==== ====
1994
--------------------------------------------
Average Yield/
Balance Interest Rate
------- -------- ------
Interest bearing deposits in banks $ 3,526 $ 198 5.62%
Federal funds 10,347 427 4.13%
Other short term investments 82 2 2.44%
Investment securities:
Held to maturity:
Taxable 82,008 5,396 6.58%
Nontaxable (1) 12,094 1,853 15.32%
Available for sale
Taxable 776 35 4.51%
Total investment securities 94,878 7,284 7.68%
Loans: (2)
Commercial & industrial(3) 96,182 10,075 10.47%
Commercial mortgages(4) 63,533 10,937 17.21%
Other loans(1) 5,987 729 12.18%
-------- ------- -----
Total loans 165,702 21,741 13.12%
-------- ------- -----
Total interest earning assets $274,535 $29,652 10.80%
Non interest earning assets
Cash & due from banks 5,111
Other assets 18,424
Allowance for loan loss (8,198)
Def income/unearned disc (7,170)
--------
Total non interest
earning assets 7,627
--------
Total assets $282,162
========
Liabilities & Stockholders' Equity
Deposits:
Savings $ 8,930 222 2.49%
NOW & Money Market 51,941 1,353 2.60%
CDs & other time deposits 115,199 6,621 5.75%
-------- ------- -----
Total interest bearing deposits $176,070 $ 8,196 4.65%
Federal funds 270 6 2.22%
Long term borrowings 708 42 5.93%
-------- ------- -----
Total interest bearing liabilities $177,048 $ 8,244 4.66%
-------- ------- -----
Non interest bearing deposits 29,059
Other liabilities 9,657
--------
Total liabilities 215,764
Stockholders' equity 66,398
--------
Total liabilities and
stockholders' equity $282,162
========
Net interest income $21,408
=======
Net yield on
interest earning assets 7.80%
=====
(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.
(4) Interest income on commercial mortgages for 1994 include a one-time income
of $2.5 million.
13
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, 1996 and 1995, as compared to respective
previous periods, into amounts attributable to both rate and volume variances.
(in thousands) 1996 Vs 1995 1995 Vs 1994
--------------------------------- ---------------------------------
Changes due to: Changes due to:
-------------------- --------------------
Interest income Volume Rate Total Volume Rate Total
- --------------- ------- ------- ------- ------- ------- -------
Interest bearing deposits in banks $ (14) $ 14 $ -- $ (83) $ (10) $ (93)
Federal funds sold (6) (100) (106) 727 (33) 694
Investment securities:
Held to maturity:
Taxable 1,070 (112) 958 (976) 126 (850)
Nontaxable(1) (835) 262 (573) 705 (53) 652
Available for sale
Taxable 238 22 260 8 23 31
------- ------- ------- ------- ------- -------
Total investment securities 657 (43) 614 (263) 96 (167)
Loans:(2)
Commercial & industrial 303 2,286 2,589 1,655 1,234 2,889
Commercial mortgages(3) 829 (272) 557 (349) (3,354) (3,703)
Other loans(1) 524 (315) 209 985 96 1,081
------- ------- ------- ------- ------- -------
Total loans 1,656 1,699 3,355 2,291 (2,024) 267
------- ------- ------- ------- ------- -------
Total increase (decrease) in interest income $ 2,109 $ 1,785 $ 3,893 $ 2,672 $(1,971) $ 701
Interest expense
- ----------------
Deposits:
Savings $ 109 $ (21) $ 88 $ 91 $ 24 $ 115
NOW & Money Market 351 (245) 106 242 429 671
CDs & other time deposits 185 24 209 433 (106) 327
------- ------- ------- ------- ------- -------
Total interest bearing deposits 645 (242) 403 766 347 1,113
Federal funds purchased (5) -- (5) -- (1) (1)
Mortgage payable and
long term borrowings 69 (6) 63 216 21 237
------- ------- ------- ------- ------- -------
Total increase (decrease) in interest expense 709 (248) 461 982 367 1,349
------- ------- ------- ------- ------- -------
Total increase (decrease) in
net interest income $ 1,400 $ 2,033 $ 3,433 $ 1,690 $(2,338) $ (650)
======= ======= ======= ======= ======= =======
14
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 1996 1995 1994 1993 1992
- ----- -----------------------------------------------------------------------------------------------------
Commercial & industrial $116,616 55% $124,065 61% $104,312 62% $104,991 59% $116,940 57%
Real estate 93,925 44% 75,758 37% 64,357 38% 73,157 41% 86,803 43%
Consumer 2,097 1% 3,352 2% -- -- -- -- -- --
-------- -------- -------- -------- --------
Total gross loans 212,638 100% 203,175 100% 168,689 100% 178,148 100% 203,743 100%
Unearned income (1,290) (1,160) (1,006) (616) (890)
Disc on loans purchased (2,331) (3,596) (4,924) (9,852) (12,083)
Allowance for loan loss (9,084) (9,747) (8,992) (6,608) (10,889)
-------- -------- -------- -------- --------
Total loans, net $199,933 $188,672 $153,747 $161,072 $179,881
======== ======== ======== ======== ========
Analysis of Allowance for Loan Loss
- -----------------------------------
Year ending December 31,
(in thousands)
----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Total Loans $209,017 $198,419 $162,739 $167,680 $190,770
======== ======== ======== ======== ========
Daily average loan balance $200,618 $185,734 $165,702 $190,222 $184,184
======== ======== ======== ======== ========
Allowance for loan loss:
Balance at the beginning of the year $9,747 $8,992 $6,608 $10,889 $6,106
Charge offs by loan type:
Commercial 843 292 273 1,711 229
Real estate 240 21 17 4,068 1,778
-------- -------- -------- -------- --------
Total charge offs 1,083 313 290 5,779 2,007
Recoveries by loan type:
Commercial 1,790 125 141 629 145
Real estate 118 31 33 58 2,395
-------- -------- -------- -------- --------
Total recoveries 1,908 156 174 687 2,540
-------- -------- -------- -------- --------
Net loan charge offs (825) 157 116 5,092 (533)
Purchase of Knoblauch Bank -- 912 -- -- --
Increase (decrease) in
provision for loan loss (1,488) - - 2,500 811 4,250
-------- -------- -------- -------- --------
Balance at end of year $ 9,084 $ 9,747 $ 8,992 $ 6,608 $ 10,889
======== ======== ======== ======== ========
Net charge offs to average loans (0.41)% 0.08% 0.07% 2.68% (0.29%)
======== ======== ======== ======== ========
Allowance to loans at year end 4.35% 4.91% 5.53% 3.94% 5.71%
======== ======== ======== ======== ========
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.
15
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
(in thousands) December 31,
---------------------------------------
1996 1995 1994
-------- -------- --------
Loans secured by real estate
Construction and land development $ 5,057 $ 6,845 $ 10,681
Secured by farmland (including farm residential and other improvements) -- 355 373
Secured by 1-4 family residential properties:
Revolving, open-end loans secured by 1-4 family residential
properties and extended under lines of credit 11,165 11,319 9,840
All other loans secured by 1-4 family residential properties:
Secured by first liens 21,843 24,580 8,329
Secured by junior liens 7,121 7,428 1,977
Secured by multi family (5 or more) residential properties 20,882 23,853 20,362
Secured by nonfarm nonresidential properties 117,559 97,607 78,033
Commercial and industrial loans to US addresses 24,559 26,122 35,840
Loans to individuals for household, family, and other personal
expenditures 1,848 3,358
Obligations of state and political subdivisions in the US 1,903 1,391 3,134
All other loans 211 317 101
Less: Any unearned income on loans listed above 3,621 4,756 5,931
-------- -------- --------
Total loans and leases, net of unearned income $209,017 $198,419 $162,739
======== ======== ========
Credit Quality
The following table presents the principal amounts of nonaccruing loans and
other real estate.
Years ending December 31,
(in thousands)
---------------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------- -------
Non-accruing loans (1)(2) $4,653 $6,233 $1,703 $ 7,726 $10,560
Past due loans over 90 days but still accruing -- 391 391 391 --
------ ------ ------ ------- -------
Total nonperforming loans 4,653 6,624 2,094 8,117 10,560
Other real estate 504 612 4,492 6,505 11,170
------ ------ ------ ------- -------
Total nonperforming assets $5,157 $7,236 $6,586 $14,622 $21,730
====== ====== ====== ======= =======
Nonperforming assets to total assets 1.45% 2.03% 2.10% 4.80% 6.73%
====== ====== ====== ======= =======
Nonperforming loans to total loans 2.23% 3.34% 1.29% 4.84% 5.54%
====== ====== ====== ======= =======
Allowance for loan loss
to nonperforming loans 195.23% 147.15% 429.42% 81.40% 103.12%
====== ====== ====== ======= =======
(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 $418,740 for 1996, $1,889,000 for 1995, $115,000 for
1994, $1,380,000 for 1993, and $1,166,000 for 1992.
16
Investments Securities
The contractual maturity distribution and weighted average rate of the
investments held to maturity portfolio at December 31, 1996 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, 1996
(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 $ -- -- $ -- -- $ -- -- $ 499 17.7% $ 499 17.7%
U.S. Treasuries 3,989 5.6% 6,584 5.6% 1,938 6.8% 2,672 7.6% 15,183 6.1%
Other securities (1) 50,165 7.3% 28,805 7.7% 18,824 6.9% - - - - 97,794 7.4%
-------------------------------------------------------------------------------------------------------
Total $54,154 7.2% $35,389 7.3% $20,762 6.9% $3,171 8.9% $113,476 7.2%
=======================================================================================================
(1) Other securities is comprised of corporate debt securities rated "A" or
better at the time of acquisition.
The following tables presents the consolidated book values and
approximate market value at December 31, 1996, 1995, and 1994, 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)
------------------------------------------------------------------------------------
1996 1995 1994
--------------------- -------------------- --------------------
Amortized Market Amortized Market Amortized Market
Securities held to maturity cost value cost value cost value
- ------------------------------ --------- ------ --------- ------ --------- ------
State & political subdivisions $ 499 $ 580 $ 499 $ 612 $11,918 $12,356
U.S. Treasuries 15,183 15,321 20,810 21,166 -- --
Other securities (1) 97,793 97,734 82,154 82,858 82,570 79,388
-------- -------- -------- -------- ------- -------
Total $113,475 $113,635 $103,463 $104,636 $94,488 $91,744
======== ======== ======== ======== ======= =======
As of December 31,
(in thousands)
------------------------------------------------------------------------------------
1996 1995 1994
--------------------- -------------------- --------------------
Amortized Market Amortized Market Amortized Market
Securities held to maturity cost value cost value cost value
- ------------------------------ --------- ------ --------- ------ --------- ------
Federal Home Loan Bank stock $1,024 $1,024 $938 $938 $1,725 $1,725
Preferred and common stock 3,703 3,701 32 32 3 3
------ ------ ---- ---- ------ ------
Total $4,727 $4,725 $970 $970 $1,728 $1,728
====== ====== ==== ==== ====== ======
17
Deposits
The average balance of deposits by major classifications for each of
the last three years are presented in the following table.
As of December 31,
(in thousands)
------------------------------------------------------------------------------
1996 1995 1994
------------------ ------------------- -------------------
Average Average Average
rate Rate rate Rate rate Rate
------- ---- ------- ---- ------- ----
Demand deposits:
Non interest bearing $33,369 -- $32,319 -- $29,059 --
Interest bearing (NOW) 20,823 2.28% 16,007 2.59% 12,929 2.29%
Money market deposits 50,774 3.26% 44,342 3.63% 39,012 2.71%
Savings deposits 16,514 2.57% 12,319 1.80% 8,930 2.49%
Certificate of deposit 126,089 5.68% 122,826 5.66% 115,199 5.75%
-------- ---- -------- ---- -------- ----
Total deposits $247,569 $227,813 $205,129
======== ======== ========
The remaining maturity of Certificates of Deposit of $100,000 or greater.
At December 31,
(in thousands)
------------------------------
Maturity 1996 1995
------- ------
Three months or less $ 7,678 $ 3,971
Over three months through twelve months 9,330 5,993
Over twelve months through five years 6,212 12,449
Over five years 438 438
------- -------
Total $23,658 $22,851
======= =======
Short and Long Term Borrowings
- ------------------------------
Year ending December 31,
(in thousands)
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------- ------- ----
Short term borrowings (1) $ -- $ -- $21,000 $10,060 $
Long term borrowings:
Mortgage payable (2) 613 652 689 727 765
FHLB advances (3) 4,201 2,332 3,280 -- --
------ ------ ------- ------- ----
Total long term borrowings $4,814 $2,984 $24,969 $10,787 $765
====== ====== ======= ======= ====
(1) In 1994 and 1993, 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 (5.36% at
December 31, 1996) and is guaranteed by an industrial development
authority.
(3) Advances from the Federal Home Loan Bank of Pittsburgh consist of four
separate advances with interest rates of 7.00% to 8.20%, with maturities
from December 31, 1997 thru 2006.
18
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 decreased $1.1 million, or 0.3% to $355.2 million at
December 31, 1996 from $356.3 million at year end 1995. Cash and cash
equivalents decreased $28.3 million, or 61%, primarily due to Fed Funds being
reinvested in new loans and investment securities. Total loans increased 5% from
$198.4 million at December 31, 1995 to $209 million at December 31, 1996.
Investment securities increased $13.8 million to $118.2 million at December 31,
1996, an increase of 13% from $104.5 million at December 31, 1995.
The RBPA's primary source of funding, deposits, decreased 5% from
$268.2 million at December 31, 1995 to $254.2 million at December 31, 1996. This
decrease in deposits is primarily due to runoff experienced in money market
deposits and certificate of deposits of $15.7 and $9.8 million, respectively.
Long term borrowings, which are comprised of advances from the Federal Home Loan
Bank of Pittsburgh ("FHLB") and a mortgage, increased $1.9 million due to an
additional $2.5 million FHLB advance taken in January 1996, partially offset by
a scheduled maturity of an existing FHLB advance of $.6 million.
Stockholders' equity increased $7.4 million or 9.6% in 1996 to $84.6
million primarily due to net income of $10.2 million and $1.2 million relating
to the exercise of employee stock options, partially offset, by a $4.0 million
reduction due to RBPA repurchasing of 198,113 shares of Class A stock in
accordance with a stock buyback program. Additionally, a $2 million decrease was
attributable to cash dividends declared and paid in 1996.
Results of Operations
Overview
RBPA reported net income of $10.2 million, in 1996, a 23% increase over
the $8.3 million reported in 1995 and 28% increase over the $8.0 million
reported in 1994. Net income per share was $1.23, $1.01 and $.97 for 1996, 1995,
and 1994, respectively. This 23% increase in net income for 1996 is due to a
$3.4 million and $2.1 million respective increase in net interest income before
loan loss provision, and noninterest income, partially offset by a $4.8 million
increase in noninterest expense.
RBPA's results of operations depend primarily on its net interest
income, or the difference between interest income on earning assets and interest
expense on interest bearing liabilities. Net interest income is affected by
market and economic conditions which influence rates and loan and deposit
growth. RBPA's net interest income was $23.6 million as compared to $20.2
million in 1995, an increase of $3.4 million, or 16% primarily due to an
increase in interest income of $3.8 million, or 13%. This increase is partially
offset by a $500 thousand increase in interest expense. The increase in interest
income was primarily due an increase in average earning assets of $27.3 million,
in addition to the receipt of a one-time interest recovery relating to a loan
payoff.
In 1995, net interest income decreased $614 thousand primarily due to a
one time recovery income in 1994 of $2.5 million. Without the effect of this
one-time income of $2.5 million in 1994, net interest income would have
increased approximately $1.9 million, or 9% in 1995 over 1994.
19
Yield on Loans and Mortgages
1996 1995 1994
---- ---- ----
Average loan outstandings $200,618,000 $185,734,000 $165,702,000
Interest and fees on loans $ 25,110,000 $ 22,007,000 $ 21,741,000
Average Yield 12.52% 11.85% 13.12%
Although RBPA has generated five year fixed rate loans, a portion of
the loan portfolio continues to be comprised of variable rate loans which helps
to maintain its interest spread when rates change. RBPA's yields tend to have
less of a downward fluctuation when interest rates decline because many of the
RBPA's loans have interest rate minimums associated with them.
Yields on loans increased 67 basis points in 1996 to 12.52% partially
due to an interest recovery relating to a loan payoff in 1996. Average loans
increased $14.9 million, or 8% in 1996 primarily due to an increase in loan
originations. The Bank's average prime rate for 1996 was 8.29% versus 8.80% for
1995.
In 1995, yields on loans decreased to 11.85% primarily due to a
decrease in accretion income in 1995 of approximately $2.5 million relating to a
loan payoff in 1994 previously purchased at a significant discount. This one
time income alone contributed 142 basis points to the total yield in 1994. The
Bank's average prime rate for 1995 was 8.80% vs. 7.20% for 1994. Average loans
outstanding increased $20 million in 1995 from 1994. This increase is
attributable to the KSB acquisition, partially offset by scheduled maturities
and payoffs during 1995.
Investments Securities Held to Maturity
1996 1995 1994
---- ---- ----
Average investment securities $113,693,000 $98,924,000 $94,102,000
Interest income $ 7,390,000 $ 7,051,000 $ 7,249,000
Average yield 6.42% 7.13% 7.70%
Held to maturity ("HTM") investment securities are comprised of taxable
(corporate debt, US Treasuries & agencies) and to a lesser extent, non taxable
(state & municipal) investment securities. The yield on HTM investment
securities decreased 71 basis points in 1996 to primarily due to scheduled
maturities of higher yielding taxable bonds which were ultimately replaced by
lower yielding taxable bonds. The average balance of HTM investment securities
increased $14.8 million, or 15.0%. These purchases in corporate issues were "A"
rated or better by Moodys or Standard & Poor, with maturities in the three to
five year ranges. It is RBPA's expressed intention to hold these securities to
maturity, as has been the established investment policy.
In 1995, the yield on HTM investment securities decreased 57 basis
points primarily due to higher yielding taxable bonds which were ultimately
replaced by lower yielding bonds as interest rates declined, in addition to
significant bond calls experienced in the higher yielding nontaxable bond
portfolio. The average balance of HTM investment securities increased $4.8
million in 1995 due to an increase of $18.8 million in US Treasuries and
agencies relating to the KSB acquisition, partially offset by nontaxable bond
calls of approximately $11.4 million.
20
Interest Expense on NOW and Money Market Deposits
1996 1995 1994
---- ---- ----
Average NOW & Money Market deposits $71,597,000 $60,349,000 $51,941,000
Interest expense $ 2,129,000 $ 2,023,000 $ 1,353,691
Average cost of funds 2.97% 3.35% 2.60%
In 1996, the average cost of funds on NOW and money market deposits
decreased 38 basis points to 2.97% from 3.35% as interest rates declined during
1996. Average cost of funds on NOW and money market deposits for 1995 increased
75 basis points to 3.35% from 2.60% for 1994 primarily due to the addition of
higher costing deposits acquired from KSB. The average balance of these deposits
increased to $71.6 million in 1996 from $60.3 million in 1995 and $51.9 million
in 1994 primarily due to the acquisition of KSB in July 1995.
Interest Expense on Time Deposits
1996 1995 1994
---- ---- ----
Average time deposits $126,089,000 $122,826,000 $115,199,000
Interest expense $ 7,157,000 $ 6,948,000 $ 6,621,000
Average cost of funds 5.68% 5.66% 5.75%
The average balance of time deposits increased $3.3 million in 1996,
while the average cost of funds increased slightly to 5.68% from 5.66% in 1995.
The average balance of time deposits increased $7.6 million during 1995,
primarily due to additional time deposits of approximately $55 million relating
to the KSB acquisition, partially offset by significant scheduled maturities
experienced during 1995. The average cost of funds for time deposits decreased
to 5.66% in 1995 from 5.75% in 1994.
Although rates in general started to move downward in 1995, the
reaction of deposits to rate changes (both increases and decreases) is slower
than the change in the prime rate because these time deposits must mature before
a rate adjustment would become effective. In 1996, nineteen percent of time
deposits are comprised of certificates of deposit accounts with balances of
$100,000 or more, which are considered more rate volatile than lower balance
deposits; however, the penalty for early redemption somewhat mitigates this
volatility.
Provision for Possible Loan Losses
The provision for loan losses is an amount charged to expense to
provide for future losses on existing loans. In order to determine the amount of
the provision for loan loss, RBPA conducts a quarterly review of the loan
portfolio to evaluate overall credit quality. This evaluation consists of an
analysis of individual loans and overall risk characteristics and size of the
loan, and takes into consideration current economic and market conditions,
changes in non-performing loans, the capability of specific borrowers to repay
loan obligations as well as current collateral values.
Due to recoveries exceeding charge offs in 1996, a recovery from the
allowance for loan loss of $1.5 million (credit) was recorded in 1996. This $1.5
million recovery in 1996 was primarily due to Management's assessment that the
overall level of loan loss reserves is adequate. Charge offs in 1996 were $1.1
million as compared to $.3 million for 1995. Recoveries in 1996 were $1.9
million as compared to $.2 million in 1995.
The provision charged against income in 1995 was $0 compared to $2.5
million in 1994. In 1995, charge offs were $.3 million compared to $.3 million
in 1994. Recoveries in 1995 were $.2 million as compared
21
to $.2 million for 1994. The decrease in provision in 1995 is primarily due to
Management's assessment that the overall level of loan loss reserves is
adequate.
The allowance for possible loan loss at December 31, 1996 was $9.1
million, or 4.3% of total loans, compared to $9.7 million, or 4.9% of total
loans at December 31, 1995, and $9 million, or 5.5% of total loans at December
31, 1994.
Non Interest Income
Non interest income includes service charges on depositors' accounts,
safe deposit rentals and various services such as cashing checks, issuing money
orders and travelers checks, redeeming US savings bonds and similar activities.
Most components of non interest income are a modest and stable source of income,
with exceptions of one-time gains and losses from the sale of other real estate
owned, from period to period these sources of income may vary considerably.
Service charges on depositors' accounts, safe deposit rentals and other fees are
periodically reviewed by Management to remain competitive with other local
banks.
Non interest income increased $2.1 million, or 104%, in 1996 to $4.2
million as compared to $2.1 million in 1995. This increase is primarily due to
gains experienced on the sale of other real estate owned of $1.1 million, and to
a lesser extent, an increase in gains on sale of loans of $.3 million, and
service fees and commissions of $.2 million.
Total non interest income in 1995 was $2.1 million as compared to $2.4
million for 1994. This decrease of $.4 million in 1995 is attributable to a
decline in gains on sale of other real estate. The 1994 amount included a
one-time, pre-tax gain of $1.4 million from the sale of various other real
estate. This activity is primarily due to the management aggressively
concentrating on the disposal of its portfolio of Other Real Estate during 1995
and 1994. Loans are transferred into Other Real Estate when the Bank forecloses
on the real estate collateralizing a non-performing loan, or when the borrower
abandons the property and the Bank elects to assume control of the property.
When this occurs the Bank will transfer the loan to Other Real Estate at the
lower of the book value of the loan or the fair market value, less disposal
costs, of the real estate held as collateral.
Service charge income increased $86 thousand in 1995, or 12% as
compared to 1994 primarily due to additional fee income associated with the KSB
acquisition in 1995.
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.
Total non interest expense increased $4.8 million in 1996 to $15.1
million primarily due to an increase in salaries, wages and employee benefits of
$4.8 million, reflecting the addition of new employees relating to the KSB
acquisition in addition to an expense recorded relating to the establishment of
a liability for the Stock Option and Appreciation Right Plan.
The Company has a Stock Option and Appreciation Right Plan which
provides employees compensation in the form of options to purchase shares of the
Company's common stock. At the time an option is granted, an
22
identical number of stock appreciation rights are granted, which enable the
recipient on exercise, to receive payment in cash of increases in the market
value of the stock from the date of grant. Accordingly, the Company accrued $2.5
million relating to these stock appreciation rights as employee benefits expense
in 1996 toward the difference between current market values and the values at
the grant date.
Additional increases in total non interest expense in 1996 were
attributable to increases in occupancy expense, primarily the result of
operating four additional banking offices due to the acquisition of KSB in 1995.
Salary expenses increased $.6 million in 1996 primarily due to an increase in
staffing expense associated with the acquisition of KSB.
In 1995, total non interest expense increased $.7 million to $10.3
million primarily due to an increase in salaries, wages and employee benefits of
$1 million, reflecting the addition of new employees relating to the KSB
acquisition. There were 117 full time equivalent employees at December 31, 1995
versus 83 at December 31, 1994.
Non-payroll related expenses, excluding occupancy and equipment
expenses, decreased $.1 million to $4.8 million in 1996 from $4.9 million in
1995, primarily due to decreases in expenses associated with other real estate
and FDIC insurance assessment and other expense items. Expenses associated with
other real estate decreased in 1996 primarily due to Management aggressively
disposing of these properties, as total other real estate continued its downward
trend to less than .2% of total assets at December 31, 1996. The FDIC deposit
assessment decreased significantly from $.3 million for 1995 to $2 thousand for
1996, due to a reduction in rates by the FDIC charged on deposits for well
capitalized banks. These decreases were partially offset by an increase in the
Pennsylvania Bank Shares Tax in 1996. The Pennsylvania Bank Shares Tax is based
on the average capital of a bank. Since the Bank has a strong capital position,
the Pennsylvania Bank Shares Tax expense will increase as the Bank's capital
grows. Additionally, there were increases in expenses associated with
professional fees, data processing, advertising, printing and supplies primarily
due to the KSB acquisition in 1995.
In 1995, non-payroll related expenses, excluding occupancy and
equipment expenses, decreased $.3 million to $4.9 million in 1995 from $5.2
million in 1994, primarily due to decreases in expenses associated with other
real estate and FDIC insurance assessment. Additionally, there were increases in
expenses associated with fees, data processing, advertising, postage and express
mail, training and education.
Accounting for Income Taxes
The provision for federal income taxes was $3.9 million in 1996 as
compared to $3.6 million for 1995 and $3.1 million for 1994. The increases in
the tax provision for 1996, 1995 and 1994 are due to higher taxable income of
approximately $2.3 million, $.8 million and $1.9 million for 1996, 1995 and
1994, respectively. These increases in taxable income are partially due to lower
levels of tax-exempt income for both years, as the tax free investment
securities portfolio continues to shrink due to bond calls.
Accounting for Debt and Equity Securities
The Bank adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," at January 1, 1994. This standard requires
investments in securities to be classified in one of three categories; held to
maturity, trading or available for sale. Debt securities that the Bank has the
positive intent and ability to hold to maturity are classified as held to
maturity and are reported at amortized cost. As the Bank does not engage in
security trading, the balance of its debt securities and any equity securities
are classified as available for sale. Net unrealized gains and losses for such
securities, net of tax effect, are required to be recognized as a separate
component of stockholders' equity and excluded from the determination of net
income. Since the
23
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,
1996, 1995 and 1994 was 49.1%, 54.2%, 60.5%, 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. At December 31,
1996, RBPA is in a slightly asset sensitive position which indicates assets will
reprice more quickly than liabilities.
The interest rate sensitivity analysis is an important management tool,
however, it does have some inherent shortcomings. It is a "static" analysis.
Although certain assets and liabilities may have similar maturities or
repricing, they may react in different degrees to changes in market interest
rates. Additionally, repricing characteristics of certain assets and liabilities
may vary substantially within a given period.
The following table summarizes repricing intervals for interest earning
assets and interest bearing liabilities as of December 31, 1996, 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
24
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.
Interest Rate Sensitivity
(in millions)
Non-rate
sensitive
Days & rate
----------------------------- 1 to 5 sensitive
Assets 0-90 91-180 181-365 years over 5 yrs Total
- ------ ---------------------------------------------------------------
Interest-bearing deposits in banks $ 1.4 $ -- $ -- $ -- $ -- $ 1.4
Federal funds sold 10.6 -- -- -- -- 10.6
Investment securities:
Available for sale 4.8 -- -- -- -- 4.8
Held to maturity 23.2 16.0 16.0 47.4 10.9 113.5
Loans: fixed rate (1) 6.6 0.9 2.8 61.6 9.4 81.2
variable rate 37.6 3.1 7.3 54.0 29.5 131.5
Other assets -- -- -- -- 12.0 12.0
----- ----- ----- ------ ------ ------
Total Assets $84.2 $20.0 $26.1 $163.0 $ 61.8 $355.1
===== ===== ===== ====== ====== ======
Liabilities & Capital
Non interest bearing deposits $ -- $ -- $ -- $ -- $ 38.3 $ 38.3
Interest bearing deposits
Certificate of deposits 25.1 24.5 24.5 47.8 0.4 122.3
Other 45.3 -- -- -- 48.3 93.6
Other liabilities -- -- -- -- 12.1 12.1
Mortgage & long term debt -- -- 0.6 1.1 2.5 4.2
Capital -- -- -- -- 84.6 84.6
----- ----- ----- ------ ------ ------
Total liabilities & capital $70.4 $24.5 $25.1 $ 48.9 $186.2 $355.1
===== ===== ===== ====== ====== ======
Net interest rate sensitivity GAP $13.7 $(4.5) $ 1.0 $114.1
===== ===== ===== ======
Cumulative interest rate sensitivity GAP $13.7 $ 9.2 $10.2 $124.3
===== ===== ===== ======
GAP as a percentage of assets 4% (1%) 0%
===== ===== =====
GAP as a percentage of equity 16% (5%) 1%
===== ===== =====
Cumulative GAP as a percentage of assets 4% 3% 3%
===== ===== =====
Cumulative GAP as a percentage of equity 16% 11% 12%
===== ===== =====
- ----------
(1) Fixed rate loans include a portion of variable rate loans whose floors are
in effect at December 31, 1996
25
Capital Adequacy
The table shown below sets forth RBPA's consolidated capital level and
performance ratios.
Regulatory
1996 1995 1994 Minimum
---------- ---- ---- -------
Capital Level
Leverage ratio 24.2% 22.2% 26.0% 3%
Risk based capital ratio:
Tier 1 28.9% 27.7% 27.8% 4%
Tier 2 30.2% 29.0% 29.0% 8%
Capital Performance
Return on average assets 3.0% 2.6% 2.6% --
Return on average equity 12.7% 11.1% 12.4% --
RBPA's sources of capital have been derived from the issuance of stock
as well as retained earnings. However, RBPA has not had a stock offering since
1986. Total stockholder's equity has increased. At December 31, 1996, RBPA had
an average capital to average asset ratio of 23.0%. 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, 1996, RBPA's ratio using
these standards was 30.2%.
Management Options to Purchase Securities
On June 27, 1990, the directors of the Bank approved the Royal Bank of
Pennsylvania 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). At the same time a stock option is
issued a stock appreciation right for an identical number of shares is also
granted. The option price is equal to the fair market value at the date of the
grant. At December 31, 1996, 540,885 options have been granted (the fair market
per share at the time of the grant was $10.00 in 1996 and $8.25 in 1995) which
are exercisable at 20% per year. At December 31, 1996, options covering 298,310
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 ($10.00 per
share in 1996 and $8.25 in 1995) at the date of the grant. Currently, the strike
price on the options ranges from $2.814 to $10.00 per share. During 1996, 4,103
options were exercised at strike prices ranging from $2.814 to $7.616 per share.
At December 31, 1996, 52,545 options were outstanding and options covering
42,045 shares were exercisable.
26
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, 1996 and 1995
27
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, 1996 and
1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. 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 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 at December 31, 1996 and 1995,
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Philadelphia, Pennsylvania
January 24, 1997
28
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1996 1995
------------- -------------
Cash and due from banks $ 7,744,012 $ 9,320,012
Federal funds sold 10,625,000 37,325,000
------------- -------------
Total cash and cash equivalents 18,369,012 46,645,012
------------- -------------
Interest bearing deposits in banks 953,000 718,751
Investment securities held to maturity
(market value of $113,635,320 - 1996 and $104,636,075 - 1995) 113,474,908 103,462,796
Investment securities available for sale - at market value 4,725,151 970,336
Total loans 209,016,895 198,419,480
Less allowance for loan losses 9,084,153 9,746,559
------------- -------------
Net loans 199,932,742 188,672,921
Other real estate, net 504,104 612,249
Premises and equipment, net 4,708,531 4,427,248
Accrued interest and other assets 12,481,420 10,754,527
------------- -------------
$ 355,148,868 $ 356,263,840
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 38,327,081 $ 34,113,344
Interest bearing (includes certificates of deposit in excess
of $100,000 of $23,657,679 - 1996 and $22,850,705 - 1995) 215,855,522 234,128,196
------------- -------------
Total deposits 254,182,603 268,241,540
Accrued interest and other liabilities 11,571,988 7,849,273
Long-term borrowings 4,201,000 2,332,000
Mortgage payable 612,607 652,367
------------- -------------
Total liabilities 270,568,198 279,075,180
------------- -------------
Stockholders' equity
Common stock
Class A, par value $2 per share; authorized, 18,000,000 shares; issued,
6,596,625 - 1996 and 6,086,554 - 1995 13,193,250 12,173,108
Class B, par value $.10 per share; authorized, 2,000,000 shares; issued,
1,592,091 - 1996 and 1,529,100 - 1995 159,209 152,910
Capital surplus 34,827,443 29,871,868
Retained earnings 38,427,800 34,991,338
Accumulated unrealized loss on investment securities available for sale (1,158) (564)
------------- -------------
86,606,544 77,188,660
Treasury stock - at cost, 198,113 - 1996 of Class A shares (2,025,874) --
------------- -------------
84,580,670 77,188,660
------------- -------------
$ 355,148,868 $ 356,263,840
============= =============
The accompanying notes are an integral part of these statements.
29
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
1996 1995 1994
------------ ------------ ------------
Interest income
Loans, including fees $ 25,109,566 $ 21,754,636 $ 21,740,731
Investment securities held to maturity
Taxable 5,870,852 5,353,431 5,430,690
Tax-exempt 58,488 661,588 1,222,704
Investment securities available for sale
Taxable 64,293 65,786 --
Tax-exempt 261,443 -- --
Deposits in banks 131,005 103,510 198,439
Federal funds sold 987,370 1,121,163 426,612
U.S. Treasury and agencies 1,134,687 694,571 1,694
------------ ------------ ------------
TOTAL INTEREST INCOME 33,617,704 29,754,685 29,020,870
------------ ------------ ------------
Interest expense
Deposits 9,711,456 9,308,218 8,195,488
Mortgage payable and other 342,819 279,273 41,823
Federal funds purchased -- 4,876 6,455
------------ ------------ ------------
TOTAL INTEREST EXPENSE 10,054,275 9,592,367 8,243,766
------------ ------------ ------------
NET INTEREST INCOME 23,563,429 20,162,318 20,777,104
(Decrease) increase in provision for loan losses (1,487,734) -- 2,500,000
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 25,051,163 20,162,318 18,277,104
------------ ------------ ------------
Other income
Service charges and fees 1,008,054 780,245 693,670
Realized gains on sale of investment securities held for sale -- 13,147 --
Gain on other real estate 2,015,994 870,313 1,434,726
Gain on sale of loans 427,023 85,791 71,282
Other income 751,415 305,747 253,475
------------ ------------ ------------
4,202,486 2,055,243 2,453,153
------------ ------------ ------------
Other expenses
Salaries, wages and employee benefits 9,601,628 4,849,409 3,861,193
Occupancy and equipment 660,219 557,825 555,261
Other operating expenses 4,847,801 4,904,129 5,235,893
------------ ------------ ------------
15,109,648 10,311,363 9,652,347
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 14,144,001 11,906,198 11,077,910
Income taxes 3,907,111 3,647,702 3,065,593
------------ ------------ ------------
NET INCOME $ 10,236,890 $ 8,258,496 $ 8,012,317
============ ============ ============
Per share data
Net income $ 1.23 $ 1.01 $ 0.97
============ ============ ============
The accompanying notes are an integral part of these statements
30
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994
Class A common stock Class B common stock
Shares Amount Shares Amount
--------- ----------- --------- --------
Balance, January 1, 1994, as previously reported 5,858,557 $11,717,114 1,415,050 $141,505
Cumulative effect of change in accounting for
stock dividends -- -- -- --
--------- ----------- --------- --------
Balance, January 1, 1994, as restated 5,858,557 11,717,114 1,415,050 141,505
Net income for the year ended December 31, 1994 -- -- -- --
Conversion of Class B common stock to Class A
common stock 37,153 74,306 (32,318) (3,232)
6% stock dividends declared 352,475 704,950 84,005 8,401
Cash in lieu of fractional shares -- -- -- --
Purchase of treasury stock - at cost -- -- -- --
Employee stock options exercised 12,735 25,470 -- --
--------- ----------- --------- --------
Balance, December 31, 1994 6,260,920 12,521,840 1,466,737 146,674
Net income for the year ended December 31, 1995 -- -- -- --
Conversion of Class B common stock to Class A
common stock 27,234 54,468 (24,424) (2,443)
6% stock dividends declared 347,661 695,322 87,359 8,736
Cash in lieu of fractional shares -- -- -- --
Purchase of treasury stock -- -- -- --
Retirement of treasury stock (560,265) (1,120,530) (572) (57)
Employee stock options exercised 11,004 22,008 -- --
Cash dividends on common stock -- -- -- --
Transfer of capital in formation of holding company -- -- -- --
Net unrealized loss on securities available for sale -- -- -- --
--------- ----------- --------- --------
Net
unrealized
loss on
securities
Capital Retained available Treasury
surplus earnings for sale stock
----------- ----------- ---------- -----------
Balance, January 1, 1994, as previously reported $12,875,069 $40,127,198 $ -- $(2,209,143)
Cumulative effect of change in accounting for
stock dividends 10,987,695 (10,987,695) -- --
----------- ----------- ----- -----------
Balance, January 1, 1994, as restated 23,862,764 29,139,503 -- (2,209,143)
Net income for the year ended December 31, 1994 -- 8,012,317 -- --
Conversion of Class B common stock to Class A
common stock -- (71,074) -- --
6% stock dividends declared 3,552,919 (4,266,270) -- --
Cash in lieu of fractional shares -- (1,721) -- --
Purchase of treasury stock - at cost -- -- -- (172,500)
Employee stock options exercised 101,490 -- -- --
----------- ----------- ----- -----------
Balance, December 31, 1994 27,517,173 32,812,755 -- (2,381,643)
Net income for the year ended December 31, 1995 -- 8,258,496 -- --
Conversion of Class B common stock to Class A
common stock -- (52,026) -- --
6% stock dividends declared 2,880,934 (3,584,992) -- --
Cash in lieu of fractional shares -- (2,069) -- --
Purchase of treasury stock -- -- -- (843,986)
Retirement of treasury stock (2,105,045) -- -- 3,225,629
Employee stock options exercised 78,806 -- -- --
Cash dividends on common stock -- (940,826) -- --
Transfer of capital in formation of holding company 1,500,000 (1,500,000) -- --
Net unrealized loss on securities available for sale -- -- (564) --
----------- ----------- ----- -----------
(Continued)
31
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED
Years ended December 31, 1996, 1995 and 1994
Class A common stock Class B common stock
Shares Amount Shares Amount
--------- ----------- --------- --------
Balance, December 31, 1995 6,086,554 $12,173,108 1,529,100 $152,910
Net income for the year ended December 31, 1996 -- -- -- --
Conversion of Class B common stock to Class A
common stock 32,851 65,702 (28,650) (2,865)
6% stock dividends declared 365,229 730,458 91,641 9,164
Cash in lieu of fractional shares -- -- -- --
Purchase of treasury stock -- -- -- --
Employee stock options exercised 111,991 223,982 -- --
Cash dividends on common stock -- -- -- --
Net unrealized loss on securities available for sale -- -- -- --
--------- ----------- --------- ---------
Balance, December 31, 1996 6,596,625 $13,193,250 1,592,091 $159,209
========= =========== ========= ========
Net
unrealized
loss on
securities
Capital Retained available Treasury
surplus earnings for sale stock
----------- ----------- ----- -----------
Balance, December 31, 1995 $29,871,868 $34,991,338 $ (564)$ --
Net income for the year ended December 31, 1996 -- 10,236,890 -- --
Conversion of Class B common stock to Class A
common stock -- (62,837) -- --
6% stock dividends declared 4,025,365 (4,764,987) -- --
Cash in lieu of fractional shares -- (2,099) -- --
Purchase of treasury stock -- -- -- (2,025,874)
Employee stock options exercised 930,210 -- -- --
Cash dividends on common stock -- (1,970,505) -- --
Net unrealized loss on securities available for sale -- -- (594) --
----------- ----------- ------- -----------
Balance, December 31, 1996 $34,827,443 $38,427,800 $(1,158) $(2,025,874)
=========== =========== ======= ===========
The accompanying notes are an integral part of this statement.
32
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities
Net income $ 10,236,890 $ 8,258,496 $ 8,012,317
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 412,395 264,920 190,182
(Decrease) increase in provision for loan losses (1,487,734) -- 2,500,000
Accretion of investment securities discount (70,938) (137,114) (59,693)
Amortization of investment securities premium 722,147 205,236 477,320
Amortization of deferred loan fees (130,272) (107,578) (316,215)
Accretion of discount on loans purchased (1,265,330) (1,397,740) (4,930,956)
Provision (benefit) for deferred income taxes (912,654) (11,005) (1,372,653)
Loss (gain) on sale of equipment -- 4,101 (3,270)
Gain on other real estate (2,015,994) (870,313) (1,434,726)
Gain on sale of loans (427,023) (85,791) (71,282)
Realized gains on sale of investment securities held for sale -- (13,147) --
(Increase) decrease in accrued interest receivable (301,024) (872,930) 175,594
Decrease (increase) in other assets 1,394,977 (2,466,059) (424,217)
Increase (decrease) in accrued interest payable 768,127 788,815 (546,855)
Increase in unearned income on loans 261,203 260,583 707,325
Increase in other liabilities 2,954,589 1,655,439 878,034
------------ ------------ ------------
Net cash provided by operating activities 10,139,359 5,475,913 3,780,905
------------ ------------ ------------
Cash flows from investing activities
Net (decrease) increase in interest bearing balances in banks (234,249) 279,000 4,218,124
Proceeds from calls and maturities of investment securities
held to maturity 18,554,228 16,101,561 8,997,900
Purchase of investment securities held to maturity (29,217,548) (37,040,063) (19,077,340)
Proceeds from sale of investment securities available for sale -- 11,908,594 --
Sales (purchase) of Federal Home Loan Bank stock -- 786,200 (1,725,000)
Purchase of securities available for sale (3,754,815) (28,795) --
Net (increase) decrease in loans (10,118,860) 17,002,492 19,722,521
Purchase of loan portfolio -- (51,493,946) (10,202,395)
Proceeds from sale of premises and equipment -- 8,241 3,270
Purchase of premises and equipment (693,677) (847,404) (258,103)
Proceeds from sale and payments on other real estate 2,124,138 4,750,670 3,447,338
------------ ------------ ------------
Net cash (used in) provided by investing activities (23,340,783) (38,573,450) 5,126,315
------------ ------------ ------------
(Continued)
33
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
1996 1995 1994
------------ ------------ ------------
Cash flows from financing activities
Net (decrease) increase in short-term borrowings $ -- $(21,000,000) $ 10,940,000
Net (decrease) increase in non-interest bearing and
interest bearing demand deposits and savings accounts (4,275,541) 30,592,932 (2,061,750)
Net (decrease) increase in certificates of deposit (9,783,396) 25,683,709 (12,034,875)
Mortgage payments (39,760) (36,781) (37,957)
Cash dividends in lieu of fractional shares (2,099) (2,069) (1,721)
Purchase of treasury stock (2,025,874) (843,986) (172,500)
Net increase (decrease) in long-term borrowings 1,869,000 (948,000) 3,280,000
Issuance of common stock under stock option plans 1,154,192 100,814 126,960
Cash dividends (1,970,505) (940,826) --
Other (593) (564) --
------------ ------------ ------------
Net cash (used in) provided by financing activities (15,074,576) 32,605,229 38,157
------------ ------------ ------------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (28,276,000) (492,308) 8,945,377
Cash and cash equivalents at beginning of year 46,645,012 47,137,320 38,191,943
------------ ------------ ------------
Cash and cash equivalents at end of year $ 18,369,012 $ 46,645,012 $ 47,137,320
============ ============ ============
Supplemental disclosure of cash flow information
Cash paid during the year for
Interest $ 9,286,149 $ 8,803,552 $ 8,790,621
============ ============ ============
Income taxes $ 4,850,000 $ 3,050,000 $ 4,114,182
============ ============ ============
Transfers from loans to other real estate $ -- $ -- $ 2,655,085
============ ============ ============
The accompanying notes are an integral part of these statements.
34
- --------------------------------------------------------------------------------
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
Royal Bancshares of Pennsylvania, Inc. (the Company) and its wholly-owned
subsidiaries: Royal Investments of Delaware, Inc. and Royal Bank of
Pennsylvania (the Bank), including the Bank's wholly-owned subsidiary, Royal
Real Estate, Inc. On June 29, 1995, the Company was formed and acquired all
of the outstanding common stock of the Bank in a business combination
accounted for in a manner similar to a pooling of interests. In the
transaction, the Bank's shareholders exchanged common stock of the Bank for
common stock of the Company on a share-for-share basis. These financial
statements reflect the historical information of the Company. All
significant intercompany transactions and balances have been eliminated.
1. Business
The Company, through its subsidiary bank, offers a full range of banking
services to individual and corporate customers located in eastern
Pennsylvania. The Bank competes with other banking and financial
institutions in certain markets, including financial institutions with
resources substantially greater than its own. Commercial banks, savings
banks, savings and loan associations, credit unions and money market funds
actively compete for savings and time deposits and for various types of
loans. Such institutions, as well as consumer finance and insurance
companies, may be considered competitors of the Bank with respect to one or
more of the services it renders.
In addition to being subject to competition from other financial
institutions, the Company is subject to regulations of certain federal
agencies and, accordingly, it is periodically examined by those regulatory
authorities.
2. Use of Estimates
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the balance sheet and revenues and
expenditures for the period. Therefore, actual results could differ
significantly from those estimates.
The principal estimate that is particularly susceptible to significant
change in the near term relates to the allowance for loan losses. In
connection with this estimate, when circumstances warrant, management
obtains independent appraisals for significant properties. However, future
changes in real estate market conditions and the economy could affect the
Company's allowance for loan losses.
35
- --------------------------------------------------------------------------------
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
3. Investment Securities
The Company accounts for investment securities in accordance with Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This standard requires
investments in securities to be classified in one of three categories: held
to maturity, trading or available for sale. Debt securities that the Company
has the positive intent and ability to hold to maturity are classified as
held to maturity and are reported at amortized cost. As the Company does not
engage in security trading, the balance of its debt securities and any
equity securities are classified as available for sale. Net unrealized gains
and losses for such securities, net of tax effect, are required to be
recognized as a separate component of stockholders' equity and excluded from
the determination of net income.
4. Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of
the portfolio, past loan loss experience, current economic conditions,
volume, growth and composition of the loan portfolio, and other relevant
factors. The allowance is increased by provisions for loan losses charged
against income. Decreases in the allowance result from management's
determination that the allowance for loan losses exceeds their estimates of
potential loan loss.
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures," on October 1, 1995. This
new standard requires that a creditor measure impairment based on the
present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor
may measure impairment based on a loan's observable market price, or the
fair value of the collateral if the loan is collateral dependent. Regardless
of the measurement method, a creditor must measure impairment based on the
fair value of the collateral when the creditor determines that foreclosure
is probable. The adoption of SFAS No. 114, as amended by SFAS No. 118, had
no material impact on the Company's consolidated financial position or
results of operations.
5. Loan Fees and Related Costs
Interest on loans is accrued and credited to operations based upon the
principal amount outstanding. Accretion of unearned discounts on loans has
been added to the related interest income. Accrual of interest is
discontinued on a loan when management believes that the borrower's
financial condition is such that collection of interest is doubtful and
generally when a loan becomes 90 days past due as to principal or interest.
When interest accruals are discontinued, interest credited to income in the
current year is reversed and interest accrued in the prior year is charged
to the allowance for loan losses. Management may elect to continue the
accrual of interest when the estimated net realizable value of collateral is
sufficient to cover the principal balance and accrued interest.
36
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. Other Real Estate
Other real estate is recorded at the lower of the customer's loan balance or
the adjusted fair market value of the real estate securing the loan. The
adjusted fair market value is determined by reducing the fair market value
by estimated costs for the disposition of the property. Costs relating to
holding the property are expensed when incurred.
7. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation,
which is computed principally on the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized on the
straight-line method over the shorter of the estimated useful lives of the
improvements or the terms of the related leases. The estimated useful lives
for buildings and leasehold improvements range from 15 to 31.5 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 $125,964, $95,604 and $64,785 for 1996,
1995 and 1994, respectively.
10. Stock Option Plans
Under two stock option plans, the Company grants stock options to employees,
officers and directors.
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which allows an entity to use a fair value-based
method for valuing stock-based compensation which measures compensation cost
at the grant date based on the fair value of the award. Compensation is then
recognized over the service period, which is usually the vesting period.
Alternatively, the standard permits entities to continue accounting for
employee stock options and similar instruments under Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
its related Interpretations. Entities that continue to account for stock
options using APB Opinion No. 25 are required to make pro forma disclosures
of net income and earnings per share, as if the fair value-based method of
accounting defined in SFAS No. 123 had been applied.
37
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The Company's stock option plans are accounted for under APB Opinion No.
25. The adoption of SFAS No. 123 had no material effect on the Company's
consolidated financial position or results of operations.
11. Per Share Information
Earnings per share are calculated on the basis of the weighted average
number of shares outstanding of 8,291,056, 8,199,605 and 8,260,121 for the
years ended December 31, 1996, 1995 and 1994, respectively. Per share
information and weighted average shares outstanding have been restated to
reflect the 6% stock dividend of May 1996, 1995 and 1994.
12. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, short-term investments and federal funds
sold. Generally, federal funds are purchased and sold for one-day periods.
13. Financial Instruments
The Company follows the provisions of SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments," which requires all entities to disclose the
estimated fair value of their assets and liabilities considered to be
financial instruments. Financial instruments consist primarily of
securities, loans and deposits. The Company has provided these disclosures
in note S.
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. Goodwill
Goodwill, which represents the excess of the cost of acquired companies over
the fair value of the companies' net assets at the date of acquisition, is
being amortized on the straight-line method over a period of 15 years.
38
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
16. Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
The FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," as amended by SFAS No.
127, which provides accounting guidance on transfers of financial assets,
servicing of financial assets and extinguishment of liabilities. This
statement is effective for transfers of financial assets, servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996. Adoption of this new statement is not expected to have a material
impact on the Company's consolidated financial position or results of
operations.
17. Advertising Costs
The Company and the Bank expense advertising costs as incurred.
18. Stock Dividends
The Company reduced retained earnings and increased additional paid-in
capital as of January 1, 1994 and for the years ended December 31, 1995 and
1994 to charge retained earnings for the stock dividends paid at the fair
value of additional shares issued which were previously recorded at par
value.
NOTE B - ACQUISITIONS
On July 21, 1995, the Bank acquired from the State Workers' Insurance Fund
(SWIF) all of the outstanding stock of Knoblauch State Bank (KSB) in a
purchase transaction for approximately $8,200,000 in cash. KSB was a
state-chartered bank with five offices engaged in commercial and retail
banking. At June 30, 1995, KSB had total assets of approximately $95,900,000
and deposits of approximately $87,000,000. The purchase of KSB resulted in
the creation of goodwill of $2,762,114. The results of KSB's operations from
July 21, 1995 through December 31, 1995 and the combined results for the
year ended December 31, 1996 are included in the consolidated statements of
income for 1995 and 1996, respectively.
Prior to the merger, KSB had been engaged in various litigation relating to
the propriety of the Secretary of Banking's seizure of the Knoblauch Private
Bank and The Marian Bank, and the transfer of certain of their assets to
KSB. At the time of the merger, settlement of this litigation had been
substantially completed; however, certain litigation remained outstanding.
As a result, the Company's consideration for the purchase of KSB's
outstanding shares was placed in escrow pending resolution of the seizure
litigation. Should the seizure litigation be settled adversely to KSB, the
escrowed funds will be used to satisfy any judgments against KSB. The
Company could be liable for any judgments in excess of the escrowed funds.
Management believes that the possibility that judgments would exceed the
escrowed funds is remote.
39
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE B - ACQUISITIONS - Continued
On October 6, 1995, the Company was named in a lawsuit filed by Catherine
Baker Knoll, Pennsylvania State Treasurer, alleging the SWIF board acted
improperly in approving the sale of KSB to the Company and seeking to break
the escrow and have the escrowed funds paid to the Treasury of the
Commonwealth of Pennsylvania. If the escrow is broken, the Company may be at
risk for any unsettled seizure litigation. Management believes the
likelihood of an adverse outcome is slight, and in any event, there will be
no material adverse effect on the liquidity, results of operations or
financial position of the Company.
The following pro forma results are unaudited and were prepared under the
assumption that the acquisition of KSB was effective at the beginning of
each year presented:
1995 1994
---- ----
(unaudited)
Total income $36,341,844 $39,981,757
=========== ===========
Net income $ 7,568,580 $ 6,389,143
=========== ===========
Net income per share $ 0.96 $ 0.85
=========== ===========
NOTE C - INVESTMENT SECURITIES
The amortized cost, 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:
1996
---------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ----------
Investment securities held to maturity
Obligations of states and political
subdivisions $ 498,465 $ 81,135 $ -- $ 579,600
U.S. treasuries 7,967,376 9,410 2,686 7,974,100
Corporate securities 97,793,198 297,720 356,787 97,734,131
U.S. agencies 7,215,869 134,429 2,809 7,347,489
------------ -------- ---------- ------------
$113,474,908 $522,694 $362,282 $113,635,320
=========== ======== ======== ===========
Investment securities available for sale
Federal Home Loan Bank stock -
at cost $ 1,024,200 $ -- $ -- $ 1,024,200
Preferred and common stock 3,702,707 -- 1,756 3,700,951
------------ -------- ---------- ------------
$ 4,726,907 $ -- $ 1,756 $ 4,725,151
============ ======== ========= ============
40
- --------------------------------------------------------------------------------
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE C - INVESTMENT SECURITIES - Continued
In 1995, the FASB issued a special report, "A Guide to Implementation of
SFAS No. 115." In this guide, the FASB stated it was permitting a one-time
opportunity to reassess the appropriateness of the designation of
securities. The guide provided that any resulting reclassification must
occur between November 15, 1995 and December 31, 1995. The Company completed
this reassessment and reclassified $20,809,979 of securities from available
for sale to held to maturity effective December 31, 1995.
1995
-------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
Investment securities held to maturity
Obligations of states and political
subdivisions $ 498,977 $ 113,353 $ -- $ 612,331
U.S. treasuries 9,944,622 140,778 -- 10,085,400
Corporate securities 82,153,840 873,407 170,055 82,857,192
U.S. agencies 10,865,357 223,786 7,991 11,081,152
------------ ----------- ----------- ------------
$103,462,796 $ 1,351,324 $ 178,046 $104,636,075
============ =========== =========== ============
1995
-------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
Investment securities available for sale
Federal Home Loan Bank stock -
at cost $ 938,800 $ -- $ -- $ 938,800
Corporate securities 32,391 -- 855 31,536
------------ ----------- ----------- ------------
$ 971,191 $ -- $ 855 $ 970,336
============ =========== =========== ============
1996
-------------------------------------------------------------
Held to maturity Available for sale
---------------------------- --------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
Within 1 year $ 56,158,831 $ 55,185,780 $ -- $ --
After 1 but within 5 years 45,927,095 47,008,635 -- --
After 5 but within 10 years 8,218,383 8,110,658 -- --
After 10 years 3,170,599 3,330,247 -- --
------------ ------------ ----------- -----------
113,474,908 113,635,320 -- --
Federal Home Loan Bank stock -- -- 1,024,200 1,024,200
Preferred and common stock -- -- 3,702,707 3,700,951
------------ ------------ ----------- -----------
$113,474,908 $113,635,320 $ 4,726,907 $ 4,725,151
============ ============ =========== ===========
41
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE C - INVESTMENT SECURITIES - Continued
The amortized cost and estimated fair value of investment securities at
December 31, 1995, 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.
1995
-------------------------------------------------------------
Held to maturity Available for sale
---------------------------- --------------------------
Estimated Gross Estimated
Amortized fair unrealized fair
cost value losses value
--------- ---------- ---------- ---------
Within 1 year $ 13,942,095 $ 14,003,337 $ -- $ --
After 1 but within 5 years 80,850,251 81,646,823 -- --
After 5 but within 10 years 4,732,278 4,838,730 -- --
After 10 years 3,938,172 4,147,185 -- --
------------ ------------ --------- -----------
103,462,796 104,636,075 -- --
Federal Home Loan Bank stock -- -- 938,800 938,800
Corporate securities -- -- 32,391 31,536
------------ ------------ --------- -----------
$103,462,796 $104,636,075 $ 971,191 $ 970,336
============ ============ ========== ===========
Proceeds from the sale of investment securities held for sale during 1996,
1995 and 1994 were $-0-, $11,908,594 and $-0-, respectively, resulting in
gross realized gains of $-0-, $13,174 and $-0- during 1996, 1995 and 1994,
respectively.
As of December 31, 1996 and 1995, investment securities with a book value
of $18,263,840 and $18,292,456, respectively, were pledged as collateral
to secure public deposits and for other purposes required or permitted by
law.
NOTE D - LOANS
Major classifications of loans are as follows:
1996 1995
---- ----
Consumer $ 2,097,746 $ 3,351,624
Commercial and industrial 116,616,587 124,065,359
Real estate 93,923,890 75,758,222
------------ ------------
Total gross loans 212,638,223 203,175,205
Less
Unearned income (1,290,574) (1,159,641)
Unamortized discount on loans purchased (2,330,754) (3,596,084)
------------ ------------
Total loans $209,016,895 $198,419,480
============ ============
42
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE D - LOANS - Continued
Loans on which the accrual of interest has been discontinued or reduced
amounted to $4,652,669 and $6,233,376 at December 31, 1996 and 1995,
respectively. If interest had been accrued, such income would have been
$418,740 and $1,889,823 for the years ended December 31, 1996 and 1995,
respectively. Loan balances past due 90 days or more that are not on a
non-accrual status, but management expects will eventually be paid in full,
amounted to approximately $-0- and $391,000 at December 31, 1996 and 1995,
respectively. Although the Company has non-performing loans of $4,652,669 at
December 31, 1996, 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 approximately $5,462,000 and $11,724,000 at December 31,
1996 and 1995, respectively. During 1996, $-0- of new loans were made and
repayments totalled $6,262,000.
The balance of impaired loans was $1,928,415 at December 31, 1996. 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 allowance for credit loss associated with impaired
loans was $-0- at December 31, 1996. The income recognized on impaired loans
during 1996 was $1,420. Total cash collected on impaired loans during 1996
was $193,579, of which $192,159 was credited to the principal balance
outstanding on such loans. Interest that would have been accrued on impaired
loans during 1996 was $70,163. The Company's policy for interest income
recognition on impaired loans is to recognize income on currently performing
restructured loans under the accrual method. The Company recognizes income
on non-accrual loans under the cash basis when the principal payments on the
loans become current and the collateral on the loan is sufficient to cover
the outstanding obligation to the Company. If these factors do not exist,
the Company does not recognize income.
NOTE E - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
1996 1995 1994
---- ---- ----
Balance at beginning of year $ 9,746,559 $ 8,991,618 $ 6,607,780
----------- ---------- ----------
Charge-offs (1,082,865) (313,028) (290,359)
Recoveries 1,908,193 155,719 174,197
----------- ----------- ----------
Net charge-offs and recoveries 825,328 (157,309) (116,162)
Additions due to Knoblauch merger -- 912,250 --
(Decrease) increase in provision for loan losses (1,487,734) -- 2,500,000
----------- ----------- ----------
Balance at end of year $ 9,084,153 $ 9,746,559 $ 8,991,618
=========== =========== ===========
43
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
1996 1995
---- ----
Land $ 1,373,478 $ 1,373,478
Buildings 3,802,047 3,590,739
Furniture and fixtures 2,113,000 1,626,707
----------- -----------
7,288,525 6,590,924
Less accumulated depreciation 2,579,994 2,163,676
----------- -----------
$ 4,708,531 $ 4,427,248
=========== ===========
NOTE G - DEPOSITS
Deposits are summarized as follows:
1996 1995
---- ----
Demand $ 38,327,081 $ 34,113,344
NOW and money market 76,648,603 85,531,884
Savings 16,345,166 15,951,163
Time, $100,000 and over 23,657,679 22,850,705
Other time 99,204,074 109,794,444
------------ ------------
$254,182,603 $268,241,540
============ ============
Certificates of deposit of $100,000 or more consist of the following:
1996 1995
---- ----
Three months or less $ 7,678,131 $ 3,971,326
Over three months through twelve months 9,329,628 5,993,315
Over twelve months through five years 6,211,785 12,449,223
Over five years 438,135 436,841
------------ ------------
$23,657,679 $22,850,705
=========== ===========
Maturities of certificates of deposit for the next five years and thereafter
are as follows:
1997 $ 74,423,350
1998 16,676,879
1999 13,207,430
2000 6,685,768
2001 and thereafter 5,021,993
------------
$116,015,420
============
44
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE H - MORTGAGE PAYABLE
The mortgage payable is payable to a bank at 65% of the prime rate (5.36% at
December 31, 1996) 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,
------------------------
1997 $ 37,394
1998 39,449
1999 41,618
2000 43,905
2001 46,319
Thereafter 403,922
--------
$612,607
========
NOTE I - LONG-TERM BORROWINGS
Long-term borrowings consist of advances from the Federal Home Loan Bank at
December 31, 1996 and are as follows:
Due date
December 27, Interest rate
------------ -------------
1997 7.94% $ 638,000
1998 8.12 698,000
1999 8.20 365,000
2006 7.00 2,500,000
----------
$4,201,000
==========
The advances are collateralized by Federal Home Loan Bank stock and certain
of the Company's first mortgage loans.
45
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE J - LEASE COMMITMENTS
The Company leases various premises under non-cancellable agreements which
expire through 2000 and require minimum annual rentals. The minimum rental
commitments under the leases are as follows:
Year ending December 31,
------------------------
1997 $ 353,392
1998 267,179
1999 172,056
2000 173,033
2001 49,656
Thereafter 49,656
----------
$1,064,972
==========
Rental expense for all leases was approximately $339,000, $274,000 and
$200,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
NOTE K - CONTINGENCIES
In March 1995, a class action was certified against the Company based upon
alleged misrepresentation concerning the Company's simple interest
multi-year certificates of deposit (CDs). The class certified consists of
all individuals who purchased or redeemed simple interest multi-year CDs on
or after August 29, 1984, and the compensatory damages claimed by the class
plaintiffs consist of the difference between simple interest and annual
compounding of interest on those CDs. Class plaintiffs also seek treble
damages under the Pennsylvania Unfair Trade Practices and Consumer
Protection Law. Management believes that there are substantial defenses
against these claims and that it is unlikely that any potential loss would
have a material adverse effect on the Company's liquidity, results of
operations or financial position.
NOTE L - 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.
46
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE M - 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:
1996 1995 1994
---- ---- ----
Pennsylvania bank shares tax $ 707,442 $ 688,498 $ 627,743
FDIC assessments 2,000 321,082 521,164
Professional fees 1,595,248 1,595,701 1,839,442
Other real estate expense 141,040 481,318 904,219
NOTE N - INCOME TAXES
The components of the income tax expense (benefit) included in the
consolidated statements of income are as follows:
1996 1995 1994
---- ---- ----
Income tax expense
Current $4,445,217 $3,658,707 $ 4,438,246
Deferred federal tax (912,654) (11,005) (1,372,653)
Benefit applied to reduce goodwill 374,548 -- --
---------- ---------- -----------
$3,907,111 $3,647,702 $ 3,065,593
========== ========== ===========
The difference between the applicable income tax expense and the amount
computed by applying the statutory federal income tax rate of 35% in 1996, 1995
and 1994 is as follows:
1996 1995 1994
---- ---- ----
Computed tax expense at statutory rate $4,950,400 $4,167,169 $3,877,268
Tax-exempt income (223,053) (364,854) (614,107)
Low-income housing tax credit (310,615) - -
Net operating loss carryover from KSB - (78,410) -
Other, net (409,621) (76,203) (197,568)
Effect of 34% rate bracket (100,000) - -
---------- ---------- ----------
Applicable income tax expense $3,907,111 $3,647,702 $3,065,593
========== ========== ==========
47
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE N - INCOME TAXES - Continued
Deferred tax assets and liabilities consist of the following:
1996 1995
---- ----
Deferred tax assets
Allowance for doubtful accounts $ 361,517 $ 867,374
Accrued legal expenses 1,084,848 816,000
Accrued stock-based compensation 864,879 -
Asset valuation reserves 708,260 890,059
Goodwill 127,346 -
Net operating loss carryovers from KSB 7,330,965 7,506,903
----------- -----------
10,447,815 10,080,336
Less valuation allowance 7,330,965 7,856,245
----------- -----------
3,146,850 2,224,091
Deferred tax liabilities
Depreciation 56,802 81,225
Accretion of discount 96,001 61,473
----------- -----------
152,803 142,698
----------- ----------
Net deferred tax asset $ 2,994,047 $ 2,081,393
=========== ==========
The Company has approximately $22,000,000 of net operating loss carryovers
from the acquisition of KSB (note B). These losses will fully expire in
2009. The utilization of these losses is subject to limitation under Section
382 of the Internal Revenue Code. As a result, a valuation allowance has
been established to eliminate the deferred tax asset attributable to these
net operating losses in the amount of $7,330,965.
During 1996, the Company realized a tax benefit related to the net operating
loss carryovers from the acquisition of KSB (note B). 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 ten years.
NOTE O - STOCK OPTION PLANS
At December 31, 1996, 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 ($10.00 in 1996
and $8.25 in 1995) at the date of the grant. Currently, the strike price on
the options ranges from $2.814 to $10.00 per share. During 1996, 4,103
options were exercised at strike prices ranging from $2.814 to $7.616 per
share. At December 31, 1996, 52,545 options are outstanding, and options
covering 42,045 shares were exercisable.
48
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE O - 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, 1996, options covering 298,310 shares
were exercisable by 24 employees. Stock option transactions consist of the
following:
1996 1995
---- ----
Outstanding at beginning of year 552,150 454,826
Granted 100,404 104,722
Exercised (107,888) (5,265)
Cancelled (3,781) (2,133)
---------- ----------
Outstanding at end of year 540,885 552,150
========== ==========
Option price per share exercised $2.801 - $3.919 $2.972 - $7.152
Outstanding at end of year 2.801 - 10.00 2.972 - 8.068
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, "Accounting for Stock-Based Compensation," the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below.
1996 1995
---- ----
Net income
As reported $ 10,237 $ 8,258
Pro forma 10,152 8,210
Earnings per share
As reported $ 1.23 $ 1.01
Pro forma 1.22 1.00
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 1996 and 1995: dividend yield of
4.17% and 2.46% for 1996 and 1995, respectively, and expected volatility of
30.26%, risk-free interest rate of 6.58%, and expected lives of 10 years for
both years.
49
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE P - CONCENTRATIONS OF CREDIT RISK
The Company primarily grants commercial and real estate loans in the greater
Philadelphia metropolitan area. Approximately 6% of loans are outside the
normal lending area. The Company has concentrations of credit risk in real
estate development loans (26%) at December 31, 1996. A substantial portion
of its debtors' ability to honor these contracts is dependent upon the
economic sector.
Approximately 83% of the Company's investment portfolio consists of
corporate securities.
NOTE Q - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit and standby
letters of credit. Such financial instruments are recorded in the financial
statements when they become payable. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The contract amounts of those
instruments reflect the extent of involvement the Company has in particular
classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance by the
other party to commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. The Company uses
the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
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, 1996 are as follows:
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit $12,269,515
Standby letters of credit and financial
guarantees written 753,710
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.
The Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Company
upon extension of credit, is based on management's credit evaluation.
Collateral held varies but may include personal or commercial real estate,
accounts receivable, inventory and equipment.
50
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE Q - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued
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 1996. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers. The Company holds personal or commercial real estate, accounts
receivable, inventory and equipment as collateral supporting those
commitments for which collateral is deemed necessary. The extent of
collateral held for those commitments is 80%.
NOTE R - 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 FDIA, no dividend may be paid
if a bank is in arrears in the payment of any insurance assessment due 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, 1996, management
believes that the Bank meets all capital adequacy requirements to which it
is subject.
51
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE R - REGULATORY MATTERS - Continued
As of December 31, 1996, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank
must maintain minimum total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios are also presented in the
table.
To be well
Required capitalized under
for capital prompt corrective
Actual adequacy purposes action provisions
------------------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total capital
(to risk-weighted assets)
Company (consolidated) $86,009,159 30.17% $22,807,987 8.00% N/A
greater than/= greater than/= greater than/=
Bank $54,493,377 22.77% $20,902,755 8.00% $26,128,444 10.00%
greater than/= greater than/= greater than/=
Tier I capital
(to risk-weighted assets)
Company (consolidated) $82,377,244 28.89% $11,403,994 4.00% N/A
greater than/= greater than/= greater than/=
Bank $56,155,493 21.49% $10,451,378 4.00% $15,677,066 6.00%
greater than/= greater than/= greater than/=
Tier I capital
(to average assets, leverage)
Company (consolidated) $82,377,244 24.15% $10,234,667 3.00% N/A
greater than/= greater than/= greater than/=
Bank $56,155,493 17.26% $ 9,758,242 3.00% $16,263,736 5.00%
greater than/= greater than/= greater than/=
NOTE S - 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.
52
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE S - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
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, 1996
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:
1996 1995
------------------------------ ------------------------------
Estimated Estimated
fair Carrying fair Carrying
value amount value amount
------------ ------------ ------------- -------------
Cash and cash equivalents $ 18,369,012 $ 18,369,012 $ 46,645,012 $ 46,645,012
Interest bearing deposits in banks 1,047,744 953,000 1,033,227 718,751
Investment securities held to maturity 113,635,320 113,474,908 104,636,075 103,462,796
Investment securities available for sale 4,725,151 4,725,151 970,336 970,336
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:
1996 1995
------------------------------ ------------------------------
Estimated Estimated
fair Carrying fair Carrying
value amount value amount
------------ ------------ ------------- -------------
Deposits with stated maturities $128,903,194 $122,861,753 $155,474,182 $148,217,657
Mortgage payable 612,607 612,607 652,367 652,367
Long-term borrowings with stated
maturities 4,768,305 4,201,000 2,544,963 2,332,000
Fair value of financial instrument liabilities with no stated maturities has
been estimated to equal the carrying amount (the amount payable on demand),
totalling $125,279,409 and $112,767,358 at December 31, 1996 and 1995,
respectively.
53
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE S - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
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:
1996 1995
------------------------------ ------------------------------
Estimated Estimated
fair Carrying fair Carrying
value amount value amount
------------ ------------ ------------- -------------
Net loans $214,217,901 $199,932,742 $198,681,706 $188,672,921
There is no material difference between the carrying amount and estimated
fair value of off-balance-sheet items totalling $13,023,225 and $12,283,808
at December 31, 1996 and 1995, 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.
NOTE T - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
The Company was formed on June 29, 1995. Condensed financial information for
the parent company only follows. The balance sheet for December 31, 1996 and
the statements of income and cash flows for the period (since inception)
then ended are presented below.
CONDENSED BALANCE SHEETS
December 31,
-----------------------------
1996 1995
---- ----
Assets
Investment in Royal Investments of Delaware, Inc. - at equity $27,055,328 $21,244,245
Investment in Royal Bank of Pennsylvania - at equity 58,358,928 55,913,196
Other assets 260,000 31,219
----------- ------------
$85,674,256 $77,188,660
=========== ===========
Liabilities $ 1,093,586 $ --
Stockholders' equity 84,580,670 77,188,660
----------- -----------
$85,674,256 $ 7,188,660
=========== ===========
54
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE T - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY- Continued
CONDENSED STATEMENTS OF INCOME
Year ended December 31,
-----------------------------
1996 1995
---- ----
Income
Equity in undistributed net earnings of subsidiaries $ 8,257,413 $ 7,345,584
Dividends from subsidiary bank 1,972,600 940,826
Other income 10,581 --
----------- -----------
Total income 10,240,594 8,286,410
Expense
Income tax expense 3,704 27,914
----------- -----------
Net income $10,236,890 $ 8,258,496
=========== ===========
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------------
1996 1995
---- ----
Cash flows from operating activities
Net income $10,236,890 $ 8,258,496
Adjustments to reconcile net income to net cash provided by
operating activities
Undistributed earnings from subsidiaries (8,257,413) (7,345,584)
Non-cash income tax expense 3,704 --
Non-cash rental income (10,581) --
Non-cash compensation expense -- 27,914
----------- -----------
Net cash provided by operating activities 1,972,600 940,826
----------- -----------
Cash flows from investing activities
Investment in subsidiary (5,000,000) (20,698,008)
----------- -----------
Net cash used in investing activities (5,000,000) (20,698,008)
----------- -----------
Cash flows from financing activities
Cash dividends paid (1,972,600) (940,826)
Dividends from subsidiary bank 5,000,000 20,698,008
----------- -----------
Net cash provided by financing activities 3,027,400 19,757,182
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS -- --
Cash and cash equivalents at beginning of year -- --
----------- -----------
Cash and cash equivalents at end of year $ -- $ --
=========== ===========
55
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 $100,000 in 1996.
Summary Compensation Table
Other Restricted Securities All
Annual Stock Underlying Other
Compensation Award(s) Options Compensation
Name and Principal Position Year Salary($) Bonus($)(2) ($) ($) SARS(#) ($)(1)
- ----------------------------------- ------------ ----------- ----------- ------------- ------------ ----------- -------------
Daniel M. Tabas 1996 308,112 129,509 30,800 -- 21,589 2,550
Chairman of the Board 1995 300,597 132,564 30,800 -- 25,505 2,550
1994 292,295 114,093 29,900 -- 22,013 2,550
Lee E. Tabas 1996 243,247 94,941 17,800 -- 17,044 2,550
President and CEO 1995 237,314 97,180 17,800 -- 20,136 2,550
1994 231,075 83,649 16,900 -- 17,378 2,550
Joseph P. Campbell 1996 154,256 37,050 4,800 -- 4,632 2,550
Managing Director 1995 150,493 37,924 4,800 -- 3,648 2,550
1994 125,247 23,266 3,900 -- 2,430 2,550
James J. McSwiggan 1996 118,274 28,408 -- -- 3,078 2,550
Treasurer and CFO 1995 115,390 29,078 -- -- 2,797 2,550
1994 102,113 17,554 -- -- 2,140 2,550
Richard S. Hannye 1996 153,750 -- 780 -- 3,552 2,550
Corporate Counsel 1995 150,000 -- 720 -- 3,636 2,550
1994 135,021 -- -- -- -- 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 $2,550. From January 1, 1996
to June 30, 1996, the Plan was administered by Valley Forge Consultants.
Commencing on July 1, 1996, the Plan was administered by J. M. Singley
Associates, Inc. Each employee participant is entitled to contribute up to 15%
of his gross salary. Senior management executives are asked to refrain from
contributing to the plan in the event the administrator determines such
contributions would make the Plan top heavy. Each participant in the Plan will
have credited to his Participant's Benefit Account his proportionate share of
all appropriate amounts. Future benefits are based on future contributions.
(2) Bonuses of Messrs. Tabas, Campbell and McSwiggan are performance based and
tied to goals set by the Stock Option, SARS and Compensation Committee.
56
Employee options/SAR Grants in Fiscal Year 1996
Potential Realized
Value at
Assumed Annual
Number of % of Total Rates of Stock Price
Securities Options/SARS Exercise Appreciation for
underlying Granted to or Base Option Term
Options/SARS Employees Price Expiration ----------------------------
Name Granted (#)(1) in Fiscal Years ($/Sh) Date 5% 10%
- ------------------------------- ------------- --------------- -------- ---------- ------------ -------------
Daniel M. Tabas 21,589 32.066% 10.00 4/20/06 271,544 688,146
Lee E. Tabas 17,044 25.315% 10.00 4/20/06 214,378 543,275
Joseph P. Campbell 4,632 6.880% 10.00 4/20/06 58,261 147,644
James J. McSwiggan 3,552 5.276% 10.00 4/20/06 44,676 113,219
Richard S. Hannye 3,078 4.572% 10.00 4/20/06 38,715 98,111
- ------------------
(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, 1996).
Aggregated Option/SAR Exercises in Last Fiscal Year and 1996 Option/SAR Values
Number of Securities
Underlying Unexercised Value of
Options/SARS Unexercised in-the Money
Shares at Options/SARS at
Acquired December 31, 1996 December 31, 1996
on Value ------------------------------ --------------------------------
Name Exercise(#) Realized ($) Exercisable(#) Unexercisable Exercisable($) Unexercisable($)
- ------------------- ----------- -------------- ---------------- ------------- ------------- ------------------
Daniel M. Tabas 107,888 1,507,088 73,380 90,143 777,072 826,048
Lee E. Tabas - - - - 143,104 71,165 2,005,444 652,110
Joseph P. Campbell - - - - 7,610 11,799 87,147 100,360
James J. McSwiggan - - - - 6,630 9,457 74,605 68,844
Richard S. Hannye - - - - 817 6,346 6,792 36,404
- ----------------------
(1) Value of unexercised options/SARS is based used the closing stock price at
December 31, 1996.
57
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,
1997 on which 6,434,844 Class A shares and 1,555,363 Class B shares were
outstanding (net of treasury stock of 204,016 Class A shares).
Name and address of Shares Beneficially Percent of
Beneficial owner Owned Class (5)
------------------- ----- --------
Daniel M. Tabas (4) 3,385,741(Class A) 52.02%
543 Mulberry Lane 1,064,302(Class B) 68.43%
Haverford, PA 19041
Lee E. Tabas (4) 578,700(Class A) 8.80%
1 Dove Lane 99,177(Class B) 6.38%
Haverford, PA 19041
Richard Tabas 53(Class A) -- %
1309 Lafayette Road 107,389(Class B) 6.90%
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, 1997.
Director Shares Percent
or officer Beneficially of
Name Age since Owned (1) (3) Stock (2)
---------------------- ------ ----------- --------------- --------------------
Daniel M. Tabas (4) 73 1980 3,385,741(A) 55.56%
1,064,302(B)
Lee E. Tabas (4) 47 1980 578,700(A) 8.28%
99,177(B)
Joseph P. Campbell 48 1982 55,699(A) 0.87%
13,567(B)
Richard S. Hannye 39 1993 817(A) 0.01%
James J. McSwiggan 41 1993 7,753(A) 0.09%
Robert R. Tabas (4) 41 1988 155,729(A) 2.54%
50,733(B)
Katherine Platt 46 1996 450(A) 0.01%
58
Charles W. Burhans 68 1970 24,521(A) 0.30%
Albert Ominsky 62 1982 19,387(A) 0.61%
26,546(B)
Carl M. Cousins 64 1993 4,721(A) 0.06%
Charles Willner 69 1984 113,593(A) 1.84%
32,562(B)
Howard Wurzak (4) 41 1985 45,295(A) 0.55%
Edward Tepper 57 1986 17,975(A) 0.64%
30,124(B)
Jack Loew 50 1997 -- --
Susan Tabas Tepper(4) 34 1996 187,422(A) 3.05%
54,776(B)
--------------------
Percent of class(5)
All directors and --------------------
executive officers -- -- 4,597,850(A) 68.48%
as a group (15 persons) 1,479,176(B) 95.10%
- --------------------------------------------
(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, Susan Tabas Tepper, and Howard
Wurzak, members of their immediate families and their affiliates and associates,
in the aggregate, own 4,352,881 shares of Class A Common Stock (68.69% 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 1,268,988 shares of
Class B common stock. Messr. Tabas, Susan Tabas Tepper, and Howard Wurzak have
unexercised but exercisable options to purchase 238,343 shares of Class A common
stock. In calculating the tabulated percent of class, an additional 238,343
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, 6,713,803 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, Robert R. Tabas, Susan
Tabas Tepper, and the father-in-law of Howard Wurzak.
Lee Evan Tabas is the President, Chief Executive Officer and a Director
of the Registrant. He does some consulting to Tabas Enterprises. He is the son
of Daniel M. Tabas, brother of Robert R. Tabas and Susan Tabas Tepper, brother
in law of Howard Wurzak.
Joseph Campbell is Managing Director and a Director of the Registrant.
Mr. Campbell is employed by Tabas Enterprises on a part time basis.
59
Richard S. Hannye is the Secretary and Corporate Counsel of the
Registrant. Mr. Hannye was previously associated with the law firm of Hecker
Brown Sherry and Johnson in Philadelphia.
James McSwiggan is the Chief Financial Officer and Treasurer of the
Registrant. Mr. McSwiggan is employed by Tabas Enterprises on a part time basis.
Directors
Katherine Platt, a Director of the Registrant, is a partner of the law
firm Platt, DiGriorgio & DiFabio in Paoli, Pennsylvania.
Charles W. Burhans, a Director of the Registrant, is the President of
Burhans Glass Company, a fabricator and installer of glass products in the King
of Prussia, Pennsylvania area.
Albert Ominsky, a Director of the Registrant, is an attorney and
President of the law firm of Ominsky & Welsh, P.C. in Philadelphia,
Pennsylvania.
Robert R. Tabas is a Vice President, Senior Lender and Director of the
Registrant. Mr. Tabas is a Vice President with Tabas Enterprises. He is the son
of Daniel M. Tabas, and brother of Lee E. Tabas and Susan Tabas Tepper, and
brother in law of Howard Wurzak.
Edward Tepper, a Director of the Registrant, is the Chairman of the
Philadelphia Kixx, a professional indoor soccer team, and the President of
Tepper Properties, a real estate investment company in Villanova, Pennsylvania.
He is the father-in-law of Susan Tabas Tepper.
Charles Willner, a Director of the Registrant, is the owner and manager
of Willner Properties, primarily dealing with investments in real estate in the
King of Prussia, Pennsylvania area.
Howard Wurzak, a Director of the Registrant, is President of
Hospitality Management Group, Inc. and the President of the Twelve Caesars
Banquet Facility in Philadelphia, Pennsylvania. He is the son-in-law of Daniel
M. Tabas and the brother-in-law of Lee E. Tabas, Robert R. Tabas and Susan Tabas
Tepper.
Carl M. Cousins, a Director of the Registrant, is the owner and
principal veterinarian of Haverford Animal Hospital in Haverford, Pennsylvania.
Jack Loew, a Director of the Registrant since January, 1997, is
president and treasurer of Hough/Loew Associates, a design/build construction
and development firm specializing in office, industrial and retail properties.
Susan Tabas Tepper, a Director of the Registrant, does consulting and
public relations work for Tabas Enterprises. She is the daughter of Daniel M.
Tabas, the daughter-in-law of Edward Tepper, the sister of Lee E. Tabas and
Robert R. Tabas, and the sister-in-law of Howard Wurzak.
Beneficial Ownership - Compliance
Section 16 (A) of the Securities Exchange Act of 1934, as amended,
requires the Corporation's officers and directors, and persons who own more than
10 percent of the registered class of the Corporation's equity securities, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission ("SEC"). Officers, directors and greater than 10 percent
shareholders are required by SEC regulation to furnish the Corporation copies of
all Section 16(a) forms they file.
Based solely on its review of forms that were received from certain
reporting persons, the Corporation believes that during the period January 1,
1996 through December 31, 1996, its officers and directors were in compliance
with all filing requirements applicable to them.
60
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 3l, l996 of the above nature exceeded $8,000,000 or
10% of the equity capital accounts to the Registrant.
The largest aggregate amount of indebtedness during the year l996 of
all Directors and Officers to the Bank as a group, and to their associates was
$11,700,000. The total of such outstanding loans at December 3l, l996 was
$5,462,000. Interest rates ranged for fixed rates from 7.5% to 10.5%. Floating
rates ranged from prime to prime plus 2.5 points.
The Registrant has had and intends to have business transactions in the
ordinary course of business with Directors and associates on comparable terms as
those prevailing from time to time for other nonaffiliated vendors of the
Registrant. In particular, the Registrant has used hospitality services of
director's, Howard Wurzak, and Daniel Tabas. Director Albert Ominsky's firm
provides legal services to the Bank. Director Edward Tepper provides
construction supervision and property inspection services to the Bank.
61
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 Finical 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.
10.2 Outside Directors' Stock Option Plan
11. Statement Re: Computation of Earnings Per Share.
Included at Item 8, hereof, Note A, "Per Share
Information".
21. Subsidiaries of Registrant.
27. Financial Data Schedule.
(b) No Current Report on Form 8-K was files by the Registrant during the fourth
quarter of the fiscal year December 31, 1996.
62
SIGNATURES
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 26, 1997 /s/ Daniel M. Tabas
___________________________________ Chairman _________________________________________________________
Daniel M. Tabas
March 26, 1997 /s/ Lee E. Tabas
___________________________________ President/CEO/ _________________________________________________________
Director Lee E. Tabas
March 26, 1997 /s/ Joseph P. Campbell
___________________________________ Managing Director/ _________________________________________________________
Director Joseph P. Campbell
March 26, 1997 /s/ James J. McSwiggan
___________________________________ Treasurer/CFO _________________________________________________________
James J. McSwiggan
March 26, 1997 /s/ Albert Ominsky
___________________________________ Director _________________________________________________________
Albert Ominsky
March 26, 1997 /s/ Charles Burhans
___________________________________ Director _________________________________________________________
Charles Burhans
March 26, 1997 /s/ Robert R. Tabas
___________________________________ Senior Vice President/ _________________________________________________________
Director Robert R. Tabas
March 26, 1997 /s/ Charles Willner
___________________________________ Director _________________________________________________________
Charles Willner
March 26, 1997 /s/ Carl Cousins
___________________________________ Director _________________________________________________________
Carl Cousins
63
DATE TITLE SIGNATURE
---- ----- ---------
___________________________________ Director _________________________________________________________
Howard Wurzak
March 26, 1997 /s/ Katherine Platt
___________________________________ Director _________________________________________________________
Katherine Platt
March 26, 1997 /s/ Edward Tepper
___________________________________ Director _________________________________________________________
Edward Tepper
March 26, 1997 /s/ Jack Loew
___________________________________ Director _________________________________________________________
Jack Loew
March 26, 1997 /s/ Susan Tabas Tepper
___________________________________ Director _________________________________________________________
Susan Tabas Tepper
64
ROYAL BANCHSARES 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) Bylaws (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.
10.2 Outside Directors' Stock Option Plan.
11 Statement Re: Computation of Earnings Per Share. (Included at
Item 8, hereof. Note A. "per Share Information.)
21 Subsidiaries of Registrant
27 Financial Data Schedule.
65