<PAGE>   1


                                    FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

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

                   For the fiscal year ended DECEMBER 31, 1999

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934. For the transition period from ___________ to
         ___________

                         Commission File Number 0-26366

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

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

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

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

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

Securities registered pursuant to Section 12(g) of the Act:
                               CLASS A COMMON STOCK   ($2.00 PAR VALUE)
                               CLASS B COMMON STOCK   ($.10 PAR VALUE)

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

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

         The aggregate market value of common shares of the Registrant held by
non-affiliates, based on the closing sale price as of February 29, 2000 was
$60,670,086.

          As of February 29, 2000, the Registrant had 8,054,918 and 1,766,149
shares outstanding of Class A and Class B common stock, respectively.
<PAGE>   2
ITEM 1. BUSINESS.

THE COMPANY

         Royal Bancshares of Pennsylvania, Inc. ("RBPA" or the "Registrant") is
a Pennsylvania business corporation and a bank holding company registered under
the federal Bank Holding Company Act of 1956, as amended (the "Holding Company
Act"), and is supervised by the Board of Governors of the Federal Reserve System
(Federal Reserve Board). Its legal headquarters is located at 732 Montgomery
Avenue, Narberth, PA. On June 29, 1995, pursuant to the plan of reorganization
approved by the shareholders of Royal Bank of Pennsylvania (the "Bank"), all of
the outstanding shares of common stock of the Bank were acquired by the RBPA and
were exchanged on a one-for-one basis for common stock of RBPA. The principal
activities of RBPA are owning and supervising the Bank, which engages in a
general banking business in Montgomery County, Pennsylvania. RBPA also has a
wholly owned nonbank subsidiary, Royal Investments of Delaware, Inc., which is
engaged in investment activities. At December 31, 1999, RBPA had consolidated
total assets of approximately $522.5 million, total deposits of approximately
$381.3 million and stockholders' equity of approximately $95.8 million.

         From time to time, RBPA may include forward-looking statements relating
to such matters as anticipated financial performance, business prospects,
technological developments, new products, research and development activities
and similar matters in this and other filings with the Securities Exchange
Commission. The Private Securities Litigation Reform Act of 1995 provides safe
harbor for forward-looking statements. When we use words such as "believes", or
"expects," "anticipates" or similar expressions, we are making forward-looking
statements. In order to comply with the terms of the safe harbor, RBPA notes
that a variety of factors could cause RBPA's actual results and experience to
differ materially from the anticipated results or other expectations expressed
in RBPA's forward-looking statements. The risks and uncertainties that may
affect the operations, performance development and results of RBPA's business
include the following: general economic conditions, including their impact on
capital expenditures; business conditions in the banking industry; the
regulatory environment; rapidly changing technology and evolving banking
industry standards; competitive factors, including increased competition with
community, regional and national financial institutions; new service and product
offerings by competitors and price pressures and similar items.


THE BANK

         The Bank was incorporated in the Commonwealth of Pennsylvania on July
30, 1963, and was chartered by the Commonwealth of Pennsylvania Department of
Banking and commenced operation as a Pennsylvania state-chartered bank on
October 22, 1963. The Bank is the successor of the Bank of King of Prussia, the
principal ownership of which was acquired by Daniel M. Tabas in 1980. Royal Bank
of Pennsylvania is an insured bank under the Federal Deposit Insurance
Corporation (the "FDIC").

         The Bank derives its income principally from interest charged on loans
and interest on investment securities and fees received in connection with the
origination of loans and other services. The Bank's principal expenses are
interest expense on deposits and operating expenses. Funds for activities are
provided principally by operating revenues, deposit growth and the repayment of
outstanding loans.

         Service Area. The Bank's primary service area includes Montgomery,
Chester, Bucks, Delaware, Berks and Philadelphia counties, southern New Jersey
and Delaware in the vicinity of Wilmington. This area includes residential areas
and industrial and commercial businesses of the type usually found within a
major metropolitan area. The Bank serves this area from thirteen offices located
throughout Montgomery,
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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 are not subject to significant seasonal fluctuations. The
Bank is a member of the Federal Reserve Fedline Wire Transfer System.

         Competition. The Bank is subject to intense competition from commercial
banks, thrifts and other financial institutions. The Bank actively competes with
such banks and institutions for local deposits and local retail and commercial
accounts, and is also subject to competition from banks from areas outside its
service area for certain segments of its business. For a number of years,
competition has been increasing in the Bank's basic banking business because of
the growing number of financial service entities that have entered our local
market. This trend was accelerated by the passage of federal laws in the early
1980's, which sharply expanded the powers of thrifts and credit unions, giving
them most of the powers that were formerly reserved for commercial banks. While
attempting to equalize the competition among the depository institutions, these
statutes have little effect on less regulated entities such as money market
mutual funds and investment banking firms. Many of these competitors have
substantially greater financial resources and more extensive branch systems. To
be successful, smaller banks must find a competitive edge. The Bank prides
itself on giving its customers personalized service. The Bank has continued at
modest levels its research activities relating to the development of new
services and the improvement of existing bank services. Marketing activities
have continued that have allowed the Bank to remain competitive. These
activities include the review of existing services and the solicitation of new
users of banking services. The Bank is not dependent upon a single customer or a
small number of customers, the loss of which should have a material adverse
effect on the Bank or RBPA.

         Employees. RBPA employed approximately 134 persons on a full-time
equivalent basis as of December 31, 1999.

         Deposits. At December 31, 1999, total deposits of the Bank were
distributed among demand deposits (12%), money market deposit accounts, savings
and Super Now (29%) and time deposits (59%). At year end 1999, deposits
increased $89.7 million from year end 1998, or 28%, primarily due to an increase
in certificate of deposits and to a lesser extent, NOW and money market
deposits.

         Lending. At December 31, 1999, the Bank had a total loan portfolio of
$351.8 million, representing 69% of total assets. The loan portfolio is
categorized into commercial, commercial mortgages, residential mortgages
(including home equity lines of credit), construction, and installment loans.

         Current market and regulatory trends in banking are changing the basic
nature of the banking industry. The Bank intends to keep pace with the banking
industry by being competitive with respect to interest rates and new types or
classes of deposits insofar as it is practical to do so consistent with the
Bank's size, objective of profit maintenance and stable capital structure.
<PAGE>   4
NON-BANK  SUBSIDIARY

         On June 30, 1995, RBPA established a special purpose Delaware
investment company, Royal Investments of Delaware, Inc., ("RID") as a
wholly-owned subsidiary. Its legal headquarters is at 103 Springer Building,
3411 Silverside Road, Wilmington, DE. RID buys, holds and sells investment
securities. At December 31, 1999, total assets of RID were $29.5 million, of
which $20.7 million was held in cash and cash equivalents. Investment securities
were $5.8 million at December 31, 1999.

SUPERVISION AND REGULATION

         Holding Company. RBPA, as a Pennsylvania business corporation, is
subject to the jurisdiction of the Securities and Exchange Commission (the
"SEC") and of state securities commissions for matters relating to the offering
and sale of its securities. Accordingly, if RBPA wishes to issue additional
shares of its Common Stock, in order, for example, to raise capital or to grant
stock options, RBPA will have to comply with the registration requirements of
the Securities Act of 1933 as amended, or find an applicable exemption from
registration.

         RBPA is subject to the provisions of the Bank Holding Company Act of
1956, as amended (the "BHC Act"), and to supervision by the Federal Reserve
Board. The BHC Act requires RBPA to secure the prior approval of the Federal
Reserve Board before it owns or controls, directly or indirectly, more than 5%
of the voting shares of any corporation, including another bank. In addition,
the BHC Act prohibits RBPA from acquiring more than 5 % of the voting shares of,
or interest in, or all or substantially all of the assets of, any bank located
outside Pennsylvania, unless such an acquisition is specifically authorized by
laws of the state in which such bank is located.

         A bank holding company also is prohibited from engaging in or acquiring
direct or indirect control of more than 5% of the voting shares of any such
company engaged in non-banking activities unless the Federal Reserve Board, by
order or regulation, has found such activities to be closely related to banking
or managing or controlling banks as to be a proper incident thereto. In making
this determination, the Federal Reserve Board considers whether the performance
of these activities by a bank holding company would offer benefits to the public
that outweigh possible adverse effects.

         As a bank holding company, RBPA is required to file an annual report
with the Federal Reserve Board and any additional information that the Federal
Reserve Board may require pursuant to the BHC Act. The Federal Reserve Board may
also make examinations of the holding company and any or all of subsidiaries.
Further, under Section 106 of the 1970 amendments to the BHC Act and the Federal
Reserve Board's regulation, a bank holding company and its subsidiaries are
prohibited from engaging in certain tying arrangements in connection with any
extension of credit or provision of credit of any property or services. The so
called "anti-tying" provisions state generally that a bank may not extend
credit, lease, sell property or furnish any service to a customer on the
condition that the customer obtain additional credit or service from the bank,
its bank holding company or any other subsidiary of its bank holding company, or
on the condition that the customer not obtain other credit or services from a
competitor of the bank, its bank holding company or any subsidiary of its bank
holding company.

         Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act and by state banking laws on any
extensions of credit to the bank holding company or any of its subsidiaries, on
investments in the stock or other securities of the bank holding company and on
taking of such stock or securities as collateral for loans to any borrower.
<PAGE>   5
         Under Pennsylvania law, RBPA is permitted to control an unlimited
number of banks. However, RBPA would be required under the BHC Act to obtain the
prior approval of the Federal Reserve Board before acquiring all or
substantially all of the assets of any bank, or acquiring ownership or control
of any voting shares of any other than the Bank, if, after such acquisition,
would control more than 5% of the voting shares of such bank.

         The Bank. The deposits of Royal Bank of Pennsylvania are insured by the
FDIC. The Bank is subject to supervision, regulation and examination by the
Pennsylvania Department of Banking and by the FDIC. In addition, the Bank is
subject to a variety of local, state and federal laws that affect its operation.

         Under the Pennsylvania Banking Code of 1965, as amended, the ("Code"),
the Registrant has been permitted since March 4, 1990 to control an unlimited
number of banks. However, the Registrant would be required under the Bank
Holding Company Act to obtain the prior approval of the Federal Reserve Board
before it could acquire all or substantially all of the assets of any bank, or
acquiring ownership or control of any voting shares of any bank other than the
Bank, if, after such acquisition, the registrant would own or control more than
5 percent of the voting shares of such bank. The Bank Holding Company Act has
been amended by the Riegle-Neal Interstate Banking and Branching Act of 1994
which authorizes bank holding companies subject to certain limitations and
restrictions to acquire banks located in any state.

         In 1995, the Code was amended to harmonize Pennsylvania law with the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 to enable
Pennsylvania institutions to participate fully in interstate banking and to
remove obstacles to the choice by banks from other states engaged in interstate
banking to select Pennsylvania as a head office location. Some of the more
salient features of the amendment are described below.

         A bank holding company located in Pennsylvania, another state, the
District of Columbia or a territory or possession of the United States may
control one or more banks, bank and trust companies, national banks, interstate
banks and, with the prior written approval of the Pennsylvania Department of
Banking, may acquire control of a bank and trust company or a national bank
located in Pennsylvania. A Pennsylvania-chartered institution may maintain
branches in any other state, the District of Columbia, or a territory or
possession of the United States upon the written approval of the Pennsylvania
Department of Banking.

         Finally, a banking institution existing under the laws of another
jurisdiction may establish a branch in Pennsylvania if the laws of the
jurisdiction in which it is located permit a Pennsylvania-chartered institution
or a national bank located in Pennsylvania to establish and maintain a branch in
such jurisdiction on substantially the same terms and conditions.

         In 1995, the Pennsylvania General Assembly enacted the Economic
Development Agency, Fiduciary and Lender Environmental Liability Protection Act
which, among other things, provides protection to lenders from environmental
liability and remediation costs under the environmental laws for releases and
contamination caused by others. A lender who engages in activities involved in
the routine practices of commercial lending, including, but not limited to, the
providing of financial services, holding of security interests, workout
practices, foreclosure or the recovery of funds from the sale of property shall
not be liable under the environmental acts or common law equivalents to the
Pennsylvania Department of Environmental resources or to any other person by
virtue of the fact that the lender engages in such commercial lending practices.
A lender, however, will be liable if it, its employees or agents, directly cause
an immediate release or directly exacerbate a release of regulated substances on
or from the property, or knowingly and willfully compelled the borrower to
commit an action which caused such release or violation of an environmental act.
The Economic Development Agency, Fiduciary and Lender Environmental
<PAGE>   6
Liability Protection Act, however, does not limit federal liability which still
exists under certain circumstances.

         A subsidiary bank of a holding company is subject to certain
restrictions imposed by the Federal Reserve Act, as amended, on any extensions
of credit to the bank holding company or its subsidiaries, on investments in the
stock or other securities of the bank holding company or its subsidiaries, and
on taking such stock or securities as collateral for loans. The Federal Reserve
Act, as amended, and Federal Reserve Board regulations also place certain
limitations and reporting requirements on extensions of credit by a bank to
principal shareholders of its parent holding company, among others, and to
related interests of such principal shareholders. In addition, such legislation
and regulations may affect the terms upon which any person who becomes a
principal shareholder of a holding company may obtain credit from banks with
which the subsidiary bank maintains a correspondent relationship.

         Federal law also prohibits the acquisition of control of a bank holding
company without prior notice to certain federal bank regulators. Control is
defined for this purpose as the power, directly or indirectly, to direct the
management or policies of the bank or bank holding company or to vote 25% or
more of any class of voting securities of the bank holding company.

         From time to time, various types of federal and state legislation have
been proposed that could result in additional regulation of, and restrictions
on, the business of the Bank. It cannot be predicted whether any such
legislation will be adopted or how such legislation would affect the business of
the Bank. As a consequence of the extensive regulation of commercial banking
activities in the United States, the Bank's business is particularly susceptible
to being affected by federal legislation and regulations that may increase the
costs of doing business.

         Under the Federal Deposit Insurance Act ("FDIC Act"), the FDIC
possesses the power to prohibit institutions regulated by it (such as the Bank)
from engaging in any activity that would be an unsafe and unsound banking
practice or in violation of applicable law. Moreover, the FDIC Act: (i) empowers
the FDIC to issue cease-and-desist or civil money penalty orders against the
Bank or its executive officers, directors and/or principal shareholders based on
violations of law or unsafe and unsound banking practices; (ii) authorizes the
FDIC to remove executive officers who have participated in such violations or
unsound practices; (iii) restricts lending by the Bank to its executive
officers, directors, principal shareholders or related interests thereof; (iv)
restricts management personnel of a bank from serving as directors or in other
management positions with certain depository institutions whose assets exceed a
specified amount or which have an office within a specified geographic area.
Additionally, the FDIC Act provides that no person may acquire control of the
Bank unless the FDIC has been given 60-days prior written notice and within that
time has not disapproved the acquisition or extended the period for disapproval.
In April 1995, regulators revised the Community Reinvestment Act ("CRA") with an
emphasis on performance over process and documentation. Under the revised rules,
the five-point rating scale is still utilized by examiners to assign a numerical
score for a bank's performance in each of three areas:
lending, service and investment.

         Under the CRA, the FDIC is required to: (i) assess the records of all
financial institutions regulated by it to determine if these institutions are
meeting the credit needs of the community (including low-and moderate-income
neighborhoods) which they serve, and (ii) take this record into account in its
evaluation of any application made by any such institutions for, among other
things, approval of a branch or other deposit facility, office relocation, a
merger or an acquisition of bank shares. The CRA also requires the federal
banking agencies to make public disclosures of their evaluation of each bank's
record of meeting the credit needs of its entire community, including low-and
moderate-income neighborhoods. This evaluation will include a descriptive rate
("outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance")
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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
<PAGE>   8
to any written order or final directive by the FDIC to meet and maintain a
specific capital level. The Bank is presently categorized as a
"well-capitalized" institution.

         An "adequately capitalized" institution would be one that meets the
required minimum capital levels, but does not meet the definition of a
"well-capitalized" institution. The existing capital rules generally require
banks to maintain a Tier 1 Leverage Ratio of at least 4% and an 8% total
risk-based capital ratio. Since the risk-based capital requirement to be in the
form of Tier 1 capital, this also will mean that a bank would need to maintain
at least 4% Tier 1 risk-based capital ratio. An institution must meet each of
the required minimum capital levels in order to be deemed "adequately
capitalized."

         An "undercapitalized" institution is one that fails to meet one or more
of the required minimum capital levels for an "adequately capitalized"
institution. Under the FDIC Improvement Act, an "undercapitalized" institution
must file a capital restoration plan and is automatically subject to
restrictions on dividends, management fees and asset growth. In addition, the
institution is prohibited from making acquisitions, opening new branches or
engaging in new lines of business without the prior approval of its primary
federal regulator. A number of other restrictions may be imposed.

         A "critically undercapitalized" institution is one that has a tangible
equity (Tier 1 capital) ratio of 2% or less. In addition to the same
restrictions and prohibitions that apply to "undercapitalized" and
"significantly undercapitalized" institutions, any institution that becomes
"critically undercapitalized" is prohibited from taking the following actions
without the prior written approval of its primary federal supervisory agency:
engaging in any material transactions other than in the usual course of
business; extending credit for highly leveraged transactions; amending its
charter or bylaws; making any material changes in accounting methods; engaging
in certain transactions with affiliates; paying excessive compensation or
bonuses; and paying interest on liabilities exceeding the prevailing rates in
the institution's market area. In addition, a "critically undercapitalized"
institution is prohibited from paying interest or principal on its subordinated
debt and is subject to being placed in conservatorship or receivership if its
tangible equity capital level is not increased within certain mandated time
frames.

         REAL ESTATE LENDING GUIDELINES. Pursuant to the FDIC Improvement Act,
the FDIC has issued real estate lending guidelines that establish loan-to-value
("LTV") ratios for different types of real estate loans. A LTV ratio is
generally defined as the total loan amount divided by the appraised value of the
property at the time the loan is originated. If a bank does not hold a first
lien position, the total loan amount would be combined with the amount of all
senior liens when calculating the ratio. In addition to establishing the LTV
ratios, the FDIC's real estate guidelines require all real estate loans to be
based upon proper loan documentation and a recent independent appraisal of the
property.

  The FDIC's guidelines establish the following limits for LTV ratios:
<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>
<PAGE>   9
         The guidelines provide exceptions to the LTV ratios for
government-backed loans; loans facilitating the sale of real estate acquired by
the lending institution in the normal course of business; loans where the Bank's
decision to lend is not based on the offer of real estate as collateral and such
collateral is taken only out of an abundance of caution; and loans renewed,
refinanced, or restructured by the original lender to the same borrower, without
the advancement of new money. The regulation also allows institutions to make a
limited amount of real estate loans that do not conform with the proposed LTV
ratios. Under this exception, the Bank would be allowed to make real estate
loans that do not conform with the LTV ratio limits, up to an amount not to
exceed 100% of the Bank's total capital.

         TRUTH IN SAVINGS ACT. The FDIC Improvement Act also contains the Truth
in Savings Act. The purpose of this Act is to require the clear and uniform
disclosure of the rates of interest that are payable on deposit accounts by the
Bank and the fees that are assessable against deposit accounts, so that
consumers can make a meaningful comparison between the competing claims of banks
with regard to deposit accounts and products. This Act requires the Bank to
include, in a clear and conspicuous manner, the following information with each
periodic statement of a deposit account: (1) the annual percentage yield earned,
(2) the amount of interest earned, (3) the amount of any fee and charges imposed
and (4) the number of days in the reporting period. This Act allows for civil
lawsuits to be initiated by customers if the Bank violates any provision or
regulation under this Act.

         GRAMM-LEACH-BLILEY ACT. On November 12, 1999, President Clinton signed
the Gramm-Leach-Bliley Act of 1999, the Financial services Modernization Act.
The Financial Services Modernization Act repeals the two affiliation provisions
of the Glass-Steagall Act:

         -        Section 20, which restricted the affiliation of Federal
                  Reserve Member Banks with firms "engaged principally" in
                  specified securities activities; and

         -        Section 32, which restricts officer, director, or employee
                  interlocks between a member bank and any company or person
                  "primarily engaged" in specified securities activities.

In addition, the Financial Services Modernization Act contains provisions that
expressly preempt any state insurance law. The law establishes a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers. It revises and expands
the framework of the Bank Holding Company Act framework to permit a holding
company system to engage in a full range of financial activities through a new
entity known as a Financial Holding Company. "Financial activities" is broadly
defined to include not only banking, insurance and securities activities, but
also merchant banking and additional activities that the Federal Reserve, in
consultation with the Secretary of the Treasury, determines to be financial in
nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally.

         In general, the Financial Services Modernization Act:

         -        Repeals historical restrictions on, and eliminates many
                  federal and state law barriers to, affiliations among banks,
                  securities firms, insurance companies, and other financial
                  service providers;

         -        Provides a uniform framework for the functional regulation of
                  the activities of banks, savings institutions and their
                  holding companies;
<PAGE>   10
         -        Broadens the activities that may be conducted by national
                  banks, banking subsidiaries of bank holding companies, and
                  their financial subsidiaries;

         -        Provides an enhanced framework for protecting the privacy of
                  consumer information;

         -        Adopts a number of provisions related to the capitalization,
                  membership, corporate governance, and the other measures
                  designed to modernize the Federal Home Loan Bank system;

         -        Modifies the laws governing the implementation of the
                  Community Reinvestment Act; and

         -        Addresses a variety of other legal and regulatory issues
                  affecting both day-to-day operations and long-term activities
                  of financial institutions.

                  In order for the Registrant to take advantage of the ability
                  to affiliate with other financial service providers, the
                  Registrant must become a "Financial Holding Company" as
                  permitted under an amendment to the Bank Holding Company Act.
                  To become a Financial holding Company, a company must file a
                  declaration with the Federal Reserve, electing to engage in
                  activities permissible for Financial Holding Companies and
                  certifying that it is eligible to do so because all of its
                  insured depository institution subsidiaries are
                  well-capitalized and well-managed. In addition, the Federal
                  Reserve must determine that each insured depository
                  institution subsidiary of the company has at least a
                  satisfactory "CRA rating. The Registrant currently meets the
                  requirements to make an election to become a Financial Holding
                  Company. The Registrant's management has not determined at
                  this time whether it will seek an election to become a
                  Financial Holding Company. The Registrant is examining its
                  strategic business plan to determine whether, based on market
                  conditions, the relative financial conditions of the
                  Registrant and its subsidiaries, regulatory capital
                  requirements, general economic conditions, and other factors,
                  the Registrant desires to utilize any of its expanded powers
                  provided in the Financial Service Modernization Act.

                  The Financial Services Modernization Act also includes a new
                  section of the Federal Deposit Insurance Act governing
                  subsidiaries of state banks that engage in "activities as
                  principal that would only be permissible" for a national bank
                  to conduct in a financial subsidiary. It expressly preserves
                  the ability of a state bank to retain all existing
                  subsidiaries. Because Pennsylvania permits commercial banks
                  chartered by the state to engage in any activity permissible
                  for national banks, the Bank will be permitted to form
                  subsidiaries to engage in the activities authorized by the
                  Financial Services Modernization Act, to the same extent as a
                  national bank. In order to form a financial subsidiary, the
                  Bank must be well-capitalized, and the Bank would be subject
                  to the same capital deduction, risk management and affiliate
                  transaction rules as applicable to national banks.

                  The Registrant and the Bank do not believe that the Financial
                  Services Modernization Act will have a material adverse effect
                  on our operations in the near-term. However, to the extent
                  that it permits banks, securities firms, and insurance
                  companies to affiliate, the financial services industry may
                  experience further consolidation. The Financial Services
                  Modernization Act is intended to grant to community banks
                  certain powers as a matter of right that larger institutions
                  have accumulated on an ad hoc basis. Nevertheless, this act
                  may have the result of increasing the amount of competition
                  that the Registrant and the Bank face
<PAGE>   11
                  from larger institutions and other types of companies offering
                  financial products, many of which may have substantially more
                  financial resources than the Registrant and the Bank.

MONETARY POLICY

         The earnings of the Bank are affected by the policies of regulatory
authorities including the Federal Reserve Board. An important function of the
Federal Reserve System is to influence the money supply and interest rates.
Among the instruments used to implement those objectives are open market
operations in United States government securities, changes in reserve
requirements against member bank deposits and limitations on interest rates that
member banks may pay on time and savings deposits. These instruments are used in
varying combinations to influence overall growth and distribution of bank loans,
investments and deposits, and their use may also affect rates charged on loans
or paid for deposits.

         The policies and regulations of the Federal Reserve Board have had and
will probably continue to have a significant effect on its reserve requirements,
deposits, loans and investment growth, as well as the rate of interest earned
and paid, and are expected to affect the Bank's operations in the future. The
effect of such policies and regulations upon the future business and earnings of
the Bank cannot be predicted.

EFFECTS OF INFLATION

         Inflation has some impact on RBPA's operating costs. Unlike many
industrial companies, however, substantially all of RBPA's assets and
liabilities are monetary in nature. As a result, interest rates have a more
significant impact on RBPA's performance than the general level of inflation.
Over short periods of time, interest rates may not necessarily move in the same
direction or in the same magnitude as prices of goods and services.
<PAGE>   12
ITEM 2.  PROPERTIES

         The Bank has fourteen banking offices, of which thirteen are located in
Pennsylvania. The Bank also has a business loan center located in Delaware.

                    Narberth Office (1)
                    732 Montgomery Ave
                    Narberth, Pa. 19072

                    Philadelphia  Offices
                    - One Penn Square West
                      30 South 15th Street
                      Philadelphia, Pa 19102

                    - 1340 Walnut Street
                      Philadelphia, Pa. 19107

                    - 401 Fairmount Avenue (1)
                      Philadelphia, Pa. 19123

                    Jenkintown Office (1)
                    600 Old York Road
                    Jenkintown, Pa 19046

                    Villanova Office
                    801 East Lancaster Avenue
                    Villanova, Pa. 19085

                    Shillington Office
                    516 East Lancaster Avenue
                     Shillington. Pa 19607

                    Trooper Office(1)
                    Trooper & Egypt Roads
                    Trooper, Pa. 19401

                    Reading Office
                    501 Washington Street
                    Reading, Pa. 19601

                    Delaware Loan Office
                    The Rodney Square Club
                    1100 North Market Street
                    Wilmington, Delaware 19801

                    King of Prussia Office
                    Rt. 202 at Wilson Road
                    King of Prussia, Pa. 19406

                    Bridgeport Office (1)
                    105 W. 4th Street
                    Bridgeport, Pa. 19406

                    Upper Merion Office
                    Beidler & Henderson Roads
                    King of Prussia, Pa. 19406

                    Phoenixville Office (1)
                    808 Valley Forge Road
                    Phoenixville, Pa. 19460

-------------
(1) Owned

         The Bank owns six of the above properties, of which one property is
subject to a mortgage. The remaining seven properties are leased with expiration
dates between 1999 and 2004. The Bank also leases storage warehouse space in
Bridgeport, Pa. at an annual rate of $10 thousand. During 1999, the Bank made
aggregate lease payments of approximately $304 thousand. The Bank believes that
all of its properties are attractive, adequately insured, and well maintained
and are adequate for RBPA's purposes. The Bank also owns a property located at
144 Narberth Avenue, Narberth, PA, which may serve as a site for future
expansion.


ITEM 3.  LEGAL PROCEEDINGS

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


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

None
<PAGE>   13
ITEM 5.  MARKET FOR THE BANK'S COMMON STOCK AND RELATED SECURITY HOLDER
         MATTERS

         On September 6, 1988 the Registrant's Class A Common Stock commenced
trading on the NASDAQ National Market System (NASDAQ/NMS). The Registrant's
NASDAQ Symbol is RBPAA and is included in the NASDAQ National Market Stock Table
which is published in most major newspapers. The following table presents the
high, low and closing transaction prices on all NASDAQ/NMS securities. The
market makers for the Registrant's stock are F. J. Morrissey & Co., Inc., Ryan
Beck & Co., Inc., Herzog, Heine, Geduld, Inc., Wheat First Union Securities
Inc., Ferris Baker Watts Inc., Sandler O'Neill, and Nash Weiss. There is no
market for the Class B Common Stock, as such is prohibited by the terms of the
Class B Common Stock. The following table shows the range of high, low-end and
closing bid prices for the Registrant's stock as reported by NASDAQ

                                   BID PRICES
<TABLE>
<CAPTION>

         1999                           HIGH          LOW           CLOSE
         ----                       -----------   -----------   -----------
<S>                                 <C>           <C>           <C>
         First Quarter ......       $    15.339   $    14.194   $    15.110
         Second Quarter .....            15.655        13.507        15.119
         Third Quarter ......            15.595        14.048        14.345
         Fourth Quarter .....            14.702        13.500        14.438

         1998                            HIGH           LOW           CLOSE
         ----                       -----------   -----------   -----------
         First Quarter ......       $    19.812   $    16.730   $    17.611
         Second Quarter .....            19.002        16.941        17.170
         Third Quarter ......            17.743        12.134        13.736
         Fourth Quarter .....            15.453        11.676        14.881
</TABLE>

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

         The bid information shown above is derived from statistical reports of
the NASDAQ Stock Market and reflects inter-dealer prices without retail mark-up,
mark-down or commissions and may not necessarily represent actual transaction.
The NASDAQ Stock Market, Inc., is a wholly-owned subsidiary of National
Association of Securities Dealers, Inc.

         The approximate number of recorded holders of the Registrant's Class A
and Class B Common Stock, as of February 29, 2000, is shown below:
<TABLE>
<CAPTION>

         TITLE OF CLASS                    NUMBER OF RECORD HOLDERS
         --------------                    ------------------------
<S>                                        <C>
         Class A Common Stock                      413
         Class B Common Stock                      171
</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 458 as of February 29, 2000.
<PAGE>   14
DIVIDENDS

         Subject to certain limitations imposed by law, the Board of Directors
of the Registrant may declare a dividend on shares of common stock.

         Stock Dividends. On April 24, 1997, the Board of Directors of the
Registrant declared a 4% stock dividend on both its Class A Common Stock and
Class B Common Stock shares payable May 8, 1997, to shareholders of record on
April 28, 1997. The stock dividend resulted in the issuance of 258,176
additional shares of Class A Common Stock and 61,859 additional shares of Class
B Common Stock. On April 22, 1998, the Board of Directors of the Registrant
declared a 4% stock dividend on both its Class A Common Stock and Class B Common
Stock shares payable May 8, 1998, to shareholders of record on May 1, 1998. The
stock dividend resulted in the issuance of 272,213 additional shares of Class A
Common Stock and 63,595 additional shares of Class B Common Stock. On April 21,
1999, the Board of Directors of the Registrant declared a 4% stock dividend on
both its Class A Common Stock and Class B Common Stock shares payable May 14,
1999, to Shareholders of record on May 3, 1999. The stock dividend resulted in
the issuance of 288,728 additional shares of Class A Common Stock and 65,296
additional shares of Class B Common Stock. On October 20, 1999, the board of
directors of the Registrant declared a 5% stock dividend on both its Class a
Common stock and Class B common stock shares payable on January 17, 2000, to
shareholders of record on January 3, 2000. The stock dividend resulted in the
issuance of 382,857 additional shares of Class A common stock and 84,241
additional shares of Class B common stock. Future stock dividends, if any, will
be at the discretion of the Board of Directors and will be dependent on the
level of earnings and compliance with regulatory requirements.

         Cash Dividends. The Registrant paid cash dividends in each quarter of
1999 and 1998 for holders of Class A Common Stock and for holders of Class B
common stock. This resulted in a charge to retained earnings of approximately
$7.8 million and $7.2 million for 1999 and 1998, respectively. The following
table sets forth on a quarterly basis the dividend paid to holders of each Class
A and Class B common stock for 1999 and 1998.
<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>

<TABLE>
<CAPTION>

                                                    CASH DIVIDENDS PER SHARE
         1998                                          CLASS A   CLASS B
         ----                                        ----------  -------
<S>                                                <C>           <C>
         First Quarter ..........................      $   .20   $ .2300
         Second Quarter .........................      $   .20   $ .2300
         Third Quarter ..........................      $   .20   $ .2300
         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, a restriction is placed on the availability of capital surplus
for payment of dividends by the Bank.
<PAGE>   15
         Under the Pennsylvania Business Corporation Law of 1988, as amended,
the Registrant may pay dividends only if after payment the Registrant would be
able to pay its debts as they become due in the usual course of business and the
total assets are greater than the sum of its total liabilities plus the amount
that would be needed if the Registrant were to be dissolved at the time of the
dividend to satisfy the preferential rights upon dissolution of shareholders
whose preferential rights are superior to those receiving the dividend. See Note
Q to the Consolidated Financial Statements in Item 8 of this report.
<PAGE>   16
ITEM 6. SELECTED FINANCIAL DATA

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

                                                                         YEARS ENDED DECEMBER 31,
                                                                           (IN THOUSANDS)
                                                 ------------------------------------------------------------------
INCOME STATEMENT DATA                              1999          1998          1997           1996           1995
-----------------------                          --------      --------      --------       --------       --------
<S>                                              <C>           <C>           <C>            <C>            <C>
Interest income ...........................      $ 44,682      $ 40,640      $ 33,372       $ 33,618       $ 29,755
Interest expense ..........................        15,922        13,163        10,048         10,054          9,592
                                                 --------      --------      --------       --------       --------
Net interest income .......................        28,760        27,477        23,324         23,564         20,163
Increase (Decrease) Provision for loan
losses ....................................          --           4,770        (2,118)        (1,488)          --
                                                 --------      --------      --------       --------       --------
Net interest income after loan loss
provision .................................        28,760        22,707        25,442         25,052         20,163
    Gain on sale of loans .................            45             4            29            427             86
    Gain/Loss on real estate ..............           350          --           1,204          2,016            870
    Other income ..........................         1,644         3,570         1,392          1,788          1,098
                                                 --------      --------      --------       --------       --------
Total other income ........................         2,039         3,574         2,625          4,231          2,054
Income before other expenses & income taxes        30,799        26,281        28,067         29,283         22,217
Non-interest expenses:
    Salaries ..............................         7,265         5,028         9,546          9,602          4,850
    Other .................................         5,865         5,845         5,088          5,537          5,461
                                                 --------      --------      --------       --------       --------
Total other expenses ......................        13,130        10,873        14,634         15,139         10,311
                                                 --------      --------      --------       --------       --------
Income before taxes .......................        17,669        15,408        13,433         14,144         11,906
Income taxes ..............................         5,564         4,624         4,074          3,907          3,648
                                                 --------      --------      --------       --------       --------
Net income ................................      $ 12,105      $ 10,784      $  9,359       $ 10,237       $  8,258
                                                 ========      ========      ========       ========       ========
Basic earnings per share (1) ..............      $   1.21      $   1.09      $    .95       $   1.06       $    .88
                                                 --------      --------      --------       --------       --------
Diluted earnings per share (1) ............      $   1.19      $   1.07      $    .94       $   1.03       $    .85
                                                 --------      --------      --------       --------       --------
</TABLE>


(1) Earnings per share has the weighted average number of shares used in the
calculation adjusted to reflect a 5% stock dividend in 2000, a 4% stock dividend
in 1999, a 4% stock dividend in 1998, a 4% stock dividend in 1997, a 6% stock
dividend in 1996, and a 6% stock dividend in 1995.

<TABLE>
<CAPTION>

BALANCE SHEET DATA                          1999             1998              1997              1996                1995
------------------------                  --------         --------          --------          --------            --------
(in thousands)
<S>                                       <C>              <C>                <C>               <C>                <C>
Total assets                              $522,536         $427,622           $416,598          $355,149           $356,264
Total average assets                       469,193          407,623            342,361           343,360            312,823
Loans, net                                 343,081          292,556            282,711           209,017            198,419
Total deposits                             381,286          290,390            265,363           254,183            268,242
Total long term debt                        30,000           30,365             31,063             4,814              2,984
Total stockholders' equity                  95,835           94,069             89,505            84,581             77,189
Total average stockholders' equity          94,824           91,374             86,572            80,910             74,091
Return on average assets                       2.6%             2.6%               2.7%              3.0%               2.6%
Return on average equity                      12.8%            11.8%              10.8%             12.7%              11.1%
Average equity to average assets              20.3%            22.4%              25.3%             23.6%              23.7%
Cash dividend payout ratio                    64.9%            66.6%              56.7%             19.2%              11.4%
</TABLE>
<PAGE>   17
AVERAGE BALANCES

         The following table presents the average daily balances of assets,
liabilities and stockholders' equity and the respective interest paid on
interest bearing assets and interest bearing liabilities, as well as average
rates for the periods indicated:
<TABLE>
<CAPTION>
                                              1999                              1998                              1997
                                -------------------------------    -----------------------------      -----------------------------
                                 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 .......................    $    430    $     16     3.72%    $    505    $     24     4.75%    $  1,230    $     87     7.10%
Federal funds ...............      11,345         558     4.92%      25,210       1,372     5.44%      17,921       1,012     5.64%
Investment securities:
   Held to maturity:
         Taxable ............      78,251       5,726     7.32%      46,946       3,228     6.88%      84,399       5,604     6.64%
         Nontaxable (1) .....         694          82    11.82%       3,098         314    10.14%       1,455         169    11.63%
                                 -----------------------------     -----------------------------     -----------------------------
         Total held
           to maturity ......      78,945       5,808     7.36%      50,044       3,542     7.08%      85,854       5,773     6.72%
    Available for sale
          Taxable ...........      51,617       4,512     8.74%      27,419       2,296     8.37%      12,212         991     8.12%
                                 -----------------------------     -----------------------------     -----------------------------
      Total investment
      securities ............     130,562      10,320     7.90%      77,463       5,838     7.54%      98,066       6,764     6.90%
Loans: (2)
    Commercial & industrial .     139,639      15,374    11.01%     116,823      13,783    11.80%     111,704      12,297    11.01%
    Commercial mortgages ....     170,282      17,131    10.06%     170,690      18,279    10.71%      87,464      11,658    13.33%
    Other loans (1) .........      10,623       1,311    12.34%      12,403       1,451    11.70%      14,200       1,782    12.55%
                                 -----------------------------     -----------------------------     -----------------------------
            Total loans .....     320,544      33,816    10.55%     299,916      33,513    11.17%     213,368      25,737    12.06%
                                 -----------------------------     -----------------------------     -----------------------------
Total interest earning assets    $462,881    $ 44,710     9.66%    $403,094    $ 40,747    10.11%    $330,585    $ 33,600    10.16%
Non interest earning assets
      Cash & due from banks         8,775                             8,717                             6,636
      Other assets                 17,159                            15,843                            17,366
      Allowance for loan loss     (12,186)                          (10,313)                           (8,764)
      Def income/unearned disc     (7,436)                           (9,718)                           (3,462)
                                 --------                          --------                          --------
Total non interest
          Earning assets            6,312                             4,529                            11,776
                                 --------                          --------                          --------
Total assets                     $469,193                          $407,623                          $342,361
                                 ========                          ========                          ========

LIABILITIES & STOCKHOLDERS'
  EQUITY
Deposits:
      Savings                    $ 19,932         538     2.70%   $  18,214    $   514      2.82%    $ 16,668    $    454     2.72%
      NOW & Money Market           75,289       2,123     2.82%      79,975      2,174      2.72%      69,077       2,171     3.14%
      CDs & other time deposits   192,545      11,356     5.90%     142,206      8,479      5.96%     121,934       7,185     5.89%
                                 -----------------------------    ------------------------------    ------------------------------
    Total interest bearing
      deposits                   $287,766      14,017     4.87%    $240,395    $11,167      4.65%    $207,679    $  9,810     4.72%
Federal funds                          61           3     4.92%          90          4      4.44%         123           6     5.00%
Long term borrowings               30,869       1,902     6.16%      31,611      1,992      6.30%       3,066         231     7.54%
                                 -----------------------------    ------------------------------    ------------------------------
Total interest bearing
liabilities                      $318,696      15,922     5.00%   $ 272,096    $13,163      4.84%    $210,868    $ 10,047     4.76%
                                 -----------------------------    ------------------------------    ------------------------------
    Non interest bearing
    deposits                       42,829                            29,691                           32,992
    Other liabilities              12,844                            14,462                           11,929
                                 --------                          --------                          --------
Total liabilities                 374,369                           316,249                          255,789
     Stockholders' equity          94,824                            91,374                           86,572
                                 --------                          --------                          --------
Total liabilities and
      Stockholders' equity       $469,193                          $407,623                          $342,361
                                 ========                          ========                          =======
Net interest income                          $ 28,788                          $ 27,584                          $ 23,553
                                             ========                          ========                          ========
Net yield on interest earning                             6.22%                             6.84%                             7.12%
assets                                                ========                          ========                          ========
</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.
<PAGE>   18
RATE VOLUME

         The following table sets forth a rate/volume analysis, which segregates
in detail the major factors contributing to the change in net interest income
for the years ended, December 31, 1999 and 1998, as compared to respective
previous periods, into amounts attributable to both rate and volume variances.

<TABLE>
<CAPTION>

                                                      1999 VS 1998                           1998 VS 1997
                                                     (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 .....    $   (12)    $   (12)    $   (24)    $   (40)    $   (23)    $   (63)
Federal funds sold .....................       (277)       (521)       (798)        689        (329)        360
Investment securities:
   Held to maturity:
         Taxable .......................      2,279         220       2,499      (2,569)        193      (2,376)
         Nontaxable ....................       (276)         43        (233)        169         (24)        145
    Available for sale
          Taxable ......................      2,111         105       2,216       1,272          33       1,305
                                            -------------------------------     -------------------------------
      Total investment securities ......      4,114         368       4,482      (1,128)        202        (926)
Loans:
    Commercial & industrial ............      2,558         967       1,591         579         907       1,486
    Commercial mortgages ...............        (44)     (1,104)     (1,148)      9,286      (2,665)      6,621
    Other loans ........................       (217)         77        (140)       (216)       (115)       (331)
                                            -------------------------------     -------------------------------
            Total loans ................      2,297      (1,994)        303       9,649      (1,873)      7,776
                                            -------------------------------     -------------------------------
Total increase (decrease) in interest
income .................................    $ 6,122     $(2,159)    $ 3,963     $ 9,170     $(2,023)    $(7,147)


INTEREST EXPENSE

Deposits:
  Savings ..............................    $    47     $   (23)    $    24     $    43     $    17     $    60
  NOW & Money Market ...................       (130)         79         (51)        318        (315)          3
  CDs & other time deposits ............      2,970         (93)      2,877       1,208         268          28
                                            -------------------------------     -------------------------------
         Total interest bearing deposits      2,887        (212)      2,850       1,569        (212)      1,357
Federal funds purchased ................         (1)       --            (1)         (2)       --            (2)
Mortgage payable and
                long term borrowings ...        (46)        (44)        (89)      1,805         (44)      1,761
                                            -------------------------------     -------------------------------

Total increase (decrease) in interest
expense ................................      2,840         (80)      2,760       3,372        (256)      3,116
                                            -------------------------------     -------------------------------
Total increase (decrease) in
      net interest income ..............    $ 3,282     $(2,079)    $ 1,203     $ 5,798     $(1,767)    $ 4,031
                                            ===============================     ===============================
</TABLE>
<PAGE>   19
LOANS
         The following table reflects the composition of the loan portfolio of
Royal Bank of Pennsylvania and the percent of gross outstandings represented by
each category at the dates indicated.
<TABLE>
<CAPTION>

                                                                  YEAR ENDING DECEMBER 31,
                                                                       (IN THOUSANDS)
                           --------------------------------------------------------------------------------------------------------
Loans                             1999                 1998                 1997                 1996                 1995
-----                      -------------------- -------------------- -------------------- -------------------- --------------------
<S>                        <C>           <C>    <C>           <C>    <C>           <C>    <C>           <C>    <C>          <C>
Comm'l & industrial          $168,329      46%    $127,972      42%     $123,800     41%     $116,616     55%     $124,065     61%
Real estate                   191,312      53%     182,595      57%      176,315     58%       93,925     44%       75,758     37%
Consumer                        2,653       1%       2,033       1%        1,523      1%        2,097      1%        3,352      2%
                             --------     ---     --------     ---      --------    ---      --------    ---      --------    ---
      Total gross loans       362,294     100%     312,600     100%      301,638    100%      212,638    100%      203,175    100%
Unearned income               (2,154)              (1,833)               (1,498)              (1,290)              (1,160)
Disc on loans purchased       (5,322)              (6,291)               (9,243)              (2,331)              (3,596)
                             --------             --------              --------             --------             --------
                              354,818              304,476               290,897              209,017              198,419
Allowance for loan loss      (11,737)             (11,920)               (8,186)              (9,084)              (9,747)
                             --------             --------              --------             --------             --------
    Total loans, net         $343,081             $292,556              $282,711             $199,933             $188,672
                             ========             ========              ========             ========             ========
</TABLE>



ANALYSIS OF ALLOWANCE FOR LOAN LOSS
<TABLE>
<CAPTION>

                                                                 YEAR ENDING DECEMBER 31,
                                                                   (IN THOUSANDS)
                                         ---------------------------------------------------------------------
                                             1999          1998           1997           1996          1995
                                         -----------    ----------     ---------      ---------      ---------

<S>                                        <C>           <C>           <C>            <C>            <C>
Total Loans ...........................    $ 354,818     $ 304,476     $ 290,897      $ 209,017      $ 198,419
                                           =========     =========     =========      =========      =========

Daily average loan balance ............    $ 320,544     $ 299,916     $ 213,368      $ 200,618      $ 185,734
                                           =========     =========     =========      =========      =========

Allowance for loan loss:
   Balance at the beginning of the year    $  11,920     $   8,186     $   9,084      $   9,747      $   8,992
   Charge offs by loan type:
        Commercial ....................        1,062         1,501           762            843            292
        Real  estate ..................           13           135          --              240             21
                                           ---------     ---------     ---------      ---------      ---------
   Total charge offs ..................        1,075         1,636           762          1,083            313
   Recoveries by loan type:
         Commercial ...................          850           540         1,934          1,790            125
         Individual ...................           35          --            --             --             --
         Real estate ..................            7            60            48            118             31
                                           ---------     ---------     ---------      ---------      ---------
    Total recoveries ..................          892           600         1,982          1,908            156
                                           ---------     ---------     ---------      ---------      ---------
    Net loan charge offs ..............          183         1,036        (1,220)          (825)           157
         Purchase of Knoblauch Bank ...         --            --            --             --              912
         Increase (decrease) in
              Provision for loan loss..         --           4,770        (2,118)        (1,488)          --
                                           ---------     ---------     ---------      ---------      ---------
Balance at end of year ................    $  11,737     $  11,920     $   8,186      $   9,084      $   9,747
                                           =========     =========     =========      =========      =========
Net charge offs to average loans ......          .06%          .35%        (0.57%)        (0.41%)         0.08%
                                           =========     =========     =========      =========      =========
Allowance to total loans at year end ..         3.31%         3.91%         4.35%          4.35%          4.91%
                                           =========     =========     =========      =========      =========
</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.
<PAGE>   20
         The company utilizes an internal rating system to monitor and evaluate
the credit risk inherent in its loan portfolio. All loans approved by the loan
committee, executive board committee and the Board of Directors are initially
assigned a rating of pass. The loan review officer, Vice President of Special
Assets and the loan review committee are expected to recommend changes in loan
ratings when facts come to their attention that warrant an upgrade or downgrade
in a loan rating. Problem and potential problem assets are assigned the three
lowest ratings. Such ratings coincide with the "Substandard", "Doubtful" and
"Loss" classifications used by federal regulators in their examination of
financial institutions. Generally, an asset is considered Substandard if it is
inadequately protected by the current net worth and paying capacity of the
obligors and/or the collateral pledged. Substandard assets have a well-defined
weakness or weaknesses that jeopardize the liquidation of the debt. Assets
classified as Doubtful have all the weaknesses inherent in those classified
Substandard with the added characteristics that the weaknesses present make
collection or liquidation in full, on the basis of currently existing facts,
highly questionable and improbable. Assets classified as Loss are those
considered uncollectable and of such little value that their continuance as
assets is not warranted. On a regular basis, the Loan Review Officer and senior
management review the status of each loan.

           While the Company believes that it has established an adequate
allowance for loan losses, there can be no assurance that the regulators, in
reviewing the Company's loan portfolio, will not request the company to
materially increase its allowances for loan losses. Although management believes
that adequate specific and general loan loss allowances have been established,
actual losses are dependant upon future events and, as such, further additions
to the level of specific and general loss allowances could become necessary.
<PAGE>   21
LOANS AND LEASE FINANCING RECEIVABLES

         The following table summarizes the loan portfolio by loan category and
amount that corresponds to the appropriate regulatory definitions.
<TABLE>
<CAPTION>
                                                                                              YEAR ENDING
                                                                                              DECEMBER 31,
                                                                                             (IN THOUSANDS)
                                                                         --------------- -- ----------------- ---- ---------------
                                                                              1999                1998                  1997
                                                                         ---------------    -----------------      ---------------
<S>                                                                      <C>                <C>                   <C>
Loans secured by real estate
    Construction and land development                                           $50,210              $35,571              $29,172
    Secured by farmland (including farm residential and other
      improvements)                                                                  --                  - -                   --
    Secured by 1-4 family residential properties:
    Revolving, open-end loans secured by 1-4 family residential
      properties and extended under lines of credit                               8,341                7,648               11,433
        All other loans secured by 1-4 family residential properties:
            Secured by first liens                                               15,458               17,836               23,139
            Secured by junior liens                                               6,010                6,131                8,195
    Secured by multi family (5 or more) residential properties                   19,021               20,386               23,459
    Secured by nonfarm nonresidential properties                                237,247              198,225              177,196
    Commercial and industrial loans to US addresses                              21,090               24,362               25,820
    Loans to individuals for household, family, and other personal
     expenditures                                                                 4,252                1,206                1,478
    Obligations of state and political subdivisions in the US                       411                1,149                1,593
     All other loans                                                                254                   87                  154
     Less: Any unearned income on loans listed above                              7,476                8,125               10,742
                                                                         ---------------    -----------------      ---------------
     Total loans and leases, net of unearned income                            $354,818             $304,476             $290,897
                                                                         ===============    =================      ===============
</TABLE>


CREDIT QUALITY

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

<TABLE>
<CAPTION>
                                                                     YEARS ENDING DECEMBER 31,
                                                                          (IN THOUSANDS)
                                            ----------------------------------------------------------------------------
                                             1999            1998            1997            1996            1995
                                          ------------    ------------    ------------    ------------   -------------
<S>                                       <C>             <C>             <C>             <C>            <C>
Non-accruing loans (1)(2)                      $1,209          $3,419          $4,317          $4,653          $6,233
Past due loans over 90 days but still
  accruing                                         --              --              --              --             391
                                          ------------    ------------    ------------    ------------   -------------
         Total nonperforming loans              1,209           3,419           4,317           4,653           6,624
Other real estate                                  19             707              --             504             612
                                          ------------    ------------    ------------    ------------   -------------

          Total nonperforming assets           $1,228          $4,126          $4,317          $5,157          $7,236
                                          ============    ============    ============    ============   =============

Nonperforming assets to total assets            0.23%           0.96%           1.04%           1.45%           2.03%
                                          ============    ============    ============    ============   =============
Nonperforming loans to total loans              0.33%           1.09%           1.43%           2.19%           3.34%
                                          ============    ============    ============    ============   =============
Allowance for loan loss
                to nonperforming loans        970.80%         348.64%         189.62%         195.23%         147,15%
                                          ============    ============    ============    ============   =============
</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 $108,832 for 1999, $307,744 for 1998, $388,517 for 1997,
$418,740 for 1996, and $1,889,000 for 1995.
<PAGE>   22
INVESTMENTS SECURITIES

         The contractual maturity distribution and weighted average rate of the
investments held to maturity portfolio at December 31, 1999 are presented in the
following table. Weighted average rate on tax-exempt obligations have been
computed on a fully taxable equivalent basis assuming a tax rate of 34%.

<TABLE>
<CAPTION>
                                                              AS OF DECEMBER 31, 1999
                                                                  (IN THOUSANDS)
                    ------------------------------------------------------------------------------------------------------------
                                             AFTER 1 YEAR BUT     AFTER 5 YEARS, BUT
SECURITIES HELD                      WITHIN 1 YEAR     WITHIN 5 YEARS    WITHIN 10 YEARS    AFTER 10 YEARS          TOTAL
TO  MATURITY                       AMOUNT      RATE   AMOUNT     RATE   AMOUNT     RATE    AMOUNT      RATE   AMOUNT      RATE
------------                       ------      ----   ------     ----   ------     ----    ------      ----   ------      ----
<S>                               <C>        <C>     <C>        <C>     <C>        <C>     <C>        <C>     <C>        <C>
US Treasuries
 and agencies                     $ 4,584      6.9%  $   601      5.6%  $   566      7.5%  $   862      7.0%  $ 6,613      6.8%
Other securities                   13,230      6.9%   48,162      7.5%   11,113      8.5%    3,947      6.4%   76,452      7.1%
                                  -------    -----   -------    -----   -------    -----   -------    -----   -------    -----

      Total                       $17,814      6.9%  $48,763      7.5%  $11,679      8.5%  $ 4,809      6.5%  $83,065      7.1%
                                  =======    =====   =======    =====   =======    =====   =======    =====   =======    =====
</TABLE>




         The following tables presents the consolidated book values and
approximate market value at December 31, 1999, 1998, and 1997, respectively, for
each major category of RBPA's investment securities portfolio for held to
maturity securities and available for sale securities.

<TABLE>
<CAPTION>
                                                                     AS OF DECEMBER 31,
                                                                       (IN THOUSANDS)

                                              1999                            1998                        1997
                                      ---------------------           ---------------------       ---------------------
                                      AMORTIZED      MARKET           AMORTIZED      MARKET       AMORTIZED      MARKET
SECURITIES HELD TO MATURITY              COST        VALUE               COST        VALUE           COST         VALUE
---------------------------              ----        -----               ----        -----           ----         -----
<S>                                   <C>          <C>                <C>          <C>            <C>           <C>
State & political subdivisions           $  --       $  --              $3,098      $3,128          $3,098       $3,152
US Treasuries & agencies                 6,614       6,623               4,532       4,660          12,908       13,096
Other securities                        76,451      74,871              54,264      54,372          48,365       48,737
                                       -------     -------             -------     -------         -------      -------

             Total                     $83,065     $81,494             $61,894     $62,160         $64,371      $64,985
                                       =======     =======             =======     =======         =======      =======
</TABLE>


<TABLE>
<CAPTION>
                                                                     AS OF DECEMBER 31,
                                                                       (IN THOUSANDS)

                                              1999                            1998                           1997
                                     ---------------------           ---------------------          ---------------------
                                     AMORTIZED      MARKET           AMORTIZED      MARKET          AMORTIZED      MARKET
SECURITIES AVAILABLE FOR SALE          COST         VALUE               COST        VALUE              COST         VALUE
-----------------------------          ----         -----               ----        -----              ----         -----
<S>                                  <C>           <C>               <C>           <C>              <C>           <C>
Federal Home Loan Bank stock            $3,170      $3,170              $3,170      $3,170             $3,174       $3,174
Preferred and common stock               3,727       3,537               2,867       2,919              2,944        2,977
Other securities                        55,652      52,778              29,031      30,863             13,964       14,897
                                       -------     -------             -------     -------            -------      -------

             Total                     $62,549     $59,485             $35,068     $36,952            $20,082      $21,048
                                       =======     =======             =======     =======            =======      =======
</TABLE>
<PAGE>   23
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)

                                           1999                         1998                          1997
                                     --------------------        ----------------------       ----------------------
                                     AVERAGE                       AVERAGE                       AVERAGE
                                     BALANCE        RATE           BALANCE       RATE            BALANCE       RATE
<S>                                 <C>            <C>            <C>           <C>             <C>            <C>
Demand deposits:
     Non interest bearing            $42,829         --            $29,691         --            $32,992        --
     Interest bearing (NOW)           31,480        2.22%           27,138        2.25%           24,539       2.50%
Money market deposits                 43,809        3.25%           52,837        3.30%           44,538       3.50%
Savings deposits                      19,932        2.70%           18,214        2.82%           16,668       2.72%
Certificate of deposit               192,545        5.90%          142,206        5.96%          121,934       5.89%
                                     -------        ----           -------        ----           -------       ----
         Total deposits             $330,595                      $270,086                      $240,671
                                     =======                       =======                       =======
</TABLE>




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

<TABLE>
<CAPTION>
                                                       AT DECEMBER 31,
                                                       (IN THOUSANDS)

MATURITY                                           1999                   1998
                                                   ----                   ----
<S>                                              <C>                     <C>
Three months or less                              $11,623                 $4,607
Over three months through twelve months            10,360                  7,465
Over twelve months through five years              85,311                 20,909
Over five years                                    18,823                 15,773
                                                  -------                 ------

                   Total                         $126,117                $48,754
                                                 ========                =======
</TABLE>


SHORT AND LONG TERM BORROWINGS
<TABLE>
<CAPTION>
                                                                                      YEAR ENDING DECEMBER 31,
                                                                                           (IN THOUSANDS)

                                                              1999            1998            1997            1996             1995
                                                             -------         -------         -------         -------         -------
<S>                   <C>                                    <C>             <C>             <C>             <C>             <C>
Short term borrowings (1)                                    $  --           $  --           $15,000         $  --           $  --
Long term borrowings:
  Mortgage payable (2)                                           480             527             571             613             652
  FHLB advances (3)                                           30,000          30,365          31,063           4,201           2,332
                                                             -------         -------         -------         -------         -------

         Total long term borrowings                          $30,480         $30,892         $46,634         $ 4,814         $ 2,984
                                                             =======         =======         =======         =======         =======
</TABLE>


(1) In 1997, short-term borrowings consisted of federal funds purchased which
matured within one to four days from the transaction date.

(2) The mortgage payable is payable to a bank at 65% of prime rate (5.525% at
December 31, 1999) and is guaranteed by an industrial development authority.

(3) Advances from the Federal Home Loan Bank of Pittsburgh consist of one
advance with an interest rates of 6.24%, and matures on December 23, 2002.
<PAGE>   24
ITEM 7.  MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

         The following discussion and analysis of financial condition and
results of operations should be read in conjunction with the Consolidated
Financial Statements of RBPA (see Item 8) and related notes included herein.


FINANCIAL CONDITION

         Total assets increased $94.9 million, or 22%, to $522.5 million at
December 31, 1999 from $427.6 million at year end 1998, primarily due to growth
experienced in loans and investment securities during 1999 of $50.3 million and
$43.7 million, respectively, partially offset by a $1.5 million decrease in cash
and cash equivalents.

         Cash and Cash Equivalents. Cash and cash equivalents are comprised of
cash on hand, and cash in interest bearing and non interest bearing accounts in
banks, in addition to federal funds sold. Cash and cash equivalents decreased
$1.5 million, or 8%, to $17.7 million at December 31, 1999, primarily due to
growth in loans and investment securities during 1999. The average balance of
cash and cash equivalents was $20.5 million for 1999 versus $34.4 million for
1998 which indicates that cash and cash equivalents were more efficiently
deployed in higher earning assets during 1999.

         Investment Securities Held to Maturity. Held to maturity investment
securities ("HTM") represents approximately 17% of average earning assets during
1999 and are comprised of primarily corporate debt securities of investment
grade quality, at the time of purchase. During 1999, HTM securities increased
$21.2 million from $61.9 million at December 31, 1998 to $83.1 million at
December 31, 1999.

         Investment Securities Available for Sale. Available for sale securities
("AFS") represent 11% of average earning assets during 1999 and are primarily
comprised of capital trust security issues of regional banks and foreign
corporate bonds. At December 31, 1999, AFS investment securities were $59.5
million while they were $37 million at December 31, 1998, an increase of $22.5
million.

         Loans. RBPA's primary earning assets are loans, representing
approximately 69% of average earning assets during 1999. The loan portfolio has
historically been comprised primarily of business demand loans and commercial
mortgages in roughly equal amounts, and to a significantly lesser extent,
consumer loans comprised of one to four family residential and home equity
loans. This composition of loans did not change during 1999. During 1999, total
loans increased 16% from $304.5 million at December 31, 1998 to $354.8 million
at December 31, 1999 primarily due to internally generated loan growth and loan
purchases.

         Deposits. RBPA's primary source of funding, deposits, increased $90.9
million, or 31%, from $290.4 million at December 31, 1998 to $381.3 million at
December 31, 1999. This increase in deposits is primarily due to an increase of
$86.1 million in certificates of deposits, or 56% from December 31, 1998. This
increase in certificate of deposits is primarily due to the increase in brokered
deposits during 1999. At December 31, 1999 brokered deposits were $107.7 million
as compared to $12.1 million at December 31, 1998. Other deposit categories
comprised of NOW and money market, and savings deposits increased .4% during
1999 over their levels at December 31, 1998.
<PAGE>   25
         Borrowings. Borrowings are comprised of long term borrowings (advances,
mortgage) and short term borrowings (overnight borrowings). Long term borrowings
decreased $.4 million to $30.5 million at December 31, 1999 primarily due to a
scheduled maturity of a Federal Home Loan Bank ("FHLB") advance in December,
1999, and scheduled amortization of the mortgage payable. The average balance of
long term borrowings and mortgages during 1999 was $30.9 million versus $31.6
million for 1998.

         Stockholders' Equity. Stockholders' equity increased $1.8 million or 2%
in 1999 to $95.8 million primarily due to net income of $12.1 million partially
offset by $7.8 million in cash dividends paid in 1999. Additionally,
stockholders equity was effected by the decline in market value of AFS
investment securities during 1999, which resulted in a downward adjustment of
$3.3 million.


RESULTS OF OPERATIONS

         General. RBPA's results of operations depend primarily on net interest
income, which is the difference between interest income on interest earning
assets and interest expense on interest bearing liabilities. Interest earning
assets consist principally of loans and investment securities, while interest
bearing liabilities consist primarily of deposits. Net income is also effected
by the provision for loan losses and the level of non-interest income as well as
by non-interest expenses, including salary and employee benefits, occupancy
expenses and other operating expenses.

         Net Income. Net income in 1999 was $12.1 million as compared to $10.8
million in 1998 and, $9.4 million in 1997. Basic earnings per share were $1.21,
$1.09 and $0.95 for 1999, 1998, and 1997, respectively. The $1.3 million
increase in net income for 1999 represents a 12% increase over the 1998 and is
primarily attributable to the increase in interest income relating to the
investment security portfolio. The increase in net income of $1.4 million or 15%
in 1998 over 1997 is primarily due to an increase in net interest income,
primarily attributable to the growth in average loans and the acquisition of
higher yielding investment securities during 1998.

         Net Interest Income. Net interest income is affected by market and
economic conditions, which influence rates on loan and deposit growth. Net
interest income was $28.8 million in 1999, compared to $27.5 million in 1998,
and $23.3 million in 1997. This increase in net interest income is primarily due
to the increase in interest income relating to the increase in loans and
investment securities during 1999, while the yield on interest earning assets
decreased 45 basis points to 9.66% from 10.11% for 1998. In 1998, yields on
interest earning assets decreased slightly to 10.11% from 10.16% in 1997, a
difference of 5 basis points. In 1999, average interest earning assets increased
$59.8 million to $462.9 million from the 1998 level. This increase in average
interest earning assets in 1999 is due to growth in average investment
securities and loans of $53.1 million and $20.6 million, respectively. In 1998
average interest earning assets increased to $403.1 million from $330.6 million
in 1997, primarily due to the purchase of a $75 million loan portfolio in
December 1997. In 1999 rates on interest bearing liabilities increased to 5.00%
from 4.84% level in 1998 as overall rates increased during the year. Average
interest bearing liabilities increased to $318.7 million in 1999 from $272.1
million in 1998. This increase in the rates is primarily due to the increase in
higher costing brokered deposits in 1999. In 1998, rates on interest bearing
liabilities increased to 4.84% versus 4.76% in 1997. Rates on interest bearing
deposits increased primarily due to higher costing certificates of deposits in
1998. Additionally, other borrowings also contributed to this increase due to
the addition of a $30 million FHLB advance in December 1997 at an annual rate of
6.24% for a term of five years.
<PAGE>   26
LOANS AND MORTGAGES

<TABLE>
<CAPTION>
                                                    1999                      1998                       1997
                                                    ----                      ----                       ----
<S>                                            <C>                        <C>                       <C>
Average loan outstandings                      $320,544,000               $299,916,000              $213,368,000
Interest and fees on loans                     $ 33,816,000               $ 33,513,000              $ 25,737,000
      Average Yield                                   10.55%                    11.17%                     12.06%
</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, 1999 variable rate loans represented approximately 44% of loans.

         In 1999, the average balance of loans increased $20.6 million to $320.5
million primarily due to purchases and internally generated loan growth.
However, the average yield on loans decreased 62 basis points in 1999 primarily
due to new loans generally repricing downwards as the Bank's average prime rate
for 1999 declined 21 basis points to 7.98% from the 8.19% average prime rate for
1998.

         In 1998, RBPA's average prime rate decreased to 8.19% in 1998 from
8.43% in 1997, which contributed to the 89 basis point decline in the yield on
loans from a yield of 12.06% in 1997 to a yield of 11.17% for 1998. The average
balance of loans increased $86.5 million to $299.9 million in 1998 primarily due
to the purchase of the FDIC loan portfolio in December 1997 in addition to
internally generated loan growth during 1998.


INVESTMENTS SECURITIES HELD TO MATURITY

<TABLE>
<CAPTION>
                                                       1999                1998                      1997
                                                       ----                ----                      ----
<S>                                                 <C>                 <C>                      <C>
Average HTM investment securities                   $78,945,000         $50,044,000              $85,854,000
         Interest income                            $ 5,808,000         $ 3,542,000              $ 5,773,000
          Average yield                                    7.36%               7.08%                    6.72%
</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 1999, the yield on HTM investment securities increased 28 basis
points to 7.36% from 7.08% for 1998. This increase is primarily due to the
purchase of higher yielding corporate debt securities primarily during the first
six months of 1999.

         In 1998 the yield in HTM investment securities increased 35 basis
points to 7.08% from 6.73% in 1997. This increase is partially attributable to a
24 basis point increase in yield on taxable investment securities in 1998,
primarily due to the purchase of higher yielding corporate debt securities and
the maturity of lower yielding securities during the year. However, the average
balance of HTM investment securities decreased $35.8 million to $50 million in
1998 as scheduled maturities outpaced purchases.
<PAGE>   27
INVESTMENTS SECURITIES AVAILABLE FOR SALE

<TABLE>
<CAPTION>
                                          1999               1998              1997
                                          ----               ----              ----
<S>                                    <C>               <C>               <C>
Average AFS investment securities      $51,617,000       $27,419,000       $12,212,000
   Interest and dividend income        $ 4,512,000       $ 2,296,000       $   991,000
          Average yield                       8.74%             8.37%             8.12%
</TABLE>

         AFS investment securities are comprised primarily of non-rated capital
trust security issues of regional banks, rated foreign corporate debt
securities, and to a lesser extent preferred and common stock.

         In 1999, the average balance of AFS investment securities increased
$24.2 million to $51.6 from the $27.4 million level in 1998, representing 11% of
average earning assets. This increase is due to the purchase of additional
capital trust investment securities, in addition to foreign corporate debt,
which lifted the overall yield of AFS investment securities 37 basis point to
8.74% for 1999.

         In 1998, the average balance increased $15.2 million to $27.4 million,
primarily due to the purchase of capital trust securities. In 1997 the average
balance increased $8.5 million to $12.2 million, primarily due to the purchase
of capital trust securities, and an increase in the FHLB stock position.


INTEREST EXPENSE ON NOW AND MONEY MARKET DEPOSITS

<TABLE>
<CAPTION>
                                            1999              1998              1997
                                            ----              ----              ----
<S>                                      <C>               <C>               <C>
Average NOW & Money Market deposits      $75,289,000       $79,975,000       $69,077,000
          Interest expense               $ 2,123,000       $ 2,174,000       $ 2,171,000
       Average cost of funds                    2.82%             2.72%             3.14%
</TABLE>

         In 1999 the average cost of funds on NOW and money market deposits
increased 10 basis points to 2.82% from 2.72, as 1999 saw overall rates
increase. In 1998 the average cost of funds on NOW and money market deposits
decreased 42 basis points to 2.72% as interest rates decreased slightly in 1998
while the average balance increased $10.9 million.


    INTEREST EXPENSE ON TIME DEPOSITS

<TABLE>
<CAPTION>
                              1999              1998              1997
                              ----              ----              ----
<S>                        <C>                <C>                <C>
Average time deposits      $192,545,000       $142,206,000       $121,934,000
   Interest expense        $ 11,356,286       $  8,479,000       $  7,185,000
Average cost of funds              5.90%              5.96%              5.89%
</TABLE>

         In 1999, the average balance of time deposits increased $50.3 million
to $192.6 million. This growth in time deposits was due to the increase in the
use of higher costing brokered deposits in 1999 as compared to 1998. At December
31, 1999 brokered deposits was $107.7 million as compared to $12.1 million at
December 31, 1998, an increase of $95.5 million. In 1998, the average balance
and the cost of funds of time deposits increased $20.3 million and 7 basis
points, respectively, to $142.2 million and a rate of 5.96% primarily due to
addition of brokered deposits during the year.

          Although rates in general started to move upward in 1999, the reaction
of deposits to rate changes (both increases and decreases) is slower than the
change in the prime rate because these time deposits must mature before a rate
adjustment would become effective. In 1999, 33% of time deposits were comprised
of certificates of deposits accounts with balances of $100,000 or more, while in
1998, 17% of time deposits were comprised of certificates of deposit accounts
with balances of $100,000 or more. These types of
<PAGE>   28
deposit have traditionally been considered more rate volatile than other types
of deposits, however at Royal Bank the penalty for early redemption somewhat
mitigates this volatility.


PROVISION FOR POSSIBLE LOAN LOSSES

         The provision for loan losses is an amount charged to expense to
provide for future losses on existing loans. In order to determine the amount of
the provision for loan loss, RBPA conducts a quarterly review of the loan
portfolio to evaluate overall credit quality. This evaluation consists of an
analysis of individual loans and overall risk characteristics and size of the
loan, and takes into consideration current economic and market conditions,
changes in non-performing loans, the capability of specific borrowers to repay
loan obligations as well as current collateral values.

         In 1999, no provision for loan losses was recorded as compared to $4.8
million in 1998 due to senior management deeming the level of loan loss reserve
to be adequate. Net charge-offs in 1999 were $.2 million as compared to $1
million for 1998, a decrease of $.8 million.

         During 1998, RBPA recorded a provision for loan loss of $4.8 million,
as compared to a $2.1 million (credit) was recorded in 1997, an increase of $6.9
million. This increase can be attributed to the increase in loan growth during
1998, a $.9 million increase in charge-offs in 1998, and a negative provision
(credit) recorded in 1997, primarily due to recoveries exceeding charge-offs.
Net charge-offs were $1 million in 1998, an increase of $2.2 million from 1997
primarily due to recoveries exceeding charge-offs in 1997 by $1.2 million.

         The allowance for possible loan loss at December 31, 1999 was $11.7
million, or 3.3% of net loans as compared to $11.9 million at December 31, 1998
or 3.9% of net loans, and $8.2 million at December 31, 1997, or 2.8% of net
loans.


NON-INTEREST INCOME

         Non-interest income includes service charges on depositors' accounts,
safe deposit rentals and various services such as cashing checks, issuing money
orders and travelers checks, and redeeming US savings bonds and similar
activities. Most components of non-interest income are a modest and stable
source of income, with exceptions of one-time gains and losses from the sale of
other real estate owned, from period to period these sources of income may vary
considerably. Service charges on depositors' accounts, safe deposit rentals and
other fees are periodically reviewed by Management to remain competitive with
other local banks.

         In 1999, non-interest income decreased $1.5 million to $2 million as
compared to $3.6 million for 1998. This decrease is primarily due to a one-time
$2.3 million income recorded in 1998, partially offset by receipt of $.5 million
income received in 1999 relating to the refund of Pennsylvania Shares tax from
the State of Pennsylvania. Additionally, gains on the sale of other real estate
was $.3 million as compared to $-0- for 1998.

         Non-interest income increased $.9 million to $3.6 million in 1998 from
$2.6 million in 1997. This increase was primarily due to a $2.3 million increase
in other income, the result of a reversal of a legal accrual relating to the
settlement of litigation in 1998. This increase in other income was partially
offset by a $1.2 million decrease in gains on sale of other real estate in 1998,
and a $.2 million decrease in income relating to service charges.
<PAGE>   29
NON-INTEREST EXPENSE

         Non-interest expense includes compensation and employee benefits,
occupancy, advertising, FDIC insurance, state taxes, depreciation, and other
expenses such as auditing, automatic teller machines (ATMs), data processing,
legal, outside service charges, postage, printing, and other expenses relating
to other real estate owned.

         In 1999, non-interest expense increased $2.3 million to $13.1 million
from $10.9 million in 1998. This increase is primarily due to a $2.3 million
credit adjustment recorded in 1998, which is primarily attributable to the
accrual for the Stock Option and Appreciation Right Plan. Occupancy expense
decreased $.1 million in 1999 to $.6 million, while other operating expense
increased $.1 million, or 2% from $5.1 million in 1998 to $5.2 million in 1999.

         Non-interest expense decreased $3.7 million in 1998 to $10.9 million
from $14.6 million for 1997. This decrease is primarily due to a $4.5 million
decrease in salaries and employee benefits, partially offset by $.8 million
increase in other operating expense. The decrease in salaries and employee
benefits is primarily related to fluctuation in the accrual for the Stock Option
and Appreciation Right Plan for 1998 and 1997.

           RBPA has a Stock Option and Appreciation Right Plan, which provides
employees compensation in the form of options to purchase shares of the
Company's common stock. The reserve for future stock option expense is
reflective of the RBPA's stock price at December 31, of every year. Stock price
volatility can contribute to the volatility in the expense associated with the
Stock Option and Appreciation Right Plan. In 1998 RBPA's stock price decreased
to $16.00 at December 31 1998 from $23.50 at December 31, 1997. Accordingly,
RBPA recorded the difference between the current market values and the values at
the grant date of $1.4 million (credit) during 1998. The expense accrual for
1997 was $3.8 million relating to these stock appreciation rights as employee
benefits expense toward the difference between current market values and the
values at the grant date.


ACCOUNTING FOR INCOME TAXES

         The provision for federal income taxes was $5.6 million in 1999 as
compared to $4.6 million for 1998 and $4.1 million for 1997 representing an
effective tax rate of 31.5%, 30%, and 30.3%, respectively. The $1 million
increase in the tax provision for 1999 and 1998 are primarily due to a higher
level of taxable income of $2.3 and $2 million, respectively, primarily related
to and increase in interest income on loans and investment securities.


ACCOUNTING FOR DEBT AND EQUITY SECURITIES

         The Company accounts for investment securities in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
This standard requires investments in securities to be classified in one of
three categories; held to maturity, trading or available for sale. Debt
securities that the Bank has the positive intent and ability to hold to maturity
are classified as held to maturity and are reported at amortized cost. As the
Bank does not engage in security trading, the balance of its debt securities and
any equity securities are classified as available for sale. Net unrealized gains
and losses for such securities, net of tax effect, are required to be recognized
as a separate component of stockholders' equity and excluded from the
determination of net income.
<PAGE>   30
ASSET LIABILITY MANAGEMENT

         The primary functions of asset-liability management are to assure
adequate liquidity and maintain an appropriate balance between interest earning
assets and interest bearing liabilities. This process is overseen by the
Asset-Liability Committee ("ALCO") which monitors and controls, among other
variables, the liquidity, balance sheet structure and interest rate risk of the
consolidated company within policy parameters established and outlined in the
Funds, Cash Flow and Liquidity Policies and Procedures which are reviewed by the
Board of Directors at least annually. Additionally, the ALCO committee meets
periodically and reports on liquidity, interest rate sensitivity and projects
financial performance in various interest rate scenarios.

         Liquidity. Liquidity is the ability of the financial institution to
ensure that adequate funds will be available to meet its financial commitments
as they become due. In managing its liquidity position, the financial
institution evaluates all sources of funds, the largest of which is deposits.
Also taken into consideration is the repayment of loans. These sources provide
the financial institution with alternatives to meet its short-term liquidity
needs. Longer-term liquidity needs may be met by issuing longer-term deposits
and by raising additional capital.

         RBPA generally maintains a liquidity ratio equal to or greater than 25%
of total deposits and short-term liabilities. Liquidity is specifically defined
as the ratio of net cash, short term and marketable assets to net deposits and
short-term liabilities. The liquidity ratio for the years ended December 31,
1999, 1998 and 1997 was 41%, 40%, and 39%, respectively. Management believes
that RBPA's liquidity position continues to be adequate, continues to be in
excess of its peer group level and meets or exceeds the liquidity target set
forth in the Funds, Cash Flow and Liquidity Policies and Procedures. Management
believes that due to its financial position, it will be able to raise deposits
as needed to meet liquidity demands. However, any financial institution could
have unmet liquidity demands at any time.

         Interest Rate Sensitivity. Interest rate sensitivity is a function of
the repricing characteristics of the financial institution's assets and
liabilities. These include the volume of assets and liabilities repricing, the
timing of repricing, and the relative levels of repricing. Attempting to
minimize the interest rate sensitivity gaps is a continual challenge in a
changing rate environment. The interest sensitivity report examines the
positioning of the interest rate risk exposure in a changing interest rate
environment. Ideally the rate sensitive assets and liabilities will be
maintained in a matched position to minimize interest rate risk.

         The interest rate sensitivity analysis is an important management tool,
however, it does have some inherent shortcomings. It is a "static" analysis.
Although certain assets and liabilities may have similar maturities or
repricing, they may react in different degrees to changes in market interest
rates. Additionally, repricing characteristics of certain assets and liabilities
may vary substantially within a given period.


         The following table summarizes repricing intervals for interest earning
assets and interest bearing liabilities as of December 31, 1999, and the
difference or "gap" between them on an actual and cumulative basis for the
periods indicated. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities.
During a period of falling interest rates, a positive gap would tend to
adversely affect net interest income, while a negative gap would tend to result
in an increase in net interest income. During a period of rising interest rates,
a positive gap would tend to result in an increase in net interest income while
a negative gap would tend to affect net interest income adversely. At December
31, 1999, RBPA is in an asset sensitive position of $51.5 million, which
indicates assets will reprice somewhat faster than liabilities within one year.
<PAGE>   31
INTEREST RATE SENSITIVITY
(IN  MILLIONS)
<TABLE>
<CAPTION>
                                                             DAYS
                                                    ----------------------        1 TO 5        OVER 5      NON-RATE
ASSETS (1)                                           0 - 90       91 - 365        YEARS         YEARS       SENSITIVE       TOTAL
                                                    --------      --------       --------      -------      ---------     ----------
<S>                                                 <C>           <C>            <C>           <C>          <C>           <C>
Interest-bearing deposits in banks                  $    0.6       $--           $ --           $--           $--           $    0.6
Federal funds sold                                       0.2        --             --            --                              0.2
Investment securities:
       Available for sale                                6.7        --               11.8          41.0        --               59.5
       Held to maturity                                 11.3           6.5           48.8          16.5        --               83.1
                                                    --------       -------       --------       -------       -------       --------
    Total investment securities                         18.0           6.5           60.6          57.5        --              142.6
Loans:(2)
       Fixed rate (3)                                    8.5           7.2          152.4          34.5        --              202.6
       Variable rate                                   138.9           1.9           11.9           6.9        --              159.6
                                                    --------       -------       --------       -------       -------       --------
    Total loans                                        147.4           9.1          164.3          41.4        --              362.2
Other assets(4)                                       --            --             --            --              16.9           16.9
                                                    --------       -------       --------       -------       -------       --------
    Total Assets                                    $  166.2       $  15.6       $  224.9       $  98.9       $  16.9       $  522.5
                                                    ========       =======       ========       =======       =======       ========
LIABILITIES & CAPITAL

Deposits:
       Non interest bearing deposits                $--           $--            $ --           $--          $   45.5      $   45.5
       Interest bearing deposits(5)                     58.0          --             37.2         --           --              95.2
       Certificate of deposits                          28.9          43.4          168.3         --           --             240.6
                                                    --------      --------       --------       ---------    ----------    --------
    Total deposits                                      86.9          43.4          205.5         --             45.5         381.3
Short term borrowings                                   --            --           --             --           --            --
Mortgage and long term borrowings                       --            --             30.5         --           --              30.5
Other liabilities                                       --            --           --             --             14.9          14.9
Capital                                                 --            --           --             --             95.8          95.8
                                                    --------       -------       --------       -------       -------       --------
    Total liabilities & capital                     $   86.9      $   43.4       $  236.0       $--          $  156.2      $  522.5
                                                    ========      ========       ========       =========    ==========    ========

Net  interest rate  GAP                             $   79.3      $  (27.8)     $   (11.1)       $   98.9      ($ 139.3)
                                                    ========      ========       ========       =========    ==========

Cumulative interest rate  GAP                       $   79.3      $   51.5      $    40.4        $  139.3        --
                                                    ========      ========       ========       =========    ========
GAP to total  assets                                     15%           -5%
                                                    ========      ========
GAP to total equity                                      83%           -29%
                                                    ========      ========
Cumulative GAP to total assets                           15%            10%
                                                    ========      ========
Cumulative GAP to total equity                           83%            54%
                                                    ========      ========

</TABLE>

(1) Interest earning assets are included in the period in which the balances are
expected to be repaid and/or repriced as a result of anticipated prepayments,
scheduled rate adjustments, and contractual maturities.

(2) Reflects principal maturing within the specified periods for fixed and
repricing for variable rate loans; includes nonperforming loans.

(3) Fixed rate loans include a portion of variable rate loans whose floors are
in effect at December 31, 1999.

(4) For purposes of gap analysis, other assets include the allowance for
possible loan loss; unamortized discount on purchased loans and deferred fees on
loans.

(5) Based on historical analysis, Money market and Savings deposits are assumed
to have rate sensitivity of 1 month; NOW account deposits are assumed to have a
rate sensitivity of 4 months.



         The method to analyze interest rate sensitivity in the table above has
a number of limitations. Certain assets and liabilities may react differently to
changes in interest rates even though they reprice or mature in the same time
periods. The interest rates on certain assets and liabilities may change at
different times than changes in market interest rates, with some changing in
advance of changes in market rates and some lagging behind changes in market
rates. Also, certain assets have provisions, which limit changes in interest
rates each time the interest rate changes and for the entire term of the loan.
Additionally, prepayments and withdrawals experienced in the event of a change
in interest rates may deviate significantly from those assumed in the interest
rate sensitivity table. Additionally, the ability of some borrowers to service
their debt may decrease in the event of an interest rate increase.
<PAGE>   32
CAPITAL ADEQUACY

         The table shown below sets forth RBPA's consolidated capital level and
performance ratios.

<TABLE>
<CAPTION>
                                                                           REGULATORY
                                            1999        1998        1997    MINIMUM
                                           ------      ------      ------  ----------
<S>                                        <C>         <C>         <C>     <C>
CAPITAL LEVEL
   Leverage ratio                           18.8%       22.1%       25.6%     3%
   Risk based capital ratio:
        Tier 1                              20.4%       24.1%       25.1%     4%
        Tier 2                              21.6%       25.4%       26.4%     8%

CAPITAL PERFORMANCE
    Return on average assets                 2.6%        2.6%        2.7%     --
    Return on average equity                12.8%       11.8%       10.8%     --
</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, 1999, RBPA had an average capital to
average asset ratio of 20.2%. RBPA has no current plans to raise capital through
new stock offerings and indeed, seeks ways to leverage its existing capital,
which is considered excessive by industry standards.

         In early 1989, each of the federal bank regulatory agencies issued
risk-based capital standards, which were phased in December 31, 1992. The new
standards place assets in various categories of risk with varying weights
assigned, and consider certain off-balance sheet activities, such as letters of
credit and loan commitments in the base for purposes of determining capital
adequacy. The principal objective of establishing the risk-based capital
framework is to achieve greater convergence in the measurement and assessment of
capital adequacy due to the divergence of asset mixes maintained from one
depository institution to the next. At December 31, 1999, RBPA's ratio using
these standards was 20.4%.


YEAR 2000 ISSUES

         RBPA as with the financial industry as a whole, has experienced no
significant problems or irregularities with regard to the Y2K issue. The costs
associated with Y2K compliance in 1999 was immaterial. In 1999, the Clean
Management Committee was formed to ensure that all computer systems, programs
and technology remain Y2K compliant. However, while not expected, there can be
no assurance that the corporation, its suppliers and customers, or the financial
industry, will not experience any problems in the future. If any problems were
to occur in the future, RBPA intends to react according to its contingency plan.


MANAGEMENT OPTIONS TO PURCHASE SECURITIES

         On June 27, 1990, the directors of the Bank approved the Royal Bank of
Pennsylvania Non-qualified Stock Option and Appreciation Right Plan (the Plan).
The Plan was reapproved by the shareholders in connection with the formation of
the holding company. The Plan is an incentive program under which Bank officers
and other key employees may be awarded additional compensation in the form of
options to purchase up to 1,000,000 shares of the Registrant's Class A common
stock (but not in excess of
<PAGE>   33
15% of outstanding shares). The option price is equal to the fair market value
at the date of the grant. At December 31, 1999, 377,247 options have been
granted (the fair market per share at the time of the grant was $14.75 in 1999
and $19.952 in 1998) which are exercisable at 20% per year. At December 31,
1998, options covering 263,647 shares were exercisable.

         In 1990, the directors of the Bank approved a non-qualified Outside
Directors Stock Option Plan. The Plan was reapproved by the shareholders in
connection with the formation of the holding company. Under the terms of the
plan, 150,000 shares of Class A stock are authorized for grants. Each director
is entitled to 1,500 shares of stock annually, which is exercisable after one
year of service. The options were granted at the fair market value ($14.75 per
share in 1999 and $19.952 in 1998) at the date of the grant. Currently, the
strike price on the options ranges from $2.312 to $17.574 per share. During
1999, 11,241 options were exercised at strike prices from $2.426 to $12.761 per
share. At December 31, 1999, 69,424 options were outstanding and options
covering 35,954 shares were exercisable.


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         A simulation model is therefore used to estimate the impact of various
changes, both upward and downward, in market interest rates and volumes of
assets and liabilities on the net income. This model produces an interest rate
exposure report that forecast changes in the market value of portfolio equity
under alternative interest rate environment. The market value of portfolio is
defined as the present value of existing assets and liabilities. The calculated
estimates of changes in the market value of portfolio value are as follows:

<TABLE>
<CAPTION>
                         At December 31, 1999 (Dollars in Thousands)

                                         Market Value of          Percent of
                   Changes in Rates      Portfolio Equity            Change
                   ----------------      ----------------         ----------
<S>                                      <C>                      <C>
                  + 300 basis points      $ 88,886                 -20.0%
                  + 200 basis points        96,186                 -13.5%
                  + 100 basis points       103,577                  -6.8%
                      Flat rate            111,169                     0
                  - 100 basis points       126,008                  13.3%
                  - 200 basis points       139,477                  25.5%
                  - 300 basis points       152,348                  37.0%
</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 the calculations were based.
<PAGE>   34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



              FINANCIAL STATEMENTS AND REPORT OF
           INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

            ROYAL BANCSHARES OF PENNSYLVANIA, INC.
                       AND SUBSIDIARIES

                  DECEMBER 31, 1999 AND 1998
<PAGE>   35
               Report of Independent Certified Public Accountants


Board of Directors
Royal Bancshares of Pennsylvania, Inc. and Subsidiaries


We have audited the accompanying consolidated balance sheets of Royal Bancshares
of Pennsylvania, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in stockholders' equity and
comprehensive income and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

          We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

          In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Royal
Bancshares of Pennsylvania, Inc. and Subsidiaries as of December 31, 1999 and
1998, and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.






Philadelphia, Pennsylvania
January 26, 2000
<PAGE>   36
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
                           CONSOLIDATED BALANCE SHEETS
                                  December 31,

<TABLE>
<CAPTION>
               ASSETS                                                                  1999                1998
                                                                                       ----                ----
<S>                                                                               <C>               <C>
Cash and due from banks                                                           $   17,525,462    $    5,692,654
Federal funds sold                                                                       200,000        13,550,000
                                                                                    ------------      ------------
               Total cash and cash equivalents                                        17,725,462        19,242,654
                                                                                    ------------      ------------
Investment securities held to maturity (market value of $81,493,670
    and $62,159,860 in 1999 and 1998, respectively)                                   83,064,914        61,894,538
Investment securities available for sale - at market value                            59,485,027        36,951,162
Total loans                                                                          354,818,236       304,475,629
    Less allowance for loan losses                                                    11,737,337        11,919,545
                                                                                    ------------      ------------
               Net loans                                                             343,080,899       292,556,084
Premises and equipment, net                                                            5,784,708         5,452,765
Accrued interest and other assets                                                     13,395,037        11,524,581
                                                                                    ------------      ------------
                                                                                    $522,536,047      $427,621,784
                                                                                    ============      ============
               LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
    Deposits
       Non-interest bearing                                                        $  45,541,164     $  41,150,730
       Interest bearing (includes certificates of deposit in excess
        of $100,000 of $126,117,263 and $48,754,354 in 1999
          and 1998, respectively)                                                    335,744,854       249,238,955
                                                                                    ------------      ------------
               Total deposits                                                        381,286,018       290,389,685
    Accrued interest and other liabilities                                            14,935,932        12,271,111
    Long-term borrowings                                                              30,000,000        30,365,000
    Mortgage payable                                                                     479,579           526,720
                                                                                    ------------      ------------
               Total liabilities                                                     426,701,529       333,552,516
                                                                                    ------------      ------------
Stockholders' equity
    Common stock
       Class A, par value $2.00 per share; authorized, 18,000,000
        shares; issued, 7,879,349 and 7,429,689 shares in 1999 and
         1998, respectively                                                           15,758,698        14,859,378
       Class B, par value $0.10 per share; authorized, 2,000,000 shares;
        issued, 1,683,113 and 1,630,544 shares in 1999 and 1998, respectively            168,311           163,054
    Capital surplus                                                                   50,865,395        45,392,659
    Retained earnings                                                                 33,329,374        34,556,343
    Accumulated other comprehensive (loss) income                                     (2,022,053)        1,242,919
                                                                                    ------------      ------------
                                                                                      98,099,725        96,214,353
    Treasury stock - at cost, 215,388 Class A shares in 1999
       and 207,516 in 1998                                                            (2,265,207)       (2,145,085)
                                                                                    ------------      ------------
                                                                                      95,834,518        94,069,268
                                                                                    ------------      ------------
                                                                                    $522,536,047      $427,621,784
                                                                                    ============      ============

</TABLE>


The accompanying notes are an integral part of these statements.
<PAGE>   37
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

                        CONSOLIDATED STATEMENTS OF INCOME

                             Year ended December 31,

<TABLE>
<CAPTION>
                                                                                1999              1998             1997
                                                                                ----              ----             ----
<S>                                                                         <C>               <C>               <C>
Interest income
    Loans, including fees                                                   $ 33,816,210      $ 33,513,439      $ 25,559,901
    Investment securities held to maturity
        Taxable                                                                5,726,349         3,227,921         5,604,469
        Tax-exempt                                                                53,530           207,931           116,779
    Investment securities available for sale
        Taxable                                                                4,268,333         2,121,921           893,447
        Tax-exempt                                                               243,590           173,199            97,937
    Deposits in banks                                                             15,682            24,251           112,294
    Federal funds sold                                                           558,416         1,371,643           986,552
                                                                            ------------      ------------      ------------
           TOTAL INTEREST INCOME                                              44,682,110        40,640,305        33,371,379
                                                                            ------------      ------------      ------------
Interest expense
    Deposits                                                                  14,016,747        11,167,451         9,810,104
    Mortgage payable and other                                                 1,902,432         1,995,750           231,252
    Federal funds purchased                                                        3,015              --               6,148
                                                                            ------------      ------------      ------------
           TOTAL INTEREST EXPENSE                                             15,922,194        13,163,201        10,047,504
                                                                            ------------      ------------      ------------
           NET INTEREST INCOME                                                28,759,916        27,477,104        23,323,875
Increase (Decrease) in provision for loan losses                                    --           4,769,785        (2,118,281)
                                                                            ------------      ------------      ------------
           NET INTEREST INCOME AFTER PROVISION
              FOR LOAN LOSSES                                                 28,759,916        22,707,319        25,442,156
                                                                            ------------      ------------      ------------

Other income
    Service charges and fees                                                     856,230           830,932           981,111
    Realized gains on sale of investment securities available for sale              --                --              13,643
    Gain on other real estate                                                    349,351              --           1,204,443
    Gain on sale of loans                                                         44,773             3,831            28,585
    Other income                                                                 787,614         2,739,602           397,194
                                                                            ------------      ------------      ------------
                                                                               2,037,968         3,574,365         2,624,976
                                                                            ------------      ------------      ------------
Other expenses
    Salaries, wages and employee benefits                                      7,264,824         5,028,428         9,545,799
    Occupancy and equipment                                                      637,624           706,320           756,202
    Other operating expenses                                                   5,227,171         5,138,734         4,332,119
                                                                            ------------      ------------      ------------
                                                                              13,129,619        10,873,482        14,634,120
                                                                            ------------      ------------      ------------
           INCOME BEFORE INCOME TAXES                                         17,668,265        15,408,202        13,433,012
Income taxes                                                                   5,563,737         4,624,262         4,074,280
                                                                            ------------      ------------      ------------
           NET INCOME                                                       $ 12,104,528      $ 10,783,940      $  9,358,732
                                                                            ============      ============      ============
Per share data
    Net income - basic                                                      $       1.21      $       1.09      $        .95
                                                                            ============      ============      ============
    Net income - diluted                                                    $       1.19      $       1.07      $        .94
                                                                            ============      ============      ============
</TABLE>

The accompanying notes are an integral part of these statements
<PAGE>   38
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                            AND COMPREHENSIVE INCOME

                  Years ended December 31, 1999, 1998 and 1997


<TABLE>
<CAPTION>


                                                                    Class A common stock                     Class B common stock
                                                                -----------------------------           ---------------------------
                                                                  Shares            Amount               Shares             Amount
                                                                ---------        ------------           ---------       -----------
<S>                                                             <C>              <C>                    <C>             <C>
Balance, January 1, 1997                                        6,596,625        $ 13,193,250           1,592,091       $   159,209
    Net income for the year ended December 31, 1997                  --                  --                  --                --
    Conversion of Class B common stock to Class A
      common stock                                                 70,344             140,688             (61,091)           (6,109)
    4% stock dividends declared                                   258,176             516,352              61,859             6,186
    Cash in lieu of fractional shares                                --                  --                  --                --
    Purchase of treasury stock                                       --                  --                  --                --
    Stock options exercised                                        90,576             181,152                --                --
    Cash dividends on common stock                                   --                  --                  --                --
    Other comprehensive income, net of
      reclassifications and taxes                                    --                  --                  --                --
                                                                ---------        ------------           ---------       -----------
    Comprehensive income


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


<TABLE>
<CAPTION>
                                                                                                            Accumulated
                                                                                                               other
                                                                      Capital            Retained           comprehensive
                                                                      surplus            earnings           income (loss)
                                                                  ------------        ------------         ---------------
<S>                                                                <C>                 <C>                  <C>
Balance, January 1, 1997                                          $ 34,827,443        $ 38,427,800         $     (1,158)
    Net income for the year ended December 31, 1997                       --             9,358,732                 --
    Conversion of Class B common stock to Class A
      common stock                                                        --              (134,579)                --
    4% stock dividends declared                                      3,799,706          (4,322,244)                --
    Cash in lieu of fractional shares                                     --                (2,477)                --
    Purchase of treasury stock                                            --                  --                   --
    Stock options exercised                                            170,469                --                   --
    Cash dividends on common stock                                        --            (5,303,873)                --
    Other comprehensive income, net of
      reclassifications and taxes                                         --                  --                639,300
                                                                  ------------        ------------         ---------------
    Comprehensive income


Balance, December 31, 1997                                        $ 38,797,618        $ 38,023,359         $    638,142
    Net income for the year ended December 31, 1998 -                      --           10,783,940                 --
    Conversion of Class B common stock to Class A
      common stock                                                        --               (56,533)                --
    4% stock dividends declared                                      6,466,085          (7,017,070)                --
    Cash in lieu of fractional shares                                     --                (2,023)                --
    Stock options exercised                                            128,956                --                   --
    Cash dividends on common stock                                        --            (7,175,330)                --
    Other comprehensive income, net of
      reclassifications and taxes                                         --                  --                604,777
                                                                  ------------        ------------         ---------------
    Comprehensive income
</TABLE>



<TABLE>
<CAPTION>


                                                                        Treasury          Comprehensive
                                                                          stock              income
                                                                    ---------------      ---------------
<S>                                                                  <C>                 <C>
Balance, January 1, 1997                                            $ (2,025,874)
    Net income for the year ended December 31, 1997                         --           $  9,358,732
    Conversion of Class B common stock to Class A
      common stock                                                          --
    4% stock dividends declared                                             --
    Cash in lieu of fractional shares                                       --
    Purchase of treasury stock                                          (119,211)
    Stock options exercised                                                 --
    Cash dividends on common stock                                          --
    Other comprehensive income, net of
      reclassifications and taxes                                           --                639,300
                                                                    ------------         ------------
    Comprehensive income                                                                 $  9,998,032
                                                                                         ============


Balance, December 31, 1997                                          $ (2,145,085)
    Net income for the year ended December 31, 1998 -                                    $ 10,783,940
    Conversion of Class B common stock to Class A
      common stock                                                          --
    4% stock dividends declared                                             --
    Cash in lieu of fractional shares                                       --
    Stock options exercised                                                 --
    Cash dividends on common stock                                          --
    Other comprehensive income, net of
      reclassifications and taxes                                           --                604,777
                                                                                         ------------
    Comprehensive income                                                                 $ 11,388,717
                                                                                         ============
</TABLE>




                                                  (Continued)
<PAGE>   39
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                      AND COMPREHENSIVE INCOME - CONTINUED

                  Years ended December 31, 1999, 1998 and 1997


<TABLE>
<CAPTION>


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

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


<TABLE>
<CAPTION>
                                                                                                          Accumulated
                                                                                                             other
                                                                   Capital             Retained           comprehensive
                                                                   surplus             earnings           income (loss)
                                                               ------------        ------------         ---------------
<S>                                                            <C>                 <C>                  <C>
Balance, December 31, 1998                                     $ 45,392,659        $ 34,556,343         $  1,242,919
    Net income for the year ended December 31, 1999                    --            12,104,528                 --
    Conversion of Class B common stock to Class A
      common stock                                                     --               (27,987)                --
    4% stock dividends declared                                   4,867,469          (5,451,455)                --
    Cash in lieu of fractional shares                                  --                (3,212)                --
    Purchase of treasury stock                                         --                  --                   --
    Stock options exercised                                         605,267                --                   --
    Cash dividends on common stock                                     --            (7,848,843)                --
    Other comprehensive income, net of
      reclassifications and taxes                                      --                  --             (3,264,972)
                                                               ------------        ------------         ------------
    Comprehensive income

Balance, December 31, 1999                                     $ 50,865,395        $ 33,329,374         $ (2,022,053)
                                                               ============        ============         ============
</TABLE>



<TABLE>
<CAPTION>


                                                                 Treasury         Comprehensive
                                                                   stock              income
                                                              ------------        -------------
<S>                                                           <C>                 <C>
Balance, December 31, 1998                                    $ (2,145,085)
    Net income for the year ended December 31, 1999                   --           $ 12,104,528
    Conversion of Class B common stock to Class A
      common stock                                                    --
    4% stock dividends declared                                       --
    Cash in lieu of fractional shares                                 --
    Purchase of treasury stock                                    (120,122)
    Stock options exercised                                           --
    Cash dividends on common stock                                    --
    Other comprehensive income, net of
      reclassifications and taxes                                     --             (3,264,972)
                                                              ------------         ------------
    Comprehensive income                                                           $  8,839,556
                                                                                   ============
Balance, December 31, 1999                                    $ (2,265,207)
                                                              ============
</TABLE>


         The accompanying notes are an integral part of this statement.
<PAGE>   40
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                             Year ended December 31,



<TABLE>
<CAPTION>
                                                                              1999                   1998                   1997
                                                                         ------------           ------------           ------------
<S>                                                                      <C>                    <C>                    <C>
Cash flows from operating activities
    Net income                                                           $ 12,104,528           $ 10,783,940           $  9,358,732
    Adjustments to reconcile net income to
           net cash provided by operating activities
        Depreciation and amortization                                         413,864                351,039                323,916
        (Increase)Decrease in provision for loan losses                          --                4,769,785             (2,118,281)
        Accretion of investment securities discount                          (338,760)               (75,116)               (61,462)
        Amortization of investment securities premium                         896,332                294,699                697,987
        Amortization of deferred loan fees                                   (389,588)              (278,215)              (137,591)
        Accretion of discount on loans purchased                           (1,848,658)            (3,005,281)            (1,849,384)
        Provision (benefit) for deferred income taxes                      (1,257,494)                75,361                579,007
        Gain on other real estate                                            (349,351)                  --               (1,204,443)
        Gain on sale of loans                                                 (44,773)                (3,831)               (28,585)
        Realized gains on sale of investment securities
           available for sale                                                    --                     --                  (13,643)
        (Decrease)Increase in accrued interest receivable                      62,692                 99,146               (626,542)
        Decrease in other assets                                             (466,003)             1,915,737              1,648,874
        Increase in accrued interest payable                                  569,898              1,288,379                952,653
        Increase in unearned income on loans                                1,589,739                613,025                345,443
        (Decrease) increase in other liabilities                            2,094,923             (4,113,266)               934,994
                                                                         ------------           ------------           ------------

               Net cash provided by operating activities                   13,037,349             12,715,402              8,801,675
                                                                         ------------           ------------           ------------

Cash flows from investing activities
    Proceeds from calls and maturities of investment
        securities held to maturity                                        13,797,967             43,508,610             58,516,144
    Purchase of investment securities held to maturity                    (35,554,592)           (41,251,689)            (9,310,907)
    Proceeds from sale of investment securities available
        for sale                                                                 --                     --                   18,129
    (Purchase) sales of Federal Home Loan Bank stock                             --                    5,000             (2,150,000)
    Purchase of investment securities available for sale                  (25,770,160)           (15,302,591)           (14,276,725)
    Net increase in loans                                                 (50,724,449)           (12,593,341)           (14,331,580)
    Purchase of loan portfolio                                                                          --              (66,740,249)
    Purchase of premises and equipment                                       (745,807)            (1,014,883)              (404,306)
    Proceeds from sale and payments on other real estate                    1,032,614                   --                1,708,547
                                                                         ------------           ------------           ------------

               Net cash used in investing activities                      (97,964,427)           (26,648,894)           (46,970,947)
                                                                         ------------           ------------           ------------
</TABLE>





                                   (Continued)
<PAGE>   41
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                             Year ended December 31,

<TABLE>
<CAPTION>
                                                                               1999                   1998                  1997
                                                                           -------------         -------------         ------------
<S>                                                                        <C>                   <C>                   <C>
Cash flows from financing activities
    Net increase (decrease) in short-term borrowings                       $       --            $(15,000,000)         $ 15,000,000
    Net (decrease) increase in non-interest bearing and
        interest bearing demand deposits and savings accounts                 4,813,360            10,718,876            (6,135,112)
    Net increase (decrease) in certificates of deposit                       86,082,973            14,307,375            17,315,943
    Mortgage payments                                                           (47,141)              (44,165)              (41,722)
    Cash dividends in lieu of fractional shares                                  (3,213)               (2,023)               (2,479)
    Purchase of treasury stock                                                 (120,121)                 --                (119,211)
    Net increase (decrease) in long-term borrowings                            (365,000)             (698,000)           26,862,000
    Issuance of common stock under stock option plans                           897,871               353,141             1,987,986
    Cash dividends                                                           (7,848,843)           (7,175,330)           (5,303,873)
                                                                           ------------          ------------          ------------

               Net cash provided by financing activities                     83,409,886             2,459,874            49,563,532
                                                                           ------------          ------------          ------------

               NET INCREASE (DECREASE) IN
                   CASH AND CASH EQUIVALENTS                                 (1,517,192)          (11,473,618)           11,394,260

Cash and cash equivalents at beginning of year                               19,242,654            30,716,272            19,322,012
                                                                           ------------          ------------          ------------

Cash and cash equivalents at end of year                                   $ 17,725,462          $ 19,242,654          $ 30,716,272
                                                                           ============          ============          ============

Supplemental disclosure of cash flow information
    Cash paid during the year for
        Interest                                                           $ 15,352,296          $ 11,874,822          $  9,094,851
                                                                           ============          ============          ============

        Income taxes                                                       $  4,044,000          $  2,750,000          $  3,750,000
                                                                           ============          ============          ============
</TABLE>







The accompanying notes are an integral part of these statements.
<PAGE>   42
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1999 and 1998




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    The accompanying consolidated financial statements include the accounts of
    Royal Bancshares of Pennsylvania, Inc. (the Company) and its wholly-owned
    subsidiaries: Royal Investments of Delaware, Inc. and Royal Bank of
    Pennsylvania (the Bank), including the Bank's wholly-owned subsidiary, Royal
    Real Estate, Inc. On June 29, 1995, the Company was formed and acquired all
    of the outstanding common stock of the Bank in a business combination
    accounted for in a manner similar to a pooling of interests. In the
    transaction, the Bank's shareholders exchanged common stock of the Bank for
    common stock of the Company on a share-for-share basis. These financial
    statements reflect the historical information of the Company. All
    significant intercompany transactions and balances have been eliminated.

    1.  Business

    The Company, through its subsidiary bank, offers a full range of banking
    services to individual and corporate customers located in eastern
    Pennsylvania. The Bank competes with other banking and financial
    institutions in certain markets, including financial institutions with
    resources substantially greater than its own. Commercial banks, savings
    banks, savings and loan associations, credit unions and money market funds
    actively compete for savings and time deposits and for various types of
    loans. Such institutions, as well as consumer finance and insurance
    companies, may be considered competitors of the Bank with respect to one or
    more of the services it renders.

    In addition to being subject to competition from other financial
    institutions, the Company is subject to regulations of certain federal
    agencies and, accordingly, it is periodically examined by those regulatory
    authorities.

    On January 1, 1998, the Company adopted Statement of Financial Accounting
    Standards (SFAS) No. 131, which redefines how operating segments are
    determined and requires disclosures of certain financial and descriptive
    information about the Company's operating segments. Management has
    determined the Company operates in one business segment, community banking.

    2.  Use of Estimates

    In preparing the consolidated financial statements, management is required
    to make estimates and assumptions that affect the reported amounts of assets
    and liabilities as of the date of the balance sheet and revenues and
    expenditures for the period. Therefore, actual results could differ
    significantly from those estimates.

    The principal estimate that is particularly susceptible to significant
    change in the near term relates to the allowance for loan losses. In
    connection with this estimate, when circumstances warrant, management
    obtains independent appraisals for significant properties. However, future
    changes in real estate market conditions and the economy could affect the
    Company's allowance for loan losses.




                                   (Continued)
<PAGE>   43
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1999 and 1998




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    3.  Investment Securities

    The Company accounts for investment securities in accordance with SFAS No.
    115. This standard requires investments in securities to be classified in
    one of three categories: held to maturity, trading or available for sale.
    Debt securities that the Company has the positive intent and ability to hold
    to maturity are classified as held to maturity and are reported at amortized
    cost. As the Company does not engage in security trading, the balance of its
    debt securities and any equity securities are classified as available for
    sale. Net unrealized gains and losses for such securities, net of tax
    effect, are required to be recognized as a separate component of
    stockholders' equity and excluded from the determination of net income.

    In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
    No. 133. Subsequent to this statement, SFAS No. 137 was issued which amended
    the effective date of SFAS No. 133 to be all fiscal quarters of all fiscal
    years beginning after June 15, 2000. SFAS No. 133 establishes accounting and
    reporting standards for derivative instruments, including certain derivative
    instruments imbedded in other contracts, and for hedging activities. It
    requires that an entity recognize all derivatives as either assets or
    liabilities in the statement of financial position and measure those
    instruments at fair value. If certain conditions are met, a derivative may
    be specifically designated as a hedge. The accounting for changes in the
    fair value of a derivative (gains and losses) depends on the intended use of
    the derivative and resulting designation. The adoption of SFAS No. 133 is
    not anticipated to have a material impact on the Company's financial
    position or results of operations.

    4.  Allowance for Loan Losses

    The allowance for loan losses is maintained at a level believed adequate by
    management to absorb potential losses in the loan portfolio. Management's
    determination of the adequacy of the allowance is based on an evaluation of
    the portfolio, past loan loss experience, current economic conditions,
    volume, growth, and composition of the loan portfolio, and other relevant
    factors. The allowance is increased by provisions for loan losses charged
    against income. Decreases in the allowance result from management's
    determination that the allowance for loan losses exceeds their estimates of
    potential loan loss.

    The Company accounts for loans in accordance with SFAS No. 114, as amended
    by SFAS No. 118, which requires that a creditor measure impairment based on
    the present value of expected future cash flows discounted at the loan's
    effective interest rate, except that as a practical expedient, a creditor
    may measure impairment based on a loan's observable market price, or the
    fair value of the collateral if the loan is collateral-dependent. Regardless
    of the measurement method, a creditor must measure impairment based on the
    fair value of the collateral when the creditor determines that foreclosure
    is probable.






                                   (Continued)
<PAGE>   44
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1999 and 1998



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    5.  Loan Fees and Related Costs

    Interest on loans is accrued and credited to operations based upon the
    principal amount outstanding. Accretion of unearned discounts on loans has
    been added to the related interest income. Accrual of interest is
    discontinued on a loan when management believes that the borrower's
    financial condition is such that collection of interest is doubtful and
    generally when a loan becomes 90 days past due as to principal or interest.
    When interest accruals are discontinued, interest credited to income in the
    current year is reversed and interest accrued in the prior year is charged
    to the allowance for loan losses.

    6.  Other Real Estate

    Other real estate is recorded at the lower of the customer's loan balance or
    the adjusted fair market value of the real estate securing the loan. The
    adjusted fair market value is determined by reducing the fair market value
    by estimated costs for the disposition of the property. Costs relating to
    holding the property are expensed when incurred. Other real estate owned of
    $19,314 and $707,397 at December 31, 1999 and 1998, respectively, is
    included in accrued interest and other assets on the balance sheets.

    7.  Premises and Equipment

    Premises and equipment are stated at cost less accumulated depreciation,
    which is computed principally on the straight-line method over the estimated
    useful lives of the assets. Leasehold improvements are amortized on the
    straight-line method over the shorter of the estimated useful lives of the
    improvements or the terms of the related leases. The estimated useful lives
    for buildings and leasehold improvements range from 15 to 31-1/2 years, and
    for furniture and fixtures are 5 to 7 years.

    8.  Income Taxes

    Under the liability method specified by SFAS No. 109, deferred tax assets
    and liabilities are determined based on the difference between the financial
    statement and tax bases of assets and liabilities as measured by the enacted
    tax rates which will be in effect when these differences reverse. Deferred
    tax expense is the result of changes in deferred tax assets and liabilities.
    The principal types of differences between assets and liabilities for
    financial statement and tax return purposes are the allowance for loan
    losses, deferred loan fees and accumulated depreciation.

    9.  Profit-Sharing Plan

    The Company has a contributory 401(k) plan covering substantially all
    employees. The Company contributed $131,128, $127,788 and $135,650 for 1999,
    1998 and 1997, respectively.




                                   (Continued)
<PAGE>   45
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    10.  Stock Option Plans

    Under two stock option plans, the Company grants stock options to employees,
    officers and directors.

    The Company adopted SFAS No. 123, which allows an entity to use a fair
    value-based method for valuing stock-based compensation which measures
    compensation cost at the grant date based on the fair value of the award.
    Compensation is then recognized over the service period, which is usually
    the vesting period. Alternatively, the standard permits entities to continue
    accounting for employee stock options and similar instruments under
    Accounting Principles Board (APB) Opinion No. 25, and its related
    Interpretations. Entities that continue to account for stock options using
    APB Opinion No. 25 are required to make pro forma disclosures of net income
    and earnings per share (EPS), as if the fair value-based method of
    accounting defined in SFAS No. 123 had been applied.

    The Company's stock option plans are accounted for under APB Opinion No. 25.
    The adoption of SFAS No. 123 had no material effect on the Company's
    consolidated financial position or results of operations.

    11.  Benefit Plan

    During 1999, the Company implemented a noncontributory nonqualified, defined
    benefit pension plan covering certain eligible employees. On January 1,
    1999, the Company adopted SFAS No. 132, which revises employers' disclosures
    about pension and other postretirement benefits plans. It eliminated certain
    current disclosures and requires additional information about changes in the
    benefit obligation and the fair values of plan assets. It also standardizes
    the requirements for pensions and other postretirement benefit plans, to the
    extent possible, and illustrates combined formats for the presentation of
    pension plan and other postretirement benefit plans disclosures.

    12.  Per Share Information

    During 1998, the Company adopted the provisions of SFAS No. 128, which
    eliminates primary and fully diluted EPS and requires presentation of basic
    and diluted EPS in conjunction with the disclosure of the methodology used
    in computing such EPS. Basic EPS excludes dilution and is computed by
    dividing income available to common shareholders by the weighted average
    common shares outstanding during the period. Diluted EPS takes into account
    the potential dilution that could occur if securities or other contracts to
    issue common stock were exercised and converted into common stock.




                                   (Continued)
<PAGE>   46
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    Prior period EPS calculations have been restated to reflect the adoption of
    SFAS No. 128. Basic and diluted EPS are calculated as follows:


<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               10,005,806              $   1.21

Effect of dilutive securities
   Stock options                                                                --                    182,674               --
                                                                         -----------              -----------              --------

Diluted EPS
   Income available to common shareholders
      plus assumed exercise of options                                   $12,104,528               10,188,480              $   1.19
                                                                         ===========              ===========              ========
</TABLE>


<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                9,878,071             $   1.09

Effect of dilutive securities
   Stock options                                                                  --                    197,408               --
                                                                           -----------              -----------              -------

Diluted EPS
   Income available to common shareholders
      plus assumed exercise of options                                     $10,783,940               10,075,479             $   1.07
                                                                           ===========              ===========              =======
</TABLE>
<TABLE>
<CAPTION>
                                                                                                        1997
                                                                              Income               Average shares          Per share
                                                                             (numerator)           (denominator)             amount
<S>                                                                      <C>                    <C>                       <C>
Basic EPS
   Income available to common shareholders                                    $9,358,732                9,806,750            $   .95

Effect of dilutive securities
   Stock options                                                                    --                    178,217                --
                                                                              ----------               ----------            -------

Diluted EPS
   Income available to common shareholders
      plus assumed exercise of options                                        $9,358,732                9,984,967            $   .94
                                                                              ==========               ==========            =======
</TABLE>

                                   (Continued)
<PAGE>   47
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    EPS is calculated on the basis of the weighted average number of shares
    outstanding of 10,005,806, 9,878,071 and 9,806,750 for the years ended
    December 31, 1999, 1998 and 1997, respectively. Per share information and
    weighted average shares outstanding have been restated to reflect the 5%
    stock dividend of January 2000, the 4% stock dividend of May 1999, the 4%
    stock dividend of May 1998, and the 4% stock dividend of May 1997.

    13.  Cash and Cash Equivalents

    For purposes of reporting cash flows, cash and cash equivalents include cash
    on hand, amounts due from banks, short-term investments and federal funds
    sold. Generally, federal funds are purchased and sold for one-day periods.

    14.  Financial Instruments

    The Company follows the provisions of SFAS No. 107, which requires all
    entities to disclose the estimated fair value of their assets and
    liabilities considered to be financial instruments. Financial instruments
    consist primarily of securities, loans and deposits.

    15.  Long-Lived Assets

         The Company follows the provisions of SFAS No. 121, which provides
    guidance on when to recognize and how to measure impairment losses of
    long-lived assets and certain identifiable intangibles and how to value
    long-lived assets to be disposed of.

    16. Accounting for Transfers and Servicing of Financial Assets and
        Extinguishments of Liabilities

         The Company accounts for financial assets in accordance with SFAS No.
    125, as amended by SFAS No. 127, in 1998. SFAS No. 125 applies a
    control-oriented, financial components approach to financial asset transfer
    transactions whereby the Company: (1) recognizes the financial and servicing
    assets it controls and the liabilities it has incurred; (2) derecognizes
    financial assets when control has been surrendered; and (3) derecognizes
    liabilities once they are extinguished. Under SFAS No. 125, control is
    considered to have been surrendered only if: (i) the transferred assets have
    been isolated from the transferor and its creditors, even in bankruptcy or
    other receivership; (ii) the transferee has the right to pledge or exchange
    the transferred assets or is a qualifying special-purpose entity (as
    defined) and the holders of beneficial interests in that entity have the
    right to pledge or exchange those interests; and (iii) the transferor does
    not maintain effective control over the transferred assets through an
    agreement which both entitles and obligates it to repurchase or redeem those
    assets prior to maturity, or through an agreement which both entitles it to
    repurchase or redeem those assets if they were not readily obtainable
    elsewhere. If any of these conditions are not met, the Company accounts for
    the transfer as a secured borrowing. SFAS No. 125 also requires that the
    Company derecognize a liability if and when it is extinguished. A liability
    is considered extinguished under SFAS No. 125 if: (1) the Company pays the
    creditor and, thus, is relieved of its obligation for the liability; or (2)
    is legally released from being the primary obligor under the liability,
    either judicially or by the creditor. The adoption of SFAS No. 125 had no
    material impact on the Company's consolidated financial position or results
    of operations.

                                   (Continued)
<PAGE>   48
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    17. Advertising Costs

    The Company and the Bank expense advertising costs as incurred.

    18. Comprehensive Income

         On January 1, 1998, the Company adopted SFAS No. 130, Reporting
    Comprehensive Income. This standard establishes new standards for reporting
    comprehensive income which includes net income as well as certain other
    items which result in a change to equity during the period. These financial
    statements have been reclassified to reflect the provisions of SFAS No. 130.

     The income tax effects allocated to comprehensive income is as follows:

<TABLE>
<CAPTION>
                                                                                          December 31, 1999
                                                                       ------------------------------------------------------------
                                                                                                                          Net of
                                                                        Before tax                  Tax                     tax
                                                                          amount                  expense                   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 gains
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>







                                   (Continued)
<PAGE>   49
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

<TABLE>
<CAPTION>
                                                                                  December 31, 1997
                                                                   ----------------------------------------------
                                                                                                          Net of
                                                                    Before tax           Tax                tax
                                                                      amount           expense            amount
                                                                   ----------        -----------      ------------
<S>                                                                <C>               <C>               <C>
         Unrealized gains on securities
             Unrealized holding gains arising during period        $   982,280       $   333,566       $   648,714
         Less reclassification adjustment for gains
         realized in net income                                        (13,643)           (4,229)           (9,414)
                                                                   -----------      ------------      ------------
         Other comprehensive income, net                           $   968,637       $   329,337       $   639,300
                                                                    ==========        ==========        ==========
</TABLE>

    19.  Reclassifications

    Certain reclassifications of prior year amounts have been made to conform to
the 1999 presentation.

NOTE B - INVESTMENT SECURITIES

    The amortized cost, gross unrealized gains and losses, and estimated fair
    value of the Company's investment securities held to maturity and available
    for sale are summarized as follows:


<TABLE>
<CAPTION>
                                                                                            1999
                                                         ---------------------------------------------------------------------------
                                                                                  Gross               Gross              Estimated
                                                           Amortized            unrealized          unrealized              fair
                                                             cost                 gains                losses               value
                                                          -----------          -----------          -----------          -----------
<S>                                                       <C>                  <C>                 <C>                  <C>
       Investment securities held to maturity
  Obligations of states and political
    subdivisions                                          $      --            $      --            $      --            $      --
  U.S. treasuries                                                --                   --                   --                   --
  Corporate securities                                     76,451,151              144,767            1,724,979           74,870,939
  U.S. agencies                                             6,613,763               37,714               28,746            6,622,731
                                                          -----------          -----------          -----------          -----------
                                                          $83,064,914          $   182,481          $ 1,753,725          $81,493,670
                                                          ===========          ===========          ===========          ===========
Investment securities available for sale
  Federal Home Loan Bank stock -
      at cost                                             $ 3,169,700          $      --            $      --            $ 3,169,700
  Preferred and common stock                                3,726,673               10,923              200,098            3,537,498
  Other securities                                         55,652,348              444,300            3,318,819           52,777,829
                                                          -----------          -----------          -----------          -----------
                                                          $62,548,721          $   455,223          $ 3,518,917          $59,485,027
                                                          ===========          ===========          ===========          ===========
</TABLE>



                                   (Continued)
<PAGE>   50
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998




NOTE B - INVESTMENT SECURITIES - Continued


<TABLE>
<CAPTION>
                                                                                          1998
                                                          --------------------------------------------------------------------------
                                                                                  Gross               Gross              Estimated
                                                           Amortized           unrealized           unrealized             fair
                                                              cost                gains               losses                value
                                                          -----------          -----------          -----------          -----------
<S>                                                       <C>                  <C>                 <C>                  <C>
 Investment securities held to maturity
  Obligations of states and political
    subdivisions                                          $ 3,098,465          $    29,178          $      --            $ 3,127,643
  U.S. treasuries                                             250,000                1,769                 --                251,769
  Corporate securities                                     54,264,311              550,849              442,851           54,372,309
  U.S. agencies                                             4,281,762              126,478                  101            4,408,139
                                                          -----------          -----------          -----------          -----------
                                                          $61,894,538          $   708,274          $   442,952          $62,159,860
                                                          ===========          ===========          ===========          ===========

Investment securities available for sale
  Federal Home Loan Bank stock -
      at cost                                             $ 3,169,700          $      --            $      --            $ 3,169,700
  Preferred and common stock                                2,867,012               51,950                 --              2,918,962
  Other securities                                         29,031,240            1,831,260                 --             30,862,500
                                                          -----------          -----------          -----------          -----------
                                                          $35,067,952          $ 1,883,210          $      --            $36,951,162
                                                          ===========          ===========          ===========          ===========
</TABLE>

    The amortized cost and estimated fair value of investment securities at
    December 31, 1999 and 1998, by contractual maturity, are shown below.
    Expected maturities will differ from contractual maturities because
    borrowers may have the right to call or prepay obligations with or without
    call or prepayment penalties.


<TABLE>
<CAPTION>
                                                                                         1999
                                                    --------------------------------------------------------------------------------
                                                            Held to maturity                            Available for sale
                                                                            Estimated                                    Estimated
                                                    Amortized                 fair                 Amortized               fair
                                                       cost                   value                   cost                 value
                                                    -----------            -----------            -----------            -----------
<S>                                                 <C>                    <C>                    <C>                    <C>
Within 1 year                                       $17,813,636            $17,783,276            $      --              $      --
After 1 but within 5 years                           48,302,439             47,302,106             12,031,975             11,774,195
After 5 but within 10 years                          11,482,381             11,443,482              8,630,955              8,522,014
After 10 years                                        5,006,458              4,964,806             34,989,418             33,481,620
                                                    -----------            -----------            -----------            -----------
                                                     83,064,914             81,483,670             55,652,348             53,777,829
Federal Home Loan Bank stock                               --                     --                3,169,700              3,169,700
Preferred and common stock                                 --                     --                3,726,673              3,537,498
                                                    -----------            -----------            -----------            -----------
                                                    $83,064,914            $81,493,670            $62,548,721            $59,485,027
                                                    ===========            ===========            ===========            ===========
</TABLE>



                                   (Continued)
<PAGE>   51
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998




NOTE B - INVESTMENT SECURITIES - Continued


<TABLE>
<CAPTION>
                                                                                         1998
                                                    --------------------------------------------------------------------------------
                                                            Held to maturity                            Available for sale
                                                    ----------------------------------            ----------------------------------
                                                                           Estimated                                     Estimated
                                                     Amortized               fair                 Amortized                 fair
                                                       cost                  value                   cost                   value
                                                    -----------            -----------            -----------            -----------
<S>                                                 <C>                    <C>                    <C>                    <C>
Within 1 year                                       $12,228,163            $12,249,864            $      --              $      --
After 1 but within 5 years                           36,656,386             37,073,862                   --                     --
After 5 but within 10 years                           7,328,418              7,182,482                   --                     --
After 10 years                                        5,681,571              5,653,652             29,031,240             30,862,500
                                                    -----------            -----------            -----------            -----------
                                                     61,894,538             62,159,860             29,031,240             30,862,500
Federal Home Loan Bank stock                               --                     --                3,169,700              3,169,700
Preferred and common stock                                 --                     --                2,867,012              2,918,962
                                                    -----------            -----------            -----------            -----------
                                                    $61,894,538            $62,159,860            $35,067,952            $36,951,162
                                                    ===========            ===========            ===========            ===========
</TABLE>

    Proceeds from the sale of investment securities available for sale during
    1999, 1998 and 1997 were $-0-, $-0-, and $18,129, respectively, resulting in
    gross realized gains of $-0-, $-0-, and $13,643 during 1999, 1998 and 1997,
    respectively.

    As of December 31, 1999 and 1998, investment securities with a book value of
    $21,295,289 and $13,716,861, respectively, were pledged as collateral to
    secure public deposits and for other purposes required or permitted by law.

NOTE C - LOANS

    Major classifications of loans are as follows:

<TABLE>
<CAPTION>
                                                            1999                   1998
<S>                                                    <C>                   <C>
 Consumer                                              $   2,653,428         $   2,032,878
 Commercial and industrial                               166,477,867           127,972,082
 Real estate                                             193,162,959           182,595,194
                                                       -------------         -------------
        Total gross loans                                362,294,254           312,600,154
Less
   Unearned income                                        (2,154,106)           (1,833,236)
        Unamortized discount on loans purchased           (5,321,912)           (6,291,289)
                                                       -------------         -------------
        Total loans                                    $ 354,818,236         $ 304,475,629
                                                       =============         =============
</TABLE>



                                   (Continued)
<PAGE>   52
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998




NOTE C - LOANS - Continued

    Loans on which the accrual of interest has been discontinued or reduced
    amounted to $1,209,242 and $3,419,378 at December 31, 1999 and 1998,
    respectively. If interest had been accrued, such income would have been
    $108,832 and $307,744 for the years ended December 31, 1999 and 1998,
    respectively. Although the Company has non-performing loans of $1,209,242 at
    December 31, 1999, management believes it has adequate collateral to limit
    its credit risk.

    The Company granted loans to the officers and directors of the Company and
    to their associates. Related party loans are made on substantially the same
    terms, including interest rates and collateral, as those prevailing at the
    time for comparable transactions with unrelated persons and do not involve
    more than normal risk of collectibility. The aggregate dollar amount of
    these loans was $13,975,279 and $14,415,902 at December 31, 1999 and 1998,
    respectively. During 1999, $135,750 of new loans were made and repayments
    totalled $576,373.

    The balance of impaired loans was $42,097 at December 31, 1999. The Company
    has identified a loan as impaired when it is probable that interest and
    principal will not be collected according to the contractual terms of the
    loan agreements. The income recognized on impaired loans during 1999 was
    $5,360. Total cash collected on impaired loans during 1999 was $131,930, of
    which $126,570 was credited to the principal balance outstanding on such
    loans. Interest that would have been accrued on impaired loans during 1999
    was $20,186. The Company's policy for interest income recognition on
    impaired loans is to recognize income on currently performing restructured
    loans under the accrual method. The Company recognizes income on non-accrual
    loans under the cash basis when the principal payments on the loans become
    current and the collateral on the loan is sufficient to cover the
    outstanding obligation to the Company. If these factors do not exist, the
    Company does not recognize income.

NOTE D - ALLOWANCE FOR LOAN LOSSES

    Changes in the allowance for loan losses were as follows:

<TABLE>
<CAPTION>
                                                            1999                 1998                  1997
<S>                                                     <C>                  <C>                  <C>
Balance at beginning of year                            $ 11,919,545         $  8,186,237         $  9,084,153
                                                        ------------         ------------         ------------

   Charge-offs                                            (1,075,122)          (1,635,919)            (761,790)
   Recoveries                                                892,914              599,442            1,982,155
                                                        ------------         ------------         ------------

          Net charge-offs and recoveries                    (182,208)          (1,036,477)           1,220,365

Increase (decrease) in provision for loan losses                --              4,769,785           (2,118,281)
                                                        ------------         ------------         ------------

Balance at end of year                                  $ 11,737,337         $ 11,919,545         $  8,186,237
                                                        ============         ============         ============
</TABLE>
<PAGE>   53
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998


NOTE E - PREMISES AND EQUIPMENT

    Premises and equipment are summarized as follows:

<TABLE>
<CAPTION>
                                                                    Estimated
                                                                   useful lives           1999             1998

<S>                                                             <C>                <C>                <C>
        Land                                                          -             $  1,973,478      $  1,973,478
        Buildings and leasehold improvements                    15 - 31.5 years        4,763,487         4,225,378
        Furniture and fixtures                                   5 - 7    years        2,703,541         2,495,844
                                                                                     -----------       ------------
                                                                                       9,440,506         8,694,700
        Less accumulated depreciation and amortization                                 3,655,798         3,241,935
                                                                                     -----------       -----------
                                                                                    $  5,784,708      $  5,452,765
                                                                                     ===========       ===========
</TABLE>

NOTE F - DEPOSITS

    Deposits are summarized as follows:
<TABLE>
<CAPTION>
                                                                                         1999               1998

<S>                                                                                <C>               <C>
      Demand                                                                       $   45,541,164    $   41,150,730
      NOW and money market                                                             75,983,512        75,348,561
      Savings                                                                          19,193,298        19,405,323
      Time, $100,000 and over                                                         126,117,263        48,754,354
      Other time                                                                      114,450,781       105,730,717
                                                                                      -----------       -----------
                                                                                     $381,286,018      $290,389,685
                                                                                     ============      ============

</TABLE>

    Certificates of deposit of $100,000 or more consist of the following:

<TABLE>
<CAPTION>
                                                                                          1999              1998
<S>                                                                                 <C>                <C>
      Three months or less                                                          $  11,622,167      $  4,606,561
      Over three months through twelve months                                          10,360,400         7,465,667
      Over twelve months through five years                                            85,311,810        20,908,866
      Over five years                                                                  18,822,886        15,773,260
                                                                                     ------------        ----------
                                                                                     $126,117,263       $48,754,354
                                                                                     ============        ==========

</TABLE>




                                   (Continued)
<PAGE>   54
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998




NOTE F - DEPOSITS - Continued

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

<TABLE>
<CAPTION>
<S>                                            <C>
              2000                             $  70,447,361
              2001                                22,914,069
              2002                                70,037,078
              2003                                21,046,240
              2004                                24,336,353
              Thereafter                          31,786,943
                                                ------------
                                                $240,568,044
                                                ============

</TABLE>

NOTE G - MORTGAGE PAYABLE

    The mortgage payable is payable to a bank at 65% of the prime rate (5.525%
    at December 31, 1999) and is guaranteed by an industrial development
    authority. A substantial portion of the land and building is pledged as
    security under this mortgage.

    Required principal payments for the next five years and thereafter are as
follows:

      Year ending December 31,

<TABLE>
<CAPTION>
<S>                                             <C>
              2000                              $      48,986
              2001                                     51,776
              2002                                     54,725
              2003                                     57,853
              2004                                     61,137
              Thereafter                              205,102
                                                  -----------
                                                 $    479,579
                                                  ===========
</TABLE>

NOTE H - LONG-TERM BORROWINGS

    Long-term borrowings consist of advances from the Federal Home Loan Bank at
December 31, 1999 and are as follows:

<TABLE>
<CAPTION>
          Due date             Interest rate                Balance
<S>                            <C>                       <C>
      December 23, 2002            6.24                  $ 30,000,000
                                                         ============
</TABLE>

        The advances are collateralized by Federal Home Loan Bank stock,
    investment securities and certain of the Company's first mortgage loans.
<PAGE>   55
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998




NOTE I - LEASE COMMITMENTS

    The Company leases various premises under non-cancellable agreements, which
    expire through 2004 and require minimum annual rentals. The minimum rental
    commitments under the leases are as follows:

      Year ending December 31,

<TABLE>
<CAPTION>
<S>                                       <C>
              2000                        $    319,412
              2001                             316,935
              2002                             318,435
              2003                             270,709
              2004                             170,726
                                           -----------
                                           $ 1,396,217
                                           ===========

</TABLE>

    Rental expense for all leases was approximately $304,000, $335,000 and
    $343,000 for the years ended December 31, 1999, 1998 and 1997, respectively.

NOTE J - COMMON STOCK

    Each holder of Class A and Class B common stock is entitled to one vote for
    each Class A share and ten votes for each Class B share held. Holders of
    either class of common stock are entitled to equal per share dividends when
    declared.

    The Class B shares may not be transferred in any manner except to the
    holder's immediate family. Class B shares have been converted to Class A
    shares at the average rate of 1.15 to 1.

NOTE K - OTHER OPERATING EXPENSES

    The following items which are greater than 1% of the aggregate of "Total
    Interest Income" and "Total Other Income" are included in "Other Expenses"
    for the respective years indicated:

<TABLE>
<CAPTION>
                                                                         1999              1998              1997
<S>                                                               <C>               <C>              <C>
      Advertising                                                 $    356,394      $    214,813     $     396,831
      Pennsylvania bank shares tax                                     743,930           726,161           720,630
      Professional fees                                                501,977           544,109           330,959
      Loss on investment partnership                                   622,571         1,080,415         1,019,375
      Travel                                                           513,267           385,489           382,162
</TABLE>
<PAGE>   56
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998



NOTE L - INCOME TAXES

    The components of the income tax expense (benefit) included in the
    consolidated statements of income are as follows:
<TABLE>
<CAPTION>
                                                                        1999              1998              1997
<S>                                                                <C>               <C>               <C>
      Income tax expense (benefit)
         Current                                                   $ 5,127,198       $ 4,055,012       $ 3,757,471
         Deferred federal tax                                          177,400           310,111            57,670
      Benefit applied to reduce goodwill                               259,139           259,139           259,139
                                                                   -----------       -----------       -----------
                                                                   $ 5,563,737       $ 4,624,262       $ 4,074,280
                                                                    ==========        ==========        ==========
</TABLE>

    The difference between the applicable income tax expense and the amount
    computed by applying the statutory federal income tax rate of 35% in 1999,
    1998 and 1997 is as follows:

<TABLE>
<CAPTION>
                                                                        1999              1998              1997
<S>                                                                <C>               <C>               <C>
      Computed tax expense at statutory rate                       $ 6,183,893       $ 5,392,871       $ 4,701,554
      Tax-exempt income                                                (98,256)         (258,100)         (178,469)
      Low-income housing tax credit                                   (544,939)         (544,939)         (309,580)
      Other, net                                                       123,039          (134,430)          (39,225)
      Effect of 34% rate bracket                                      (100,000)         (100,000)         (100,000)
                                                                   -----------       -----------       -----------
      Applicable income tax expense                                $ 5,563,737       $ 4,624,262       $ 4,074,280
                                                                    ==========        ==========        ==========
</TABLE>

    Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
                                                                                          1999               1998
<S>                                                                                  <C>                <C>
       Deferred tax assets
       Allowance for doubtful accounts                                               $ 1,263,028        $ 1,263,028
       Accrued pension expenses                                                          158,186                -
       Accrued stock-based compensation                                                  658,493            992,959
       Asset valuation reserves                                                          472,013            472,013
       Goodwill                                                                          127,346            127,346
       Unrealized loss on securities                                                   1,041,656                -
       Net operating loss carryovers from Knoblauch State Bank                         7,790,916          7,961,948
                                                                                      ----------        -----------
                                                                                      11,511,638         10,817,294
       Less valuation allowance                                                       (7,790,916)        (7,961,948)
                                                                                      ----------         ----------
                                                                                       3,720,722          2,855,346
                                                                                      ----------        -----------
       Deferred tax liabilities
       Unrealized gain on securities                                                         -              640,292
       Depreciation                                                                      111,810             93,533
       Accretion of discount                                                             118,392            135,547
                                                                                     -----------        -----------
                                                                                         230,202            869,372
                                                                                     -----------        -----------
              Net deferred tax asset                                                 $ 3,490,520        $ 1,985,974
                                                                                      ==========         ==========
</TABLE>

                                   (Continued)
<PAGE>   57
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998




NOTE L - INCOME TAXES - Continued

    The Company has approximately $23,000,000 of net operating loss carryovers
    from the acquisition of Knoblauch State Bank (KSB). These losses will fully
    expire in 2019. The utilization of these losses is subject to limitation
    under Section 382 of the Internal Revenue Code. As a result, a valuation
    allowance has been established to eliminate the deferred tax asset
    attributable to these net operating losses.

    During 1999, the Company realized a tax benefit related to the net operating
    loss carryovers from the acquisition of KSB. The deferred tax asset
    associated with those loss carryovers is fully offset by a valuation
    allowance. Accordingly, the realized tax benefit is reflected as a reduction
    of the goodwill associated with the acquisition and a corresponding
    reduction of deferred income tax benefit for the year.

NOTE M - STOCK OPTION PLANS

    At December 31, 1999, the Company had two stock-based compensation plans
    which are described below. The Company accounts for these plans under APB
    Opinion No. 25.

    1.  Outside Directors' Stock Option Plan

    The Company adopted a non-qualified outside Directors' Stock Option Plan in
    1990 (the Director's Plan). Under the terms of the Director's Plan, 150,000
    shares of Class A stock are authorized for grants. Each director is entitled
    to 1,500 shares of stock annually which are exercisable after one year of
    service. The options were granted at the fair market value ($14.75 in 1999,
    $19.952 in 1998 and $13.75 in 1997) at the date of the grant. Currently, the
    strike price on the options ranges from $2.312 to $17.574 per share. During
    1999, 11,241 options were exercised at strike prices from $2.426 to $12.761
    per share. At December 31, 1999, 69,424 options are outstanding, and options
    covering 35,954 shares were exercisable.

    2.  Stock Option and Appreciation Right Plan

    The Company adopted a Stock Option and Appreciation Right Plan (the Plan) on
    June 27, 1990. The Plan is an incentive program under which Company officers
    and other key employees may be awarded additional compensation in the form
    of options to purchase up to 1,000,000 shares of the Company's Class A
    common stock (but not in excess of 15% of outstanding shares). At the time a
    stock option is issued, a stock appreciation right for an identical number
    of shares may also be granted. The option price is equal to the fair market
    value at the date of the grant. The options are exercisable at 20% per year
    beginning one year after the date of grant and must be exercised within ten
    years of the grant. As of December 31, 1999, options covering 263,647 shares
    were exercisable by 66 employees.






                                   (Continued)
<PAGE>   58
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998




NOTE M - STOCK OPTION PLANS - Continued

    Stock option transactions consist of the following:

<TABLE>
<CAPTION>
                                                1999                            1998                              1997
                                       ---------------------------     ---------------------------     ---------------------------
                                                         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                             464,583         $     8.133     519,277         $     6.561     540,885         $     5.917
Granted                                 89,627              13.518      61,641              14.861      63,487              11.080
Exercised                             (135,027)              5.943    (110,723)              3.100     (83,293)              4.091
Cancelled                              (41,936)             12.624      (5,612)             13.140      (1,802)             10.752
                                       -------         -----------     -------         -----------     -------         -----------

Outstanding at end of year             377,247         $     6.798     464,583         $     8.133     519,277         $     6.561
                                       =======         ===========     =======         ===========     =======         ===========
</TABLE>

<TABLE>
<CAPTION>
<S>                                  <C>                           <C>                     <C>
Option price per share
   exercised                         $2.593  -  $12.724            $2.59 - $13.000         $2.695 - $9.633

Outstanding at end
   of year                           $2.373  -  $17.584            $2.59 - $19.183         $2.695 - $13.225
</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>
                                    1999              1998             1997
                                     (in thousands, except per share amounts)
<S>                             <C>               <C>              <C>
Net income
   As reported                  $   12,105        $   10,784       $    9,359
   Pro forma                        12,035            10,737            9,337

EPS
   As reported - basic          $     1.21        $     1.09       $      .95
   As reported - diluted              1.19              1.07              .94
   Pro forma - basic                  1.20              1.09              .95
   Pro forma - diluted                1.18              1.07              .94
</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 1999, 1998 and 1997: dividend yield
    of 5.33%, 5.25% and 3.40% for 1999, 1998 and 1997, respectively; expected
    volatility of 36.3%; and risk-free interest rate of 6.4% in 1999, 4.57% in
    1998 and 5.71% in 1997. Expected lives are 10 years for 1999, 1998 and 1997.
<PAGE>   59
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998




NOTE N - PENSION PLAN

    Based upon actuarial computations, net periodic pension plan costs include
the following components:

<TABLE>
<CAPTION>
<S>                                                         <C>
Benefit obligation at December 31, 1999                     $ 2,209,962
Fair value of plan assets at January 1, 1999                       --
                                                            -----------
Funded status                                                (2,209,962)
Accrued benefit cost recognized in the statement
   of financial position                                        451,961

Weighted average assumptions as of December 31, 1999
   Discount rate                                                      7%
   Expected return on plan assets                                   N/A
   Rate of compensation                                               4%
Benefit cost                                                $   451,961
Employer contribution                                           451,961
Benefits paid                                                      --
</TABLE>

NOTE O - CONCENTRATIONS OF CREDIT RISK

    The Company primarily grants commercial and real estate loans in the greater
    Philadelphia metropolitan area. Approximately 31% of loans are outside the
    normal lending area. The Company has concentrations of credit risk in real
    estate development loans (14%) at December 31, 1999. A substantial portion
    of its debtors' ability to honor these contracts is dependent upon the
    economic sector.

    Approximately 54% of the Company's investment portfolio consist of corporate
securities.

NOTE P - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

    The Company is a party to financial instruments with off-balance-sheet risk
    in the normal course of business to meet the financing needs of its
    customers and to reduce its own exposure to fluctuations in interest rates.
    These financial instruments include commitments to extend credit and standby
    letters of credit. Such financial instruments are recorded in the financial
    statements when they become payable. Those instruments involve, to varying
    degrees, elements of credit and interest rate risk in excess of the amount
    recognized in the consolidated balance sheets. The contract amounts of those
    instruments reflect the extent of involvement the Company has in particular
    classes of financial instruments.

    The Company's exposure to credit loss in the event of non-performance by the
    other party to commitments to extend credit and standby letters of credit is
    represented by the contractual amount of those instruments. The Company uses
    the same credit policies in making commitments and conditional obligations
    as it does for on-balance-sheet instruments.


                                   (Continued)
<PAGE>   60
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998




NOTE P - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued

    Unless noted otherwise, the Company does not require collateral or other
    security to support financial instruments with credit risk. The contract
    amounts as of December 31, 1999 are as follows:

<TABLE>
<CAPTION>
<S>                                                                                                    <C>
        Financial instruments whose contract amounts represent credit risk
           Commitments to extend credit                                                                $74,977,703
           Standby letters of credit and financial guarantees written                                    3,111,203
</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.

    The Company evaluates each customer's creditworthiness on a case-by-case
    basis. The amount of collateral obtained, if deemed necessary by the Company
    upon extension of credit, is based on management's credit evaluation.
    Collateral held varies but may include personal or commercial real estate,
    accounts receivable, inventory and equipment.

    Standby letters of credit are conditional commitments issued by the Company
    to guarantee the performance of a customer to a third party. Those
    guarantees are primarily issued to support public and private borrowing
    arrangements, including commercial paper, bond financing and similar
    transactions. Most guarantees extend for one year and expire in decreasing
    amounts through 2000. The credit risk involved in issuing letters of credit
    is essentially the same as that involved in extending loan facilities to
    customers. The Company holds personal or commercial real estate, accounts
    receivable, inventory and equipment as collateral supporting those
    commitments for which collateral is deemed necessary. The extent of
    collateral held for those commitments is 80%.

NOTE Q - REGULATORY MATTERS

    1.  Payment of Dividends

    Under the Pennsylvania Business Corporation Law, the Company may pay
    dividends only if it is solvent and would not be rendered insolvent by the
    dividend payment. There are also restrictions set forth in the Pennsylvania
    Banking Code of 1965 (the Banking Code) and in the Federal Deposit Insurance
    Act (FDIA) concerning the payment of dividends by the Company. Under the
    Banking Code, no dividends may be paid except from "accumulated net
    earnings" (generally undivided profits). Under the FDIA, no dividend may be
    paid if a bank is in arrears in the payment of any insurance assessment due
    to the Federal Deposit Insurance Corporation (FDIC).



                                   (Continued)
<PAGE>   61
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998


NOTE Q - REGULATORY MATTERS - Continued

    2.  Capital Ratios

    The Bank is subject to various regulatory capital requirements administered
    by the federal banking agencies. Failure to meet minimum capital
    requirements can initiate certain mandatory--and possible additional
    discretionary--actions by regulators that, if undertaken, could have a
    direct material effect on the Bank's financial statements. Under capital
    adequacy guidelines and the regulatory framework for prompt corrective
    action, the Bank must meet specific capital guidelines that involve
    quantitative measures of the Bank's assets, liabilities and certain
    off-balance-sheet items as calculated under regulatory accounting practices.
    The Bank's capital amounts and classification are also subject to
    qualitative judgments by the regulators about components, risk weightings
    and other factors.

    Quantitative measures established by regulations to ensure capital adequacy
    require the Company and the Bank to maintain minimum amounts and ratios (set
    forth in the table below) of total and Tier I capital (as defined in the
    regulations) to risk-weighted assets (as defined), and of Tier I capital (as
    defined) to average assets (as defined). As of December 31, 1999, management
    believes that the Bank meets all capital adequacy requirements to which it
    is subject.

    As of March 31, 1999, the most recent notification from the FDIC categorized
    the Bank as well capitalized under the regulatory framework for prompt
    corrective action. To be categorized as well capitalized, the Bank must
    maintain minimum total risk-based, Tier I risk-based and Tier I leverage
    ratios as set forth in the table. There are no conditions or events since
    that notification that management believes have changed the institution's
    category.

    The Bank's actual capital amounts and ratios are also presented in the
    table.


<TABLE>
<CAPTION>

                                                                        1999
                                    ------------------------------------------------------------------------------------
                                                                                                       To be well
                                                                      Required                       capitalized under
                                                                     for capital                     prompt corrective
                                             Actual               adequacy purposes                   action provisions
                                    ---------------------       ----------------------             ---------------------
                                    Amount          Ratio       Amount           Ratio             Amount          Ratio
                                    ------          ------      ------           -----             ------          -----
<S>                              <C>                 <C>     <C>              <C>              <C>             <C>
 Total capital
 (to risk-weighted assets)
    Company (consolidated)       $102,678,179        21.64%  $37,960,671         >8.00%                  N/A
                                                                                 -
    Bank                           71,914,673        15.35    37,484,002         >8.00           $46,855,003       >10.00%
                                                                                 -                                 -

 Tier I capital
 (to risk-weighted assets)
    Company (consolidated)         96,675,145        20.37    18,980,336        > 4.00                   N/A
                                                                                -
    Bank                           65,985,199        21.44    18,742,001        > 4.00            28,113,002        >6.00
                                                                                -                                   -

 Tier I capital
 (to average assets, leverage)
    Company (consolidated)         96,675,145        18.75    15,467,565        > 3.00                   N/A
                                                                                -
    Bank                           65,985,199        13.00    15,223,609        > 3.00            25,372,682        >5.00
                                                                                -                                   -
</TABLE>
                                   (Continued)
<PAGE>   62
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998




NOTE Q - REGULATORY MATTERS - Continued


<TABLE>
<CAPTION>
                                                                                  1998
                                       -------------------------------------------------------------------------------------------
                                                                                                                   To be well
                                                                                 Required                      capitalized under
                                                                               for capital                     prompt corrective
                                                    Actual                  adequacy purposes                  action provisions
                                        ---------------------------       ----------------------          ------------------------
                                        Amount                Ratio       Amount           Ratio          Amount             Ratio
                                        ------               ------       ------           -----          ------             -----
<S>                                    <C>                   <C>        <C>               <C>            <C>                <C>
Total capital
(to risk-weighted assets)
   Company (consolidated)              $96,153,986           25.36%     $30,328,567        > 8.00               N/A
                                                                                           -
   Bank                                 66,995,778           17.90       29,936,382        > 8.00         $37,420,477        >10.00%
                                                                                           -                                 -

Tier I capital
(to risk-weighted assets)
   Company (consolidated)               91,326,497           24.09       15,164,283        > 4.00                            N/A
                                                                                           -
   Bank                                 62,228,811           16.63       14,968,191        > 4.00         $22,452,286        > 6.00
                                                                                           -                                 -
Tier I capital
(to average assets, leverage)
   Company (consolidated)               91,326,497           22.11       12,391,306        > 3.00                            N/A
                                                                                           -
   Bank                                 62,228,811           15.30       12,203,346        > 3.00         $20,338,910        > 5.00
                                                                                           -                                 -
</TABLE>

NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS

    SFAS No. 107 requires disclosure of the estimated fair value of an entity's
    assets and liabilities considered to be financial instruments. For the
    Company, as for most financial institutions, the majority of its assets and
    liabilities are considered financial instruments as defined in SFAS No. 107.
    However, many of such instruments lack an available trading market, as
    characterized by a willing buyer and seller engaging in an exchange
    transaction. Also, it is the Company's general practice and intent to hold
    its financial instruments to maturity and not to engage in trading or sales
    activities. Therefore, the Company had to use significant estimations and
    present value calculations to prepare this disclosure.

    Changes in the assumptions or methodologies used to estimate fair value may
    materially affect the estimated amounts. Also, management is concerned that
    there may not be reasonable comparability between institutions due to the
    wide range of permitted assumptions and methodologies in the absence of
    active markets. This lack of uniformity gives rise to a high degree of
    subjectivity in estimating financial instrument fair value.

    Fair values have been estimated using data which management considered the
    best available and estimation methodologies deemed suitable for the
    pertinent category of financial instrument. The estimation methodologies,
    resulting fair values and recorded carrying amounts at December 31, 1999 and
    1998 were as follows:

    Fair values of loans and deposits with floating interest rates are generally
    presumed to approximate the recorded carrying amounts.
<PAGE>   63
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998

NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

    Fair value of financial instruments actively traded in a secondary market
    has been estimated using quoted market prices as follows:

<TABLE>
<CAPTION>
                                                                 1999                             1998
                                                    ----------------------------       --------------------------
                                                      Estimated                        Estimated
                                                        fair           Carrying           fair          Carrying
                                                        value           amount            value          amount
                                                    -----------       -----------      -----------     -----------
<S>                                                 <C>               <C>              <C>             <C>
        Cash and cash equivalents                   $17,725,462       $17,725,462      $19,142,624     $19,142,624
        Investment securities held to maturity       81,493,670        83,064,914       62,159,860      61,894,538
        Investment securities available for sale     59,485,027        59,485,027       36,951,162      36,951,162
</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>
                                                                1999                              1998
                                                    ----------------------------       --------------------------
                                                      Estimated                        Estimated
                                                        fair           Carrying           fair          Carrying
                                                        value           amount            value          amount
                                                   ------------      ------------     ------------    ------------
<S>                                              <C>               <C>              <C>             <C>

        Deposits with stated maturities            $240,188,294      $240,568,044     $155,837,473    $154,485,071
        Mortgage payable                                479,579           479,579          526,720         526,720
        Long-term borrowings with stated
          maturities                                 32,787,036        30,000,000       35,394,276      30,365,000
</TABLE>

    Fair value of financial instrument liabilities with no stated maturities has
    been estimated to equal the carrying amount (the amount payable on demand),
    totalling $140,717,974 and $135,904,614 at December 31, 1999 and 1998,
    respectively.

    Fair value of the net loan portfolio has been estimated using present value
    cash flow, discounted at the treasury rate adjusted for non-interest
    operating costs and giving consideration to estimated prepayment risk and
    credit loss factors, as follows:
<TABLE>
<CAPTION>
                                                               1999                               1998
                                                    ----------------------------       --------------------------
                                                      Estimated                        Estimated
                                                        fair           Carrying           fair          Carrying
                                                        value           amount            value          amount
                                                   ------------     -------------     ------------     -----------
<S>                                                <C>              <C>              <C>             <C>

        Net loans                                  $374,250,097      $343,080,899     $318,340,245     $292,556,084
</TABLE>

    There is no material difference between the carrying amount and estimated
    fair value of off-balance-sheet items totalling $78,078,906 and $48,673,501
    at December 31, 1999 and 1998, respectively, which are primarily comprised
    of unfunded loan commitments which are generally priced at market at the
    time of funding.

    The Company's remaining assets and liabilities are not considered financial
    instruments. No disclosure of the relationship value of the Company's
    deposits is required by SFAS No. 107.
<PAGE>   64
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998


NOTE S - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY

    The Company was formed on June 29, 1995. Condensed financial information for
    the parent company only follows. The balance sheets for December 31, 1999
    and 1998 and the statements of income and cash flows for the years then
    ended are presented below.

                            CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                  --------------------------------
                                                                                       1999              1998
                                                                                  -------------     --------------
<S>                                                                               <C>               <C>
       Assets
          Cash                                                                       $   932,372       $   193,823
          Investment in Royal Investments of Delaware, Inc. - at equity               29,451,166        28,676,818
          Investment in Royal Bank of Pennsylvania - at equity                        65,201,409        64,939,271
          Other assets                                                                   249,571           259,356
                                                                                   -------------      ------------

                                                                                     $95,834,518       $94,069,268
                                                                                   -------------      ------------

          Stockholders' equity                                                        95,834,518        94,069,268
                                                                                   -------------      ------------

                                                                                     $95,834,518       $94,069,268
                                                                                   =============      ============
</TABLE>

                         CONDENSED STATEMENTS OF INCOME

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

               Total income                                                           12,197,934        10,902,083
                                                                                     -----------       -----------

       Expenses
          Other expenses                                                                 119,801           160,430
          Income tax (benefit) expense                                                   (26,395)          (42,287)
                                                                                     -----------       -----------

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

               Net income                                                            $12,104,528       $10,783,940
                                                                                     ===========       ===========

</TABLE>




                                   (Continued)
<PAGE>   65
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998




NOTE S - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued

                       CONDENSED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                        Year ended December 31,
                                                                                     -----------------------------
                                                                                          1999             1998
                                                                                     -----------      ------------
<S>                                                                                  <C>               <C>
    Cash flows from operating activities
        Net income                                                                   $12,104,528       $10,783,940
        Adjustments to reconcile net income to net cash provided
               by operating activities
           Undistributed earnings from subsidiaries                                   (4,304,705)       (4,985,119)
           Operating expenses                                                            119,801           160,430
           Rental income                                                                 (44,386)          (39,610)
           Non-cash income tax (benefit) expense                                         (26,395)          (42,287)
                                                                                     -----------       -----------

               Net cash provided by operating activities                               7,848,843         5,877,354
                                                                                     -----------       -----------

    Cash flows from financing activities
        Cash dividends paid                                                           (7,848,843)       (7,177,353)
        (Decrease) increase in other liabilities                                             -          (1,637,763)
        Other, net                                                                       738,549           275,255
                                                                                     -----------      ------------

               Net cash (used in) provided by financing activities                    (7,110,294)       (8,539,861)
                                                                                     -----------       -----------

               NET INCREASE (DECREASE) IN CASH                                           738,549        (2,662,507)

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

    Cash at end of year                                                             $    932,372      $    193,823
                                                                                     -----------       -----------
</TABLE>
<PAGE>   66
ITEM  9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
          AND FINANCIAL DISCLOSURE

         None.


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

         The information required in this Item, relating to directors, executive
officers, control persons is set forth in the Registrant's Proxy Statement to be
used in connection with the 2000 Annual Meeting of Shareholders under the
heading "Remuneration of directors and Officers and Other Transactions", which
pages are incorporated herein by reference.

         BENEFICIAL OWNERSHIP - COMPLIANCE. Section 16(a) of the Securities
Exchange Act of 1934, as amended, requires the Corporation's officers and
directors, and persons who own more than 10 percent of the registered class of
the Corporation's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Officers,
directors and greater than 10 percent shareholders are required by SEC
regulation to furnish the Corporation copies of all Section 16(a) forms they
file.

         Based solely on its review of forms that were received from certain
reporting persons, the Corporation believes that during the period January 1,
1999 through December 31, 1999, its officers and directors were in compliance
with all filing requirements applicable to them.


ITEM 11.  EXECUTIVE COMPENSATION

         The information required by this Item, relating to executive
compensation, is set forth in the Registrant's Proxy Statement to be used in
connection with the 2000 Annual Meeting of Shareholders, under the heading
"Remuneration of Directors and Officers and Other Transactions", which pages are
incorporated herein by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

         The information required by this Item, relating to beneficial ownership
of the Registrant's Common Stock, is set forth in the Registrant's Proxy
Statement to be used in connection with the 2000 Annual Meeting of Shareholders,
under the heading "Information About Nominees, Continuing Directors and
Executive Officers", which pages are incorporated herein by reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this Item, relating to transactions with
management and others, certain business relationships and indebtedness of
management, is set forth in the Registrant's Proxy Statement to be used in
connection with the 2000 Annual Meeting of Shareholders, under the heading
"Interest of Management and Others in Certain Transactions", which page are
incorporated herein by reference.
<PAGE>   67
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

a.       1.  Financial Statements

                The following financial statements are included by reference in
                Part II, Item 8 hereof.
                  Report of Independent Certified Public Accountants.
                  Consolidated Balance Sheets.
                  Consolidated Statements of Income.
                  Consolidated Statements of Changes in Stockholders' Equity.
                  Consolidated Statement of Cash Flows.
                  Notes To Consolidated Financial Statements.

         2. Financial Statement Schedules

                  Financial Statement Schedules are omitted because the required
information is either not applicable, not required or is shown in the respective
financial statements or in the notes thereto.

         3.  The following Exhibits are files herewith or incorporated by
             reference as a part of this Annual Report.

               3(i)  Articles of Incorporation. (Incorporated by reference to
                     Exhibit 3(i) to Registrant's Registration Statement No.
                     0-26366 on Form S-4.)

               3(ii) By-laws. (Incorporated by reference to Exhibit 3(i) to
                     Registrant's Registration Statement No. 0-26366 on Form
                     S-4.)

               10.1  Stock Option and Appreciation Right Plan. (Incorporated by
                     reference to the Registrant's Registration Statement N0.
                     333-25855, on form S-8 filed with the Commission on April
                     5, 1997).

               10.2  Outside Directors' Stock Option Plan. (Incorporated by
                     reference to the Registrant's Registration Statement N0.
                     333-25855, on form S-8 filed with the Commission on April
                     5, 1997).

               11.   Statement Re: Computation of Earnings Per Share. Included
                     at Item 8, hereof, Note A, "Per Share Information".

               12.   Statement re: Computation of Ratios. (Included at Item 8
                     here of, Note Q, "Regulatory Matters.")

               21.   Subsidiaries of Registrant.

               23.   Consent of Independent Accountants.

               27.   Financial Data Schedule.

(b)  No Current Report on Form 8-K was filed by the Registrant during the fourth
     quarter of the fiscal year December 31, 1999.

(c)  The exhibits required to be filed by this Item are listed under Item 14(a)3
     above.

(d)  Not applicable
<PAGE>   68
         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of l934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                     ROYAL BANCSHARES OF PENNSYLVANIA, INC.

     DATE                            TITLE                    SIGNATURE
     ----                            -----                    ---------
March 24, 2000                      Chairman              /s/ Daniel M. Tabas
                                                          Daniel M. Tabas


March 24, 2000                   President/CEO            /s/ Joseph P. Campbell
                                    Director              Joseph P. Campbell


March 24, 2000                   Treasurer/CFO            /s/ James J. McSwiggan
                                                          James J. McSwiggan


March 24, 2000                      Director              /s/ Albert Ominsky
                                                          Albert Ominsky


March 24, 2000                      Director              /s/ Anthony J. Micale
                                                          Anthony J. Micale

                                 Vice Chairman/
March 24, 2000               Senior Vice President/       /s/ Robert R. Tabas
                                    Director              Robert R. Tabas


March 24, 2000                      Director              /s/ Gregory T. Reardon
                                                          Gregory T. Reardon


March 24, 2000                      Director              /s/ Carl M. Cousins
                                                            Carl M. Cousins




                                                                    Continued...
<PAGE>   69
    DATE                          TITLE                    SIGNATURE
    ----                          -----                    ---------


March 24, 2000                  Director              /s/ Lee E. Tabas
                                                      Lee E. Tabas


March 24, 2000                  Director              /s/ Howard Wurzak
                                                      Howard Wurzak


March 24, 2000           Senior Vice President/       /s/ John M. Decker
                                Director              John M. Decker


March 24, 2000           Senior Vice President/       /s/ Murray Stempel
                                Director              Murray Stempel


March 24, 2000                  Director              /s/ Jack R. Loew
                                                      Jack R. Loew


March 24, 2000                  Director              /s/ Edward B. Tepper
                                                      Edward  B. Tepper
<PAGE>   70
                     ROYAL BANCSHARES OF PENNSYLVANIA, INC.
                           ANNUAL REPORT ON FORM 10-K
                                  EXHIBIT INDEX

     3(i)  Articles of Incorporation. (Incorporated by reference to Exhibit 3(i)
           to Registrant's Registration Statement No. 0-26366 on Form S-4.)

     3(ii) By-laws. (Incorporated by reference to Exhibit 3(i) to Registrant's
           Registration Statement No. 0-26366 on Form S-4.)

     10.1  Stock Option and Appreciation Right Plan. (Incorporated by reference
           to the Registrant's Registration Statement N0. 333-25855, on form S-8
           filed with the Commission on April 5, 1997).

     10.2  Outside Directors' Stock Option Plan. (Incorporated by reference to
           the Registrant's Registration Statement N0. 333-25855, on form S-8
           filed with the Commission on April 5, 1997).

     11.   Statement Re: Computation of Earnings Per Share. (Included at Item 8,
           hereof, Note A, "Per Share Information".)

     12.   Statements re: Computation of Ratios. (Included at Item 8 here of,
           Note Q, "Regulatory Matters.")

     21.   Subsidiaries of Registrant.

     23.   Consent of Independent Accountants.

     27.   Financial Data Schedule.