corresp

ROYAL BANCSHARES OF PENNSYLVANIA, INC.
732 Montgomery Avenue
Narberth, Pennsylvania 19072

July 17, 2009

VIA EDGAR and Facsimile

Kathryn McHale, Esquire
Staff Attorney
United States Securities and Exchange Commission
Division of Corporation Finance
Washington, D.C. 20549
Mail Stop 4561

Re:

Royal Bancshares of Pennsylvania, Inc.
Form 10-K for the Fiscal Year Ended December 31, 2008
Form 10-Q for the Quarterly Period Ended March 31, 2009
File No. 000-26366

Dear Ms. McHale:

We are responding to your letter, dated June 19, 2009, relating to the filings referenced above of Royal Bancshares of Pennsylvania, Inc. (the “Company”). Each of your comments is set forth below, together with the Company’s related response. For convenience of reference, we have repeated each of your questions or comments, in bold, immediately prior to our related response.

Form 10-K for the Fiscal Year Ended December 31, 2008

Item 1B. Unresolved Staff Comments, page 24

We note that you did not have any unresolved comments from the Commission staff at the time the Form 10-K was filed. In future filings, please change the heading of this item to correspond with the heading in Form 10-K and follow the disclosure instructions.

We will change the heading of Item 1B. in future Form 10-K filings to correspond with the heading in Form 10-K and follow the disclosure instructions for this Item.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Securities Authorized for Issuance Under Equity Compensation Plans, page 26

In future filings, please provide the information required by Item 201(d) of Regulation S-K under Item 12 of Form 10-K rather than Item 5. See Regulation S-K Compliance and Disclosure Interpretation 106.01 for additional information.

In future filings, we will provide the information required by Item 201(d) of Regulation S-K under Item 12 of Form 10-K rather than under Item 5 of Form 10-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Credit Quality, page 49

	3.		We refer to the “Transfers to OREO” column totaling $9.2 million in the table on page 53 showing quarterly changes in non-accrual loans for the year ended December 31, 2008. We also note the Form 10-Q for the period ended March 31, 2009 shows Other Real Estate Owned increased to $20.2 million as of March 31, 2009 compared to $10.3 million as of December 31, 2008. Considering the significant increases in Other Real Estate Owned, please provide us supplementally and include in future interim and annual filings the following information:

	•		A roll-forward analysis of the changes in this account and how they relate to the collateralized loans that were impaired for these fiscal periods.

Set forth below is a table which details the changes in OREO from December 31, 2008 to March 31, 2009. Included in the table is the line item “Assets acquired on non-accrual loans”.


	For the three
	months ended
	March 31, 2009
	(In thousands)

Beginning balance	$	10,346
Capital improvements		711
Assets acquired on non-accrual loans		9,231
Other		(44	)
Valuation allowance		—

Ending balance	$	20,244

As requested, we will include this table in future filings.

•

Disclose how the Allowance for Loan Losses was affected for the writedowns on the collateralized loan prior to the transfer to Other Real Estate Owned.

During the first quarter of 2009, the Company acquired the collateral for three loans through, or in lieu of, foreclosure. At the time of the transfer to other real estate owned, the Company recorded a charge-off of $867,000 through the allowance for loan and lease losses on one of the properties due to the loan balance exceeding the fair market value of the collateral. On another property during the fourth quarter of 2008, the Company recorded a charge-off of $2.3 million through the allowance for loan and lease losses and transferred the remaining balance to OREO in the first quarter of 2009. The remaining asset acquired was recorded to OREO at the carrying value of the loan. Similar information will be included in future filings.

Item 8. Financial Statements and Supplementary Data

Financial Statements for the Year ended December 31 2008

Note A.19, Variable Interest Entities (“VIE”), page 82

We refer to your investment of $6.6 million in the Royal Scully Associates Partnership for which you recorded impairment charges of $8.5 million in 2007 and $1.5 million in 2008 and to which you made two mezzanine loans totaling $9.2 million. Please tell us and discuss in future filings how you considered any impairments with respect to these two loans considering your statement that as of December 31, 2008 the Partnership projects insufficient sales to repay a portion of the mortgages payable by mid 2009, has a net capital deficiency and their 2008 financial statements were prepared with a going concern emphasis paragraph.

In September 2005, the Company, together with a real estate development company (“Scully”), formed a limited partnership, Royal Scully Associates, L.P. Royal Investments America is a limited partner in the partnership (the “Partnership”). As noted on page 83 of the Form 10-K the remaining exposure for the Company on this investment is $6.6 million as of December 31, 2008 (which includes the mezzanine loans). This amount is the net book balance remaining on the consolidated financial statements of the Company and includes the Company’s portion of the impairments taken by the Partnership through December 31, 2008. Per the requirements of FIN 46R and ARB 51, the Company consolidates the financial statements of the Partnership into its balance sheet and income statement and recognizes income and losses according to these requirements. The additional $1.5 million impairment that was recorded in December 2008 resulted from an adjustment to the number of units projected to be sold in future periods based on recent sales activity. The Partnership’s external auditors agreed with the adjusted sales

projections as well as the amount of impairment that was necessary as of December 31, 2008.

The Partnership was issued a going concern opinion by their independent auditors in connection with the financial statements as of and for the year ended December 31, 2008. This was largely due to a significant principal payment that was required by June 9, 2009 in order to avoid an acceleration of the maturity date to the same date. Based on sales activity during the 4^th quarter and the projected sales for the first two months of 2009, this requirement would be difficult to meet and therefore the going concern was issued. It was management’s belief that the Partnership would be able to work out these issues with their lender and continue to operate the project which would enable the Company to be repaid at a minimum its $6.6 million book balance and therefore no further impairment had been recorded.

As of today, the Partnership has obtained a verbal modification of the loan terms which includes an extension of time that will result in a waiver of the June 9, 2009 principal payment.

Note C, Investment Securities, page 88

	5.		We note your disclosure on page 91 that you did not consider your investments in preferred and common stock to be other than temporarily impaired at December 31, 2008, since the Company had the ability and intent to hold these investments until a recovery of fair value. The unrealized losses on these investments were $8.9 million at December 31, 2008. We further note your disclosure on page 11 of your Form 10-Q for the period ended March 31, 2009, that the Company recorded an impairment charge to earnings of $3.1 million in the first quarter of 2009 due to the length of time and/or the severity of the loss position of these securities. Please address the following;

	•		Supplementally tell us what specific facts changed between the filing of your Form 10-K for the year ended December 31, 2008 and the date on which you recorded the $3.1 million other than temporary impairment charge with respect to these equity securities;

The amortized cost of the equity securities at December 31, 2008 amounted to $19.0 million with an unrealized loss of $6.8 million of which the entire amount was less than twelve months in duration. The equity securities were common stocks in six separate accounts managed exclusively for the benefit of the Company by an investment management company. At June 30, 2008, the total collective loss of these stocks was less than 10% of the book value. At year end 2008 the total loss severity amounted to 36%, however these stocks had only been in a loss position for four to six months. Management concluded that there was no OTTI at December 31, 2008 primarily due to the length of time that these stocks had been in a loss position.

During the first quarter of 2009 the common stocks experienced an increased loss severity of $600,000 that resulted in a loss severity of almost 40%, but more importantly, the length of loss position had increased by an additional three months. It also became apparent that a recovery of stock prices for many of these stocks would not likely occur in the foreseeable future. Management also considered any unusual situation pertaining to a specific stock such as significant changes in the dividend, industry trend or other critical negative factor.

•

For those securities with significant duration and severity of temporary impairment at the end of the period presented, tell us and revise future filings to provide an enhanced discussion of the specific securities impaired, the analysis performed and specific factors considered in reaching a conclusion that an other than temporary impairment had not occurred. Specifically tell us how you determine ability and intent to hold until a recovery in fair value; and

See the discussion below for the determination of both temporary and other than temporary impairment for the stocks within the six managed accounts.

With regard to the ability and intent to hold until a recovery in fair value, management considers the following factors: the current cash position and availability of other non-pledged assets that permits the investment to be held for an extended period of time but not necessarily until maturity, any decisions reached at monthly investment committee meetings as to the intent to dispose of specific types of investments and any specific investment committee goals or guidelines related to the disposition of specific investments.

•

For those securities for which an other than temporary impairment was recognized, tell us and revise future filings to provide an enhanced discussion of the specific securities impaired, the analysis performed and related reasons for the impairment recognition in the current period especially as compared to similar securities for which an other than temporary impairment was not recognized, to the extent applicable.

At March 31, 2009 there were 266 common stocks. Of the 266 common stocks, 256 stocks were in an unrealized loss position at the end of the 2009 first quarter. After analyzing the common stocks’ loss severities, duration of unrealized losses, analyst price projections, and recent significant price recoveries subsequent to quarter end, management determined that 81 of the common stocks were OTTI. The loss severities ranged from 28.1% to 90.4% and the unrealized loss duration was 7 to 24 months.

For the common stocks for which OTTI was not recognized, there were 156 common stocks that were in a $3.9 million unrealized loss position for less than 12 months; 19 common stocks that were in a $648,000 unrealized loss position for more than 12 months; and 10 stocks with unrealized gains. The loss severity ranged from 1%-76% for 5 months to less than 2 years. Management also reviewed the stocks’ price history during

the past nine months to determine if the stocks had traded approximately close to the cost basis.

	6.		We refer to the copula method used to determine the value of the CDOs, which you state is a market standard valuation model that depends on the correlated default events of the obligors within the underlying collateral pool. Please tell us and in future filings provide the following information:

	•		Tell us how the Company determined the validity and appropriateness of the various assumptions and input data used that were considered indicators of defaults in future periods.

Given the illiquid market for these synthetic CDOs there was no market pricing available for determining fair value. The Company did receive third party pricing on a monthly basis that incorporated the copula model, corporate spreads in the marketplace and the timing of the maturity of these investments in arriving at “indicative pricing.” Based upon the range of the bid and asked price for actual sales, albeit limited, of similarly structured CDOs during the past three quarters, management concluded that the indicative pricing represented a reasonable approach in arriving at fair value for these investments. The analysis did not look at indicators of defaults but instead it analyzed what would happen to the principal if actual defaults occurred. Based on the current subordination, the 2 CDOs that mature in 2009 can sustain, under a worst-case scenario with 0% recovery and the heavily-weighted credits defaulting, a total of 3-6 credit events before the tranche experiences its first dollar of loss. With the same 0% recovery assumption, but the lesser-weighted entities subject to credit events, the tranche can sustain 8-10 defaults before experiencing its first loss. At a 40% recovery rate, principal impairment would require 4-8 heavily-weighted, or 13-15 lesser weighted entities to default in the portfolio. Based on the current subordination, the CDO which matures in 2010 can sustain, under a worst-case 0% recovery scenario, 18 defaults before experiencing its first dollar of loss. At a 40% recovery rate, principal erosion will not occur until the 29th default in the reference portfolio. As of year end the CDO with the 2010 maturity has adsorbed 6 credit events with a 62% recovery rate. Management also engaged two independent third parties to review the CDOs as noted below to validate the fair values received and determine potential impairment.

•

Discuss any procedures to periodically update the assumptions and input data used to determine the expected default rate considering the current volatility of the financial and insurance markets in you have the CDO pools.

In addition to receiving indicative monthly pricing for the CDOs as previously noted, management received valuation updates from two separate organizations to determine potential impairment. One independent third party analysis was provided by a specialized rating agency that issues credit reports on high yield corporate bonds. The analysis prepared by the specialized rating agency compared their assigned ratings (default risk ranking) that utilized a numerical rating system from 1 through 8 with both a 2 year and a

5 year outlook to Moody’s and S & P’s ratings for the individual companies within the CDO pool. The two year ranking was more relevant considering that the CDO matures in June of 2010. Based upon the individual ratings, which considered cash flow when available, of approximately 100 diversified companies within the CDO, they concluded that the expected credit defaults would result in a return of 100% of the principal invested. Given the maturity dates of December 2009 and June of 2010 management concluded that OTTI had not occurred for the CDOs. Another third party independent analysis provided by an investment advisor approached the potential for future credit defaults using various credit ratings of three agencies (Moody’s, S & P and Fitch) in conjunction with Value Line, a highly regarded independent investment research firm. The volatility of financial markets has impacted the fair value of these investments; however, the volatility of the insurance markets has had no impact since the credit enhancement for these CDOs are tied to the originator, which is a well capitalized bank in Canada, rather than an insurance company like many other CDOs.

•

Tell us whether and how you consider cash flow analysis in determining the fair value of these securities and in assessing other than temporary impairment.

Management considered cash flow modeling in determining the fair value of these securities through the use of two independent third parties mentioned previously.

Note N, Financial Instruments with Off-Balance Sheet Risk and Concentration of Credit Risk, page 109

	7.		We refer to the table on page 111 of financial assets measured at fair value on a nonrecurring basis that shows impaired loans for $56.5 million as Level 3 valuations. Please tell us and discuss in future filings the following:

	•		Where you have recorded the valuation basis for the remaining $29.3 million of impaired loans. Refer to Note D, Loans and Leases on page 94 that states total impaired loans for 2008 were S85.8 million.

We used the term “valuation allowance” to mean loan loss reserve allocation as the result of a FAS 114 impairment analysis. The fair value of impaired loans of $56.5 million in the table on page 111 was computed by subtracting the “valuation allowance related to impaired loans” of $12.9 million from the “impaired loans with a valuation allowance” of $69.4 million (these amounts are disclosed on page 94.) The fair value for the $16.5 million in impaired loans without a valuation allowance is included with the total loan portfolio in the table on page 113. The FAS 114 impairment analysis on the loans that are included in the $16.5 million did not show a collateral shortfall. Consequently, no valuation allowance (specific reserve) was allocated.

We will add in future filings the following disclosure before the nonrecurring table:

“Certain loans are evaluated for impairment on an individual basis under SFAS No. 114. The impairment analysis includes current collateral values, known relevant factors that may affect loan collectability, and risks inherent in different kinds of lending. When the

collateral value or discounted cash flows less costs to sell is less than the carrying value of the loan a specific reserve (valuation allowance) is established.”

•

Provide similar disclosure with respect to Note 11, Fair Value of Financial Instruments on page 17 of the Form 10-Q for the period ended March 31, 2009 which shows in the table Impaired Loans of $38 million as compared to total impaired loans of $70 million as stated in the “Credit Risk Management” section on page 36.

We used the term “valuation allowance” to mean loan loss reserve allocation as the result of a FAS 114 impairment analysis. The fair value of impaired loans of $38.0 million in the table on page 19 was computed by subtracting the valuation allowance related to impaired loans of $8.7 million from the impaired loans with a valuation allowance of $46.7 million (these amounts are disclosed on page 13.) The FAS 114 impairment analysis on the loans that are included in the $23.3 million did not show a collateral shortfall. Consequently, no valuation allowance (specific reserve) was allocated.

•

The reasons why you have not included in this table Other Real Estate Owned totaling $10.4 million as of December 31, 2008.

We relied on the following paragraph under the nonrecurring table on page 111 to explain OREO not being listed in the table:

“As discussed above, the Company has delayed its disclosure requirements of non-financial assets and liabilities. Certain real estate owned with write-downs subsequent to foreclosure is carried at fair value at the balance sheet date for which the Company has not yet adopted the provisions of SFAS 157.”

The OREO balance was disclosed in the “Credit Quality” section in the non-performing assets table and in the Consolidated Balance Sheets on pages 49 and 64, respectively. In future filings we will include OREO in the non-recurring table.

•

Consider in your response whether management uses updated appraisals to determine the fair value of OREOS. Refer to Note A.6, Other Real Estate Owned on page 78 that states subsequent to foreclosure management performs valuations and the assets are carried at the lower of carrying amount or fair value less cost to sell.

In December 2008, one property valued at $7.9 million was transferred into OREO. At least annually, management reviews relevant information, including updated appraisals and genuine offers to purchase (less costs to sell) OREO properties to determine their appropriate carrying amount. When the fair value is lower than the carrying value we create a valuation allowance against the OREO property by booking a charge to earnings.

Item 10. Directors, Executive Officers and Corporate Governance

Definitive Proxy Statement on Schedule 14A

Compensation Discussion and Analysis, page 9

Please revise to disclose how the Compensation Committee made the determination to grant stock options in 2008 under the long term incentive plan and how the amounts awarded were determined. See Items 402(b)(1)(v) and 402(b)(2)(v) of Regulation S-K.