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                                    FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
         OF 1934

                   For the fiscal year ended DECEMBER 31, 2000

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934.

            For the transition period from ___________ to ___________

                         Commission File Number 0-26366

                     ROYAL BANCSHARES OF PENNSYLVANIA, INC.
                     --------------------------------------
             (Exact name of registrant as specified in its charter)

                PENNSYLVANIA                              23-2812193
     -------------------------------                  -------------------
     (State or other jurisdiction of                     (IRS Employer
      incorporation or organization)                  Identification No.)

               732 MONTGOMERY AVENUE, NARBERTH, PENNSYLVANIA 19072
               ---------------------------------------------------
                    (Address of principal executive offices)

Registrant's telephone number, including area code  (610) 668-4700

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: CLASS A COMMON STOCK
                                                            ($2.00 PAR VALUE)

                                                            CLASS B COMMON STOCK
                                                            ($.10 PAR VALUE)

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contended, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

      The aggregate market value of common shares of the Registrant held by
non-affiliates, based on the closing sale price as of February 28, 2001 was
$72,592,647.

       As of February 28, 2001, the Registrant had 8,589,490 and 1,817,329
shares outstanding of Class A and Class B common stock, respectively.


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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,


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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.


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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.


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      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


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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")


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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


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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:

<TABLE>
<CAPTION>
                                                                 LTV
             Loan Category                                       Limit
             -------------                                       -----
<S>                                                              <C>
             Raw Land                                              65%
             Land Development
             Construction:
                           Commercial, Multifamily (includes
                            condos and co-ops), and other
                             Nonresidential                        80%
                             Improved Property                     85%
             Owner occupied 1-4 Family and Home Equity
                             (without credit enhancements)         90%
</TABLE>

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      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;


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      -     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.


                                       10
<PAGE>   11
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.  PROPERTIES

      The Bank has fourteen banking offices, of which thirteen are located in
Pennsylvania.

<TABLE>
<S>                                   <C>                                <C>
Narberth Office (1)                   Villanova Office                   King of Prussia Office (1)
732 Montgomery Ave                    801 East Lancaster Avenue          Rt. 202 at Wilson Road
Narberth, Pa. 19072                   Villanova, Pa. 19085               King of Prussia, Pa. 19406

Philadelphia  Offices                 Shillington Office                 Bridgeport Office (1)
- One Penn Square West                516 East Lancaster Avenue          105 W. 4th Street
  30 South 15th Street                Shillington. Pa 19607              Bridgeport, Pa. 19406
  Philadelphia, Pa 19102
                                      Trooper Office(1)                  Upper Merion Office
- 1340 Walnut Street                  Trooper & Egypt Roads              Beidler & Henderson Roads
  Philadelphia, Pa. 19107             Trooper, Pa. 19401                 King of Prussia, Pa. 19406

- 401 Fairmount Avenue (1)            Reading Office                     Phoenixville Office (1)
  Philadelphia, Pa. 19123             501 Washington Street              808 Valley Forge Road
                                      Reading, Pa. 19601                 Phoenixville, Pa. 19460
Jenkintown Office (1)
600 Old York Road                     Delaware Loan Office(2)
Jenkintown, Pa 19046                  The Rodney Square Club
                                      1100 North Market Street
                                      Wilmington, Delaware 19801
</TABLE>

----------
(1) owned     (2) Lease expired 2/28/01


                                       11
<PAGE>   12
      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.  LEGAL PROCEEDINGS

      Management, after consulting with RBPA's legal counsel, is not aware of
any litigation that would have a material adverse effect on the consolidated
financial position of RBPA. There are no proceedings pending other than routine
litigation incident to the business of RBPA. In addition, no material
proceedings are known to be contemplated by governmental authorities against
RBPA.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

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

<TABLE>
<CAPTION>
           2000                                    HIGH       LOW     CLOSE
           ----                                    ----       ---     -----
<S>                                               <C>       <C>       <C>
           First Quarter ......................   $14.229   $11.792   $12.024
           Second Quarter .....................    15.854    14.250    14.603
           Third Quarter ......................    17.167    15.792    16.012
           Fourth Quarter .....................    16.209    14.750    14.246
</TABLE>

<TABLE>
<CAPTION>
           1999                                    HIGH       LOW     CLOSE
           ----                                    ----       ---     -----
<S>                                               <C>       <C>       <C>
           First Quarter ......................   $16.542   $15.667   $14.172
           Second Quarter .....................    16.396    14.833    14.229
           Third Quarter ......................    15.896    15.146    13.908
           Fourth Quarter .....................    15.292    14.458    13.748
</TABLE>

         (Source: This summary reflects information supplied by NASDAQ.)


                                       12
<PAGE>   13
      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:

<TABLE>
<CAPTION>
      TITLE OF CLASS                          NUMBER OF RECORD HOLDERS
      --------------------                    ------------------------
<S>                                           <C>
      Class A Common Stock                            409
      Class B Common Stock                            163
</TABLE>

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.


                                       13
<PAGE>   14
<TABLE>
<CAPTION>
                                                   CASH DIVIDENDS PER SHARE
                                                   ------------------------
           2000                                      CLASS A     CLASS B
           ----                                      -------     -------
<S>                                                  <C>         <C>
           First Quarter ......................       $.21       $.2415
           Second Quarter .....................       $.21       $.2415
           Third Quarter ......................       $.21       $.2415
           Fourth Quarter .....................       $.21       $.2415
</TABLE>

<TABLE>
<CAPTION>
                                                   CASH DIVIDENDS PER SHARE
                                                   ------------------------
           1999                                      CLASS A     CLASS B
           ----                                      -------     -------
<S>                                                  <C>         <C>
           First Quarter ......................       $.21       $.2415
           Second Quarter .....................       $.21       $.2415
           Third Quarter ......................       $.21       $.2415
           Fourth Quarter .....................       $.21       $.2415
</TABLE>

      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.


                                       14
<PAGE>   15
ITEM 6. SELECTED FINANCIAL DATA

      The following selected consolidated financial and operating information
for RBPA should be read in conjunction with ITEM 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and accompanying notes in ITEM 8:

<TABLE>
<CAPTION>
                                                                        YEARS ENDED DECEMBER 31,
                                                                             (IN THOUSANDS)
                                                   ------------------------------------------------------------------
INCOME STATEMENT DATA                                2000           1999          1998          1997           1996
                                                   --------       --------      --------      --------       --------
<S>                                                <C>            <C>           <C>           <C>            <C>
Interest income                                    $ 58,875       $ 44,682      $ 40,640      $ 33,372       $ 33,618
Interest expense                                     22,549         15,922        13,163        10,048         10,054
                                                   --------       --------      --------      --------       --------
Net interest income                                  36,326         28,760        27,477        23,324         23,564
Increase (Decrease) Provision for loan losses           250             --         4,770        (2,118)        (1,488)
                                                   --------       --------      --------      --------       --------
Net interest income after loan loss provision        36,076         28,760        22,707        25,442         25,052
    Gains on sale of loans                               --             45             4            29            427
    Gains on sale of real estate                         53            350            --         1,204          2,016
    (Losses) on AFS investment securities            (1,302)            --            --            --             --
    Other income                                      1,206          1,644         3,570         1,392          1,788
                                                   --------       --------      --------      --------       --------
Total other income                                      (43)         2,039         3,574         2,625          4,231
Income before other expenses & income taxes          36,033         30,799        26,281        28,067         29,283
Non-interest expenses:
    Salaries and benefits                             7,979          7,265         5,028         9,546          9,602
    Other                                             5,812          5,865         5,845         5,088          5,537
                                                   --------       --------      --------      --------       --------
Total other expenses                                 13,791         13,130        10,873        14,634         15,139
                                                   --------       --------      --------      --------       --------
Income before taxes                                  22,242         17,669        15,408        13,433         14,144
Income taxes                                          7,982          5,564         4,624         4,074          3,907
                                                   --------       --------      --------      --------       --------
Net income                                         $ 14,260       $ 12,105      $ 10,784      $  9,359       $ 10,237
                                                   ========       ========      ========      ========       ========

Basic earnings per share (1)                       $   1.34       $   1.15      $   1.04      $    .90       $   1.00
                                                   --------       --------      --------      --------       --------
Diluted earnings per share (1)                     $   1.32       $   1.14      $   1.03      $    .89       $    .97
                                                   --------       --------      --------      --------       --------
</TABLE>

----------
(1) Earnings per share has the weighted average number of shares used in the
calculation adjusted to reflect a 5% stock dividend in February 2001, a 5% stock
dividend in 2000, a 4% stock dividend in 1999, a 4% stock dividend in 1998, a 4%
stock dividend in 1997, and a 6% stock dividend in 1996.

<TABLE>
<CAPTION>
                                                                 AS OF DECEMBER 31,
                                        --------------------------------------------------------------------
BALANCE SHEET DATA                        2000           1999           1998           1997           1996
                                        --------       --------       --------       --------       --------
(in thousands)
<S>                                     <C>            <C>            <C>            <C>            <C>
Total assets                            $630,081       $522,536       $427,622       $416,598       $355,149
Total average assets                     573,780        469,193        407,623        342,361        343,360
Loans, net                               411,973        343,081        292,556        282,711        199,933
Total deposits                           472,582        381,286        290,390        265,363        254,183
Total long term debt                      30,000         30,000         30,365         31,063          4,814
Total stockholders' equity               103,502         95,835         94,069         89,505         84,581
Total average stockholders' equity        99,126         94,824         91,374         86,572         80,910
Return on average assets                    2.5%           2.6%           2.6%           2.7%           3.0%
Return on average equity                   14.3%          12.8%          11.8%          10.8%          12.7%
Average equity to average assets           17.3%          20.2%          22.4%          25.3%          23.6%
Cash dividend payout ratio                 59.7%          64.9%          66.6%         56.97%          19.2%
</TABLE>

                                       15
<PAGE>   16
AVERAGE BALANCES

      The following table presents the average daily balances of assets,
liabilities and stockholders' equity and the respective interest paid on
interest bearing assets and interest bearing liabilities, as well as average
rates for the periods indicated:

<TABLE>
<CAPTION>
                                                  2000                           1999                           1998
                                     ----------------------------   ----------------------------   ----------------------------
                                      AVERAGE              YIELD/    AVERAGE              YIELD/    AVERAGE              YIELD/
ASSETS (In thousands)                 BALANCE   INTEREST    RATE     BALANCE   INTEREST    RATE     BALANCE   INTEREST    RATE
                                     --------   --------   ------   --------   --------   ------   --------   --------   ------
<S>                                  <C>        <C>        <C>      <C>        <C>        <C>      <C>        <C>        <C>
Interest bearing deposits in banks   $    559   $     23    4.11%   $    430   $     16    3.72%   $    505   $     24    4.75%
Federal funds                          24,117      1,531    6.35%     11,345        558    4.92%     25,210      1,372    5.44%
Investment securities:
  Held to maturity:
     Taxable                           67,050      5,115    7.63%     78,251      5,726    7.32%     46,946      3,228    6.88%
     Nontaxable (1)                        --         --      --         694         82   11.82%      3,098        314   10.14%
                                     --------   --------   ------   --------   --------   ------   --------   --------   ------
          Total held to maturity       67,050      5,115    7.63%     78,945      5,808    7.36%     50,044      3,542    7.08%
  Available for sale
     Taxable                           67,185      6,177    9.19%     51,617      4,512    8.74%     27,419      2,296    8.37%
                                     --------   --------   ------   --------   --------   ------   --------   --------   ------
Total investment securities           134,235     11,292    8.41%    130,562     10,320    7.90%     77,463      5,838    7.54%
Loans: (2)
  Commercial & industrial             182,359     19,580   10.74%    139,639     15,374   11.01%    116,823     13,783   11.80%
  Commercial mortgages                213,281     25,326   11.87%    170,282     17,131   10.06%    170,690     18,279   10.71%
  Other loans (1)                       9,154      1,123   12.27%     10,623      1,311   12.34%     12,403      1,451   11.70%
                                     --------   --------   ------   --------   --------   ------   --------   --------   ------
     Total loans                      404,794     46,029   11.37%    320,544     33,816   10.55%    299,916     33,513   11.17%
                                     --------   --------   ------   --------   --------   ------   --------   --------   ------
Total interest earning assets        $563,705   $ 58,875   10.44%   $462,881   $ 44,710    9.66%   $403,094   $ 40,747   10.11%
Non interest earning assets
   Cash & due from banks                9,648                          8,775                          8,717
   Other assets                        18,810                         17,159                         15,843
   Allowance for loan loss            (12,034)                       (12,186)                       (10,313)
   Def income/unearned disc            (6,349)                        (7,436)                        (9,718)
                                     --------                       --------                       --------
Total non interest
          Earning assets               10,075                          6,312                          4,529
                                     --------                       --------                       --------
Total assets                         $573,780                       $469,193                       $407,623
                                     ========                       ========                       ========
LIABILITIES & STOCKHOLDERS' EQUITY
Deposits:

   Savings                           $ 19,942        541    2.71%   $ 19,932        538    2.70%   $ 18,214   $    514    2.82%
   NOW                                 35,714        870    2.44%     31,480        699    2.22%     27,138        610    2.25%
   Money market                        56,514      2,278    4.03%     43,809      1,424    3.25%     52,837      1,564    2.96%
   CDs & other time deposits          269,430     16,939    6.29%    192,545     11,356    5.90%    142,206      8,479    5.96%
                                     --------   --------   ------   --------   --------   ------   --------   --------   ------
  Total interest bearing deposits    $381,600     20,628    5.41%   $287,766     14,017    4.87%   $240,395   $ 11,167    4.65%
Federal funds                             295         17    5.76%         61          3    4.92%         90          4    4.44%
Long term borrowings                   30,613      1,904    6.22%     30,869      1,902    6.16%     31,611      1,992    6.30%
                                     --------   --------   ------   --------   --------   ------   --------   --------   ------
Total interest bearing liabilities   $412,508     22,549    5.47%   $318,696     15,922    5.00%   $272,096   $ 13,163    4.84%
                                     --------   --------   ------   --------   --------   ------   --------   --------   ------
  Non interest bearing deposits        45,501                         42,829                         29,691
  Other liabilities                    16,025                         12,844                         14,462
                                     --------                       --------                       --------
Total liabilities                     474,034                        374,369                        316,249
  Stockholders' equity                 99,746                         94,824                         91,374
                                     --------                       --------                       --------
Total liabilities and
        Stockholders' equity         $573,780                       $469,193                       $407,623
                                     ========                       ========                       ========
Net interest income                             $ 36,326                       $ 28,788                       $ 27,584
                                                ========                       ========                       ========
Net yield on
     Interest-earning assets                                6.44%                          6.22%                          6.84%
                                                           ======                         ======                         ======
</TABLE>

(1) The indicated income and annual rate are presented in a taxable equivalent
basis using the federal tax rate of 34% for all periods.
(2) Nonaccruing loans have been included in the appropriate average loan balance
category, but interest on these loans has not been included.


                                       16
<PAGE>   17
RATE VOLUME

      The following table sets forth a rate/volume analysis, which segregates in
detail the major factors contributing to the change in net interest income for
the years ended, December 31, 2000 and 1999, as compared to respective previous
periods, into amounts attributable to both rate and volume variances.

<TABLE>
<CAPTION>
                                                             2000 VS 1999                                1999 VS 1998
                                                            (IN THOUSANDS)                              (IN THOUSANDS)
                                                --------------------------------------       --------------------------------------
                                                    CHANGES DUE TO:                              CHANGES DUE TO:
                                                -----------------------                      -----------------------
INTEREST INCOME                                  VOLUME          RATE          TOTAL          VOLUME          RATE          TOTAL
                                                --------       --------       --------       --------       --------       --------
<S>                                             <C>            <C>            <C>            <C>            <C>            <C>
Interest bearing deposits in banks              $      9       $     (4)      $      5       $     (1)      $     (5)      $     (6)
Federal funds sold                                 1,105           (130)           975           (290)          (526)          (816)
Investment securities:
   Held to maturity:
         Taxable                                    (896)           285           (611)         2,279            219          2,498
         Nontaxable                                  (41)           (41)           (82)          (101)          (131)          (232)
    Available for sale

          Taxable                                  1,421            244          1,665          2,111            105          2,216
                                                --------       --------       --------       --------       --------       --------
      Total investment securities                    484            488            972          4,289            193          4,482
Loans:
    Commercial & industrial                        4,596           (390)         4,206          2,558           (967)         1,591
    Commercial mortgages                           4,781          3,414          8,195            (44)        (1,104)        (1,148)
    Other loans                                     (180)            (8)          (188)          (217)            77           (140)
                                                --------       --------       --------       --------       --------       --------
            Total loans                            9,197          3,016         12,213          2,297         (1,994)           303
                                                --------       --------       --------       --------       --------       --------

Total increase (decrease) in interest income    $ 10,795       $  3,370       $ 14,165       $  6,295       $ (2,332)      $  3,963

INTEREST EXPENSE

Deposits:
  Savings                                       $    (14)      $     17       $      3       $     47       $    (23)      $     24
  NOW & Money Market                                 530            495          1,025           (130)            79            (51)
  CDs & other time deposits                        4,791            792          5,583          2,970            (93)         2,877
                                                --------       --------       --------       --------       --------       --------
         Total interest bearing deposits           5,307          1,304          6,611          2,887            (37)         2,850
Federal funds purchased                               14             --             14             (1)            --             (1)
Mortgage payable and
                long term borrowings                 (16)            18              2            (46)           (44)           (90)
                                                --------       --------       --------       --------       --------       --------

Total increase (decrease) in interest expense      5,305          1,322          6,627          2,840            (81)         2,759
                                                --------       --------       --------       --------       --------       --------
Total increase (decrease) in
      net interest income                       $  5,490       $  2,048       $  7,538       $  3,455       $ (2,251)      $  1,204
                                                ========       ========       ========       ========       ========       ========
</TABLE>

                                       17
<PAGE>   18
LOANS

      The following table reflects the composition of the loan portfolio of
Royal Bank of Pennsylvania and the percent of gross outstandings represented by
each category at the dates indicated.

<TABLE>
<CAPTION>
                                                                      AS OF DECEMBER 31,
                                                                        (IN THOUSANDS)
                          ----------------------------------------------------------------------------------------------------------
Loans                            2000                  1999                  1998                  1997                  1996
                          ------------------    ------------------    ------------------    ------------------    ------------------
<S>                       <C>           <C>     <C>           <C>     <C>           <C>     <C>           <C>     <C>           <C>
Comm'l & industrial       $ 193,398      45%    $ 168,329      46%    $ 127,972      42%    $ 123,800      41%    $ 116,616      55%
Real estate                 233,111      54%      191,312      53%      182,595      57%      176,315      58%       93,925      44%
Consumer                      2,449       1%        2,653       1%        2,033       1%        1,523       1%        2,097       1%
                          ---------     ----    ---------     ----    ---------     ----    ---------     ----    ---------     ----
      Total gross loans     428,958     100%      362,294     100%      312,600     100%      301,638     100%      212,638     100%
Unearned income              (1,991)               (2,154)               (1,833)               (1,498)               (1,290)
Disc on loans purchased      (3,020)               (5,322)               (6,291)               (9,243)               (2,331)
                          ---------             ---------             ---------             ---------             ---------
                            423,946               354,818               304,476               290,897               209,017
Allowance for loan loss     (11,973)              (11,737)              (11,920)               (8,186)               (9,084)
                          ---------             ---------             ---------             ---------             ---------
    Total loans, net      $ 411,973             $ 343,081             $ 292,556             $ 282,711             $ 199,933
                          =========             =========             =========             =========             =========
</TABLE>

ANALYSIS OF ALLOWANCE FOR LOAN LOSS

<TABLE>
<CAPTION>
                                                                          YEAR ENDING DECEMBER 31,
                                                                               (IN THOUSANDS)
                                             ---------------------------------------------------------------------------------
                                                2000              1999              1998              1997              1996
                                             ---------         ---------         ---------         ---------         ---------
<S>                                          <C>               <C>               <C>               <C>               <C>
Total Loans                                  $ 423,946         $ 354,818         $ 304,476         $ 290,897         $ 209,017
                                             =========         =========         =========         =========         =========

Daily average loan balance                   $ 404,794         $ 320,544         $ 299,916         $ 213,368         $ 200,618
                                             =========         =========         =========         =========         =========

Allowance for loan loss:
  Balance at the beginning of the year       $  11,737         $  11,920         $   8,186         $   9,084         $   9,747
  Charge offs by loan type:
    Commercial                                     523             1,062             1,501               762               843
    Real  estate                                   105                13               135                --               240
                                             ---------         ---------         ---------         ---------         ---------
  Total charge offs                                628             1,075             1,636               762             1,083
  Recoveries by loan type:
     Commercial                                    596               850               540             1,934             1,790
     Individual                                      4                35                --                --                --
     Real estate                                    14                 7                60                48               118
                                             ---------         ---------         ---------         ---------         ---------
   Total recoveries                                614               892               600             1,982             1,908
                                             ---------         ---------         ---------         ---------         ---------
   Net loan charge offs                            (14)             (183)           (1,036)            1,220               825
     Increase (decrease) in
            Provision for loan loss                250                --             4,770            (2,118)           (1,488)
                                             ---------         ---------         ---------         ---------         ---------
Balance at end of year                       $  11,973         $  11,737         $  11,920         $   8,186         $   9,084
                                             =========         =========         =========         =========         =========

Net charge offs to average loans                    --               .06%              .35%            (0.57%)           (0.41%)
                                             =========         =========         =========         =========         =========

Allowance to total loans at year end              2.82%             3.31%             3.91%             4.35%             4.35%
                                             =========         =========         =========         =========         =========
</TABLE>

      The allowance for loan losses is established through provisions for loan
losses based on management's on-going evaluation of the risks inherent in the
Company's loan portfolio. Factors considered in the evaluation process include
growth of the loan portfolio, risk characteristics of the types of loans in the
portfolio, geographic and large borrower concentrations, current regional
economic and real estate market conditions that could affect the ability of
borrowers to pay, the value of underlying collateral, and trends in loan
delinquencies and charge-offs.


                                       18
<PAGE>   19
      The company utilizes an internal rating system to monitor and evaluate the
credit risk inherent in its loan portfolio. All loans approved by the loan
committee, executive board committee and the Board of Directors are initially
assigned a rating of pass. The loan review officer, Vice President of Special
Assets and the loan review committee are expected to recommend changes in loan
ratings when facts come to their attention that warrant an upgrade or downgrade
in a loan rating. Problem and potential problem assets are assigned the three
lowest ratings. Such ratings coincide with the "Substandard", "Doubtful" and
"Loss" classifications used by federal regulators in their examination of
financial institutions. Generally, an asset is considered Substandard if it is
inadequately protected by the current net worth and paying capacity of the
obligors and/or the collateral pledged. Substandard assets have a well-defined
weakness or weaknesses that jeopardize the liquidation of the debt. Assets
classified as Doubtful have all the weaknesses inherent in those classified
Substandard with the added characteristics that the weaknesses present make
collection or liquidation in full, on the basis of currently existing facts,
highly questionable and improbable. Assets classified as Loss are those
considered uncollectable and of such little value that their continuance as
assets is not warranted. On a regular basis, the Loan Review Officer and senior
management review the status of each loan.

        While the Company believes that it has established an adequate allowance
for loan losses, there can be no assurance that the regulators, in reviewing the
Company's loan portfolio, will not request the company to materially increase
its allowances for loan losses. Although management believes that adequate
specific and general loan loss allowances have been established, actual losses
are dependant upon future events and, as such, further additions to the level of
specific and general loss allowances could become necessary.


                                       19
<PAGE>   20
LOANS AND LEASE FINANCING RECEIVABLES

      The following table summarizes the loan portfolio by loan category and
amount that corresponds to the appropriate regulatory definitions.

<TABLE>
<CAPTION>
                                                                                                      AS OF
                                                                                                   DECEMBER 31,
                                                                                                  (IN THOUSANDS)
                                                                                     ----------------------------------------
                                                                                       2000            1999            1998
                                                                                     --------        --------        --------
<S>                                                                                  <C>             <C>             <C>
Loans secured by real estate
  Construction and land development                                                  $ 75,038        $ 50,210        $ 35,571
  Secured by 1-4 family residential properties:
  Revolving, open-end loans secured by 1-4 family residential properties and
                     extended under lines of credit                                     7,825           8,341           7,648
    All other loans secured by 1-4 family residential properties:
      Secured by first liens                                                            5,621          15,458          17,836
      Secured by junior liens                                                           4,130           6,010           6,131
  Secured by multi family (5 or more) residential properties                           19,832          19,021          20,386
  Secured by nonfarm nonresidential properties                                        291,463         237,247         198,225
  Commercial and industrial loans to US addresses                                      20,245          21,090          24,362
  Loans to individuals for household, family, and other personal expenditures           4,503           4,252           1,206
  Obligations of state and political subdivisions in the US                               256             411           1,149
   All other loans                                                                         58             254              87
   Less: Any unearned income on loans listed above                                      5,025           7,476           8,125
                                                                                     --------        --------        --------

   Total loans and leases, net of unearned income                                    $423,946        $354,818        $304,476
                                                                                     ========        ========        ========
</TABLE>

CREDIT QUALITY

The following table presents the principal amounts of nonaccruing loans and
other real estate.

<TABLE>
<CAPTION>
                                                                     AS OF DECEMBER 31,
                                                                       (IN THOUSANDS)
                                            --------------------------------------------------------------------
                                              2000           1999           1998           1997           1996
                                            --------       --------       --------       --------       --------
<S>                                         <C>            <C>            <C>            <C>            <C>
Non-accruing loans (1)(2)                   $  3,548       $  1,209       $  3,419       $  4,317       $  4,653
Other real estate                                 --             19            707             --            504
                                            --------       --------       --------       --------       --------
      Total nonperforming assets            $  3,548       $  1,228       $  4,126       $  4,317       $  5,157
                                            ========       ========       ========       ========       ========

Nonperforming assets to total assets           0.56%          0.23%          0.96%          1.04%          1.45%
                                            ========       ========       ========       ========       ========
Nonperforming loans to total loans             0.84%          0.34%          1.12%          1.48%          2.23%
                                            ========       ========       ========       ========       ========
Allowance for loan loss
         to nonperforming loans              330.80%        970.80%        348.64%        189.62%        195.23%
                                            ========       ========       ========       ========       ========
</TABLE>

(1) Generally a loan is placed on nonaccruing status when it has been delinquent
for a period of 90 days or more unless the loan is both well secured and in the
process of collection.
(2) If interest had been accrued on these nonaccruing loans, such income would
have approximated $319,000 for 2000, $109,000 for 1999, $308,000 for 1998,
$389,000 for 1997, and $419,000 for 1996.


                                       20
<PAGE>   21
INVESTMENTS SECURITIES

      The contractual maturity distribution and weighted average rate of the
investments held to maturity portfolio at December 31, 2000 are presented in the
following table. Weighted average rate on tax-exempt obligations have been
computed on a fully taxable equivalent basis assuming a tax rate of 34%.

<TABLE>
<CAPTION>
                                                                  AS OF DECEMBER 31, 2000
                                                                      (IN THOUSANDS)
                       ------------------------------------------------------------------------------------------------------------
                                              AFTER 1 YEAR BUT      AFTER 5 YEARS, BUT
                         WITHIN 1 YEAR         WITHIN 5 YEARS         WITHIN 10 YEARS        AFTER 10 YEARS              TOTAL
SECURITIES HELD        ----------------       ----------------       ----------------       ----------------       ----------------
TO  MATURITY           AMOUNT      RATE       AMOUNT      RATE       AMOUNT      RATE       AMOUNT      RATE       AMOUNT      RATE
                       ------      ----       ------      ----       ------      ----       ------      ----       ------      ----
<S>                   <C>          <C>       <C>          <C>       <C>          <C>       <C>          <C>       <C>          <C>
US Treasuries
 & gov agencies       $ 3,500      7.2%      $ 4,427      7.7%      $ 4,372      7.3%      $10,770      7.4%      $23,069      7.4%
Other securities        8,439      7.9%       50,401      7.5%        4,200      7.3%           --        %        63.041      7.5%
                      -------      ---       -------      ---       -------      ---       -------      ---       -------      ---
         Total        $11,939      7.7%      $54,828      7.5%      $ 8,572      7.3%      $10,770      7.4%      $86,110      7.5%
                      =======      ===       =======      ===       =======      ===       =======      ===       =======      ===
</TABLE>

      The following tables presents the consolidated book values and approximate
fair value at December 31, 2000, 1999, and 1998, respectively, for each major
category of RBPA's investment securities portfolio for held to maturity
securities and available for sale securities.

<TABLE>
<CAPTION>
                                                                      AS OF DECEMBER 31,
                                                                        (IN THOUSANDS)
                                      ----------------------------------------------------------------------------------
                                               2000                          1999                          1998
                                      ----------------------        ----------------------        ----------------------
                                      AMORTIZED        FAIR         AMORTIZED        FAIR         AMORTIZED        FAIR
SECURITIES HELD TO MATURITY             COST           VALUE          COST           VALUE          COST           VALUE
                                        ----           -----          ----           -----          ----           -----
<S>                                   <C>            <C>            <C>            <C>            <C>            <C>
State & political subdivisions        $    --        $    --        $    --        $    --        $ 3,098        $ 3,128
US Treasuries & agencies               23,071         23,070          6,614          6,623          4,532          4,660
Other securities                       63,039         63,279         76,451         74,871         54,264         54,372
                                      -------        -------        -------        -------        -------        -------

                   Total              $86,110        $86,349        $83,065        $81,494        $61,894        $62,160
                                      =======        =======        =======        =======        =======        =======
</TABLE>

<TABLE>
<CAPTION>
                                                                      AS OF DECEMBER 31,
                                                                        (IN THOUSANDS)
                                      ----------------------------------------------------------------------------------
                                               2000                          1999                          1998
                                      ----------------------        ----------------------        ----------------------
                                      AMORTIZED        FAIR         AMORTIZED        FAIR         AMORTIZED        FAIR
SECURITIES AVAILABLE FOR SALE           COST           VALUE          COST           VALUE          COST           VALUE
                                        ----           -----          ----           -----          ----           -----
<S>                                   <C>            <C>            <C>            <C>            <C>            <C>
Federal Home Loan Bank stock          $ 3,170        $ 3,170        $ 3,170        $ 3,170        $ 3,170        $ 3,170
Preferred and common stock              1,040          1,043          3,727          3,537          2,867          2,919
Other securities                       66,828         65,931         55,652         52,778         29,031         30,863
                                      -------        -------        -------        -------        -------        -------

                   Total              $71,038        $70,144        $62,549        $59,485        $35,068        $36,952
                                      =======        =======        =======        =======        =======        =======
</TABLE>

                                       21
<PAGE>   22
DEPOSITS

      The average balance of deposits by major classifications for each of the
last three years is presented in the following table.

<TABLE>
<CAPTION>
                                                               AS OF DECEMBER 31,
                                                                 (IN THOUSANDS)
                                -------------------------------------------------------------------------------
                                         2000                         1999                         1998
                                ---------------------        ---------------------        ---------------------
                                 AVERAGE                      AVERAGE                      AVERAGE
                                 BALANCE        RATE          BALANCE        RATE          BALANCE        RATE
                                --------        ----         --------        ----         --------        ----
<S>                             <C>             <C>          <C>             <C>          <C>             <C>
Demand deposits:
  Non interest bearing          $ 45,501          --         $ 42,829          --         $ 29,691          --
  Interest bearing (NOW)          35,714        2.44%          31,480        2.22%          27,138        2.25%
Money market deposits             56,514        4.03%          43,809        3.25%          52,837        2.96%
Savings deposits                  19,942        2.71%          19,932        2.70%          18,214        2.82%
Certificate of deposit           269,430        6.29%         192,545        5.90%         142,206        5.96%
                                --------        ----         --------        ----         --------        ----
          Total deposits        $427,101                     $330,595                     $270,086
                                ========                     ========                     ========
</TABLE>

The remaining maturity of Certificates of Deposit of $100,000 or greater:

<TABLE>
<CAPTION>
                                                   AS OF DECEMBER 31,
                                                    (IN THOUSANDS)
                                               ------------------------
MATURITY                                         2000            1999
                                               --------        --------
<S>                                            <C>             <C>
Three months or less                           $ 19,509        $ 11,623
Over three months through twelve months          25,262          10,360
Over twelve months through five years           109,846          85,311
Over five years                                  12,143          18,823
                                               --------        --------

                           Total               $166,760        $126,117
                                               ========        ========
</TABLE>

SHORT AND LONG TERM BORROWINGS

<TABLE>
<CAPTION>
                                                                       YEAR ENDING DECEMBER 31,
                                                                            (IN THOUSANDS)
                                                 -------------------------------------------------------------------
                                                   2000           1999           1998           1997           1996
                                                 -------        -------        -------        -------        -------
<S>                                              <C>            <C>            <C>            <C>            <C>
Short term borrowings                            $ 3,000        $    --        $    --        $15,000        $    --
Long term borrowings:
  Mortgage payable (1)                               431            480            527            571            613
  FHLB advances (2)                               30,000         30,000         30,365         31,063          4,201
                                                 -------        -------        -------        -------        -------

               Total long term borrowings        $33,431        $30,480        $30,892        $46,634        $ 4,814
                                                 =======        =======        =======        =======        =======
</TABLE>


(1) The mortgage payable is payable to a bank at 65% of prime rate (6.175% at
December 31, 2000) and is guaranteed by an industrial development authority.
(2) Advances from the Federal Home Loan Bank of Pittsburgh consist of one
advance with an interest rate of 6.24%, and matures on December 23, 2002.


                                       22
<PAGE>   23
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


                                       23
<PAGE>   24
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.


                                       24
<PAGE>   25

        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

<TABLE>
<CAPTION>
                                                         2000               1999               1998
                                                         ----               ----               ----
<S>                                                  <C>                <C>                <C>
                 Average loan outstandings           $404,794,000       $320,544,000       $299,916,000
                 Interest and fees on loans          $ 46,029,000       $ 33,816,000       $ 33,513,000
                       Average Yield                    11.37%             10.55%            11.17%
</TABLE>

      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

<TABLE>
<CAPTION>
                                                               2000              1999              1998
                                                               ----              ----              ----
<S>                                                        <C>               <C>               <C>
                Average HTM investment securities          $67,050,000       $78,945,000       $50,044,000
                         Interest income                   $ 5,115,000       $ 5,808,000       $ 3,542,000
                          Average yield                       7.63%             7.36%             7.08%
</TABLE>

      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,


                                       25
<PAGE>   26
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

<TABLE>
<CAPTION>
                                                               2000              1999              1998
                                                               ----              ----              ----
<S>                                                        <C>               <C>               <C>
                Average AFS investment securities          $67,185,000       $51,617,000       $27,419,000
                  Interest and dividend income             $ 6,177,000       $ 4,512,000       $ 2,296,000
                          Average yield                       9.19%             8.74%             8.37%
</TABLE>

      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

<TABLE>
<CAPTION>
                                                                2000              1999              1998
                                                                ----              ----              ----
<S>                                                         <C>               <C>               <C>
               Average NOW & Money Market deposits          $92,228,000       $75,289,000       $79,975,000
                        Interest expense                    $ 3,448,000       $ 2,123,000       $ 2,174,000
                      Average cost of funds                    3.73%             2.82%             2.72%
</TABLE>

      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

<TABLE>
<CAPTION>
                                                         2000               1999               1998
                                                         ----               ----               ----
<S>                                                  <C>                <C>                <C>
                      Average time deposits          $269,430,000       $192,545,000       $142,206,000
                        Interest expense             $ 21,498,000       $ 11,356,286       $  8,479,000
                      Average cost of funds             6.61%              5.90%              5.96%
</TABLE>

                                       26
<PAGE>   27
      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.


                                       27
<PAGE>   28
      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


                                       28
<PAGE>   29
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


                                       29
<PAGE>   30
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)

<TABLE>
<CAPTION>
                                                        DAYS                 1 TO 5          OVER 5        NON-RATE
                                              -----------------------
                                              0 - 90         91 - 365         YEARS           YEARS        SENSITIVE          TOTAL
                                              ------         --------         -----           -----        ---------          -----
<S>                                           <C>             <C>            <C>             <C>             <C>             <C>
ASSETS (1)
Interest-bearing deposits in banks            $  4.2          $   --         $   --          $   --          $   --          $  4.2
Federal funds sold                              27.5              --             --              --                            27.5
Investment securities:
       Available for sale                        4.2             1.3           21.1            43.5              --            70.1
       Held to maturity                          4.5             7.4           54.8            19.3              --            86.0
                                              ------          ------         ------          ------          ------          ------
    Total investment securities                  8.7             8.7           75.9            62.8              --           156.1
Loans:(2)
       Fixed rate (3)                           16.2            21.1          150.5            44.0              --           231.8
       Variable rate                           179.5             8.5            2.9             6.4              --           197.3
                                              ------          ------         ------          ------          ------          ------
    Total loans                                195.7            29.6          153.4            50.4              --           429.1
Other assets(4)                                   --              --             --              --            13.2            13.2
                                              ------          ------         ------          ------          ------          ------
    Total Assets                              $236.1          $ 38.3         $229.3          $113.2          $ 13.2          $630.1
                                              ======          ======         ======          ======          ======          ======

LIABILITIES & CAPITAL
Deposits:

       Non interest bearing deposits          $   --          $   --         $   --          $   --          $ 47.6          $ 47.6
       Interest bearing deposits (5)           117.0              --           13.9              --              --           130.9
       Certificate of deposits                  36.6            63.4          194.1              --              --           294.1
                                              ------          ------         ------          ------          ------          ------
    Total deposits                             153.6            63.4          208.0              --            47.6           472.6
Short term borrowings                            3.0              --             --              --              --             3.0
Mortgage and long term borrowings                 --              --           30.4              --              --            30.4
Other liabilities                                 --              --             --              --            20.6            20.6
Capital                                           --              --             --              --           103.5           103.5
                                              ------          ------         ------          ------          ------          ------
    Total liabilities & capital               $156.6          $ 63.4         $238.4          $   --          $171.7          $630.1
                                              ======          ======         ======          ======          ======          ======

Net interest rate GAP                         $ 79.5          $(25.1)        $ (9.1)         $113.2         ($158.5)
                                              ======          ======         ======          ======          ======

Cumulative interest rate GAP                  $ 79.5          $ 54.4         $ 45.3          $158.5              --
                                              ======          ======         ======          ======          ======
GAP to total assets                               13%             -4%
                                              ======          ======
GAP to total equity                               77%            -24%
                                              ======          ======
Cumulative GAP to total assets                    13%              9%
                                              ======          ======
Cumulative GAP to total equity                    77%             53%
                                              ======          ======
</TABLE>

(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


                                       30
<PAGE>   31
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:

<TABLE>
<CAPTION>
                                                                               REGULATORY
                                      2000           1999           1998         MINIMUM
                                      ----           ----           ----         -------
<S>                                   <C>            <C>            <C>        <C>
CAPITAL LEVEL
   Leverage ratio                     17.0%          18.8%          22.1%          3%
   Risk based capital ratio:
        Tier 1                        18.1%          20.4%          24.1%          4%
        Total                         19.4%          21.6%          25.4%          8%

CAPITAL PERFORMANCE
    Return on average assets           2.5%           2.6%           2.6%          --
    Return on average equity          14.3%          12.8%          11.8%          --
</TABLE>

      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.


                                       31
<PAGE>   32
      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.  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)

<TABLE>
<CAPTION>
                                        Market Value of   Percent of
                  Changes in Rates     Portfolio Equity     Change
                  ----------------     ----------------     ------
<S>                                    <C>                <C>
                 + 300 basis points        $100,513         -16.3%
                 + 200 basis points         106,852         -11.0%
                 + 100 basis points         113,429          -5.5%
                     Flat rate              120,062            0
                 - 100 basis points         132,771          10.6%
                 - 200 basis points         144,922          20.7%
                 - 300 basis points         157,112          30.9%
</TABLE>

      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.


                                       32
<PAGE>   33
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


                                       33
<PAGE>   34
               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)


                                       34
<PAGE>   35
             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                       December 31,
                                                                                           -----------------------------------
                                                                                                2000                  1999
                                                                                           -------------         -------------
<S>                                                                                        <C>                   <C>
                    ASSETS

Cash and due from banks                                                                    $  15,772,422         $  17,525,462
Federal funds sold                                                                            27,450,000               200,000
                                                                                           -------------         -------------
                    Total cash and cash equivalents                                           43,222,422            17,725,462
                                                                                           -------------         -------------
Investment securities held to maturity (fair value of $86,348,525
     and $81,493,670 in 2000 and 1999, respectively)                                          86,109,704            83,064,914

Investment securities available for sale - at fair value                                      70,143,717            59,485,027

Total loans                                                                                  423,945,784           354,818,236
     Less allowance for loan losses                                                           11,972,839            11,737,337
                                                                                           -------------         -------------
                    Net loans                                                                411,972,945           343,080,899

Premises and equipment, net                                                                    6,615,153             5,784,708

Accrued interest receivable                                                                    5,504,058             4,735,442

Other assets                                                                                   6,512,899             8,659,595
                                                                                           -------------         -------------
                                                                                           $ 630,080,898         $ 522,536,047
                                                                                           =============         =============
                    LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
     Deposits

         Non-interest bearing                                                              $  47,608,128         $  45,541,164
         Interest bearing                                                                    424,973,825           335,744,854
                                                                                           -------------         -------------
                    Total deposits                                                           472,581,953           381,286,018

     Accrued interest payable                                                                 11,237,712             7,999,316
     Other liabilities                                                                         9,328,326             6,936,616
     Advance from Federal Home Loan Bank                                                      33,000,000            30,000,000
     Mortgage payable                                                                            431,386               479,579
                                                                                           -------------         -------------
                    Total liabilities                                                        526,579,377           426,701,529
                                                                                           -------------         -------------
Stockholders' equity
     Common stock
         Class A, par value $2.00 per share; authorized, 18,000,000 shares; issued,
            8,387,711 and 7,879,349 shares in 2000 and 1999, respectively                     16,775,422            15,758,698
         Class B, par value $0.10 per share; authorized, 2,000,000 shares; issued,
            1,730,715 and 1,683,113 shares in 2000 and 1999, respectively                        173,072               168,311
     Additional paid in capital                                                               57,767,946            50,865,395
     Retained earnings                                                                        31,640,205            33,329,374
     Accumulated other comprehensive loss                                                       (589,917)           (2,022,053)
                                                                                           -------------         -------------
                                                                                             105,766,728            98,099,725
     Treasury stock - at cost, 215,388 Class A shares in 2000
         and 1999                                                                             (2,265,207)           (2,265,207)
                                                                                           -------------         -------------
                                                                                             103,501,521            95,834,518
                                                                                           -------------         -------------
                                                                                           $ 630,080,898         $ 522,536,047
                                                                                           =============         =============
</TABLE>

The accompanying notes are an integral part of these statements.


                                       35
<PAGE>   36
             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

                        Consolidated Statements of Income

<TABLE>
<CAPTION>
                                                                                       Year ended December  31,
                                                                        -----------------------------------------------------
                                                                            2000                 1999                1998
                                                                        ------------         ------------        ------------
<S>                                                                     <C>                  <C>                 <C>
Interest income
     Loans, including fees                                              $ 46,028,952         $ 33,816,210        $ 33,513,439
     Investment securities held to maturity
          Taxable                                                          5,115,443            5,726,349           3,227,921
          Tax-exempt                                                              --               53,530             207,931
     Investment securities available for sale
          Taxable                                                          6,176,987            4,268,333           2,121,921
          Tax-exempt                                                              --              243,590             173,199
     Deposits in banks                                                        23,072               15,682              24,251
     Federal funds sold                                                    1,530,592              558,416           1,371,643
                                                                        ------------         ------------        ------------
               TOTAL INTEREST INCOME                                      58,875,046           44,682,110          40,640,305
                                                                        ------------         ------------        ------------
Interest expense
     Deposits                                                             20,628,298           14,016,747          11,167,451
     Borrowings and mortgage payable                                       1,904,005            1,902,432           1,995,750
     Federal funds purchased                                                  17,238                3,015                  --
                                                                        ------------         ------------        ------------
               TOTAL INTEREST EXPENSE                                     22,549,541           15,922,194          13,163,201
                                                                        ------------         ------------        ------------
               NET INTEREST INCOME                                        36,325,505           28,759,916          27,477,104

Provision for loan losses                                                    250,000                   --           4,769,785
                                                                        ------------         ------------        ------------
               NET INTEREST INCOME AFTER PROVISION
                  FOR LOAN LOSSES                                         36,075,505           28,759,916          22,707,319
                                                                        ------------         ------------        ------------
Other income
     Service charges and fees                                                893,545              856,230             830,932
     Losses on sale of investment securities available for sale             (301,958)                  --                  --
     Impairment loss on investment securities available for sale          (1,000,000)                  --                  --
     Gains on other real estate                                               53,407              349,351                  --
     Gains on sale of loans                                                       --               44,773               3,831
     Other income                                                            312,607              787,614           2,739,602
                                                                        ------------         ------------        ------------
                                                                             (42,399)           2,037,968           3,574,365
                                                                        ------------         ------------        ------------
Other expenses
     Salaries and employee benefits                                        7,978,660            7,264,824           5,028,428
     Occupancy and equipment                                                 672,455              637,624             706,320
     Advertising                                                             424,109              356,394             214,813
     Pennsylvania bank shares tax                                            757,971              743,930             726,161
     Professional fees                                                       428,652              501,977             544,109
     Losses on investment partnership                                        620,000              622,571           1,080,415
     Travel                                                                  441,204              513,267             385,489
     Other operating expenses                                              2,468,411            2,489,032           2,187,747
                                                                        ------------         ------------        ------------
                                                                          13,791,462           13,129,619          10,873,482
                                                                        ------------         ------------        ------------
               INCOME BEFORE INCOME TAXES                                 22,241,644           17,668,265          15,408,202

Income taxes                                                               7,981,580            5,563,737           4,624,262
                                                                        ------------         ------------        ------------
               NET INCOME                                               $ 14,260,064         $ 12,104,528        $ 10,783,940
                                                                        ============         ============        ============
Per share data
     Net income - basic                                                 $       1.34         $       1.15        $       1.04
                                                                        ============         ============        ============
     Net income - diluted                                               $       1.32         $       1.14        $       1.03
                                                                        ============         ============        ============
</TABLE>

The accompanying notes are an integral part of these statements.


                                       36
<PAGE>   37
             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

            Consolidated Statement of Changes in Stockholders' Equity

                  Years ended December 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>

                                               Class A common stock                Class B common stock              Additional
                                          ------------------------------      -------------------------------         paid in
                                             Shares            Amount             Shares            Amount            capital
                                          ------------      ------------      ------------       ------------       ------------
<S>                                       <C>               <C>               <C>                <C>                <C>
Balance, December 31, 1997                   7,015,721      $ 14,031,442         1,592,859       $    159,286       $ 38,797,618
   Net income for the year ended
     December 31, 1998                              --                --                --                 --                 --
   Conversion of Class B common
     stock to Class A common stock              29,562            59,124           (25,910)            (2,591)                --
   4% stock dividends declared                 272,313           544,626            63,595              6,359          6,466,085
   Cash in lieu of fractional shares                --                --                --                 --                 --
   Stock options exercised                     112,093           224,186                --                 --            128,956
   Cash dividends on common stock                   --                --                --                 --                 --
   Other comprehensive income, net
     of reclassifications and taxes                 --                --                --                 --                 --
                                          ------------      ------------      ------------       ------------       ------------

   Comprehensive income


Balance, December 31, 1998                   7,429,689        14,859,378         1,630,544            163,054         45,392,659
   Net income for the year ended
     December 31, 1999                              --                --                --                 --                 --
   Conversion of Class B common
     stock to Class A common stock              14,630            29,260           (12,727)            (1,273)                --
   4% stock dividends declared                 288,728           577,456            65,296              6,530          4,867,469
   Cash in lieu of fractional shares                --                --                --                 --                 --
   Purchase of treasury stock                       --                --                --                 --                 --
   Stock options exercised                     146,302           292,604                --                 --            605,267
   Cash dividends on common stock                   --                --                --                 --                 --
   Other comprehensive income, net
     of reclassifications and taxes                 --                --                --                 --                 --
                                          ------------      ------------      ------------       ------------       ------------

   Comprehensive income


Balance, December 31, 1999                   7,879,349      $ 15,758,698         1,683,113       $    168,311       $ 50,865,395
                                          ============      ============      ============       ============       ============
</TABLE>

<TABLE>
<CAPTION>
                                                              Accumulated
                                                                 other
                                            Retained         comprehensive       Treasury          Comprehensive
                                            earnings         income (loss)         stock              income
                                          ------------       ------------       ------------       ------------
<S>                                       <C>                <C>                <C>                <C>
Balance, December 31, 1997                $ 38,023,359       $    638,142       $ (2,145,085)
   Net income for the year ended
     December 31, 1998                      10,783,940                 --                 --       $ 10,783,940
   Conversion of Class B common
     stock to Class A common stock             (56,533)                --                 --
   4% stock dividends declared              (7,017,070)                --                 --
   Cash in lieu of fractional shares            (2,023)                --                 --
   Stock options exercised                          --                 --                 --
   Cash dividends on common stock           (7,175,330)                --                 --
   Other comprehensive income, net
     of reclassifications and taxes                 --            604,777                 --            604,777
                                          ------------       ------------       ------------       ------------

   Comprehensive income                                                                            $ 11,388,717
                                                                                                   ============

Balance, December 31, 1998                  34,556,343          1,242,919         (2,145,085)
   Net income for the year ended
     December 31, 1999                      12,104,528                 --                 --       $ 12,104,528
   Conversion of Class B common
     stock to Class A common stock             (27,987)                --                 --
   4% stock dividends declared              (5,451,455)                --                 --
   Cash in lieu of fractional shares            (3,212)                --                 --
   Purchase of treasury stock                       --                 --           (120,122)
   Stock options exercised                          --                 --                 --
   Cash dividends on common stock           (7,848,843)                --                 --
   Other comprehensive income, net
     of reclassifications and taxes                 --         (3,264,972)                --         (3,264,972)
                                          ------------       ------------       ------------       ------------

   Comprehensive income                                                                            $  8,839,556
                                                                                                   ============

Balance, December 31, 1999                $ 33,329,374       $ (2,022,053)      $ (2,265,207)
                                          ============       ============       ============
</TABLE>

                                   (Continued)


                                       37
<PAGE>   38
             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

      Consolidated Statement of Changes in Stockholders' Equity - Continued

                  Years ended December 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>

                                               Class A common stock                Class B common stock              Additional
                                          ------------------------------      -------------------------------         paid in
                                             Shares            Amount             Shares            Amount            capital
                                          ------------      ------------      ------------       ------------       ------------
<S>                                       <C>               <C>               <C>                <C>                <C>
Balance, January 1, 2000                     7,879,349      $ 15,758,698         1,683,113       $    168,311       $ 50,865,395
   Net income for the year ended
     December 31, 2000                              --                --                --                 --                 --
   Conversion of Class B common
     stock to Class A common stock              42,129            84,258           (36,632)            (3,663)                --
   5% stock dividends declared                 382,857           765,714            84,234              8,424          6,581,785
   Cash in lieu of fractional shares                --                --                --                 --                 --
   Stock options exercised                      83,376           166,752                --                 --            320,766
   Cash dividends on common stock                   --                --                --                 --                 --
   Other comprehensive income, net
     of reclassifications and taxes                 --                --                --                 --                 --
                                          ------------      ------------      ------------       ------------       ------------

   Comprehensive income


Balance, December 31, 2000                   8,387,711      $ 16,775,422         1,730,715       $    173,072       $ 57,767,946
                                          ============      ============      ============       ============       ============
</TABLE>

<TABLE>
<CAPTION>
                                                              Accumulated
                                                                 other
                                            Retained         comprehensive       Treasury          Comprehensive
                                            earnings         income (loss)         stock              income
                                          ------------       ------------       ------------       ------------
<S>                                       <C>                <C>                <C>                <C>
Balance, January 1, 2000                  $ 33,329,374       $ (2,022,053)      $ (2,265,207)
   Net income for the year ended
     December 31, 2000                      14,260,064                 --                 --       $ 14,260,064
   Conversion of Class B common
     stock to Class A common stock             (80,595)                --                 --                 --
   5% stock dividends declared              (7,355,923)                --                 --                 --
   Cash in lieu of fractional shares            (2,671)                --                 --                 --
   Stock options exercised                          --                 --                 --                 --
   Cash dividends on common stock           (8,510,044)                --                 --                 --
   Other comprehensive income, net
     of reclassifications and taxes                 --          1,432,136                 --          1,432,136
                                          ------------       ------------       ------------       ------------

   Comprehensive income                                                                            $ 15,692,200
                                                                                                   ============

Balance, December 31, 2000                $ 31,640,205       $   (589,917)      $ (2,265,207)
                                          ============       ============       ============
</TABLE>

         The accompanying notes are an integral part of this statement.


                                       38
<PAGE>   39
            ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                             Year ended December 31,

<TABLE>
<CAPTION>
                                                                                2000                 1999                 1998
                                                                            ------------         ------------         ------------
<S>                                                                         <C>                  <C>                  <C>
Cash flows from operating activities
   Net income                                                               $ 14,260,064         $ 12,104,528         $ 10,783,940
   Adjustments to reconcile net income to
           net cash provided by operating activities
      Depreciation and amortization                                              413,864              413,864              351,039
      Provision for loan losses                                                  250,000                   --            4,769,785
      Accretion of investment securities discount                               (112,441)            (338,760)             (75,116)
      Amortization of investment securities premium                              240,382              896,332              294,699
      Amortization of deferred loan fees                                      (2,622,125)            (389,588)            (278,215)
      Accretion of discount on loans purchased                                (2,976,085)          (1,848,658)          (3,005,281)
      Provision (benefit) for deferred income taxes                              588,295           (1,257,494)              75,361
      Gains on other real estate                                                 (53,407)            (349,351)                  --
      Gains on sale of loans                                                          --              (44,773)              (3,831)
      Losses on sales of investment securities
           available for sale                                                    301,958                   --                   --
      Impairment loss on investment securities available for sale              1,000,000                   --                   --
      Decrease (increase) in accrued interest receivable                        (768,616)              62,692               99,146
      Decrease (increase) in other assets                                      2,153,179             (466,003)           1,915,737
      Increase in accrued interest payable                                     3,238,396              569,898            1,288,379
      Increase (decrease) in other liabilities                                 2,391,710            2,094,923           (4,113,266)
                                                                            ------------         ------------         ------------

              Net cash provided by operating activities                       18,305,174           11,447,610           12,102,377
                                                                            ------------         ------------         ------------

Cash flows from investing activities
   Proceeds from calls and maturities of investment
      securities held to maturity                                             14,612,933           13,797,967           43,508,610
   Purchases of investment securities held to maturity                       (30,001,160)         (35,554,592)         (41,251,689)
   Proceeds from calls, maturities and sale of investment securities
      available for sale                                                       1,076,671                   --                   --
   Proceeds from sales of investment securities
      available for sale                                                         610,313                   --                   --
   Purchases of Federal Home Loan Bank stock                                          --                   --                5,000
   Purchases of investment securities available for sale                              --          (25,770,160)         (15,302,591)
   Net increase in loans                                                     (31,963,563)         (49,134,710)         (11,980,316)
   Purchase of loan portfolio                                                (32,194,365)                  --
   Purchase of premises and equipment                                         (1,244,309)            (745,807)          (1,014,883)
   Proceeds from sale and payments on other real estate                           72,721            1,032,614                   --
                                                                            ------------         ------------         ------------

                Net cash used in investing activities                        (79,030,759)         (96,374,688)         (26,035,869)
                                                                            ------------         ------------         ------------
</TABLE>

                                   (Continued)


                                       39
<PAGE>   40
            ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

                Consolidated Statements of Cash Flows - Continued

                             Year ended December 31,

<TABLE>
<CAPTION>
                                                                                2000                 1999                 1998
                                                                            ------------         ------------         ------------
<S>                                                                         <C>                  <C>                  <C>
Cash flows from financing activities
   Net increase in non-interest bearing and
      interest bearing demand deposits and savings accounts                 $ 37,773,004         $  4,813,360         $ 10,718,876
   Net increase in certificates of deposit                                    53,522,931           86,082,973           14,307,375
   Principal payments on mortgage                                                (48,193)             (47,141)             (44,165)
   Cash dividends in lieu of fractional shares                                    (2,671)              (3,213)              (2,023)
   Purchase of treasury stock                                                         --             (120,121)                  --
   Proceeds from (repayment of) borrowings                                     3,000,000             (365,000)         (15,698,000)
   Issuance of common stock under stock option plans                             487,518              897,871              353,141
   Cash dividends paid                                                        (8,510,044)          (7,848,843)          (7,175,330)
                                                                            ------------         ------------         ------------

                Net cash provided by financing activities                     86,222,545           83,409,886            2,459,874
                                                                            ------------         ------------         ------------

                Net increase (decrease) in cash and cash equivalents          25,496,960           (1,517,192)         (11,473,618)

Cash and cash equivalents at beginning of year                                17,725,462           19,242,654           30,716,272
                                                                            ------------         ------------         ------------

Cash and cash equivalents at end of year                                    $ 43,222,422         $ 17,725,462         $ 19,242,654
                                                                            ============         ============         ============

Supplemental disclosure of cash flow information
   Cash paid during the year for
        Interest                                                            $ 19,311,145         $ 15,352,296         $ 11,874,822
                                                                            ============         ============         ============

        Income taxes                                                        $  5,650,000         $  4,044,000         $  2,750,000
                                                                            ============         ============         ============
</TABLE>

The accompanying notes are an integral part of these statements.


                                       40






<PAGE>   41
             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)


                                       41
<PAGE>   42
             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)


                                       42
<PAGE>   43
             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)


                                       43
<PAGE>   44
             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)


                                       44
<PAGE>   45
             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)


                                       45
<PAGE>   46
             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:

<TABLE>
<CAPTION>
                                                                             December 31, 2000
                                                               ---------------------------------------------
                                                                                    Tax             Net of
                                                               Before tax        (benefit)           tax
                                                                 amount           expense           amount
                                                               -----------      -----------      -----------
<S>                                                            <C>              <C>              <C>
     Unrealized gains on securities
     Unrealized holding gains arising during period            $ 2,471,853      $   840,425      $ 1,631,428
     Less reclassification adjustment for losses
       realized in net income                                     (301,958)        (102,666)        (199,292)
                                                               -----------      -----------      -----------

       Other comprehensive income, net                         $ 2,169,895      $   737,759      $ 1,432,136
                                                               ===========      ===========      ===========
</TABLE>


                                   (Continued)


                                       46
<PAGE>   47
             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

<TABLE>
<CAPTION>
                                                                              December 31, 1999
                                                               ---------------------------------------------

                                                                                                   Net of
                                                                Before tax          Tax             tax
                                                                  amount          benefit          amount
                                                               -----------      -----------      -----------
<S>                                                            <C>              <C>              <C>
     Unrealized losses on securities
     Unrealized holding losses arising during period           $(4,950,740)     $(1,685,768)     $(3,264,972)
     Less reclassification adjustment for losses
       realized in net income                                           --               --               --
                                                               -----------      -----------      -----------
       Other comprehensive loss, net                           $(4,950,740)     $(1,685,768)     $(3,264,972)
                                                               ===========      ===========      ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                              December 31, 1998
                                                               ---------------------------------------------
                                                                                                    Net of
                                                               Before tax           Tax              tax
                                                                 amount           expense           amount
                                                               -----------      -----------      -----------
<S>                                                            <C>              <C>              <C>
     Unrealized gains on securities
     Unrealized holding gains arising during period            $   916,330      $   311,553      $   604,777
     Less reclassification adjustment for gains
       realized in net income                                           --               --               --
                                                               -----------      -----------      -----------

       Other comprehensive income, net                         $   916,330      $   311,553      $   604,777
                                                               ===========      ===========      ===========
</TABLE>

     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:

<TABLE>
<CAPTION>
                                                                           2000
                                              --------------------------------------------------------------
                                                                 Gross            Gross
                                               Amortized       unrealized       unrealized         Fair
                                                 cost            gains            losses           value
                                              ------------    ------------     ------------     ------------
<S>                                           <C>             <C>              <C>              <C>
     Investment securities held to maturity
       Corporate securities                   $ 63,038,666    $    834,919     $   (595,032)    $ 63,278,553
       U.S. agencies                            23,071,038              --           (1,066)      23,069,972
                                              ------------    ------------     ------------     ------------
                                              $ 86,109,704    $    834,919     $   (596,098)    $ 86,348,525
                                              ============    ============     ============     ============
</TABLE>


                                   (Continued)


                                       47
<PAGE>   48
             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2000 and 1999


NOTE B - INVESTMENT SECURITIES - Continued

<TABLE>
<CAPTION>
                                                                             2000
                                                 --------------------------------------------------------------
                                                                    Gross            Gross
                                                  Amortized       unrealized       unrealized         Fair
                                                    cost            gains            losses           value
                                                 ------------    ------------     ------------     ------------
<S>                                              <C>             <C>              <C>              <C>
     Investment securities available for sale
       Federal Home Loan Bank stock -
         at cost                                 $ 3,169,700     $         --     $         --     $  3,169,700
       Preferred and common stock                   1,039,855           3,614             (238)       1,043,231
       Other securities                            66,827,977       1,431,200       (2,328,391)      65,930,786
                                                 ------------    ------------     ------------     ------------
                                                 $ 71,037,532    $  1,434,814     $ (2,328,629)    $ 70,143,717
                                                 ============    ============     ============     ============
</TABLE>

<TABLE>
<CAPTION>
                                                                             1999
                                                 --------------------------------------------------------------
                                                                    Gross            Gross
                                                  Amortized       unrealized       unrealized         Fair
                                                    cost            gains            losses           value
                                                 ------------    ------------     ------------     ------------
<S>                                              <C>             <C>              <C>              <C>
     Investment securities held to maturity
        Corporate securities                     $ 76,451,151     $   144,767      $ (1,724,979)    $ 74,870,939
        U.S. agencies                               6,613,763          37,714           (28,746)       6,622,731
                                                 ------------     ------------     ------------     ------------
                                                 $ 83,064,914     $    182,481     $ (1,753,725)    $ 81,493,670
                                                 ============     ============     ============     ============

     Investment securities available for sale
        Federal Home Loan Bank stock -
            at cost                              $  3,169,700     $         --     $         --     $  3,169,700
        Preferred and common stock                  3,726,673           10,923         (200,098)       3,537,498
        Other securities                           55,652,348          444,300       (3,318,819)      52,777,829
                                                 ------------     ------------     ------------     ------------
                                                 $ 62,548,721     $    455,223     $ (3,518,917)    $ 59,485,027
                                                 ============     ============     ============     ============
</TABLE>

     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)


                                       48
<PAGE>   49
             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2000 and 1999


NOTE B - INVESTMENT SECURITIES - Continued

<TABLE>
<CAPTION>
                                                                    2000
                                          --------------------------------------------------------
                                                              Held to maturity
                                                           ----------------------
     Available for sale
     ------------------
                                           Amortized        Fair         Amortized        Fair
                                             cost           value          cost           value
                                          -----------    -----------    -----------    -----------
<S>                                       <C>            <C>            <C>            <C>
          Within 1 year                   $11,939,255    $11,795,824    $ 1,251,115    $ 1,267,450
          After 1 but within 5 years       54,828,186     54,682,684     21,950,425     21,138,326
          After 5 but within 10 years       8,571,540      9,102,294      9,692,442      9,640,410
          After 10 years                   10,770,723     10,767,723     33,933,995     33,884,600
                                          -----------    -----------    -----------    -----------
                                           86,109,704     86,348,525     66,827,977     65,930,786
          Federal Home Loan Bank stock             --             --      3,169,700      3,169,700
          Preferred and common stocks              --             --      1,039,855      1,043,231
                                          -----------    -----------    -----------    -----------
                                          $86,109,704    $86,348,525    $71,037,532    $70,143,717
                                          ===========    ===========    ===========    ===========
</TABLE>

     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:

<TABLE>
<CAPTION>
                                                                  2000               1999
                                                              -------------     -------------
<S>                                                           <C>               <C>
         Consumer                                             $   2,449,433     $   2,653,428
         Commercial and industrial                              193,397,994       166,477,867
         Real estate                                            233,110,207       193,162,959
                                                              -------------     -------------
              Total gross loans                                 428,957,634       362,294,254
         Less
           Unearned income                                       (1,991,544)       (2,154,106)
              Unamortized discount on loans purchased            (3,020,306)       (5,321,912)
                                                              -------------     -------------
              Total loans                                     $ 423,945,784     $ 354,818,236
                                                              =============     =============
</TABLE>


                                   (Continued)


                                       49
<PAGE>   50
             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:

<TABLE>
<CAPTION>
                                                 2000             1999             1998
                                             ------------     ------------     ------------
<S>                                          <C>              <C>              <C>
          Balance at beginning of year       $ 11,737,337     $ 11,919,545     $  8,186,237
             Charge-offs                         (628,590)      (1,075,122)      (1,635,919)
             Recoveries                           614,092          892,914          599,442
                                             ------------     ------------     ------------
             Net charge-offs                      (14,498)        (182,208)      (1,036,477)
          Provision for loan losses               250,000               --        4,769,785
                                             ------------     ------------     ------------
          Balance at end of year             $ 11,972,839     $ 11,737,337     $ 11,919,545
                                             ============     ============     ============
</TABLE>


                                       50
<PAGE>   51
             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:

<TABLE>
<CAPTION>
                                                                     Estimated
                                                                    useful lives           2000              1999
                                                                   ---------------      -----------      -----------
<S>                                                                <C>                  <C>              <C>
     Land                                                             --                $ 1,973,478      $ 1,973,478
     Buildings and leasehold improvements                          15 - 31.5 years        5,991,511        4,763,487
     Furniture and fixtures                                            5 - 7 years        2,719,819        2,703,541
                                                                                        -----------      -----------
                                                                                         10,684,808        9,440,506
     Less accumulated depreciation and amortization                                       4,069,655        3,655,798
                                                                                        -----------      -----------
                                                                                        $ 6,615,153      $ 5,784,708
                                                                                        ===========      ===========
</TABLE>

     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:

<TABLE>
<CAPTION>
                                                    2000            1999
                                                ------------    ------------
<S>                                             <C>             <C>
         Demand                                 $ 47,608,128    $ 45,541,164
         NOW and money market                    110,935,025      75,983,512
         Savings                                  19,947,825      19,193,298
         Time, $100,000 and over                 166,760,323     126,117,263
         Other time                              127,330,652     114,450,781
                                                ------------    ------------
                                                $472,581,953    $381,286,018
                                                ============    ============
</TABLE>

    Maturities of certificates of deposit for the next five years and thereafter
are as follows:

<TABLE>
<S>                                                      <C>
              2001                                       $  99,163,872
              2002                                          80,089,458
              2003                                          42,883,422
              2004                                          28,568,645
              2005                                          13,752,304
              Thereafter                                    29,633,274
                                                          ------------

                                                          $294,090,975
                                                          ============
</TABLE>


                                       51
<PAGE>   52
             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:

<TABLE>
<CAPTION>
          Issue date             Maturity date         Interest rate         Balance
       -----------------       -----------------       -------------       -----------
<S>                            <C>                     <C>                 <C>
       December 13, 2000       June 13, 2001                6.43           $ 3,000,000
       December 23, 1997       December 23, 2002            6.24            30,000,000
                                                                           -----------

                                                                           $33,000,000
                                                                           ===========
</TABLE>

          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:

<TABLE>
<CAPTION>
       Year ending December 31,
       ------------------------
<S>                                                              <C>
               2001                                              $    50,843
               2002                                                   54,073
               2003                                                   57,508
               2004                                                   61,162
               2005                                                   65,047
               Thereafter                                            142,753
                                                                 -----------
                                                                 $   431,386
                                                                 ===========
</TABLE>

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:

<TABLE>
<CAPTION>
       Year ending December 31,
       ------------------------
<S>                                                               <C>
                2001                                              $   331,000
                2002                                                  325,000
                2003                                                  271,000
                2004                                                  171,100
                                                                  -----------
                                                                  $ 1,098,000
                                                                  ===========
</TABLE>


                                   (Continued)


                                       52
<PAGE>   53
             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:

<TABLE>
<CAPTION>
                                                   2000            1999           1998
                                                -----------     -----------    -----------
<S>                                             <C>             <C>            <C>
     Income tax expense (benefit)
       Current                                  $ 8,265,489     $ 5,127,196    $ 4,055,012
       Deferred federal tax                        (543,048)        177,402        310,111
     Benefit applied to reduce goodwill             259,139         259,139        259,139
                                                -----------     -----------    -----------

                                                $ 7,981,580     $ 5,563,737    $ 4,624,262
                                                ===========     ===========    ===========
</TABLE>

     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:

<TABLE>
<CAPTION>
                                                       2000            1999            1998
                                                    -----------     -----------     -----------
<S>                                                 <C>             <C>             <C>
     Computed tax expense at statutory rate         $ 7,784,575     $ 6,183,893     $ 5,392,871
     Tax-exempt income                                  (84,470)        (98,256)       (258,100)
     Low-income housing tax credit                     (544,939)       (544,939)       (544,939)
     Other, net                                         826,414         123,039         134,430
     Effect of 34% rate bracket                              --        (100,000)       (100,000)
                                                    -----------     -----------     -----------

     Applicable income tax expense                  $ 7,981,580     $ 5,563,737     $ 4,624,262
                                                    ===========     ===========     ===========
</TABLE>


                                   (Continued)


                                       53
<PAGE>   54
             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:

<TABLE>
<CAPTION>
                                                                                 2000             1999
                                                                             ------------     ------------
<S>                                                                          <C>              <C>
     Deferred tax assets
        Allowance for loan losses                                            $  1,348,028     $  1,263,028
        Unrealized losses on investment securities available-for-sale             303,897        1,041,656
        Accrued stock-based compensation                                          521,228          658,493
        Asset valuation reserves                                                  974,362          472,013
        Other                                                                     435,003          285,532
        Net operating loss carryovers from Knoblauch State Bank                 7,619,884        7,790,916
                                                                             ------------     ------------
                                                                               11,202,402       11,511,638
     Less valuation allowance                                                  (7,619,884)      (7,790,916)
                                                                             ------------     ------------
                                                                                3,582,518        3,720,722
                                                                             ------------     ------------
     Deferred tax liabilities
        Other                                                                     286,709          230,202
                                                                             ------------     ------------
                                                                                  286,709          230,202
                                                                             ------------     ------------
            Net deferred tax asset, included in other assets                 $  3,295,809     $  3,490,520
                                                                             ============     ============
</TABLE>

     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:

<TABLE>
<CAPTION>
                                                                              2000
                                                            ------------------------------------------
                                                              Income      Average shares    Per share
                                                            (numerator)   (denominator)      amount
                                                            -----------   --------------   -----------
<S>                                                         <C>           <C>              <C>
         Basic EPS
             Income available to common shareholders        $14,260,064     10,650,390       $  1.34
          Effect of dilutive securities
             Stock options                                           --        138,323         (0.02)
                                                            -----------    -----------       -------
          Diluted EPS
             Income available to common shareholders
                plus assumed exercise of options            $14,260,064     10,788,713       $  1.32
                                                            ===========     ==========       =======
</TABLE>


                                   (Continued)


                                       54
<PAGE>   55
             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.

<TABLE>
<CAPTION>
                                                                              1999
                                                            ------------------------------------------
                                                              Income      Average shares    Per share
                                                            (numerator)   (denominator)      amount
                                                            -----------   --------------   -----------
<S>                                                         <C>           <C>              <C>
         Basic EPS
          Income available to common shareholders           $12,104,528     10,516,583       $  1.15

       Effect of dilutive securities
          Stock options                                              --        133,615         (0.01)
                                                            -----------     ----------       -------

       Diluted EPS
          Income available to common shareholders
              plus assumed exercise of options              $12,104,528     10,650,198       $  1.14
                                                            ===========     ==========       =======
</TABLE>

     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.

<TABLE>
<CAPTION>
                                                                              1998
                                                            ------------------------------------------
                                                              Income      Average shares    Per share
                                                            (numerator)   (denominator)      amount
                                                            -----------   --------------   -----------
<S>                                                         <C>           <C>              <C>
       Basic EPS
          Income available to common shareholders           $10,783,940     10,383,598       $  1.04

       Effect of dilutive securities
          Stock options                                              --        133,673         (0.01)
                                                            -----------     ----------       -------

       Diluted EPS
          Income available to common shareholders
              plus assumed exercise of options              $10,783,940     10,517,271       $  1.03
                                                            ===========     ==========       =======
</TABLE>

     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.


                                       55
<PAGE>   56
             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:

<TABLE>
<CAPTION>
                                                2000                     1999                    1998
                                         --------------------    --------------------    --------------------
                                                     Weighted                Weighted                Weighted
                                                     average                 average                 average
                                                     exercise                exercise                exercise
                                          Shares      price       Shares      price       Shares      price
                                         --------    --------    --------    --------    --------    --------
<S>                                      <C>         <C>         <C>         <C>         <C>         <C>
       Outstanding at beginning
             of year                      70,088      $11.20      69,296      $10.67      58,184      $   --
          Granted                         12,600       14.26      12,033       12.87      12,516       16.74
          Exercised                      (20,095)       7.69     (11,241)       7.59      (1,404)       7.35
          Cancelled                           --          --          --          --          --          --
                                          ------                  ------                  ------
       Outstanding at end of year         62,593      $11.82      70,088      $11.20      69,296      $10.67
                                          ======                  ======                  ======
       Weighted average fair value
       of options granted during
       the year                                       $ 2.45                  $ 2.00                  $ 3.02
</TABLE>

     The following table summarizes information about options outstanding and
exercisable at December 31, 2000:

<TABLE>
<CAPTION>
                                                Options outstanding                         Options exercisable
                                -------------------------------------------------      -----------------------------
                                                     Weighted
                                                      average           Weighted                           Weighted
                                                     remaining          average                            average
         Range of                  Number           contractual         exercise         Number            exercise
      exercise prices            outstanding        life (years)          price         exercisable          price
     -----------------          -------------      --------------      ----------      -------------      ----------
<S>                             <C>                <C>                 <C>             <C>                <C>
     $  3.19 - $  4.13               2,805                1.8            $  3.58            2,805           $ 3.58
     $  5.93 - $  8.07              15,207                5.1               6.78           15,207             6.78
     $  11.10 - $14.26              32,065                8.9              13.00           19,465            12.20
     $  16.74                       12,516                8.0              16.74           12,516            16.74
                                   -------                                                -------
                                    62,593                                                 49,993
                                   =======                                                =======
</TABLE>


                                   (Continued)


                                       56
<PAGE>   57
             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:

<TABLE>
<CAPTION>
                                                2000                     1999                    1998
                                         --------------------    --------------------    --------------------
                                                     Weighted                Weighted                Weighted
                                                     average                 average                 average
                                                     exercise                exercise                exercise
                                          Shares      price       Shares      price       Shares      price
                                         --------    --------    --------    --------    --------    --------
<S>                                      <C>         <C>         <C>         <C>         <C>         <C>
       Outstanding at beginning
             of year                      377,247     $ 6.80      464,583     $ 8.13      519,277     $ 6.56
          Granted                          67,717      12.96       89,627      13.52       61,641      14.86
          Exercised                       (63,281)      4.74     (135,027)      5.94     (110,723)      3.10
          Cancelled                        (5,905)     13.68      (41,936)     12.62       (5,612)     13.14
                                         --------                --------                --------
       Outstanding at end of year         375,778     $ 9.34      377,247     $ 6.80      464,583     $ 8.13
                                         ========                ========                ========
       Weighted average fair value
       of options granted during
       the year                                       $ 2.45                  $ 2.00                  $ 3.02
</TABLE>


                                   (Continued)


                                       57
<PAGE>   58
             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:

<TABLE>
<CAPTION>
                                                Options outstanding                         Options exercisable
                                -------------------------------------------------      -----------------------------
                                                     Weighted
                                                      average           Weighted                           Weighted
                                                     remaining          average                            average
         Range of                  Number           contractual         exercise         Number            exercise
      exercise prices            outstanding        life (years)          price         exercisable          price
     -----------------          -------------      --------------      ----------      -------------      ----------
<S>                             <C>                <C>                 <C>             <C>                <C>
     $  2.26 - $  3.16              18,982              1.6              $ 2.63            18,982           $ 2.63
     $  4.12 - $  6.15             140,633              4.2                5.61           140,633             5.61
     $  8.07 - $ 11.10              86,130              6.4                9.24            62,283             9.04
     $ 12.88 - $ 16.75             130,033              9.1               14.41            22,492            15.18
                                   -------                                                -------

                                   375,778                                                244,390
                                   =======                                                =======
</TABLE>

     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.

<TABLE>
<CAPTION>
                                              2000              1999              1998
                                             -------           -------           -------
                                               (in thousands, except per share amounts)
<S>                                          <C>               <C>               <C>
       Net income
          As reported                        $14,260           $12,105           $10,784
          Pro forma                           14,196            12,059            10,759

       Earnings per share
          As reported - basic                  $1.34             $1.15            $1.04
          As reported - diluted                 1.32              1.14             1.03
          Pro forma - basic                     1.33              1.15             1.04
          Pro forma - diluted                   1.31              1.13             1.03
</TABLE>

     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.


                                       58
<PAGE>   59
             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):

<TABLE>
<CAPTION>
                                                              2000               1999
                                                           -----------        -----------
<S>                                                        <C>                <C>
       Change in benefit obligation
          Benefit obligation at beginning of year          $ 2,209,962        $ 1,879,367
          Service cost                                        (632,351)           199,039
          Interest cost                                         85,801            131,556
          Other changes                                        118,524                 --
                                                           -----------        -----------
          Benefits obligation at end of year               $ 1,781,936        $ 2,209,962
                                                           ===========        ===========
</TABLE>

     Net pension cost included the following components (in thousands):

<TABLE>
<CAPTION>
                                                              2000             1999
                                                           ----------       ----------
<S>                                                        <C>               <C>
       Service cost                                        $  341,258       $  320,405
       Interest cost                                           85,801          131,556
                                                           ----------       ----------

       Net periodic benefit cost                           $  427,059       $  451,961
                                                           ==========       ==========
</TABLE>

          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.


                                       59
<PAGE>   60
             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:

<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                     -----------------------------
                                                                                        2000              1999
                                                                                     -----------       -----------
<S>                                                                                  <C>               <C>
       Financial instruments whose contract amounts represent credit risk
          Commitments to extend credit                                               $74,072,960       $74,977,703
          Standby letters of credit and financial guarantees written                   1,853,005         3,111,203
</TABLE>

     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)


                                       60
<PAGE>   61
             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)


                                       61
<PAGE>   62
             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.

<TABLE>
<CAPTION>
                                                                                          2000
                                              ----------------------------------------------------------------------

                                                                                         Required
                                                                                        for capital
                                                      Actual                         adequacy purposes
                                              -----------------------     -------------------------------------------
                                                 Amount        Ratio        Amount                  Ratio
                                              ------------    -------     -----------     ---------------------------
<S>                                           <C>             <C>         <C>             <C>
          Total capital
          (to risk-weighted assets)
             Company (consolidated)           $110,403,289     19.40%     $45,516,323     greater than or equal to 8.00%
             Bank                               78,052,025     13.92       44,845,672     greater than or equal to 8.00
          Tier I capital
          (to risk-weighted assets)
             Company (consolidated)            103,219,007     18.14       22,758,161     greater than or equal to 4.00
             Bank                               70,983,584     12.66       22,422,836     greater than or equal to 4.00
          Tier I capital
          (to average assets, leverage)
             Company (consolidated)            103,219,007     16.98       18,234,176     greater than or equal to 3.00
             Bank                               70,983,584     11.85       17,971,586     greater than or equal to 3.00
</TABLE>

<TABLE>
<CAPTION>
                                              --------------------------------------------
                                                                To be well
                                                            capitalized under
                                                            prompt corrective
                                                            action provisions
                                              --------------------------------------------
                                                 Amount                   Ratio
                                              -------------    ---------------------------
<S>                                           <C>              <C>
          Total capital
          (to risk-weighted assets)
             Company (consolidated)                N/A                     N/A
             Bank                              $56,057,090     greater than or equal to 10.00%
          Tier I capital
          (to risk-weighted assets)
             Company (consolidated)                N/A                     N/A
             Bank                               33,634,254     greater than or equal to  6.00
          Tier I capital
          (to average assets, leverage)
             Company (consolidated)                N/A                     N/A
             Bank                               29,952,642     greater than or equal to  5.00
</TABLE>

<TABLE>
<CAPTION>
                                                                                          1999
                                              ----------------------------------------------------------------------

                                                                                         Required
                                                                                        for capital
                                                      Actual                         adequacy purposes
                                              -----------------------     -------------------------------------------
                                                 Amount        Ratio        Amount                  Ratio
                                              ------------    -------     -----------     ---------------------------
<S>                                           <C>             <C>         <C>             <C>
       Total capital
       (to risk-weighted assets)
          Company (consolidated)              $102,678,179     21.64%     $37,960,671     greater than or equal to 8.00%
          Bank                                  71,914,673     15.35       37,484,002     greater than or equal to 8.00
       Tier I capital
       (to risk-weighted assets)
          Company (consolidated)                96,675,145     20.37       18,980,336     greater than or equal to 4.00
          Bank                                  65,985,199     14.08       18,742,001     greater than or equal to 4.00
       Tier I capital
       (to average assets, leverage)
          Company (consolidated)                96,675,145     18.75       15,467,565     greater than or equal to 3.00
          Bank                                  65,985,199     13.00       15,223,609     greater than or equal to 3.00
</TABLE>

<TABLE>
<CAPTION>
                                              --------------------------------------------
                                                                To be well
                                                            capitalized under
                                                            prompt corrective
                                                            action provisions
                                              --------------------------------------------
                                                 Amount                   Ratio
                                              -------------    ---------------------------
<S>                                           <C>              <C>
          Total capital
          (to risk-weighted assets)
             Company (consolidated)                N/A                     N/A
             Bank                              $46,855,003     greater than or equal to 10.00%
          Tier I capital
          (to risk-weighted assets)
             Company (consolidated)                N/A                     N/A
             Bank                               28,113,002     greater than or equal to  6.00
          Tier I capital
          (to average assets, leverage)
             Company (consolidated)                N/A                     N/A
             Bank                               25,372,682     greater than or equal to  5.00

</TABLE>


                                       62
<PAGE>   63
             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:

<TABLE>
<CAPTION>
                                                                  2000                                1999
                                                      -----------------------------       -----------------------------
                                                       Estimated                           Estimated
                                                         fair            Carrying            fair            Carrying
                                                         value            amount             value            amount
                                                      -----------       -----------       -----------       -----------
<S>                                                   <C>               <C>               <C>               <C>
       Cash and cash equivalents                      $43,222,422       $43,222,422       $17,725,462       $17,725,462
       Investment securities held to maturity          86,348,525        86,109,704        81,493,670        83,064,914
       Investment securities available for sale        70,143,717        70,143,717        59,485,027        59,485,027
</TABLE>

     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:

<TABLE>
<CAPTION>
                                                                  2000                                1999
                                                     ------------------------------      ------------------------------
                                                       Estimated                           Estimated
                                                         fair            Carrying            fair            Carrying
                                                         value            amount             value            amount
                                                     ------------      ------------      ------------      ------------
<S>                                                  <C>               <C>               <C>               <C>
       Deposits with stated maturities               $316,244,981      $294,090,975      $240,188,294      $240,568,044
       Mortgage payable                                   431,386           431,386           479,579           479,579
       Long-term borrowings                            35,876,823        33,000,000        32,787,036        30,000,000
</TABLE>


                                   (Continued)


                                       63
<PAGE>   64
             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:

<TABLE>
<CAPTION>
                                                                  2000                                1999
                                                     ------------------------------      ------------------------------
                                                       Estimated                           Estimated
                                                         fair            Carrying            fair            Carrying
                                                         value            amount             value            amount
                                                     ------------      ------------      ------------      ------------
<S>                                                  <C>               <C>               <C>               <C>
       Net loans                                     $443,368,393      $411,972,945      $374,250,097      $343,080,899
</TABLE>

     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

<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                    ------------------------------
                                                                                        2000               1999
                                                                                    ------------       -----------
<S>                                                                                 <C>                <C>
       Assets
          Cash                                                                      $  1,396,216       $   932,372
          Investment in Royal Investments of Delaware, Inc. - at equity               30,583,452        29,451,166
          Investment in Royal Bank of Pennsylvania - at equity                        71,264,851        65,201,409
          Other assets                                                                   257,002           249,571
                                                                                    ------------       -----------

                                                                                    $103,501,521       $95,834,518
                                                                                    ============       ===========

          Stockholders' equity                                                       103,501,521        95,834,518
                                                                                    ------------       -----------

                                                                                    $103,501,521       $95,834,518
                                                                                    ============       ===========
</TABLE>


                                   (Continued)


                                       64
<PAGE>   65
             ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES

             Notes To Consolidated Financial Statements - Continued

                           December 31, 2000 and 1999


                         CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                                 Year ended December 31,
                                                                   -----------------------------------------------
                                                                      2000              1999              1998
                                                                   -----------       -----------       -----------
<S>                                                                <C>               <C>               <C>
       Income
          Equity in undistributed net earnings of subsidiaries     $ 5,763,591       $ 4,304,705       $ 4,985,119
          Dividends from subsidiary bank                             8,512,714         7,848,843         5,877,354
          Other income                                                  49,788            44,386            39,610
                                                                   -----------       -----------       -----------

               Total income                                         14,326,093        12,197,934        10,902,083
                                                                   -----------       -----------       -----------

       Expenses
          Other expenses                                                67,536           119,801           160,430
          Income tax benefit                                            (1,507)          (26,395)          (42,287)
                                                                   -----------       -----------       -----------

               Total expenses                                           66,029            93,406           118,143
                                                                   -----------       -----------       -----------

               Net income                                          $14,260,064       $12,104,528       $10,783,940
                                                                   ===========       ===========       ===========
</TABLE>

                       CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                 Year ended December 31,
                                                                   -----------------------------------------------
                                                                      2000              1999              1998
                                                                   -----------       -----------       -----------
<S>                                                                <C>               <C>               <C>
     Cash flows from operating activities
        Net income                                                 $14,260,064       $12,104,528       $10,783,940
        Adjustments to reconcile net income to net cash
               provided by operating activities
           Undistributed earnings from subsidiaries                 (4,647,243)       (4,304,705)       (4,985,119)
           Operating expenses                                           67,536           119,801           160,430
           Rental income                                               (49,788)          (44,386)          (39,610)
           Non-cash income tax benefit                                  (1,507)          (26,395)          (42,287)
           Increase in other liabilities                                    --                --        (1,637,763)
                                                                   -----------       -----------       -----------

               Net cash provided by operating activities             9,629,062         7,848,843         4,239,591
                                                                   -----------       -----------       -----------

     Cash flows from financing activities
        Cash dividends paid                                         (8,510,044)       (7,848,843)       (7,175,303)
        Other, net                                                    (655,174)          738,549           273,232
                                                                   -----------       -----------       -----------

               Net cash used in financing activities                (9,165,218)       (7,110,294)       (6,902,098)
                                                                   -----------       -----------       -----------

               Net increase (decrease) in cash                         463,844           738,549        (2,662,507)

     Cash at beginning of year                                         932,372           193,823         2,856,330
                                                                   -----------       -----------       -----------

     Cash at end of year                                           $ 1,396,216       $   932,372       $   193,823
                                                                   ===========       ===========       ===========
</TABLE>


                                       65
<PAGE>   66
             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.


                                       66
<PAGE>   67
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

          None.


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

          The information required in this Item, relating to directors,
executive officers, control persons is set forth in the Registrant's Proxy
Statement to be used in connection with the 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.  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.  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.  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.


                                       67
<PAGE>   68
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.


                                       68
<PAGE>   69
(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.


                                       69
<PAGE>   70
                     ROYAL BANCSHARES OF PENNSYLVANIA, INC.
                     --------------------------------------

<TABLE>
<CAPTION>
    DATE                                      TITLE                            SIGNATURE
    ----                                      -----                            ---------
<S>                                    <C>                              <C>

 March 21, 2001                              Chairman                    /s/ Daniel M. Tabas
----------------------------                                            ----------------------------
                                                                         Daniel M. Tabas


 March 21, 2001                            President/CEO                 /s/ Joseph P. Campbell
----------------------------                 Director                   ----------------------------
                                                                         Joseph P. Campbell


 March 21, 2001                            Treasurer/CFO                 /s/ James J. McSwiggan
----------------------------                                            ----------------------------
                                                                         James J. McSwiggan


 March 21, 2001                              Director                    /s/ Albert Ominsky
----------------------------                                            ----------------------------
                                                                         Albert Ominsky


 March 21, 2001                              Director                    /S/ Anthony J. Micale
----------------------------                                            ----------------------------
                                                                         Anthony J. Micale


                                          Vice Chairman/
 March 21, 2001                        Senior Vice President/            /S/ Robert R. Tabas
----------------------------                 Director                   ----------------------------
                                                                         Robert R. Tabas


 March 21, 2001                              Director                     /S/ Gregory T. Reardon
----------------------------                                             ----------------------------
                                                                          Gregory T. Reardon


 March 21, 2001                              Director                      /S/ Carl M. Cousins
----------------------------                                             ----------------------------
                                                                          Carl M. Cousins
</TABLE>


                                                                    Continued...


                                       70
<PAGE>   71
<TABLE>
<CAPTION>
    DATE                                      TITLE                            SIGNATURE
    ----                                      -----                            ---------
<S>                                    <C>                              <C>

March 21, 2001                               Director                     /S/ Lee E. Tabas
----------------------------                                             ----------------------------
                                                                          Lee E. Tabas


March 21, 2001                               Director                     /S/ Howard Wurzak
----------------------------                                             ----------------------------
                                                                          Howard Wurzak


March 21, 2001                            Senior Vice President/          /S/ John M. Decker
----------------------------                 Director                    ----------------------------
                                                                          John M. Decker


March 21, 2001                            Senior Vice President/          /S/ Murray Stempel
----------------------------                 Director                    ----------------------------
                                                                          Murray Stempel


March 21, 2001                               Director                     /S/ Jack R. Loew
----------------------------                                             ----------------------------
                                                                          Jack R. Loew


March 21, 2001                               Director                     /S/ Edward B. Tepper
----------------------------                                             ----------------------------
                                                                          Edward B. Tepper
</TABLE>


                                       71
<PAGE>   72
                     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.


                                       72