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, 2000, RBPA had consolidated total assets of approximately $630.1 million, total deposits of approximately $472.6 million and stockholders' equity of approximately $103.5 million.
From time to time, RBPA may include forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters in this and other filings with the Securities Exchange Commission. The Private Securities Litigation Reform Act of 1995 provides safe harbor for forward-looking statements. When we use words such as "believes", or "expects," "anticipates" or similar expressions, we are making forward-looking statements. In order to comply with the terms of the safe harbor, RBPA notes that a variety of factors could cause RBPA's actual results and experience to differ materially from the anticipated results or other expectations expressed in RBPA's forward-looking statements. The risks and uncertainties that may affect the operations, performance development and results of RBPA's business include the following: general economic conditions, including their impact on capital expenditures; business conditions in the banking industry; the regulatory environment; rapidly changing technology and evolving banking industry standards; competitive factors, including increased competition with community, regional and national financial institutions; new service and product offerings by competitors and price pressures and similar items.
THE BANK
The Bank was incorporated in the Commonwealth of Pennsylvania on July 30, 1963, was chartered by the Commonwealth of Pennsylvania Department of Banking and commenced operation as a Pennsylvania state-chartered bank on October 22, 1963. The Bank is the successor of the Bank of King of Prussia, the principal ownership of which was acquired by Daniel M. Tabas in 1980. Royal Bank of Pennsylvania is an insured bank under the Federal Deposit Insurance Corporation (the "FDIC").
The Bank derives its income principally from interest charged on loans and interest on investment securities and fees received in connection with the origination of loans and other services. The Bank's principal expenses are interest expense on deposits and operating expenses. Principally operating revenues, deposit growth and the repayment of outstanding loans provide funds for activities.
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 732 Montgomery Avenue, Narberth, PA.
The Bank conducts business operations as a commercial bank offering checking accounts, savings and time deposits, and loans, including residential mortgages, home equity and SBA loans. The Bank also offers safe deposit boxes, collections, and other customary bank services (excluding trust) to its customers. Drive-up, ATM, and night depository facilities are available. Services may be added or deleted from time to time. The services offered and the business of the Bank is not subject to significant seasonal fluctuations. The Bank is a member of the Federal Reserve Fedline Wire Transfer System. The Bank became 16.5% partner in Bankers Settlement Services of Eastern Pennsylvania, L.L.C., a title company. The Bank, together with five other banks in the area, formed this title company on August 16, 2000.
Competition. The Bank is subject to intense competition from commercial banks, thrifts and other financial institutions. The Bank actively competes with such banks and institutions for local deposits and local retail and commercial accounts, and is also subject to competition from banks from areas outside its service area for certain segments of its business. For a number of years, competition has been increasing in the Bank's basic banking business because of the growing number of financial service entities that have entered our local market. This trend was accelerated by the passage of federal laws in the early 1980's, which sharply expanded the powers of thrifts and credit unions, giving them most of the powers that were formerly reserved for commercial banks. While attempting to equalize the competition among the depository institutions, these statutes have little effect on less regulated entities such as money market mutual funds and investment banking firms. Many of these competitors have substantially greater financial resources and more extensive branch systems. To be successful, smaller banks must find a competitive edge. The Bank prides itself on giving its customers personalized service. The Bank has continued at modest levels its research activities relating to the development of new services and the improvement of existing bank services. Marketing activities have continued that have allowed the Bank to remain competitive. These activities include the review of existing services and the solicitation of new users of banking services. The Bank is not dependent upon a single customer or a small number of customers, the loss of which should have a material adverse effect on the Bank or RBPA.
Employees. RBPA employed approximately 135 persons on a full-time equivalent basis as of December 31, 2000.
Deposits. At December 31, 2000, total deposits of the Bank were distributed among demand deposits (10%), money market deposit accounts, savings and Super Now (28%) and time deposits (62%). At year-end 2000, deposits increased $91.3 million from year-end 1999, or 24%, primarily due to an increase in certificate of deposits and money market deposits.
Lending. At December 31, 2000, the Bank had a total loan portfolio of $423.9 million, representing 67% 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.
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, 2000, total assets of RID were $30.6 million, of which $20.7 million was held in cash and cash equivalents and $2.5 million was held in investment securities.
SUPERVISION AND REGULATION
Holding Company. RBPA, as a Pennsylvania business corporation, is subject to the jurisdiction of the Securities and Exchange Commission (the "SEC") and of state securities commissions for matters relating to the offering and sale of its securities. Accordingly, if RBPA wishes to issue additional shares of its Common Stock, in order, for example, to raise capital or to grant stock options, RBPA will have to comply with the registration requirements of the Securities Act of 1933 as amended, or find an applicable exemption from registration.
RBPA is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and to supervision by the Federal Reserve Board. The BHC Act requires RBPA to secure the prior approval of the Federal Reserve Board before it owns or controls, directly or indirectly, more than 5% of the voting shares of any corporation, including another bank. In addition, the BHC Act prohibits RBPA from acquiring more than 5 % of the voting shares of, or interest in, or all or substantially all of the assets of, any bank located outside Pennsylvania, unless such an acquisition is specifically authorized by laws of the state in which such bank is located.
A bank holding company also is prohibited from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any such company engaged in non-banking activities unless the Federal Reserve Board, by order or regulation, has found such activities to be closely related to banking or managing or controlling banks as to be a proper incident thereto. In making this determination, the Federal Reserve Board considers whether the performance of these activities by a bank holding company would offer benefits to the public that outweigh possible adverse effects.
As a bank holding company, RBPA is required to file an annual report with the Federal Reserve Board and any additional information that the Federal Reserve Board may require pursuant to the BHC Act. The Federal Reserve Board may also make examinations of the holding company and any or all of subsidiaries. Further, under Section 106 of the 1970 amendments to the BHC Act and the Federal Reserve Board's regulation, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit or provision of credit of any property or services. The so called "anti-tying" provisions state generally that a bank may not extend credit, lease, sell property or furnish any service to a customer on the condition that the customer obtain additional credit or service from the bank, its bank holding company or any other subsidiary of its bank holding company, or on the condition that the customer not obtain other credit or services from a competitor of the bank, its bank holding company or any subsidiary of its bank holding company.
Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act and by state banking laws on any extensions of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities of the bank holding company and on taking of such stock or securities as collateral for loans to any borrower.
Under Pennsylvania law, RBPA is permitted to control an unlimited number of banks. However, RBPA would be required under the BHC Act to obtain the prior approval of the Federal Reserve Board before acquiring all or substantially all of the assets of any bank, or acquiring ownership or control of any voting shares of any other than the Bank, if, after such acquisition, would control more than 5% of the voting shares of such bank.
The Bank. The deposits of Royal Bank of Pennsylvania are insured by the FDIC. The Bank is subject to supervision, regulation and examination by the Pennsylvania Department of Banking and by the FDIC. In addition, the Bank is subject to a variety of local, state and federal laws that affect its operation.
Under the Pennsylvania Banking Code of 1965, as amended, the ("Code"), the Registrant has been permitted since March 4, 1990 to control an unlimited number of banks. However, the Registrant would be required under the Bank Holding Company Act to obtain the prior approval of the Federal Reserve Board before it could acquire all or substantially all of the assets of any bank, or acquiring ownership or control of any voting shares of any bank other than the Bank, if, after such acquisition, the registrant would own or control more than 5 percent of the voting shares of such bank. The Bank Holding Company Act has been amended by the Riegle-Neal Interstate Banking and Branching Act of 1994 which authorizes bank holding companies subject to certain limitations and restrictions to acquire banks located in any state.
In 1995, the Code was amended to harmonize Pennsylvania law with the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 to enable Pennsylvania institutions to participate fully in interstate banking and to remove obstacles to the choice by banks from other states engaged in interstate banking to select Pennsylvania as a head office location. Some of the more salient features of the amendment are described below.
A bank holding company located in Pennsylvania, another state, the District of Columbia or a territory or possession of the United States may control one or more banks, bank and trust companies, national banks, interstate banks and, with the prior written approval of the Pennsylvania Department of Banking, may acquire control of a bank and trust company or a national bank located in Pennsylvania. A Pennsylvania-chartered institution may maintain branches in any other state, the District of Columbia, or a territory or possession of the United States upon the written approval of the Pennsylvania Department of Banking.
Finally, a banking institution existing under the laws of another jurisdiction may establish a branch in Pennsylvania if the laws of the jurisdiction in which it is located permit a Pennsylvania-chartered institution or a national bank located in Pennsylvania to establish and maintain a branch in such jurisdiction on substantially the same terms and conditions.
In 1995, the Pennsylvania General Assembly enacted the Economic Development Agency, Fiduciary and Lender Environmental Liability Protection Act which, among other things, provides protection to lenders from environmental liability and remediation costs under the environmental laws for releases and contamination caused by others. A lender who engages in activities involved in the routine practices of commercial lending, including, but not limited to, the providing of financial services, holding of security interests, workout practices, foreclosure or the recovery of funds from the sale of property shall not be liable under the environmental acts or common law equivalents to the Pennsylvania Department of Environmental resources or to any other person by virtue of the fact that the lender engages in such commercial lending practices. A lender, however, will be liable if it, its employees or agents, directly cause an immediate release or directly exacerbate a release of regulated substances on or from the property, or knowingly and willfully compelled the borrower to commit an action, which caused such release or violation of an environmental act. The Economic Development Agency, Fiduciary and Lender
Environmental Liability Protection Act, however, does not limit federal liability which still exists under certain circumstances.
A subsidiary bank of a holding company is subject to certain restrictions imposed by the Federal Reserve Act, as amended, on any extensions of credit to the bank holding company or its subsidiaries, on investments in the stock or other securities of the bank holding company or its subsidiaries, and on taking such stock or securities as collateral for loans. The Federal Reserve Act, as amended, and Federal Reserve Board regulations also place certain limitations and reporting requirements on extensions of credit by a bank to principal shareholders of its parent holding company, among others, and to related interests of such principal shareholders. In addition, such legislation and regulations may affect the terms upon which any person who becomes a principal shareholder of a holding company may obtain credit from banks with which the subsidiary bank maintains a correspondent relationship.
Federal law also prohibits the acquisition of control of a bank holding company without prior notice to certain federal bank regulators. Control is defined for this purpose as the power, directly or indirectly, to direct the management or policies of the bank or bank holding company or to vote 25% or more of any class of voting securities of the bank holding company.
From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restrictions on, the business of the Bank. It cannot be predicted whether any such legislation will be adopted or how such legislation would affect the business of the Bank. As a consequence of the extensive regulation of commercial banking activities in the United States, the Bank's business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business.
Under the Federal Deposit Insurance Act ("FDIC Act"), the FDIC possesses the power to prohibit institutions regulated by it (such as the Bank) from engaging in any activity that would be an unsafe and unsound banking practice or in violation of applicable law. Moreover, the FDIC Act: (i) empowers the FDIC to issue cease-and-desist or civil money penalty orders against the Bank or its executive officers, directors and/or principal shareholders based on violations of law or unsafe and unsound banking practices; (ii) authorizes the FDIC to remove executive officers who have participated in such violations or unsound practices; (iii) restricts lending by the Bank to its executive officers, directors, principal shareholders or related interests thereof; (iv) restricts management personnel of a bank from serving as directors or in other management positions with certain depository institutions whose assets exceed a specified amount or which have an office within a specified geographic area. Additionally, the FDIC Act provides that no person may acquire control of the Bank unless the FDIC has been given 60-days prior written notice and within that time has not disapproved the acquisition or extended the period for disapproval. In April 1995, regulators revised the Community Reinvestment Act ("CRA") with an emphasis on performance over process and documentation. Under the revised rules, the five-point rating scale is still utilized by examiners to assign a numerical score for a bank's performance in each of three areas: lending, service and investment.
Under the CRA, the FDIC is required to: (i) assess the records of all financial institutions regulated by it to determine if these institutions are meeting the credit needs of the community (including low-and moderate-income neighborhoods) which they serve, and (ii) take this record into account in its evaluation of any application made by any such institutions for, among other things, approval of a branch or other deposit facility, office relocation, a merger or an acquisition of bank shares. The CRA also requires the federal banking agencies to make public disclosures of their evaluation of each bank's record of meeting the credit needs of its entire community, including low-and moderate-income neighborhoods. This evaluation will include a descriptive rate ("outstanding," "satisfactory," "needs to improve" or "substantial noncompliance")
and a statement describing the basis for the rating. After its most recent examination of the Bank under CRA, the FDIC gave the Bank a CRA rating of satisfactory.
Under the Bank Secrecy Act ("BSA"), banks and other financial institutions are required to report to the Internal Revenue Service currency transactions of more than $10,000 or multiple transactions in any one day of which the Bank is aware that exceed $10,000 in the aggregate or other lesser amounts. Civil and criminal penalties are provided under the BSA for failure to file a required report, for failure to supply information required by the BSA or for filing a false or fraudulent report.
RIEGLE-NEAL INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT OF 1994. The Bank believes that further merger activity within Pennsylvania is likely to occur in the future, resulting in increased concentration levels in banking markets within Pennsylvania and other significant changes in the competitive environment. The Riegle-Neal allows adequately capitalized and managed bank holding companies to acquire banks in any state starting one year after enactment (September 29, 1995). Another provision of the Riegle-Neal Act allows interstate merger transactions beginning June 1, 1997. States are permitted, however, to pass legislation providing for either earlier approval of mergers with out-of-state banks, or "opting-out" of interstate mergers entirely. Through interstate merger transactions, banks will be able to acquire branches of out-of-state banks by converting their offices into branches of the resulting bank. The Riegle-Neal Act provides that it will be the exclusive means for bank holding companies to obtain interstate branches. Under the Riegle-Neal Act, banks may establish and operate a "de novo branch" in any State that "opts-in" to de novo branching. Foreign banks are allowed to operate branches, either de novo or by merger. These branches can operate to the same extent that the establishment and operation of such branches would be permitted if the foreign bank were a national bank or state bank. All these changes are expected to intensify competition in local, regional and national banking markets. The Pennsylvania Banking Code has been amended to enable Pennsylvania institutions to participate fully in interstate banking (see discussion above).
Management cannot anticipate what changes Congress may enact, or, if enacted, their impact on RBPA's financial position and reported results of operation. As a consequence of the extensive regulation of commercial banking activities in the United States, RBPA's business is particularly susceptible to being affected by federal and state legislation and regulations that may increase the costs of doing business.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
GENERAL. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDIC Improvement Act") includes several provisions that have a direct impact on the Bank. The most significant of these provisions are discussed below.
The FDIC is required to conduct periodic full-scope, on-site examinations of the Bank. In order to minimize losses to the deposit insurance funds, the FDIC Improvement Act establishes a format to more monitor FDIC-insured institutions and to enable prompt corrective action by the appropriate federal supervisory agency if an institution begins to experience any difficulty. The FDIC Improvement Act establishes five "capital" categories. They are: (1) well capitalized, (2) adequately capitalized, (3) undercapitalized, (4) significantly undercapitalized, and (5) critically undercapitalized. The overall goal of these new capital measures is to impose more scrutiny and operational restrictions on banks as they descend the capital categories from well capitalized to critically undercapitalized.
Under Current regulations, a "well-capitalized" institution would be one that has at least a 10% total risk-based capital ratio, a 6% Tier 1 risk-based capital ratio, a 5% Tier 1 Leverage Ratio, and is not subject
to any written order or final directive by the FDIC to meet and maintain a specific capital level. The Bank is presently categorized as a "well-capitalized" institution.
An "adequately capitalized" institution would be one that meets the required minimum capital levels, but does not meet the definition of a "well-capitalized" institution. The existing capital rules generally require banks to maintain a Tier 1 Leverage Ratio of at least 4% and an 8% total risk-based capital ratio. Since the risk-based capital requirement to be in the form of Tier 1 capital, this also will mean that a bank would need to maintain at least 4% Tier 1 risk-based capital ratio. An institution must meet each of the required minimum capital levels in order to be deemed "adequately capitalized."
An "undercapitalized" institution is one that fails to meet one or more of the required minimum capital levels for an "adequately capitalized" institution. Under the FDIC Improvement Act, an "undercapitalized" institution must file a capital restoration plan and is automatically subject to restrictions on dividends, management fees and asset growth. In addition, the institution is prohibited from making acquisitions, opening new branches or engaging in new lines of business without the prior approval of its primary federal regulator. A number of other restrictions may be imposed.
A "critically undercapitalized" institution is one that has a tangible equity (Tier 1 capital) ratio of 2% or less. In addition to the same restrictions and prohibitions that apply to "undercapitalized" and "significantly undercapitalized" institutions, any institution that becomes "critically undercapitalized" is prohibited from taking the following actions without the prior written approval of its primary federal supervisory agency: engaging in any material transactions other than in the usual course of business; extending credit for highly leveraged transactions; amending its charter or bylaws; making any material changes in accounting methods; engaging in certain transactions with affiliates; paying excessive compensation or bonuses; and paying interest on liabilities exceeding the prevailing rates in the institution's market area. In addition, a "critically undercapitalized" institution is prohibited from paying interest or principal on its subordinated debt and is subject to being placed in conservatorship or receivership if its tangible equity capital level is not increased within certain mandated time frames.
REAL ESTATE LENDING GUIDELINES. Pursuant to the FDIC Improvement Act, the FDIC has issued real estate lending guidelines that establish loan-to-value ("LTV") ratios for different types of real estate loans. A LTV ratio is generally defined as the total loan amount divided by the appraised value of the property at the time the loan is originated. If a bank does not hold a first lien position, the total loan amount would be combined with the amount of all senior liens when calculating the ratio. In addition to establishing the LTV ratios, the FDIC's real estate guidelines require all real estate loans to be based upon proper loan documentation and a recent independent appraisal of the property.
The FDIC's guidelines establish the following limits for LTV ratios:
The guidelines provide exceptions to the LTV ratios for government-backed loans; loans facilitating the sale of real estate acquired by the lending institution in the normal course of business; loans where the Bank's decision to lend is not based on the offer of real estate as collateral and such collateral is taken only out of an abundance of caution; and loans renewed, refinanced, or restructured by the original lender to the same borrower, without the advancement of new money. The regulation also allows institutions to make a limited amount of real estate loans that do not conform with the proposed LTV ratios. Under this exception, the Bank would be allowed to make real estate loans that do not conform with the LTV ratio limits, up to an amount not to exceed 100% of the Bank's total capital.
TRUTH IN SAVINGS ACT. The FDIC Improvement Act also contains the Truth in Savings Act. The purpose of this Act is to require the clear and uniform disclosure of the rates of interest that are payable on deposit accounts by the Bank and the fees that are assessable against deposit accounts, so that consumers can make a meaningful comparison between the competing claims of banks with regard to deposit accounts and products. This Act requires the Bank to include, in a clear and conspicuous manner, the following information with each periodic statement of a deposit account: (1) the annual percentage yield earned, (2) the amount of interest earned, (3) the amount of any fee and charges imposed and (4) the number of days in the reporting period. This Act allows for civil lawsuits to be initiated by customers if the Bank violates any provision or regulation under this Act.
GRAMM-LEACH-BLILEY ACT. On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act of 1999, the Financial services Modernization Act. The Financial Services Modernization Act repeals the two affiliation provisions of the Glass-Steagall Act:
- Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms "engaged principally" in specified securities activities; and
- Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person "primarily engaged" in specified securities activities.
In addition, the Financial Services Modernization Act contains provisions that expressly preempt any state insurance law. The law establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers. It revises and expands the framework of the Bank Holding Company Act framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a Financial Holding Company. "Financial activities" is broadly defined to include not only banking, insurance and securities activities, but also merchant banking and additional activities that the Federal Reserve, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
In general, the Financial Services Modernization Act:
- Repeals historical restrictions on, and eliminates many federal and state law barriers to, affiliations among banks, securities firms, insurance companies, and other financial service providers;
- Provides a uniform framework for the functional regulation of the activities of banks, savings institutions and their holding companies;
- Broadens the activities that may be conducted by national banks, banking subsidiaries of bank holding companies, and their financial subsidiaries;
- Provides an enhanced framework for protecting the privacy of consumer information;
- Adopts a number of provisions related to the capitalization, membership, corporate governance, and the other measures designed to modernize the Federal Home Loan Bank system;
- Modifies the laws governing the implementation of the Community Reinvestment Act; and
- Addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions.
In order for the Registrant to take advantage of the ability to affiliate with other financial service providers, the Registrant must become a "Financial Holding Company" as permitted under an amendment to the Bank Holding Company Act. To become a Financial holding Company, a company must file a declaration with the Federal Reserve, electing to engage in activities permissible for Financial Holding Companies and certifying that it is eligible to do so because all of its insured depository institution subsidiaries are well-capitalized and well-managed. In addition, the Federal Reserve must determine that each insured depository institution subsidiary of the company has at least a satisfactory "CRA rating. The Registrant currently meets the requirements to make an election to become a Financial Holding Company. The Registrant's management has not determined at this time whether it will seek an election to become a Financial Holding Company. The Registrant is examining its strategic business plan to determine whether, based on market conditions, the relative financial conditions of the Registrant and its subsidiaries, regulatory capital requirements, general economic conditions, and other factors, the Registrant desires to utilize any of its expanded powers provided in the Financial Service Modernization Act.
The Financial Services Modernization Act also includes a new section of the Federal Deposit Insurance Act governing subsidiaries of state banks that engage in "activities as principal that would only be permissible" for a national bank to conduct in a financial subsidiary. It expressly preserves the ability of a state bank to retain all existing subsidiaries. Because Pennsylvania permits commercial banks chartered by the state to engage in any activity permissible for national banks, the Bank will be permitted to form subsidiaries to engage in the activities authorized by the Financial Services Modernization Act, to the same extent as a national bank. In order to form a financial subsidiary, the Bank must be well-capitalized, and the Bank would be subject to the same capital deduction, risk management and affiliate transaction rules as applicable to national banks.
The Registrant and the Bank do not believe that the Financial Services Modernization Act will have a material adverse effect on our operations in the near-term. However, to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result of increasing the amount of competition that the Registrant and the Bank face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than the Registrant and the Bank.
MONETARY POLICY
The earnings of the Bank are affected by the policies of regulatory authorities including the Federal Reserve Board. An important function of the Federal Reserve System is to influence the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities, changes in reserve requirements against member bank deposits and limitations on interest rates that member banks may pay on time and savings deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may also affect rates charged on loans or paid for deposits.
The policies and regulations of the Federal Reserve Board have had and will probably continue to have a significant effect on its reserve requirements, deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Bank's operations in the future. The effect of such policies and regulations upon the future business and earnings of the Bank cannot be predicted.
EFFECTS OF INFLATION
Inflation has some impact on RBPA's operating costs. Unlike many industrial companies, however, substantially all of RBPA's assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on RBPA's performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as prices of goods and services.
ITEM 2.
ITEM 2. PROPERTIES
The Bank has fourteen banking offices, of which thirteen are located in Pennsylvania.
- ---------- (1) owned (2) Lease expired 2/28/01
The Bank owns six of the above properties. One property is subject to a mortgage. The remaining seven properties are leased with expiration dates between 2000 and 2004. The Bank also leases storage warehouse space in Bridgeport, Pa. at an annual rate of $10 thousand. During 2000, the Bank made aggregate lease payments of approximately $388 thousand. The Bank believes that all of its properties are attractive, adequately insured, and well maintained and are adequate for RBPA's purposes. The Bank also owns a property located at 144 Narberth Avenue, Narberth, PA, which may serve as a site for future expansion.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Management, after consulting with RBPA's legal counsel, is not aware of any litigation that would have a material adverse effect on the consolidated financial position of RBPA. There are no proceedings pending other than routine litigation incident to the business of RBPA. In addition, no material proceedings are known to be contemplated by governmental authorities against RBPA.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5.
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. There is no market for the registrant's Class B Common Stock, as such is prohibited by the terms of the Class B Common Stock. The following table shows the range of high, low-end and closing bid prices for the Registrant's stock as reported by NASDAQ
BID PRICES
(Source: This summary reflects information supplied by NASDAQ.)
The bid information shown above is derived from statistical reports of the NASDAQ Stock Market and reflects inter-dealer prices without retail mark-up, mark-down or commissions and may not necessarily represent actual transaction. The NASDAQ Stock Market, Inc., is a wholly-owned subsidiary of National Association of Securities Dealers, Inc.
The approximate number of recorded holders of the Registrant's Class A and Class B Common Stock, as of February 28, 2001, is shown below:
Because substantially all of the holders of Class B Common Stock are also holders of Class A Common stock the number of record holders of the two classes on a combined basis was approximately 456 as of February 28, 2001.
DIVIDENDS
Subject to certain limitations imposed by law, the Board of Directors of the Registrant may declare a dividend on shares of common stock.
Stock Dividends. On April 22, 1998, the Board of Directors of the Registrant declared a 4% stock dividend on both its Class A Common Stock and Class B Common Stock shares payable May 8, 1998, to shareholders of record on May 1, 1998. The stock dividend resulted in the issuance of 272,313 additional shares of Class A Common Stock and 63,595 additional shares of Class B Common Stock.
On April 21, 1999, the Board of Directors of the Registrant declared a 4% stock dividend on both its Class A Common Stock and Class B Common Stock shares payable May 14, 1999, to Shareholders of record on May 3, 1999. The stock dividend resulted in the issuance of 288,728 additional shares of Class A Common Stock and 65,296 additional shares of Class B Common Stock.
On October 20, 1999, the board of directors of the Registrant declared a 5% stock dividend on both its Class a Common stock and Class B common stock shares payable on January 17, 2000, to shareholders of record on January 3, 2000. The stock dividend resulted in the issuance of 382,857 additional shares of Class A common stock and 84,234 additional shares of Class B common stock.
On January 17, 2001, the board of directors of the Registrant declared a 5% stock dividend on both its Class a Common stock and Class B common stock shares payable on February 12, 2001, to shareholders of record on January 29, 2001. The stock dividend resulted in the issuance of 408,197 additional shares of Class A common stock and 86,614 additional shares of Class B common stock. Future stock dividends, if any, will be at the discretion of the Board of Directors and will be dependent on the level of earnings and compliance with regulatory requirements.
Cash Dividends. The Registrant paid cash dividends in each quarter of 2000 and 1999 for holders of Class A Common Stock and for holders of Class B common stock. This resulted in a charge to retained earnings of approximately $8.5 million and $7.8 million for 2000 and 1999, respectively. The following table sets forth on a quarterly basis the dividend paid to holders of each Class A and Class B common stock for 2000 and 1999, adjusted to give effect to the stock dividends paid.
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, the Bank places a restriction on the availability of capital surplus for payment of dividends.
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 Regulatory Matters Note to the Consolidated Financial Statements in Item 8 of this report.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial and operating information for RBPA should be read in conjunction with ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements of RBPA (see Item 8) and related notes included herein.
FINANCIAL CONDITION
Total assets increased $107.5 million, or 21%, to $630.1 million at December 31, 2000 from $522.5 million at year-end 1999, primarily due to growth experienced in loans, cash and cash equivalents, and investment securities during 2000 of $69.1 million, $25.5 million and $13.7 million, respectively.
Cash and Cash Equivalents. Cash and cash equivalents are comprised of cash on hand, and cash in interest bearing and non-interest bearing accounts in banks, in addition to federal funds sold. Cash and cash equivalents increased $25.5 million, or 143%, to $43.2 million at December 31, 2000. The average balance of cash and cash equivalents was approximately $34.9 million for 2000 versus $20.6 million for 1999. The majority of this average balance is held in interest-bearing accounts or invested daily in overnight fed funds. The average balance of these funds that earn interest was $24.7 million in 2000. This increase in the balance and average balance of cash and cash equivalents is reflective of the deposit cash inflows partially attributable to the introduction of the new Royal Treasury deposit account and an increase in certificates of deposits during 2000.
Investment Securities Held to Maturity. Held to maturity ("HTM") investment securities represents approximately 12% of average earning assets during 2000 and are comprised of primarily corporate debt securities of investment grade quality, at the time of purchase. During 2000, HTM investment securities increased by $3 million to $86.1 million at December 31, 2000, from $83.1 million at December 31, 1999 as purchases outpaced maturities, partially offset by a reclass of $12.2 million of HTM investment securities to available for sale ("AFS) investment securities on April 1, 2000 with RBPA's adoption of SFAS No.133, as amended.
Investment Securities Available for Sale. AFS investment securities represent 12% of average earning assets during 2000 and are primarily comprised of capital trust security issues of regional banks, domestic corporate debt and foreign corporate debt. At December 31, 2000, AFS investment securities were $70.1 million while they were $59.5 million at December 31, 1999, an increase of $10.6 million primarily due to a reclass of $12.2 million of HTM investment securities to AFS investments in April 2000 with RBPA's adoption of SFAS No. 133, as amended.
Loans. RBPA's primary earning assets are loans, representing approximately 69% of average earning assets during 2000. The loan portfolio has historically been comprised primarily of business demand loans and commercial mortgages in roughly equal amounts, and to a significantly lesser extent, consumer loans comprised of one to four family residential and home equity loans. This composition of loans did not change during 2000. During 2000, total loans increased $69.1 million from $354.8 million at December 31, 1999 to $423.9 million at December 31, 2000 primarily due to internally generated loan growth in addition to several loan pool purchases.
Deposits. RBPA's primary source of funding, deposits, increased $91.3 million, or 24%, from $381.3 million at December 31, 1999 to $472.6 million at December 31, 2000. This increase in deposits is primarily due to an increase of $53.5 million in certificates of deposits, or 22% from December 31, 1999. This increase in certificate of deposits is primarily due to the increase in brokered deposits during 2000. At
December 31, 2000, brokered deposits were $143.2 million as compared to $107.7 million at December 31, 1999. Money market deposits accounts increased $33.9 million, or 52% from $65.2 million at December 31, 1999 to $99.2 million at December 31, 2000. Other deposit categories comprised of demand, NOW, and savings deposits increased $3.9 million during 2000 over their levels at December 31, 1999.
Borrowings. Borrowings are comprised of long-term borrowings (advances, mortgage) and short-term borrowings (overnight borrowings, advances). Long-term borrowings decreased $.1 million to $30.4 million at December 31, 2000 from $30.5 million at December 31, 1999, primarily due to scheduled amortization of the mortgage payable. Short term borrowings increased from $-0- at December 31, 1999 to $3 million at December 31, 2000, primarily due to a $3 million short term FHLB advance taken in December 2000 with a term of six months. The average balance of borrowings and mortgages during 2000 was $30.6 million versus $30.9 million for 1999.
Stockholders' Equity. Stockholders' equity increased $7.7 million or 8% in 2000 to $103.5 million primarily due to net income of $14.3 million partially offset by $8.5 million in cash dividends paid in 2000. Additionally, stockholders equity was affected by the increase in market value of AFS investment securities during 2000, which resulted in an upward adjustment of $1.4 million.
RESULTS OF OPERATIONS
General. RBPA's results of operations depend primarily on net interest income, which is the difference between interest income on interest earning assets and interest expense on interest bearing liabilities. Interest earning assets consist principally of loans and investment securities, while interest bearing liabilities consist primarily of deposits. Net income is also affected by the provision for loan losses and the level of non-interest income as well as by non-interest expenses, including salary and employee benefits, occupancy expenses and other operating expenses.
Net Income. Net income in 2000 was $14.3 million as compared to $12.1 million in 1999 and, $10.8 million in 1998. Basic earnings per share were $1.34, $1.15 and $1.04 for 2000, 1999, and 1998, respectively. The $2.2 million increase in net income for 2000 represents an 18% increase over 1999, and is primarily attributable to the increase in interest income relating to loans and the investment security portfolio, and to a lesser extent, non-recurring fee and accretion income on loans. The increase in net income of $1.3 million for 1999 represents a 12% increase over 1998 and is primarily attributable to the increase in interest income relating to the investment security portfolio.
Net Interest Income. Net interest income is RBPA's primary source of income. Its level is a function of the average balance of interest-earning assets, the average balance of interest-bearing liabilities, and the spread between the yield on assets and liabilities. In turn, these factors are influenced by the pricing and mix of RBPA's interest-earning assets and funding sources. Additionally, net interest income is affected by market and economic conditions, which influence rates on loan and deposit growth.
Net interest income was $36.3 million in 2000 as compared to $28.7 million in 1999. The increase in 2000 of net interest income of $7.6 million is primarily due to an increase in the average earning assets in 2000 to $563.7 million. This is an increase of $100.8 million, or 21% over the level for 1999. This increase in interest earning assets contributed to a $14.2 million increase in interest income to $58.9 million in 2000, as compared to $44.7 million in 1999. Interest expense on interest bearing liabilities increased to $22.5 million in 2000 from $15.9 million in 1999. This increase is primarily due to an increase in the average balance of interest - bearing liabilities, primarily deposits in 2000 to $412.5 million from $318.9 million in 1999.
Net interest income was $28.7 million in 1999 compared with $27.5 million in 1998. The increase in net interest income in 1999 is primarily due to the increase in interest income relating to the increase in loans and investment securities during 1999, while the yield on interest earning assets decreased 45 basis points to 9.66% from 10.11% for 1998. In 1999, average interest earning assets increased $59.8 million to $462.9 million from the 1998 level. This increase in average interest earning assets in 1999 is due to growth in average investment securities and loans of $53.1 million and $20.6 million, respectively. In 1999 rates on interest bearing liabilities increased to 5.00% from 4.84% level in 1998 as overall rates increased during the year. Average interest bearing liabilities increased to $318.7 million in 1999 from $272.1 million in 1998. This increase in the rates is primarily due to the increase in higher costing brokered deposits in 1999.
LOANS AND MORTGAGES
RBPA continues to originate primarily five year fixed rate loans, while a portion of the loan portfolio continues to be comprised of variable rate loans which helps to a degree to maintain its interest spread when rates change. At December 31, 2000 variable rate loans represented approximately 46% of total loans.
In 2000, the average balance of loans increased $84.3 million to $404.8 million primarily due to the purchase of two loan pools, in addition to internally generated loan growth. The average yield on loans increased 82 basis points to 11.37% in 2000 from 10.55% in 1999 primarily due to an increase in the Royal prime rate in 2000, in addition to nonrecurring fee and accretion income recorded during the year. RBPA's average prime rate increased 121 basis points to approximately 9.19% in 2000 from 7.98% average prime rate for 1999.
In 1999, the average balance of loans increased $20.6 million to $320.5 million primarily due to purchase of a loan pool, in addition to internally generated loan growth. However, the average yield on loans decreased 62 basis points in 1999 primarily due to new loans generally repricing downwards as the Bank's average prime rate for 1999 declined 21 basis points to 7.98% from the 8.19% average prime rate for 1998.
HTM INVESTMENT SECURITIES
HTM investment securities are comprised primarily of taxable corporate debt issues and to a lesser extent, US Treasuries and agencies, and non-taxable state and municipal investment securities. The corporate debt issues are investment grade at the time of purchase, with maturities in the three to six year range. It is RBPA's expressed intention to hold these securities to maturity, as has been the established investment policy.
In 2000 the yield in HTM investment securities increased 27 basis points to 7.63% from 7.36% in 1999. This increase is partially attributable to an increase in yield on taxable investment securities in 2000,
primarily due to the purchase of higher yielding corporate debt securities. However, the average balance of HTM investment securities decreased $11.9 million to $67.1 million in 2000 primarily due to a reclassification of $12.2 million of HTM investment securities to AFS investment securities in April 2000.
In 1999, the yield on HTM investment securities increased 28 basis points to 7.36% from 7.08% for 1998. This increase is primarily due to the purchase of higher yielding corporate debt securities primarily during the first six months of 1999.
AFS INVESTMENT SECURITIES
AFS investment securities are comprised primarily of non-rated capital trust security issues of regional banks, rated domestic and foreign corporate debt securities, and to a lesser extent preferred and common stock.
In 2000, the average balance of AFS investment securities increased $15.6 million to $67.2 million primarily due to the reclass of $12.2 million of HTM investment securities to AFS investment securities in April 2000. This 45 basis point increase in the average yield is primarily due to the effect of a full year of this level of average AFS investment securities in 2000 versus 1999.
In 1999, the average balance of AFS investment securities increased $24.2 million to $51.6 from the $27.4 million level in 1998, representing 11% of average earning assets. This increase is due to the purchase of additional capital trust investment securities, in addition to foreign corporate debt, which lifted the overall yield of AFS investment securities 37 basis points to 8.74% for 1999.
INTEREST EXPENSE ON NOW AND MONEY MARKET DEPOSITS
In 2000 the average cost of funds on NOW and money market deposits increased 91 basis points to 3.73% from 2.82% in 1999 primarily due to the introduction of the Royal Treasury account in March 2000. This account has been successful in attracting new deposits and is the primary factor in the increase in the cost of funds and the average balance in 2000. In 1999 the average cost of funds on NOW and money market deposits increased 10 basis points to 2.82% from 2.72%, as 1999 saw overall rates increase.
INTEREST EXPENSE ON TIME DEPOSITS
In 2000 the average balance of time deposits increased $76.9 million to $269.4 million. This increase in time deposits is primarily due to the continued reliance on higher costing brokered deposits in 2000, and is the primary factor in the 71 basis point increase in the average cost of these funds. In 1999, the average balance of time deposits increased $50.3 million to $192.6 million. This growth in time deposits was due to the increase in the use of higher costing brokered deposits in 1999 as compared to 1998. At December 31, 1999 brokered deposits was $107.7 million as compared to $12.1 million at December 31, 1998, an increase of $95.5 million.
Although rates in general continued to move upward in 2000, 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 2000, 56% of time deposits were comprised of certificates of deposits accounts with balances of $100,000 or more, while in 1999, 33% of time deposits were comprised of certificates of deposit accounts with balances of $100,000 or more. These types of deposit have traditionally been considered more rate volatile than other types of deposits, however RBPA's penalty for early redemption somewhat mitigates this volatility.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for loan losses is an amount charged to expense to provide for future losses on existing loans. In order to determine the amount of the provision for loan loss, RBPA conducts a quarterly review of the loan portfolio to evaluate overall credit quality. This evaluation consists of an analysis of individual loans and overall risk characteristics and size of the loan, and takes into consideration current economic and market conditions, changes in non-performing loans, the capability of specific borrowers to repay loan obligations as well as current collateral values.
In 2000 a provision for loan losses of $.3 million was recorded while in 1999, no provision for loan losses was recorded. Net charge-offs in 2000 was a credit of $14 thousand as compared to $.2 million for 1999.
In 1999, no provision for loan losses was recorded as compared to $4.8 million in 1998 due to senior management assessment that the level of loan loss reserve was adequate. Net charge-offs were in 1999 were $.2 million as compared to $1 million for 1998, a decrease of $.8 million.
The allowance for possible loan loss at December 31, 2000 was $12 million, or 2.9% of net loans as compared to $11.7 million at December 31, 1999 or 3.4% of net loans, and $11.9 million at December 31, 1998, or 3.9% of net loans.
NON-INTEREST INCOME
Non-interest income includes service charges on depositors' accounts, safe deposit rentals and various services such as cashing checks, issuing money orders and travelers checks, and redeeming US savings bonds and similar activities. Most components of non-interest income are a modest and stable source of income, with exceptions of one-time gains and losses from the sale of other real estate owned, from period to period these sources of income may vary considerably. Service charges on depositors' accounts, safe deposit rentals and other fees are periodically reviewed by Management to remain competitive with other local banks.
In 2000, total non-interest income decreased $2 million to a net loss of $42 thousand primarily due to losses associated with AFS investment securities experienced in the fourth quarter of 2000. A $1 million charge to income was recorded in December 2000 relating to the capital trust preferred portion of AFS investment securities. A $.3 million loss was recorded on the sale of common stock in October 2000. Other income declined $.5 million primarily to the one time receipt of nonrecurring income in 1999. Gain on sale of real estate declined $.3 million in 2000 as RBPA sold its only foreclosed property. These decreases in non-interest income are partially offset by a $37 thousand increase in service charges and fees in 2000.
In 1999, non-interest income decreased $1.5 million to $2 million as compared to $3.6 million for 1998. This decrease is primarily due to a one-time $2.3 million income recorded in 1998, partially offset by receipt of $.5 million income received in 1999 relating to the refund of Pennsylvania Shares tax from the State of Pennsylvania. Additionally, gains on the sale of other real estate was $.3 million as compared to $-0- for 1998.
NON-INTEREST EXPENSE
Non-interest expense includes compensation and employee benefits, occupancy, advertising, FDIC insurance, state taxes, depreciation, and other expenses such as auditing, automatic teller machines (ATMs), data processing, legal, outside service charges, postage, printing, and other expenses relating to other real estate owned.
Non-interest expense increased $.7 million to $13.8 million in 2000, from $13.1 million in 1999. This increase is primarily due to a $.7 million increase in salaries and employee benefits in 2000 primarily due normal merit increases in salaries, in addition to an increase in the bonus accrual of $.2 million and $.5 million respectively. Occupancy expense increased $34 thousand to $.7 million in 2000. These increases were partially offset by a $.1 million decrease in other operating expenses, as management continues to manage and attempt to control expenses.
In 1999, non-interest expense increased $2.3 million to $13.1 million from $10.9 million in 1998. This increase is primarily due to a $2.3 million credit adjustment recorded in 1998, which is primarily attributable to the accrual for the Stock Option and Appreciation Right Plan. Occupancy expense decreased $.1 million in 1999 to $.6 million, while other operating expense increased $.1 million, or 2% from $5.1 million in 1998 to $5.2 million in 1999.
ACCOUNTING FOR INCOME TAXES
The provision for federal income taxes was $8 million in 2000 as compared to $5.6 million for 1999, and $4.6 million for 1998 representing an effective tax rate of 35%, 32%, and 30%, respectively. The $2.4 million increase in the tax provision for 2000 and 1999 are primarily due to a higher level of taxable income of $4.6 and $2.3 million, respectively, primarily related to and increase in interest income on loans and investment securities.
ACCOUNTING FOR DEBT AND EQUITY SECURITIES
The Company accounts for investment securities in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This standard requires investments in securities to be classified in one of three categories; held to maturity, trading or available for sale. Debt securities that
the Bank has the positive intent and ability to hold to maturity are classified as held to maturity and are reported at amortized cost. As the Bank does not engage in security trading, the balance of its debt securities and any equity securities are classified as available for sale. Net unrealized gains and losses for such securities, net of tax effect, are required to be recognized as a separate component of stockholders' equity and excluded from the determination of net income.
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, 2000, 1999 and 1998 was 53%, 41%, and 40%, respectively. Management believes that RBPA's liquidity position continues to be adequate, continues to be in excess of its peer group level and meets or exceeds the liquidity target set forth in the Funds, Cash Flow and Liquidity Policies and Procedures. Management believes that due to its financial position, it will be able to raise deposits as needed to meet liquidity demands. However, any financial institution could have unmet liquidity demands at any time.
Interest-Rate Sensitivity. Interest rate sensitivity is a function of the repricing characteristics of the financial institution's assets and liabilities. These include the volume of assets and liabilities repricing, the timing of repricing, and the relative levels of repricing. Attempting to minimize the interest rate sensitivity gaps is a continual challenge in a changing rate environment. The interest sensitivity report examines the positioning of the interest rate risk exposure in a changing interest rate environment. Ideally the rate sensitive assets and liabilities will be maintained in a matched position to minimize interest rate risk.
The interest rate sensitivity analysis is an important management tool, however, it does have some inherent shortcomings. It is a "static" analysis. Although certain assets and liabilities may have similar maturities or repricing, they may react in different degrees to changes in market interest rates. Additionally, repricing characteristics of certain assets and liabilities may vary substantially within a given period.
The following table summarizes repricing intervals for interest earning assets and interest bearing liabilities as of December 31, 2000, and the difference or "gap" between them on an actual and cumulative basis for the periods indicated. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. During a period of falling interest rates, a
positive gap would tend to adversely affect net interest income, while a negative gap would tend to result in an increase in net interest income. During a period of rising interest rates, a positive gap would tend to result in an increase in net interest income while a negative gap would tend to affect net interest income adversely. At December 31, 2000, RBPA is in an asset sensitive position of $54.4 million, which indicates assets will reprice somewhat faster than liabilities within one year.
INTEREST RATE SENSITIVITY (IN MILLIONS)
(1) Interest earning assets are included in the period in which the balances is expected to be repaid and/or repriced as a result of anticipated prepayments, scheduled rate adjustments, and contractual maturities. (2) Reflects principal maturing within the specified periods for fixed and repricing for variable rate loans; includes nonperforming loans. (3) Fixed rate loans include a portion of variable rate loans whose floors are in effect at December 31, 2000. (4) For purposes of gap analysis, other assets include the allowance for possible loan loss; unamortized discount on purchased loans and deferred fees on loans. (5) Based on historical analysis, Money market and Savings deposits are assumed to have rate sensitivity of 1 month; NOW account deposits are assumed to have a rate sensitivity of 4 months.
The method of analysis of interest rate sensitivity in the table above has a number of limitations. Certain assets and liabilities may react differently to changes in interest rates even though they reprice or mature in the same time periods. The interest rates on certain assets and liabilities may change at different
times than changes in market interest rates, with some changing in advance of changes in market rates and some lagging behind changes in market rates. Also, certain assets have provisions, which limit changes in interest rates each time the interest rate changes and for the entire term of the loan. Additionally, prepayments and withdrawals experienced in the event of a change in interest rates may deviate significantly from those assumed in the interest rate sensitivity table. Additionally, the ability of some borrowers to service their debt may decrease in the event of an interest rate increase.
CAPITAL ADEQUACY
The table shown below sets forth RBPA's consolidated capital level and performance ratios:
RBPA's sources of capital have been derived from the issuance of stock as well as retained earnings. While RBPA has not had a stock offering since 1986, total stockholder's equity has increased primarily due to steady increases in retained earnings. At December 31, 2000, RBPA had an average capital to average asset ratio of 17.3%. RBPA has no current plans to raise capital through new stock offerings and indeed, seeks ways to leverage its existing capital, which is considered excessive by industry standards.
In early 1989, each of the federal bank regulatory agencies issued risk-based capital standards, which were phased in December 31, 1992. The new standards place assets in various categories of risk with varying weights assigned, and consider certain off-balance sheet activities, such as letters of credit and loan commitments in the base for purposes of determining capital adequacy. The principal objective of establishing the risk-based capital framework is to achieve greater convergence in the measurement and assessment of capital adequacy due to the divergence of asset mixes maintained from one depository institution to the next. At December 31, 2000, RBPA's ratio using these standards was 18.1%.
MANAGEMENT OPTIONS TO PURCHASE SECURITIES
In June 1990, the directors of the Bank approved the Royal Bank of Pennsylvania Non-qualified Stock Option and Appreciation Right Plan (the Plan). The shareholders in connection with the formation of the holding company reapproved the Plan. The Plan is an incentive program under which Bank officers and other key employees may be awarded additional compensation in the form of options to purchase up to 1,000,000 shares of the Registrant's Class A common stock (but not in excess of 15% of outstanding shares). The option price is equal to the fair market value at the date of the grant. At December 31, 2000, 375,778 options have been granted which are exercisable at 20% per year. At December 31, 2000, options covering 375,778 shares were exercisable by 66 employees.
In June 1990, the directors of the Bank approved a non-qualified Outside Directors Stock Option Plan. The shareholders in connection with the formation of the holding company reapproved the Plan. 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 at the date of the grant. At December 31, 2000, 62,593 options were outstanding and options covering 49,993 shares were exercisable.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
A simulation model is therefore used to estimate the impact of various changes, both upward and downward, in market interest rates and volumes of assets and liabilities on the net income. This model produces an interest rate exposure report that forecast changes in the market value of portfolio equity under alternative interest rate environment. The market value of portfolio is defined as the present value of existing assets and liabilities. The calculated estimates of changes in the market value of portfolio value are as follows:
As of December 31, 2000 (Dollars in Thousands)
The assumptions used in evaluating the vulnerability of earnings and capital to changes in interest rates are based on management's considerations of past experience, current position and anticipated future economic conditions. The interest rate sensitivity of assets and liabilities as well as the estimated effect of changes in interest rates on the market value of portfolio equity could vary substantially if different assumptions are used or actual experience differs from what the calculations may be based.
ITEM 8.
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, 2000 AND 1999
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, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Royal Bancshares of Pennsylvania, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
Philadelphia, Pennsylvania January 24, 2001 (except for note R, as to which the date is March 12, 2001)
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these statements.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Income
The accompanying notes are an integral part of these statements.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
Years ended December 31, 2000, 1999 and 1998
(Continued)
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity - Continued
Years ended December 31, 2000, 1999 and 1998
The accompanying notes are an integral part of this statement.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended December 31,
(Continued)
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows - Continued
Year ended December 31,
The accompanying notes are an integral part of these statements.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
December 31, 2000 and 1999
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. 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.
Statement of Financial Accounting Standards (SFAS) No. 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in subsequent interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The statement also requires that public enterprises report a measure of segment profit of loss, certain specific revenue and expense items and segment assets. It also requires that information be reported about revenues derived from the enterprises' products or services, or about the countries in which the enterprises earn revenues and holds assets, and about major customers, regardless of whether that information is used in making operating decisions.
The Company has one reportable segment, "Community Banking." All of the Company's activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, commercial lending is dependent upon the ability of the Bank to fund itself with retail deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer and residential mortgage lending. Accordingly, all significant operating decisions are based upon analysis of the Company as one operating segment or unit.
(Continued)
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
3. Investment Securities
The Company accounts for investment securities in accordance with SFAS No. 115. This standard requires investments in securities to be classified in one of three categories: held to maturity, trading or available for sale. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and are reported at amortized cost. As the Company does not engage in security trading, the balance of its debt securities and any equity securities are classified as available for sale. Net unrealized gains and losses for such securities, net of tax effect, are required to be recognized as a separate component of stockholders' equity and excluded from the determination of net income.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was amended in June, 1999 by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." In June, 2000, by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," (collectively SFAS No. 133) was issued. SFAS No. 133 requires that entities recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Under SFAS No. 133, an entity may designate a derivative as a hedge of exposure to either changes in: (a) fair value of a recognized assets or liability or firm commitment, (b) cash flows of a recognized or forecasted transaction, or (c) foreign currencies of a net investment in foreign operations, firm commitments, available-for-sale securities or a forecasted transaction. Depending upon the effectiveness of the hedge and/or the transaction being hedged, any changes in the fair value of the derivative instrument is either recognized in earnings in the current year, deferred to future periods, or recognized in other comprehensive income. Changes in the fair value of all derivative instruments not recognized as hedge accounting are recognized in current year earnings. SFAS No. 133 is required for all fiscal quarters or fiscal years beginning after June 15, 2000. The Company adopted SFAS No. 133 effective April 1, 2000.
(Continued)
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
SFAS No. 133 allowed a reclassification of investment securities without calling into question the intent of the Company to hold other investment securities to maturity in the future. On April 1, 2000, the Company reclassified investment securities from held to maturity to available for sale with a fair market value of $11,135,142 resulting in an increase of accumulated other comprehensive income of $301,958.
SFAS No. 119 "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments," requires disclosures about financial instruments, which are defined as futures, forwards, swap and option contracts and other financial instruments with similar characteristics. On balance sheet receivables and payables are excluded from this definition. The Company did not hold any derivative financial instruments as defined by SFAS No. 119 at December 31, 2000 or 1999.
4. Allowance for Loan Losses
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan and lease losses.
The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses in the loan portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loan loss experience, current economic conditions, volume, growth, and composition of the loan portfolio, and other relevant factors. The allowance is increased by provisions for loan losses charged against income. Decreases in the allowance result from management's determination that the allowance for loan losses exceeds their estimates of potential loan loss.
The Company accounts for its impaired loans in accordance with SFAS No. 114, as amended by SFAS No. 118, which requires that a creditor measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral-dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable.
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.
(Continued)
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
5. Other Real Estate
Other real estate is recorded at the lower of the customer's loan balance or the adjusted fair market value of the real estate securing the loan. The adjusted fair market value is determined by reducing the fair market value by estimated costs for the disposition of the property. Costs relating to holding the property are expensed when incurred. Other real estate owned of approximately $-0- and $19,000 at December 31, 2000 and 1999, respectively, is included in other assets on the consolidated balance sheets.
6. 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 Company follows the provisions of SFAS No. 121, which provides guidance on when to recognize and how to measure impairment losses of long-lived assets and certain identifiable intangibles and how to value long-lived assets to be disposed of.
7. 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, asset valuation reserves and net operating loss carryovers.
8. Per Share Information
The Company follows the provisions of SFAS No. 128, which eliminated primary and fully diluted EPS and requires presentation of basic and diluted EPS in conjunction with the disclosure of the methodology used in computing such EPS. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted EPS takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.
(Continued)
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
9. Stock Option Plans
The Company follows SFAS No. 123, which allows an entity to use a fair value-based method for valuing stock-based compensation, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the standard permits entities to continue accounting for employee stock options and similar instruments under Accounting Principles Board (APB) Opinion No. 25, and its related Interpretations. Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net income and earnings per share (EPS), as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. The Company's stock option plans are accounted for under APB Opinion No. 25.
10. Benefit Plans
During 1999, the Company implemented a noncontributory nonqualified, defined benefit pension plan covering certain eligible employees. On January 1, 1998, the Company adopted SFAS No. 132, which revises employers' disclosures about pension and other postretirement benefits plans. It eliminated certain current disclosures and requires additional information about changes in the benefit obligation and the fair values of plan assets. It also standardizes the requirements for pensions and other postretirement benefit plans, to the extent possible, and illustrates combined formats for the presentation of pension plan and other postretirement benefit plans disclosures.
11. 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.
12. Financial Instruments
The Company follows the provisions of SFAS No. 107, which requires all entities to disclose the estimated fair value of their assets and liabilities considered to be financial instruments. Financial instruments consist primarily of securities, loans and deposits.
(Continued)
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
13. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
In September 2000, SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," replaced SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," and revised the standards for accounting for the securitizations and other transfers of financial assets and collateral. This new standard also requires certain disclosures, but carries over most of the provisions of SFAS No. 125. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. However, for recognition and reclassification of collateral and for disclosures relating to securitizations transactions and collateral this statement is effective for fiscal years ending after December 15, 2000 with earlier application not allowed and is to be applied prospectively. The adoption of this statement is not expected to have a material impact on the Company's consolidated financial statements.
14. Advertising Costs
The Company and the Bank expense advertising costs as incurred.
15. Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. This standard establishes new standards for reporting comprehensive income, which includes net income as well as certain other items, which result in a change to equity during the period.
The income tax effects allocated to comprehensive income is as follows:
(Continued)
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
16. Reclassifications
Certain reclassifications of prior year amounts have been made to conform to the 2000 presentation.
NOTE B - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of the Company's investment securities held to maturity and available for sale are summarized as follows:
(Continued)
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE B - INVESTMENT SECURITIES - Continued
The amortized cost and estimated fair value of investment securities at December 31, 2000, 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.
(Continued)
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE B - INVESTMENT SECURITIES - Continued
Proceeds from the sale of investment securities available for sale during 2000, 1999 and 1998 were $610,313, $-0- and $-0-, respectively, resulting in gross realized loss of $301,958, $-0- and $-0- during 2000, 1999 and 1998, respectively. Additionally, the Company recorded an impairment loss of $1,000,000 in 2000 on certain trust preferred investment securities available for sale that were issued by a related party.
As of December 31, 2000 and 1999, investment securities with a book value of $26,454,684 and $21,295,289, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law.
NOTE C - LOANS
Major classifications of loans are as follows:
(Continued)
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE C - LOANS - Continued
Loans on which the accrual of interest has been discontinued or reduced amounted to approximately $3,548,000 and $1,209,000 at December 31, 2000 and 1999, respectively. If interest had been accrued, such income would have been approximately $319,000, $109,000 and $308,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Although the Company has non-performing loans of approximately $3,548,000 at December 31, 2000, management believes it has adequate collateral to limit its credit risk.
The Company granted loans to the officers and directors of the Company and to their associates. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility. The aggregate dollar amount of these loans was $13,826,000 and $13,975,000 at December 31, 2000 and 1999, respectively. During 2000, $140,000 of new loans were made and repayments totaled $289,000.
The balance of impaired loans was approximately $67,000 and $42,000 at December 31, 2000 and 1999, respectively. The Company has identified a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreements. The income recognized on impaired loans during 2000 was $5,307. Total cash collected on impaired loans during 2000 was $50,247, of which $44,940 was credited to the principal balance outstanding on such loans. Interest that would have been accrued on impaired loans during 2000 was $19,147. 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.
Changes in the allowance for loan losses were as follows:
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
Depreciation and amortization in expense was approximately $414,000, $414,000 and $351,000 for the years ended 2000, 1999 and 1998.
NOTE E - DEPOSITS
Deposits are summarized as follows:
Maturities of certificates of deposit for the next five years and thereafter are as follows:
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE F - BORROWINGS
1. Advances from the Federal Home Loan Bank
Borrowings consist of advances from the Federal Home Loan Bank at December 31, 2000 and 1999 are as follows:
The advances are collateralized by Federal Home Loan Bank stock, investment securities and certain of the Company's first mortgage loans.
2. Mortgage Payable
The mortgage payable is payable to a bank at 65% of the prime rate (6.175% at December 31, 2000) 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:
NOTE G - LEASE COMMITMENTS
The Company leases various premises under non-cancellable agreements, which expire through 2004 and require minimum annual rentals. The approximate minimum rental commitments under the leases are as follows:
(Continued)
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE G - LEASE COMMITMENTS - Continued
Rental expense for all leases was approximately $388,000, $304,000 and $335,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
NOTE H - COMMON STOCK
Each holder of Class A and Class B common stock is entitled to one vote for each Class A share and ten votes for each Class B share held. Holders of either class of common stock are entitled to equal per share dividends when declared.
The Class B shares may not be transferred in any manner except to the holder's immediate family. Class B shares have been converted to Class A shares at the average rate of 1.15 to 1.
NOTE I - INCOME TAXES
The components of the income tax expense (benefit) included in the consolidated statements of income are as follows:
The difference between the applicable income tax expense and the amount computed by applying the statutory federal income tax rate of 35% in 2000, 1999 and 1998 is as follows:
(Continued)
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE I - INCOME TAXES - Continued
Deferred tax assets and liabilities consist of the following:
The Company has approximately $22,000,000 of net operating loss carryovers from the acquisition of Knoblauch State Bank (KSB). These losses will fully expire in 2019. The utilization of these losses is subject to limitation under Section 382 of the Internal Revenue Code. As a result, a valuation allowance has been established to eliminate the deferred tax asset attributable to these net operating losses.
During 2000, 1999 and 1998, the Company realized a tax benefit related to the net operating loss carryovers from the acquisition of KSB. The deferred tax asset associated with those loss carryovers is fully offset by a valuation allowance. Accordingly, the realized tax benefit is reflected as a reduction of the goodwill associated with the acquisition and a corresponding reduction of deferred income tax benefit for the year.
NOTE J - EARNINGS PER SHARE
Basic and diluted EPS are calculated as follows:
(Continued)
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE J - EARNINGS PER SHARE - Continued
Options to purchase 45,985 shares of common stock with an exercise price of $16.74 per share were not included in the computation of 2000 diluted EPS because the exercise price was greater than the average market price of the common stock.
Options to purchase 45,985 shares of common stock with an exercise price of $16.74 per share were not included in the computation of 1999 diluted EPS because the exercise price was greater than the average market price of the common stock.
Options to purchase 45,985 shares of common stock with an exercise price $16.74 per share were not included in the computation of 1998 diluted EPS because the exercise price was greater than the average market price of the common stock.
Per share information and weighted average shares outstanding have been restated to reflect the 5% stock dividend of February 2001, the 5% stock dividend of January 2000, the 4% stock dividend of May 1999, and the 4% stock dividend of May 1998.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE K - STOCK OPTION PLANS
The Company has 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 (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 at the date of the grant. At December 31, 2000, 62,593 options are outstanding and options covering 49,993 shares were exercisable.
Stock option transactions consist of the following:
The following table summarizes information about options outstanding and exercisable at December 31, 2000:
(Continued)
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE K - STOCK OPTION PLANS - Continued
2. Stock Option and Appreciation Right Plan
The Company adopted a Stock Option and Appreciation Right Plan (the Plan). 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, 2000, 375,778 options were outstanding and options covering 244,390 shares were exercisable.
Stock option transactions consist of the following:
(Continued)
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE K - STOCK OPTION PLANS - Continued
The following table summarizes information about options outstanding and exercisable at December 31, 2000:
Had compensation cost for both plans been determined based on the fair value of the options at the grant dates consistent with the method required by SFAS No. 123, the Company's net income and EPS would have been reduced to the pro forma amounts indicated below.
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 2000, 1999 and 1998: dividend yield of 5.95%, 5.33% and 5.25% for 2000, 1999 and 1998, respectively; expected volatility of 36.3%; and risk-free interest rate of 5.11% in 2000, 6.4% in 1999 and 4.57% in 1998. Expected lives are 10 years for 2000, 1999 and 1998.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE L - PENSION PLAN
The Company has a noncontributory nonqualified defined benefit pension plan covering certain eligible employees. The Company-sponsored pension plan provides retirement benefits under pension trust agreements and under contracts with insurance companies. The benefits are based on years of service and the employee's compensation during the highest five consecutive years during the last 10 years of employment. The Company's policy is to fund pension costs allowable for income tax purposes.The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheets (in thousands):
Net pension cost included the following components (in thousands):
The assumed discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7% and 4%, respectively, in 2000 and 1999. The expected long-term rate of return on assets was 7% for 2000 and 1999.
The Company has a capital accumulation and salary reduction plan under Section 401(k) of the Internal Revenue Code of 1986, as amended. Under the plan, all employees are eligible to contribute from 1% to a maximum of 15% of their annual salary, with the Company matching 100% of any contribution between 1% and 5% subject to a $2,550 per employee annual limit. Matching contributions to the plan were approximately $141,000, $131,000 and $128,000 for the years ended December 31, 2000, 1999 and 1998.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE M - CONCENTRATIONS OF CREDIT RISK
The Company primarily grants commercial and real estate loans in the greater Philadelphia metropolitan area. Approximately 42% of loans are outside the normal lending area. The Company has concentrations of credit risk in real estate development loans (26%) at December 31, 2000. A substantial portion of its debtors' ability to honor these contracts is dependent upon the economic sector.
Approximately 84% of the Company's investment portfolio consists of corporate securities.
NOTE N - 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 are as follows:
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, and others are for staged construction, the total commitment amounts do not necessarily represent immediate cash requirements.
(Continued)
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE N - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued
The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Most guarantees extend for one year and expire in decreasing amounts through 2000. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds personal or commercial real estate, accounts receivable, inventory and equipment as collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held for those commitments is 80%.
NOTE O - REGULATORY MATTERS
1. Payment of Dividends
Under the Pennsylvania Business Corporation Law, the Company may pay dividends only if it is solvent and would not be rendered insolvent by the dividend payment. There are also restrictions set forth in the Pennsylvania Banking Code of 1965 (the Banking Code) and in the Federal Deposit Insurance Act (FDIA) concerning the payment of dividends by the Company. Under the Banking Code, no dividends may be paid except from "accumulated net earnings" (generally undivided profits). Under the FDIA, no dividend may be paid if a bank is in arrears in the payment of any insurance assessment due to the Federal Deposit Insurance Corporation (FDIC).
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, 2000, management believes that the Bank meets all capital adequacy requirements to which it is subject.
(Continued)
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE O - REGULATORY MATTERS - Continued
2. Capital Ratios
As of March 31, 2000, 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.
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an entity's assets and liabilities considered to be financial instruments. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in SFAS No. 107. However, many of such instruments lack an available trading market, as characterized by a willing buyer and seller engaging in an exchange transaction. Also, it is the Company's general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities. Therefore, the Company had to use significant estimations and present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair value may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair value.
Fair values have been estimated using data which management considered the best available and estimation methodologies deemed suitable for the pertinent category of financial instrument. The estimation methodologies, resulting fair values and recorded carrying amounts at December 31, 2000 and 1999 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:
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:
(Continued)
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
Fair value of financial instrument liabilities with no stated maturities has been estimated to equal the carrying amount (the amount payable on demand), totaling $198,490,978 and $140,717,974 at December 31, 2000 and 1999, respectively.
Fair value of the net loan portfolio has been estimated using present value cash flow, discounted at the treasury rate adjusted for non-interest operating costs and giving consideration to estimated prepayment risk and credit loss factors, as follows:
There is no material difference between the carrying amount and estimated fair value of off-balance-sheet items totaling $75,925,965 and $78,078,906 at December 31, 2000 and 1999, 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 Q - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Condensed financial information for the parent company only follows.
CONDENSED BALANCE SHEETS
(Continued)
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
CONDENSED STATEMENTS OF INCOME
CONDENSED STATEMENTS OF CASH FLOWS
ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements - Continued
December 31, 2000 and 1999
NOTE R - SUBSEQUENT EVENTS
On March 12, 2001, Royal Bank of Pennsylvania, a wholly owned subsidiary of Royal Bancshares of Pennsylvania entered into a Purchase and Assumption Agreement with Crusader Holding Corporation, a Pennsylvania corporation, the holding company for Crusader Savings Bank, FSB, a federally chartered savings bank, to which Royal Bank will acquire substantially all of Crusader Savings Bank's assets and assume substantially all of its liabilities. The purchase price is payable in cash, based on Crusader's tangible book value, and will be adjusted through closing for net income and any other changes to Crusader's book value. This transaction is anticipated to be accounted for under the purchase method of accounting.
The completion of transaction is subject to the satisfaction of various conditions including the receipt of regulatory approval from the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the Pennsylvania State Banking Department.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required in this Item, relating to directors, executive officers, control persons is set forth in the Registrant's Proxy Statement to be used in connection with the 2001 Annual Meeting of Shareholders under the heading "Remuneration of directors and Officers and Other Transactions", which pages are incorporated herein by reference.
BENEFICIAL OWNERSHIP - COMPLIANCE. Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Corporation's officers and directors, and persons who own more than 10 percent of the registered class of the Corporation's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Officers, directors and greater than 10 percent shareholders are required by SEC regulation to furnish the Corporation copies of all Section 16(a) forms they file.
Based solely on its review of forms that were received from certain reporting persons, the Corporation believes that during the period January 1, 2000 through December 31, 2000, its officers and directors were in compliance with all filing requirements applicable to them.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item, relating to executive compensation, is set forth in the Registrant's Proxy Statement to be used in connection with the 2001 Annual Meeting of Shareholders, under the heading "Remuneration of Directors and Officers and Other Transactions", which pages are incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item, relating to beneficial ownership of the Registrant's Common Stock, is set forth in the Registrant's Proxy Statement to be used in connection with the 2001 Annual Meeting of Shareholders, under the heading "Information About Nominees, Continuing Directors and Executive Officers", which pages are incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item, relating to transactions with management and others, certain business relationships and indebtedness of management, is set forth in the Registrant's Proxy Statement to be used in connection with the 2001 Annual Meeting of Shareholders, under the heading "Interest of Management and Others in Certain Transactions", which page are incorporated herein by reference.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. 1. Financial Statements
The following financial statements are included by reference in Part II, Item 8 hereof. Report of Independent Certified Public Accountants. Consolidated Balance Sheets. Consolidated Statements of Income. Consolidated Statements of Changes in Stockholders' Equity. Consolidated Statement of Cash Flows. Notes To Consolidated Financial Statements.
2. Financial Statement Schedules
Financial Statement Schedules are omitted because the required information is either not applicable, not required or is shown in the respective financial statements or in the notes thereto.
3. The following Exhibits are files herewith or incorporated by reference as a part of this Annual Report.
2 Purchase and Assumption Agreement, dated as of March 12, 2001, among Royal Bank of Pennsylvania, Crusader Holding Corporation, Crusader Savings Bank, F.S.B. and Asset Investment Corporation. (Incorporated by reference to Exhibit 2 to Registrant's Report on Form 8-K, filed with the Commission on March 15, 2001.)
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 99 to Registrant's Current Report on Form 8-K, filed with the Commission on March 13, 2001.)
10.1 Stock Option and Appreciation Right Plan. (Incorporated by reference to the Registrant's Registration Statement N0. 333-25855, on form S-8 filed with the Commission on April 5, 1997).
10.2 Outside Directors' Stock Option Plan. (Incorporated by reference to the Registrant's Registration Statement N0. 333-25855, on form S-8 filed with the Commission on April 5, 1997).
11. Statement Re: Computation of Earnings Per Share. Included at Item 8, hereof, Note A, "Per Share Information".
12. Statement re: Computation of Ratios. (Included at Item 8 here of, Note Q, "Regulatory Matters.")
21. Subsidiaries of Registrant.
23. Consent of Independent Accountants.
(b) No Current Report on Form 8-K was filed by the Registrant during the fourth quarter of the fiscal year December 31, 2000.
(c) The exhibits required to be filed by this Item are listed under Item 14(a)3 above.
(d) Not applicable.
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. --------------------------------------
Continued...
ROYAL BANCSHARES OF PENNSYLVANIA, INC. ANNUAL REPORT ON FORM 10-K EXHIBIT INDEX
2 Purchase and Assumption Agreement, dated as of March 12, 2001, among Royal Bank of Pennsylvania, Crusader Holding Corporation, Crusader Savings Bank, F.S.B. and Asset Investment Corporation. (Incorporated by reference to Exhibit 2 to Registrant's Report on Form 8-K, filed with the Commission on March 15, 2001.)
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 99 to Registrant's Current Report on Form 8-K, filed with the Commission on March 13, 2001.)
10.1 Stock Option and Appreciation Right Plan. (Incorporated by reference to the Registrant's Registration Statement N0. 333-25855, on form S-8 filed with the Commission on April 5, 1997).
10.2 Outside Directors' Stock Option Plan. (Incorporated by reference to the Registrant's Registration Statement N0. 333-25855, on form S-8 filed with the Commission on April 5, 1997).
11. Statement Re: Computation of Earnings Per Share. (Included at Item 8, hereof, Note A, "Per Share Information".)
12. Statements re: Computation of Ratios. (Included at Item 8 here of, Note Q, "Regulatory Matters.")
21. Subsidiaries of Registrant.
23. Consent of Independent Accountants.