10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended: June 30, 2007

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

For the transition period from:                      to

Commission file number: 0-26366

ROYAL BANCSHARES OF PENNSYLVANIA, INC.

(Exact name of the registrant as specified in its charter)

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

732 Montgomery Avenue, Narberth, PA 19072

(Address of principal Executive Offices)

(610) 668-4700

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ       No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non- accelerated filer. See definitions of large accelerated filer and accelerated filer in Rule 12-b-2 of the Exchange Act.

Large accelerated filer  o      Accelerated filer  þ       Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No. þ

Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class A Common Stock	Outstanding at July 31, 2007
$2.00 par value	11,000,067
Class B Common Stock	Outstanding at July 31, 2007
$.10 par value	2,108,538

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	ITEM 1 — FINANCIAL STATEMENTS
	ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4 — CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 1A. Risk Factors
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3. Default Upon Senior Securities
	Item 4. Submission of Matters to Vote Security Holders
	Item 5. Other Information
	Item 6. Exhibits
SIGNATURES
Chief Executive Officer Section 302
Chief Financial Officer Section 302
Chief Executive Officer Section 906
Chief Financial Officer Section 906

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

Royal Bancshares of Pennsylvania Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
(unaudited)

	June 30, 2007			December 31, 2006
Assets
Cash and due from banks	$	13,844		$	13,426
Interest bearing deposits		67,130			66,810
Federal funds sold		1,000			2,200
Total cash and cash equivalents		81,974			82,436
Investment securities held to maturity (fair value of $197,621 at June 30, 2007 and $254,249 at December 31, 2006		197,418			255,429
Investment securities available for sale (“AFS”) at fair value		316,224			302,036
FHLB Stock, at cost		8,719			11,276
Loans		629,166			602,958
Less allowance for loan losses		11,739			11,455
Net Loans		617,427			591,503
Premises and equipment, net		7,709			7,766
Real estate owned via equity investments		35,542			42,514
Accrued interest receivable		16,972			16,494
Bank owned life insurance		23,354			22,906
Other assets		25,641			23,951
Total Assets	$	1,330,980		$	1,356,311
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Non-interest bearing	$	71,482		$	61,002
Interest bearing		820,133			798,455
Total deposits		891,615			859,457
Accrued interest payable		14,714			10,654
Other liabilities		15,909			18,593
Borrowings		192,996			246,087
Obligations related to equity investments in real estate		22,809			29,342
Subordinated debentures		25,774			25,774
Total liabilities		1,163,817			1,189,907
Minority interests		3,442			3,150
Stockholders’ equity
Common stock
Class A, par value $2 per share, authorized 18,000,000 shares; issued, 11,305,372 at June 30, 2007 and 11,287,462 at December 31, 2006		22,611			22,575
Class B, par value $0.10 per share; authorized, 3,000,000 shares; issued, 2,108,538 at June 30, 2007 and 2,108,827 at December 31, 2006		211			211
Additional paid in capital		121,908			121,542
Retained earnings		23,593			23,464
Accumulated other comprehensive loss		(790	)		(2,273	)
		167,533			165,519
Treasury stock — at cost, shares of Class A, 288,588 at June 30, 2007 and 215,388 at December 31, 2006		(3,812	)		(2,265	)
Total stockholders’ equity		163,721			163,254
Total liabilities and stockholders’ equity	$	1,330,980		$	1,356,311

The accompanying notes are an integral part of these statements.

Royal Bancshares of Pennsylvania, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands, except per share data)	2007		2006		2007		2006
Interest Income
Interest income
Loans, including fees	$	15,359	$	15,494	$	29,756	$	29,590
Investment securities held to maturity		2,882		2,944		5,835		5,800
Investment securities available for sale:
Taxable interest		3,940		4,215		7,952		8,626
Tax exempt interest		19		19		37		37
Deposits in banks		824		11		1,365		23
Federal funds sold		44		5		88		25
TOTAL INTEREST INCOME		23,068		22,688		45,033		44,101
Interest expense
Deposits		9,816		6,385		18,914		11,848
Borrowings		2,615		4,355		5,291		8,358
Obligations related to equity investments in real estate		264		889		519		1,501
TOTAL INTEREST EXPENSE		12,695		11,629		24,724		21,707
NET INTEREST INCOME		10,373		11,059		20,309		22,394
Provision for loan losses		159		963		371		1,299
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		10,214		10,096		19,938		21,095
Other income
Service charges and fees		387		354		687		708
Net gains on investment securities available for sale		733		161		733		244
Income related to equity investments in real estate		1,052		1,331		2,360		2,109
Gains on sales of other real estate		450		81		686		1,574
Gains on sales of loans		22		174		189		217
Income from bank owned life insurance		233		214		448		425
Other income		29		585		126		621
TOTAL OTHER INCOME		2,906		2,900		5,229		5,898
Other expenses
Salaries and wages		2,695		2,541		5,371		4,986
Employee benefits		850		641		1,568		1,276
Stock Option Expense		15		178		177		357
Occupancy and equipment		449		400		896		804
Expenses related to equity investments in real estate		556		490		1,379		609
Other operating expenses		2,122		2,144		3,882		4,632
TOTAL OTHER EXPENSE		6,687		6,394		13,273		12,664
Minority interest		189		14		385		(68	)
INCOME BEFORE INCOME TAXES		6,244		6,588		11,509		14,397
Income taxes		1,961		2,002		3,601		4,465
NET INCOME	$	4,283	$	4,586	$	7,908	$	9,932
Per share data
Net income – basic	$	0.32	$	0.34	$	0.59	$	0.74
Net income – diluted	$	0.32	$	0.34	$	0.58	$	0.73
Cash dividends– Class A shares	$	0.287500	$	0.261900	$	0.57500	$	0.52380
Cash dividends– Class B shares	$	0.330625	$	0.301190	$	0.66125	$	0.60238

The accompanying notes are an integral part of these statements.

Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
Six Months ended June 30, 2007
(UNAUDITED)

															Accumulated
									Additional						other
(in thousands, except per share data)	Class A common stock				Class B common stock				Paid in			Retained			comprehensive			Treasury			Comprehensive
	Shares		Amount		Shares		Amount		Capital			earnings			(loss)			stock			Income
Balance, January 1, 2007		11,287	$	22,575		2,108	$	211	$	121,542		$	23,464		$	(2,273	)	$	(2,265	)
Adjustment related to adoption of of FASB No. 158, net of taxes																1,006
Net income		—		—		—		—		—			7,908			—			—		$	7,908
Cash in lieu of fractional shares		—		—		—		—		—			(14	)		—			—			—
Stock dividend adjustment		—		—		—		—		(13	)		13			—			—			—
Cash dividends on common stock (Class A $0.5750 Class B $0.66125)		—		—		—		—		—			(7,778	)		—			—			—
Purchase of treasury stock																			(1,547	)
Adjustment to net periodic pension cost		—		—		—		—		—			—			56			—			56
Stock options exercised		18		36		—		—		140
Stock option expense		—		—		—		—		177			—			—			—			—
Tax benefit stock options		—		—		—		—		62			—			—			—			—
Other comprehensive income, net of reclassifications and taxes		—		—		—		—		—			—			421			—			421
Comprehensive income																					$	8,385
Balance, June 30, 2007		11,305	$	22,611		2,108	$	211	$	121,908		$	23,593		$	(790	)	$	(3,812	)

Royal Bancshares of Pennsylvania, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’
EQUITY AND COMPREHENSIVE INCOME
Six Months ended June 30, 2006
(UNAUDITED)

																		Accumulated
										Un-			Additional					other
	Class A common stock				Class B common stock					Distributed			Paid in		Retained			comprehensive			Treasury			Comprehensive
(in thousands, except per share data)	Shares		Amount		Shares			Amount		B-Shares			Capital		earnings			(loss)			stock			Income
Balance, January 1, 2006		10,700	$	21,400		1,993		$	199	$	2		$	104,285	$	32,827		$	(940	)	$	(2,265	)
Net income		—		—		—			—		—					9,932			—			—		$	9,932
5% Stock dividend		527		1,054		100			11		—			15,575		(16,640	)
Conversion of Class B common stock to Class A Common stock Class A Common stock		4		7		(3	)		—		—			—		(8	)		—			—			—
Issuance of undistributed shares		—		—		20			2		(2	)		—		—			—			—			—
Cash in lieu of fractional shares		—		—		—			—		—			—		(11	)		—			—			—
Cash dividends on common stock (Class A $0.52380 Class B $0.60238		—		—		—			—		—			—		(7,037	)		—			—			—
Stock options exercised		4		8		—			—		—			51		—			—			—			—
Other comprehensive loss, net of reclassifications and taxes		—		—		—			—		—			—		—			(2,532	)		—			(2,532	)
Comprehensive income																								$	7,400
Balance, June 30, 2006		11,235	$	22,469		2,110		$	212	$	—		$	119,911	$	19,063		$	(3,472	)	$	(2,265	)

The accompanying notes are an integral part of the financial statement.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30,
(in thousands)

	2007			2006
Cash flows from operating activities
Net income	$	7,908		$	9,932
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		572			749
Stock compensation expense		177			357
Provision for loan losses		371			1,299
Net accretion of discounts and premiums on loans, mortgage-backed securities and investments		(1,189	)		6,359
Provision (benefit) for deferred income taxes		106			(3,451	)
Gains on sales of other real estate		(686	)		(1,574	)
Gains on sales of loans		(189	)		(217	)
Net gains on sales of investment securities		(733	)		(244	)
Income from equity investments		(86	)		—
Income from bank owned life insurance		(448	)		—
Changes in assets and liabilities:
Increase in accrued interest receivable		(478	)		(668	)
Decrease in other assets		4,171			1,788
Increase in accrued interest payable		4,060			973
Decrease in other liabilities		(720	)		(1,203	)
Net cash provided by operating activities		12,836			14,100
Cash flows from investing activities
Proceeds from calls/maturities of HTM investment securities		60,011			—
Proceeds from calls/maturities of AFS investment securities		38,627			25,552
Proceeds from sales of AFS investment securities		—			4,230
Purchase of AFS investment securities		(51,652	)		(18,375	)
Purchase of HTM investment securities		(2,000	)		—
Redemption of FHLB Stock		2,557			658
Net increase in loans		(25,255	)		(87,885	)
Purchase of premises and equipment		(405	)		(299	)
Net proceeds from sale of premises and equipment – VIE		1,339			—
Distributions from equity investments		86			—
Net decrease in premises and equipment relating to VIE		—			3,586
Net cash provided (used) by investing activities		23,308			(72,533	)
Cash flows from financing activities:
Decrease in non-interest bearing and interest bearing demand deposits and savings accounts		(16,515	)		(15,172	)
Increase in certificates of deposit		48,673			76,208
Mortgage payments		(39	)		(37	)
Repayments from short term borrowings		(53,000	)		—
Repayments from long term borrowings		(91	)		(1,500	)
Repayment of mortgage debt – VIE		(6,533	)		(1,703	)
Income tax benefit on stock options		62			—
Cash dividends		(7,778	)		(7,037	)
Cash in lieu of fractional shares		(14	)		(11	)
Purchase of treasury stock		(1,547	)		—
Issuance of common stock under stock option plans		176			59
Net cash (used) provided by financing activities		(36,606	)		50,807
Net decrease in cash and cash equivalents		(462	)		(7,626	)
Cash and cash equivalents at beginning of period		82,436			30,895
Cash and cash equivalents at end of period	$	81,974		$	23,269
Supplemental Disclosure
Taxes paid	$	2,736		$	1,500
Interest paid	$	20,665		$	20,734

The accompanying notes are an integral part of these statements.

ROYAL BANCSHARES OF PENNSYLVANIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

     The accompanying unaudited consolidated financial statements include the accounts of Royal Bancshares of Pennsylvania, Inc. (“Company”) and its wholly-owned subsidiaries, Royal Investments of Delaware, Inc., Royal Asian Bank (effective July 17, 2006, prior thereto, a division of Royal Bank America) and Royal Bank America (“Royal Bank”), including Royal Bank’s subsidiaries, Royal Real Estate of Pennsylvania, Inc., Royal Investments America, LLC, and its five 60% ownership interests in Crusader Servicing Corporation, Royal Tax Lien Services, LLC, Royal Bank America Leasing, LP, RBA ABL Group, LP and RBA Capital, LP. The two Delaware trusts, Royal Bancshares Capital Trust I and Royal Bancshares Capital Trust II are not consolidated per requirements under FASB Interpretation (“FIN”) No. 46(R). These financial statements reflect the historical information of the Company. All significant inter-company transactions and balances have been eliminated.

1.

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information. The interim financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary to present a fair statement of the results for the interim periods. These interim financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2006. The results of operations for the three-month and six-month periods ended June 30, 2007, are not necessarily indicative of the results to be expected for the full year.

The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America and general practices within the financial services industry. Applications of the principles in the Company’s preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. These estimates and assumptions are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates.

2. Segment Information

Community Banking

The Company’s Community Banking segment which includes Royal Bank and Royal Asian Bank (“the Banks”) consists of commercial and retail banking. The Community Banking business segment is managed as a single strategic unit which generates revenue from a variety of products and services provided by the Banks. For example, commercial lending is dependent upon the ability of the Banks to fund them with retail deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer lending.

     Tax lien operation

The Company’s Tax Lien Operation, which includes Crusader Servicing Corporation and Royal Tax Lien Services, LLC does not meet the quantitative thresholds for requiring disclosure, but has different characteristics than the Community Banking segment. The Company’s Tax Lien Operation consists of purchasing delinquent tax certificates from local municipalities at auction. The tax lien segment is in the business of purchasing delinquent tax liens from municipalities and then processing those liens to either encourage the property holder to pay off the lien, or to foreclose and sell the property. The tax lien operation earns income based on interest rates (determined at auction) and penalties assigned by the municipality along with gains on sale of foreclosed properties.

Equity investments

As of June 30, 2007 and 2006, the Company is reporting on a consolidated basis its interest in one equity investment in real estate as a Variable Interest Entity (“VIE”) which has different characteristics than the Community Banking segment. The Company has an equity investment in an apartment complex that is being converted into condominiums.

The Company’s investments in VIE’s is further discussed in Note 10.

The following table presents selected financial information for reportable business segments for the three month periods ended June 30, 2007 and 2006.

	Three months ended June 30, 2007
(in thousands)	Community		Tax Lien		Equity
	Banking		Operation		Investment			Consolidated
Total assets	$	1,234,530	$	57,048	$	39,402		$	1,330,980
Total deposits		891,615		—		—			891,615
Interest income	$	21,842	$	1,226	$	—		$	23,068
Interest expense		11,529		902		264			12,695
Net interest income (loss)		10,313		324		(264	)		10,373
Provision for loan losses		159		—		—			159
Total non-interest income		1,655		431		820			2,906
Total non-interest expense		6,277		17		393			6,687
Minority interest		189		—		—			189
Income tax expense		1,717		187		57			1,961
Net income	$	3,626	$	551	$	106		$	4,283

	Three months ended June 30, 2006
(in thousands)	Community		Tax Lien		Equity
	Banking		Operation		Investment			Consolidated
Total assets	$	1,266,871	$	44,886	$	47,452		$	1,359,209
Total deposits		758,445		—		—			758,445
Interest income	$	21,601	$	1,087	$	—		$	22,688
Interest expense		9,907		832		890			11,629
Net interest income		11,694		255		(890	)		11,059
Provision for loan losses		962		1		—			963
Total non-interest income		1,356		213		1,331			2,900
Total non-interest expense		5,714		247		433			6,394
Minority interest		14		—		—			14
Income tax expense		1,970		29		3			2,002
Net income (loss)	$	4,390	$	191	$	5		$	4,586

     Interest paid to the Community Banking segment by the Tax Lien Operation was approximately $902,000 and $832,000 for the three-month periods ended June 30, 2007 and 2006. Interest paid to the Community Banking segment by the Equity Investment segment was approximately $230,000 for each of the three-month periods ended June 30, 2007 and 2006.

     The following table presents selected financial information for reportable business segments for the six month periods ended June 30, 2007 and 2006.

	Six months ended June 30, 2007
(in thousands)	Community		Tax Lien		Equity
	Banking		Operation		Investment			Consolidated
Total assets	$	1,234,530	$	57,048	$	39,402		$	1,330,980
Total deposits		891,615		—		—			891,615
Interest income	$	42,509	$	2,524	$	—		$	45,033
Interest expense		22,403		1,802		519			24,724
Net interest income (loss)		20,106		722		(519	)		20,309
Provision for loan losses		371		—		—			371
Total non-interest income		2,686		645		1,898			5,229
Total non-interest expense		11,925		523		825			13,273
Minority interest		385		—		—			385
Income tax expense		3,183		224		194			3,601
Net income	$	6,928	$	620	$	360		$	7,908

	Six months ended June 30, 2006
(in thousands)	Community			Tax Lien		Equity
	Banking			Operation		Investment			Consolidated
Total assets	$	1,266,871		$	44,886	$	47,452		$	1,359,209
Total deposits		758,445			—		—			758,445
Interest income	$	41,796		$	2,305	$	—		$	44,101
Interest expense		18,537			1,670		1,501			21,708
Net interest income		23,259			635		(1,501	)		22,393
Provision for loan losses		1,295			3		—			1,298
Total non-interest income		2,994			795		2,109			5,898
Total non-interest expense		11,233			722		709			12,664
Minority interest		(68	)		—		—			(68	)
Income tax expense		4,376			124		(35	)		4,465
Net income (loss)	$	9,417		$	581	$	(66	)	$	9,932

     Interest paid to the Community Banking segment by the Tax Lien Operation was approximately $1,802,000 and $1,670,000 for the six-month periods ended June 30, 2007 and 2006. Interest paid to the Community Banking segment by the Equity Investment segment was approximately $460,000 for each of the six-month periods ended June 30, 2007 and 2006.

3.

Per Share Information

The Company follows the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings Per Share”. The Company has two classes of common stock currently outstanding. The classes are A and B, of which a share of Class B is convertible into 1.15 shares of Class A. 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 using the treasury stock method. On December 20, 2006 the Board of Directors of the Company declared a 5% stock dividend on both its Class A common stock and Class B common stock shares payable on January 17, 2007. All share and per share information has been restated to reflect this dividend. Basic and diluted EPS are calculated as follows (in thousands, except per share data):

	Three months ended June 30, 2007
(dollars in thousands, except for per share data)	Income		Average shares		Per share
	(numerator)		(denominator)		Amount
Basic EPS
Income available to common shareholders	$	4,283		13,495	$	0.32
Effect of dilutive securities:
Stock options		—		67		—
Diluted EPS
Income available to common shareholders plus
assumed exercise of options	$	4,283		13,562	$	0.32

	Three months ended June 30, 2006
(dollars in thousands, except for per share data)	Income		Average shares		Per share
	(numerator)		(denominator)		Amount
Basic EPS
Income available to common shareholders	$	4,586		13,441	$	0.34
Effect of dilutive securities:
Stock options		—		107		—
Diluted EPS
Income available to common shareholders plus assumed exercise of options	$	4,586		13,548	$	0.34

	Six months ended June 30, 2007
(dollars in thousands, except for per share data)	Income		Average shares		Per share
	(numerator)		(denominator)		Amount
Basic EPS
Income available to common shareholders	$	7,908		13,497	$	0.59
Effect of dilutive securities:
Stock options		—		80		(0.01	)
Diluted EPS
Income available to common shareholders plus assumed exercise of options	$	7,908		13,577	$	0.58

	Six months ended June 30, 2006
(dollars in thousands, except for per share data)	Income		Average shares		Per share
	(numerator)		(denominator)		Amount
Basic EPS
Income available to common shareholders	$	9,932		13,439	$	0.74
Effect of dilutive securities:
Stock options		—		111		(0.01	)
Diluted EPS
Income available to common shareholders plus assumed exercise of options	$	9,932		13,550	$	0.73

Note: The stock dividend declared on December 20, 2006 and paid on January 17, 2007 resulted in the issuance of 526,825 additional shares of Class A common stock and 100,345 additional shares of Class B common stock.

4. Comprehensive Income

SFAS No. 130, Reporting Comprehensive Income, requires the reporting of other comprehensive income, which includes net income as well as certain other items, which results in changes to equity during the period.

(in thousands)	Before		Tax		Net of
	Tax		(expense)		Tax
June 30, 2007	Amount		Benefit		Amount
Unrealized gains on securities:
Unrealized holding gains arising during period	$	1,382	$	484	$	898
Less reclassification adjustment for gains realized in net income		733		256		477
Unrealized gains on investment securities	$	649	$	228	$	421
Adjustment to net periodic pension cost		86		30		56
Adjustment related to adoption of FASB No. 158		1,547		541		1,006
Other comprehensive income	$	2,282	$	799	$	1,483

(in thousands)	Before			Tax			Net of
	Tax			(expense)			Tax
June 30, 2006	Amount			Benefit			Amount
Unrealized gains on securities:
Unrealized holding losses arising during period	$	(4,140	)	$	(1,449	)	$	(2,691	)
Less reclassification adjustment for gains realized in net income		244			85			159
Other comprehensive income	$	(3,896	)	$	(1,364	)	$	(2,532	)

	The projected pension obligation was reduced from $2.5 million to $1.4 million during the second quarter of 2007, to reflect the Company’s projected benefit obligation.
5.	Investment Securities:
	The carrying value and approximate market value of investment securities at June 30, 2007 are as follows:

	Amortized		Gross		Gross			Approximate
	Purchased		Unrealized		Unrealized			Fair		Carrying
(in thousands)	Cost		Gains		Losses			Value		Value
Held to maturity:
Mortgage Backed	$	118	$	—	$	—		$	118	$	118
US Agencies		135,000		—		(1,802	)		133,198		135,000
Other Securities		62,300		2,005		—			64,305		62,300
Total Held to Maturity	$	197,418	$	2,005	$	(1,802	)	$	197,621	$	197,418
Available for sale:
Mortgage Backed	$	34,662	$	43	$	(1,010	)	$	33,695	$	33,695
CMO’s		33,234		140		(458	)		32,916		32,916
US Agencies		124,981		—		(3,576	)		121,405		121,405
Other securities		122,343		6,213		(348	)		128,208		128,208
Total Available for Sale	$	315,220	$	6,396	$	(5,392	)	$	316,224	$	316,224

6. Allowance for Loan Losses:

Changes in the allowance for loan losses were as follows:

	Three months ended June 30,						Six months ended June 30,
(in thousands)	2007			2006			2007			2006
Balance at beginning period	$	11,648		$	10,550		$	11,455		$	10,276
Charge-offs
Single family residential		(50	)		(50	)		(51	)		(173	)
Non-residential		—			—			—			(2	)
Tax certificates		—			(1	)		—			(1	)
Commercial and Industrial		(44	)		—			(69	)		—
Other loans		—			—			—			—
Total charge-offs		(94	)		(51	)		(120	)		(176	)
Recoveries
Single family residential		19			2			23			57
Non-residential		1			1			4			4
Tax certificates		—			—			—			—
Commercial and Industrial		6			1			6			1
Other loans		—			—			—			5
Total recoveries		26			4			33			67
Net Loan (charge offs) recoveries		(68	)		(47	)		(87	)		(109	)
Provision for loan losses		159			963			371			1,299
Balance at the end of period	$	11,739		$	11,466		$	11,739		$	11,466

7.	Pension Plan
	The Company has a noncontributory nonqualified defined benefit pension plan (“Pension Plan”) covering certain eligible employees. The Company’s Pension Plan provides retirement benefits under pension trust agreements and under contracts with insurance companies. The benefits are based on years of service and the employee’s compensation during the highest three consecutive years during the last 10 years of employment.
	Net periodic defined benefit pension expense for the three-months and six-month periods ended June 30, 2007 and 2006 included the following components:

	Three months ended				Six months ended
	June 30,				June 30,
(in thousands)	2007		2006		2007		2006
Service cost	$	154	$	70	$	257	$	140
Interest cost		148		85		246		170
Amortization of prior service cost		30		23		47		47
Amortization of actuarial loss		23		—		39		—
Net periodic benefit cost	$	355	$	178	$	589	$	357

	The total projected benefit obligation under the plan is estimated to be $9.0 million at June 30, 2007. This projected benefit obligation is the present value of the amounts potentially payable under the plan as computed by actuary calculations made by our third party plan administrator.
8.	Stock Option Plans

Outside Directors’ Stock option Plan

The Company has adopted a non-qualified Outside Directors’ Stock Option Plan (the “Director’s Plan”). Under the terms of the Director’s Plan, 250,000 shares of Class A stock are authorized for grants. Each director is entitled to a grant of an option to purchase 1,500 shares of stock annually, which are exercisable one year after the grant date. The options were granted at the fair market value at the date of the grant. The ability to issue new grants under this plan has expired. See the discussion below concerning the 2007 Long- Term Incentive Plan.

The following table presents the activity related to the Director Plan for the six months ended June 30, 2007.

				Weighted		Weighted
				Average		Average		Average
				Exercise		Remaining		Intrinsic
	Options			Price		Term (yrs)		Value
Options outstanding at December 31, 2006		102,552		$	18.41
Granted		—			—
Exercised		(2,258	)		9.13
Forfeited		—			—
Options outstanding at June 30, 2007		100,294		$	18.62		5.8	$	109,437
Options exercisable at June 30, 2007		100,294		$	18.62		5.8	$	109,437

As of June 30, 2007, there were no non-vested shares under the Director’s Plan.

Employee Stock Option Plan and Appreciation Right Plan

The Company has adopted a Stock Option and Appreciation Right Plan (the “Employee Plan”). The Employee 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 1,800,000 shares of Royal Bancshares’ Class A common stock (but not in excess of 19% of outstanding shares). 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. The ability to issue new grants under the plan has expired. See the discussion below concerning the 2007 Long-Term Incentive Plan.

The following table presents the activity related to the Employee Plan for the six months ended June 30, 2007.

				Weighted		Weighted
				Average		Average		Average
				Exercise		Remaining		Intrinsic
	Options			Price		Term (yrs)		Value
Options outstanding at December 31, 2006		853,804		$	19.47
Granted		—			—
Exercised		(14,334	)		9.21
Forfeited		—			—
Options outstanding at June 30, 2007		839,470		$	19.65		6.3	$	54,461
Options exercisable at June 30, 2007		519,080		$	17.72		5.7	$	1,032,969

The following table provides detail for non-vested shares under the Employee Plan at June 30, 2007.

				Weighted
				Average
				Exercise
	Options			Price
Non-vested options – December 31, 2006		462,985		$	21.35
Granted		—			—
Vested		(142,595	)		20.40
Forfeited/expired		—			—
Non-vested options — June 30, 2007		320,390		$	21.21

   As of June 30, 2007, there was approximately $1.5 million of total unrecognized compensation cost related to non-vested options under the Director Plan and the Employee Plan.

The 2007 Long-Term Incentive Plan was approved at the May 16, 2007 Annual Meeting. All employees and non-employee directors of the Company and its designated subsidiaries are eligible participants. The plan includes 1,000,000 shares of Class A common stock, subject to customary anti-dilution adjustments, or approximately 9.0% of total outstanding shares of the Class A common stock. As of June 30, 2007, no shares from this plan have been granted.

9. Interest Rate Swaps

For asset/liability management purposes, the Company uses interest rate swaps which are agreements between the Company and another party (known as a counterparty) where one stream of future interest payments is exchanged for another based on a specified principal amount (known as notional amount). The Company will use interest rate swaps to hedge various exposures or to modify interest rate characteristics of various balance sheet accounts. Such derivatives are used as part of the asset/liability management process, are linked to specific liabilities, and have a high correlation between the contract and the underlying item being hedged, both at inception and throughout the hedge period.

The Company currently utilizes interest rate swap agreements to convert a portion of its fixed rate time deposits to a variable rate (fair value hedge) to fund variable rate loans and investments as well as convert a portion of variable rate borrowings (cash flow hedge) to fund fixed rate loans. Interest rate swap contracts in which a series of interest flows are exchanged over a prescribed period. The Company has completed documentation determining the effectiveness of each hedge using the Volatility Reduction Measure (“VRM”) on a quarterly basis.

At June 30, 2007 and December 31, 2006, the information pertaining to outstanding interest rate swap agreements used to hedge fixed rate loans and investments is as follows:

	June 30,			Dec. 31,
(in thousands)	2007			2006
Notional Amount	$	60,539		$	60,588
Weighted average pay rate		5.57	%		5.52	%
Weighted average receive rate		4.76	%		4.58	%
Weighted average maturity (years)		4.1			4.6
Fair value relating to interest rate swaps	$	(849	)	$	(1,074	)

The fair value on the interest rate swaps included above is estimated by a third party using characteristics such as the current interest environment in conjunction with the remaining term.

10.	Variable Interest Entities (“VIE”)
	Real estate owned via equity investments

In July 2003, Royal Bank (through its wholly owned subsidiary Royal Investments America, LLC) received regulatory approval to acquire ownership interest in real estate projects. With the adoption of FIN 46(R) the Company is required to perform an analysis to determine whether such investments meet the criteria for consolidation into the Company’s financial statements. As of June 30, 2007, the company has one VIE which is consolidated into the Company’s financial statements. Royal Scully Associates, L.P. (“Royal Scully”) met the requirements for consolidation under FIN 46(R) based on Royal Investments America being the primary financial beneficiary. This was determined based on the amount invested by Royal Investments America compared to our partners.

In September 2005, the Company, together with a real estate development company, formed Royal Scully. Royal Scully was formed to convert an apartment complex into condominiums in Blue Bell, Pennsylvania. The development company is the general partner of Royal Scully. The Company invested 66% of the initial capital contribution, or $2.5 million, with the development company holding the remaining equity interest. In addition, the Company holds two notes totaling $9.2 million with a competitive term and interest rate. Upon the repayment of the initial capital contributions and preferred return, distributions will convert to 50% for the Company and 50% for the development company. The Company utilizes the period of December 2006 to May 2007 in consolidating the financial statements of Royal Scully. At June 30, 2007, Royal Scully had total assets of $39.4 million of which $35.5 million is real estate as reflected on the consolidated balanced sheet and total borrowings of $32.0 million, of which $9.2 million relates to notes discussed above and of which $-0- is guaranteed by the Company. The Company’s exposure to loss due to its investment in and receivables due from Royal Scully is $13.8 million at June 30, 2007.

Trust Preferred Securities

Management previously determined that Royal Bancshares Trust I/II (“Trusts”) utilized for the Company’s $25.8 million of pooled trust preferred securities issuance, qualifies as a variable interest entities under FIN 46. The Trusts issued mandatory redeemable preferred stock to investors and loaned the proceeds to the Company. The Trusts hold, as their sole asset, subordinated debentures issued by the Company in 2006.

The Company does not consolidate the Trusts as FIN 46(R) precludes consideration of the call option embedded in the preferred stock when determining if the Company has the right to a majority of the Trusts expected returns. The non-consolidation results in the investment in common stock of the Trusts to be included in other assets with a corresponding increase in outstanding debt of $774,000. In addition, the income received on the common stock investments is included in other income.

The final rule would retain the current maximum percentage of total capital permitted for trust preferred securities at 25%, but would enact other changes to the rules governing trust preferred securities that affect their use as a part of the collection of entities known as “restricted core capital elements.” The rule would take effect March 31, 2009; however, a five-year transition period starting March 31, 2004 and leading up to that date would allow bank holding companies to continue to count trust preferred securities as Tier 1 Capital after applying FIN-46(R). Management has evaluated the effects of the final rule and does not anticipate a material impact on its capital ratios.

11. Change in Accounting Principle

The Company adopted the provisions of the Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN48), Accounting for Uncertainty in Income Taxes – an interpretation of FASB No. 109, on January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the implementation of FIN 48, the Company did not identify any uncertain tax positions that it believes should be recognized in the financial statements.

12. Commitments, Contingencies and Concentrations

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.

The contract amounts are as follows (in thousands):

	June 30, 2007		Dec. 31, 2006
Financial instruments whose contract amounts represent credit risk:
Open-end lines of credit	$	104,171	$	103,169
Commitment to extend credit		17,232		28,543
Standby letters of credit and financial guarantees written		8,465		4,862
Financial instruments whose notional amount exceed the amount of credit risk:
Interest rate swap agreements		60,496		60,588

13. Reclassifications and Restatement for 5% Stock Dividend

Certain items in the consolidated financial statements and accompanying notes have been reclassified to conform with the current year’s presentation format. There was no effect on net income for the periods presented herein as a result of reclassification. All applicable amounts in these consolidated financial statements (including stock options and earnings per share information) have been restated for a 5% stock dividend paid January 17, 2007.

14. Recent accounting pronouncements

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments. This statement amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement resolves issues addressed in Statement 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interest in Securitized Financial Assets. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15,

2006. The Company adopted this guidance on January 1, 2007. The adoption did not have any effect on Royal Bancshares’ financial position or results of operations.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Asset- An Amendment of FASB Statement No. 140. This statement amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. It also permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. The Company adopted this statement effective January 1, 2007. The adoption did not have a material effect on the Company’s financial position or results of operations.

In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) in Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life insurance Arrangements. EITF 06-4 applies to life insurance arrangements that provide an employee with a specific benefit that is not limited to the employee’s active service period, including certain bank-owned life insurance (“BOLI”) policies. EITF 06-4 requires an employer to recognize a liability and related compensation costs for future benefits that extend to postretirement periods. EITF 06-4 is effective for fiscal years beginning after December 15, 2007, with earlier application permitted. The Company is continuing to evaluate the impact of this consensus, which may require the Company to recognize an additional liability and compensation expense related to its BOLI policies.

In September 2006, the FASB ratified the consensus reached by the EITF in Issue 06-5, Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance. Technical Bulletin No. 85-4 states that an entity should report as an asset in the statement of financial position the amount that could be realized under insurance contract. EITF 06-5 clarifies certain factors that should be considered in the determination of the amount that could be realized. EITF 06-5 is effective for fiscal years beginning after December 15, 2006, with earlier application permitted under certain circumstances. The Company does not expect it to have a material impact on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a frame work for measuring fair value under GAAP, and expands disclosures about fair value measurements. FASB Statement No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal years. The Company is currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 157 on our consolidated financial position or results of operations.

In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB 108, companies might evaluate the materiality of financial-statement misstatements using either the income statement or the balance sheet approach, with the income statement approach focusing on new misstatements added in the current year, and the balance sheet approach focusing on the cumulative amount of misstatement present in a company’s balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected. SAB No. 108 now requires that companies view financial statement misstatements as material if they are material according to either the income statement or balance sheet approach. The Company has analyzed SAB No. 108 and determined that adoption of it did not impact on the reported financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value of Option for Financial Assets and Financial Liabilities. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has

been elected in earnings at each subsequent reporting date. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157. The Company did not elect to early adopt SFAS No. 157. We are currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 159 on our consolidated financial position or results of operations.

In March 2007, the FASB ratified EITF Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.” EITF 06-11 requires companies to recognize the income tax benefit realized from dividends or dividend equivalents that are charged to retained earnings and paid to employees for nonvested equity-classified employee share-based payment awards as an increase to additional paid-in capital. EITF 06-11 is effective for fiscal years beginning after September 15, 2007. The Company does not expect EITF 06-11 will have a material impact on its financial position, results of operations or cash flows.

In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 “Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements” (EITF 06-10). EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The Company is currently assessing the impact of EITF 06-10 on its consolidated financial position and results of operations.

In June 2007, the AICPA issued Statement of Position (“SOP”) No. 07-1, “Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies” (“SOP 07-1”). SOP 07-1 addresses when the accounting principles of the AICPA Audit and Accounting Guide Investment Companies must be applied by an entity and whether those accounting principles must be retained by a parent company in consolidation or by an investor in the application of the equity method of accounting. The SOP is effective for fiscal years beginning on or after December 15, 2007, with earlier application encouraged. We are evaluating the effect of adopting SOP 07-1 on our Consolidated Financial Statements.

In April 2007, the FASB directed the FASB Staff to issue FSP No. FIN 39-1, “Amendment of FASB Interpretation No. 39” (“FSP FIN 39-1”). FSP FIN 39-1 modifies FIN No. 39, “Offsetting of Amounts Related to Certain Contracts,” and permits companies to offset cash collateral receivables or payables with net derivative positions under certain circumstances. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. We are evaluating the effect of adopting FSP FIN 39-1 on our Consolidated Financial Statements.

In May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 “Definition of Settlement in FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. The implementation of this standard did not have a material impact on our consolidated financial position or results of operations.

In February 2007, the FASB issued FASB Staff Position (FSP) FAS 158-1, “Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88, and No 106 and to the Related Staff Implementation Guides.” This FSP makes conforming amendments to other FASB statements and staff implementation guides and provides technical corrections to SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” The conforming amendments in this FSP did not have a material impact on our consolidated financial statements or disclosures.

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to assist in understanding and evaluating the changes in the financial condition and earnings performance of the Company and its subsidiaries for the three-month and six-month periods ended June 30, 2007 and June 30, 2006. This discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2006 included in the Company’s 2006 Form 10-K.

FORWARD-LOOKING STATEMENTS

From time to time, the Company 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 and Exchange Commission. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. When we use words such as “believes”, “expects,” “anticipates” or similar expressions, we are making forward-looking statements. In order to comply with the terms of the safe harbor, Royal Bancshares notes that a variety of factors could cause the Company’s actual results and experience to differ materially from the anticipated results or other expectations expressed in Royal Bancshares forward-looking statements. The risks and uncertainties that may affect the operations, performance development and results of the Company’s business include the following: general economic conditions, including their impact on capital expenditures; interest rate fluctuations: 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.

All forward-looking statements contained in this report are based on information available as of the date of this report. The Company expressly disclaims any obligation to update any forward-looking statement to reflect future statements to reflect future events or developments.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America and general practices within the financial services industry. Applications of the principles in the Company’s preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. These estimates and assumptions are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates.

Note A to the Company’s consolidated financial statements (included in Item 8 of the Form 10-K for the year ended December 31, 2006) lists significant accounting policies used in the development and presentation of the Company’s financial statements. The following discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other quantitative and qualitative factors that are necessary for an understanding and evaluation of the Company and its results of operations. The Company is an investor in a variable interest entity and is required to report its investment in the variable interest entity on a consolidated basis under FIN 46(R). The variable interest entity is responsible for providing its financial information to the Company. We complete an internal review of this financial information. This review requires substantive judgment and estimation. The Company has identified accounting for allowance for loan losses, deferred tax assets and derivative securities as among the most critical accounting policies and estimates in that they are important to the presentation of the Company’s financial condition and results of operations, and they require difficult, subjective or complex judgments as a result of the need to make estimates.

RESULTS OF OPERATIONS

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 and borrowings.

Interest income is recognized according to the effective interest yield method. Net income is also affected by the provision for loan losses and the level of non-interest income as well as by non-interest expenses, including salary and employee benefits, occupancy expenses and other operating expenses.

Consolidated Net Income

The second quarter of 2007 net income of $4.3 million was $303,000 or 6.6% lower than the second quarter of 2006 net income of $4.6 million. The lower net income earned during the second quarter of 2007 was primarily the result of the continued pressures on funding costs and the reduction in interest income related to an increase in non-accruing loans during 2007. Non-accruing loans increased from $6.6 million at December 31, 2006 to $29.1 million at June 30, 2007. Management is closely monitoring these loans and believes they are adequately collateralized. Basic earnings per share and diluted earnings per share were both $.32 for the second quarter of 2007. Basic earnings per share and diluted earnings per share were both $.34 for the second quarter of 2006. The three month period ended June 30, 2007 return on average assets and return on average equity were 1.28% and 10.49%, respectively. During the second quarter of 2006 the return on average assets was 1.38% and the average return on equity was 11.82%.

Net income for the year to date period ending June 30, 2007 of $7.9 million was $2.0 million lower than the same period in 2006. The lower net income was also attributed to the higher funding costs and the impact of the increase in non-accruing loans during 2007. The six months ended June 30, 2007 basic earnings per share and diluted earnings per share were $.59 and $.58, respectively. The six months ended June 30, 2006 basic earnings per share was $.74 and diluted earnings per share was $.73. The six month period ended June 30, 2007 return on average assets and return on average equity were 1.19% and 9.75%, respectively. The six month period ending June 30, 2006 return on average assets was 1.52% and the average return on equity was 12.85%.

Interest Income

The second quarter of 2007 interest income grew $380,000, or 1.7%, compared to the second quarter of 2006. Cash and cash equivalent interest income increased $852,000, and was partially offset by a $337,000 decrease in investment interest income and a $135,000 reduction in loan interest income. The $135,000 lower loan interest income earned in the second quarter of 2007, was primarily due to the $728,000 reduction related to non-accruing loans. During 2007, six loans in excess of $1.0 million each were added to non-accruing status. Year to date June 30, 2007 total interest income decreased $932,000, primarily as a result of the $2.0 million reduction related to the non-accruing loans mentioned above.

Interest Expense

Interest expense increased $1.1 million to $12.7 million for the quarter ended June 30, 2007 compared to the same period in 2006. The increase in interest expense was the result of an increase in average deposits along with higher interest rates paid on deposits. The increase was partially offset by a $626,000 reduction in interest expense related to an equity investment in real estate. Excluding interest expense related to the variable interest entity, interest expense grew $1.7 million or 15.7%. Average deposits grew 20.7% in the second quarter of 2007, compared to the second quarter of 2006. This increase was primarily a result of the growth average certificates of deposits through promotions featuring attractive rates. Higher rates in NOW and money market accounts also contributed to the higher interest expense in the second quarter of 2007. The increase in deposits was used to offset maturing Federal Home Loan Bank borrowings. Year to date June 30, 2007 interest expense increased $3.0 million compared to the same period in 2006. This increase was partially offset by a $1.0 million reduction in interest expense related to an equity investment in real estate. Excluding the interest expense related to the variable interest entity, interest expense grew $4.0 million or 19.8%. This increase was primarily due to the increase in overall funding cost and the increase in the mix of higher costing certificates of deposits during 2007.

Net Interest Margin

The second quarter 2007 net interest margin of 3.56% was lower than the second quarter 2006 net interest margin of 3.99%, though it was higher than the first quarter of 2007 net interest margin of 3.47%. The year to date 2007 net interest margin of 3.51% was below the 4.09% experienced in the same period in 2006.

The following table represents the average daily balances of assets, liabilities and shareholders’ equity and the respective interest bearing assets and interest bearing liabilities, as well as average rates for the periods indicated, exclusive of interest on obligations related to the variable interest entity. The loans outstanding include non-accruing loans. The yield on earning assets and the net interest margin are presented on a fully tax-equivalent (FTE) and annualized basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt investments and loans using the federal statutory tax rate of 35% for each period presented.

	For the three months ended							For the three months ended
	June 30, 2007							June 30, 2006
(in thousands)	Average							Average
	Balance		Interest		Yield			Balance		Interest		Yield
Cash equivalents	$	65,596	$	868		5.31	%	$	1,339	$	16		4.79	%
Investments securities		537,032		6,841		5.11	%		573,973		7,177		5.02	%
Loans		623,430		15,592		10.03	%		626,463		15,495		9.92	%
Earning assets		1,226,058		23,301		7.62	%		1,201,775		22,688		7.57	%
Non earning assets		86,043							82,621
Total average assets	$	1,312,101						$	1,284,396
Deposits	$	896,814		9,816		4.39	%	$	743,310		6,385		3.45	%
Borrowings		218,843		2,615		4.79	%		363,110		4,355		4.81	%
Total interest bearing liabilities		1,115,657		12,431		4.47	%		1,106,420		10,740		3.89	%
Non-interest bearing liabilities and equity		196,444							177,976
Total average liabilities and equity	$	1,312,101						$	1,284,396
Net interest margin			$	10,870		3.56	%			$	11,948		3.99	%

	For the six months ended							For the six months ended
	June 30, 2007							June 30, 2006
(in thousands)	Average							Average
	Balance		Interest		Yield			Balance		Interest		Yield
Cash equivalents	$	54,492	$	1,454		5.38	%	$	2,029	$	49		4.87	%
Investments securities		551,794		13,824		5.05	%		580,399		14,462		5.03	%
Loans		615,685		30,218		9.90	%		596,470		29,590		10.00	%
Earning assets		1,221,971		45,496		7.51	%		1,178,898		44,101		7.54	%
Non earning assets		85,794							86,766
Total average assets	$	1,307,765						$	1,265,664
Deposits	$	892,166		18,914		4.28	%	$	724,048		11,848		3.30	%
Borrowings		222,028		5,291		4.81	%		363,385		8,358		4.64	%
Total interest bearing liabilities		1,114,194		24,205		4.38	%		1,087,433		20,206		3.75	%
Non-interest bearing liabilities and equity		193,571							178,231
Total average liabilities and equity	$	1,307,765						$	1,265,664
Net interest margin			$	21,291		3.51	%			$	23,895		4.09	%

Rate Volume Analysis

The following table sets forth a rate/volume analysis, which segregates in detail the major factors contributing to the change in net interest income exclusive of interest on obligation through VIE, for the three-month and six-month periods ended June 30, 2007, as compared to the respective period in 2006, into amounts attributable to both rates and volume variances.

	For the three months ended									For the six months ended
	June 30,									June 30,
	2007 vs. 2006									2007 vs. 2006
	Increase (decrease)									Increase (decrease)
(in thousands)	Volume			Rate			Total			Volume			Rate			Total
INTEREST INCOME
Interest-bearing deposits	$	812		$	1		$	813		$	1,334		$	9		$	1,343
Federal funds sold		39			—			39			62			1			63
Investments securities
Held to maturity		(166	)		90			(76	)		(91	)		127			36
Available for sale		(481	)		221			(260	)		(643	)		(32	)		(675	)
Total Investments securities		204			312			516			662			105			767
Loans
Commercial demand loans		(170	)		(169	)		(339	)		560			(501	)		59
Commercial mortgages		(25	)		(258	)		(283	)		(116	)		(146	)		(262	)
Residential and home equity		(110	)		69			(41	)		(244	)		85			(159	)
Leases receivables		353			(19	)		334			673			(31	)		642
Tax certificates		47			92			139			45			174			219
Other loans		(14	)		4			(10	)		(29	)		10			(19	)
Loan fees		297			—			297			148			—			148
Total loans		378			(281	)		97			1,037			(409	)		628
Total increase in interest income		582			31			613			1,699			(304	)		1,395
INTEREST EXPENSE
Deposits
NOW and money market		(298	)		646			348			(489	)		1,294			805
Savings		(3	)		(1	)		(4	)		(6	)		(2	)		(8	)
Time deposits		2,457			630			3,087			4,856			1,413			6,269
Total deposits		2,156			1,275			3,431			4,361			2,705			7,066
Trust preferred		—			15			15			—			28			28
Borrowings		(1,601	)		(154	)		(1,755	)		(3,195	)		100			(3,095	)
Total increase in interest expense		555			1,136			1,691			1,166			2,833			3,999
Total increase (decrease) in net interest income	$	27		$	(1,105	)	$	(1,078	)	$	533		$	(3,137	)	$	(2,604	)

Provision for Loan Losses

The provision for loan losses was $159,000 during the second quarter of 2007 and $371,000 year to date as of June 30, 2007, compared to $963,000 and $1,299,000 during the respective periods in 2006. The allowance for loan losses to total loans ratio increased to 1.87% at June 30, 2007, from 1.80% at June 30, 2006.

Non-interest Income

The second quarter 2007 non-interest income of $2.9 million was even with the second quarter of 2006. Higher net gains on investment securities available for sale and gains on the sale of other real estate were offset by lower operating income related to the equity investment in real estate and gains recognized on non-consolidated equity investments. The consolidated equity investment in real estate is associated with the Royal Scully VIE described in notes 2 and 10. The year to date June 30, 2007 non-interest income was $669,000 lower than the $5.2 million recorded in 2006. This reduction in non-interest income was related to higher gains on the sale of other real estate in the first half of 2006, compared to the same period in 2007.

Non-interest Expense

The second quarter of 2007 non-interest expense of $6.7 million increased $293,000, or 4.6% from the second quarter of 2006. Year to date June 30, 2007 non-interest expenses of $13.3 million was $609,000, or 4.8% higher than the same period in 2006. These increases were associated with both the opening of a new Royal

Asian Bank branch in the first quarter of 2007 and the addition of two specialty lending subsidiaries, Royal Bank America Asset Based Lending and RBA Capital during the second half of 2006. These increases were partially offset by lower expenses associated with the equity investment in real estate.

Income Tax Expense

Total income tax expense for the second quarters of 2007 and 2006 were both $2.0 million. The effective tax rate for the second quarter of 2007 was 31.4% compared to the 30.4% for the same period in 2006. The year to date June 30, 2007 effective tax rate of 31.3%, compared to 31.0% effective tax rate for the same period in 2006. The higher effective tax rates recorded during 2007 reflect the lower level of tax free loan interest recorded in 2007, compared to 2006.

FINANCIAL CONDITION

Consolidated Assets

Total consolidated assets as of June 30, 2007 decreased $25.3 million from December 31, 2006. A $46.4 million decrease in investment securities was partially offset by a $26.2 increase in higher yielding loans. Also contributing to this decrease was a $7.0 million reduction in real estate associated with the equity investment in real estate. The lower level of assets was related to the planned decrease in Federal Home Loan Bank borrowings during the first half of 2007.

Loans

Total loans increased $26.2 million from the $603.0 million level at December 31, 2006 to $629.2 million at June 30, 2007. This increase is primarily due to an increase in secured other real estate loans, commercial and industrial loans and leases, which was partially offset by a decrease in construction and land development loans.

The following table represents loan balances by type:

(amounts in thousands)	June 30, 2007			Dec. 31, 2006
Commercial and industrial loans	$	63,967		$	43,019
Construction and land development		159,755			183,534
Single family residential		45,536			43,338
Other real estate secured		340,010			319,894
Leases		19,840			13,404
Other loans		1,581			1,333
Total gross loans		630,689			604,522
Deferred fees		(1,523	)		(1,564	)
Total loans	$	629,166		$	602,958

Non-performing loans

(in thousands)	June 30, 2007			Dec. 31, 2006
Non-accruing loans (1)	$	29,089		$	6,560
Other real estate owned		971			924
Total nonperforming assets	$	30,060		$	7,484
Nonperforming assets to total assets		2.26	%		0.55	%
Nonperforming loans to total loans		4.62	%		1.09	%
Allowance for loan loss to non-accruing loans		40.36	%		174.62	%

(1) Generally, a loan is placed on non-accruing 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.

Loans on which the accrual of interest has been discontinued was $29.1 million at June 30, 2007, as compared to $6.6 million at December 31, 2006, an increase of $22.5 million. This increase is primarily the result of transferring three construction loans, two construction mezzanine loans and one asset based loan to non-accrual status during the first half of 2007. One construction loan in the amount of $4.8 million was sold at auction on May 29, 2007 and should settle during the third quarter of 2007 at approximately the outstanding loan amount. Two of these loans (one construction and one construction mezzanine loan) representing $8.2 million were related to one customer for a condominium building in Maryland. We anticipate a payment of approximately $490,000 in the third quarter on the sale of one of the condominiums. Two other loans (one construction and one construction mezzanine loan) to another customer in the amount of $6.9 million were also added to non-accruing status during 2007. These loans are secured by a condominium building in New Jersey. A loan loss reserve in the amount of $129,000 has been allocated to these loans. The asset based loan in the amount of $3.1 million was added to non-accruing status in June 2007. We are continuing to collect payments on this loan and have allocated a $307,000 loan loss reserve to it.

The Company identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual term of the loan agreement. The total of impaired loans at June 30, 2007 was $28.0 million and the average year to date June 30, 2007 impaired loans was $23.7 million. The allowance for loan losses related to impaired loans was $796,000 at June 30, 2007. 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. The income recognized on impaired loans was $303,000 for the first six months of 2007.

The balance of impaired loans at December 31, 2006 was $14.6 million. The allowance for loan losses related to these impaired loans was $3.6 million. The average balance of impaired loans was $13.8 million during 2006 and the income recognized on impaired loans during 2006 was $641,000.

Allowance for Loan Losses

The Company considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. Management determines the allowance for loan losses with the objective of maintaining a reserve level sufficient to absorb estimated probable credit losses. Management has determined the Company’s balance in the allowance for loan losses based on management’s detailed analysis and review of loan portfolio. Management considers all known relevant internal and external factors that may affect loan collectibility. The periodic analysis and review includes an evaluation of the loan portfolio in relation to historical loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors, including Management’s assumptions as to future delinquencies, recoveries and losses. Management’s evaluation is inherently subjective and all of these factors may be susceptible to significant change. To the extent actual outcomes differ from management’s assessments, the Company may be required to make additional provisions for loan losses that could adversely impact earnings in future periods.

The allowance for loan losses increased $284,000 to $11.7 million at June 30, 2007 from $11.5 million at December 31, 2006. The $284,000 increase was attributed to recording a provision of $371,000 offset by net charge offs of $87,000. The amount of the allowance for loan losses represents 1.87% of total loans at June 30, 2007 versus 1.90% at December 31, 2006. Management believes that, based on information currently available, the allowance for loan loss is sufficient to cover losses inherent in the Company’s loan portfolio at this time. As noted in the review of the non-performing loans section of this report, the Company has experienced a significant increase in non-accruing loans during the first six months of 2007. Management is aggressively managing these loans in an effort to reduce the level of non-accrual loans. Management has allocated specific loan loss reserves to the loans when they believe the loans are not adequately collateralized. No assurances can be given that the level

of allowance will be sufficient to cover future loan losses or that future adjustments to the allowance will be sufficient to cover future loan losses or that future adjustments to the allowance will not be necessary if economic and/or other conditions differ substantially from the economic and other conditions considered by management in evaluating the adequacy of the current level of the allowance.

An analysis of the Allowance for Loan losses by loan type is set forth below:

	June 30, 2007					December 31, 2006
			Percent of					Percent of
			loans					loans
	Amount		in each			Amount		in each
	in		category to			in		category to
	thousands		total loans			thousands		total loans
Domestic
Commercial and industrial	$	1,202		10.19	%	$	559		6.70	%
Construction and land development		3,662		25.45	%		4,526		29.93	%
Single family residential		1,320		7.23	%		845		6.71	%
Real Estate – non-residential		4,935		45.24	%		5,165		48.14	%
Real Estate – multi-family		102		1.59	%		56		0.99	%
Tax certificates		—		6.89	%		—		5.18	%
Lease financing		503		3.16	%		293		2.17	%
Installment loans to individuals		15		0.25	%		11		0.18	%
Foreign		—		N/A			—		N/A
Unallocated		—		N/A			—		N/A
Total	$	11,739		100.00	%	$	11,455		100.00	%

Investment Securities

Total investment securities decreased $46.4 million to $522.4 million at June 30, 2007, from the level at December 31, 2006. This decrease is primarily due to maturities and calls of investments along with principal repayments from mortgage backed securities during the first six months of 2007. These proceeds were primarily used to fund loan growth.

Cash and Cash Equivalents

Total cash and cash equivalents decreased $462,000 from the $82.4 million level at December 31, 2006 to $82.0 million at June 30, 2007 due to a reduction in federal funds sold.

Deposits

Total deposits, the primary source of funds, increased $32.2 million to $891.6 million at June 30, 2007, from the level at December 31, 2006. This growth was primarily related to the planned increase in time deposits through promotions featuring attractive rates. Time deposits under $100,000 grew $28.2 million, time deposits over $100,000 increased $20.4 million and non-interest bearing demand deposits grew $10.5 million. Partially offsetting these increases was a decrease to NOW and money market accounts of $26.2 million and a $749,000 reduction in savings accounts.

     The following table represents ending deposit balances by type:

(in thousands)	June 30, 2007		Dec. 31, 2006
Demand (non-interest bearing)	$	71,482	$	61,002
NOW and Money Markets		249,944		276,190
Savings		16,436		17,185
Time deposits (over $100)		305,959		285,485
Time deposits (under $100)		247,794		219,595
Total deposits	$	891,615	$	859,457

Borrowings

Total borrowings decreased $53.1 million to $193.0 million at June 30, 2007, from $246.1 million at December 31, 2006. This reduction is attributed to a $53.0 million decrease in overnight borrowings with the Federal Home Loan Bank resulting from increased deposit funding. The Company’s investment in VIE’s is further discussed in Note 10.

Obligations Related to Equity Investments in Real Estate

As a result of the adoption of FIN 46(R) the Company consolidated into its statement of condition $22.8 million of debt at June 30, 2007 and $29.3 million of debt at December 31, 2006 related to real estate equity investment of which none is guaranteed by the Company.

Stockholders’ Equity

Consolidated stockholders’ equity increased $467,000 to $163.7 million at June 30, 2007 from $163.3 million at December 31, 2006. This increase is primarily due a decrease in the loss in accumulated other comprehensive income related to an increase in gains in the available for sale portfolio of approximately $421,000 and an adjustment related to the adoption of FASB No. 158 of $1.0 million. Additional paid in capital grew $366,000 as a result of stock options exercised during the first half of 2007. These increases were partially offset by the $1.5 million increase in treasury stock. Net income for the first six months of 2007 was $7.9 million and the dividends paid during the first six months of 2007 was $7.8 million.

CAPITAL ADEQUACY

The Company and its banking subsidiaries are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines involve quantitative measure of assets and liabilities calculated under regulatory accounting practices. Quantitative measures established by banking regulations, designed to ensure capital adequacy, required the maintenance of minimum amounts of capital to total “risk weighted” assets and a minimum Tier 1 leverage ratio, as defined by the banking regulations. At June 30, 2007, the Company was required to have a minimum Tier 1 and total capital ratios of 4% and 8%, respectively, and a minimum Tier 1 leverage ratio of 3% plus an additional 100 to 200 basis points.

The table below provides a comparison of The Company and Royal Bank’s risk-based capital ratios and leverage ratios for June 30, 2007 and the year ended December 31, 2006:

											To be well
											capitalized under
						For capital					prompt corrective
	Actual		Actual			adequacy purposes					action provision
June 30, 2007	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk-weighted assets)
Company (consolidated)	$	203,565		20.51	%	$	79,405		8.00	%		N/A		N/A
Royal Bank		151,515		16.49	%		73,508		8.00	%	$	91,885		10.00	%
Royal Asian		15,673		21.86	%		5,735		8.00	%		7,168		10.00	%
Tier I Capital (to risk-weighted assets)
Company (consolidated)	$	191,826		19.33	%	$	39,702		4.00	%		N/A		N/A
Royal Bank		140,513		15.29	%		36,754		4.00	%	$	55,131		6.00	%
Royal Asian		14,936		20.84	%		2,867		4.00	%		4,301		6.00	%
Tier I Capital (to average assets, leverage)
Company (consolidated)	$	191,826		14.31	%	$	40,210		3.00	%		N/A		N/A
Royal Bank		140,513		11.14	%		37,828		3.00	%	$	63,047		5.00	%
Royal Asian		14,936		14.05	%		3,189		3.00	%		5,315		5.00	%

											To be well
											capitalized under
						For capital					prompt corrective
	Actual		Actual			adequacy purposes					action provision
December 31, 2006	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital (to risk-weighted assets)
Company (consolidated)	$	203,190		20.38	%	$	79,757		8.00	%		N/A		N/A
Royal Bank		150,274		16.44	%		73,112		8.00	%	$	91,390		10.00	%
Royal Asian		15,493		25.29	%		4,901		8.00	%		6,126		10.00	%
Tier I Capital (to risk-weighted assets)
Company (consolidated)	$	191,735		19.23	%	$	39,879		4.00	%		N/A		N/A
Royal Bank		139,599		15.28	%		36,556		4.00	%	$	54,834		6.00	%
Royal Asian		14,727		24.04	%		2,450		4.00	%		3,676		6.00	%
Tier I Capital (to average assets, leverage)
Company (consolidated)	$	191,735		14.92	%	$	38,547		3.00	%		N/A		N/A
Royal Bank		139,599		11.23	%		37,286		3.00	%	$	62,143		5.00	%
Royal Asian		14,727		23.03	%		1,918		3.00	%		3,197		5.00	%

The Company’s ratios compare favorably to the minimum required amounts of Tier 1 and total capital to “risk weighted” assets and the minimum Tier 1 leverage ratio, as defined by banking regulations. The Company currently meets the criteria for a well-capitalized institution, and management believes that the Company will continue to meet its minimum capital requirements. At present, the Company has no commitments for significant capital expenditures.

The Company is not under any agreement with regulatory authorities nor is the Company aware of any current recommendations by the regulatory authorities that, if such recommendations were implemented, would have a material effect on liquidity, capital resources or operations of the Company.

LIQUIDITY & INTEREST RATE SENSITIVITY

Liquidity is the ability to ensure that adequate funds will be available to meet the Company’s financial commitments as they become due. In managing its liquidity position, all sources of funds are evaluated, the largest of which is deposits. Also taken into consideration are securities maturing in one year or less, other short-term investment and the repayment of loans. These sources provide alternatives to meet its short-term liquidity needs. In addition, the FHLB is available to provide short-term liquidity when other sources are unavailable. Longer liquidity needs may be met by issuing longer-term deposits and by raising additional capital. The liquidity ratio is calculated by adding total cash and investments less reserve requirements divided by deposits and short-term liabilities which is generally maintained at a level equal to or greater than 25%.

The liquidity ratio of the Company remains adequate at approximately 43% and exceeds the Company’s target ratio set forth in the Asset/Liability Policy. The Company’s level of liquidity is provided by funds invested primarily in corporate bonds, capital trust securities, US Treasuries and agencies, and to a lesser extent, federal funds sold. The overall liquidity position is monitored on a monthly basis.

In managing its interest rate sensitivity positions, the Company seeks to develop and implement strategies to control exposure of net interest income to risks associated with interest rate movements Interest rate sensitivity is a function of the repricing characteristics of the Company’s assets and liabilities. These include the volume of assets and liabilities repricing, the timing of the repricing, and the interest rate sensitivity gaps is a continual challenge in a changing rate environment. The following table shows separately the interest sensitivity of each category of interest earning assets and interest bearing liabilities as of June 30, 2007:

Interest Rate Sensitivity

(in millions)	Days						1 to 5			Over 5		Non-rate
	0 – 90			91 – 365			Years			Years		Sensitive			Total
Assets
Interest-bearing deposits in banks	$	67.2		$	—		$	—		$	—	$	13.8		$	81.0
Federal funds sold		1.0			—			—			—		—			1.0
Investment securities:
Available for sale		31.1			45.7			144.8			93.6		1.0			316.2
Held to maturity		30.1			100.3			67.0			—		—			197.4
Total investment securities		61.2			146.0			211.8			93.6		1.0			513.6
Loans:
Fixed rate		20.1			47.9			184.4			35.1		—			287.5
Variable rate		291.1			37.7			12.7			0.1		(11.7	)		329.9
Total loans		311.2			85.6			197.1			35.2		(11.7	)		617.4
Other assets		8.7			23.4			—			—		85.9			118.0
Total Assets	$	449.3		$	255.0		$	408.9		$	128.8	$	89.0		$	1,331.0
Liabilities & Capital
Deposits:
Non interest bearing deposits	$	—		$	—		$	—		$	—	$	71.5		$	71.5
Interest bearing deposits		29.6			88.7			148.1			—		—			266.4
Certificate of deposits		56.6			286.4			207.7			3.0		—			553.7
Total deposits		86.2			375.1			355.8			3.0		71.5			891.6
Borrowings (1)		48.4			50.0			120.4			—		22.8			241.6
Other liabilities		0.1			—			—			—		34.0			34.1
Capital		—			—			—			—		163.7			163.7
Total liabilities & capital	$	134.7		$	425.1		$	476.2		$	3.0	$	292.0		$	1,331.0
Net interest rate GAP	$	314.6		$	(170.1	)	$	(67.3	)	$	125.8	$	(203.0	)
Cumulative interest rate GAP	$	314.6		$	144.5		$	77.2		$	203.0
GAP to total assets		24	%		-13	%
GAP to total equity		192	%		-104	%
Cumulative GAP to total assets		24	%		11	%
Cumulative GAP to total equity		192	%		88	%

(1) The $22.8 in borrowings classified as non-rate sensitive are related to variable interest entities and are not obligations of the Company.

The Company’s exposure to interest rate risk is mitigated somewhat by a portion of the Company’s loan portfolio consisting of floating rate loans, which are tied to the prime lending rate but which have interest rate floors and no interest rate ceilings. Although the Company is originating fixed rate loans, a portion of the loan portfolio continues to be comprised of floating rate loans with interest rate floors.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The information presented in the Liquidity and Interest Rate Sensitivity section of the Management’s Discussion and Analysis of Financial Condition and Results Operations of this Report is incorporated herein by reference.

ITEM 4 – CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

The Company maintains a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities

Exchange Commission’s rules and forms. As of the end of the period covered by this report, the Company evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, our CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as June 30, 2007, in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s Exchange Act filings.

There are inherent limitations to the effectiveness of any controls system. A controls system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that its objectives are met. Further, the design of a control system must reflect the fact that there are limits on resources, and the benefits of controls must be considered relative to their costs and their impact on the business model. We intend to continue to improve and refine our internal control over financial reporting.

(b) Changes in internal controls.

There has not been any change in the Company’s internal control over financial reporting during the quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

     None

Item 1A. Risk Factors

There have been no material changes from risk factors as previously disclosed in our Form 10-K for the year ended December 31, 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Stock Repurchases

     The following table provides information on repurchases by the Company of its common stock in each month of the quarter ended June 30, 2007:

					Total Number		Maximum
					of Shares		Number of
					Purchased		Shares that
					as Part of		may yet be
	Total		Average		Publicly		Purchased
	Number of		Price		Announced		Under the
	Shares		Paid per		Plans or		Plans or
Period	Repurchased		Share		Programs		Programs
April 1, 2007 through April 30, 2007		—	$	—		—	—
May 1, 2007 through May 31, 2007		17,900	$	20.46		17,900		652,100
June 1, 2007 through June 30, 2007		55,300	$	21.34		55,300		596,800

1.	Transactions are reported as of settlement dates.
2.	The Company’s current stock repurchase program was approved by its Board of Directors and announced on May 16, 2007.
3.	The number of shares approved for repurchase under the Company’s current stock repurchase program is 670,000.
4.	The Company’s current stock repurchase program has no expiration date.
5.	The Company did not have a stock repurchase plan or program expire during the period covered by the table.
6.	The Company did not have a stock repurchase plan or program that is has determined to terminate prior to expiration or under which it does not intend to make further purchases.

Item 3. Default Upon Senior Securities

     None

Item 4. Submission of Matters to Vote Security Holders

     On Wednesday, May 16, 2007, the Annual Meeting of Shareholders’ of the Company was convened in Philadelphia, PA at 6:30 P.M. to consider the following matters.

1. The following nominees were elected as Class II Directors of the Registrant to serve for a three year term. There was no solicitation in opposition to the nominees of the Board of Directors. The votes cast with respect to each individual nominees were as follows:

Name	For		Withhold
Anthony Micale		27,711,491		400,723
Mitchell Morgan		27,731,691		380,523
Albert Ominsky		27,727,721		384,493
Gregory Reardon		27,731,473		380,741
Robert Tabas		27,160,358		951,856

2. Approval of the 2007 Long-Term Incentive Plans. The votes cast in this matter were as follows:

For	23,724,812
Against	2,046,732
Abstain	80,952

Item 5. Other Information

     On September 8, 2006 the Company’s wholly owned subsidiary Royal Bank America formed a subsidiary called RBA ABL Group LP to originate asset based loans. The Bank owns 60% of the subsidiary.

     On October 2, 2006 the Company’s wholly owned subsidiary Royal Bank America formed a subsidiary called RBA Capital LP to originate structured financing. The Bank owns 60% of the subsidiary.

     On October 20, 2006 the Company changed The Transfer and Dividend and Paying Agent from Registrar and Transfer Company to StockTrans Inc. located in Ardmore, Pennsylvania.

Item 6. Exhibits

     (a)

3.1	Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3(i) of the Company’s registration Statement on Form S-4 No. 0-26366.)
3.2	Bylaws of the Company (Incorporated by reference to Exhibit 99 to the Company’s current report on Form 8-K filed with the Commission on March 13, 2001, amended April 19, 2006.
10.1	Employment Agreement dated September 11, 2006 by and among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Bank America (“Bank”) and Joseph P. Campbell, President and Chief Executive Officer of the Corporation and the Bank. (Incorporated by reference to Exhibit 10.1 to the Company’s report on Form 10-Q dated March 31, 2007, as filed on May 15, 2007.)
10.2	Employment Agreement dated September 22, 2006 by and among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Bank America (“Bank”) and James J. McSwiggan, Jr, Chief Operating Officer of the Corporation and the Bank. (Incorporated by reference to Exhibit 10.2 to the Company’s report on Form 10-Q dated March 31, 2007, as filed on May 15, 2007.)
10.3	Employment Agreement dated February 22, 2007 by and among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Bank America (“Bank”) and Murray Stempel, III, Executive Vice President and Chief Lending Officer of the Corporation and the Bank. (Incorporated by reference to Exhibit 10.3 to the Company’s report on Form 10-Q dated March 31, 2007, as filed on May 15, 2007.)
10.4	Employment Agreement dated February 23, 2007 by and among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Bank America (“Bank”) and John Decker, Executive Vice President Mezzanine/Equity Lending of the Corporation and the Bank. (Incorporated by reference to Exhibit 10.4 to the Company’s report on Form 10-Q dated March 31, 2007, as filed on May 15, 2007.)
10.5	Employment Agreement dated February 23, 2007 by and among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Bank America (“Bank”) and Robert R. Tabas, Executive Vice President the Corporation and the Bank.

	(Incorporated by reference to Exhibit 10.5 to the Company’s report on Form 10-Q dated March 31, 2007, as filed on May 15, 2007.)
10.6	Employment Agreement dated February 22, 2007 by and among Royal Bancshares of Pennsylvania, Inc. (“Corporation”), Royal Asian Bank (“Bank”) and Edward Shin, President of Royal Asian Bank. (Incorporated by reference to Exhibit 10.6 to the Company’s report on Form 10-Q dated March 31, 2007, as filed on May 15, 2007.)
10.7	Royal Bancshares of Pennsylvania, Inc. 2007 Long-Term Incentive Plan. (Incorporated by reference to Exhibit A to the Company’s definitive Proxy Statement dated April 6, 2007.
31.1	Section 302 Certification Pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 signed by Joseph P. Campbell, Chief Executive Officer of Royal Bancshares of Pennsylvania on August 8, 2007.
31.2	Section 302 Certification Pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 signed by Gregg J. Wagner, Chief Financial Officer of Royal Bancshares of Pennsylvania on August 8, 2007.
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Joseph P. Campbell, Chief Executive Officer of Royal Bancshares of Pennsylvania on August 8, 2007.
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Gregg J. Wagner, Chief Financial Officer of Royal Bancshares of Pennsylvania on August 8, 2007.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ROYAL BANCSHARES OF PENNSYLVANIA, INC.

(Registrant)

Dated: August 8, 2007	/s/ Gregg J. Wagner
	Gregg J. Wagner
	Chief Financial Officer

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Joseph P. Campbell, Chief Executive Officer, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Royal Bancshares of Pennsylvania;
2.	Based on my knowledge, the quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15(d)-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared:
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide a reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted principals;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 8, 2007

/s/ Joseph P. Campbell
Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Gregg J. Wagner, Chief Financial Officer, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Royal Bancshares of Pennsylvania;
2.	Based on my knowledge, the quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared:
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide a reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted principals;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 8, 2007

/s/ Gregg J. Wagner

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADDED BY
SECTION 906 OF THE SARBANES-OXLEY ACT 2002

     In connection with this Quarterly Report of Royal Bancshares of Pennsylvania, Inc (“Royal”) on Form 10-Q for the period ending June 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph P. Campbell, Chief Executive Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d) as applicable of the Securities Exchange Act of 1934, as amended; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Royal as of the dates and for the periods expressed in the Report.

The foregoing certification is being furnish solely pursuant to 18 U.S. C. Section 1350 and is not being filed as part of this Report or as a separate disclosure document.

/s/ Joseph P. Campbell

Joseph P. Campbell

Chief Executive Officer

August 8, 2007

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADDED BY
SECTION 906 OF THE SARBANES-OXLEY ACT 2002

     In connection with this Quarterly Report of Royal Bancshares of Pennsylvania, Inc (“Royal”) on Form 10-Q for the period ending June 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gregg J. Wagner, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1	The Report fully complies with the requirements of Section 13(a) or 15(d) as applicable of the Securities Exchange Act of 1934, as amended; and
2	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Royal as of the dates and for the periods expressed in the Report.

The foregoing certification is being furnish solely pursuant to 18 U.S. C. Section 1350 and is not being filed as part of this Report or as a separate disclosure document.

/s/ Gregg J. Wagner

Gregg J. Wagner

Chief Financial Officer

August 8, 2007