<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, 1998

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

            For the transition period from ___________ to ___________

                         Commission File Number 0-26366

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

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

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

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

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

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

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

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

         The aggregate market value of common shares of the Registrant held by
non-affiliates, based on the closing sale price as of February 28, 1999 was
$54,714,031.

          As of February 28, 1999, the Registrant had 7,224,883 and 1,630,517
shares outstanding of Class A and Class B common stock, respectively.
<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, 1998, RBPA had consolidated
total assets of approximately $427.6 million, total deposits of approximately
$290.4 million and stockholders' equity of approximately $94.1 million.

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

THE BANK

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

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

         Service Area. The Bank's primary service area includes Montgomery,
Chester, Bucks, Delaware, Berks and Philadelphia counties, southern New Jersey
and Delaware in the vicinity of Wilmington. This area includes residential areas
and industrial and commercial businesses of the type usually found within a
major metropolitan area. The Bank serves this area from thirteen offices located
throughout Montgomery, Philadelphia and Berks counties. The Bank also considers
the states of Pennsylvania, New Jersey, New


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York and Delaware to constitute its service area for certain services. On
occasion, the Bank will do business with clients located outside of its service
area. The Bank's legal headquarters are located at 732 Montgomery Avenue,
Narberth, PA.

         The Bank conducts business operations as a commercial bank offering
checking accounts, savings and time deposits, and loans, including residential
mortgages, home equity and SBA loans. The Bank also offers safe deposit boxes,
collections, and other customary bank services (excluding trust) to its
customers. Drive-up, ATM, and night depository facilities are available.
Services may be added or deleted from time to time. The services offered and the
business of the Bank are not subject to significant seasonal fluctuations. The
Bank is a member of the Federal Reserve Fedline Wire Transfer System.

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

         Employees. RBPA employed approximately 133 persons on a full-time
equivalent basis as of December 31, 1998.

         Deposits. At December 31, 1998, total deposits of the Bank were
distributed among demand deposits (14%), money market deposit accounts, savings
and Super Now (33%) and time deposits (53%). At year end 1998, deposits
increased $25.0 million from year end 1997, or 9.4%, primarily due to an
increase in certificate of deposits and to a lesser extent, NOW and money market
deposits. We note that the Bank or any bank could be financially stressed in the
event a material number of the depositors elected to withdraw deposits from the
institution within a short period of time. Conceivably, this could occur even
though the FDIC insures each depositor for up to $100,000.

         Lending. At December 31, 1998, the Bank had a total loan portfolio of
$304.5 million, representing 71% of total assets. The loan portfolio is
categorized into commercial, commercial mortgages, residential mortgages
(including home equity lines of credit), construction, and installment loans.

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




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<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, 1998, total assets of RID were $28.7 million, of
which $22.6 million was held in cash and cash equivalents. Investment securities
were $6.1 million at December 31, 1998.

SUPERVISION AND REGULATION

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

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

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

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

         Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act and by state banking laws on any
extensions of credit to the bank holding company or any of its subsidiaries, on
investments in the stock or other securities of the bank holding company and on
taking of such stock or securities as collateral for loans to any borrower.



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         Under Pennsylvania law, RBPA is permitted to control an unlimited
number of banks. However, RBPA would be required under the BHC Act to obtain the
prior approval of the Federal Reserve Board before acquiring all or
substantially all of the assets of any bank, or acquiring ownership or control
of any voting shares of any other than the Bank, if, after such acquisition,
would control more than 5% of the voting shares of such bank.

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

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

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

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

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

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


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<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


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to any written order or final directive by the FDIC to meet and maintain a
specific capital level. The Bank is presently categorized as a
"well-capitalized" institution.

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

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

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

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

  The FDIC's guidelines establish the following limits for LTV ratios:

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



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<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.

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.


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<PAGE>   10
ITEM 2.  PROPERTIES

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


Narberth Office (1)

732 Montgomery Ave
Narberth, Pa. 19072


Philadelphia  Offices

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

- 1340 Walnut Street
  Philadelphia, Pa. 19107

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


Jenkintown Office (1)

600 Old York Road
Jenkintown, Pa 19046


Villanova Office

801 East Lancaster Avenue
Villanova, Pa. 19085


Shillington Office

516 East Lancaster Avenue
Shillington. Pa 19607


Trooper Office(1)

Trooper & Egypt Roads
Trooper, Pa. 19401


Reading Office

501 Washington Street
Reading, Pa. 19601


Delaware Office

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


King of Prussia Office

Rt. 202 & Warner Road
King of  Prussia, Pa. 19406


Bridgeport Office (1)

105 W. 4th Street
Bridgeport, Pa. 19406


Upper Merion Office

Beidler & Henderson Roads
King of Prussia, Pa. 19406


Phoenixville Office (1)

808 Valley Forge Road
Phoenixville, Pa. 19460



----------

(1) owned

         The Bank owns six of the above properties, of which one property is
subject to a mortgage. The remaining seven properties are leased with expiration
dates between 1999 and 2003. During 1998, the Bank made aggregate lease payments
of approximately $335 thousand. The Bank believes that all of its properties are
attractive, adequately insured, and well maintained and are adequate for RBPA's
purposes. The Bank also owns a property located at 144 Narberth Avenue,
Narberth, PA, which may serve as a site for future expansion.


ITEM 3.  LEGAL PROCEEDINGS

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


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

None


                                       10
<PAGE>   11
ITEM 5. MARKET FOR THE BANK'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS

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

                                   BID PRICES

<TABLE>
<CAPTION>
                 1998                      HIGH        LOW          CLOSE
                 ----                      ----        ---          -----
<S>                                        <C>         <C>          <C>
                 First Quarter .........   $22.500     $19.000      $ 20.00
                 Second Quarter ........    21.000      18.500       18.750
                 Third Quarter .........    19.375      13.125       15.000
                 Fourth Quarter ........    16.875      12.750       16.125
</TABLE>

<TABLE>
<CAPTION>
                 1997                      HIGH        LOW          CLOSE
                 ----                      ----        ---          -----
<S>                                        <C>         <C>          <C>
                 First Quarter .........   $14.875     $11.500      $ 14.00
                 Second Quarter ........    15.125      13.000       14.875
                 Third Quarter .........    17.000      14.500       16.875
                 Fourth Quarter ........    25.750      16.000       22.250
</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 March 25, 1999, is shown below:

<TABLE>
<CAPTION>
         TITLE OF CLASS                  NUMBER OF RECORD HOLDERS
         --------------                  ------------------------
<S>                                      <C>
         Class A Common Stock                      408
         Class B Common Stock                      166
</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 449 as of March 25, 1999.


DIVIDENDS

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



                                       11
<PAGE>   12
         Stock Dividends. On March 14, 1996, the Board of Directors of the
Registrant declared a 6% stock dividend on both its Class A Common Stock and
Class B Common Stock shares payable May 10, 1996, to Shareholders of record on
April 18, 1996. The stock dividend resulted in the issuance of 365,229
additional shares of Class A Common Stock and 91,641 additional shares of Class
B Common Stock.. On April 24, 1997, the Board of Directors of the Registrant
declared a 4% stock dividend on both its Class A Common Stock and Class B Common
Stock shares payable May 8, 1997, to Shareholders of record on April 28, 1997.
The stock dividend resulted in the issuance of 258,176 additional shares of
Class A Common Stock and 61,859 additional shares of Class B Common Stock. On
April 22, 1998, the Board of Directors of the Registrant declared a 4% stock
dividend on both its Class A Common Stock and Class B Common Stock shares
payable May 8, 1998, to Shareholders of record on May 1, 1998. The stock
dividend resulted in the issuance of 272,313 additional shares of Class A Common
Stock and 63,595 additional shares of Class B Common Stock. Future dividends, if
any, will be at the discretion of the Board of Directors and will be dependent
on the level of earnings and compliance with regulatory requirements.

         Cash Dividends. The Registrant paid a cash dividends in each quarter of
1998 and 1997 for holders of Class A Common Stock and for holders of Class B
common stock. This resulted in a charge to retained earnings of approximately
$7.2 million and $5.3 million for 1998 and 1997, respectively. The following
table sets forth on a quarterly basis the dividend paid to holders of each Class
A and Class B common stock for 1998 and 1997.

<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>

<TABLE>
<CAPTION>
                                             CASH DIVIDENDS PER SHARE
                                             ------------------------
                 1997                        CLASS A          CLASS B
                 ----                        -------          -------
<S>                                          <C>              <C>
                 First Quarter .........      $.12             $.1380
                 Second Quarter ........      $.15             $.1725
                 Third Quarter .........      $.18             $.2070
                 Fourth Quarter ........      $.18             $.2070
</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.

         Under the Pennsylvania Business Corporation Law of 1988, as amended,
the Registrant may pay dividends only if after payment the Registrant would be
able to pay its debts as they become due in the usual course of business and the
total assets are greater than the sum of its total liabilities plus the amount
that would be needed if the Registrant were to be dissolved at the time of the
dividend to satisfy the preferential rights upon dissolution of shareholders
whose preferential rights are superior to those receiving the dividend. See Note
Q to the Consolidated Financial Statements in Item 8 of this report.


                                       12
<PAGE>   13
ITEM 6. SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                                    (IN THOUSANDS)
                                                ------------------------------------------------------
INCOME STATEMENT DATA                             1998       1997        1996        1995       1994
---------------------                           --------   --------    --------    --------   --------
<S>                                             <C>        <C>         <C>         <C>        <C>
Interest income                                 $ 40,640   $ 33,372    $ 33,618    $ 29,755   $ 29,021
Interest expense                                  13,163     10,048      10,054       9,592      8,244
                                                --------   --------    --------    --------   --------
Net interest income                               27,477     23,324      23,564      20,163     20,777
Increase (Decrease) Provision for loan losses      4,770     (2,118)     (1,488)         --      2,500
                                                --------   --------    --------    --------   --------
Net interest income after loan loss provision     22,707     25,442      25,052      20,163     18,277
    Gain on sale of loans                              4         29         427          86         71
    Gain/Loss on real estate                          --      1,204       2,016         870      1,435
    Other income                                   3,570      1,392       1,788       1,098        947
                                                --------   --------    --------    --------   --------
Total other income                                 3,574      2,625       4,231       2,054      2,453
Income before other expenses & income taxes       26,281     28,067      29,283      22,217     20,730
Non-interest expenses:
    Salaries                                       5,028      9,546       9,602       4,850      3,861
    Other                                          5,845      5,088       5,537       5,461      5,791
                                                --------   --------    --------    --------   --------
Total other expenses                              10,873     14,634      15,139      10,311      9,652
                                                --------   --------    --------    --------   --------
Income before taxes                               15,408     13,433      14,144      11,906     11,078
Income taxes                                       4,624      4,074       3,907       3,648      3,066
                                                --------   --------    --------    --------   --------
Net income                                      $ 10,784   $  9,359    $ 10,237    $  8,258   $  8,012
                                                ========   ========    ========    ========   ========

Basic earnings per share (1)                    $   1.19   $   1.04    $   1.16    $   0.93   $   0.88
                                                --------   --------    --------    --------   --------

Diluted earnings per share (1)                  $   1.15   $   1.00    $   1.13    $   0.90   $   0.86
                                                --------   --------    --------    --------   --------
</TABLE>

----------

(1)      Earnings per share has the weighted average number of shares used in
         the calculation adjusted to reflect a 4% stock dividend in 1998, a 4%
         stock dividend in 1997, a 6% stock dividend in 1996, a 6% stock
         dividend in 1995 and, a 6% stock dividend in 1994.


<TABLE>
<CAPTION>
BALANCE SHEET DATA                     1998        1997        1996        1995        1994
------------------                     ----        ----        ----        ----        ----
<S>                                  <C>         <C>         <C>         <C>         <C>
(in thousands)
Total assets                         $427,622    $416,598    $355,149    $356,264    $312,956
Total average assets                  407,623     342,361     343,360     312,823     282,162
Loans, net                            292,556     282,711     209,017     198,419     162,739
Total deposits                        290,390     265,363     254,183     268,242     211,965
Total long term debt                   30,365      31,063       4,814       2,984       3,969
Total stockholders' equity             94,069      89,505      84,581      77,189      70,617
Total average stockholders' equity     91,374      86,572      80,910      74,091      66,398
Return on average assets                  2.6%        2.7%        3.0%        2.6%        2.8%
Return on average equity                 11.8%       10.8%       12.7%       11.1%       12.1%
Average equity to average assets         22.4%       25.3%       23.6%       23.7%       23.5%
Cash dividend payout ratio               66.6%       56.7%       19.2%       11.4%         --
</TABLE>


                                       13
<PAGE>   14
AVERAGE BALANCES

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

<TABLE>
<CAPTION>
                                                    1998                           1997                           1996
                                       -----------------------------  -----------------------------  -----------------------------
                                        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     $     505   $      24   4.75%  $   1,230   $      87   7.10%  $   1,758   $     103   5.86%
Federal funds                             25,210       1,372   5.44%     17,921       1,012   5.64%     18,332       1,015   5.54%
Investment securities:
    Held to maturity:
         Taxable                          46,946       3,228   6.88%     84,399       5,604  6.64.%    109,522       7,006   6.40%
         Nontaxable (1)                    3,098         314  10.14%      1,455         169  11.63%        497          88  17.71%
                                       ---------   ---------  -----   ---------   ---------  -----   ---------   ---------  -----
               Total held to maturity     50,044       3,542   7.08%     85,854       5,773   6.72%    110,019       7,094   6.45%
    Available for sale
         Taxable                          27,419       2,296   8.37%     12,212         991   8.12%      3,674         326   8.87%
                                       ---------   ---------  -----   ---------   ---------  -----   ---------   ---------  -----
Total investment securities               77,463       5,838   7.54%     98,066       6,764   6.90%    113,693       7,420   6.53%
Loans: (2)
    Commercial & industrial (3)          116,823      13,783  11.80%    111,704      12,297  11.01%    113,543      15,553  13.70%
    Commercial mortgages                 170,690      18,279  10.71%     87,464      11,658  13.33%     68,689       7,791  11.34%
    Other loans (1)                       12,403       1,451  11.70%     14,200       1,782  12.55%     18,386       1,766   9.61%
                                       ---------   ---------  -----   ---------   ---------  -----   ---------   ---------  -----
            Total loans                  299,916      33,513  11.17%    213,368      25,737  12.06%    200,618      25,110  12.52%
                                       ---------   ---------  -----   ---------   ---------  -----   ---------   ---------  -----
Total interest earning assets          $ 403,094   $  40,747  10.11%  $ 330,585   $  33,600  10.16%  $ 334,401   $  33,648  10.06%
Non interest earning assets
      Cash & due from banks                8,717                          6,636                          6,207
      Other assets                        15,843                         17,366                         16,401
      Allowance for loan loss            (10,313)                        (8,764)                        (9,672)
      Def income/unearned disc            (9,718)                        (3,462)                        (3,977)
                                       ---------                      ---------                      ---------
Total non interest
               Earning assets              4,529                         11,776                          8,959
                                       ---------                      ---------                      ---------
Total assets                           $ 407,623                      $ 342,361                      $ 343,360
                                       =========                      =========                      =========

LIABILITIES & STOCKHOLDERS' EQUITY
Deposits:
      Savings                          $  18,214         514   2.82%  $  16,668   $     454   2.72%  $  16,514   $     425   2.57%
      NOW & Money Market                  79,975       2,174   2.72%     69,077       2,171   3.14%     71,597       2,129   2.97%
      CDs & other time deposits          142,206       8,479   5.96%    121,934       7,185   5.89%    126,089       7,157   5.68%
                                       ---------   ---------  -----   ---------   ---------  -----   ---------   ---------  -----
    Total interest bearing deposits    $ 240,395      11,167   4.65%  $ 207,679   $   9,810   4.72%  $ 214,200   $   9,711   4.53%
Federal funds                                 90           4   4.44%        123           6   5.00%         --          --     --
Long term borrowings                      31,611       1,992   6.30%      3,066         231   7.54%      4,909         343   6.99%
                                       ---------   ---------  -----   ---------   ---------  -----   ---------   ---------  -----
Total interest bearing liabilities     $ 272,096      13,163   4.84%  $ 210,868   $  10,047   4.76%  $ 219,109   $  10,054   4.59%
                                       ---------   ---------  -----   ---------   ---------  -----   ---------   ---------  -----
    Non interest bearing deposits         29,691                         32,992                         33,369
    Other liabilities                     14,462                         11,929                          9,972
                                       ---------                      ---------                      ---------
Total liabilities                        316,249                        255,789                        262,450
    Stockholders' equity                  91,374                         86,572                         80,910
                                       ---------                      ---------                      ---------
Total liabilities and
            Stockholders' equity       $ 407,623                      $ 342,361                      $ 343,360
                                       =========                      =========                      =========
Net interest income                                $  27,584                      $  23,553                      $  23,594
                                                   =========                      =========                      =========
Net yield on
         interest earning assets                               6.84%                          7.12%                          7.06%
                                                              =====                          =====                          =====
</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.

(3)      Interest income on commercial & industrial loans for 1996 include a
         one-time recovery of interest of $3.2 million.




                                       14
<PAGE>   15
RATE VOLUME

         The following table sets forth a rate/volume analysis, which segregates
in detail the major factors contributing to the change in net interest income
for the years ended, December 31, 1998 and 1997, as compared to respective
previous periods, into amounts attributable to both rate and volume variances.


<TABLE>
<CAPTION>
                                                             1998 VS 1997                           1997 VS 1996
                                                            (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                $   (40)     $   (23)     $   (63)     $   (35)     $    19      $   (16)
Federal funds sold                                    689         (329)         360           --           (3)          (3)
Investment securities:
   Held to maturity:
         Taxable                                   (2,569)         193       (2,376)      (1,659)         257       (1,402)
         Nontaxable                                   169          (24)         145          120          (39)          81
   Available for sale
         Taxable                                    1,272           33        1,305          695          (30)         665
                                                  -------      -------      -------      -------      -------      -------
      Total investment securities                  (1,128)         202         (926)        (844)         188         (656)
Loans:
   Commercial & industrial                            579          907        1,486         (248)      (3,008)      (3,256)
   Commercial mortgages                             9,286       (2,665)       6,621        2,357        1,510        3,867
   Other loans                                       (216)        (115)        (331)        (455)         471           16
                                                  -------      -------      -------      -------      -------      -------
         Total loans                                9,649       (1,873)       7,776        1,654       (1,027)         627
                                                  -------      -------      -------      -------      -------      -------

Total increase (decrease) in interest income      $ 9,170      $(2,023)     $ 7,147      $   775      ($  823)     ($   48)



INTEREST EXPENSE

Deposits:
  Savings                                         $    43      $    17      $    60      $     4      $    25      $    29
  NOW & Money Market                                  318         (315)           3          (77)         119           42
  CDs & other time deposits                         1,208           86        1,294         (240)         268           28
                                                  -------      -------      -------      -------      -------      -------
         Total interest bearing deposits            1,569         (212)       1,357         (313)         412           99
Federal funds purchased                                (2)          --           (2)           6           --            6
Mortgage payable and
            long term borrowings                    1,805          (44)       1,761         (137)          25         (112)
                                                  -------      -------      -------      -------      -------      -------

Total increase (decrease) in interest expense       3,372         (256)       3,116         (444)         437           (7)
                                                  -------      -------      -------      -------      -------      -------
Total increase (decrease) in
         net interest income                      $ 5,798      $(1,767)     $ 4,031      $ 1,219      $(1,260)     $   (41)
                                                  =======      =======      =======      =======      =======      =======
</TABLE>


                                       15
<PAGE>   16
LOANS
         The following table reflects the composition of the loan portfolio of
Royal Bank of Pennsylvania and the percent of gross outstandings represented by
each category at the dates indicated.

<TABLE>
<CAPTION>
                                                                  YEAR ENDING DECEMBER 31,
                                                                       (IN THOUSANDS)
                         ----------------------------------------------------------------------------------------------------------
Loans                          1998               1997                   1996                     1995                   1994
                         ----------------------------------------------------------------------------------------------------------
<S>                      <C>         <C>   <C>           <C>   <C>                <C>   <C>                <C>   <C>            <C>
Comm'l & industrial      $127,972     41%  $ 123,800      41%  $ 116,616           55%  $ 124,065           61%  $ 104,312       62%
Real estate               182,595     58%    176,315      58%     93,925           44%     75,758           37%     64,357       38%
Consumer                    2,033      1%      1,523       1%      2,097            1%      3,352            2%         --       --
                         --------    ---   ---------     ---   ---------          ---   ---------          ---   ---------      ---
    Total gross loans     312,600    100%    301,638     100%    212,638          100%    203,175          100%    168,669      100%
Unearned income            (1,833)            (1,498)             (1,290)                  (1,160)                  (1,006)
Disc on loans purchased    (6,291)            (9,243)             (2,331)                  (3,596)                  (4,924)
                         --------          ---------           ---------                ---------                ---------
                          304,476            290,897             209,017                  198,419                  162,739
Allowance for loan loss   (11,920)            (8,186)             (9,084)                  (9,747)                  (8,992)
                         --------          ---------           ---------                ---------                ---------
    Total loans, net     $292,556          $ 282,711           $ 199,933                $ 188,672                $ 153,747
                         ========          =========           =========                =========                =========
</TABLE>


ANALYSIS OF ALLOWANCE FOR LOAN LOSS

<TABLE>
<CAPTION>
                                                              YEAR ENDING DECEMBER 31,
                                                                   (IN THOUSANDS)
                                          ---------------------------------------------------------------
                                             1998         1997          1996          1995         1994
                                          ---------    ---------     ---------     ---------    ---------
<S>                                       <C>          <C>           <C>           <C>          <C>
Total Loans                               $ 304,476    $ 290,897     $ 209,017     $ 198,419    $ 162,739
                                          =========    =========     =========     =========    =========

Daily average loan balance                $ 299,916    $ 213,368     $ 200,618     $ 185,734    $ 165,702
                                          =========    =========     =========     =========    =========

Allowance for loan loss:
   Balance at the beginning of the year   $   8,186    $   9,084     $   9,747     $   8,992    $   6,608
   Charge offs by loan type:
        Commercial                            1,501          762           843           292          273
        Real estate                             135           --           240            21           17
                                          ---------    ---------     ---------     ---------    ---------
   Total charge offs                          1,636          762         1,083           313          290
   Recoveries by loan type:
        Commercial                              540        1,934         1,790           125          141
        Real estate                              60           48           118            31           33
                                          ---------    ---------     ---------     ---------    ---------
   Total recoveries                             600        1,982         1,908           156          174
                                          ---------    ---------     ---------     ---------    ---------
   Net loan charge offs                       1,036       (1,220)         (825)          157          116
        Purchase of Knoblauch Bank               --           --           --           912            --
        Increase (decrease) in
             provision for loan loss          4,770       (2,118)       (1,488)           --        2,500
                                          ---------    ---------     ---------     ---------    ---------
Balance at end of year                    $  11,920    $   8,186     $   9,084     $   9,747    $   8,992
                                          =========    =========     =========     =========    =========

Net charge offs to average loans                .35%       (0.57%)       (0.41%)        0.08%        0.07%
                                          =========    =========     =========     =========    =========

Allowance to loans at year end                 3.91%        2.81%         4.35%         4.91%        5.53%
                                          =========    =========     =========     =========    =========
</TABLE>

The Bank utilizes the reserve method of accounting for possible loan losses.
Under this method, provisions for possible loan losses are charged to operation
and recognized loan losses are charged and loan recoveries are credited to the
allowance. The allowance for possible loan loss represents the amount set aside
to protect against the risk inherent in the Bank's portfolio. Management's
periodic evaluation of the adequacy of the allowance takes into consideration
the Bank's past loan loss experience, known and inherent risks in the loan
portfolio, adverse situations which may affect the borrower's ability to repay,
overall portfolio quality, and current economic conditions. Provisions for
possible loan losses are charged to earnings to bring the allowance to a level
considered by management to be appropriate in light of the foregoing
considerations. However, since loan loss reserve adequacy is subjective, the
loan loss reserve may be excessively funded or need additional funds from time
to time. A loan review is performed quarterly by the Loan Review officer to
determine the adequacy of the reserves.



                                       16
<PAGE>   17
LOANS AND LEASE FINANCING RECEIVABLES

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

<TABLE>
<CAPTION>
                                                                                           YEAR ENDING
                                                                                           DECEMBER 31,
                                                                                          (IN THOUSANDS)
                                                                                  ------------------------------
                                                                                      1998       1997       1996
                                                                                  --------   --------   --------
<S>                                                                               <C>        <C>        <C>
Loans secured by real estate
    Construction and land development                                             $ 35,571   $ 29,172   $  5,057
    Secured by farmland (including farm residential and other improvements)             --         --         --
    Secured by 1-4 family residential properties:
    Revolving, open-end loans secured by 1-4 family residential properties and
                extended under lines of credit                                       7,648     11,433     11,655
        All other loans secured by 1-4 family residential properties:
            Secured by first liens                                                  17,836     23,139     21,843
            Secured by junior liens                                                  6,131      8,195      7,121
    Secured by multi family (5 or more) residential properties                      20,386     23,459     20,882
    Secured by nonfarm nonresidential properties                                   198,225    177,196    117,559
    Commercial and industrial loans to US addresses                                 24,362     25,820     24,559
    Loans to individuals for household, family, and other personal expenditures      1,206      1,478      1,848
    Obligations of state and political subdivisions in the US                        1,149      1,593      1,903
     All other loans                                                                    87        154        211
     Less: Any unearned income on loans listed above                                 8,125     10,742      3,621
                                                                                  --------   --------   --------

     Total loans and leases, net of unearned income                               $304,476   $290,897   $209,017
                                                                                  ========   ========   ========
</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)
                                                  -------------------------------------------------------
                                                    1998        1997        1996        1995        1994
                                                  -------     -------     -------     -------     -------
<S>                                               <C>         <C>         <C>         <C>         <C>
Non-accruing loans (1)(2)                         $ 3,419     $ 4,317     $ 4,653     $ 6,233     $ 1,703
Past due loans over 90 days but still accruing         --          --          --         391         391
                                                  -------     -------     -------     -------     -------
         Total nonperforming loans                  3,419       4,317       4,653       6,624       2,094
Other real estate                                     707          --         504         612       4,492
                                                  -------     -------     -------     -------     -------
         Total nonperforming assets               $ 4,126     $ 4,317     $ 5,157     $ 7,236     $ 6,586
                                                  =======     =======     =======     =======     =======

Nonperforming assets to total assets                 0.96%       1.04%       1.45%       2.03%       2.10%
                                                  =======     =======     =======     =======     =======
Nonperforming loans to total loans                   1.09%       1.43%       2.19%       3.34%       1.29%
                                                  =======     =======     =======     =======     =======
Allowance for loan loss
                to nonperforming loans             348.64%     189.62%     195.23%     147.15%     429.42%
                                                  =======     =======     =======     =======     =======
</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 $307,744 for 1998, $388,517 for 1997, $418,740 for 1996, and
$1,889,000 for 1995.


                                       17
<PAGE>   18
INVESTMENTS SECURITIES

         The contractual maturity distribution and weighted average rate of the
investments held to maturity portfolio at December 31, 1998 are presented in the
following table. Weighted average rate on tax-exempt obligations have been
computed on a fully taxable equivalent basis assuming a tax rate of 34%.

<TABLE>
<CAPTION>
                                                              AS OF DECEMBER 31, 1998
                                                                   (IN THOUSANDS)
                      ---------------------------------------------------------------------------------------------------------
                                             AFTER 1 YEAR BUT     AFTER 5 YEARS, BUT
SECURITIES HELD         WITHIN 1 YEAR         WITHIN 5 YEARS       WITHIN 10 YEARS        AFTER 10 YEARS            TOTAL
---------------       -----------------     -----------------     -----------------     -----------------     -----------------
TO  MATURITY          AMOUNT      RATE      AMOUNT      RATE      AMOUNT      RATE      AMOUNT      RATE      AMOUNT      RATE
------------          ------      ----      ------      ----      ------      ----      ------      ----      ------      ----
<S>                   <C>         <C>       <C>         <C>       <C>         <C>       <C>         <C>       <C>         <C>
State & political
     Subdivisions     $ 2,700     10.5%     $    --       --      $    --       --      $   398     15.7%     $ 3,098     11.1%
US Treasuries
 and agencies             250      6.5%       1,954      5.6%         965      6.9%       1,363      7.0%       4,532      6.3%
Other securities        9,278      6.4%      34,702      7.5%       6,363      8.5%       3,921      7.4%      54,264      6.9%
                      -------     ----      -------     ----      -------     ----      -------     ----      -------     ----

      Total           $12,228      7.3%     $36,656      7.4%     $ 7,328      8.3%     $ 5,682      7.8%     $61,894      7.1%
                      =======     ====      =======     ====      =======     ====      =======     ====      =======     ====
</TABLE>




         The following tables presents the consolidated book values and
approximate market value at December 31, 1998, 1997, and 1996, respectively, for
each major category of RBPA's investment securities portfolio for held to
maturity securities and available for sale securities.

<TABLE>
<CAPTION>
                                                                     AS OF DECEMBER 31,
                                                                       (IN THOUSANDS)
                                     -----------------------------------------------------------------------------------
                                              1998                           1997                          1996
                                     -----------------------       -----------------------       -----------------------
                                     AMORTIZED       MARKET        AMORTIZED       MARKET        AMORTIZED       MARKET
SECURITIES HELD TO MATURITY            COST          VALUE           COST          VALUE           COST          VALUE
---------------------------            ----          -----           ----          -----           ----          -----
<S>                                  <C>            <C>            <C>            <C>            <C>            <C>
State & political subdivisions       $  3,098       $  3,128       $  3,098       $  3,152       $    499       $    580
US Treasuries & agencies                4,532          4,660         12,908         13,096         15,183         15,321
Other securities                       54,264         54,372         48,365         48,737         97,793         97,734
                                     --------       --------       --------       --------       --------       --------

             Total                   $ 61,894       $ 62,160       $ 64,371       $ 64,985       $113,475       $113,635
                                     ========       ========       ========       ========       ========       ========
</TABLE>


<TABLE>
<CAPTION>
                                                                AS OF DECEMBER 31,
                                                                  (IN THOUSANDS)
                                  ------------------------------------------------------------------------------
                                           1998                        1997                        1996
                                  ----------------------      ----------------------      ----------------------
                                  AMORTIZED       MARKET      AMORTIZED       MARKET      AMORTIZED       MARKET
SECURITIES AVAILABLE FOR SALE        COST         VALUE          COST         VALUE          COST         VALUE
-----------------------------        ----         -----          ----         -----          ----         -----
<S>                               <C>            <C>          <C>            <C>          <C>            <C>
Federal Home Loan Bank stock       $ 3,170       $ 3,170       $ 3,174       $ 3,174       $ 1,024       $ 1,024
Preferred and common stock           2,867         2,919         2,944         2,977         3,703         3,701
Other securities                    29,031        30,863        13,964        14,897            --            --
                                   -------       -------       -------       -------       -------       -------

             Total                 $35,068       $36,952       $20,082       $21,048       $ 4,727       $ 4,725
                                   =======       =======       =======       =======       =======       =======
</TABLE>


                                       18
<PAGE>   19
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)
                                  --------------------------------------------------------------------------
                                          1998                       1997                       1996
                                  --------------------       --------------------       --------------------
                                  AVERAGE                    AVERAGE                    AVERAGE
                                  BALANCE        RATE        BALANCE        RATE        BALANCE        RATE
                                  -------        ----        -------        ----        -------        ----
<S>                               <C>            <C>         <C>            <C>         <C>            <C>
Demand deposits:
     Non interest bearing         $ 29,691         --        $ 32,992         --        $ 33,369         --
     Interest bearing (NOW)         27,138       2.25%         24,539       2.50%         20,823       2.28%
Money market deposits               52,837       3.30%         44,538       3.50%         50,774       3.26%
Savings deposits                    18,214       2.82%         16,668       2.72%         16,514       2.57%
Certificate of deposit             142,206       5.96%        121,934       5.89%        126,089       5.68%
                                  --------       ----        --------       ----        --------       ----

         Total deposits           $270,086                   $240,671                   $247,569
                                  ========                   ========                   ========
</TABLE>



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

<TABLE>
<CAPTION>
                                                             AT DECEMBER 31,
                                                             (IN THOUSANDS)
                                                         -----------------------
MATURITY                                                   1998            1997
                                                         -------         -------
<S>                                                      <C>             <C>
Three months or less                                     $ 4,607         $ 5,433
Over three months through twelve months                    7,465           8,850
Over twelve months through five years                     20,909          14,052
Over five years                                           15,773           4,840
                                                         -------         -------

                   Total                                 $48,754         $33,175
                                                         =======         =======
</TABLE>


SHORT AND LONG TERM BORROWINGS

<TABLE>
<CAPTION>
                                                              YEAR ENDING DECEMBER 31,
                                                                   (IN THOUSANDS)
                                          ---------------------------------------------------------------
                                            1998          1997          1996          1995          1994
                                          -------       -------       -------       -------       -------
<S>                                       <C>           <C>           <C>           <C>           <C>
Short term borrowings (1)                 $    --       $15,000       $    --       $    --       $21,000
Long term borrowings:
  Mortgage payable (2)                        527           571           613           652           689
  FHLB advances (3)                        30,365        31,063         4,201         2,332         3,280
                                          -------       -------       -------       -------       -------

         Total long term borrowings       $30,892       $46,634       $ 4,814       $ 2,984       $24,969
                                          =======       =======       =======       =======       =======
</TABLE>


----------

(1) In 1997 and 1994, short term borrowings consisted of federal funds purchased
which matured within one to four days from the transaction date.

(2) The mortgage payable is payable to a bank at 65% of prime rate (5.525% at
December 31, 1998) and is guaranteed by an industrial development authority.

(3) Advances from the Federal Home Loan Bank of Pittsburgh consist of two
separate advances with interest rates of 8.20% and 6.24%, with maturities of
December 27, 1999 and December 23, 2002, respectively.


                                       19
<PAGE>   20
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

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


FINANCIAL CONDITION

         Total assets increased $11.0 million, or 3%, to $427.6 million at
December 31, 1998 from $416.6 million at year end 1997, primarily due to growth
experienced in loans and investment securities of $9.9 million and $13.4
million, respectively, partially offset by a $11.3 million decrease in cash and
cash equivalents.

         Cash and Cash Equivalents. Cash and cash equivalents are comprised of
cash on hand, and cash in interest bearing and non interest bearing accounts in
banks, in addition to federal funds sold. Cash and cash equivalents decreased
$11.3 million, or 37%, to $19.1 million at December 31, 1998, primarily due to
growth in loans and investment securities during 1998. The average balance of
cash and cash equivalents was $34.4 million for 1998 versus $25.8 million for
1997.

         Investment Securities Held to Maturity. Held to maturity investment
securities ("HTM") represents approximately 12% of average earning assets during
1998 and are comprised of primarily corporate debt securities of investment
grade quality at the time of purchase. HTM investment securities declined $2.5
million, or 4%, from $64.4 million at December 31, 1997 to $61.9 million at
December 31, 1998, primarily due to scheduled maturities exceeding purchases
during 1998.

         Investment Securities Available for Sale. Available for sale securities
("AFS") represent 7% of average earning assets during 1998 and are primarily
comprised of capital trust security issues of regional banks. AFS investment
securities were $37 million at December 31, 1998, an increase of $15.9 million
from $21 million at December 31, 1997. This increase is primarily due to the
purchase of capital trust securities during 1998.

         Loans. RBPA's primary earning assets are loans, representing
approximately 74% of average earning assets during 1998. The loan portfolio has
historically been comprised primarily of business demand loans and commercial
mortgages in roughly equal amounts, and to a significantly lesser extent one to
four family residential and home equity loans. This composition of loans did not
change during 1998. During 1998, total loans increased 5% from $290.9 million at
December 31, 1997 to $304.5 million at December 31,1998, primarily due to
internally generated loan growth.

         Deposits. RBPA's primary source of funding, deposits, increased $25
million, or 9%, from $265.4 million at December 31, 1997 to $290.4 million at
December 31, 1998. This increase in deposits is primarily due to increases in
certificates of deposits, NOW and money market, and savings deposits of $14.3
million, $5.3 million and $2.0 million, respectively, in addition to a $3.4
million increase in non-interest bearing deposits. The $14.3 million increase in
certificates of deposits is primarily attributable to $20 million increase in
brokered deposits during 1998.


                                       20
<PAGE>   21
         Borrowings. Borrowings are comprised of long term borrowings (advances,
mortgage) and short term borrowings (overnight borrowings). Long term borrowings
decreased $.7 million to $30.9 million at December 31, 1998 primarily due to a
scheduled maturity of a Federal Home Loan Bank ("FHLB") advance in December,
1998 and scheduled amortization of the mortgage payable. The average balance of
long term borrowings and mortgages during 1998 was $31.6 million versus $3.1
million for 1997. Short-term borrowings decreased $15 million to $-0- at
December 31, 1998 from $15 million at December 31, 1997. The average balance of
short-term borrowings during 1998 and 1997 was $.1 million.

         Stockholders' Equity. Stockholders' equity increased $4.6 million or 5%
in 1998 to $94.1 million primarily due to net income of $10.8 million partially
offset by $7.2 million in cash dividends paid in 1998.


RESULTS OF OPERATIONS

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

         Net Income. Net income was $10.8 million in 1998 compared to $9.4
million in 1997 and $10.2 million in 1996. Basic earnings per share were $1.19,
$1.04 and $1.16 for 1998, 1997, and 1996, respectively. The increase in net
income of $1.4 million in 1998, or 15%, is primarily due to an increase in net
interest income, primarily attributable to the growth in average loans and the
acquisition of higher yielding investment securities during 1998. The $.8
million decrease in net income for 1997 from 1996 was primarily due to the
receipt of nonrecurring income in 1996 relating to loan recoveries.

         Net Interest Income. Net interest income is affected by market and
economic conditions, which influence rates on loan and deposit growth. Net
interest income was $27.5 million in 1998, compared to $23.3 million in 1997,
and $23.6 million in 1996. Yields on interest earning assets decreased slightly
to 10.11% for 1998 from 10.16% in 1997, a difference of 5 basis points. The
yield on interest earning assets in 1997 increased 10 basis points from 10.06%
for 1996. Average interest earning assets increased to $403.1 million from
$330.6 million in 1997, primarily due to the purchase of a $75 million loan
portfolio in December 1997. Average interest earning assets decreased $3.8
million in 1997 from $334.4 million in 1996 to $330.6 million for 1997,
primarily due to decreases in investment securities of $15.6 million, partially
offset by an increase in the average balance of loans of $12.8 million. Yields
on interest bearing liabilities increased to 4.84% in 1998 versus 4.76% in 1997
and, 4.59% for 1996. Yields on interest bearing deposits increased primarily due
to higher costing certificates of deposits in 1998. Additionally, other
borrowings also contributed to this increase due to the addition of a $30
million FHLB advance in December 1997 at an annual rate of 6.24% for a term of
five years. Average interest bearing liabilities increased to $272.1 million
from $210.9 million for 1997, primarily due to increases of certificates of
deposit and the FHLB borrowing of $20.3 million and $28.5 million, respectively.


                                       21
<PAGE>   22
LOANS AND MORTGAGES

<TABLE>
<CAPTION>
                                              1998                1997                1996
                                          ------------        ------------        ------------
<S>                                       <C>                 <C>                 <C>
         Average loan outstandings        $299,916,000        $213,368,000        $200,618,000
         Interest and fees on loans       $ 33,513,000        $ 25,737,000        $ 25,110,000
               Average Yield                     11.17%              12.06%              12.52%
</TABLE>

         RBPA continues to originate five year fixed rate loans, a portion of
the loan portfolio continues to be comprised of variable rate loans which helps
to maintain its interest spread when rates change. RBPA's average prime rate
decreased to 8.19% in 1998 from 8.43% in 1997, which contributed to the 89 basis
point decline in the yield on loans from a yield of 12.06% in 1997 to a yield of
11.17% for 1998. The average balance of loans increased $86.5 million to $299.9
million in 1998 primarily due to the purchase of the FDIC loan portfolio in
December 1997 in addition to internally generated loan growth during 1998.

         In 1997, while RBPA's average prime rate increased to 8.43% from 8.29%
in 1996, the yield on loans decreased 46 basis points in 1997 from 12.52% in
1996 to 12.06% in 1997 primarily due to interest recoveries in 1996 relating to
loan payoffs in 1996. Average loans increased to $12.8 million to $213.4 million
in 1997 primarily due to internally generated loan growth.


INVESTMENTS SECURITIES HELD TO MATURITY

<TABLE>
<CAPTION>
                                                   1998                1997                1996
                                               ------------        ------------        ------------
<S>                                            <C>                 <C>                 <C>
       Average HTM investment securities       $ 50,044,000        $ 85,854,000        $110,019,000
                Interest income                $  3,542,000        $  5,773,000        $  7,094,000
                Average yield                          7.08%               6.72%               6.45%
</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 of
investment grade at the time of purchase, with maturities in the three to six
year range. It is RBPA's expressed intention to hold these securities to
maturity, as has been the established investment policy.

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

         In 1997, the yield in HTM investment securities increased 28 basis
points to 6.73% from 6.45% in 1996. This increase is partially attributable to
an increase in yield on taxable investment securities of 24 basis points in
1997, in addition to an increase in the average balance of the nontaxable
investment securities, which have a higher effective yield. The average balance
of HTM investment securities decreased $24.2 million in 1997 as scheduled
maturities outpaced purchases.


                                       22
<PAGE>   23
INVESTMENTS SECURITIES AVAILABLE FOR SALE

<TABLE>
<CAPTION>
                                                  1998               1997               1996
                                               -----------        -----------        -----------
<S>                                            <C>                <C>                <C>
       Average AFS investment securities       $27,419,000        $12,212,000        $ 3,674,000
          Interest and dividend income         $ 2,296,000        $   991,000        $   326,000
                 Average yield                        8.37%              8.12%              8.87%
</TABLE>

         AFS investment securities are comprised primarily of capital trust
security issues of regional banks and to a lesser extent preferred and common
stock. Some of these securities are rated while others are not. The average
balance increased $15.2 million during 1998 to $27.4 million, primarily due to
the purchase of capital trust securities. In 1997 the average balance increased
$8.5 million to $12.2 million, primarily due to the purchase of capital trust
securities, and an increase in the FHLB stock position.


INTEREST EXPENSE ON NOW AND MONEY MARKET DEPOSITS

<TABLE>
<CAPTION>
                                                   1998               1997               1996
                                                -----------        -----------        -----------
<S>                                             <C>                <C>                <C>
      Average NOW & Money Market deposits       $79,975,000        $69,077,000        $71,597,000
                Interest expense                $ 2,174,000        $ 2,171,000        $ 2,129,000
             Average cost of funds                     2.72%              3.14%              2.97%
</TABLE>

         In 1998 the average cost of funds on NOW and money market deposits
decreased 42 basis points to 2.72% as interest rates decreased slightly in 1998
while the average balance increased $10.9 million. In 1997, the average balance
decreased $2.5 million to $69.1 million while the average cost of funds on NOW
and money market deposits increased 17 basis points to 3.14% as interest rates
increased slightly in 1997.


INTEREST EXPENSE ON TIME DEPOSITS

<TABLE>
<CAPTION>
                                             1998                1997                1996
                                         ------------        ------------        ------------
<S>                                      <C>                 <C>                 <C>
             Average time deposits       $142,206,000        $121,934,000        $126,089,000
                Interest expense         $  8,479,000        $  7,185,000        $  7,157,000
             Average cost of funds               5.96%               5.89%               5.68%
</TABLE>

         In 1998, the average balance and the cost of funds of time deposits
increased $20.3 million and 7 basis points, respectively, to $142.2 million and
a rate of 5.96% primarily due to addition of brokered deposits during the year.
In 1997 the average balance of time deposits decreased $4.2 million to $121.9
million while the average cost of funds increased 21 basis points from 5.68% in
1996 to 5.89% in 1997.

          Although rates in general started to move downward, the reaction of
deposits to rate changes (both increases and decreases) is slower than the
change in the prime rate because these time deposits must mature before a rate
adjustment would become effective. In 1998, seventeen percent of time deposits
were comprised of certificates of deposit accounts with balances of $100,000 or
more, which have traditionally been considered more rate volatile than lower
balance deposits, however at Royal Bank the penalty for early redemption
somewhat mitigates this volatility.


                                       23
<PAGE>   24
PROVISION FOR POSSIBLE LOAN LOSSES

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

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

         Due to recoveries exceeding charge offs for 1997 and 1996, a recovery
from the allowance for loan loss of $2.1 million (credit) and $1.5 million
(credit), respectively was recorded in 1997 and 1996. These recoveries in 1997
and 1996 were primarily due to Management's assessment that the overall level of
loan loss reserves was adequate. Charge offs in 1997 were $.8 million as
compared to $1.1 million for 1996. Recoveries in 1997 were $2 million as
compared to $1.9 million in 1996.

         The allowance for possible loan loss at December 31, 1998 was $11.9
million, or 3.9% of loans as compared to $8.2 million at December 31, 1997 or
2.8% of loans, and $9.1 million at December 31, 1996, or 4.3% of loans.


NON-INTEREST INCOME

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

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

         In 1997, non-interest income decreased $1.6 million to $2.6 million in
1997 from $4.2 million in 1996. This decrease primarily due to the decrease in
gains associated with the sale of other real estate owned in 1997. In 1997,
these gains were $1.2 million as compared to $2 million in 1996. Additionally,
gains on sale of loans decreased $.4 million in 1997 primarily due to a decrease
in total dollar volume of residential mortgage loans closed and sold in 1997
versus 1996. Loans are transferred into Other Real Estate when the Bank
forecloses on the real estate collateralizing a non-performing loan, or when the
borrower abandons the property and the Bank elects to assume control of the
property. When this occurs


                                       24
<PAGE>   25
the Bank will transfer the loan to Other Real Estate at the lower of the book
value of the loan or the fair market value, less disposal costs, of the real
estate held as collateral.


NON-INTEREST EXPENSE

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

         Non-interest expense decreased $3.7 million in 1998 to $10.9 million
from $14.6 million for 1997. This decrease is primarily due to a $4.5 million
decrease in salaries and employee benefits, partially offset by $.8 million
increase in other operating expense. The decrease in salaries and employee
benefits is primarily related to fluctuation in the accrual for the Stock Option
and Appreciation Right Plan for 1998 and 1997.
           RBPA has a Stock Option and Appreciation Right Plan, which provides
employees compensation in the form of options to purchase shares of the
Company's common stock. The reserve for future stock option expense is
reflective of the RBPA's stock price at December 31 of every year. Stock price
volatility can contribute to the volatility in the expense associated with the
Stock Option and Appreciation Right Plan. In 1998 RBPA's stock price decreased
to $16.00 at December 31 1998 from $23.50 at December 31, 1997. Accordingly,
RBPA recorded the difference between the current market values and the values at
the grant date of $1.4 million (credit) during 1998. The expense accrual for
1997 and 1996 were $3.8 million and $2.5 million, respectively, relating to
these stock appreciation rights as employee benefits expense toward the
difference between current market values and the values at the grant date.

         In 1997, total non-interest expense decreased $.5 million to $14.6
million as compared to $15.1 million for 1996. This decrease is primarily due to
various decreases in other operating expenses of $.5 million. While salaries and
employee benefits expense of $9.5 million represents the largest component of
non-interest expense, it decreased slightly from the $9.6 million recorded in
1996. These decreases were partially offset by a $.1 million increase in
occupancy expense relating to a settlement of a lease obligation assumed from
the Knoblauch State Bank acquisition.


ACCOUNTING FOR INCOME TAXES

         The provision for federal income taxes was $4.6 million in 1998 as
compared to $4.1 million for 1997 and $3.9 million for 1996 representing an
effective tax rate of 30%, 30.3% and 27.6%, respectively. The $.5 million
increase in the tax provision for 1998 is primarily due to a higher level of
taxable income for 1998 of $2 million, primarily related to interest income on
loans. The increase in the tax provision for 1997 was due to a change in the
deferred tax asset in 1997 from 1996.


ACCOUNTING FOR DEBT AND EQUITY SECURITIES

         The Bank adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," at January 1, 1994. This standard requires
investments in securities to be classified in one of three categories; held to
maturity, trading or available for sale. Debt securities that the Bank has the
positive intent and ability to hold to maturity are classified as held to
maturity and are reported at amortized cost. As the Bank does not engage in
security trading, the balance of its debt securities and any equity securities
are


                                       25
<PAGE>   26
classified as available for sale. Net unrealized gains and losses for such
securities, net of tax effect, are required to be recognized as a separate
component of stockholders' equity and excluded from the determination of net
income. Since the majority of the Bank's investments are classified as held to
maturity, the adoption of SFAS No. 115 did not have a significant effect on
stockholders' equity at January 1, 1994 and December 31, 1994.


ASSET LIABILITY MANAGEMENT

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

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

         RBPA generally maintains a liquidity ratio equal to or greater than 25%
of total deposits and short-term liabilities. Liquidity is specifically defined
as the ratio of net cash, short term and marketable assets to net deposits and
short-term liabilities. The liquidity ratio for the years ended December 31,
1998, 1997 and 1996 was 40%, 39%, 49%, respectively. Management believes that
RBPA's liquidity position continues to be adequate, continues to be in excess of
its peer group level and meets or exceeds the liquidity target set forth in the
Funds, Cash Flow and Liquidity Policies and Procedures. Management believes that
due to its financial position, it will be able to raise deposits as needed to
meet liquidity demands. However, any financial institution could have unmet
liquidity demands at any time.

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

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


                                       26
<PAGE>   27
         The following table summarizes repricing intervals for interest earning
assets and interest bearing liabilities as of December 31, 1998, and the
difference or "gap" between them on an actual and cumulative basis for the
periods indicated. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities.
During a period of falling interest rates, a positive gap would tend to
adversely affect net interest income, while a negative gap would tend to result
in an increase in net interest income. During a period of rising interest rates,
a positive gap would tend to result in an increase in net interest income while
a negative gap would tend to affect net interest income adversely. At December
31, 1998, RBPA is in an asset sensitive position of $11.7 million, which
indicates assets will reprice somewhat faster than liabilities within one year.

INTEREST RATE SENSITIVITY
(IN  MILLIONS)

<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         $  0.4        $   --        $   --       $   --       $   --        $  0.4
Federal funds sold                           13.6            --            --           --                       13.6
Investment securities:
       Available for sale                    37.0            --            --           --           --          37.0
       Held to maturity                       5.2           7.0          36.1         13.5           --          61.8
                                           ------        ------        ------       ------       ------        ------
    Total investment securities              42.2           7.0          36.1         13.5           --          98.8
Loans:(2)
       Fixed rate (3)                        13.6           6.1         113.0         28.0           --         160.7
       Variable rate                         33.0          32.9          58.9         27.0           --         151.8
                                           ------        ------        ------       ------       ------        ------
    Total loans                              46.6          39.0         171.9         55.0           --         312.5
Other assets(4)                                --            --            --           --          2.3           2.3
                                           ------        ------        ------       ------       ------        ------
    Total Assets                           $102.8        $ 46.0        $208.0       $ 68.5       $  2.3        $427.6
                                           ======        ======        ======       ======       ======        ======

LIABILITIES & CAPITAL
---------------------
Deposits:
       Non interest bearing deposits       $   --        $   --        $   --       $   --       $ 36.9        $ 36.9
       Interest bearing deposits(5)          70.1            --          28.9           --           --          99.0
       Certificate of deposits               23.4          42.7          88.4           --           --         154.5
                                           ------        ------        ------       ------       ------        ------
    Total deposits                           93.5          42.7         117.3           --         36.9         290.4
Short term borrowings                          --            --            --           --           --            --
Mortgage and long term borrowings                            --          30.0           --           --          30.9
                                                                                                                  0.9
Other liabilities                              --            --            --           --         12.2          12.2
Capital                                        --            --            --           --         94.1          94.1
                                           ------        ------        ------       ------       ------        ------
    Total liabilities & capital            $ 93.5        $ 43.6        $147.3       $   --       $143.2        $427.6
                                           ======        ======        ======       ======       ======        ======

Net interest rate GAP                      $  9.3        $  2.4        $ 60.7       $ 68.5      ($141.0)
                                           ======        ======        ======       ======       ======

Cumulative interest rate GAP               $  9.3        $ 11.7        $ 72.4       $141.0           --
                                           ======        ======        ======       ======       ======
GAP to total  assets                            2%            1%
                                           ======        ======
GAP to total equity                            14%            4%
                                           ======        ======
Cumulative GAP to total assets                  2%            3%
                                           ======        ======
Cumulative GAP to total equity                 14%           18%
                                           ======        ======
</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
         variable rate loans and includes nonperforming loans.

(3)      Fixed rate loans include a portion of variable rate loans whose floors
         are in effect at December 31, 1998.

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

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


                                       27
<PAGE>   28
         The method to analyze interest rate sensitivity in the table above has
a number of limitations. Certain assets and liabilities may react differently to
changes in interest rates even though they reprice or mature in the same time
periods. The interest rates on certain assets and liabilities may change at
different times than changes in market interest rates, with some changing in
advance of changes in market rates and some lagging behind changes in market
rates. Also, certain assets have provisions, which limit changes in interest
rates each time the interest rate changes and for the entire term of the loan.
Additionally, prepayments and withdrawals experienced in the event of a change
in interest rates may deviate significantly from those assumed in the interest
rate sensitivity table. Additionally, the ability of some borrowers to service
their debt may decrease in the event of an interest rate increase.


CAPITAL ADEQUACY

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

<TABLE>
<CAPTION>
                                                                           REGULATORY
                                          1998        1997        1996      MINIMUM
                                          ----        ----        ----      -------
<S>                                       <C>         <C>         <C>      <C>
CAPITAL LEVEL
   Leverage ratio                         22.1%       25.6%       24.2%        3%
   Risk based capital ratio:
        Tier 1                            24.1%       25.1%       28.9%        4%
        Tier 2                            25.4%       26.4%       30.2%        8%

CAPITAL PERFORMANCE
   Return on average assets                2.6%        2.7%        3.0%       --
   Return on average equity               11.8%       10.8%       12.7%       --
</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, 1998, RBPA had an average capital to
average asset ratio of 22.4%. RBPA has no current plans to raise capital through
new stock offerings and indeed, seeks ways to leverage its existing capital,
which is considered excessive by industry standards.

         In early 1989, each of the federal bank regulatory agencies issued
risk-based capital standards, which were phased in December 31, 1992. The new
standards place assets in various categories of risk with varying weights
assigned, and consider certain off-balance sheet activities, such as letters of
credit and loan commitments in the base for purposes of determining capital
adequacy. The principal objective of establishing the risk-based capital
framework is to achieve greater convergence in the measurement and assessment of
capital adequacy due to the divergence of asset mixes maintained from one
depository institution to the next. At December 31, 1998, RBPA's ratio using
these standards was 24.1%.


YEAR 2000

         Management has initiated a company wide program to prepare RBPA's
computer systems and applications for the year 2000. The year 2000 problem is
pervasive and complex as virtually every computer system will be affected in
some way by the rollover of the two-digit year value to 00. Through a special
committee, RBPA has conducted a comprehensive review of its computer systems and
third party vendors providing hardware and software services and has identified
systems and vendors that could be


                                       28
<PAGE>   29
affected by the year 2000 issue. The Bank subsidiary will replace or cause third
party vendors to replace all software and hardware that is not year 200
compliant. All year 200 replacement software and hardware will be fully tested
by March 31, 1999. As much of RBPA's data processing is outsourced to third
party vendors, RBPA does not expect the costs associated with year 2000
compliance over the next three years to have a material effect on its financial
position or results of operations. The amount expensed in 1998 was immaterial.


MANAGEMENT OPTIONS TO PURCHASE SECURITIES

         On June 27, 1990, the directors of the Bank approved the Royal Bank of
Pennsylvania Non-qualified Stock Option and Appreciation Right Plan (the Plan).
The Plan was reapproved by the shareholders in connection with the formation of
the holding company. The Plan is an incentive program under which Bank officers
and other key employees may be awarded additional compensation in the form of
options to purchase up to 1,000,000 shares of the Registrant's Class A common
stock (but not in excess of 15% of outstanding shares). The option price is
equal to the fair market value at the date of the grant. At December 31, 1998,
464,583 options have been granted (the fair market per share at the time of the
grant was $19.95 in 1998 and $13.75 in 1997) which are exercisable at 20% per
year. At December 31, 1998, options covering 304,258 shares were exercisable.

         In 1990, the directors of the Bank approved a non-qualified Outside
Directors Stock Option Plan. The Plan was reapproved by the shareholders in
connection with the formation of the holding company. Under the terms of the
plan, 150,000 shares of Class A stock are authorized for grants. Each director
is entitled to 1,500 shares of stock annually, which is exercisable after one
year of service. The options were granted at the fair market value ($19.952 per
share in 1998 and $13.75 in 1997) at the date of the grant. Currently, the
strike price on the options ranges from $2.608 to $19.952 per share. During
1998, 1,404 options were exercised at strike prices of $7.345 per share. At
December 31, 1998, 63,992 options were outstanding and options covering 49,952
shares were exercisable.


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

                   At December 31, 1998 (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                         Market Value of           Percent of
                              Changes in Rates           Portfolio Equity            Change
                              ----------------           ----------------            ------
<S>                                                      <C>                       <C>
                             + 300 basis points              $ 97,860                (10.3)
                             + 200 basis points               101,614                 (6.9)
                             + 100 basis points               105,367                 (3.4)
                                 Flat rate                    109,120                   --
                             - 100 basis points               116,626                  6.9
                             - 200 basis points               124,134                 13.8
                             - 300 basis points               131,640                 20.6
</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


                                       29
<PAGE>   30
economic conditions. The interest rate sensitivity of assets and liabilities as
well as the estimated effect of changes in interest rates on the market value of
portfolio equity could vary substantially if different assumptions are used or
actual experience differs from the calculations were based.




                                       30
<PAGE>   31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




            FINANCIAL STATEMENTS AND REPORT OF
         INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

          ROYAL BANCSHARES OF PENNSYLVANIA, INC.
                     AND SUBSIDIARIES

                DECEMBER 31, 1998 AND 1997




                                       31
<PAGE>   32
               Report of Independent Certified Public Accountants


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


We have audited the accompanying consolidated balance sheets of Royal Bancshares
of Pennsylvania, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity and
comprehensive income and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

          In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Royal
Bancshares of Pennsylvania, Inc. and Subsidiaries as of December 31, 1998 and
1997, and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.





/s/ Grant Thornton, LLP
--------------------------
Philadelphia, Pennsylvania
January 22, 1999


                                       32
<PAGE>   33
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEETS

                                  December 31,

<TABLE>
<CAPTION>
               ASSETS                                                                         1998                 1997
                                                                                         -------------        -------------
<S>                                                                                      <C>                  <C>
Cash and due from banks                                                                  $   5,592,624        $   7,491,242
Federal funds sold                                                                          13,550,000           22,925,000
                                                                                         -------------        -------------
               Total cash and cash equivalents                                              19,142,624           30,416,242
                                                                                         -------------        -------------
Interest bearing deposits in banks                                                             100,030              300,030
Investment securities held to maturity (market value of $62,159,860
    and $64,984,987 in 1998 and 1997, respectively)                                         61,894,538           64,371,042
Investment securities available for sale - at market value                                  36,951,162           21,048,793
Total loans                                                                                304,475,629          290,897,048
    Less allowance for loan losses                                                          11,919,545            8,186,237
                                                                                         -------------        -------------
               Net loans                                                                   292,556,084          282,710,811
Other real estate, net                                                                         707,397                   --
Premises and equipment, net                                                                  5,452,765            4,788,921
Accrued interest and other assets                                                           10,817,184           12,962,240
                                                                                         -------------        -------------
                                                                                         $ 427,621,784        $ 416,598,079
                                                                                         =============        =============
               LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
    Deposits
       Non-interest bearing                                                              $  41,150,730        $  37,712,928
       Interest bearing (includes certificates of deposit in excess of $100,000 of
         $48,754,354 and $33,175,135 in 1998 and 1997, respectively)                       249,238,955          227,650,506
                                                                                         -------------        -------------
               Total deposits                                                              290,389,685          265,363,434
    Federal funds purchased                                                                         --           15,000,000
    Accrued interest and other liabilities                                                  12,271,111           15,095,998
    Long-term borrowings                                                                    30,365,000           31,063,000
    Mortgage payable                                                                           526,720              570,885
                                                                                         -------------        -------------
               Total liabilities                                                           333,552,516          327,093,317
                                                                                         -------------        -------------
Stockholders' equity
    Common stock
       Class A, par value $2.00 per share; authorized, 18,000,000 shares; issued,
         7,429,689 and 7,015,721 shares in 1998 and 1997, respectively                      14,859,378           14,031,442
       Class B, par value $0.10 per share; authorized, 2,000,000 shares; issued,
         1,630,544 and 1,592,859 shares in 1998 and 1997, respectively                         163,054              159,286
    Capital surplus                                                                         45,392,659           38,797,618
    Retained earnings                                                                       34,556,343           38,023,359
    Accumulated other comprehensive income                                                   1,242,919              638,142
                                                                                         -------------        -------------
                                                                                            96,214,353           91,649,847
    Treasury stock - at cost, 207,516 Class A shares in 1998
       and 1997, respectively                                                               (2,145,085)          (2,145,085)
                                                                                         -------------        -------------
                                                                                            94,069,268           89,504,762
                                                                                         -------------        -------------
                                                                                         $ 427,621,784        $ 416,598,079
                                                                                         =============        =============
</TABLE>

The accompanying notes are an integral part of these statements.


                                       33
<PAGE>   34
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

                        CONSOLIDATED STATEMENTS OF INCOME

                             Year ended December 31,

<TABLE>
<CAPTION>
                                                                                 1998               1997                1996
                                                                             ------------       ------------        ------------
<S>                                                                          <C>                <C>                 <C>
Interest income
    Loans, including fees                                                    $ 33,513,439       $ 25,559,901        $ 25,109,566
    Investment securities held to maturity
        Taxable                                                                 3,227,921          5,604,469           7,005,539
        Tax-exempt                                                                207,931            116,779              58,488
    Investment securities available for sale
        Taxable                                                                 2,121,921            893,447              64,293
        Tax-exempt                                                                173,199             97,937             261,443
    Deposits in banks                                                              24,251            112,294             131,005
    Federal funds sold                                                          1,371,643            986,552             987,370
                                                                             ------------       ------------        ------------
           TOTAL INTEREST INCOME                                               40,640,305         33,371,379          33,617,704
                                                                             ------------       ------------        ------------
Interest expense
    Deposits                                                                   11,167,451          9,810,104           9,711,456
    Mortgage payable and other                                                  1,995,750            231,252             342,819
    Federal funds purchased                                                            --              6,148                  --
                                                                             ------------       ------------        ------------
           TOTAL INTEREST EXPENSE                                              13,163,201         10,047,504          10,054,275
                                                                             ------------       ------------        ------------
           NET INTEREST INCOME                                                 27,477,104         23,323,875          23,563,429
Increase (Decrease) in provision for loan losses                                4,769,785         (2,118,281)         (1,487,734)
                                                                             ------------       ------------        ------------
           NET INTEREST INCOME AFTER PROVISION
              FOR LOAN LOSSES                                                  22,707,319         25,442,156          25,051,163
                                                                             ------------       ------------        ------------

Other income
    Service charges and fees                                                      830,932            981,111           1,008,054
    Realized gains on sale of investment securities available for sale                 --             13,643                  --
    Gain on other real estate                                                          --          1,204,443           2,015,994
    Gain on sale of loans                                                           3,831             28,585             427,023
    Other income                                                                2,739,602            397,194             780,333
                                                                             ------------       ------------        ------------
                                                                                3,574,365          2,624,976           4,231,404
                                                                             ------------       ------------        ------------
Other expenses
    Salaries, wages and employee benefits                                       5,028,428          9,545,799           9,601,628
    Occupancy and equipment                                                       706,320            756,202             660,219
    Other operating expenses                                                    5,138,734          4,332,119           4,876,719
                                                                             ------------       ------------        ------------
                                                                               10,873,482         14,634,120          15,138,566
                                                                             ------------       ------------        ------------
           INCOME BEFORE INCOME TAXES                                          15,408,202         13,433,012          14,144,001
Income taxes                                                                    4,624,262          4,074,280           3,907,111
                                                                             ------------       ------------        ------------
           NET INCOME                                                        $ 10,783,940       $  9,358,732        $ 10,236,890
                                                                             ============       ============        ============
Per share data
    Net income - basic                                                       $       1.19       $       1.04        $       1.16
                                                                             ============       ============        ============
    Net income - diluted                                                     $       1.15       $       1.00        $       1.13
                                                                             ============       ============        ============
</TABLE>

The accompanying notes are an integral part of these statements.




                                       34
<PAGE>   35
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                            AND COMPREHENSIVE INCOME

                  Years ended December 31, 1998, 1997 and 1996


<TABLE>
<CAPTION>
                                                          Class A common stock      Class B common stock
                                                        -----------------------    ----------------------      Capital
                                                          Shares       Amount        Shares       Amount       surplus
                                                        ---------   -----------    ---------    ---------    -----------
<S>                                                     <C>         <C>            <C>          <C>          <C>
Balance, January 1, 1996                                6,086,554   $12,173,108    1,529,100    $ 152,910    $29,871,868
    Net income for the year ended December 31, 1996            --            --           --           --             --
    Conversion of Class B common stock to Class A
      common stock                                         32,851        65,702      (28,650)      (2,865)            --
    6% stock dividends declared                           365,229       730,458       91,641        9,164      4,025,365
    Cash in lieu of fractional shares                          --            --           --           --             --
    Purchase of treasury stock                                 --            --           --           --             --
    Stock options exercised                               111,991       223,982           --           --        930,210
    Cash dividends on common stock                             --            --           --           --             --
    Other comprehensive income, net of
      reclassifications and taxes                              --            --           --           --             --
                                                        ---------   -----------    ---------    ---------    -----------
    Comprehensive income


Balance, December 31, 1996                              6,596,625    13,193,250    1,592,091      159,209     34,827,443

    Net income for the year ended December 31, 1997            --            --           --           --             --
    Conversion of Class B common stock to Class A
      common stock                                         70,344       140,688      (61,091)      (6,109)            --
    4% stock dividends declared                           258,176       516,352       61,859        6,186      3,799,706
    Cash in lieu of fractional shares                          --            --           --           --             --
    Purchase of treasury stock                                 --            --           --           --             --
    Stock options exercised                                90,576       181,152           --           --        170,469
    Cash dividends on common stock                             --            --           --           --             --
    Other comprehensive income, net of
      reclassifications and taxes                              --            --           --           --             --
                                                        ---------   -----------    ---------    ---------    -----------
    Comprehensive income

</TABLE>

<TABLE>
<CAPTION>
                                                                         Accumulated
                                                                            other
                                                          Retained      comprehensive    Treasury     Comprehensive
                                                          earnings      income (loss)     stock          income
                                                        ------------    -------------  -----------    -------------
<S>                                                     <C>             <C>            <C>            <C>
Balance, January 1, 1996                                $ 34,991,338      $    (564)   $        --
    Net income for the year ended December 31, 1996       10,236,890             --             --    $ 10,236,890
    Conversion of Class B common stock to Class A
      common stock                                           (62,837)            --             --
    6% stock dividends declared                           (4,764,987)            --             --
    Cash in lieu of fractional shares                         (2,099)            --             --
    Purchase of treasury stock                                    --             --     (2,025,874)
    Stock options exercised                                       --             --             --
    Cash dividends on common stock                        (1,970,505)            --             --
    Other comprehensive income, net of
      reclassifications and taxes                                 --           (594)            --            (594)
                                                        ------------      ---------    -----------    ------------
    Comprehensive income                                                                              $ 10,236,296
                                                                                                      ============

Balance, December 31, 1996                                38,427,800         (1,158)    (2,025,874)

    Net income for the year ended December 31, 1997        9,358,732             --             --       9,358,732
    Conversion of Class B common stock to Class A
      common stock                                          (134,579)            --             --
    4% stock dividends declared                           (4,322,244)            --             --
    Cash in lieu of fractional shares                         (2,477)            --             --
    Purchase of treasury stock                                    --             --       (119,211)
    Stock options exercised                                       --             --             --
    Cash dividends on common stock                        (5,303,873)            --             --
    Other comprehensive income, net of
      reclassifications and taxes                                 --        639,300             --         639,300
                                                        ------------      ---------    -----------    ------------
    Comprehensive income                                                                              $  9,998,032
                                                                                                      ============
</TABLE>


                                   (Continued)


                                       35
<PAGE>   36
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

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

                  Years ended December 31, 1998, 1997 and 1996


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


Balance, December 31, 1998                              7,429,689   $14,859,378    1,630,544    $ 163,054    $45,392,659
                                                        =========   ===========    =========    =========    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                         Accumulated
                                                                            other
                                                          Retained      comprehensive    Treasury     Comprehensive
                                                          earnings      income (loss)     stock          income
                                                        ------------    -------------  -----------    -------------
<S>                                                     <C>             <C>            <C>            <C>
Balance, December 31, 1997                              $38,023,359      $  638,142    $(2,145,085)
    Net income for the year ended December 31, 1998      10,783,940                                    $10,783,940
    Conversion of Class B common stock to Class A
      common stock                                          (56,533)
    4% stock dividends declared                          (7,017,070)
    Cash in lieu of fractional shares                        (2,023)
    Stock options exercised
    Cash dividends on common stock                       (7,175,330)
    Other comprehensive income, net of
      reclassifications and taxes                                           604,777                        604,777
                                                        -----------      ----------    -----------     -----------
    Comprehensive income                                                                               $11,388,717
                                                                                                       ===========

Balance, December 31, 1998                              $34,556,343      $1,242,919    $(2,145,085)
                                                        ===========      ==========    ===========
</TABLE>




         The accompanying notes are an integral part of this statement.


                                       36
<PAGE>   37
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                             Year ended December 31,



<TABLE>
<CAPTION>
                                                                  1998              1997              1996
                                                              ------------      ------------      ------------
<S>                                                           <C>               <C>               <C>
Cash flows from operating activities
    Net income                                                $ 10,783,940      $  9,358,732      $ 10,236,890
    Adjustments to reconcile net income to
           net cash provided by operating activities
        Depreciation and amortization                              351,039           323,916           412,395
        (Increase)Decrease in provision for loan losses          4,769,785        (2,118,281)       (1,487,734)
        Accretion of investment securities discount                (75,116)          (61,462)          (70,938)
        Amortization of investment securities premium              294,699           697,987           722,147
        Amortization of deferred loan fees                        (278,215)         (137,591)         (130,272)
        Accretion of discount on loans purchased                (3,005,281)       (1,849,384)       (1,265,330)
        Provision (benefit) for deferred income taxes               75,361           579,007          (912,654)
        Gain on other real estate                                       --        (1,204,443)       (2,015,994)
        Gain on sale of loans                                       (3,831)          (28,585)         (427,023)
        Realized gains on sale of investment securities
           available for sale                                           --           (13,643)               --
        (Decrease)Increase in accrued interest receivable           99,146          (626,542)         (301,024)
        Decrease in other assets                                 1,915,737         1,648,874         1,394,977
        Increase in accrued interest payable                     1,288,379           952,653           768,127
        Increase in unearned income on loans                       613,025           345,443           261,203
        (Decrease) increase in other liabilities                (4,113,266)          934,994         2,954,589
                                                              ------------      ------------      ------------

               Net cash provided by operating activities        12,715,402         8,801,675        10,139,359
                                                              ------------      ------------      ------------

Cash flows from investing activities
    Net increase (decrease) in interest bearing balances
        in banks                                                   200,000           652,970          (234,249)
    Proceeds from calls and maturities of investment
        securities held to maturity                             43,508,610        58,516,144        18,554,228
    Purchase of investment securities held to maturity         (41,251,689)       (9,310,907)      (29,217,548)
    Proceeds from sale of investment securities available
        for sale                                                        --            18,129                --
    (Purchase) sales of Federal Home Loan Bank stock                 5,000        (2,150,000)               --
    Purchase of investment securities available for sale       (15,302,591)      (14,276,725)       (3,755,408)
    Net increase in loans                                      (12,593,341)      (14,331,580)      (10,118,860)
    Purchase of loan portfolio                                          --       (66,740,249)               --
    Purchase of premises and equipment                          (1,014,883)         (404,306)         (693,677)
    Proceeds from sale and payments on other real estate                --         1,708,547         2,124,138
                                                              ------------      ------------      ------------

               Net cash used in investing activities           (26,448,894)      (46,317,977)      (23,341,376)
                                                              ------------      ------------      ------------
</TABLE>




                                   (Continued)


                                       37
<PAGE>   38
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                             Year ended December 31,



<TABLE>
<CAPTION>
                                                                           1998              1997              1996
                                                                       ------------      ------------      ------------
<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            10,718,876        (6,135,112)       (4,275,541)
    Net increase (decrease) in certificates of deposit                   14,307,375        17,315,943        (9,783,396)
    Mortgage payments                                                       (44,165)          (41,722)          (39,760)
    Cash dividends in lieu of fractional shares                              (2,023)           (2,479)           (2,099)
    Purchase of treasury stock                                                   --          (119,211)       (2,025,874)
    Net increase (decrease) in long-term borrowings                        (698,000)       26,862,000         1,869,000
    Issuance of common stock under stock option plans                       353,141         1,987,986         1,154,192
    Cash dividends                                                       (7,175,330)       (5,303,873)       (1,970,505)
                                                                       ------------      ------------      ------------

               Net cash provided by (used in) financing activities        2,459,874        49,563,532       (15,073,983)
                                                                       ------------      ------------      ------------

               NET INCREASE (DECREASE) IN
                   CASH AND CASH EQUIVALENTS                            (11,273,618)       12,047,230       (28,276,000)

Cash and cash equivalents at beginning of year                           30,416,242        18,369,012        46,645,012
                                                                       ------------      ------------      ------------

Cash and cash equivalents at end of year                               $ 19,142,624      $ 30,416,242      $ 18,369,012
                                                                       ============      ============      ============

Supplemental disclosure of cash flow information
    Cash paid during the year for
        Interest                                                       $ 11,874,822      $  9,094,851      $  9,286,149
                                                                       ============      ============      ============

        Income taxes                                                   $  2,750,000      $  3,750,000      $  4,850,000
                                                                       ============      ============      ============
</TABLE>




The accompanying notes are an integral part of these statements.


                                       38
<PAGE>   39
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1998 and 1997



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

    1.  Business

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

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

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

    2.  Use of Estimates

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

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




                                   (Continued)



                                       39
<PAGE>   40
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1998 and 1997




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    3.  Investment Securities

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

    In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
    No. 133, Accounting for Derivative Instruments and Hedging Activity. SFAS
    No. 133 establishes accounting and reporting standards for derivative
    instruments, including certain derivative instruments imbedded in other
    contracts, and for hedging activities. It requires that an entity recognize
    all derivatives as either assets or liabilities in the statement of
    financial position and measure those instruments at fair value. If certain
    conditions are met, a derivative may be specifically designated as a hedge.
    The accounting for changes in the fair value of a derivative (gains and
    losses) depends on the intended use of the derivative and resulting
    designation. SFAS No. 133 is effective for all fiscal quarters of fiscal
    years beginning after June 15, 1999. Earlier application is permitted only
    as of the beginning of any fiscal quarter. The adoption of SFAS No. 133 is
    not anticipated to have a material impact on the Company's financial
    position or results of operations.

    4.  Allowance for Loan Losses

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

    The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of
    a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment
    of a Loan - Income Recognition and Disclosures," on October 1, 1995. This
    new standard requires that a creditor measure impairment based on the
    present value of expected future cash flows discounted at the loan's
    effective interest rate, except that as a practical expedient, a creditor
    may measure impairment based on a loan's observable market price, or the
    fair value of the collateral if the loan is collateral-dependent. Regardless
    of the measurement method, a creditor must measure impairment based on the
    fair value of the collateral when the creditor determines that foreclosure
    is probable. The adoption of SFAS No. 114, as amended by SFAS No. 118, had
    no material impact on the Company's consolidated financial position or
    results of operations.


                                   (Continued)




                                       40
<PAGE>   41
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1998 and 1997



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    5.  Loan Fees and Related Costs

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

    6.  Other Real Estate

    Other real estate is recorded at the lower of the customer's loan balance or
    the adjusted fair market value of the real estate securing the loan. The
    adjusted fair market value is determined by reducing the fair market value
    by estimated costs for the disposition of the property. Costs relating to
    holding the property are expensed when incurred.

    7.  Premises and Equipment

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

    8.  Income Taxes

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

    9.  Profit-Sharing Plan

    The Company has a contributory 401(k) plan covering substantially all
    employees. The Company contributed $127,788, $135,650 and $125,964 for 1998,
    1997 and 1996, respectively.




                                   (Continued)


                                       41
<PAGE>   42
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    10.  Stock Option Plans

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

    On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
    Stock-Based Compensation," which allows an entity to use a fair value-based
    method for valuing stock-based compensation which measures compensation cost
    at the grant date based on the fair value of the award. Compensation is then
    recognized over the service period, which is usually the vesting period.
    Alternatively, the standard permits entities to continue accounting for
    employee stock options and similar instruments under Accounting Principles
    Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
    its related Interpretations. Entities that continue to account for stock
    options using APB Opinion No. 25 are required to make pro forma disclosures
    of net income and earnings per share (EPS), as if the fair value-based
    method of accounting defined in SFAS No. 123 had been applied.

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

    11.  Per Share Information

    During 1997, the Company adopted the provisions of SFAS No. 128, "Earnings
    Per Share," which eliminates primary and fully diluted EPS and requires
    presentation of basic and diluted EPS in conjunction with the disclosure of
    the methodology used in computing such EPS. Basic EPS excludes dilution and
    is computed by dividing income available to common shareholders by the
    weighted average common shares outstanding during the period. Diluted EPS
    takes into account the potential dilution that could occur if securities or
    other contracts to issue common stock were exercised and converted into
    common stock. Prior period EPS calculations have been restated to reflect
    the adoption of SFAS No. 128. Basic and diluted EPS are calculated as 
    follows:


<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         9,030,657      $    1.19

    Effect of dilutive securities
       Stock options                                                         333,016
                                                       -----------         ---------      ---------

    Diluted EPS
       Income available to common shareholders
          plus assumed exercise of options             $10,783,940         9,363,673      $    1.15
                                                       ===========         =========      =========
</TABLE>


                                   (Continued)


                                       42
<PAGE>   43

             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued


<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             9,000,989            $   1.04

Effect of dilutive securities
   Stock options                                            --                 312,923                --   
                                                      ----------            ----------            --------

Diluted EPS
   Income available to common shareholders
      plus assumed exercise of options                $9,358,732             9,313,912            $   1.00
                                                      ==========            ==========            ========
</TABLE>


<TABLE>
<CAPTION>
                                                                                 1996 
                                                      -----------------------------------------------------
                                                        Income              Average shares        Per share
                                                      (numerator)           (denominator)           amount 
                                                      -----------           --------------        ---------
<S>                                                   <C>                   <C>                   <C>  
Basic EPS
   Income available to common shareholders            $10,236,890              8,827,197            $1.16

Effect of dilutive securities
   Stock options                                             --                  231,678             --   
                                                      -----------            -----------            -----

Diluted EPS
   Income available to common shareholders
      plus assumed exercise of options                $10,236,890              9,058,875            $1.13
                                                      ===========            ===========            =====
</TABLE>

    EPS is calculated on the basis of the weighted average number of shares
    outstanding of 9,030,657, 9,000,989 and 8,827,197 for the years ended
    December 31, 1998, 1997 and 1996, respectively. Per share information and
    weighted average shares outstanding have been restated to reflect the 4%
    stock dividend of May 1998, the 4% stock dividend of May 1997 and the 6%
    stock dividend of May 1996.

    12.  Cash and Cash Equivalents

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


                                   (Continued)


                                       43
<PAGE>   44
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    13.  Financial Instruments

    The Company follows the provisions of SFAS No. 107, "Disclosures about Fair
    Value of Financial Instruments," which requires all entities to disclose the
    estimated fair value of their assets and liabilities considered to be
    financial instruments. Financial instruments consist primarily of
    securities, loans and deposits. The Company has provided these disclosures
    in note R.

    14.  Long-Lived Assets

    On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
    Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
    Of," which provides guidance on when to recognize and how to measure
    impairment losses of long-lived assets and certain identifiable intangibles
    and how to value long-lived assets to be disposed of. The adoption of SFAS
    No. 121 had no material impact on the Company's consolidated financial
    position or results of operations.

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

    The Company adopted SFAS No. 125, "Accounting for Transfers and Servicing
    of Financial Assets and Extinguishments of Liabilities," as amended by SFAS
    No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No.
    125," in 1997. SFAS No. 125 applies a control-oriented, financial components
    approach to financial asset transfer transactions whereby the Company: (1)
    recognizes the financial and servicing assets it controls and the
    liabilities it has incurred; (2) derecognizes financial assets when control
    has been surrendered; and (3) derecognizes liabilities once they are
    extinguished. Under SFAS No. 125, control is considered to have been
    surrendered only if: (i) the transferred assets have been isolated from the
    transferor and its creditors, even in bankruptcy or other receivership; (ii)
    the transferee has the right to pledge or exchange the transferred assets or
    is a qualifying special-purpose entity (as defined) and the holders of
    beneficial interests in that entity have the right to pledge or exchange
    those interests; and (iii) the transferor does not maintain effective
    control over the transferred assets through an agreement which both entitles
    and obligates it to repurchase or redeem those assets prior to maturity, or
    through an agreement which both entitles it to repurchase or redeem those
    assets if they were not readily obtainable elsewhere. If any of these
    conditions are not met, the Company accounts for the transfer as a secured
    borrowing. SFAS No. 125 also requires that the Company derecognize a
    liability if and when it is extinguished. A liability is considered
    extinguished under SFAS No. 125 if: (1) the Company pays the creditor and,
    thus, is relieved of its obligation for the liability; or (2) is legally
    released from being the primary obligor under the liability, either
    judicially or by the creditor. The adoption of SFAS No. 125 had no material
    impact on the Company's consolidated financial position or results of
    operations.


                                   (Continued)


                                       44
<PAGE>   45
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    16.  Advertising Costs

    The Company and the Bank expense advertising costs as incurred.

    17.  Comprehensive Income

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

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


<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>


<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>


                                   (Continued)


                                       45
<PAGE>   46
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

<TABLE>
<CAPTION>
                                                                           December 31, 1997                       
                                                             --------------------------------------------
                                                                                Net of
                                                             Before tax           Tax               tax
                                                               amount           expense            amount    
                                                             ----------         -------            ------
<S>                                                          <C>                <C>                <C>   
Unrealized losses on securities
    Unrealized holding losses arising during period            $(898)            $(304)            $(594)
    Less reclassification adjustment for gains
    realized in net income                                      --                --                --   
                                                               -----             -----             -----

    Other comprehensive loss, net                              $(898)            $(304)            $(594)
                                                               =====             =====             =====
</TABLE>

    18.  Reclassifications

    Certain reclassifications of prior year amounts have been made to conform to
the 1998 presentation.

NOTE B - INVESTMENT SECURITIES

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


<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
                                                  ===========            ===========            ===========            ===========
</TABLE>


                                   (Continued)


                                       46
<PAGE>   47
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




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 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>



<TABLE>
<CAPTION>
                                                                                          1997
                                                    --------------------------------------------------------------------------------
                                                                              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            $    53,187            $      --              $ 3,151,652
   U.S. treasuries                                    5,620,004                 32,529                   --                5,652,533
   Corporate securities                              48,364,507                392,135                 19,217             48,737,425
   U.S. agencies                                      7,288,066                155,346                     36              7,443,377
                                                    -----------            -----------            -----------            -----------
                                                    $64,371,042            $   633,197            $    19,253            $64,984,987
                                                    ===========            ===========            ===========            ===========

Investment securities available for sale
   Federal Home Loan Bank stock -
       at cost                                      $ 3,174,200            $      --              $      --              $ 3,174,200
   Preferred and common stock                         2,944,209                 33,180                   --                2,977,389
   Other securities                                  13,963,503                933,701                   --               14,897,204
                                                    -----------            -----------            -----------            -----------

                                                    $20,081,912            $   966,881            $      --              $21,048,793
                                                    ===========            ===========            ===========            ===========
</TABLE>


                                   (Continued)


                                       47
<PAGE>   48
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE B - INVESTMENT SECURITIES - Continued

    The amortized cost and estimated fair value of investment securities at
    December 31, 1998 and 1997, by contractual maturity, are shown below.
    Expected maturities will differ from contractual maturities because
    borrowers may have the right to call or prepay obligations with or without
    call or prepayment penalties.


<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>


<TABLE>
<CAPTION>
                                                                              1997
                                        --------------------------------------------------------------------------------
                                                  Held to maturity                            Available for sale            
                                        ----------------------------------            ----------------------------------
                                                                Estimated                                     Estimated
                                         Amortized                fair                 Amortized                fair
                                           cost                  value                   cost                   value     
                                        -----------            -----------            -----------            -----------
<S>                                     <C>                    <C>                    <C>                    <C>      
Within 1 year                           $40,619,909            $40,710,209            $      --              $      --
After 1 but within 5 years               12,834,561             12,991,167                   --                     --
After 5 but within 10 years               7,140,579              7,374,922                   --                     --
After 10 years                            3,775,993              3,908,689             13,963,503             14,897,204
                                        -----------            -----------            -----------            -----------
                                         64,371,042             64,984,987             13,963,503             14,897,204
Federal Home Loan Bank stock                   --                     --                3,174,200              3,174,200
Preferred and common stock                     --                     --                2,944,209              2,977,389
                                                               -----------            -----------            -----------
                                        $64,371,042            $64,984,987            $20,081,912            $21,048,793
                                        ===========            ===========            ===========            ===========
</TABLE>

    Proceeds from the sale of investment securities available for sale during
    1998, 1997 and 1996 were $-0-, $18,129 and $-0-, respectively, resulting in
    gross realized gains of $-0-, $13,643 and $-0- during 1998, 1997 and 1996,
    respectively.

    As of December 31, 1998 and 1997, investment securities with a book value of
    $13,716,861 and $25,354,865, respectively, were pledged as collateral to
    secure public deposits and for other purposes required or permitted by law.


                                       48
<PAGE>   49
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE C - LOANS

    Major classifications of loans are as follows:

<TABLE>
<CAPTION>
                                                               1998                       1997       
                                                           -------------             -------------
<S>                                                        <C>                       <C>          
Consumer                                                   $   2,032,878             $   1,523,410
Commercial and industrial                                    127,972,082               123,800,129
Real estate                                                  182,595,194               176,315,363
                                                           -------------             -------------
        Total gross loans                                    312,600,154               301,638,902
Less
   Unearned income                                            (1,833,236)               (1,498,426)
        Unamortized discount on loans purchased               (6,291,289)               (9,243,428)
                                                           -------------             -------------
        Total loans                                        $ 304,475,629             $ 290,897,048
                                                           =============             =============
</TABLE>

    Loans on which the accrual of interest has been discontinued or reduced
    amounted to $3,419,378 and $4,316,852 at December 31, 1998 and 1997,
    respectively. If interest had been accrued, such income would have been
    $307,744 and $388,517 for the years ended December 31, 1998 and 1997,
    respectively. Although the Company has non-performing loans of $3,419,378 at
    December 31, 1998, management believes it has adequate collateral to limit
    its credit risk.

    The Company granted loans to the officers and directors of the Company and
    to their associates. Related party loans are made on substantially the same
    terms, including interest rates and collateral, as those prevailing at the
    time for comparable transactions with unrelated persons and do not involve
    more than normal risk of collectibility. The aggregate dollar amount of
    these loans was $14,393,830 and $14,651,598 at December 31, 1998 and 1997,
    respectively. During 1998, $1,224,204 of new loans were made and repayments
    totalled $1,481,972.

    The balance of impaired loans was $1,324,829 at December 31, 1998. The
    Company has identified a loan as impaired when it is probable that interest
    and principal will not be collected according to the contractual terms of
    the loan agreements. The income recognized on impaired loans during 1998 was
    $2,753. Total cash collected on impaired loans during 1998 was $148,175, of
    which $145,422 was credited to the principal balance outstanding on such
    loans. Interest that would have been accrued on impaired loans during 1998
    was $56,376. The Company's policy for interest income recognition on
    impaired loans is to recognize income on currently performing restructured
    loans under the accrual method. The Company recognizes income on non-accrual
    loans under the cash basis when the principal payments on the loans become
    current and the collateral on the loan is sufficient to cover the
    outstanding obligation to the Company. If these factors do not exist, the 
    Company does not recognize income.


                                       49
<PAGE>   50
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE D - ALLOWANCE FOR LOAN LOSSES

    Changes in the allowance for loan losses were as follows:

<TABLE>
<CAPTION>
                                                                1998                     1997                     1997      
                                                            ------------             ------------             ------------
<S>                                                         <C>                      <C>                      <C>         
Balance at beginning of year                                $  8,186,237             $  9,084,153             $  9,746,559
                                                            ------------             ------------             ------------

   Charge-offs                                                (1,635,919)                (761,790)              (1,082,865)
   Recoveries                                                    599,442                1,982,155                1,908,193
                                                            ------------             ------------             ------------

          Net charge-offs and recoveries                      (1,036,477)               1,220,365                  825,328

Increase (Decrease) in provision for loan losses               4,769,785               (2,118,281)              (1,487,734)
                                                            ------------             ------------             ------------

Balance at end of year                                      $ 11,919,545             $  8,186,237             $  9,084,153
                                                            ============             ============             ============
</TABLE>

NOTE E - PREMISES AND EQUIPMENT

    Premises and equipment are summarized as follows:

<TABLE>
<CAPTION>
                                                                    Estimated
                                                                   useful lives           1997             1997      
                                                               -------------------   ---------------  ---------------
<S>                                                            <C>                   <C>              <C>            
        Land                                                       -                   $ 1,373,478      $ 1,373,478
        Buildings and leasehold improvements                    15 - 31.5 years          4,825,378        4,001,994
        Furniture and fixtures                                   5 - 7    years          2,495,844        2,306,038
                                                                                       -----------      -----------
                                                                                         8,694,700        7,681,510
        Less accumulated depreciation and amortization                                   3,241,935        2,892,589
                                                                                       -----------      -----------
                                                                                       $ 5,452,765      $ 4,788,921
                                                                                       ===========      ===========
</TABLE>


                                       50
<PAGE>   51
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997


NOTE F - DEPOSITS

    Deposits are summarized as follows:

<TABLE>
<CAPTION>
                                                                                     1997                     1997       
                                                                                 ------------            ------------
<S>                                                                              <C>                     <C>         
  Demand                                                                         $ 41,150,730            $ 37,712,928
  NOW and money market                                                             75,348,561              70,026,150
  Savings                                                                          19,405,323              17,446,660
  Time, $100,000 and over                                                          48,754,354              33,175,135
  Other time                                                                      105,730,717             107,002,561
                                                                                 ------------            ------------
                                                                                 $290,389,685            $265,363,434
                                                                                 ============            ============

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

                                                                                     1997                    1997 
                                                                                 ------------            ------------

  Three months or less                                                           $  4,606,561            $  5,433,089
  Over three months through twelve months                                           7,465,667               8,850,440
  Over twelve months through five years                                            20,908,866              14,051,924
  Over five years                                                                  15,773,260               4,839,682
                                                                                 ------------            ------------
                                                                                 $ 48,754,354            $ 33,175,135
                                                                                 ============            ============

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

       1999                                                                                              $ 64,421,641
       2000                                                                                                21,561,236
       2001                                                                                                14,893,365
       2002                                                                                                10,178,476
       2003                                                                                                19,197,099
       Thereafter                                                                                          24,233,254
                                                                                                         ------------

                                                                                                         $154,485,071
                                                                                                         ============
</TABLE>

NOTE G - SHORT-TERM BORROWINGS

    Short-term borrowings consist of federal funds purchased and generally
    mature within one to four days from the transaction date. The balance
    outstanding at December 31, 1998 was $-0-. Average federal funds purchased
    during the year amounted $94,501 with a weighted average rate of 4.35%. The
    maximum balance at the end of one month was $-0-.


                                       51
<PAGE>   52
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE H - MORTGAGE PAYABLE

    The mortgage payable is payable to a bank at 65% of the prime rate (5.525%
    at December 31, 1998) and is guaranteed by an industrial development
    authority. A substantial portion of the land and building is pledged as
    security under this mortgage.

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

<TABLE>
<CAPTION>
      Year ending December 31,
      ------------------------
<S>                                                                                                   <C>         
              1999                                                                                    $     41,574
              2000                                                                                          43,717
              2001                                                                                          45,971
              2002                                                                                          48,341
              2003                                                                                          50,833
              Thereafter                                                                                   296,284
                                                                                                       -----------
                                                                                                      $    526,720
                                                                                                      ============
</TABLE>

NOTE I - LONG-TERM BORROWINGS

         Long-term borrowings consist of advances from the Federal Home Loan
Bank at December 31, 1998 and are as follows:

<TABLE>
<CAPTION>
      Due date                                     Interest rate
      -----------------
<S>                                                 <C>                                                <C>          
      December 27, 1999                                 8.20                                           $   365,000
      December 23, 2002                                 6.24                                            30,000,000
                                                                                                       -----------
                                                                                                       $30,365,000
                                                                                                       ===========
</TABLE>

        The advances are collateralized by Federal Home Loan Bank stock and
certain of the Company's first mortgage loans.


                                       52
<PAGE>   53
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE J - LEASE COMMITMENTS

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

<TABLE>
<CAPTION>
      Year ending December 31,
      ------------------------
<S>                                              <C>        
              1999                               $   308,178
              2000                                   302,556
              2001                                   181,601
              2002                                   181,601
              2003                                   140,772
              Thereafter                               4,138
                                                 -----------
                                                 $ 1,118,846
                                                 ===========
</TABLE>

    Rental expense for all leases was approximately $335,000 and $343,000 and
    $339,000 for the years ended December 31, 1998, 1997 and 1996, respectively.

NOTE K - COMMON STOCK

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

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

NOTE L - OTHER OPERATING EXPENSES

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

<TABLE>
<CAPTION>
                                                                       1998              1997              1996     
                                                                  --------------    --------------     --------------
<S>                                                               <C>               <C>                <C>        
      Advertising                                                 $    214,813      $    396,831       $   248,017
      Pennsylvania bank shares tax                                     726,161           720,630           707,442
      FDIC assessments                                                  33,133            31,794             2,000
      Professional fees                                                544,109           330,959         1,595,248
      Other real estate expense                                          9,387            32,668           141,040
      Loss on investment partnership                                 1,080,415         1,019,375            28,918
</TABLE>


                                       53
<PAGE>   54
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997



NOTE M - INCOME TAXES

    The components of the income tax expense (benefit) included in the
consolidated statements of income are as follows:

<TABLE>
<CAPTION>
                                                                       1998              1997              1996     
                                                                   -----------       -----------       -----------
<S>                                                                <C>               <C>               <C>        
      Income tax expense (benefit)
         Current                                                   $ 4,055,012       $ 3,757,471       $ 4,445,217
         Deferred federal tax                                          310,111            57,670          (912,654)
      Benefit applied to reduce goodwill                               259,139           259,139           374,548
                                                                   -----------       -----------       -----------
                                                                   $ 4,624,262       $ 4,074,280       $ 3,907,111
                                                                   ===========       ===========       ===========
</TABLE>

    The difference between the applicable income tax expense and the amount
    computed by applying the statutory federal income tax rate of 35% in 1998,
    1997 and 1996 is as follows:

<TABLE>
<CAPTION>
                                                                        1998              1997              1996     
                                                                   --------------    --------------    --------------
<S>                                                                <C>               <C>               <C>        
      Computed tax expense at statutory rate                        $ 5,392,871        $ 4,701,554       $ 4,950,400
      Tax-exempt income                                                (258,100)          (178,469)         (223,053)
      Low-income housing tax credit                                    (544,939)          (309,580)         (310,615)
      Other, net                                                        134,430            (39,225)         (409,621)
      Effect of 34% rate bracket                                       (100,000)          (100,000)         (100,000)
                                                                    -----------        -----------       -----------
      Applicable income tax expense                                 $ 4,624,262        $ 4,074,280       $ 3,907,111
                                                                    ===========        ===========       ===========
</TABLE>

    Deferred tax assets and liabilities consist of the following:

<TABLE>
<CAPTION>
                                                                                    1998                      1997     
                                                                                ------------             -------------
<S>                                                                             <C>                      <C>       
        Deferred tax assets
        Allowance for doubtful accounts                                         $  1,263,028             $       --
        Accrued legal expenses                                                          --                    846,857
        Accrued stock-based compensation                                             992,959                1,986,842
        Asset valuation reserves                                                     472,013                  472,013
        Goodwill                                                                     127,346                  127,346
        Net operating loss carryovers from Knoblauch State Bank                    7,961,948                6,021,989
                                                                                ------------             ------------
                                                                                  10,817,294                9,455,047
        Less valuation allowance                                                  (7,961,948)               6,021,989
                                                                                ------------             ------------
                                                                                   2,855,346                3,433,058
                                                                                ------------             ------------
        Deferred tax liabilities
        Allowance for doubtful accounts                                                 --                    351,796
        Unrealized gain on securities                                                640,292                  328,739
        Depreciation                                                                  93,533                   75,256
        Accretion of discount                                                        135,547                   69,629
                                                                                ------------             ------------
                                                                                     869,372                  825,420
                                                                                ------------             ------------
               Net deferred tax asset                                           $  1,985,974             $  2,607,638
                                                                                ============             ============
</TABLE>


                                   (Continued)


                                       54
<PAGE>   55
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE M - INCOME TAXES - Continued

    The Company has approximately $23,000,000 of net operating loss carryovers
    from the acquisition of Knoblauch State Bank (KSB). These losses will fully
    expire in 2018. The utilization of these losses is subject to limitation
    under Section 382 of the Internal Revenue Code. As a result, a valuation
    allowance has been established to eliminate the deferred tax asset
    attributable to these net operating losses.

    During 1998, the Company realized a tax benefit related to the net operating
    loss carryovers from the acquisition of KSB. The deferred tax asset
    associated with those loss carryovers is fully offset by a valuation
    allowance. Accordingly, the realized tax benefit is reflected as a reduction
    of the goodwill associated with the acquisition and a corresponding
    reduction of deferred income tax benefit for the year.

NOTE N - STOCK OPTION PLANS

    At December 31, 1998, the Company had two stock-based compensation plans
    which are described below. The Company accounts for these plans under APB
    Opinion No. 25.

    1.  Outside Directors' Stock Option Plan

    The Company adopted a non-qualified outside Directors' Stock Option Plan in
    1990 (the Director's Plan). Under the terms of the Director's Plan, 150,000
    shares of Class A stock are authorized for grants. Each director is entitled
    to 1,500 shares of stock annually which are exercisable after one year of
    service. The options were granted at the fair market value ($19.952 in 1998,
    $13.75 in 1997 and $10.00 in 1996) at the date of the grant. Currently, the
    strike price on the options ranges from $2.608 to $19.952 per share. During
    1998, 1,404 options were exercised at a strike price of $7.345 per share. At
    December 31, 1998, 63,992 options are outstanding, and options covering
    49,952 shares were exercisable.


                                  (Continued)


                                       55
<PAGE>   56
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE N - STOCK OPTION PLANS - Continued

    2.  Stock Option and Appreciation Right Plan

    The Company adopted a Stock Option and Appreciation Right Plan (the Plan) on
    June 27, 1990. The Plan is an incentive program under which Company officers
    and other key employees may be awarded additional compensation in the form
    of options to purchase up to 1,000,000 shares of the Company's Class A
    common stock (but not in excess of 15% of outstanding shares). At the time a
    stock option is issued, a stock appreciation right for an identical number
    of shares may also be granted. The option price is equal to the fair market
    value at the date of the grant. The options are exercisable at 20% per year
    beginning one year after the date of grant and must be exercised within ten
    years of the grant. As of December 31, 1998, options covering 304,258 shares
    were exercisable by 22 employees. Stock option transactions consist of the
    following:

<TABLE>
<CAPTION>
                                            1998                                 1997                              1996         
                                     --------------------                 --------------------              --------------------
                                                 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                            519,277     $ 6.561                  540,885     $ 5.917               552,150     $ 5.248
                                                                                                                       
Granted                                61,641      14.861                   63,487      11.080               100,404       8.430
Exercised                            (110,723)      3.100                  (83,293)      4.091              (107,888)      3.328
Cancelled                              (5,612)     13.140                   (1,802)     10.752                (3,781)      5.624
                                     --------     -------                 --------     -------              --------     -------
                                                                                                                       
Outstanding at end of year            464,583     $ 8.133                  519,277     $ 6.561               540,885     $ 5.917
                                     ========     =======                 ========     =======              ========     =======
                                                                                                                       
Option price per share                                                                                                 
   exercised                            $2.59 - $13.000                     $2.695 - $ 9.633                  $2.801 - $ 3.919
                                                                                                                       
Outstanding at end                                                                                                     
   of year                              $2.59 - $19.183                     $2.695 - $13.225                  $2.801 - $ 10.00
</TABLE>


                                   (Continued)

                                       56
<PAGE>   57
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE N - STOCK OPTION PLANS - Continued

    Had compensation cost for both plans been determined based on the fair value
    of the options at the grant dates consistent with the method required by
    SFAS No. 123, the Company's net income and EPS would have been reduced to
    the pro forma amounts indicated below.

<TABLE>
<CAPTION>
                                         1998         1997          1996     
                                      ---------    ---------     ---------
                                     (in thousands, except per share amounts)
<S>                                    <C>          <C>           <C>    
Net income
   As reported                         $10,784      $ 9,359       $10,237
   Pro forma                            10,713        9,312        10,212

EPS
   As reported - basic                 $  1.19      $  1.04       $  1.16
   As reported - diluted                  1.15         1.00          1.13
   Pro forma - basic                      1.19         1.04          1.16
   Pro forma - diluted                    1.15         1.00          1.13
</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 1998, 1997 and 1996: dividend yield
    of 5.25%, 3.40% and 4.17% for 1998, 1997 and 1996, respectively; expected
    volatility of 37.8%; and risk-free interest rate of 4.57% in 1998 and 5.71%
    in 1997 and 1996. Expected lives are 10 years for 1998, 1997 and 1996.

NOTE O - CONCENTRATIONS OF CREDIT RISK

    The Company primarily grants commercial and real estate loans in the greater
    Philadelphia metropolitan area. Approximately 20% of loans are outside the
    normal lending area. The Company has concentrations of credit risk in real
    estate development loans (12%) at December 31, 1998. A substantial portion
    of its debtors' ability to honor these contracts is dependent upon the
    economic sector.

    Approximately 55% of the Company's investment portfolio consists of
corporate securities.

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

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


                                   (Continued)


                                       57
<PAGE>   58
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




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

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

    Unless noted otherwise, the Company does not require collateral or other
    security to support financial instruments with credit risk. The contract
    amounts as of December 31, 1998 are as follows:

<TABLE>
<CAPTION>
        Financial instruments whose contract amounts represent credit risk
<S>                                                                                    <C>        
           Commitments to extend credit                                                $42,863,552
           Standby letters of credit and financial guarantees written                    5,809,949
</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 1999. The credit risk involved in issuing letters of credit
    is essentially the same as that involved in extending loan facilities to
    customers. The Company holds personal or commercial real estate, accounts
    receivable, inventory and equipment as collateral supporting those
    commitments for which collateral is deemed necessary. The extent of
    collateral held for those commitments is 80%.


                                       58
<PAGE>   59
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997


NOTE Q - REGULATORY MATTERS

    1.  Payment of Dividends

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

    2.  Capital Ratios

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

    Quantitative measures established by regulations to ensure capital adequacy
    require the Company and the Bank to maintain minimum amounts and ratios (set
    forth in the table below) of total and Tier I capital (as defined in the
    regulations) to risk-weighted assets (as defined), and of Tier I capital (as
    defined) to average assets (as defined). As of December 31, 1998, management
    believes that the Bank meets all capital adequacy requirements to which it
    is subject.

    As of December 31, 1997, the most recent notification from the FDIC
    categorized the Bank as well capitalized under the regulatory framework for
    prompt corrective action. To be categorized as well capitalized, the Bank
    must maintain minimum total risk-based, Tier I risk-based and Tier I
    leverage ratios as set forth in the table. There are no conditions or events
    since that notification that management believes have changed the
    institution's category.


                                   (Continued)


                                       59
<PAGE>   60
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997


NOTE Q - REGULATORY MATTERS - Continued

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


<TABLE>
<CAPTION>
                                                                   1998
                               ------------------------------------------------------------------------------
                                                                                          To be well
                                                             Required                  capitalized under
                                                           for capital                 prompt corrective
                                       Actual            adequacy purposes             action provisions     
                               ------------------   ---------------------------    --------------------------
                                 Amount     Ratio      Amount         Ratio         Amount          Ratio   
                               -----------  -----   -----------    ------------    -----------   ------------
                                                                   greater than                  greater than 
                                                                   or equal to                   or equal to  
<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>

<TABLE>
<CAPTION>
                                                                               1997
                                    ------------------------------------------------------------------------------------------------
                                                                                                                To be well
                                                                              Required                       capitalized under
                                                                             for capital                     prompt corrective
                                               Actual                     adequacy purposes                  action provisions     
                                    ------------------------          -----------------------------      ---------------------------
                                       Amount         Ratio              Amount           Ratio             Amount          Ratio  
                                    -----------       ------          -----------      ------------      -----------    ------------
                                                                                       greater than                     greater than
                                                                                       or equal to                      or equal to 
<S>                                 <C>               <C>             <C>              <C>               <C>            <C>
Total capital
(to risk-weighted assets)
  Company (consolidated)            $91,292,866       26.41%          $27,658,652         8.00%              N/A
  Bank                               61,751,238       18.68            26,450,990         8.00           $33,063,737        10.00%

Tier I capital
(to risk-weighted assets)
  Company (consolidated)             86,923,491       25.14            13,829,326         4.00               N/A
  Bank                               57,568,231       17.41            13,225,495         4.00            19,838,242         6.00

Tier I capital
(to average assets, leverage)
  Company (consolidated)             86,923,491       25.59            10,192,200         3.00               N/A
  Bank                               57,568,231       17.62             9,800,581         3.00            16,334,302         5.00
</TABLE>


                                       60
<PAGE>   61
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997


NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

    Fair values have been estimated using data which management considered the
    best available and estimation methodologies deemed suitable for the
    pertinent category of financial instrument. The estimation methodologies,
    resulting fair values and recorded carrying amounts at December 31, 1998 and
    1997 were as follows:

    Fair values of loans and deposits with floating interest rates are generally
    presumed to approximate the recorded carrying amounts.

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

<TABLE>
<CAPTION>
                                                                1998                              1997                   
                                                    -----------------------------      ---------------------------
                                                     Estimated                          Estimated
                                                       fair            Carrying           fair          Carrying
                                                       value            amount            value          amount    
                                                    -----------      ------------      -----------     -----------
<S>                                                 <C>              <C>               <C>             <C>        
        Cash and cash equivalents                   $19,142,624      $ 19,142,624      $30,416,242     $30,416,242
        Interest bearing deposits in banks              100,030           100,030          300,030         300,030
        Investment securities held to maturity       62,159,860        61,894,538       64,984,987      64,371,042
        Investment securities available for sale     36,951,162        36,951,162       21,048,793      21,048,793
</TABLE>


                                   (Continued)


                                       61
<PAGE>   62
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

    Fair value of financial instruments with stated maturities has been
    estimated using present value cash flow, discounted at a rate approximating
    current market for similar assets and liabilities, as follows:

<TABLE>
<CAPTION>
                                                            1998                                            1997
                                            ------------------------------------            ------------------------------------
                                              Estimated                                      Estimated
                                                fair                  Carrying                  fair                  Carrying
                                                value                  amount                   value                  amount    
                                            ------------            ------------            ------------            ------------
<S>                                         <C>                     <C>                     <C>                     <C>         
Deposits with stated maturities             $155,837,473            $154,485,071            $148,725,232            $140,177,697
Mortgage payable                                 526,720                 526,720                 570,885                 570,885
Long-term borrowings with stated
  maturities                                  35,394,276              30,365,000              35,885,229              31,063,000
</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 $135,904,614 and $125,185,737 at December 31, 1998 and 1997,
respectively.

Fair value of the net loan portfolio has been estimated using present value cash
flow, discounted at the treasury rate adjusted for non-interest operating costs
and giving consideration to estimated prepayment risk and credit loss factors,
as follows:


<TABLE>
<CAPTION>
                                                            1998                                            1997
                                            ------------------------------------            ------------------------------------
                                              Estimated                                      Estimated
                                                fair                  Carrying                  fair                  Carrying
                                                value                  amount                   value                  amount    
                                            ------------            ------------            ------------            ------------
<S>                                         <C>                     <C>                     <C>                     <C>         

Net loans                                   $318,340,245            $292,556,084            $296,130,317            $282,710,811
</TABLE>

    There is no material difference between the carrying amount and estimated
    fair value of off-balance-sheet items totalling $48,673,501 and $31,652,524
    at December 31, 1998 and 1997, respectively, which are primarily comprised
    of unfunded loan commitments which are generally priced at market at the
    time of funding.

    The Company's remaining assets and liabilities are not considered financial
    instruments. No disclosure of the relationship value of the Company's
    deposits is required by SFAS No. 107.


                                       62
<PAGE>   63
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




NOTE S - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY

    The Company was formed on June 29, 1995. Condensed financial information for
    the parent company only follows. The balance sheets for December 31, 1998
    and 1997 and the statements of income and cash flows for the years then
    ended are presented below.

                            CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                            December 31,               
                                                                                 ----------------------------------
                                                                                     1998                   1997      
                                                                                 -----------            -----------
<S>                                                                              <C>                    <C>       
Assets
   Cash                                                                          $   193,823            $ 2,856,330
   Investment in Royal Investments of Delaware, Inc. - at equity                  28,676,818             27,897,306
   Investment in Royal Bank of Pennsylvania - at equity                           64,939,271             60,128,889
   Other assets                                                                      259,356                260,000
                                                                                 -----------            -----------

                                                                                 $94,069,268            $91,142,525
                                                                                 ===========            ===========

Liabilities                                                                             --              $ 1,637,763
Stockholders' equity                                                              94,069,268             89,504,762
                                                                                 -----------            -----------

                                                                                 $94,069,268            $91,142,525
                                                                                 ===========            ===========
</TABLE>

                         CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                                        Year ended December 31,   
                                                                                 ----------------------------------
                                                                                     1998                   1997      
                                                                                 ------------           -----------
<S>                                                                              <C>                    <C>        
Income
   Equity in undistributed net earnings of subsidiaries                          $  4,985,119           $ 4,077,026
   Dividends from subsidiary bank                                                   5,877,354             5,301,396
   Other income                                                                        39,610                31,907
                                                                                 ------------           -----------
                                                                                
        Total income                                                               10,902,083             9,410,329
                                                                                 ------------           -----------
                                                                                
Expenses                                                                        
   Other expenses                                                                     160,430                62,198
   Income tax (benefit) expense                                                       (42,287)              (10,601)
                                                                                 ------------           -----------
                                                                                
        Total expenses                                                                118,143                51,597
                                                                                 ------------           -----------
                                                                                
        Net income                                                               $ 10,783,940           $ 9,358,732
                                                                                 ============           ===========
</TABLE>


                                   (Continued)


                                       63
<PAGE>   64
             Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1998 and 1997




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

                       CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                 Year ended December 31,   
                                                                          ------------------------------------
                                                                              1998                     1997      
                                                                          ------------             -----------
<S>                                                                       <C>                      <C>        
Cash flows from operating activities
    Net income                                                            $ 10,783,940             $ 9,358,732
    Adjustments to reconcile net income to net cash provided
           by operating activities
       Undistributed earnings from subsidiaries                             (4,985,119)             (4,077,026)
       Operating expenses                                                      160,430                  62,196
       Rental income                                                           (39,610)                (31,907)
       Non-cash income tax (benefit) expense                                   (42,287)                (10,601)
                                                                          ------------             -----------

           Net cash provided by operating activities                         5,877,354               5,301,394
                                                                          ------------             -----------

Cash flows from financing activities
    Cash dividends paid                                                     (7,177,353)             (5,306,350)
    Dividends from subsidiary bank                                                --                 2,100,000
    (Decrease) increase in other liabilities                                (1,637,763)                544,177
    Other, net                                                                 275,255                 217,109
                                                                          ------------             -----------

           Net cash (used in) provided by financing activities              (8,539,861)             (2,445,064)
                                                                          ------------             -----------

           NET INCREASE (DECREASE) IN CASH                                  (2,662,507)              2,856,330

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

Cash at end of year                                                       $    193,823             $ 2,856,330
                                                                          ============             ===========
</TABLE>


                                       64
<PAGE>   65
ITEM  9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 
                      AND FINANCIAL DISCLOSURE

         None.


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

         The information required in this Item 10 is set forth in Item 12,
Security Ownership of Beneficial Owners and Management, herein.


ITEM 11.  EXECUTIVE  COMPENSATION

         The following Summary Compensation Table sets forth all compensation
paid by the Registrant for services rendered during the past three fiscal years
by the Chief Executive Officer and each of the most highly compensated executive
officers whose total annual salary and bonus exceeded $100,000 in 1998.

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                                OTHER       RESTRICTED  SECURITIES        ALL
                                                                                ANNUAL        STOCK     UNDERLYING       OTHER
                                                                             COMPENSATION    AWARD(S)     OPTIONS    COMPENSATION
NAME AND PRINCIPAL POSITION              YEAR     SALARY($)   BONUS ($)(2)       ($)           ($)        SARS(#)       ($)(1)
---------------------------              ----     ---------   ------------   ------------   ----------  ----------   ------------
<S>                                      <C>      <C>         <C>            <C>            <C>         <C>          <C>  
Daniel M. Tabas                          1998      324,007      130,413         32,000                     7,800         2,550
Chairman of the Board                    1997      318,200      130,463         32,000         --          7,800         2,550
                                         1996      308,112      129,509         30,800         --         21,589         2,550

Lee E. Tabas                             1998      255,795       95,603         19,000                     7,800         2,550
President and CEO                        1997      251,210       95,640         18,900         --          7,800         2,550
                                         1996      243,247       94,941         17,800         --         17,044         2,550

Joseph P. Campbell                       1998      162,213       37,309         6,000                      2,439         2,550
Managing Director                        1997      159,305       37,323         6,000          --          3,480         2,550
                                         1996      154,256       37,050         4,800          --          4,632         2,550

James J. McSwiggan                       1998      124,375       28,606          --                        1,870         2,550
Treasurer and CFO                        1997      122,146       28,617          --            --          2,668         2,550
                                         1996      118,274       28,408          --            --          3,078         2,550

Richard S. Hannye                        1998      161,681        --            1,020          --          1,621         2,550
Corporate Counsel                        1997      158,783        --            1,020          --          2,312         2,550
                                         1996      153,750        --             780           --          3,552         2,550
</TABLE>

----------------
(1) Consists of Bank's contribution to its Employee 401(k) Pension Plan, under
which the Board of Directors has an obligation to match 100 percent of the total
employee contributions up to an annual maximum of $2,550. The Plan is
administered by J. M. Singley Associates, Inc. Each employee participant is
entitled to contribute up to 15% of his gross salary. Senior management
executives are asked to refrain from contributing to the plan in the event the
administrator determines such contributions would make the Plan top heavy. Each
participant in the Plan will have credited to his Participant's Benefit Account
his proportionate share of all appropriate amounts. Future benefits are based on
future contributions.

(2) Bonuses of Messrs. Tabas, Campbell and McSwiggan are performance based and
tied to goals set by the Stock Option, SARS and Compensation Committee.


                                       65
<PAGE>   66
EMPLOYEE OPTIONS/SAR GRANTS IN FISCAL YEAR 1998

<TABLE>
<CAPTION>
                                                                                                POTENTIAL REALIZED
                                                                                                     VALUE AT
                                                                                                  ASSUMED ANNUAL
                                NUMBER OF        % OF TOTAL                                    RATES OF STOCK PRICE
                               SECURITIES       OPTIONS/SARS      EXERCISE                       APPRECIATION FOR
                               UNDERLYING        GRANTED TO       OR BASE                          OPTION TERM
                              OPTIONS/SARS       EMPLOYEES         PRICE       EXPIRATION      --------------------
        NAME                 GRANTED (#)(1)   IN FISCAL YEARS      ($/SH)         DATE           5%           10%
-------------------          --------------   ---------------     --------     ----------      ------       -------
<S>                          <C>              <C>                 <C>          <C>             <C>          <C>    
Daniel M. Tabas                   7,800           19.574%          19.95        4/20/08        97,872       248,027

Lee E. Tabas                      7,800           19.574%          19.95        4/20/08        97,872       248,027

Joseph P. Campbell                2,439            6.121%          19.95        4/20/08        30,604        77,556

James J. McSwiggan                1,870            4.693%          19.95        4/20/08        23,464        59,463

Richard S. Hannye                 1,621            4.068%          19.95        4/20/08        20,340        51,545
</TABLE>

--------------
(1) Pursuant to the employee stock option plan, the options are exercisable at
20% per year after the date of grant and must be exercised within ten years of
the grant (April 20, 1998).



AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND 1998 OPTION/SAR VALUES

<TABLE>
<CAPTION>
                                                              NUMBER OF SECURITIES
                                                             UNDERLYING UNEXERCISED                   VALUE OF
                                                                  OPTIONS/SARS                UNEXERCISED IN-THE MONEY
                           SHARES                                     AT                          OPTIONS/SARS AT
                          ACQUIRED                             DECEMBER 31, 1998                 DECEMBER 31, 1998
                             ON             VALUE        -----------------------------    --------------------------------
        NAME              EXERCISE (#)   REALIZED ($)    EXERCISABLE(#)  UNEXERCISABLE    EXERCISABLE($)  UNEXERCISABLE($)
---------------------    ------------    ------------    --------------  -------------    --------------  ----------------
<S>                      <C>             <C>             <C>             <C>              <C>             <C>    
Daniel M. Tabas              --             --                97,137        46,369          1,810,116           540,645
                                                                       
Lee E. Tabas                 104,284      2,921,398          103,759        39,615          2,033,523           431,309
                                                                       
Joseph P. Campbell           --             --                14,023        10,948            244,917            94,334
                                                                       
James J. McSwiggan           --             --                11,905         8,465            208,707            73,615
                                                                       
Richard S. Hannye            --             --                 2,091         7,407             27,606            65,402
</TABLE>
                                                                     
--------------
(1) Value of unexercised options/SARS is based used the closing stock price at
December 31, 1998.


                                       66
<PAGE>   67
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table shows the amount of outstanding common stock
beneficially owned by each stockholder (including any "group" as the term is
used in Section 3(d)(3) of the Securities Exchange Act of 1934) known by the
Registrant to be the beneficial owner of more than 5% of such stock, and all
directors and officers as a group. The information is furnished as February 28,
1999 on which, 7,224,883 Class A shares and 1,630,517 Class B shares were
outstanding (net of treasury stock of 207,516 Class A shares).

<TABLE>
<CAPTION>
NAME AND ADDRESS OF                 SHARES BENEFICIALLY              PERCENT OF
 BENEFICIAL OWNER                          OWNED                      CLASS (5)
-------------------                 -------------------              ----------
<S>                                 <C>                              <C>   
Daniel M. Tabas (4)                 3,774,898(Class A)                51.56%
543 Mulberry Lane                   1,178,156(Class B)                72.26%
Haverford, PA 19041

Lee E. Tabas (4)                      648,572(Class A)                 8.85%
1 Dove Lane                           107,274(Class B)                 6.58%
Haverford, PA 19041

Richard Tabas                              57(Class A)                   --%
1309 Lafayette Road                   111,761(Class B)                 6.85%
Gladwyne, PA 19035
</TABLE>


EXECUTIVE OFFICERS AND DIRECTORS 

The following table sets forth certain information, furnished by each such
person, concerning the present directors and executive officers of the
Registrant, including their beneficial ownership of the Registrant's common
stock as of February 28, 1999.

<TABLE>
<CAPTION>
                                           DIRECTOR           SHARES               PERCENT
                                          OR OFFICER       BENEFICIALLY              OF
NAME                             AGE        SINCE          OWNED(1)(3)            STOCK(2)
-------------------              ---      ----------       ------------           --------
<S>                              <C>      <C>             <C>                     <C>   
Daniel M. Tabas (4)              75          1980           3,774,898(A)           55.78%
                                                            1,178,156(B)

Lee E. Tabas (4)                 49          1980             648,572(A)            8.39%
                                                              107,274(B)

Joseph P. Campbell               52          1982              75,224(A)             .83%

Richard S. Hannye                41          1993               2,091(A)             .02%
 
James J. McSwiggan               43          1993              14,968(A)             .16%

Robert R. Tabas (4)              43          1988             189,688(A)            2.83%
                                                               59,269(B)
</TABLE>

                                                                (continued.....)


                                       67
<PAGE>   68
<TABLE>
<S>                              <C>         <C>            <C>              <C>   
John Decker                      38          1998              15,225(A)            .17%

Terri N. Gelberg                 50          1998                 100(A)            .01%

Anthony J. Micale                61          1997                 500(A)            .01%

Albert Ominsky                   65          1982              24,203(A)            .63%
                                                               28,713(B)

Carl M. Cousins                  66          1993               8,346(A)            .09%

Gregory T. Reardon               45          1997                 390(A)            .01%


Howard Wurzak (4)                43          1985              50,571(A)            .56%

Edward B.Tepper                  59          1986              22,343(A)            .55%
                                                               24,085(B)
                                                                       ,
Jack Loew                        51          1997               4,622(A)            .05%

Murray Stempel, III (4)          43          1998                 907(A)            .01%

                                                                             -------------------
                                                                             PERCENT OF CLASS(5)
ALL DIRECTORS AND                                                            -------------------
EXECUTIVE OFFICERS AS           --           --             4,832,705(A)            64.23%
A GROUP (16 PERSONS)                                        1,509,258(B)            92.56%
</TABLE>
                                                                          
-------------------------

(1) Based on information furnished by beneficial owners or their
representatives. Includes direct and indirect ownership and, unless otherwise
indicated, also includes sole voting and investment power with respect to
reported holdings.

(2) Assumes full conversion of Class B Common Stock to Class A Common Stock at
the conversion factor of 1.15 Class A shares for each Class B share. Stock
options currently excercisable are included with total shares outstanding in
determining percentage of ownership for each respective director or executive
officer.

(3) Includes stock options unexercised, but currently excercisable, in addition
to stock beneficially owned.

(4) Daniel M. Tabas, Lee Tabas, Robert Tabas, Murray Stempel, and Howard Wurzak,
members of their immediate families and their affiliates and associates, in the
aggregate, own 4,664,636 shares of Class A Common Stock (66.53% assuming full
conversion of Class B Common Stock to Class A Common Stock at a conversion
factor of 1.15 Class A shares for each Class B share) and 1,344,699 shares of
Class B common stock. Messr. Tabas, Murray Stempel, and Howard Wurzak have
unexercised but exercisable options to purchase 235,922 shares of Class A common
stock. In calculating the tabulated percent of class, an additional 235,922
shares were added to the shares of common stock beneficially owned to the total
outstanding shares of common stock assuming all excercisable options were
exercised.

(5) The percent of class assumes all outstanding exercisable options issued to
directors and officers have been exercised and therefore, on a pro-forma basis,
7,523,803 shares of Class A common stock would be outstanding.

         The following paragraphs indicate full time positions and offices held
by the directors and executive officers and sets forth information furnished by
each such person as to his principal occupation for the last five years.


EXECUTIVE OFFICERS

         Daniel M. Tabas is the Chairman of the Board and a DIRECTOR of the
Registrant. His other principal occupation is Chief Executive Officer for Tabas
Enterprises, which consists of various entities in the restaurant, hotel, real
estate and entertainment businesses in the Philadelphia and Downingtown,
Pennsylvania areas. He is the father of Lee E. Tabas and Robert R. Tabas, and
the father-in-law of Murray Stempel and Howard Wurzak.


                                       68
<PAGE>   69
         Lee E. Tabas is the President, Chief Executive Officer and a DIRECTOR
of the Registrant. He is the son of Daniel M. Tabas, brother of Robert R. Tabas,
and brother in law of Murray Stempel and Howard Wurzak.

         Joseph P. Campbell is Managing Director and a DIRECTOR of the
Registrant. Mr. Campbell is employed by Tabas Enterprises on a part time basis.

         Richard S. Hannye is the Secretary and Corporate Counsel of the
Registrant. Mr. Hannye was previously associated with the law firm of Hecker
Brown Sherry and Johnson in Philadelphia.

         James J. McSwiggan is the Chief Financial Officer and Treasurer of the
Registrant. Mr. McSwiggan is employed by Tabas Enterprises on a part time basis.

DIRECTORS

         Terri N. Gelberg, a DIRECTOR of the Registrant, is an attorney with
Gelberg & Associates and was formerly an attorney with Bolger, Picker, Hankin &
Tannebaum in Philadelphia, Pennsylvania.

         Gregory T. Reardon, a DIRECTOR of the Registrant, is the Managing
Shareholder of a public accounting firm Weiss, Toub, Reardon & Company, P.C. in
Philadelphia Pennsylvania, and President and owner of Valuation Advisors, Inc.,
a business appraisal firm in Philadelphia Pennsylvania.

         Albert Ominsky, a DIRECTOR of the Registrant, is an attorney and
President of the law firm of Ominsky & Messa, P.C. in Philadelphia,
Pennsylvania.

         Robert R. Tabas is a Senior Vice President, Senior Lender and DIRECTOR
of the Registrant. Mr. Tabas is a Vice President with Tabas Enterprises. He is
the son of Daniel M. Tabas, and brother of Lee E. Tabas and Susan Tabas Tepper,
and brother in law of Howard Wurzak.

         Edward Tepper, a DIRECTOR of the Registrant, is the Chairman of the
Philadelphia Kixx, a professional indoor soccer team, and the President of
Tepper Properties, a real estate investment company in Villanova, Pennsylvania.

         Anthony J. Micale, a DIRECTOR of the Registrant, is an executive with
MacDonalds' Restaurants in Cherry Hill, New Jersey.

         Murray Stempel, is a Vice President and a DIRECTOR of the Registrant.
He is the son-in-law of Daniel M. Tabas and the brother-in-law of Lee E. Tabas,
Robert R. Tabas and Howard Wurzak. Mr. Stempel was a Director, Executive Vice
President and General Manager of Ajax Adhesives Industries Inc.

         Howard Wurzak, a DIRECTOR of the Registrant, is President of
Hospitality Management Group, Inc. and the President of the Twelve Caesars
Banquet Facility in Philadelphia, Pennsylvania. He is the son-in-law of Daniel
M. Tabas and the brother-in-law of Lee E. Tabas, Robert R. Tabas and Murray
Stempel.

         Carl M. Cousins, a DIRECTOR of the Registrant, is the owner and
principal veterinarian of Haverford Animal Hospital in Haverford, Pennsylvania.

         Jack Loew, a DIRECTOR of the Registrant since January, 1997, is
president and treasurer of Hough/Loew Associates, a design/build construction
and development firm specializing in office, industrial and retail properties.

         John Decker, is a Senior Vice President, Senior Lender and a DIRECTOR
of the Registrant.

BENEFICIAL OWNERSHIP - COMPLIANCE

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


                                       69
<PAGE>   70
         Based solely on its review of forms that were received from certain
reporting persons, the Corporation believes that during the period January 1,
1998 through December 31, 1998, its officers and directors were in compliance
with all filing requirements applicable to them.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         In the ordinary course of business, RBPA has had, and expects to have
in the future, banking transactions with directors, officers, principal
shareholders and their associates which involve substantially the same terms,
including interest rates, collateral and repayment terms as those prevailing at
the time for comparable transactions with others and no more than the normal
risk of collectability or other unfavorable features. No transaction during the
three years ended December 31, 1998 of the above nature exceeded $9,000,000 or
10% of the equity capital accounts to the Registrant.

         The largest aggregate amount of indebtedness during the year l998 of
all Directors and Officers to the Company as a group, and to their associates
was $14,393,830. The total of such outstanding loans at December 3l, 1998 was
$14,393,830. Interest rates ranged for fixed rates from 7.5% to 10.5%. Floating
rates ranged from prime to prime plus 2.5 points.

         In March 1999, RBPA purchased as an investment a $3 million capital
trust security issued by USA Bancshares. The president of USA Bancshares is Mr.
Kenneth Tepper. He is the son-in-law of Daniel M. Tabas, chairman of the board
of RBPA, son of Director Edward Tepper, and brother-in-law of Directors' Lee
Tabas, Robert Tabas, Murray Stempel, and Howard Wurzak.

         The Registrant has had and intends to have business transactions in the
ordinary course of business with Directors and associates on comparable terms as
those prevailing from time to time for other nonaffiliated vendors of the
Registrant. In particular, the Registrant has used hospitality services of
directors, Howard Wurzak, and Daniel Tabas. Director Albert Ominsky's law firm
has provided legal services to the Bank. Director Edward Tepper has provided
construction supervision and property inspection services to the Bank.


                                       70
<PAGE>   71
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

a.       1.  Financial Statements

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

         2.  Financial Statement Schedules

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

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

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

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

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

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

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

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

                  21.      Subsidiaries of Registrant.

                  23.      Consent of Independent Accountants.

                  27.      Financial Data Schedule.

(b) No Current Report on Form 8-K was filed by the Registrant during the fourth
quarter of the fiscal year December 31, 1998.

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

(d) Not applicable


                                       71
<PAGE>   72
         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of l934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                     ROYAL BANCSHARES OF PENNSYLVANIA, INC.

    DATE                        TITLE                        SIGNATURE
---------------         ----------------------         ----------------------
March 17, 1999                 Chairman                /s/ Daniel M. Tabas   
---------------                                        ----------------------
                                                       Daniel M. Tabas
                                                 
                                                 
March 17, 1999              President/CEO/             /s/ Lee E. Tabas
---------------                Director                ----------------------
                                                       Lee E. Tabas
                                                 
                                                 
March 17, 1999            Managing Director/           /s/ Joseph P. Campbell
---------------                Director                ----------------------
                                                       Joseph P. Campbell
                                                 
                                                 
March 17, 1999              Treasurer/CFO              /s/ James J. McSwiggan
---------------                                        ----------------------
                                                       James J. McSwiggan
                                                 
                                                 
March 17, 1999                 Director                /s/ Albert Ominsky
---------------                                        ----------------------
                                                       Albert Ominsky
                                                 
                                                 
March 17, 1999                 Director                /s/ Anthony Micale
---------------                                        ----------------------
                                                       Anthony Micale
                                                 
                                                 
March 17, 1999          Senior Vice President/         /s/ Robert R. Tabas
---------------                Director                ----------------------
                                                       Robert R. Tabas
                                                 
                                                 
March 17, 1999                 Director                /s/ Gregory T. Reardon
---------------                                        ----------------------
                                                       Gregory T. Reardon


March 17, 1999                 Director                /s/ Carl Cousins
---------------                                        ----------------------
                                                       Carl Cousins


                                                                    Continued...


                                       72
<PAGE>   73
    DATE                        TITLE                        SIGNATURE


March 17, 1999                 Director                 /s/ Howard Wurzak
--------------                                          ---------------------
                                                        Howard Wurzak
                                                     
                                                     
March 17, 1999          Senior Vice President/          /s/ John Decker
--------------                 Director                 ---------------------
                                                        John Decker
                                                     
                                                     
March 17, 1999             Vice President/              /s/ Murray Stempel
--------------                 Director                 ---------------------
                                                        Murray Stempel
                                                     
                                                     
March 17, 1999                 Director                 /s/ Jack Loew
--------------                                          ---------------------
                                                        Jack Loew
                                                     
                                                     
March 17, 1999                 Director                 /s/ Terri N. Gelberg
--------------                                          ---------------------
                                                        Terri  N. Gelberg
                                                     
                                                     
March 17, 1999                 Director                 /s/ Edward Tepper
--------------                                          ---------------------
                                                        Edward Tepper


                                       73
<PAGE>   74
                     ROYAL BANCSHARES OF PENNSYLVANIA, INC.
                           ANNUAL REPORT ON FORM 10-K
                                  EXHIBIT INDEX

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

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

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

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

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

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

21.      Subsidiaries of Registrant.

23.      Consent of Independent Accountants.

27.      Financial Data Schedule.


                                       74